By their very nature, reports of internal investigations can contain material which be extremely damaging in any subsequent litigation. Recent decisions in the US and the UK provide a timely reminder that legal professional privilege only attaches to communications when strict criteria are met, and that reports of internal investigations will often fail the test unless careful precautions have been taken.
What’s the risk?
Internal corporate investigations of potential wrongdoing, undertaken under internal company policies, or to satisfy regulatory obligations, occupy a privilege grey zone. At first blush, reports and communications connected with such investigations may appear to bear certain similarities to the characteristics of privileged communications: emphasising full and frank disclosure; forming an assessment of risk or liability; and often being instigated by or ultimately transmitted to a company’s internal or external legal advisers. Investigations may even be squarely relevant to some possible or contemplated litigation. However, as demonstrated by recent decisions overseas, these factors alone may not be enough to establish privilege.
United States ex rel. Barko v Halliburton Company
In March 2014, the United States District Court for the District of Columbia in Barko considered whether privilege attached to reports prepared as part of internal corruption investigations by US military contractor Halliburton (and related companies), as required under its government-mandated Code of Business Conduct (COBC). The reports were sought in discovery in litigation against Halliburton alleging overcharging due to corruption connected with certain government sub-contracts. The reports contained information that was highly damaging to Halliburton – the Court noted, from an in camera review, that the material contained clear evidence of fraud.
COBC investigations were typically instigated after potential misconduct was reported to Halliburton's legal department, or to an independent whistle-blower hotline. Investigators interviewed personnel, reviewed relevant documents and obtained witness statements to prepare a COBC Report for the Halliburton legal department. Despite sharing these superficial similarities with privileged communications, the Court ruled that no privilege attached. Most notably, the Court held that the investigations “were undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice” and “in the ordinary course of business irrespective of the prospect of litigation” (including because government regulations required Halliburton to investigate potential fraud). In considering the surrounding factual circumstances, the Court appeared persuaded by the fact that the interviews were conducted by non-lawyers and that the employees interviewed were never informed that the purpose of their interviews was for the purpose of preparing legal advice for the company.
Rawlinson and Hunter Trustees SA v Akers
The primary proceeding in Rawlinson was a high profile matter in which the claimants, the Tchenguiz brothers, who had been the targets of an investigation by the United Kingdom’s Serious Fraud Office (SFO), and their associated companies and trusts, sought damages following a successful challenge to the SFO’s investigation. As part of these proceedings, the claimants sought third party disclosure of reports prepared by a firm of accountants on the instructions of liquidators, which were provided to the SFO and allegedly played a key role in the material used to support the SFO’s application for search warrants against the Tchenguiz brothers and their associated companies.
On 20 February 2014, the UK Court of Appeal affirmed a lower court decision that the reports were not covered by litigation privilege. Disclosure had been resisted by the firm of accountants and the liquidators, who gave evidence that they had considered and continued actively to consider commencing proceedings against parties associated with the Tchenguiz brothers to recover assets of companies in liquidation.
The Court of Appeal affirmed the lower court’s finding that “the mere fact that a document is produced for the purpose of obtaining information or advice in connection with pending or contemplated litigation, or of conducting or aiding in the conduct of such litigation, is not sufficient to found the claim of litigation privilege.” Rather, such a purpose had to be the dominant purpose for producing the document. The Court held that this was not established, noting “plainly the first duty of the liquidators was to obtain information simply to establish what if any assets or liabilities existed and what if any steps were open to the liquidators”. Here, the Court of Appeal agreed with the lower court’s assessment that the relevant reports were prepared for multiple purposes and/or that litigation was not reasonably in prospect at the time they were prepared.
