On March 6, 2014, the U.S. District Court for the District of Columbia held in United States ex. rel. Harry Barko v. Halliburton Company, et. al.,1 that documents relating to an internal investigation conducted by defendant Kellogg Brown & Root Services, Inc. (“KBR”) were not legally privileged and therefore were subject to disclosure.
This was notwithstanding the fact that KBR’s in-house legal department was involved in the initial and final phases of the internal investigation.2 Although non- lawyer investigators conducted the investigation, including by interviewing witnesses and preparing the investigation reports, they were subject to an attorney’s supervision.3 In addition, the subject matter of the investigation was similar to more than a thousand pending reports of war-zone contract breaches that individually and collectively presented real risks of litigation (and in fact did result in the Barko litigation).
This article examines the reasoning that led to the Court’s conclusion, analyzes the extent to which it is consistent with the established law on legal privileges in the context of internal investigations,4 and suggests steps that companies and compliance departments might take to maximize their chances of successfully asserting legal privilege over internal investigation materials.
The Facts of the Case
In 2005, Harry Barko, a contract administrator of KBR, filed a complaint under the whistleblower provisions of the False Claims Act,5 alleging that KBR, Halliburton Company, and other contractors (collectively, the “Defendants”) overbilled the U.S. government under certain war-zone construction contracts.6
On February 3, 2014, Barko moved to compel the Defendants to produce certain documents relating to a Code of Business Conduct (“COBC”) investigation (“COBC Documents”) conducted by KBR between 2004 and 2006. These documents related to an internal investigation of the alleged billing misconduct that was at issue in Mr. Barko’s underlying complaint.7 The Defendants resisted producing the COBC Documents, asserting that the attorney-client privilege applied and that the investigation was conducted under counsel’s direction for the purpose of obtaining legal advice.8 The Defendants also relied on the work-product doctrine, arguing that litigation was anticipated as KBR was facing over 1,000 other reports of similar war-zone contract breaches when the investigation was conducted.9
As a government contractor, KBR was required by the U.S. Federal Acquisition Regulations, and under its contract award obligations, to undertake to establish and administer an “ongoing business ethics awareness and compliance program” and an “internal control system.”10 KBR’s Law Department was responsible for implementing the COBC compliance program, which included a code of business conduct, internal controls, whistleblowing channels, and policies and procedures on internal investigations. Under this program, reports of potential COBC violations would be directed to the Law Department or transmitted as “a tip to a dedicated P.O. Box, email address, or third-party operated hotline.”11 These reports would then be delivered to the COBC Director (an attorney),12 who would decide whether to commence an investigation. Investigators (who were typically not lawyers) would conduct witness interviews, obtain witness statements, review relevant documents, and write a report of their investigative findings.13 The investigators would conduct the investigation independently, subject to the oversight of the COBC Director. Upon completion of the investigation, the investigation file would be sent to the Law Department for assessment, including, for example, as to whether KBR should self-report a violation to the regulatory agencies.14
Upon an in camera review, the Court found the COBC Documents to be “eye- openers” with respect to Barko’s underlying claim, evidencing corruption by certain U.S. government contractors and sub- contractors, double-billing, kickbacks, and bid riggings.15
The Court’s Reasoning
The Court rejected the Defendants’ claims that the COBC Documents were protected by the attorney-client privilege and work-product doctrine. With respect to the Defendants’ attorney-client privilege claim, the key question before the Court was whether the COBC Documents were prepared and transmitted for the purpose of obtaining legal advice (and therefore privileged), or were merely factual reports connected with routine business operations (and therefore not privileged). Applying the well-known “but for” test, the Court examined whether “the communication would not have been made ‘but for’ the fact that legal advice was sought,”16 and found that the COBC Documents failed the test for the following five reasons:
- KBR’s compliance program “merely implement[ed]” regulatory requirements to investigate allegations of fraud that applied generally to government contractors.17
- The investigation would have been performed in the “ordinary course of business,” regardless of whether legal advice was sought.18
- Witnesses interviewed were not informed that each interview was intended to facilitate legal advice. Indeed, the confidentiality agreement the witnesses signed mentioned only the “possible adverse business impact unauthorized disclosure could have on KBR’s work.”19
- The investigators were not attorneys and witnesses interviewed “certainly would not have been able to infer the legal nature of the inquiry.”20
- KBR’s internal investigation could be distinguished from the investigation at issue in Upjohn Company v. United States,21 as no external counsel was consulted before its investigation began.22
Next, the Court considered the purpose of the COBC Documents with respect to the work-product claim. Under the work- product doctrine, a document containing “mental impressions, conclusions, opinions, or legal theories” of an attorney (or someone working under the supervision or direction of an attorney)23 is protected if it can “fairly be said to have been prepared or obtained because of the prospect of litigation” (the “because of ” test).24 Under this test, an articulable claim must exist, and merely a remote possibility of litigation is insufficient.25 The Court in Barko stated that the “because of ” test required both a subjective belief of an attorney involved “that litigation was a real possibility,” as well as an objectively reasonable basis for that belief.26 The Court found these requirements were not met because KBR’s investigation was conducted before any relevant litigation was filed and before Barko’s complaint was unsealed. The Court referred to the findings it made with respect to the attorney-client privilege in further support and found that the COBC Documents failed to meet either limb of the “because of ” test.
