The U.S. Circuit Court of Appeals for the District of Columbia recently clarified the formulation of the “primary purpose” test for determining whether the attorney-client privilege applies to communications made to in-house attorneys during internal investigations. This clarification will likely have a direct effect on risk managers of health care companies that investigate incidents and compliance issues through regulatory and statutory mandates.

According to the court, “if one of the significant purposes of the internal investigation was to obtain or provide legal advice, the privilege will apply.” Thus, even though attorney-client communications made during an investigation may have a dual business and legal purpose, as long as a primary purpose is to obtain legal advice (even if another primary purpose is not to obtain legal advice), the privilege applies.

Clarifying “Primary Purpose” Test

In re Kellogg Brown & Root, Inc., No. 14-5055 (D.C. Cir., June 27, 2014), the plaintiff, a former employee of Kellogg Brown & Root, Inc. (“KBR”), had brought a whistleblower action against KBR for alleged violations of federal anti-kickback and anti-bribery laws. The district court had ordered KBR to produce to the plaintiff the results of an internal investigation KBR’s legal department conducted pursuant to its corporate compliance policy. KBR refused to produce the report, arguing that the purpose of the investigation was to obtain legal advice and as such, the report was protected by the attorney-client privilege. Citing Upjohn Co. v. United States, 449 U.S. 383, 101 S.Ct. 677, (1981), the district court disagreed. It concluded that, because the investigation was “undertaken pursuant to regulatory law and corporate policy,” the privilege did not apply because KBR had failed to show that “the communications would not have been made ‘but for’ the fact that legal advice was sought.”

On petition, the circuit court vacated the order, holding that the lower court applied the wrong legal test. The circuit court found that KBR’s assertion of the privilege was “materially indistinguishable” from that in Upjohn. KBR had launched the investigation to gather facts and ensure compliance after learning of potential misconduct, and in-house counsel acted in its legal capacity in conducting the investigation.

In disagreeing with the district court’s analysis, the circuit court concluded that

  1. Upjohn did not hold or imply that outside counsel must be involved as a necessary predicate for the privilege to apply and that a lawyer’s status as in-house counsel does not vitiate the privilege;
  2. The privilege protects “[c]ommunications made by and to non-attorneys serving as agents of attorneys in internal investigations”; and
  3. Upjohn requires no “magic words” between a company and its employees regarding the purpose of the investigation for the privilege to apply.

More importantly, the circuit court found that the lower court incorrectly administered the “primary purpose” test found in Upjohn. The circuit court explained, “[t]he primary purpose test, properly and sensibly applied, cannot and does not draw a rigid distinction between a legal purpose on one hand and a business purpose on the other. [Thus,] it is often not useful or even feasible to try to determine whether the purpose was A or B when the purpose was A and B. It is thus not correct for a court to presume that a communication can have only one primary purpose.”

Instead, the correct formulation of the test asks whether “obtaining or providing legal advice was one of the significant purposes of the attorney-client communication.” If so, the attorney-client privilege protects those communications, “regardless of whether an internal investigation was conducted pursuant to a compliance program required by statute or regulation,” or “simply an exercise of company discretion” or “conducted pursuant to company policy.”

Implications for Health Care Companies

Although KBR is not a health care provider, the case is instructive for risk managers of health care companies that have regulatory and statutory mandates to investigate incidents and compliance issues.

Internal investigations of both incident reports and “whistle-blower” fraud and abuse claims can be protected by the attorney-client privilege if conducted in a manner consistent with how KBR’s in-house counsel conducted KBR’s investigation. Granted, the privilege will not prevent plaintiffs or the government from uncovering the facts, but it should protect from disclosure the legal advice, analysis, opinions and conclusions of the employees, agents and lawyers involved the investigation. Having that information compromised could adversely affect a company’s settlement prospects.

Upjohn and In re Kellogg Brown & Root, Inc. can be best summarized as follows:

  • If an investigation was conducted as part of the company’s regular business operations by internal auditors, the results of the investigation will not be protected.
  • Having lawyers involved in the investigation at the outset is the only way to create the attorney-client privilege.
  • For those companies without in-house counsel, engaging a law firm to initiate and manage those internal investigations will provide the benefits of the attorney-client.
  • Moreover, having outside counsel is beneficial in that courts generally scrutinize more closely privileges asserted by in-house counsel than by outside counsel.

Counsel’s Role in Internal Investigations

Whether a company is using its in-house lawyers or engaging outside counsel, counsel’s involvement in these types of investigations should start early in the investigation. Here are a few suggestions for counsel’s role in internal investigations.

  1. Counsel should initiate the investigation and “engage” the employees or agents charged with uncovering the facts and analyzing the incident to determine the ultimate exposure of the company.
  2. Those reports should be addressed to counsel and shared only with those employees involved in the investigation and the disposition of the incident.
  3. The reports also should state clearly on their face that they constitute legal analysis and advice.
  4. If a third party (such as a representative from the insurance carrier) needs to review privileged materials, the company should reveal only the information necessary to carry out the purpose of the review and make sure the third party knows that the documents are confidential and subject to the attorney-client privilege.