Establishing the lines between compliance and legal functions is challenging. In many companies, compliance officers report to the legal department or are staffed with qualified lawyers, making it difficult to distinguish when the compliance officer is serving in a legal capacity, rather than a compliance one.
There is an obvious and necessary symbiotic relationship between compliance and legal personnel, who all have a role in preventing and detecting potential legal violations within a company.
A compliant company will undoubtedly rely on both departments to ensure its successful operations, and there is often an unclear line between compliance and legal functions. This line can be particularly hard to determine when a company employs a single person to serve in both legal and compliance functions (eg, as general counsel and the chief compliance officer (CCO)) or where the compliance functions report to the legal department. With respect to evaluating whether compliance personnel's communications and work product is privileged, the US courts have repeatedly ruled that compliance and legal functions are distinct and that compliance-related communications and documents are not privileged. As a result, companies frequently find themselves challenged by opponents in litigations which seek the production of compliance-related documents that compliance personnel may have thought were privileged, which can easily lead to inadvertent waiver of privilege and compelled productions, even by those acting carefully and with the best intentions.
Like most analyses of attorney-client privilege and the work-product doctrine, there is unfortunately no one-size-fits-all approach to protecting the privileged work of compliance officers. Any evaluation of the privilege is fact-based and must be evaluated on a case-by-case basis. Further, courts construe privilege as narrowly as possible and in many jurisdictions continue to make novel rulings that further restrict the privilege. Companies with operations around the country cannot predict in which jurisdiction's courts they might find themselves and should therefore act in a manner that would preserve their legal privileges under even the narrowest of interpretations. However, there are some measures that companies can take which will increase the likelihood that their privileged materials are protected from disclosure.
While compliance officers are employees of the company and therefore their involvement in a company's communications would never destroy privilege, no court to date has recognised a separate compliance officer's privilege. The question of when a compliance officer's communications and work-product are privileged is therefore analysed under the two traditional categories of legal privilege:
- attorney-client privilege; and
- the work-product doctrine.
Attorney-client privilege covers communications between an attorney and a client (or their agents) as long as the communications are confidential and made to obtain or provide legal advice. The work-product doctrine protects materials prepared by an attorney or party (or one of their agents) in anticipation of litigation. The party asserting that a document is privileged bears the burden of meeting the elements of a privilege claim. In certain cases, the judge presiding over the case may require the evidence subject to the privilege claim be provided to the judge for an in-camera review. During which, the judge will review the allegedly privileged documents and may hear additional supporting evidence (eg, witness testimony and documentary evidence) in order to determine whether the evidence in question is privileged.
In In re Kellogg Brown & Root, Inc (KBR)(1) the DC Circuit provided a roadmap to determining whether compliance officers' communications could be protected by the attorney-client privilege or the work-product doctrine. In KBR a False Claims Act relator sought production of documents relating to Kellogg Brown & Root's internal investigation into claims that it had defrauded the US government in connection with military contracts in Iraq. The court concluded that the documents relating to the internal investigation were privileged, since the investigation was conducted by KBR's legal department and all non-attorney participants in the investigation were acting at the direction of KBR's in-house attorneys. While the DC Circuit ultimately upheld the privilege, it followed a protracted battle in which the district court initially rejected KBR's assertion of privilege and compelled production of sensitive investigative materials that the court described as "eye-openers".(2)
By the time that the DC Circuit weighed in, to at least some extent, the damage had already been done, as evidenced by the district court's revelation that KBR employees had steered business and otherwise provided preferential treatment to a particular third party. Although it is impossible to say what facts would have made the district court rule in KBR's favour at the trial level, KBR's position may have been strengthened by stronger contemporaneous evidence that its investigation was intended to be privileged.(3)
The DC Circuit rejected the government's argument that the purpose of the investigation was to satisfy the compliance obligations with the Department of Defence rather than to provide legal advice, holding that as long as one of the significant purposes of the communication was to obtain or provide legal advice, the communication would be protected by the attorney-client privilege. This 'primary purpose' test has been employed by the US District Court for the Southern District of New York,(4) the Central District of California,(5) the Southern District of Texas,(6) the Northern District of Georgia,(7) the District of Oregon(8) and the District of New Mexico(9) in making privilege determinations.
