While companies can breathe a sigh of relief following the District of Columbia Circuit Court's recent unanimous ruling in In Re Kellogg Brown & Root, Inc,(1) overturning the district court's decision in US, ex rel Barko v Halliburton Co, companies should take some precautions to reduce the risk of disclosure of privileged materials generated during internal investigations. While the ruling has reinforced the strength of the attorney-client privilege and work product doctrine in the District of Columbia, the lower court's narrow construction of these protections nevertheless demonstrates the importance of simple precautions that companies should consider when undertaking internal investigations to reduce the risk of privilege disputes.
In a March 2014 decision,(2) the US District Court for the District of Columbia found that no attorney-client privilege or work product immunity attached to Kellogg Brown & Root's (KBR) investigation of a qui tam plaintiff's allegations of corruption related to government subcontracts. KBR's compliance office conducted an internal investigation, as required both by law under the Federal Acquisition Regulation and by its own internal policy. The plaintiff, Barko, sought production of documents related to the company's internal audits and investigations of his allegations, over which KBR asserted claims of attorney-client privilege and work product immunity. Following an in camera review of these internal records, the court noted that the reports were "eye-openers" in showing that KBR employees had steered business and otherwise provided preferential treatment to a particular third party, which continued to receive contracts despite poor performance and repeated attempts to double bill.
In rejecting KBR's assertion of attorney-client privilege, the court applied a 'but for' test, requiring that KBR show that "the communication would not have been made 'but for' the fact that legal advice was sought".(3) The court found that attorney-client privilege did not apply here. Because the investigation was undertaken primarily as a result of regulatory requirements and corporate policies, KBR would have conducted the internal investigation regardless of whether it was seeking legal advice. The court noted, in support of its decision, that the employees interviewed had not been informed that the purpose of the interviews was to obtain legal advice; nor would they have been able to infer the legal nature of the interviews, given that the interviews were not conducted by attorneys.
The court similarly rejected KBR's argument that the work product doctrine applied. While it acknowledged that documents created by non-attorneys could be protected by the work product doctrine, that protection applied only when the investigation documents were prepared or obtained in anticipation of litigation. The court stressed that the party asserting the work product doctrine bears a heavy burden and must show that the documents were not prepared in the course of ordinary non-litigation business. In Barko, the court determined that because "any responsible business organization would investigate allegations of fraud, waste, or abuse", this internal investigation was not conducted for litigation purposes and, thus, the documents created during that investigation were not protected by the work product doctrine.(4)
On appeal, the US Court of Appeals for the District of Columbia Circuit held that the district court's decision was "irreconcilable" with the protection afforded to companies under Upjohn, noting that the facts of the case at hand were "materially indistinguishable" from those of Upjohn. The circuit court rejected several of the distinguishing characteristics relied upon by the district court. For instance, whereas the district court stressed that KBR's investigation was conducted by non-attorneys, the circuit court instead highlighted that these interviews were conducted at the direction of lawyers and that such communications are routinely protected by attorney-client privilege. Similarly, the court noted that Upjohn did not require any "magic words" notifying employees that the purpose of the investigation was to obtain legal advice, but KBR had nevertheless informed employees that the legal department was conducting a confidential investigation.(5)
The circuit court also rejected the lower court's use of the 'but for' test when analysing attorney-client privilege, rejecting the lower court's distinction that KBR's investigation was carried out pursuant to regulatory obligations, rather than to obtain legal advice.(6) Instead, the circuit court applied the 'primary purpose' test – determining that there need not be only one investigatory purpose for attorney-client privilege to apply. Providing or obtaining legal advice must be one of the significant purposes of the investigation, but not the only purpose. Attorney-client privilege protects the materials regardless of whether the investigation is required by statute, regulation or company policy.
While the District of Columbia Circuit Court rejected the lower court's ruling regarding attorney-client privilege in In Re Kellogg Brown & Root Inc,(7) steps should be taken to ensure that documents created during an internal investigation are protected by attorney-client privilege and work product doctrine.
There are real risks to companies that find their privilege claims challenged in court. Challenges to attorney-client privilege can lead to public disclosure of information. Although KBR ultimately succeeded in defending its privilege claims, the litigation itself caused the disclosure of the general content of certain privileged documents, including the fact that KBR employees had steered business and provided preferential treatment to a particular third party despite poor performance and attempts at double billing. Moreover, these cases are very fact specific. The district court's ruling in Barko demonstrates the unpredictability of the case-by-case determinations necessarily required to resolve privilege disputes. Finally, there are costs associated with litigating these issues. These risks, therefore, justify taking precautionary measures which can help companies to avoid later challenges in court.
Initially, companies should not forgo internal investigations for fear of disclosure of investigatory documents. While some internal investigations are required by regulation, even where not required, there may be strong benefits and advantages to conducting an internal investigation. For example, in the criminal antitrust context, a company may elect to undertake an internal investigation into possible collusive conduct before receipt of a grand jury subpoena or search warrant. Early detection, investigation and risk assessment might allow a company – and its employees – to receive complete amnesty for the criminal conduct. Thus, rather than forgoing the benefits of an internal investigation altogether, companies should take several steps to ensure that privileged materials are properly protected and reduce – as one can never entirely eliminate – the risk of disclosure:
- At companies where the compliance department is not part of the legal department, companies should consider appointing lawyers as key members of the compliance department, with titles that reflect such positions and responsibilities. Likewise, where non-lawyers report to lawyers, their titles and responsibilities should clearly reflect such a role. Lawyers should explicitly and clearly communicate and document their roles throughout the investigation and on all important investigative materials.
- The company should adopt clear policies to provide guidance to the compliance department about when to involve the legal department, including any investigations which present the risk of significant legal exposure to the company. The compliance department should communicate directly with the legal department and clearly document any legal advice obtained. These policies should include formal procedures for involving lawyers in the earliest stages of an investigation and should include formal coordination with the legal department.
- Any non-attorneys carrying out the investigation should regularly report to and consult with a lawyer. It is always best for lawyers to handle substantive portions of the investigations, including interviewing witnesses. Where this is not possible or practical, the non-attorneys should document the role of the lawyers on all memoranda or other records.
- All documents created in the course of the investigation, including emails, should be clearly labelled as being part of the investigation and as having been prepared by, at the direction of or for the purpose of seeking advice from legal counsel. This is especially true for documents that do not explicitly reflect the involvement of an attorney.
- At the beginning of the investigation, the compliance department should document the purpose of the investigation, noting that the investigation will assist the company in preparing for any potential litigation arising from the allegations. The department should clearly establish that they are seeking and/or providing legal advice rather than conducting the investigation for an ordinary business purpose.
- All interview subjects should receive Upjohn warnings and should be told explicitly that the interviewers are acting at the direction of legal counsel, and that information learned at the interview will be shared with counsel and used to formulate a legal strategy to defend against possible litigation. These warnings should be clearly documented in any notes or memoranda summarising the interview.
Given the risks, constantly evolving standards and factual-dependent nature of privilege determinations, companies should consider implementing the aforementioned policies and procedures to ensure that their privileged materials are and remain protected. By clearly establishing the role of counsel and communicating counsel's role in investigations, companies can avoid privilege disputes and strengthen their position in litigation on these issues.
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 (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com).The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.
(7) The District of Columbia Circuit was silent on the lower court's interpretation of the work product doctrine. The only mention of this issue by the circuit court is in the decision's final sentence: "To the extent that Barko has timely asserted other arguments for why these documents are not covered by either the attorney-client privilege or the work-product protection, the District Court may consider such arguments." Id at 18.