United States: Preserving Attorney-Client Privilege In Internal Investigations: Risks And Challenges Remain After D.C. Circuit’s High-Profile Decision In "Barko"

In today's increasingly heightened enforcement environment, internal investigations have become more prevalent, as companies seek to prevent and mitigate improper conduct. One of the most difficult tasks in conducting internal investigations is preserving the attorney-client privilege. A failure to preserve the privilege can have devastating consequences.

The recent trial court and appellate decisions in In re: Kellogg Brown & Root, Inc., illustrate the challenges companies face in maintaining privilege in an internal investigation. The much-discussed district court and subsequent D.C. Circuit opinions1 in that case addressed a discovery dispute between the parties in a qui tam False Claims Act case, as to whether the defendant, Kellogg Brown & Root, Inc. ("KBR"), should be compelled to produce responsive documents relating to investigations that the company conducted under its Code of Business Conduct ("COBC"). KBR refused to produce otherwise responsive COBC reports on the basis of attorney-client privilege and attorney work product.

After an in camera review, and noting on the record that the COBC reports were "eye openers" that contradicted some factual statements that KBR claimed in its summary judgment motion were undisputed, the trial court held that the COBC reports were not privileged and ordered KBR to produce the reports.2 The trial court reasoned that the COBC reports were not privileged because of the way KBR conducted the investigation, which included: (1) the absence of outside counsel in interviews, (2) KBR's reliance on non-attorneys to conduct employee interviews, (3) KBR's failure to advise employees in interviews that the purpose of the interview was to help the company obtain legal advice, and (4) requiring employees to sign confidentiality agreements that did not expressly state that the purpose of the investigation was to obtain legal advice. Fifth and finally, the district court also held that the "primary purpose" of KBR's investigation was not to obtain legal advice, but to comply with its obligations under its contract with the Department of Defense to "facilitate timely discovery and disclosure of improper conduct in connection with Government contracts."

On June 27, 2014, a unanimous three-judge panel reversed the district court,3 finding that:

  1. Even though outside counsel was not present for interviews of employees, the involvement of outside counsel was not "a necessary predicate for the privilege to apply";
  2. Because the investigation was conducted "at the direction of the attorneys in KBR's Law Department," KBR employees were sufficiently on notice that the investigation was for obtaining or providing legal advice, even though many of the interviews had been conducted by non-attorneys;
  3. Even though employees interviewed had not been expressly informed that the purpose of the interview was to help the company obtain legal advice, it was sufficient that employees had been instructed "not to discuss their interviews 'without the specific advance authorization of KBR General Counsel'";
  4. Even though the confidentiality agreements signed by employees did not expressly state that the purpose of the investigation was to obtain legal advice, KBR 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
  5. Even if KBR undertook the investigation to comply with a contractual requirement, obtaining or providing legal advice need not be the sole purpose of an internal investigation.

The court found that there could be "no serious dispute" that obtaining legal advice was "one of the significant purposes of KBR's investigation," and therefore the attorney-client privilege applied.

The D.C. Circuit denied an en banc petition filed by the relator, Harry Barko, in an order dated September 2nd,4 and issued its mandate on September 19th.5 Barko announced his intent to appeal to the Supreme Court6 and filed a motion before the district court to stay summary judgment proceedings7 pending a ruling from the Supreme Court on any petitions for certiorari. The district court denied this motion on September 15, and ordered additional briefing by the parties to resolve additional discovery disputes. Under the Supreme Court rules, Barko has until December 1 to ask the Court to hear his case.

Although the KBR trial court ruling generated intense interest and debate, the appellate court, at least for now, has reinstated the law in the D.C. Circuit to reflect the status quo on the applicability of attorney-client privilege in internal investigations. Although KBR, in the end,did not break any new legal ground, the case underscores the issues and risksthat companies must address with attorney-client privilege in internal investigations, including:

1. Involvement of Counsel to the Extent Possible

Even if communications made by and to non-attorneys are protected by the attorney-client privilege, the D.C. Circuit held that an investigation must still fall "under the auspices" of the company's legal department. Whether an investigation will fall under the auspices of the legal department will continue to be a fact-specific issue, but it behooves companies to involve counsel as early and often as possible, particularly if non-attorneys are to be involved in conducting the inquiry.

As an example, in another recent D.C. case, a trial court judge held that an internal audit report prepared by a U.S. Navy contractor was not privileged where outside counsel's involvement had been limited to recommending an internal investigation, and drafting a legal memo discussing potential legal issues based on the results of the investigation described by the client.8 That court even went so far as to rebuke the contractor for retaining outside counsel only "in a watered-down capacity to 'consult' on the investigation in order to cloak the investigation with privilege."

