On March 6, 2014, the United States District Court for the District of Columbia ruled that no attorney-client privilege or work product protections barred release of documents related to a company’s internal investigation of alleged misconduct in awarding overseas subcontracts.1 Judge James Gwin, sitting by designation from the Northern District of Ohio, ruled that Kellogg Brown and Root’s (KBR’s) internal investigation, undertaken to comply with federal mandatory disclosure regulations, was rooted in business necessity, rather than conducted primarily to obtain legal advice.
The Court’s holding that KBR’s internal mandatory disclosure investigation was business in nature because it was undertaken “pursuant to regulatory law and corporate policy” could be broadly read to establish a presumption that all such investigations are business in nature. That reading, however, would severely narrow the privilege for bona fide legal investigations and represent a significant departure from other decisions. Instead, it is more likely that the Court was troubled by evidence that, although counsel initially authorized the investigation, non-lawyers conducted the investigation without much direct involvement from counsel. Clarification of the ruling is currently being sought by KBR in a petition for writ of mandamus before the D.C. Circuit. Regardless of that outcome, the case highlights steps that contractors must take to show that their internal investigations are conducted primarily for a legal, rather than business, purpose, in order to preserve attorney-client privilege and work product protections. One of the most important steps is that counsel be actively involved in and supervise the work of non-lawyers.
KBR’s investigation arose from several internal tips alleging kickbacks, bribery and fraud in connection with subcontracts awarded in the Middle East under KBR’s Logistics Civil Augmentation Program III contract. The tips arrived under communication channels established by KBR’s “Code of Business Conduct” (COBC), required by the Federal Acquisition Regulation’s mandatory disclosure rules. See FAR 52.203-13. Pursuant to KBR’s standard COBC process, the tips were first reviewed by an in-house attorney serving as the director of the COBC, who then initiated the investigation and assigned development and substantiation of the claims to non-attorney KBR investigators. The investigators conducted witness interviews, reviewed documents and summarized findings in two investigatory reports. As part of the investigation, KBR in-house counsel also authorized the non-attorney investigators to consult with other non-attorney KBR contract specialists, who provided expertise in accounting, finance, procurement and subcontract administration.
According to KBR, all COBC investigations are “highly sensitive and are conducted in anticipation of potential litigation involving the Government or qui tam actions such as the present case.” 2 KBR treated its COBC files as privileged, with all tips conveyed through confidential channels and first reviewed by an in-house attorney. COBC files are kept in locked file cabinets, inside a locked room at KBR headquarters. If allegations are substantiated, the COBC director or other in-house attorney advises appropriate KBR management of the potential violation and recommended action, which sometimes requires disclosure to the government. When those disclosures are made, KBR summarizes the allegations and its findings, but has never waived the privilege over its COBC files when disclosures are made.
The Court noted that, despite KBR’s own understanding and treatment of COBC investigations as privileged, witnesses in this investigation apparently were not told that their interviews were conducted for the purpose of enabling counsel to provide legal advice to the company. Witnesses did sign fact statements labeled “Attorney-Client Privilege” and also signed confidentiality agreements that they were prohibited from discussing the interview without authorization by KBR General Counsel. However, the Court noted that these documents lacked express notification that the information contained therein was for the purpose of providing legal advice to KBR.
To protect documents under the attorney-client privilege, the party invoking the privilege must show the communication was created primarily for the purpose of obtaining legal advice. The Court relied on the legal standard outlined in United States v. ISS Marine Services, Inc.,3 in which a “but for” test was used to determine the primary purpose of the communication. In application, this means that “the party invoking the privilege must show ‘the communication would not have been made “but for” the fact that legal advice was sought.’” Id. at 128. The Court reasoned that because KBR needed to comply with mandatory disclosure regulations, which require a “written code of business ethics,” “internal controls for compliance,” “timely reporting” and “full cooperation” with the government, the investigations would have been conducted regardless of whether legal advice was sought. Op. at 6. Although the Court did not establish an irrefutable presumption of business purpose to all such investigations, the Court found KBR’s conduct, corporate policies and written records lacked sufficient evidence of legal purpose and concluded that this COBC investigation was “a routine corporate, and apparently ongoing, compliance investigation required by regulatory law and corporate policy.” Id.
The Court distinguished KBR’s investigation from that in Upjohn Co. v. United States,4 where the privilege was found, because the Upjohn investigation was “conducted only after attorneys from the legal department conferred with outside counsel on whether and how to conduct an internal investigation.” Id. Here, counsel initially reviewed and authorized the investigation, but remained largely uninvolved until reviewing investigatory reports to determine whether to disclose the information. In this case, KBR did not disclose the conduct investigated and no disciplinary action was taken.
