Compliance programs have grown in importance along with the demands of new laws and regulations. These programs are increasingly seen as vital to preventing corporate misconduct or, at least, mitigating sanctions if misconduct is found.
At the same time, company management needs to think through the scope of work assigned to compliance personnel, especially when questionable conduct is detected. Under these circumstances, an important question should be addressed: who should look into the misconduct – compliance staff or in-house or external legal counsel?
A recent decision by U.S. District Judge James S. Gwin in the District of Columbia shows that a company’s answer to this question will affect whether the investigation is subject to the attorney-client privilege. As explained by the court, a company’s internal compliance function is distinct from its legal one, and investigations conducted pursuant to a compliance function by compliance personnel will not be viewed as privileged.
In United States ex rel. Barko v. Halliburton HAL +0.88% Co., 1:05-CV-1276, 2014 WL 1016784 (D.D.C. Mar. 6, 2014), the plaintiff moved for an order compelling production of records relating to internal investigations conducted pursuant to the defendants’ internal compliance program. In particular, the plaintiff sought investigative reports written by defendants’ in-house compliance personnel regarding alleged favoritism and corruption in choosing subcontractors on government funded projects. The defendants objected on grounds of attorney-client privilege, as well as work product protection.
In considering whether the documents at issue were protected by attorney-client privilege, the court first examined the compliance program that produced the reports. Under the defendants’ compliance procedures, if, after the defendants’ compliance director determined that a tip of potential misconduct warranted further investigation, non-legal personnel in the compliance department would conduct interviews, review documents, and take statements. At the conclusion of their investigation, they would file a written report.
The court found that as a Department of Defense contractor, the defendants were required to have internal control mechanisms, like the compliance protocols leading to the reports at issue. Comparing these circumstances to those in the seminal investigations case, Upjohn Co. v. United States, 449 U.S. 383 (1981), the court determined that the instant investigations “were undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.” In reaching this conclusion, the court also considered the fact that the interviewed employees were not notified that the purpose of the interview was to assist the business in obtaining legal advice and that the confidentiality agreements they signed did not reference any legal purpose; on the contrary, these agreements specifically referenced the business impact any revelation of confidential information would have. Finally, the court considered the fact that the interviews were not conducted by lawyers.
The court reached a similar conclusion as to the work-product doctrine. Because the internal investigation was conducted in the “ordinary course of business[,] irrespective of the prospect of litigation,” and because it was conducted by “non-attorney investigators,” the court found that the documents could not be said to have been prepared in anticipation of litigation. Accordingly, it denied the documents work product protection.
This decision reminds us of two important aspects of privilege in the corporate context. First, work conducted by compliance personnel, including some investigative work, will not be viewed as privileged if it is required by law or regulation and necessary to the day-to-day functioning of the business. In those circumstances, compliance efforts have a purpose other than providing legal advice. Second, in many situations, companies will have some discretion as to whether investigative work is performed by in-house or external legal counsel on the one hand or compliance staff on the other. In these situations, if a company wants the fruits of an investigation to be privileged, it should staff and structure the investigation to make it clear that the investigation is not simply undertaken pursuant to a routine compliance function. A company should ensure that the legal purpose for an internal investigation is both clear and consistent throughout its course. And as Barko demonstrates, a crucial first step in doing so is ensuring the people who are conducting the investigation are the appropriate ones.
While non-legal personnel serve an important function in maintaining appropriate corporate compliance, if the privilege is to be preserved, the task of conducting internal investigations should ordinarily fall to lawyers.