This suspicion that corporate defendants will use the attorney-client privilege as a pretext to obstruct discovery was also evident in the KBR case, where the district court's opinion may have been colored by its view that KBR was trying to cloak the materials in privilege because those materials potentially undermined the company's case for summary judgment. The burden rests with the company to establish privilege, and judges who believe that the privilege is invoked in bad faith may not hesitate to order document production where the nexus between the investigation and counsel's involvement is not abundantly clear. For these reasons, companies should involve counsel in an investigation at the outset and attorneys should remain actively involved throughout an investigation.

2. "Magic Words" to Employees in Interviews are not Required to Show Privilege, but Effectively Worded Upjohn Warnings are Still Key

Although the D.C. Circuit made clear in KBR that there are no "magic words" a company is required to say to employees in interviews for the privilege to apply, advising employees that the communications in an investigation interview are protected by the attorney-client privilege, and that the privilege is the company's to waive, should be a standard and necessary component of such interviews, consistent with the Supreme Court's ruling in Upjohn v. United States, 449 U.S. 383 (1981). In all cases, counsel should give this warning to employees at the outset of all interviews, and should make a record in all interviews to reflect that the warnings have been provided, whether through handwritten notes or a more formal memorandum created contemporaneously with the interview. In-house counsel in particular need to exercise care to communicate that they are acting in a legal capacity rather than a business capacity in an interview, to ensure that the privilege is preserved.

3. Preserving Attorney-Client Privilege in Internal Investigations Abroad

A more specific issue not discussed in the KBR case is the application of the attorney-client privilege to internal investigations abroad. In October of last year, a New York district court ordered a Chinese bank to produce documents prepared by the bank's legal department in China, as well as communications to and from that department,9 because: (1) Chinese law does not recognize attorney-client privilege, and (2) even for documents that might have a sufficient connection with the U.S. for U.S. law to apply, those documents would only be privileged if they were prepared by or for licensed members of a bar – even though in China, it is not necessary for in-house counsel to be members of a bar.

The court later noted that the bank would be permitted to assert attorney-client privilege over documents pertaining to the bank's "global" internal investigation into the plaintiffs' claims, to the extent the bank could demonstrate that the investigation was in fact directed by counsel. Nonetheless, the outcome in that case should be a signal to U.S. companies doing business abroad, as well as non-U.S. companies investigating potential legal risks under U.S. law, that they must be attuned to potential complications with attorney-client privilege claims when conducting investigations overseas.

4. Risks for U.S. Government Contractors

Although the KBR case captured the attention of many U.S. companies across industries, including companies that do not do business with the federal government, government contractors should pay particular attention in light of the increasing legal risks companies assume in doing business with the federal government. The D.C. Circuit's opinion restored some certainty to the government contracts community by reversing the district court's ruling that the COBC investigation was not privileged if "required" under a government contract or applicable Government regulations.

Nonetheless, the need to conduct internal investigations as part of an effective legal compliance program will only increase with the growing legal risks for government contractors. Although the D.C. Circuit ultimately found that KBR could not be compelled to produce the reports in full, the gist of the reports KBR compiled is in the district court opinion and publicly available for any government agency, suspension and debarment official, or contracting officer to see. In an era of federal budget cuts and a shrinking pool of available government contracts, such information can have significant business costs for government contractors just as it can have significant legal costs. All of the foregoing underscores the need to preserve privileged materials associated with internal investigations.

Although many lauded the D.C. Circuit's decision as one that restored reason to the application of attorney-client privilege in corporate internal investigations, the case is far from resolved, having been remanded to the D.C. district court to proceed to summary judgment, and possibly to trial if the district court does not grant summary judgment for all of Barko's claims. Based on the information in the privileged documents that it reviewed in camera,the district court plainly regarded the government contractor's invocation of the attorney-client privilege with a jaundiced eye.

We continue to monitor this case, but it remains to be seen whether and how the court's conclusion that the reports directly contravened some of the company's factual representations in the litigation will affect the outcome on summary judgment. The KBR decision makes clear that it is important to take as many steps as possible at the internal investigation stage to demonstrate that related communications and documents are privileged, and the importance of communicating clearly to all involved that the company is conducting a thorough internal investigation with counsel and takes seriously any allegations of illegal conduct.


1. See http://blogs.wsj.com/law/2014/06/27/internal-investigations-are-still-privileged-dc-circuit-says/.

2. See http://colreaction.stroock.com/Reaction/7757/1.pdf.

3. See http://colreaction.stroock.com/Reaction/7757/4.pdf.

4. See http://colreaction.stroock.com/Reaction/7757/2.pdf.

5. See http://colreaction.stroock.com/Reaction/7757/3.pdf.

6. See http://www.bna.com/dc-circuit-rejects-n17179894515/.

7. See http://colreaction.stroock.com/Reaction/7757/5.pdf.

8. See http://colreaction.stroock.com/Reaction/7757/6.pdf.

9. See http://colreaction.stroock.com/Reaction/7757/7.pdf.

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