United States: Q&A With PubKLaw's Annual Review Panelists: Dickstein Shapiro's David Nadler

Last Updated: September 16 2015
Article by David M Nadler

In anticipation of our Annual Government Contracts Review FY15/16, PubKLaw is interviewing some of the leading attorneys and experts who will speak during the one-day webcast. Today, we interview David Nadler, leader of Dickstein Shapiro's Government Contracts Practice, about a pair of appellate decisions dealing with attorney-client privilege in contractors' internal investigations.

Q: The US ex rel Barko v. KBR case, which alleges that KBR inflated costs and accepted kickbacks on Iraq contracts, has been closely watched because of its treatment of attorney-client privilege in contractors' internal investigations. The relator in the case has sought access to KBR's internal investigation of the kickback claims, and initially won a decision granting access on the grounds that the investigations were performed as part of regulatory compliance and not for the purposes of obtaining legal advice. For starters, why is privilege so critical for contractors? What are some of the risks in decisions, like the overturned Barko district court decisions, that could erode the application of attorney client privilege?

A: The attorney-client privilege is one of the bedrock foundations of the legal profession.The purpose of the attorney-client privilege is to provide for sound legal advice and advocacy by ensuring that clients can speak candidly and openly with their lawyer and disclose all of the information, good and bad, for counsel to make accurate and fully informed legal judgments. The privilege is intended to provide comfort to the client that a disclosure to counsel will not later be used as an admission against their interest.

The main problem with the district court's opinions in Barko is that it was sweeping in its reasoning and, thus, created uncertainty in the business community as to the exact parameters of the privilege. The district court essentially held that any compliance effort conducted pursuant to a regulatory or business reason could not be privileged because it was not conducted specifically to obtain legal advice. However, all companies, especially government contractors, operate in a highly regulated environment so it not practical to separate the various reasons for conducting a review. The court's attempt to separate the compliance and legal reasons for a review could devolve into a slippery slope that would create more confusion as to whether, and when, the privilege applied. The lack of certainty created by the court's decisions would have caused a chilling effect on a company's willingness to conduct internal investigations and to make disclosures.

Q: KBR twice sought, and got, a mandamus order from the D.C. Circuit. How unusual is it for that to happen twice in one case, on the same issue? Why do you think the D.C. Circuit decided that it needed to step in a second time to ensure that the District Court got the privilege question right?

A: Mandamus orders are incredibly rare, so it was highly unusual for the circuit court to get involved twice, but the court had no choice because the district court, after remand, was still trying to reach the same tenuous conclusions about the privilege as it did in its first decision. The district court appears to have tried to circumvent the Circuit by holding that a deponent's review of the privileged investigatory report in preparation for a deposition made those materials not privileged. This alternative approach by the district court was probably viewed by the Circuit as another way to assert that company reviews that were conducted pursuant to a regulatory trigger are not privileged because they were not done specifically for purposes of seeking legal advice, a position that the Circuit had already rejected. I think the main reason that the Circuit took the case again was to reinforce its position againstthe district court's potentially sweeping change to the application of the privilege.

The second issue under review in the appeal—the issue of whether KBR's citation of the deposition testimony to allegedly create an inference that no fraud had occurred—was more difficult for the Circuit to address because the waiver argument was not frivolous. However, the Circuit ultimately held that KBR's use of the testimony did not waive any privilege, but that was a factual determination based on how KBR had used the information.

Q: Imagine for a minute that the D.C. Circuit had supported the district court's original decision that the investigations weren't privileged because they were "undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice." What would that have meant for contractors in general?

A: It would have been a nightmare. Government contractors operate in a highly regulated environment so it not practical to differentiate between reviews that are triggered by regulation or policy and those that seek legal advice. Indeed, the regulated nature of government contracts always implicates the need to seek legal advice on the interpretation and application of those regulations. So, the sweeping redefinition of the attorney-client privilege by the district court would have been damaging to all companies, but particularly to government contractors. It would have had a chilling effect on routine compliance efforts, and contractors' willingness to conduct internal investigations and make disclosures.

Q: After remand from the D.C. Circuit, it seemed that KBR had won the battle but lost the war, because the lower court found other reasons to rule that the investigations should be turned over to Barko. The district court held that KBR had waived privilege by using the investigation to prepare a witness that was about to be deposed, and because it had placed them "at issue" by using them in a summary judgment brief, which implied in a footnote that the investigations had found no reportable wrongdoing. Were those more fact-specific findings equally troubling to other contractors as the original "regulatory compliance" reasoning?

No, the waiver issue was unique to the facts of that case, and I don't think that the Circuit took up the appeal for the second time to address that point. Subject matter waiver is an established rule and not especially controversial. The regulatory basis for the district court's ruling, however, was far more troubling because it was so generalized that it could have had profound ramifications on all contractors regardless of the facts of the case.

Q: Where does the second mandamus decision leave us? Does is offer assurance to contractors? Does it offer a useful roadmap of the ways in which companies should carry out and protect internal investigations? Does it merely affirm the status quo that the district court decisions threatened to unsettle?

A: It sure does. The district court decision was a near death experience for the attorney-client privilege in government contracts. The Circuit court decisions were important to restore the status quo and make it clear that there is no special variant of the privilege for government contractors simply because they operate in a highly regulated environment. However, it is important to recognize that the Circuit court decisions, while persuasive, are not binding on other courts outside of D.C., and courts in other jurisdictions are free to adopt the "but for" test that was endorsed by the district court. It is therefore important for companies to follow best practices to establish and protect the privilege including: (1) ensure that counsel is actively involved in the investigation; (2) ensure that internal policies are clear that the purpose of the investigation is to seek or provide legal advice; (3) ensure that the record is clear that the investigation is being directed by counsel who will evaluate the results of the investigation and draft the findings; (4) ensure that counsel participates in the interviews and that all interviews have appropriate Upjohn instructions; (5) ensure that any investigation reports and audits are only addressed and circulated to their intended audience and clearly marked privileged and confidential; (6) ensure that internal policies are up-to-date and comply with applicable regulations, including the mandatory disclosure regulations; and (7) ensure that privilege implications are carefully considered before providing documents to other entities, such as DCAA, and assert the privilege when appropriate.

Q: Is there anything else that contractors can take away from this pair of Circuit Court decisions?

A: Although the Circuit court's Barko decisions provide much needed comfort to government contractors, given the highly regulated environment in which they operate, contractors will always be pressed for privileged information. Given that every review will be fact specific, government contractors should be meticulous in following robust and documented procedures for internal investigations. Moreover, government contractors should regularly review and update their compliance, regulatory, and investigations practices to ensure that there is appropriate legal involvement in both the development of policies and the conduct of investigations.

Previously published by PubKLaw

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