Internal investigations are a critical part of an effective anti-corruption compliance program, and challenges to the application of the attorney-client privilege to such investigations have featured prominently in recent cases. Attorneys often supervise and conduct internal investigations, gathering facts relevant to providing valuable legal advice. In conducting investigations, counsel can draw on knowledge of applicable laws and distinguish actual legal or compliance concerns from lesser issues. Communications as part of such investigations are properly shielded from compelled disclosure by the attorney-client privilege, the fundamental purpose of which involves encouraging the seeking and obtaining of legal advice. Of course, there are many reasons to conduct internal investigations, and not all business- related reviews warrant attorney involvement.
Recent decisions illustrate important issues that arise in connection with, if not limits to, the attorney-client privilege in the internal investigations context. In 2014, companies received welcome news from the D.C. Circuit in its landmark ruling in the KBR litigation. The court of appeals rejected a narrow view of the attorney- client privilege applicable to communications in the course of internal investigations and overturned a lower court ruling that had rejected claims of privilege over certain matters in such investigations.1
More recently, in a January 21, 2015 order, Magistrate Judge Gabriel Gorenstein of the United States District Court for the Southern District of New York required Bank of China Ltd. (“BOC”) to produce documents relating to its internal
investigation into allegations that the bank assisted a terrorist operative responsible for a 2006 suicide bombing in Tel Aviv, Israel. The order in Wultz v. Bank of China Ltd.2 concluded that these documents were not protected under either attorney- client privilege or work product doctrine. The ruling emphasized that BOC produced no evidence that its initial investigation was conducted at the direction of counsel and did not show that it would not have conducted the investigation absent the threat of litigation.
The BOC decision stands in contrast to another recent decision in the same judicial district. In In re General Motors LLC Ignition Switch Litigation,3 Judge Jesse Furman issued an order that shielded under attorney-client privilege and the work product doctrine interview notes and memoranda from an internal investigation conducted for General Motors (“GM”) in connection with the GM ignition switch matter. In its general tone, Judge Furman’s order denying discovery stands in apparent tension with Magistrate Judge Gorenstein’s analysis, although the two cases are on several fronts distinguishable.
The recent pair of decisions warrants review by in-house counsel, personnel in compliance functions, and outside counsel alike, as they seek to calibrate, according to risk, cost, and other factors, which investigations and related activity should proceed under counsel’s direction. For companies whose compliance, internal audit, human resources, accounting, and related functions act independently within the organization and not always at the direction of counsel – and this includes almost all such internal groups as to at least parts of their respective remits – the rulings reinforce the need to consider carefully how best to staff internal investigations and related monitoring activities. Especially for companies with significant overseas operations in which non-lawyers perform investigative, audit, or other quasi-legal functions, the BOC decision, if it stands, could have important ramifications. These decisions also underscore the importance of establishing a clear record of attorney supervision of investigative tasks.
I.The Bank of China Matter
- Factual Background
In April 2006, eleven people were killed in a Tel Aviv bombing, including teenager Daniel Wultz. On behalf of his family, attorney Robert Tolchin sent a letter (the “Demand Letter”) to BOC’s New York branch in January 2008, alleging that a bank customer, Said al-Shurafa (“Shurafa”), was a senior operative of the terrorist group responsible for the bombing and that BOC provided material assistance by executing wire transfers totaling several million dollars on Shurafa’s behalf.4 The Demand Letter indicated that the plaintiffs would file a civil action in federal court within a few weeks.
The New York branch informed its head office in Beijing and offered to recommend outside U.S. counsel to advise the bank. Instead, Wang Qi, General Manager of the Legal Compliance Department, directed Chief Compliance Officer
Geng Wei to investigate the allegations and prepare a report. Neither Wang nor Geng were attorneys.5 Concurrently, the bank’s New York office’s Chief Compliance Officer, John Beauchemin, who was not a lawyer, contacted the bank’s outside U.S. counsel and proceeded to conduct a local investigation into the allegations.
By this time, Geng was overseeing investigations in both New York and Beijing, directing employees to continue investigating Shurafa’s accounts. Geng also sent Legal and Compliance employees to Guangzhou, where they interviewed employees at local bank offices where Shurafa opened accounts and even spoke with Shurafa himself.6 Significantly, Geng later stated that his “expectation” in collecting this information was that “external counsel would use and analyze the findings for the purposes of assessing the merits of the allegations . . . and developing a litigation strategy if necessary.”7
The head office also initiated a third investigation through its Guangdong branch. As in New York and Beijing, the investigative efforts were led not by an attorney, but rather by a member of the local Legal and Compliance Department.8 According to Geng, this employee followed instructions from the head office and never spoke with the bank’s outside U.S. counsel until September 2008. After reporting its preliminary findings to the Beijing office of BOC, the Guangdong branch staff requested legal advice and recommended that BOC retain external counsel.
