Back in March, I wrote about a ruling in U.S. ex rel Barko v. Halliburton Co. et al, 1:05-CV-1276 (D.D.C.), where the court ordered the defendant to produce documents from an internal investigation into allegations of billing misconduct.  The ruling raised significant concerns about the scope of the attorney client privilege in business settings and created uncertainty about whether companies can claim privilege over internal investigations.  Last month, in In re Kellogg, Brown & Root, Inc., et al., No. 1:05-cv-1276, (D.C. Cir.  June 27, 2014), the D.C. Circuit summarily rejected the district court’s ruling and reaffirmed that under Upjohn Co. v. United States, 449 U.S. 383 (1981), the attorney-client privilege applies to communications between employees and representatives of the company’s counsel in the context of an internal investigation.  The reversal is a significant victory for corporations, particularly government contractors who are required by federal agencies to have internal compliance mechanisms for investigating allegations of potential wrongdoing.  At the same time, the ruling reinforces the need for in-house counsel to take prudent steps when conducting internal investigations.

The district found that certain documents created as part of an internal investigation into allegations of improper billing were not created solely for the purpose of seeking legal advice; instead, the court concluded that the primary purpose for their creation was to comply with regulatory requirements,  and therefore they were unprivileged business records.  When the district court denied the defendants’ request that it certify the issue for interlocutory appeal, the defendants sought mandamus review by the D.C. Circuit.  Notably, the defendants’ request for mandamus was supported by a coalition of amici from industry.  

The D.C. Circuit cited three main reasons in rejecting the district court’s attempt to distinguish the pending case from Upjohn.  First, the D.C. Circuit noted that Upjohn does not hold or imply that the involvement of outside counsel is a necessary predicate for the privilege to apply.  On the contrary, a lawyer’s status as in-house counsel “does not dilute the privilege.”  Second, the D.C. Circuit held that the investigation here was conducted at the direction of the attorneys in KBR’s Law Department.   This was a significant point;, not least because it is well settled that communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege.  Third, the D.C. Circuit held that nothing in Upjohn requires a company to use “magic words” with its employees in order to gain the benefit of the privilege for an internal investigation.  Whether or not employees were told that the investigation was being conducted “for purposes of seeking legal advice” was not dispositive.  And in any event, the D.C. Circuit found that as in Upjohn, the KBR employees knew that the company’s legal department was conducting an investigation of a sensitive nature and that the information they disclosed would be protected.

The D.C. Circuit thus soundly rejected the “but-for” test articulated by the district court, finding that it was not supported by any legal precedent.  Following the district court’s logic, the attorney-client privilege would not apply unless the sole purpose of the communication was to obtain or provide legal advice.  This narrow approach could eliminate the attorney-client privilege for communications made for both legal and business purposes.  Equally troubling was that the district court’s reasoning would eradicate the attorney-client privilege for internal investigations conducted by businesses across American industry, especially those that are required by law to maintain compliance programs.  This substantial change could ultimately thwart the purpose of internal compliance programs because businesses would be less likely to disclose facts to their attorneys since those communications would not be privileged.

Seeking to dispel any potential lingering confusion, the D.C. Circuit stated: “In the context of an organization’s internal investigation, if one of the significant purposes of the internal investigation was to obtain or provide legal advice, the privilege will apply. That is true regardless of whether an internal investigation was conducted pursuant to a company compliance program required by statute or regulation, or was otherwise conducted pursuant to company policy.”  This clear edict should go a long way in re-establishing certainty and clarity that internal corporate investigations conducted in response to allegations of potential misconduct can be privileged.  Nonetheless, companies must follow best practices to ensure that the privilege is not waived as to internal communications relating to an investigation.  As my colleagues in our White Collar practice have noted, some examples of best practices include:

  • At the beginning of the investigation, document the legal department’s intent to conduct an internal investigation for the purpose of providing legal advice to the company’s management;
  • Explain to witnesses that the internal investigation is being conducted under the auspices of the company’s counsel (whether in-house or outside counsel) for the purpose of seeking legal advice from counsel on behalf of the company;
  • Explain to witnesses that their communications with the interviewer will be protected by the attorney-client privilege, a privilege that belongs to the company;
  • Remind witnesses that the company’s attorneys involved in the internal investigation represent the company, not the witness; and
  • Maintain in-house attorney direction, if not the direction of outside counsel, of the internal investigation at all stages of the investigation.

While there is no one-size solution for all internal investigations, these steps should be included in any prudent risk management strategy.