Internal Investigations Remain Internal – Attorney Client Privilege Protected by D.C. Circuit

by Orrick - Securities Litigation and Regulatory Enforcement Group
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http://blogs.orrick.com/securities-litigation/files/2012/10/iStock_000017164817XSmall-200x150.jpgOn June 27, 2014, the U.S. Court of Appeals for the D.C. Circuit issued an important, unanimous decision upholding the assertion of attorney-client privilege for an internal investigation.  The decision is especially significant because it (a) forcefully reversed a growing trend in the D.C. federal district courts that had narrowly applied the attorney-client privilege to internal investigations and (b) confirmed that communications made during the course of an internal investigation – e.g., interviews and interview notes and reports – are privileged whenever a primary purpose of the communication was to obtain legal advice.

The case involves a False Claims Act claim against Kellogg, Brown & Root (“KBR”), a former Halliburton subsidiary, regarding alleged fraud and other unlawful conduct violating the company’s code of business conduct.  The plaintiff sought various materials relating to KBR’s investigation of the alleged conduct.  Non-lawyers, acting at the direction of in-house lawyers, conducted the interviews.

The district court held that the internal investigation materials, including the reports, were not privileged, reasoning that the investigation was “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”  In determining that the investigation was not undertaken for the purpose of obtaining legal advice, the district court applied a “but for” test pursuant to which “[t]he party invoking the privilege must show the communication would not have been made ‘but for’ the fact that legal advice was sought.”

The D.C. Circuit reversed, after taking the highly unusual step of granting KBR’s petition for a writ of mandamus after the district court had denied a request for interlocutory appeal.  The Court of Appeals found that KBR’s assertion of privilege was “materially indistinguishable” from the privilege assertion that the Supreme Court had upheld in the leading case in the area, the 1981 opinion in Upjohn Co. v. United States, 449 U.S. 383 (1981).  The D.C. Circuit found it inconsequential both that the interviews were conducted by non-lawyers and that outside counsel was not involved in the investigation.  According to the appeals court, “Upjohn does not hold or imply that the involvement of outside counsel is a necessary predicate for the privilege to apply,” and it was sufficient that the investigation was conducted “at the direction of” inside counsel.  The D.C. Circuit also dismissed the district court’s observation that employees were not informed that the purpose of the investigation was to obtain legal advice, holding that “nothing in Upjohn requires a company to use  magic words to its employees in order to gain the benefit of the privilege for an internal investigation.”

More importantly, the D.C. Circuit rejected the district court’s “but for” test, stating:  “So long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by rather than simply an exercise of company discretion.”  The court concluded by articulating the following test for deciding whether a communication made in the course of an internal investigation is privileged:  “Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?” (Emphasis by the court).

Following the district court’s order, and similar decisions by District of Columbia federal courts that had applied a “but for” test, the D.C. Circuit’s opinion provides a strong safeguard for companies deciding whether or not to conduct internal investigations into whistleblower and other allegations of corporate wrongdoing.  Companies now have greater comfort that the attorney-client privilege will protect the confidentiality of their investigations even when directed by inside rather than outside counsel and even when the interviews are conducted by non-lawyers.  Such comfort will, in turn, allow companies to conduct many investigations more quickly and cost-effectively.  Still, despite the Court of Appeals’ opinion, companies are well-advised to continue to take steps – such as appropriate involvement of outside counsel, use of lawyers to conduct interviews, and express documentation that the investigation and the interviews are being conducted in significant part to obtain legal advice – to maximize the likelihood that a reviewing court will accord attorney-client privilege status to the investigation and its contents.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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