On March 6, 2014, the District Court for the District of Columbia issued an opinion in Barko that has the potential to disrupt the manner in which companies conduct compliance investigations, particularly in regulated industries such as the defense 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 (FAR), and internal policy. The court relied heavily on the fact that the investigation was conducted by non-lawyers and would have been done even absent the involvement of the legal department. Although there are certain flaws in the court’s reasoning, this case — if widely adopted — could cause significant disruption in existing corporate compliance and investigation programs.
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. Under Halliburton’s Code, the Director of Business Conduct, upon receiving an allegation, is required to determine whether or not 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 that requires that information discussed during the interview be kept confidential. The statement, however, 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 FAR, defense contractors like Halliburton are required to adopt programs to discover, investigate, and report fraud and abuse. The court said that Halliburton’s COBC policies and procedure merely implemented these legal requirements. Thus, they did not meet the “but for” test. The court said that the investigation at issue differed from that conducted in Upjohn4 because 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 D.C. 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 upon 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 absent the threat of litigation. While recognizing 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 has made clear that it intends to appeal the court’s ruling and has sought a stay in the interim. Indeed, there appear to be several flaws in the court’s reasoning. Initially, although the court cites ISS Marine for the proposition that the “but for” test applies in the D.C. 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 D.C. Circuit has not made clear how it would come out, and other courts have taken a broader view.
Moreover, although the FAR requires that Halliburton, or any contractor, adopt certain procedures, it does not dictate the nature or contents of the compliance program 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 will not only be seeking to comply with the FAR reporting requirements, but it 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.
Also, 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 fulfill its fiduciary duties to shareholders by failing to anticipate the prospect of litigation if the allegations were substantiated.
Those weaknesses being said, it must be noted that the manner in which Halliburton chose to undertake the investigation here certainly did nothing to advance its cause. Courts have repeatedly raised concerns over the mixing of business and legal communications in potentially privileged material. In In re Vioxx Prod. Liab. Litig., 501 F. Supp. 2d 789 (E.D. La. 2007), 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, we present some general guidance on how to maximize 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, such as in investigations in which there is significant potential legal exposure to the company from the allegations. Examples are allegations of corruption, false claims, bid rigging, etc.
- The company should adopt formal procedures for involving lawyers in the early triage of allegations. The compliance program 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.
We will keep you informed of further developments in this area as they take place. If you have any questions please feel free to contact any of the authors listed.