D.C. Circuit Restores Privilege Protections to Internal Investigations
On Friday, June 27, 2014, the United States Court of Appeals for the District of Columbia Circuit issued a writ of mandamus in Kellogg Brown & Root, Inc., et al., No. 14-5055,--- F.3d ----, 2014 WL 2895939, (D.C. Cir. June 27, 2014) (KBR) with significant implications for companies that conduct internal investigations pursuant to compliance programs. The KBR writ reverses a district court decision from March of this year (the Barko decision) that had created substantial uncertainty related to the application of the attorney-client privilege in the context of compliance investigations. Indeed, as explained below, Barko seemed to put all companies -- particularly government contractors that are subject to the FAR's mandatory disclosure requirements -- in an untenable dilemma by suggesting that conducting internal investigations to minimize the risk of government enforcement action would render those same investigations vulnerable to discovery in False Claims Act (FCA) and other cases. The lower court decision also created significant uncertainty as to the application of the attorney-client privilege to investigations conducted by life sciences companies pursuant to reportable event requirements under Corporate Integrity Agreements, which require those companies to investigate and then report “probable violations” of federal healthcare program laws. In reversing, the Court of Appeals helps to restore the privilege protections for such investigations established by Upjohn Co. v. United States, 449 U.S. 383 (1981) more than 30 years ago, while also serving as a reminder of the importance of taking steps to preserve privileges and confidentiality during internal investigations.
The District Court Decision
In U.S. ex rel. Barko v. Halliburton Co., No. 1:05-cv-1276, --- F.Supp.2d ----, 2014 WL 1016784 (D.D.C. Mar. 6, 2014), a former contract administrator for Kellogg, Brown and Root (KBR) alleged that Halliburton and other KBR contractors had inflated the costs of construction services on military bases in Iraq and passed on those inflated costs to the United States Government. KBR had investigated tips about these potential procurement irregularities several years before Barko filed his lawsuit. These investigations were conducted by non-attorney security investigators working under the direction and supervision of KBR’s law department. The investigators interviewed KBR employees and submitted reports to KBR’s in-house attorneys, who would then determine whether a violation had been substantiated. If the answer was yes, the attorneys would notify senior management and advise on further action. In connection with his qui tam suit, Barko moved to compel the production of documents created in connection with these internal investigations. KBR opposed on the ground that it had conducted the internal investigation for the purpose of obtaining legal advice, and that the internal investigation documents were therefore protected by the attorney-client privilege as defined in the Upjohn case. Barko countered that the internal investigation documents were unprivileged business records that he was entitled to discover.
In concluding that the documents were not protected, the district court held that KBR’s investigation was not for the “primary purpose” of seeking legal advice. Id. at *4. In doing so, the court applied a ‘but for’ formulation first set forth in United States v. ISS Marine Servs., Inc., 905 F. Supp. 2d 121 (D.D.C. 2012), which the court interpreted to require KBR to show that “the communication would not have been made ‘but for’ the fact that legal advice was sought.” Barko, 2014 WL 1016784, at *2. In rejecting application of the privilege under that standard, the Barko court found significance in the fact that (1) in-house attorneys conducted the investigation without consultation with outside lawyers, (2) the interviewers were not attorneys, and (3) the confidentiality statements signed by the interviewees mentioned business, rather than legal, purposes for limiting the disclosure of information. Id. at *3. Lastly, and perhaps most troubling, the court held that the work-product privilege did not apply because KBR conducted the internal investigation in the ordinary course of business irrespective of the prospect of litigation. Id. at *4. The court therefore determined that the “investigations were undertaken pursuant to regulatory law and corporate policy rather than for purposes of obtaining legal advice.” Id. at *3. The court cited Department of Defense regulations that require contractors to have internal controls for compliance, including a mechanism, such as a hotline, by which employees may report suspected instances of improper conduct. The court reasoned that KBR would have conducted an investigation regardless of whether legal advice was sought because regulatory law and corporate policy required such compliance investigations.
This last aspect of the decision created confusion because, applied per its terms, the reasoning could have impeded the ability of government contractors and companies in other industries to protect sensitive internal investigations performed in connection with FAR Mandatory Disclosure rules and other regulatory requirements. This was particularly worrying in light of the government’s increasing focus on the adequacy of a company’s compliance program in charging decisions. For example, the Resource Guide to the U.S. Foreign Corrupt Practices Act issued by the SEC and DOJ makes clear that, for an FCPA compliance program to be considered adequate, it should include an “efficient, reliable, and properly funded process” for investigating allegations of misconduct. ("FCPA, A Resource Guide to the U.S. Foreign Corrupt Practices Act" at 61, available at http://www.justice.gov/criminal/fraud/fcpa/guide.pdf.) Additionally, the FAR Mandatory Disclosure rules are incorporated into many government contracts (including Federal Supply Schedule contracts) and require government contractors to report credible evidence of violations of certain fraud-based and criminal statutes in connection with the negotiation, administration, and performance of government contracts that incorporate the FAR clause. The clause also requires reporting of substantial overpayments under those government contracts. Thus, the Barko decision could have had far reaching implications in connection with any investigations conducted in connection with government contracts containing the FAR ethics clause. If left to stand, contractors and other companies that conduct good faith investigations to meet mandatory compliance reporting or other mandated disclosure requirements were potentially vulnerable to compelled production of sensitive, privileged information through discovery in FCA and other cases.
