United States: D.C. Circuit Upholds Attorney-Client Privilege In Internal Compliance Investigation

Last Updated: September 10 2014
Article by Danielle Pelot and Emily Harlan

D.C. Circuit Court's decision clarifies that an attorney-client communication is protected as long as "one of the significant purposes" of the communication is obtaining or providing legal advice

Government contractors and other companies doing business in regulated industries are exhaling after the D.C. Circuit recently overturned a lower court order compelling the production of documents created in the course of an internal investigation into fraud allegations. On June 27, a three-judge panel of the D.C. Circuit Court of Appeals ruled that defense contractor Kellogg Brown & Root ("KBR") does not have to produce reports and other materials that it created in the course of investigating whether its subcontractor engaged in cost inflation and bribery while performing work in Iraq. In re Kellogg Brown & Root, Inc., et al. , No. 14-5055 (D.C. Cir. June 27, 2014).

The D.C. Circuit Court's decision vacated a March 6, 2014 order by the U.S. District Court for the District of Columbia that had caused, in the Circuit Court's words, "substantial uncertainty about the scope of the attorney-client privilege in the business setting." The D.C. District Court had ruled that KBR could not withhold materials created as part of an internal business conduct investigation under either the attorney-client privilege or the work-product doctrine. The lower court characterized KBR's investigation as a "routine corporate, and apparently ongoing, compliance investigation required by regulatory law and corporate policy" that involved non-attorney interviewers, and contrasted it with the internal investigation conducted at the direction of the legal department and outside counsel in the seminal case addressing corporate attorney-client privilege, Upjohn Co. v. United States, 449 U.S. 383 (1981). The lower court concluded that KBR's investigation would have been conducted regardless of whether any legal advice was sought and that it therefore did not pass what the court viewed as the relevant "but for" test for application of the privilege. The opinion was sharply criticized by business and trade organizations.

In vacating the order, the D.C. Circuit Court clarified the meaning of the applicable "primary purpose" test, holding that the investigative materials at issue were cloaked in the privilege because a "significant purpose" of the investigation was to obtain or provide legal advice, even if it was not the only purpose.

In addition to articulating a clearer and more practical explanation of the relevant test, the D.C. Circuit's decision bears useful guidance for the increasing number of businesses that operate in regulated industries and perform internal investigations as part of corporate compliance programs.

Factual and legal background

The events leading to this decision began in 2005, when Harry Barko, a former KBR subcontract administrator, filed a False Claims Act suit under seal against KBR and related entities. Barko's suit alleges various illegal actions by KBR and a subcontractor, including overbilling and kickbacks, relating to the performance of government contracts for laundry facilities during wartime operations in Iraq. The government declined to intervene in Barko's suit.

Barko's complaint was unsealed and the litigation proceeded until late 2013, when a discovery dispute arose over certain investigative materials in KBR's possession relating to the subject matter of Barko's suit. According to the lower court, KBR had conducted an internal investigation during 2004–2006 pursuant to its Code of Business Conduct ("COBC"), a system of internal controls implementing Department of Defense contracting requirements. The COBC includes mechanisms for employees to report tips to the company and for the company to act on them with internal and/or external audits and reporting to appropriate officials. The Director of the COBC is a lawyer, and KBR lawyers are involved in COBC investigations, but the front-line investigators are not typically lawyers.

KBR withheld documents relating to the COBC investigation on the basis of attorney-client privilege and the work-product doctrine. Barko moved to compel. After conducting an in camera review of COBC investigation reports—some content of which is described in the March 6, 2014 opinion—the D.C. District Court (Judge James S. Gwin, sitting by designation) held that COBC investigations "resulted from the Defendants' need to comply with government regulations" and were pursued as part of KBR's regulatory compliance efforts, not for the purpose of assisting KBR in obtaining legal advice. It concluded that KBR would have conducted the COBC investigation even absent any solicitation of legal advice and, therefore, materials created in connection with the investigation were not protected by the attorney-client privilege.

The D.C. District Court also swiftly dismissed KBR's claims of protection under the work-product doctrine, finding that the reports were not prepared or obtained by lawyers in anticipation of litigation. Again, the lower court highlighted that the investigative documents were made by non-attorneys between 2004 and 2006 because government regulations required KBR to investigate reports of potential fraud in the ordinary course of business, not in anticipation of Barko's complaint, which was unsealed in 2009.

KBR sought an interlocutory appeal. Judge Gwin denied the request and ordered the documents produced to Barko immediately. KBR then sought a writ of mandamus from the D.C. Circuit Court of Appeals. KBR's petition to the Circuit Court turned on whether the lower court's ruling constituted an error that justified mandamus.

D.C. Circuit Court announces "significant purpose" clarification to "primary purpose" test

In an opinion authored by Judge Brett Kavanaugh on behalf of the three-judge panel (Griffith, Kavanaugh, and Srinivasan, Circuit Judges) that heard oral argument on May 7, 2014, the D.C. Circuit Court of Appeals concluded that the District Court's finding on privilege was "legally erroneous" and granted mandamus as appropriate under the circumstances.

After a review of Upjohn principles, the D.C. Circuit described KBR's privilege assertion as "materially indistinguishable" from the Upjohn scenario. The D.C. Circuit determined that none of the purported distinctions drawn by the lower court regarding outside counsel involvement, non-attorney interviewers, and notice to employees of a legal purpose formed a basis for denying KBR's privilege claims.