The Beijing office staff concurred and eventually retained a U.S. law firm, although the start date of its work in the investigation remained unclear.9 The plaintiffs filed a complaint in the district court in August 2008.
The Wultz plaintiffs sought documents generated in BOC’s investigation that did not reflect communications involving a U.S. lawyer. The court held that these documents were not protected under either attorney-client privilege or the work product doctrine.
A. The Court’s Decision
Under federal common law,10 attorney-client privilege protects “communications
(1) between a client and his or her attorney (2) that are intended to be, and in fact were, kept confidential (3) for the purpose of obtaining or providing legal advice.”11 BOC argued that its investigation was privileged because it was conducted “with the expectation” that U.S. counsel would use the information to provide legal advice.
However, Magistrate Judge Gorenstein rejected the notion that “a person’s collection of information is protected merely because the person harbors a plan to provide the information later to an attorney – particularly where there is no proof that the attorney sought to have the individual collect the information at issue.”12
The court noted that communications in the course of investigations in which an attorney directs a client to gather information for the purpose of rendering legal advice are typically privileged. The bank argued that its non-lawyer compliance officer, Beauchemin, had “engaged” external regulatory counsel after receiving the
Demand Letter in order to guide the office’s investigation.13 But the court disagreed, noting that Beauchemin merely “contacted” outside counsel, and the investigation bore no proof of attorney guidance.14 The court held that “the actual evidence supplied by BOC nowhere refers to an attorney directing that any particular steps be taken by anyone . . . .”15
The court also rejected BOC’s claim to work product protection. The federal work product doctrine in civil litigation is governed by Rule 26(b)(3) of the Federal Rules of Civil Procedure, which provides that a party is generally not entitled to obtain
discovery of materials “prepared in anticipation of litigation . . . .”16 In addressing work product claims, some courts have framed the issue as concerning “not merely whether [the party invoking the privilege] contemplated litigation when it
generated the materials at issue, but rather whether these materials would have been prepared in essentially similar form irrespective of litigation.”17 In the BOC case, this logic proved decisive.
Although Magistrate Judge Gorenstein accepted that the bank anticipated litigation as a result of receipt of the Demand Letter, he held that the bank’s argument seeking work product protection ignored the key issue – namely, what would BOC have done had it not anticipated litigation? The court contemplated a scenario in which BOC had learned of the allegations independently of any threat of actual litigation – such as through the bank’s internal mechanisms or a newspaper reporter18 – and surmised that BOC would have reacted the same way. In order to protect its reputation or comply with regulatory obligations, BOC “presumably would have [evaluated] whether to close the Shurafa accounts and . . . report to the relevant regulatory agencies.”19 The bank would have sent teams to Guangdong and New York to analyze relevant transactions, reviewed Shurafa’s account opening documents, and educated employees on compliance risks. In its actual investigation, the bank adopted each of these measures, which led the court to conclude that the materials would have been prepared in essentially the same way whether litigation was anticipated or not and that therefore work product protection did not apply. Critically, even if BOC would have still conducted an investigation for business or other regulatory reasons, the absence of attorney involvement seemed to persuade Magistrate Judge Gorenstein that the investigation materials would not have been generated any differently, and for that reason work product protection was inapt.
The court’s analysis of work product doctrine imposed upon the bank a demanding burden that has subsequently been challenged, both in this case as well as in other litigation. The bank has filed an objection under Rule 72(a) of the Federal Rules of Civil Procedure and requested reconsideration by an Article III judge, arguing that Magistrate Judge Gorenstein erroneously employed a “counterfactual” analysis to assess whether the materials would have been created differently if no
litigation had been anticipated.20 BOC also noted that Magistrate Judge Gorenstein’s work product analysis is presently before the Second Circuit in another, unrelated case, in which he similarly identified a lack of evidence supporting a counterfactual result.21 If Magistrate Judge Gorenstein’s analytical framework withstands scrutiny in these cases, it may signal a need for companies – at least those that may be haled before courts subject to the authority of the Second Circuit – to not only document more clearly what steps they took in connection with internal investigations, but also why the steps taken were different from steps they would have taken (or not taken) in the absence of threatened litigation.
I. In re General Motors LLC Ignition Switch Litigation
The ruling in the BOC matter can be contrasted with another recent ruling in the Southern District of New York, in which Judge Furman found that internal
investigation materials were protected by both attorney-client privilege and work product doctrine.
Although both decisions remain subject to appeal, the contrast between the two investigations – and the subsequent rulings – is instructive for companies faced with allegations of misconduct.
