Many experienced government contractors are familiar with the need to conduct internal investigations to explore potential violations of the numerous contractual, statutory and regulatory requirements imposed as conditions of doing business with the Federal Government.  Contractors may be able to protect the confidentiality and candid and open nature of internal investigations with the shields of attorney-client privilege and attorney work product doctrine. [1]  In a recent decision, United States v. ISS Marine Services, Inc., No. 1:12-mc-00481-BAH, 2012 WL 5873682 (D.D.C. Nov. 21, 2012), the District Court for the District of Columbia reminds contractors that not fully involving counsel in an internal investigation may result in loss of the protection from disclosure provided by these principles.

In ISS Marine Services, the Inspector General (IG) of the Department of Defense (DoD) issued an administrative subpoena duces tecum seeking an internal audit report of ISS Marine.  The audit report had been prepared by an internal auditor at ISS Marine at the direction of corporate executives to investigate alleged fraudulent conduct at ISS Marine’s facilities in the Middle East.  One ISS Marine executive had spoken with outside counsel.  Outside counsel, in turn, engaged in preliminary interviews of two corporate employees, proposed that his firm be retained to conduct an internal investigation, and outlined the framework under which such investigation would be conducted.  After internal discussion at ISS Marine, outside counsel ultimately was not charged with conducting the investigation.  Although the court acknowledged that outside counsel had been retained to “consult” on the investigation, the audit ultimately was completed without outside counsel’s assistance.  In addition, the final report was marked as “confidential,” but not privileged.  During the ensuing IG investigation, and in response to the administrative subpoena, ISS Marine took the position that the audit report was protected from disclosure by the attorney-client communication privilege and attorney work product doctrine. 

The court disagreed.  In holding that the report was not subject to attorney-client privilege, the court reasoned that the report was not created for the primary purpose of seeking legal advice, as ISS Marine contended.  Instead, the court was persuaded by the Government’s argument that the audit report was prepared for a business motivation:  ISS Marine’s contractual obligation to return overpayments.  The court also characterized the arrangement with outside counsel as “consultation lite” because ISS Marine did not directly involve counsel in the internal investigation, nor did attorneys provide consultation during the investigative process.  Although outside counsel may have consulted briefly prior to the start of the investigation, and the audit report was ultimately provided to counsel nearly two months after its completion, the court held that “[t]his limited interaction with counsel . . . is an insufficient basis to support application of the attorney-client privilege.” 

Holding that the audit report also did not constitute attorney work product, the court reasoned that the document was created for multiple purposes and that ISS Marine would have investigated the matter in the ordinary course of business even without the prospect of impending litigation.  The court also cited the fact that an auditor, who acted without counsel’s supervision and, in fact, never communicated with counsel, conducted the investigation.  Moreover, the court held that even if the audit report had been prepared in anticipation of litigation, the Government met its burden for the application of an exception to the protection of the doctrine by demonstrating “substantial need” under the Federal Rules of Civil Procedure and that refusing to provide the report would result in “undue hardship” to the Government.  See Fed. R. Civ. P. 26(b)(3)(A)(iii).

The court’s ruling in ISS Marine Services serves as reminder to government contractors (and all companies) that internal investigations should be structured and conducted carefully if a company wishes to preserve the protections afforded by the attorney-client privilege and attorney work product doctrine.  If a contractor wishes to assert these protections, attorneys, whether in-house or outside counsel, should be involved throughout the investigation process.  Although attorneys need not necessarily conduct all aspects of the investigation directly, they should, at a minimum, be actively involved in the investigative process and actively supervise non-attorney investigators who function at their direction.  Moreover, best practices suggest that counsel’s role in the investigation should be defined, documented, and executed to encompass the provision of legal advice about the underlying events and the prospect of Government investigation and civil or criminal litigation.  Persons involved in the internal investigation should inform interviewees that the investigation is being conducted by or at the direction of counsel, for the purpose of providing legal advice to the company, and that the interview is covered by the attorney-client privilege.  Consistent with Upjohn v. United States, 449 U.S. 383 (1982), an interviewee should also be informed that counsel represents the company, not the interviewee, and finally, that the company, not the individual interviewee, holds the attorney-client privilege and that the company may choose, at its discretion, to waive it in the future and disclose the substance of the interview.  All documents produced during the investigation should be marked with the applicable privilege and work product legends. 

ISS Marine Services comes at a time of heightened attention to the assertion of privilege and work-product doctrine protections in connection with internal audits.  On July 25, 2012, the Defense Contract Audit Agency (DCAA) announced that it had revised its Contract Audit Manual (CAM) “to expand guidance on the procedures to follow when a contractor assets attorney-client privilege, or attorney-work-product doctrine.”  CAM 1-504.4(g) instructs auditors to follow the general procedure for responding to denials of access until “a high level executive from the company asserts the privilege in writing.”  At that point, the issue would be elevated to the DCAA Regional office and, if needed, to the Policy Publications and Systems Division for coordination with counsel.

Furthermore, Section 843 of the Senate version of the National Defense Authorization Act (NDAA), S. 3254, passed on December 4, expands agency authority to examine contractor records, codified in 10 U.S.C. § 2313(a)(2), to encompass “the efficacy of contractor or subcontractor internal controls and the reliability of contractor or subcontractor business purposes.”  To achieve this oversight, Section 843 requires the DCAA to revisit its July guidance to “ensure that the [DCAA] has sufficient access to contractor internal audit reports and supporting materials in order to—(A) evaluate and test the efficacy of contractor internal controls and the reliability of associated contractor business systems; and (B) assess the amount of risk and level of testing required in connection with specific audits to be conducted by the Agency.”  S. 3254 also requires the Secretary of Defense to revise the Contractor Business Systems Improvement Program mandated by the FY11 NDAA to include an assessment of the efficacy of internal controls and “provide that refusal of a contractor to permit access to contractor internal audit reports and supporting materials . . . is a basis for disapproving the contractor business system,” with no apparent consideration for the basis on which the refusal is made.

This heightened attention to assertions of attorney-client privilege and attorney work product doctrine in connection with internal audits only enhances the need to follow procedures that will ensure their efficacy—with the cautionary tale of United States v. ISS Marine Services, Inc. firmly in mind.