However, other courts have held that obtaining legal advice must be the predominant purpose of a communication, rather than merely one of the primary purposes, before the privilege will attach. In Alomari v Ohio Dept of Public Safety the Sixth Circuit stated that "[w]hen a communication involves both legal and non-legal matters, we consider whether the predominant purpose of the communication is to render or solicit legal advice".(10) The Second Circuit also adopted a form of the 'predominant purpose' test in In re County of Erie.(11) Subsequent interpretations of these tests call into question whether there is any actual distinction between the primary purpose and predominant purpose tests.
Applying either the 'primary purpose' or 'predominant purpose' test is necessarily fact-intensive and must be done on a case-by-case basis. For companies in which certain key employees serve dual legal and compliance roles, it may be even more difficult to establish that a primary purpose of the communication was to provide legal advice, as opposed to compliance or general business advice. In other situations, such as where non-attorney compliance officers may conduct investigations into potential compliance violations that also carry the possibility for legal liability, the role of the general counsel's office or the legal department may determine whether communications and documents should remain privileged.
One good example of the complications that can arise when one employee carries out both legal and non-legal roles is the US District Court for the Western District of Texas' decision in Freescale Semiconductor v Maxim Integrated Products.(12) In Freescale Maxim's general counsel/CCO received an anonymous tip via the company's online ethics portal and responded, exchanging two messages with the anonymous employee. When Freescale sought production of the messages, the court held that the initial submission was not privileged because Maxim could not meet its burden to show that the anonymous employee had been seeking legal advice or that Maxim had somehow solicited the communication to provide legal advice. However, the court held that two subsequent communications between the whistleblower and Maxim's general counsel/CCO were protected by attorney-client privilege, as these were communications between the corporation's counsel and its agent made for the purpose of investigating a potential claim in order to render legal advice to the company. Similarly, in US ex rel Parikh v Premera Blue Cross(13) the US District Court for the Western District of Washington held that where an employee has both legal and business roles within the company, the corporation asserting the privilege must clearly demonstrate that the employee was acting in its legal capacity when he or she sent the communication for the privilege to attach. In US ex rel Frazier v IASIS Healthcare(14) the US District Court for the District of Arizona held that a CCO's communications with employees were not privileged, despite the fact that the CCO had a law degree, because he was not a member of the legal department and did not hold himself out to be a lawyer. When asserting privilege over communications of dual-purpose employees, the decision will hinge on what role the employee was acting in at the time the communication was made.
Similar rules regarding the distinction between compliance and legal functions apply when asserting work-product protection. For example, in Prince v Madison Square Garden(15) the defendant corporation first conducted an internal investigation into a former employee's discrimination claims, carried out exclusively by internal employees. The company later hired outside counsel to defend it against both the original administrative charge and the related lawsuit by the former employee. The court held as follows: "at some point, the purpose and focus of the investigation had to have shifted from an internal investigation… to an investigation for the purposes of mounting a legal defense".
The court ordered the defendants to turn over materials produced before the engagement of outside counsel, which it considered part of the internal compliance investigation, but declared that those materials created after the initiation of outside counsel's investigation were protected by the work-product doctrine. In Wultz v Bank of China Ltd(16) the court held that documents collected by compliance personnel relating to an internal investigation were not privileged merely because the company's employees expected to give them to the firm's outside counsel. In order to gain work-product protection, those documents would have to have been collected at the direction of counsel, not merely in anticipation of turning them over to counsel. These cases, and others like them, show that in order for a compliance investigation to be protected by the work-product doctrine, it should be done at the direction of the legal department, and those investigating (whether they are counsel or acting at the direction of counsel) should clearly demonstrate when they are conducting an investigation for the purposes of mounting a legal defence to an imminent legal claim against them.