Starbev GP Ltd v Interbrew Central European Holding BV
In Starbev, the underlying claim concerned the proper construction of a Contingent Value Right Agreement (CVR) pursuant to which the defendant vendor was entitled to deferred consideration following a sale of its business to certain investment funds. In December 2013, a UK commercial court judge held in Starbev that privilege did not attach to a Barclays advice in relation to the structuring of consideration for the sale of the business, and a KPMG audit report in relation to the CVR. In reaching this conclusion, Hamblen J held that Barclays’ role was merely investigatory, as borne out by documents referring to their role in terms of checking, calculating and reviewing the likely payment as a result of the sale. In respect of the KPMG report, Hamblen J emphasised that neither the formal engagement letter, nor the email request for the report, made mention of anticipated litigation; to the contrary, the request was described as “part of our normal process” and referred to reporting on work which had been done by KPMG before litigation was allegedly in prospect.
While some of the technical details of the tests for legal professional privilege differ as between the United States, the United Kingdom and Australia, the general approach is similar: a communication will only attract legal professional privilege (and therefore, be generally protected from disclosure to regulators or in subsequent litigation) if it was a confidential communication created for the dominant purpose of a lawyer giving legal advice to a client, or for the dominant purpose of a client being provided with legal services relating to actual or anticipated litigation in which the client is, or might be, a party. Communications in internal investigations which do not satisfy that purpose test are at risk of being able to be called for and used by regulators or opponents in subsequent litigation.
Don’t get caught in the grey zone – planning ahead for maximum protection
Many communications connected with internal investigations fall into a dangerous grey zone – containing frank assessments of fault and liability, without meeting the high bar for protection as privileged material, and which could be highly damaging to a company if required to be disclosed in subsequent litigation. As demonstrated by the recent overseas cases discussed in this update, mere indicia of some connection with potential future litigation will not suffice to establish privilege. Indeed, the overall regulatory or compliance purpose of an investigation may make it impossible to demonstrate a dominant litigation or legal advice purpose.
Legal professional privilege should never be lightly assumed to apply. Before undertaking internal investigations – which companies are increasingly doing as a matter of course when concerns about potential misconduct or wrongdoing are raised – companies should consider the following key precautions to minimise damaging exposure and to maximise chances of successfully claiming privilege over communications relating to those investigations.
- Document clearly the objectives of the investigation and the role of lawyers in the investigation: Although the involvement of legal advisors alone will not guarantee privilege, the prospects of successfully claiming privilege over communications will be improved if it can be shown that they were for the purpose of getting legal advice or legal services in connection with anticipated litigation.
- Consider carefully how other experts are engaged: depending on the subject matter of the investigation, it may be necessary to involve other experts. For example, a fraud or bribery investigation may call for the skills of forensic accountants, IT specialists and the like. The output of such specialists will not ordinarily be protected by privilege, unless their work is performed for the dominant purpose of enabling a lawyer to provide legal advice. Any such purpose should be reflected in the terms of engagement of those experts, and their work should be directed by (and output sent to) the company’s legal advisers.
- Establish clear guidelines for seeking legal advice: Appropriate guidelines for seeking legal advice should be built into compliance reporting protocols. High risk investigations (such as fraud, bribery or insider trading) need to be identified at an early stage and referred for early legal advice. Compliance investigations in high risk areas should not be allowed to proceed without appropriate legal oversight.
- Implement appropriate controls over internal communications: internal written communications about an investigation will not ordinarily be privileged. Companies should seek to limit communications about the investigation on a “need to know” basis. There should be clear directions for maintaining confidentiality, and for how and when issues will be escalated and reported internally. Sometimes it may also be necessary to consider whether there are officers or employees of the company who may have interests adverse or potentially adverse to the company in relation to the subject matter of the investigation, and to ensure privilege is not compromised by including those people in communications about the investigation.
- Give guidance about external communications: communications with third parties about an investigation can result in loss of privilege. Sometimes, however, a company will have an obligation to report certain matters to regulators or other third parties, or a commercial need to do so. Companies should take advice about whether it is possible to structure communications in a way which allows them to comply with reporting duties while still preserving privilege.
- Beware the risk of reports prepared for multiple purposes: It is often difficult to establish a dominant litigation or legal advice purpose where a document is prepared for multiple purposes. Consider managing this risk by being clear about why any given document is being created, and trying to keep separate, as much as possible, communications for the purpose of legal advice or litigation, and communications for other purposes (while bearing in mind that the latter will not be protected by privilege).