The D.C. Circuit explained that the lower court erred in layering a "but for" analysis onto the "primary purpose" test. While the "primary purpose" test is proper and many courts use it in such discovery disputes, it does not include the "but for" reasoning by which the lower court held that the privilege cannot apply if there is any other purpose besides a legal purpose for a lawyer-client communication. The D.C. Circuit rejected the use of a "but for" test as inconsistent with longstanding principles of attorney-client privilege law.

The D.C. Circuit then clarified the "primary purpose" test, stating: "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."

A company may have more than one significant reason for conducting an investigation—including being required to do so by regulation or corporate compliance policy—without spoiling attorney-client privilege. So long as one of those significant purposes is obtaining or providing legal advice and the communications in the course of that investigation otherwise meet the characteristics of attorney-client privileged material, the privilege can apply.

Notably, the D.C. Circuit recognized that the lower court's error was sufficiently severe and with "potentially far-reaching consequences" such that the totality of the circumstances merited the extraordinary relief of mandamus. In a nod to industry amici, the D.C. Circuit acknowledged the drastic implications that the lower court's privilege interpretation would have on corporate compliance efforts in numerous settings:

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....

....

...Because defense contractors are subject to regulatory requirements of the sort cited by the District Court, the logic of the ruling would seemingly prevent any defense contractor from invoking the attorney-client privilege to protect internal investigations undertaken as a part of a mandatory compliance program. See 48 C.F.R. §52.203-13 (2010). And because a variety of other federal laws require similar internal controls or compliance programs, many other companies likewise would not be able to assert the privilege to protect the records of their internal investigations.

The D.C. Circuit acknowledged that protecting the documents from disclosure pursuant to the attorney-client privilege may result in "potentially critical evidence [being] withheld from the factfinder." But, the Court said, "the privilege carries costs." For the privilege to be meaningful, the discovery of facts that exist only in privileged communications must sometimes cede to the purpose of the privilege—i.e., the promotion of unfettered communication between a lawyer and his client.

Lawyers for Barko have stated that they will seek review of the panel's decision by the full circuit court.

Guidance for companies conducting multi-purpose investigations

In considering the potential impact of the lower court's ruling, Judge Kavanaugh remarked that "prudent counsel monitor court decisions closely and adapt their practices in response."

The D.C. Circuit's review of KBR's COBC program and the classic Upjohn investigation are instructive for companies conducting internal investigations, particularly those in regulated industries for which healthy compliance programs and self-disclosure practices have become expected or required business measures. Examples include not just defense industry government contractors like KBR, but health care providers subject to compliance program requirements for Medicare enrollment under new Affordable Care Act provisions; public companies covered by the Sarbanes-Oxley and Dodd-Frank Acts; manufacturers and suppliers in energy, environmental, and life sciences fields who conduct business internationally; and organizations operating under a Corporate Integrity Agreement (CIA) or other government settlement terms.

As the D.C. Circuit reiterated, in the simplest terms, the privilege applies to a confidential communication between attorney and client if that communication was made for the purpose of obtaining or providing legal advice to the client. But applying this definition in the context of a multi-purpose investigation can be anything but simple. Companies assessing the scope of the privilege in their internal investigations should take notice of key elements:

Legal vs. business advice: While the facilitation of legal advice need not be the sole purpose of an internal investigation, it must still be a purpose, and a "significant" one, for the attorney-client privilege to apply. Legal advice sought or received from an attorney acting in a legal capacity is distinct from business advice, even when an attorney is involved in the delivery of such business advice.

Communications, not facts: The D.C. Circuit Court stressed that the attorney-client privilege only protects against the disclosure of privileged communications. It does not prohibit the discovery of the underlying facts contained in those communications if they can be obtained from non-privileged sources.

Attorney involvement: The D.C. Circuit's decision demonstrates that involving the company's attorneys at an appropriate stage of the investigation is critical. Key to the Court's finding that the privilege protected the investigative reports from disclosure in Barko was the role of KBR's legal department in the COBC investigation. The Court noted throughout its opinion that the investigation was conducted "at the direction of" and "under the auspices of" the legal department. Indeed, the Director of KBR's COBC is a lawyer, and other KBR attorneys were involved in the COBC investigation as well, including for the purpose of directing the non-attorney investigators. Moreover, KBR employees interviewed in connection with the investigation were told in writing not to discuss the interview without "specific advance authorization" from KBR's General Counsel. KBR's filings also asserted that the investigators themselves had to have an attorney's permission to disseminate information about the investigation.

Confidentiality: Only confidential communications are protected by the attorney-client privilege. Though the D.C. Circuit explained that KBR did not have to recite "magic words" to employees about the legal purpose of the investigation for the privilege to apply, both courts described that KBR employees signed confidentiality agreements in connection with their interviews. Similar investigative process considerations related to confidentiality can include:

  • whether interviewees are asked to keep communications confidential;
  • whether investigators and employees make efforts to separate, designate, or otherwise protect privileged communications as distinct from general business discussions; and
  • whether investigative information is gathered in anticipation of self-reporting or other possible intentional disclosure of underlying facts to third parties.

The Barko episode serves as a reminder of these hallmarks of the attorney-client privilege analysis and highlights that companies should not take for granted fundamental principles of privilege when conducting internal investigations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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