The Court of Appeals Decision
Because of the lower court decision’s potential reach, KBR filed a petition for a writ of mandamus seeking immediate review by the D.C. Circuit. The D.C. Circuit took a decidedly different approach than the lower court, and in so doing restored the attorney-client privilege to its previously understood scope. The court first found that KBR’s assertion of the privilege in Barko was materially indistinguishable from the assertion of the privilege in the Upjohn case. As in Upjohn, KBR had initiated an internal investigation to gather facts that would allow the company’s lawyers to advise on whether the company was in compliance with the law. And as in Upjohn, KBR conducted its investigation under the auspices of KBR’s in-house legal department, acting in its legal capacity. In short, the court held “[t]he same considerations that led the Court in Upjohn to uphold the corporation’s privilege claims apply here.” KBR, 2014 WL 2895939, at *3. The Court of Appeals rejected the district court’s conclusion that the privilege did not apply because the investigations had been undertaken pursuant to regulatory law and corporate policy rather than for purposes of obtaining legal advice, for several reasons.
First, the Court of Appeals found the fact that the internal investigation was conducted by in-house counsel without consultation with outside lawyers did not undermine the privileged nature of the review. The court held: “Upjohn does not hold or imply that the involvement of outside counsel is a necessary predicate for the privilege to apply. On the contrary, the general rule, which this Court has adopted, is that a lawyer’s status as in-house counsel ‘does not dilute the privilege.’” Id.(citing In re Sealed Case, 737 F.2d 94, 99 (D.C. Cir. 1984)).
Second, the Court of Appeals rejected the lower court’s conclusion that the role of non-lawyers in conducting the investigation negated the attorney-client privilege. To the contrary, the D.C. Circuit reasoned that the “investigation here was conducted at the direction of the attorneys in KBR’s Law Department. And communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege.” Id. (citing FTC v. TRW, Inc., 628 F.2d 207, 212 (D.C. Cir. 1980)). The court thus reaffirmed that interviews conducted by non-lawyers remain privileged so long as they are conducted at the direction and under the supervision of counsel, and are undertaken to gather facts that in turn will enable lawyers to advise their clients on legal obligations.
Third, the Court of Appeals found, in contrast to the lower court, that the confidentiality statements signed by the interviewees -- which mentioned business, rather than legal, purposes for limiting the disclosure of information -- did not negate the privilege. In this regard, the court stated that “nothing in Upjohn requires a company to use magic words to its employees in order to gain the benefit of the privilege for an internal investigation.” Id. The court explained that “in any event, here as in Upjohn employees knew that the company’s legal department was conducting an investigation of a sensitive nature and that the information they disclosed would be protected” and that “KBR employees were also told not to discuss their interviews “without the specific advance authorization of KBR General Counsel.” Id. The court emphasized that the “magic words” of an Upjohn warning are not a mandatory prerequisite to establishing the attorney-client privilege if the overall context of the investigation demonstrates its confidentiality and sensitivity. Providing the Upjohn warning remains a best practice, but the court recognizes that there is no one single way to give those warnings and that failure to do so is not dispositive of whether the attorney-client privilege applies.
Fourth, and most critical, the Court of Appeals rejected the district court’s attempt to distinguish Upjohn “on the ground that KBR’s internal investigation was undertaken to comply with Department of Defense regulations that require defense contractors such as KBR to maintain compliance programs and conduct internal investigations into allegations of potential wrongdoing.” Id. at *4. In an elegant defense of the attorney-client privilege, the D.C. Circuit held that the district court’s reasoning “rested on a false dichotomy” because “[s]o long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion.” Id. at *4. The Court of Appeals reaffirmed that if a “significant purpose” of the internal investigations is to obtain or provide legal advice then the primary purpose test will be satisfied and the privilege will apply:
"Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication? As the Reporter’s Note to the Restatement says, 'In general, American decisions agree that the privilege applies if one of the significant purposes of a client in communicating with a lawyer is that of obtaining legal assistance.' 1 Restatement § 72, Reporter’s Note, at 554. We agree with and adopt that formulation – 'one of the significant purposes' – as an accurate and appropriate description of the primary purpose test. Sensibly and properly applied, the test boils down to whether obtaining or providing legal advice was one of the significant purposes of the attorney-client communication.
In the context of an organization’s internal investigation, if one of the significant purposes of the internal investigation was to obtain or provide legal advice, the privilege will apply."
Id. at *5.
The D.C. Circuit's decision in KBR helps restore the understood scope of the attorney-client privilege since Upjohn was first issued 30 years ago. While that is good news for government contractors, life sciences companies, and other corporations that conduct internal investigations, those companies should continue to follow best practices for internal investigations.
• Attorneys should direct the investigation and document the oversight. Non-attorneys involved in the investigation should be given written instructions making clear that they are working at the direction and under the control of the company’s legal department or outside counsel and that one of the significant purposes of the investigation is to obtain the relevant facts that would enable the lawyers to provide legal advice to the company.
• Provide an appropriate Upjohn warning. All employees who are interviewed should receive a warning explaining that the conversation is for the purpose of providing legal advice to the company and protected by the company’s attorney-client privilege. Although the D.C. Circuit stated that “magic words” are not required, it remains important to notify witnesses that information discussed in an investigation should be kept confidential and that counsel represents the corporation and not any particular individual or employee of the corporation.
• Mark documents appropriately. Label documents that are intended to be covered by the attorney-client privilege or the work product doctrine.
• Address the investigation report to the company’s attorneys. The report of an investigation should be addressed to the company’s in-house legal department, which should memorialize its review of the report and any advice offered to the company as a result of the investigation.
• If possible, document any threat of litigation. The scope of the work product doctrine depends in part on precisely when a company is determined to have acted in anticipation of litigation. Clear documentation on this point will help prevent a later conclusion that the investigation was not connected to the threat of litigation. One way to document this is to issue a litigation hold because such holds generally mark the point at which litigation or some other enforcement activity is anticipated.