Corporate legal departments are breathing a sigh of relief after a federal appeals court effectively preserved attorney-client privilege protections. The closely watched case is an important one for all companies that conduct internal investigations.
In the case In re Kellogg Brown & Root, the U.S. Court of Appeals for the District of Columbia last month tossed out a district court ruling requiring that a company’s confidential internal investigation documents be produced. In an amicus brief criticizing the district court’s ruling, the U.S. Chamber of Commerce, Association of Corporate Counsel, the National Association of Manufacturers, and other trade associations argued that, if upheld, the decision would “erode the attorney-client privilege and negatively affect how member companies conduct corporate internal compliance programs.”
The underlying case, U.S. ex rel Barko v. Halliburton, concerns a False Claims Act whistleblower lawsuit filed by Harry Barko, a former employee of the Halliburton subsidiary Kellogg, Brown and Root, better known as KBR. He alleged that a KBR sub-contractor engaged in improper billing practices on contracts for work in Iraq and sought documents relating to the internal investigation. KBR refused, asserting attorney-client privilege.
In March, the U.S. District Court for the District of Columbia, in a controversial decision, ordered KBR to produce the documents. The court reasoned that because the documents were produced to comply with a regulatory obligation and meet the demands of KBR’s corporate policy to investigate and report on fraud allegations, rather than for the purpose of obtaining legal advice, the documents were not protected by the attorney-client privilege.
In its appeal of the ruling, KBR underscored its significance: “It is no exaggeration to say that if the district court’s ruling stands, no defense contractor—and indeed, no public company, given widespread internal-control and auditing requirements under laws such as Sarbanes-Oxley and the Foreign Corrupt Practices Act—can claim privilege over materials generated in internal investigations, because all such companies face obligations under ‘regulatory law’ comparable to those the court held rendered KBR’s investigative documents unprivileged.”
The D.C. Circuit agreed with KBR’s concerns. “The District Court’s novel approach would eradicate the attorney-client privilege for internal investigations conducted by businesses that are required by law to maintain compliance programs, which is now the case in a significant swath of American industry,” its opinion says.
Amar Sarwal, vice president of the Association of Corporate Counsel, says the decision “underscores the important role that in-house lawyers play when implementing corporate codes of conduct and regulatory requirements to ensure that their companies remain compliant with the law.”
The D.C. Circuit held that the attorney-client privilege applies so long as obtaining or providing legal advice was “one of the significant purposes of the internal investigation,” not necessarily the sole purpose. Attorney-client privilege also applies, the court said, “even if the investigation was mandated by regulation, rather than simply an exercise of company discretion.”
A company should have policies and procedures that set forth that protocol for managing the investigation.
Andrew Irwin, Partner, Steptoe
“The court in this opinion recognized that the distinction between legal advice and business advice is one that can blur very easily, particularly in companies that have large compliance programs,” Matthew Reinhard, an attorney with the law firm Miller Chevalier, says.
The D.C. Circuit further clarified that attorney-client privilege applies even if communications were conducted by non-attorneys, so long as the investigation is conducted at the direction of legal counsel and under its supervision.
“That’s pretty consistent with how corporate counsel have been operating,” Kwamina Williford, a partner with the law firm Holland & Knight, says.
“Traditionally, in-house counsel could direct non-lawyers to conduct an internal investigation. It doesn’t make sense to bring in outside counsel for every single allegation that needs to be investigated,” Reinhard says.
“So long as one of the primary purposes of that was to enable in-house counsel to provide legal advice to the company, all those communications would be protected by attorney-client privilege,” he adds.
Legal experts say the court’s ruling provides helpful guidance for corporate counsel to follow in the course of conducting an internal investigation. “It is still important to be diligent to make sure that privilege is protected,” Williford says.
For example, corporate counsel should ensure they have a “reasonably rigorous process for structuring an internal investigation,” Andrew Irwin, a partner in the law firm Steptoe, says. “The company should have policies and procedures that set forth that protocol for managing the investigation.”
Corporate counsel should also have documentation in place to clarify that the investigation is tied to providing legal advice for the company. Individuals being interviewed during the investigation should also be informed that the investigation will provide legal advice, Williford says.
ATTORNEY-CLIENT PRIVILEGE DECISION
Below is an excerpt from the decision in In Re KBR.
Under the District Court’s approach, the attorney-client privilege apparently would not apply unless the sole purpose of the communication was to obtain or provide legal advice. That is not the law. We are aware of no Supreme Court or court of appeals decision that has adopted a test of this kind in this context. The District Court’s novel approach to the attorney-client privilege would eliminate the attorney-client privilege for numerous communications that are made for both legal and business purposes and that heretofore have been covered by the attorney-client privilege. And the District Court’s novel approach would eradicate the attorney-client privilege for internal investigations conducted by businesses that are required by law to maintain compliance programs, which is now the case in a significant swath of American industry. In turn, 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.’
Source: In Re KBR.
It is also important to ensure that the investigation is conducted by counsel and under its direction, she says. In addition, individuals being interviewed must be informed that the investigation is being done under the express direction of legal counsel.
More to Come?
Although the D.C. Circuit’s opinion “brings us back to where we were before the lower court’s ruling in Barko,” the ruling is also significant in itself because it appears to be a first-of-its-kind decision, Andy Liu, a partner in the White Collar & Regulatory Enforcement Group of law firm Crowell & Moring, says.
“I cannot think of any case, certainly not at the circuit court level, that addressed the issue head on as to whether an investigation is going to be privileged in the context of a regulatory requirement,” he says.
Courts and corporate counsel are likely to cite the D.C. Circuit decision every time there is any debate as to whether attorney-client privilege applies with regard to internal communications, Reinhard says, adding that “it’s going to have importance down the line.”