The US District Court for the Eastern District of Virginia recently upheld an unsettling decision that contractor disclosures made under the Mandatory Disclosure Rule (MDR), even when subject to an investigation conducted at the direction of counsel, may constitute a waiver of the attorney-client privilege. Unfortunately, this decision, discussed below and issued from a court in a district that many government contractors call home, may counsel in favor of significantly reducing the level of detail contractors disclose under the MDR. While contractor counsel must carefully guard the privilege, their clients must recognize that reducing detail in disclosures could potentially result in more scrutiny in connection with governmental investigations and, accordingly, increased costs to contractors.  

Specifically, during discovery in Anderson v. Fluor Intercontinental, Inc. et al. (Case No. 1:19‑cv‑00289‑LO‑TCB), a wrongful termination case related to a government contractor's internal investigation into whether an employee had undisclosed conflicts of interest with a subcontractor bidding on its subcontracts, the plaintiff-employee moved to compel production of discovery related to the contractor's internal investigation. The plaintiff asserted that a subject matter waiver of the attorney-client privileged investigation had occurred through the contractor's disclosure of the investigation to the Department of Defense Inspector General (DoD-IG).

On November 8, 2019, the court held that the contractor waived the attorney-client privilege due to four statements in its disclosure. The court held that the statements—Plaintiff "appears to have inappropriately assisted . . . "; "Fluor considers [that] a violation . . ."; Plaintiff "used his position . . . to pursue [improper opportunities] and . . . to obtain and improperly disclose nonpublic information . . ."; and "Fluor estimates there may have been a financial impact . . . [due to] improper conduct"—were legal conclusions that revealed attorney-client communications that were released to the DoD-IG, a third party.  The court further concluded that these disclosures were "voluntarily" made, as admitted via pleadings (i.e., the answer) and, therefore, determined that a subject-matter waiver occurred, meaning the privilege was waived as to the communications, their subject matter and the underlying details, as well as to fact work product regarding the disclosure. 

Fluor moved for reconsideration arguing, in part and with additional support via an amicus brief, that the Court misconstrued the disclosure requirements under the MDR.  As related to this contention, the Court held, on December 20, 2019, that under the MDR, a contractor need only make a "timely, written disclosure, upon credible evidence," but that such disclosure need not be "comprehensive."  Instead, the Court held that the "natural reading [of the MDR] leads to the conclusion that the substance of the disclosure should be a notification that the contractor has credible evidence that a principal, employee, agent, or subcontractor of the contractor has committed a violation."  That is all.  The Court determined that the "full cooperation" requirement is "separate and distinct from both the [MDR] and the other internal control system function, which is similar to the [MDR]."

Prior to this decision, it was common for contractors to provide rather comprehensive information, depending on the circumstances, under the MDR to be candid with its government customer, while also preserving resources and enabling cost-savings to the extent additional investigations were unnecessary. It also was common for contractors to make disclosures even when the evidence obtained from an internal investigation did not necessarily satisfy a credible evidence standard in the contractor's opinion. Contractors might do so out of an abundance of caution so as to forestall any claim of noncompliance with the MDR.

As a result of this decision, contractors and their counsel must take care to only include high-level facts in a disclosure and to ensure that no legal conclusion, or characterization of the facts that can be viewed as a legal analysis or conclusion, is included in the disclosure. While being more circumspect in a disclosure may protect against a court finding a privilege waiver, the contractor must also anticipate the potential of frustration by the cognizant OIG and audit community and the increased cost associated with the government's effort to vet disclosures.

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