Given this information, how can companies best protect information that should be privileged from being swept up in a request for compliance-related documents and turned over to the other side? The key lies in drawing clear lines between the company's compliance and legal functions and ensuring that employees make clear when they are acting in a legal role or at the direction of counsel. This way, should the documents ever be subject to an in-camera review to determine privilege, there will be a clear evidentiary record to distinguish privileged from non-privileged documents. Companies should bear in mind that these reviews often occur years after the privilege materials were created, and the people involved may not remember details and may not even be employed at the company. Companies should therefore consider the following measures to identify documents as privileged in real time that will later serve as persuasive, contemporaneous evidence of their privileged nature.
Tips to follow
- Clearly label documents as 'privileged and confidential' and 'attorney-client communication' and/or 'attorney work product' where an employee seeks to obtain or convey legal advice or create materials in anticipation of litigation. This is particularly important for compliance officers who wear two hats and have compliance and legal functions, as it will demonstrate that a primary purpose of the document is to obtain or convey legal advice.
- Have all employees, even those outside of the legal and compliance departments, clearly and explicitly state that they are soliciting legal advice when it is being sought. They, too, can label these documents as 'privileged and confidential'.
- Draft a clear investigative plan when investigations and other attorney work products will be created by compliance personnel or non-lawyers at the direction of counsel. Whether led by in-house or external counsel, an investigation plan should be created which documents the role of these non-legal personnel. This can be revised throughout the duration of the investigation to reflect the work being carried out by non-lawyers. All such materials should also be labelled accordingly. This is particularly important where the compliance department does not have a direct reporting line to the legal department. This structure is becoming increasingly common and is preferred by the government. It also eliminates at least some evidence that an investigation is being directed by counsel.
- Report to counsel – when an investigation is being carried out at counsel's direction, there should be regular reporting to and direction from counsel. This will demonstrate that the investigation is truly being led by counsel, rather than merely being labelled as such to create indicia of privilege.
- Make clear in interviews that an investigation is being conducted at the direction of counsel and for the purposes of providing legal advice, even if counsel is not present.
- Document when legal advice is being sought or conveyed in meeting minutes. Simply because a compliance officer is speaking, records of his or her advice will not be presumed as privileged.
Things to avoid
- Simply label all documents or emails as 'privileged and confidential' as a matter of course. Instead, company personnel should use this label only when truly seeking or providing such advice in order to reflect the individual's contemporaneous understanding at the time of creating the document. Doing so will be strong evidence for an in-camera review. Conversely, where an employee (and particularly a compliance officer) labels every document – even those that he or she does not believe contain legal advice – as privileged, the label is rendered largely meaningless.
- Copy a compliance officer on every communication, even if implicitly seeking legal advice, and assume it will be privileged. Compliance officers frequently participate in strategic meetings, executive committee functions and other primarily business-related activities in order to provide compliance advice, which will not be protected as a matter of course. To the extent that any legal advice is being sought or conveyed, it should be clearly labelled to reflect that it is a primary purpose of the communication.
- Copy in-house counsel on every communication to create privilege. If counsel's advice is not being sought and the work is not being directed by counsel, the document itself is not privileged. This practice will undermine the evidentiary value of other correspondence with counsel copied, where counsel was included for the actual purpose of obtaining legal advice.
While the line between compliance and legal functions may be somewhat unclear in the day-to-day operation of a company, it is critical when determining which documents may be privileged from disclosure and which must be turned over to an opposing party. While privilege determinations may vary considerably from jurisdiction-to-jurisdiction and case-to-case, following a few simple procedures should offer the best possibility of ensuring that privileged documents remain protected. Drawing a clear distinction between compliance and legal functions, conducting internal investigations under the direction of counsel (either in-house or outside) and making the legal purpose of communications or documents clear when they are created will make the best possible record to show that documents should be protected by privilege.
For further information on this topic please contact at Virginia (Ginny) A Gibson at Hogan Lovells US LLP's Philadelphia office by telephone (+1 267 675 4600) or email (firstname.lastname@example.org). Alternatively, contact Ethan Kate or Tyler Blake at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600) or email (email@example.com or firstname.lastname@example.org). The Hogan Lovells website can be accessed at www.hoganlovells.com.
(3) For instance, there was no record that the non-attorneys that carryied out the interviews had made clear to interviewees that the interview was being conducted for the purposes of rendering legal advice. Kellogg, 756 F3d at 758.
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