On March 6 2014 the US District Court for the District of Columbia issued an opinion in United States ex rel Barko v Halliburton Company(1) that has the potential to disrupt the manner in which companies conduct compliance investigations, particularly in regulated industries such as the defence industry. The opinion found no attorney-client privilege or work product immunity for an investigation conducted by Halliburton's Office of Business Conduct because the investigation was required both by law, under the Federal Acquisition Regulation, and by internal policy. The court relied heavily on the fact that the investigation was conducted by non-lawyers and would have been carried out even without the involvement of the legal department. Although there are certain flaws in the court's reasoning, this decision – if widely adopted – could cause significant disruption in existing corporate compliance and investigation programmes.
Barko brought a qui tam complaint alleging that corruption related to certain government subcontracts had led to overcharges to the government. As part of his discovery requests, Barko sought production of investigative reports and related documents from the company's review of allegations that Halliburton employees steered subcontracts to a third party and allowed that subcontractor to submit inflated invoices for substandard work. The court conducted an in camera review of the investigation reports and documents and determined that the material showed clear evidence of fraud.
Halliburton investigated these allegations from 2004 to 2006 pursuant to a code of business conduct (COBC) investigation. Halliburton's COBC provides that the director of business conduct, on receiving an allegation, is required to determine whether to open a COBC file and proceed to investigate the matter. COBC non-lawyer investigators then conduct an investigation. They interview personnel, collect documents and obtain witness statements. During interviews, witnesses are asked to sign a confidentiality statement requiring that the information discussed during the interview be kept confidential. However, the statement neither mentions the attorney-client privilege nor discusses the involvement of lawyers in the review. This information is placed in the COBC file and a report is generated. According to the court, only then are the report and supporting material sent to the legal department.
The court found that in order for the privilege to be invoked, it must be shown that "the communication would not have been made 'but for' the fact that legal advice was sought".(2) In this case, the court found that the COBC investigations were "undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice".(3) Thus, there was no privilege.
The court found that under the Federal Acquisition Regulation, defence contractors such as Halliburton are required to adopt programmes to discover, investigate and report fraud and abuse. The court said that Halliburton's COBC policies and procedure merely implement these legal requirements. Thus, they do not meet the 'but for' test. The court said that the investigation at issue differed from that conducted in Upjohn(4) because in this case there had been no effort to consult with outside counsel about whether an investigation was needed. Further, the interview subjects were never informed that the purpose of the interview was to assist the company in obtaining legal advice. Indeed, the interview subjects were unable to infer that the purpose of the interview was to assist in legal advice because the interviewers were not lawyers.
Similarly, the court rejected the argument that the materials were protected by the work product doctrine. It noted that the District of Columbia Circuit uses the 'because of' test, looking to see whether the documents were prepared or obtained because of the prospect of litigation.(5) Noting the heavy burden on the party asserting the doctrine, the court found that in this case it was clear that the internal investigations would have been conducted in the ordinary course of business irrespective of the prospect of litigation. According to the court, not only was the investigation required by government regulations, but also no reputable business would have failed to investigate the matters at issue even without the threat of litigation. While recognising that the documents produced by non-attorneys could be protected, in this case the fact that the investigation was led by non-attorneys proved fatal to the assertion of the doctrine.
Halliburton appealed the court's ruling and argued the appeal on May 7 2014 before the US Court of Appeals for the District of Columbia Circuit. Initially, although the court cited ISS Marine for the proposition that the 'but for' test applies in the District of Columbia Circuit, in that case Judge Howell made clear that there was an alternative test that allowed the privilege to be asserted over broader communications where there was an implied request for legal assistance.(6) While the ISS Marine court adopted the 'but for' test, the District of Columbia Circuit has not made clear how it would come out, and other courts have taken a broader view.
Moreover, although the Federal Acquisition Regulation requires that Halliburton or any contractor adopt certain procedures, it does not dictate the nature or contents of the compliance programme adopted by individual companies. Nor does it preclude the integration of those procedures with the company's process for seeking of legal advice. For instance, where there is a serious allegation of government contract fraud, a company not only will be seeking to comply with the Federal Acquisition Regulation reporting requirements, but also will be anticipating likely litigation with the government or private parties resulting from the corroboration of such allegations. The court's view that the regulations alone drove the investigation here is thus far too simplistic.
In addition, the fact that the investigation in this case was required by the company's COBC does not mean that it was divorced from the process of seeking legal advice. In today's business climate any allegation of fraud carries with it a significant risk of litigation. Thus, to find that a company's mandatory requirement to investigate such allegations precludes a finding that the investigation had a legal purpose would unfairly handicap a company seeking to do the right thing. Nor would management fulfil its fiduciary duties to shareholders by failing to anticipate the prospect of litigation if the allegations were substantiated.
Those weaknesses noted, Halliburton could have undertaken the investigation in a way that would have strengthened its position. Courts have repeatedly raised concerns over the mixing of business and legal communications in potentially privileged material. In In re Vioxx Prod Liab Litig(7) the court made clear the need to examine the role of in-house counsel to determine whether they were acting in a legal or business capacity. The facts here go further and show the danger of relying on non-lawyers to conduct investigations with potential legal consequences. Halliburton's failure to integrate legal counsel into their COBC investigations rendered them vulnerable to attack by a third party seeking discovery of those investigative results.
So what can a company do to make sure that internal audit and compliance processes are as protected as possible? For example, internal audit reviews that are conducted on a fixed and regular basis as part of the everyday audit process tend to fall outside of the attorney-client privilege. The compliance department presents a particular challenge, given that its role is often undefined or, at best, ambiguous. In some companies it is part of the legal department, while in others it has a dotted-line reporting relationship and in others it is completely separate from legal.
Given the complexities in establishing attorney-client privilege protection in compliance investigations, the following is some general guidance on how to maximise protection:
- While the compliance department need not be part of the legal department to allow privilege to apply, key individuals in the department should be lawyers and should have titles that reflect responsibility for providing legal counsel to the company.
- The company should adopt policies that give guidance to the compliance department about when to involve the legal department (eg, in investigations in which there is significant potential legal exposure to the company from the allegations). Examples are allegations of corruption, false claims and bid rigging.
- The company should adopt formal procedures for involving lawyers in the early triage of allegations. The compliance programme should include formal coordination with the legal department from the very early stages.
- Individuals carrying out the investigation, including interviewing subjects, should be reporting to a lawyer, regardless of whether that lawyer is part of compliance or legal.
- When opening up a compliance investigation, care should be taken to document the purpose of the investigation, including allowing the company to prepare for litigation that is likely to result from any finding supporting the initial allegation.
- Interview subjects should receive Upjohn warnings and they should be told clearly that the interviewers are acting at the direction of legal counsel and what they say will be shared with legal counsel to allow the company to formulate legal strategy and defend against possible litigation.
As the court noted in Barko, the involvement of outside legal counsel from an early stage in the proceeding will generally be viewed as increasing the likelihood that the investigation was carried out for purposes of providing legal advice, even if there are other requirements that mandated investigation.
These recommendations cannot guarantee that a court will find an investigation to be covered by the attorney-client privilege. However, they increase the likelihood of such a finding by providing indicia that the investigation was carried out for legal purposes.
For further information on this topic please contact Stuart Altman, Michael Mason, Thomas McGovern or Peter Spivack at Hogan Lovells US LLP by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.