Home / Expert Opinion / White Collar Corner: Internal investigations and attorney-client privilege

White Collar Corner: Internal investigations and attorney-client privilege

Alan J. Bozer

Alan J. Bozer

Michael L. McCabe

Michael L. McCabe

The Supreme Court held more than 30 years ago in Upjohn Co. v. United States, 449 U.S. 383 (1981), that the attorney-client privilege applies to corporations. A federal court ruling in March 2014, however, caused considerable concern in the business community about the scope of this privilege as it pertains to a company’s internal investigations.

The district court ordered a defense contractor to produce internal investigative reports from its law department in a qui tam False Claims Act case. The court rejected claims of privilege even though the reports had been prepared at the direction of the contractor’s counsel and were kept in a locked file cabinet in counsel’s office.

On June 27, the U.S. Court of Appeals for the District of Columbia vacated the district court’s order (reported at United States ex rel. Barko v. Halliburton Co., 2014 WL 1016784 [D.D.C. Mar. 6, 2014] vacated sub nom. In re Kellogg Brown & Root, Inc., 2014 WL 2895939 [D.C. Cir. June 27, 2014]), resulting in a vindication of the attorney-client privilege in the context of internal investigations. Of equal importance is the appellate court’s detailed dissection of the district court’s reasoning, which should provide future support against other attempts to chip away at the attorney-client privilege.

District Court proceedings

The complaint alleged that the defense contractor, Kellogg Brown and Root Inc., “defrauded the U.S. government by inflating costs and accepting kickbacks while administering military contracts in wartime Iraq,” 2014 WL 2895939, at *1. Subsequent discovery demands requested internal audit and investigation documents concerning KBR’s compliance with government contracting regulations.

KBR produced thousands of pages of documents in response but withheld internal investigation reports on the basis of attorney-client privilege. KBR had conducted its internal investigation “pursuant to its code of business conduct, which is overseen by the company’s Law Department,” Id.

The district court reviewed the withheld documents in camera and determined that they were not privileged because KBR had failed to show that “the communication would not have been made ‘but for’ the fact that legal advice was sought,” Id. (citation omitted). The district court concluded that KBR’s internal investigation was “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice,” Id.

Extending the attorney-client privilege on appeal

The appellate court vacated the district court’s order compelling production of KBR’s internal investigative reports. The appellate court, citing Upjohn Co., emphasized that the extension of the attorney-client privilege to corporations was important because of “the vast and complicated array of regulatory legislation confronting the modern corporation,” which required corporations to “constantly go to lawyers to find out how to obey the law, … particularly since compliance with the law in this area is hardly an instinctive matter.” Kellogg Brown, 2014 WL 2895939, at *2 (citing Upjohn Co., 449 U.S. at 392).

The appellate court further held that the attorney-client privilege “exists to protect not only the giving of professional advice to those who can act on it but also the giving of information to the lawyer to enable him to give sound and informed advice,” Id. (quoting Upjohn Co., 449 U.S. at 390).

The appellate court was especially critical of the district court’s distinction of Upjohn. For example, the district court held that the attorney-client privilege did not apply because the “purpose of KBR’s internal investigation was to comply with … regulatory requirements rather than to obtain or provide legal advice,” Id. at *4.

The specific regulatory requirements at issue required defense contractors to “maintain compliance programs and conduct internal investigations into allegations of potential wrongdoing,” Id. The appellate court rejected this reasoning and recognized that internal investigations could have more than one purpose.

The question is whether the “primary purpose” (not the only purpose) of an internal investigation is to obtain or provide legal advice, Id. at *4-5. Many communications within a company are made for “both legal and business purposes that heretofore have been covered by the attorney-client privilege,” Id. at *4. This includes communications pertaining to government-mandated compliance programs, which often involve both legal and business concerns.

The district court was found to have wrongly defined “primary purpose” to mean that “the communication would not have been made ‘but for’ the fact that legal advice was sought.” Id. at *1 (quoting Halliburton, at *2). The appellate court held that this approach is impractical because it is often difficult “to find the one primary purpose for a communication motivated by two sometimes overlapping purposes (one legal and one business, for example),” Id. at *5.

The district court also distinguished Upjohn by emphasizing that KBR’s internal investigation was “conducted in-house without consultation with outside lawyers,” unlike in Upjohn where “in-house counsel conferred with outside counsel,” Id. at *3. The appellate court rejected this logic and noted that “[i]nside legal counsel to a corporation or similar organization … is fully empowered to engage in privileged communications,” Id.

The district court further distinguished Upjohn by noting that “many of the interviews in KBR’s investigation were conducted by non-attorneys,” unlike the Upjohn interviews which were conducted by attorneys, Id. The appellate court rejected this reasoning as well and held that KBR’s investigation “was conducted at the direction of the attorneys in KBR’s Law Department” and that “communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege,” Id.

Finally, the district court observed that the Upjohn employees “were expressly informed that the purpose of the interview was to assist the company in obtaining legal advice” but the KBR employees were not, Id. The appellate court held 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. Moreover, the KBR employees knew that the company’s internal investigation involved a “sensitive” matter and that the “information they disclosed would be protected,” Id.

Conclusion

The litigation in the District of Columbia has caused in-house counsel and law firms across the country to think anew of the importance, and limits, of the attorney-client privilege in the context of internal investigations. Without the robust protection of this privilege, businesses would be “less likely to disclose facts to their attorneys and to seek legal advice, which would ‘limit the valuable efforts of corporate counsel to ensure their client’s compliance with the law,’” Id. at *4 (quoting Upjohn, 449 U.S. at 392.).

Even though the attorney-client privilege now applies to the investigative reports in the KBR case, the best practice is still to have attorneys conduct employee interviews during internal investigations while disclosing that the purpose of the interview is to provide legal advice to the employer.

Alan J. Bozer is a partner with Phillips Lytle LLP and is co-chair of the firm’s White Collar Criminal Defense and Government Investigations Practice Team. He is active in trying criminal and civil cases, and handles appellate and arbitration work as well. He can be reached at abozer@phillipslytle.com or (716) 504-5700. Michael L. McCabe is an attorney with Phillips Lytle LLP where he focuses his practice on White Collar Criminal Defense & Government Investigations as well as Business Litigation. He can be reached at (716) 504-5729 or mmccabe@phillipslytle.com.

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