Over thirty years ago, in Upjohn Co. v. United States, 449 U.S. 383 (1981), the Supreme Court held that the attorney-client privilege applies to corporations. But a March 2014 ruling by a federal district court in the District of Columbia threatened to restrict the privilege’s application to a company’s internal investigations. The court ordered a defense contractor to produce internal investigative reports from its legal department, rejecting claims of privilege even though the reports had been prepared at the behest of the contractor’s counsel, and were kept in a locked file cabinet in counsel’s office. On June 27, 2014, the United States Court of Appeals for the District of Columbia issued an opinion vacating the district court’s order and vindicating the attorney-client privilege in the context of internal investigations. Of equal importance is the circuit court’s detailed dissection of the district court’s reasoning, which should help corporations defend against future attempts to chip away at their attorney-client privilege.
DISTRICT COURT PROCEEDINGS
The complaint alleged that the defense contractor, Kellogg Brown and Root Inc. (“KBR”), “defrauded the U.S. Government by inflating costs and accepting kickbacks while administering military contracts in wartime Iraq.” In re Kellogg Brown & Root, Inc., 756 F.3d 754, 756 (D.C. Cir. 2014). Subsequent discovery demands requested internal-audit and investigation documents concerning KBR’s compliance with government-contracting regulations. KBR produced thousands of pages of documents, but withheld internal-investigation reports on the basis of attorney-client privilege. KBR had conducted its internal investigation “pursuant to its Code of Business Conduct, which is overseen by the company’s Law Department.” Id.
The district court reviewed the documents withheld by KBR in camera and determined that they were not privileged, because KBR had failed to show that “the communication would not have been made but for the fact that legal advice was sought.” Id. (internal quotation marks omitted). KBR’s internal investigation, the district court concluded, was “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”Id. (internal quotation marks omitted).
DEFENDING THE ATTORNEY-CLIENT PRIVILEGE ON APPEAL
The circuit court vacated the district court’s order compelling production of KBR’s internal-investigation reports. CitingUpjohn Co., the circuit court emphasized that the extension of the attorney-client privilege to corporations was important because of “‘the vast and complicated array of regulatory legislation confronting the modern corporation,’ which required corporations to ‘constantly go to lawyers to find out how to obey the law, … particularly since compliance with the law in this area is hardly an instinctive matter.’” Id. at 757 (quoting Upjohn Co., 449 U.S. at 392). The circuit court further held that the attorney-client privilege “‘exists to protect not only the giving of professional advice to those who can act on it but also the giving of information to the lawyer to enable him to give sound and informed advice.’” Id. (quoting Upjohn Co., 449 U.S. at 390).
The circuit court was especially critical of the district court’s attempt to distinguish Upjohn. For example, the district court had held that the attorney-client privilege did not apply because the “purpose of KBR’s internal investigation was to comply with … regulatory requirements rather than to obtain or provide legal advice.” Id. at 758. The specific regulations at issue required defense contractors to “maintain compliance programs and conduct internal investigations into allegations of potential wrongdoing.” Id. The circuit court rejected this reasoning and recognized that internal investigations could have more than one purpose. The question is whether the “primary purpose” (not the only purpose) of an internal investigation is to obtain or provide legal advice. Id. at 759. Many communications within a company are made for “both legal and business purposes and … heretofore have been covered by the attorney-client privilege.” Id. This includes communications pertaining to government-mandated compliance programs, which often involve both legal and business concerns.
The district court also wrongly defined “primary purpose” to mean that “‘the communication would not have been made ‘but for’ the fact that legal advice was sought.’” Id. The circuit court deemed this approach impractical, as it is often difficult “to find the one primary purpose for a communication motivated by two sometimes overlapping purposes (one legal and one business, for example).” Id.
The district court also attempted to distinguish Upjohn by emphasizing that KBR’s internal investigation was “conducted in-house without consultation with outside lawyers,” unlike in Upjohn, where “in-house counsel conferred with outside counsel.” Id. at 758. The circuit court rejected this logic and noted that “[i]nside legal counsel to a corporation or similar organization … is fully empowered to engage in privileged communications.” Id. (internal quotation marks omitted) (ellipses in original).
The district court further attempted to distinguish Upjohn by noting that “many of the interviews in KBR’s investigation were conducted by non-attorneys,” whereas attorneys conducted the interviews at issue in Upjohn. Id. The circuit court rejected this reasoning as well, holding that KBR’s investigation “was conducted at the direction of the attorneys in KBR’s Law Department” and that “communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege.” Id.
Finally, the district court observed that the Upjohn employees “were expressly informed that the purpose of the interview was to assist the company in obtaining legal advice” but the KBR employees were not. Id. The circuit court held that “nothing in Upjohn requires a company to use magic words to its employees in order to gain the benefit of the privilege for an internal investigation.” Id. Moreover, the KBR employees knew that the company’s internal investigation involved a “sensitive” matter and that the “information they disclosed would be protected.” Id.
The litigation in the District of Columbia has caused in-house counsel and law firms across the country to think anew about the importance, and limits, of the attorney-client privilege in the context of internal investigations. Without the robust protection of this privilege, businesses would be “less likely to disclose facts to their attorneys and to seek legal advice, which would ‘limit the valuable efforts of corporate counsel to ensure their client’s compliance with the law.’” Id. at 759 (quoting Upjohn, 449 U.S. at 392). Even though the attorney-client privilege now applies to the investigative reports in the KBR case, the best practice is still to have attorneys conduct employee interviews during internal investigations while disclosing that the purpose of the interview is to provide legal advice to the employer.
Indeed, to ensure the maximum possible attorney-client privilege and attorney-work-product protection for an internal investigation, it is essential to consult with counsel to evaluate, design and implement the internal investigation.