Can a regulator compel the client or customer of a regulated firm that is under investigation to disclose to it documents otherwise protected by legal professional privilege for use in that investigation? And, if so, is privilege lost when such documents are disclosed? These were the issues facing the Court of Appeal in Sports Direct International plc v. Financial Reporting Council1.
The appeal, brought by Sports Direct International plc ("Sports Direct"), related to an Order made by Arnold J requiring Sports Direct to disclose certain documents to the Financial Reporting Council (the "FRC"), the regulatory body for the accountancy and audit professions, in connection with its investigation into the auditing of Sports Direct's accounts.
This Briefing summarises the decision, which has important implications for the scope of legal professional privilege.
The FRC has been conducting an investigation into Sports Direct's former auditors in connection with the Sports Direct Group's audited financial statements for the year ending April 2016. The FRC is not investigating Sports Direct itself.
The FRC determined that as part of its investigation into the auditors, it needed access to further documents which were not in the auditors' possession but which it considered that the auditors' client (Sports Direct) would have. Under the Statutory Auditors and Third Country Auditors Regulations 2016 (the "SATCAR"), the FRC has powers to require production of documents not just from auditors but also directly from the audited company.
The FRC issued a Notice to Sports Direct requiring it to disclose certain categories of documents. In response, Sports Direct disclosed around 2,000 documents, but withheld production of 40 relevant documents on the ground that they were protected by legal professional privilege. The documents comprised emails and attachments to and amongst Sports Direct's internal and external legal advisers concerning, amongst other things, legal advice relating to challenges from foreign tax authorities.
Sports Direct also sought to withhold attachments to privileged emails where the attachments as stand-alone documents would not be considered to attract legal professional privilege.
The statutory provisions relied upon by the FRC pursuant to which the disclosure Notices were issued were set out in the SATCAR. Materially, the relevant provisions expressly stated that such Notices do not require a person to provide any information or create any documents which they would be entitled to refuse to provide or produce in High Court proceedings on the grounds of legal professional privilege.
The FRC accepted that it would not have been able to compel the auditors, as the target of the investigation, to disclose to it any legal advice which the auditors might have received from their own lawyers. The question was whether the right to withhold documents on the grounds of privilege applied where the right to assert (or waive) privilege belonged to the auditors' client.
At first instance, the judge had held that "the production of documents to a regulator by a regulated person solely for the purposes of a confidential investigation by the regulator into the conduct of the regulated person is not an infringement of any legal professional privilege of clients of the regulated person in respect of those documents. That being so, in my judgment the same must be true of the production of documents to the regulator by the client" (emphasis added). The judge had also found that attachments to emails could not be withheld simply because they had been attached to emails passing between lawyers. Sports Direct appealed both points (known as the "infringement issue" and the "communication issue").
Does production of the documents to a regulator infringe privilege?
Although the FRC accepted that the documents contained material ordinarily protected by legal professional privilege, it did not accept that Sports Direct was entitled to withhold them from production. The FRC advanced two arguments:
- the withheld documents fell within a narrow exception to legal professional privilege, to the effect that where a regulator (such as the FRC) has a statutory power to request documents from a regulated person's client, there is no infringement of the client's legal professional privilege, referred to as the "no infringement" exception; and
- alternatively, the infringement is technical only and can be regarded as authorised by the relevant statutory provisions, referred to as the "technical infringement" exception.
These arguments relied on interpretation of two prior Court of Appeal and House of Lords authorities: Parry-Jones v. The Law Society and others2 andR (Morgan Grenfell & Co Ltd) v. Special Commissioner of Income Tax and another3 respectively.
The exceptions are said to arise only where documents are required by a regulator, because the documents are provided to the regulator in confidence, are only used by the regulator for the purpose of its investigation, are never disclosed more widely, and so retain their confidential and privileged nature. Importantly, the documents are not sought for use to investigate the client who has the right to privilege in the documents, but only to investigate the client's professional adviser who is subject to the jurisdiction of the relevant regulator.
The existence, scope, and basis of the exception are controversial and have been the subject of criticism from academics and practitioners. One obvious area where such a principle or policy might be especially problematic is where the client of the regulated person under investigation is also itself subject to the jurisdiction of the same regulator, as may happen, for example, in the world of financial services.