What appears to have been critical to the Court’s rulings was the fact that KBR’s investigation was conducted “pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”27 The Court accorded little, if any, weight to the facts that witness statements and reports produced during the investigation were labeled “attorney-client privilege” and kept highly confidential.28 The Court was also unswayed by the facts that KBR was facing more than 1,000 other reports of similar war-zone contract breaches when the investigation was conducted; the COBC Director, a lawyer, had called for the investigation; and the final investigative report was submitted to the General Counsel’s office for assessment at the conclusion of the investigation.29 Taking a strict and literalist approach, the Court held that no request for the provision of legal advice could be evidenced by the transmission of the investigative report to the General Counsel’s office because the documents themselves did not expressly contain such a request.30
Significance of Barko for Compliance Departments
The Barko decision reflects many tensions in the law governing the attorney- client privilege and work-product doctrines, but is not the first of its kind. The decision follows United States v. ISS Marine Services, Inc.,31 a factually similar decision by the same District Court. In ISS Marine, the Court refused to apply the protections of the attorney-client privilege and work-product doctrine to an investigation report that was drafted by an internal auditor who was not a lawyer. External counsel was consulted initially on the underlying investigation and again two months after the investigation concluded. The final report was marked “confidential” but not “privileged.” With respect to attorney-client privilege, the Court found that the investigation was conducted for a business purpose (the audit was conducted in connection with a contractual duty to return overpayments), and the limited interaction with external counsel was insufficient to support attorney- client privilege.32 Likewise, with respect to the work-product doctrine, the Court found that the report was created primarily for a business purpose and litigation was not impending at the time the report was created, and that ISS Marine would have ordinarily investigated the matter whether or not litigation was anticipated.33
For compliance departments, the practical significance of the Barko and ISS Marine decisions is the position taken by the courts that: (i) compliance-driven investigations are presumptively “part of the ordinary course of business” that do not automatically attract the protection of legal privileges, even if lawyers are involved in the process; and (ii) for such privileges to apply, direct and clear evidence will need to be shown that materials created in connection with compliance-related investigations were for the purpose of seeking legal advice and/or created in anticipation of litigation. 34
These conclusions are well-illustrated by the literalist approach adopted by the Barko Court in determining whether the COBC Documents were created for the purpose of obtaining legal advice.35 As discussed above, one of the Defendants’ arguments for the application of work-product protection was that the COBC Documents touched upon issues similar to more than 1,000 other potential contract breaches, and thus the risk of litigation was present.
Despite this circumstance, the Court found that the lack of an express written request for legal advice in the COBC Documents was fatal to the Defendants’ assertion of work-product protection. It did not help that KBR took an almost “assembly-line” approach in reviewing its 1,000-plus complaints.36 Yet the gravity and volume of the reports of breaches and resulting litigation risk could have been factors weighing in favor of the application of work-product protection.
In this era of increasingly aggressive regulatory enforcement, regulatory and compliance-related internal investigations virtually always entail the need at some point for legal input, analyses, and advice. On the facts before it, the Barko Court could well have upheld legal privileges and remained consistent with established case law, and compelling arguments could be made that it should have done so. As the Supreme Court observed in Upjohn, because there is a “vast and complicated array of regulatory legislation confronting the modern corporation, corporations, unlike most individuals, 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.”37 Accordingly, a strict and rigid approach in the compliance context is counter-intuitive and counter-productive, arguably undercutting the importance of building and investing in robust compliance programs that include self-investigation of potential regulatory violations, even where the substantial involvement of a lawyer is not possible.38
Lessons From The Barko Decision
There are important lessons to be drawn from the Barko decision, the most essential being that the involvement of in-house or external counsel in internal investigations should be substantive and not merely a formality. In addition, companies and compliance departments should consider implementing some or all of the “best practices” from the following list:
- Companies should appoint one or more lawyers (internal or external) to assess and document in writing whether the allegations/issues to be investigated warrant legal involvement, and the extent of legal involvement required.
- Written policies should be disseminated to: (i) provide threshold guidance for when attorneys should be involved; (ii) identify clear examples of non-routine matters in connection with which litigation or enforcement proceedings could reasonably be expected (e.g., allegations of fraud, improper payments, etc.); and (iii) flag other situations regularly encountered in the company’s operating environment, requiring prompt escalation to the legal department.
- One or more attorneys should be appointed to monitor investigative processes and act as gatekeepers for key investigative decisions (e.g., timeline planning, witness selection, report drafting and review),39 regardless of whether the relevant function with overall responsibilities for investigating a given matter is audit, compliance, or legal.
- When being interviewed by a lawyer, witnesses should be given Upjohn warnings informing them that the content of their interviews are subject to legal privilege and the duty of confidentiality, both held by and owed to the company.40
- Attorneys should conduct sensitive investigations and supervise non-attorney investigators. Outside counsel should be retained for the most sensitive, high- risk investigations. Companies should consider sending “Upjohn letters” to non- lawyer investigators to deputize them with powers to act under the direction and supervision of a lawyer, and to include explicitly their work product within legal privilege.41
- External experts and investigators should be retained and supervised by counsel.
- In appropriate cases, investigation reports drafted by non-lawyers should be addressed and sent to counsel expressly requesting legal advice.
- Documents should be labeled as being subject to attorney-client privilege and the work-product doctrine. However, as the courts are suspicious of over-usage and potential abuse, these labels should not be applied blindly.
The Barko and ISS Marine decisions demonstrate that courts can be hesitant to recognize and give effect to the protections of legal privilege over documents generated in connection with compliance-driven internal investigations. Although it remains to be seen if Barko will be upheld or overturned on appeal, and to what extent other courts will follow suit, it provides a caution against complacency and serves as a timely reminder of the need for companies and compliance departments to take conscientious steps to protect privileged and otherwise protected communications.