A. Factual Background
In 2014, General Motors (“GM”) issued a series of highly publicized recalls. In light of a DOJ investigation – and subsequent anticipated civil litigation – the company retained Jenner & Block (“Jenner”) to investigate the circumstances preceding the recall.
Jenner lawyers interviewed more than 200 witnesses, informing each one that the interview was intended to assist in the provision of legal advice to GM and that it was privileged and confidential.22 Once Jenner finished its report (the “Valukas Report”), GM provided copies to Congress, the DOJ, and other regulators. In a subsequent action, plaintiffs moved to compel GM to produce materials underlying the Valukas Report, particularly notes and memoranda relating to the witness interviews.
A. The Court’s Decision
Judge Furman concluded that the documents at issue were privileged. He looked to the Upjohn decision, in which the Supreme Court shielded interview materials prepared by in-house counsel as part of a factual investigation intended to facilitate
the provision of legal advice.23 The court concluded that GM’s internal investigation and accompanying interviews similarly stemmed from a request for legal advice.
Although this investigation was conducted by outside, rather than in-house, counsel, the court believed this strengthened GM’s claim to privilege because outside counsel are not typically asked to serve in mixed business and legal capacities.24
Notably, Judge Furman’s articulation of the “primary purpose” test for invoking privilege accounted for the “multiple and often-overlapping purposes” of
internal investigations.25 While acknowledging that privilege attaches only if the “predominant purpose of the communication is to render or solicit legal advice,” the court stated that legal advice need not be the “sole purpose . . . .”26 In fact, the court continued, “rare is the case that a troubled corporation will initiate an internal investigation solely for legal, rather than business, purposes; indeed the very prospect of legal action against a company necessarily implicates larger concerns about the company’s internal procedures and controls, not to mention its bottom line.”27 Therefore, though GM’s purposes in retaining Jenner and producing the Valukas Report were not exclusively legal – and despite the Report’s focus on business processes, policies, and training – the company demonstrated that the provision of legal advice was a “primary purpose” of the investigation.
Because GM had promised to share the Valukas Report, the plaintiffs alternatively argued that GM had no expectation that the report or the investigation leading
up to it would be kept confidential. But although GM ultimately disclosed the facts contained in the Valukas Report, Judge Furman asserted that the company never intended to disclose – nor did disclose – the communications reflected in the
materials underlying the report, thereby preserving the privilege.28 The court found that this decision to withhold the interview materials also barred a judicial finding of waiver.29
The court also protected from discovery Jenner’s interview notes and memoranda under the work product doctrine because they were generated “in a situation far from the ‘ordinary course of business.’”30 Because the interviews themselves were heavily shaped by a “virtually certain” possibility of litigation – all witnesses were informed that the interviews were intended to gather information to assist in providing legal advice – the court characterized the materials as classic protected attorney work product.
Significantly, Judge Furman appeared to impose a far lighter burden on GM than did Magistrate Judge Gorenstein on BOC. Whereas Magistrate Judge Gorenstein listed a variety of business and regulatory motivations for BOC to conduct effectively the same kind of internal investigation, Judge Furman reasoned that distinguishing between “anticipation of litigation” and “business purposes” was ultimately unrealistic given the “inevitability” of lawsuits.31 Although Magistrate Judge Gorenstein acknowledged that attorneys need not be present in order for work product protection to apply, the GM decision suggests that a record of counsel involvement can be a compelling way to demonstrate that an investigation – even
if conducted for other, non-legal purposes – was inherently conducted differently because of the prospect of litigation.
Further litigation, and the possibility of additional judicial guidance in these matters, particularly with respect to the possibility of work product protection, remains
a distinct possibility. Yet, taken together, these decisions serve as reminders that the purposes underlying investigations – both legal and otherwise – should not necessarily compromise a company’s claim to privilege, but the absence of attorney direction might.
This lesson is particularly salient given the routine reliance by many companies on internal audit functions, compliance, human resources departments, and, in certain jurisdictions, non-lawyer staff in company legal departments to conduct this work.32
For large-scale organizations that must prioritize competing compliance efforts, this approach can reduce costs and may well be warranted depending on the scope and risks associated with an investigation. In certain cases, however, these savings can be undercut or even offset completely by legal consequences in the future. To avoid such outcomes, companies should carefully weigh the implications of having non-lawyers unilaterally direct certain types of investigations. At minimum, companies should seek counsel’s recommendation as to whether the issues raised in specific matters, or in various types of cases, can be appropriately handled by non-lawyers. Ultimately, companies will continue to face complex choices when confronted with allegations of misconduct. Although looking to internal audit, compliance, and other non-lawyer staff is often a convenient and appropriate strategy, consideration should be given to the significant legal consequences
of conducting an internal investigation absent a record of meaningful attorney direction.