Sports Direct's arguments in response were that:
- there is no principle under English law whereby the production of documents to a regulator pursuant to statute is not an infringement of the legal professional privilege of clients of the regulated person; and
- in the alternative, even if the breach of privilege were considered to be purely technical, the FRC's powers exercised under the SATCAR did not permit it to override - even to this limited extent - any party's right to withhold privileged materials, given the clear and unambiguous terms of the statute; in particular, the FRC's express inability to compel the production of privileged documents.
The Court of Appeal held in favour of both of Sports Direct's arguments. In doing so, the court drew the following conclusions:
- The case law had not created the "no infringement" exception to privilege as argued by the FRC. In this regard, the Courts' remarks in the Parry-Jones and Morgan Grenfell cases should be read in the light of, and be confined to, the context of those cases.
- In particular, Parry-Jones related to different statutory powers (under the Solicitors Act 1945 and the Solicitors Act 1957), pursuant to which the Law Society had been conferred in clear, express, statutory language, the power to override legal professional privilege in requesting certain documents from solicitors.
- By contrast, the wording of the SATCAR provisions is clear that its provisions do not override legal professional privilege. Had Parliament intended privilege to be overridden, the SATCAR provisions would have been drafted in a different way.
- There was no support in the authorities for a gradation of infringements of privilege, or for a lower threshold to be applied when the override of privilege involved an allegedly technical infringement only.
Accordingly, the Court ruled that the exceptions to legal professional privilege argued by the FRC did not exist, and confirmed that the only exceptions recognised under English law are:
- the "iniquity" exception, in respect of communications between solicitor and client for a criminal purpose; and
- statutory exceptions or abrogations, by clear, express language or necessary implication.
Neither of these exceptions applied here, and so Sports Direct was not required to produce privileged material.
The Court also remarked that if any further exceptions to privilege were to be recognised, those exceptions would need to be principled and clear.
The communication issue (non-privileged attachments to privileged documents)
The second issue being appealed related to non-privileged attachments to privileged emails.
At first instance, the Court had rejected Sports Direct's contention that attachments to privileged emails must also be regarded as privileged, even if the documents in question would not attract privilege as stand-alone documents. Sports Direct advanced what the Court described as a "more subtle" argument on appeal, suggesting that the fact of the communication of the attachment to a legal adviser was privileged (rather than just the document itself being privileged or not privileged). The Court of Appeal rejected this distinction.
The Notice issued by the FRC did not ask for free-standing documents but only for emails and their attachments to be disclosed. Although the privileged emails fell within the scope of the FRC's document production Notice, taken by themselves the attachments to those emails would not fall within those parameters. Sports Direct argued that:
- the attachments could only be regarded as falling within the scope of the document production Notice if they were treated as part of a single communication with the email to which they were attached. If the attachments and the email were treated as a single communication then, since it is accepted that the content of the email is privileged, the whole communication should be regarded as privileged;
- if, on the other hand, the attachments were to be regarded as separate documents from the email, then they should be considered separately to see if they themselves fell within the scope of the Notice, which in this case they did not.
The Court's approach to the issue, based on its interpretation of the Notice issued by the FRC, was that an email attachment should be regarded as responsive to the Notice if it was attached to an email which was itself responsive to the Notice. Further, just because the email was privileged, that did not by itself confer privilege on the non-privileged attachments: privilege does not protect the non-privileged document, nor the fact that it was sent to a legal adviser under cover of a privileged communication. Accordingly, the Court of Appeal held that the non-privileged attachments in question fell within the scope of the Notice.
As has been widely reported since the Court of Appeal's judgment was handed down, both parties have applied for permission to appeal this ruling to the Supreme Court.
Although the context of this case concerned the FRC's statutory powers under the SATCAR, the Court's judgment – and in particular its rejection of the "no infringement" exception – will be of broader consequence, so as potentially to affect the scope of statutory powers conferred on other regulators and public authorities to compel the disclosure of documents. The decision may therefore also be of interest to other regulators; in particular, the Solicitors Regulation Authority, given the Court's treatment of the prior decision in Parry-Jones, which had involved interpretation of the Law Society's erstwhile statutory powers
Given the importance of the matters raised and the broader public interest in having a clearly defined doctrine of legal professional privilege, it is hoped that the case is considered by the Supreme Court so that there can be some degree of clarity and finality to these issues.