In exercising its authority to decide on the legality of seizures by the Federal Cartel Office (FCO), the Bonn Regional Court recently dealt with the issue of legal privilege in internal audit documents.(1) On the basis of its decision, it appears that internal audit documents – even those prepared by external counsel – can be seized during a dawn raid on a company. However, not all German courts share this view.
In July 2011 the European Commission conducted a dawn raid on the UK subsidiary of an international group of companies. The raid was part of an investigation into cartel activities, including price fixing and customer allocation, in the polyurethane foam market. Polyurethane is, among other things, used in the production of mattresses.
The parent entity immediately instructed its law firm to carry out a group-wide competition law audit. The parent entity issued a power of attorney "for the purpose of carrying out all acts related to the defence in connection with the investigation by the European Commission… in the polyurethane foam sector".
During this audit a German subsidiary – a mattress distributor – reported possible cartel activities in the German mattress markets. In a second interview the subsidiary reported possible resale price maintenance in these markets. Summaries of the interviews (dated October 2010 and February 2012) were kept by the subsidiary.
In July 2012 the FCO launched an investigation into the subsidiary for alleged resale price maintenance on the mattress market. While conducting a dawn raid in August 2012, it found and seized the documents.
The company objected to the confiscation. The Bonn District Court found – and the Bonn Regional Court confirmed – that the documents were not legally privileged and could be used by the FCO.
The Bonn Regional Court analysed existing case law and noted that under the Code of Criminal Procedure, documents are not normally privileged unless they are in a lawyer's possession. Sections 97(1) and 53(1) of the code state that written communications between a lawyer and the accused are protected by legal privilege and may not be seized from the lawyer's possession, whereas documents in the client's possession can normally be seized. In its summary of the case law, the court considered that the only exception to this rule applies to defence documents, whether prepared by the accused or exchanged between the accused and the defence lawyer.(2) On this basis, the court saw no reason why the internal audit documents that had been prepared by external lawyers on behalf of the parent entity should be protected in an investigation into the subsidiary if such documents were in the subsidiary's possession.
The court mainly focused on the absence of a defence relationship between the subsidiary and the law firm which carried out the audit. As only the parent company had mandated the law firm to act on its behalf and had instructed the firm to carry out the group-wide audit, the subsidiary was merely the object of the audit, not a client. In the court's view, the subsidiary could not be considered a client merely because it was a subsidiary of the company on whose behalf the audit was performed. Thus, the court considered that in the absence of a formal defence relationship between the subsidiary and the law firm, the documents were not legally privileged.
The court also observed that no legal privilege existed because the documents had been created months before the FCO had opened its investigation into the German subsidiary (ie, before the subsidiary had been formally accused). The court evidently considered that, by definition, documents drafted before a client is formally accused cannot be regarded as 'defence documents' for these purposes and therefore do not enjoy legal privilege.
The court also rejected the argument that the documents were protected because they were closely related to the proceedings at EU level, for which a defence relationship existed. The court noted that the investigations conducted by the European Commission and the FCO concerned different product and geographic markets. In the court's view, this demonstrated that even apart from the fact that the proceedings of the commission and those of the FCO were targeted at different legal entities, there was no sufficiently close and direct relationship between the documents and the commission proceedings.
The parties noted that in commission proceedings, legal privilege extends to documents that were prepared before investigations, as long as they are clearly intended to be used to prepare a defence. Thus, the parties argued that the effet utile principle (ie, the purpose and context) required the FCO to apply the same procedural standards in order to allow for uniform application of Article 101 of the Treaty on the Functioning of the European Union. The court rejected this argument on the same basic grounds as before, holding that EU law would also restrict privilege to defence documents that had been prepared by or on behalf of the accused party (in this case, the German subsidiary). Since the audit had been commissioned by the parent company, the audit documentation could not be deemed to constitute defence documents from the subsidiary's perspective. The FCO considered the parent entity's lawyers to be third parties in this regard – their documents did not enjoy legal privilege insofar as the German subsidiary was concerned.
The court also stated that the Akzo Nobel judgment(3) made clear that the scope of legal privilege under EU law and under national laws may differ. Thus, there was no obligation to apply the same rules on legal privilege under EU law and national law.
The decision largely rejects legal privilege for internal audit documents in Germany. The court set out two main positions whose implications may reach far beyond the facts of this case:
- Internal audit documents in the client's possession are protected only if they are defence documents (ie, if they have been drafted as a defence document by the company in question or on its behalf in a pending investigation against the company).
- Correspondence with lawyers which is in the company's possession is not protected if the company has not mandated the firm to act on its behalf. In particular, no group-wide legal privilege exists.
The court's first point is consistent with previous case law, in that documents in the client's possession are protected from seizure only if they are defence documents. However, the court's formalistic definition of 'defence documents' is arguably too narrow: it restricts the term to documents that are prepared by or on behalf of a company which is already subject to an investigation.
On these terms, internal audit documents that are prepared by external lawyers and found at a company during a (first) dawn raid would almost never be protected. Normally, no formal defence relationship exists between the lawyer and the company before the dawn raid – the company instructs its defence lawyers only in response to the surprise inspection. Consequently, documents prepared before the dawn raid would not have been prepared as part of a defence relationship and, by the court's logic, could not be defence documents.
Four days after this decision, the Gießen Regional Court(4) arrived at a more lenient, less formalistic definition. It set out a cogent view that a party's rights of defence can be safeguarded only if it can prepare its defence before formally being accused and before a defence lawyer is formally appointed. An effective defence requires that a party be able to consult its lawyer in the preparation of its defence. This appears to extend legal privilege to internal audit documentation in the client's possession if the audit could serve to prepare a defence against a possible subsequent investigation.
However, the courts of Bonn have jurisdiction to determine the legality of the FCO's investigation activities and the FCO will align its actions with their case law. Since the Bonn courts are not bound by the decision of the Gießen Regional Court, the latter's decision – although convincing in its reasoning – is likely to have little effect on FCO practice.
The court's second main position affects group-wide audits in particular. Internal audit documents can be seized if they are in the possession of employees or group entities and if such employees or entities did not themselves instruct the auditing external lawyers. Even if all group entities involved in the audit were to formally instruct the same lawyers, this would not automatically protect all audit materials from confiscation, particularly if the audit revealed that different subsidiaries had committed different infringements. Furthermore, the Bonn Regional Court has expressed doubts – without deciding the issue – as to whether German rules on professional responsibility allow the same lawyer to accept instructions by a parent company and its subsidiaries in the same matter.
Companies would be well advised to avoid keeping a copy of internal audit documentation, at least if they are not yet subject to an investigation. All such documentation should be kept by the external lawyers who audited the company – although further uncertainty surrounds the circumstances in which law firms can be raided and what documents may be confiscated from them. It has recently been argued that the amendment of Section 160a of the Code of Criminal Procedure could provide additional protection for documentation in the possession of lawyers. Despite these uncertainties, as a rule such documentation will be much safer with external lawyers than with the companies themselves.