With respect to the work product doctrine, which protects an attorney’s “mental impressions, conclusions, opinions or legal theories” prepared in anticipation of litigation, the Court applied the D.C. Circuit’s “‘because of” test.5 Under this test, the Court asked “whether, in light of the nature of the documents and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.” Id. To meet this standard, “the lawyer must at least have had a subjective belief that litigation was a real possibility, and that belief must have been objectively reasonable.”6
The Court emphasized KBR’s heavy burden in seeking work-product protection for a multi-purpose document given the D.C. Circuit’s recognition that the protection has no application to documents prepared by lawyers in the ordinary course of business. The Court concluded that because the COBC investigation was conducted in the ordinary course of business under mandatory disclosure regulations, irrespective of the prospect of litigation, the work product protection did not apply to this case. Despite KBR’s argument that any COBC investigation could blossom into litigation, the Court denied any protection under the work product doctrine because the handling of much of the investigation was by non-attorneys and the fact that the qui tam litigation based on the same facts underlying the investigation was not unsealed until three years following the conclusion of KBR’s internal investigation.
Protecting Internal Investigations
Several practice points emerge following the KBR ruling, which highlights the challenge facing large government contractors fielding numerous internal tips of alleged misconduct via compliance programs established under mandatory disclosure rules. It is not enough to treat the investigation as privileged and confidential; instead, counsel must be actively involved in supervising an investigation, and the company must be able to establish that each investigatory document was created at the direction of counsel for the purpose of providing legal advice, and, if relevant, in anticipation of litigation. In addition, the company must ensure witnesses are informed that they are providing information for a legal purpose and that they should keep the substance of their communications confidential. Particularly where non-attorneys are charged with conducting parts of the investigation, it is critical to ensure there is no question – either to those involved in the investigation or to courts that later review the evidence – that the company’s attorneys were at the helm, providing the requisite degree of oversight and involvement, and that the primary purpose of the investigation was to provide legal advice to the company.
- Ethics and compliance codes should expressly state that tips that the company considers potentially significant and non-routine will be evaluated by the company’s legal counsel for the purpose of providing legal advice to the company.
- Procedures for funneling matters to be considered for mandatory disclosures up through relevant business departments and to headquarters should be reassessed to ensure they reflect the legal rather than regulatory nature of the inquiry.
- For the most sensitive matters, attorneys should conduct most or all formal investigation interviews. When the company decides that it will use non-attorneys to conduct interviews, counsel should work directly with the nonattorneys in developing their investigation strategy and have regular contact with the non-attorneys to enable counsel to supervise the investigation.
- Witnesses should be told by counsel, or by a non-attorney acting on behalf of counsel, that they are being interviewed to obtain information to enable counsel to provide legal advice to the company. Witnesses should also be informed that the company seeks to keep the information confidential and privileged; that to do so, the witnesses must agree to keep the discussion confidential; and that the privilege belongs to the company, which has the right to disclose information to other parties should that be in the company’s best interest.
- Investigators who are non-attorneys should tell witnesses that the interview is being conducted at the request of the company’s counsel.
- Communications by non-attorneys regarding the investigation, such as reports, emails and witness summaries, should begin by stating that the information contained within the communication was obtained at the direction of counsel for purposes of providing legal advice and in anticipation of litigation.
- In-house counsel should document providing legal advice. When in-house counsel who is working on an investigation has business as well as legal responsibilities, work prepared as part of an internal investigation should reflect that it was prepared within the scope of counsel’s legal duties.
- Counsel should prepare guidelines identifying the nature and scope of the investigation and its purpose (e.g., obtaining information necessary to provide legal advice to the company in anticipation of litigation).
- Subject matter experts should be engaged by counsel, not by non-lawyer investigators, and their work should be supervised by counsel.
- Outside counsel should be used for the most sensitive investigations.
Mandatory disclosure rules for federal government contractors specifically provide that a contractor need not “waive its attorney-client privilege or the protections afforded by the attorney work product doctrine” to fully comply with those rules. FAR 52.203-13(a). But as the recent KBR ruling demonstrates, it can be difficult for contractors complying with mandatory disclosure rules to establish the attorney-client privilege or work product protections without having counsel actively engaged in the investigatory process. Because the process of investigating and reporting misconduct has been incorporated as a contractual requirement with the government, such investigations have an indelible business component. To overcome a finding that an investigation was performed as part of a routine corporate policy, contractors seeking to protect their internal investigations from disclosure must ensure the evidence will support a finding that the investigation was conducted primarily for a legal purpose. To do so, companies should ensure counsel are sufficiently involved throughout the investigation and expressly state – in its policies, as well as its investigation records – that the communications were created at the direction of counsel for the purpose of providing legal advice, and, if relevant, in anticipation of litigation.