D.C. Circuit Bolsters Attorney-Client Privilege in Internal Investigations

by Brooks Pierce

You may remember that in March, the U.S. District Court in D.C. threw the corporate world into a bit of a tizzy with a ruling that documents related to an internal investigation at Kellogg Brown & Root were not privileged and subject to discovery in a False Claims Act case.  After Judge Gwin, sitting by designation from the Northern District of Ohio, denied a stay of his order compelling disclosure of the documents in question, a great hue and cry erupted.  The D.C. Circuit heard oral argument on KBR’s petition for writ of mandamus on May 7, and an opinion vacating the district court’s order followed on Friday.  Over 30 years ago, the Supreme Court held in Upjohn v. United States, 449 U.S. 383 (1981), that the attorney-client privilege protected confidential employee communications made during a business’s internal investigation led by company lawyers.  For the court of appeals, the situation before it was no different.

The Underlying Facts

Here are the underlying facts: Harry Barko worked for KBR, and in 2005 filed a False Claims Act complaint against KBR and related corporate entities.  Basically, Barko alleged that KBR and its subcontractors had defrauded the U.S. government by inflating costs and accepting kickbacks while administering military contracts in wartime Iraq.  During discovery, Barko sought documents related to KBR’s prior internal investigation into the alleged fraud.  KBR had conducted that internal investigation pursuant to its Code of Business Conduct, which – critically for purposes of the court’s analysis – is overseen by the company’s Law Department.  KBR argued that the internal investigation had been conducted for the purpose of obtaining legal advice and that the internal investigation documents were therefore protected by the attorney-client privilege.  Barko responded that the internal investigation documents were unprivileged business records that he was entitled to discover.

Picking Apart the District Court’s Analysis

The district court reviewed the disputed documents in camera, and determined that the attorney-client privilege did not apply for a number of reasons.  First, the district court distinguished Upjohn by noting that that internal investigation began after in-house counsel conferred with outside counsel, whereas here the investigation was conducted in-house without consultation with outside lawyers.  The court of appeals was not persuaded, and applied the general rule that a lawyer’s status as in-house counsel does not dilute the privilege.

Second, the district court noted that the interviews in Upjohn were conducted by attorneys, whereas many of the interviews in KBR’s investigation were conducted by non-attorneys.  The court of appeals dismissed this as a distinguishing factor as well.  The investigation was conducted at the direction of attorneys in KBR’s Law Department.  Because communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege, KBR’s privilege was likewise protected.

Third, the district court pointed out that in Upjohn the interviewed employees were expressly informed that the purpose of the interview was to assist the company in obtaining legal advice, whereas here they were not.  Also, the confidentiality agreements signed by KBR employees did not mention that the purpose of KBR’s investigation was to obtain legal advice.  As the D.C. Circuit noted, though, nothing in Upjohn requires a company to use magic words to its employees to gain the benefit of the privilege for an internal investigation.  In any event, the KBR employees knew the company’s legal department was conducting a sensitive investigation, and that they were not to discuss their interviews without the general counsel’s authorization.

Finally, the district court also distinguished Upjohn on the ground that KBR’s internal investigation was undertaken to comply with regulations that require defense contractors to maintain compliance programs and investigate allegations of potential wrongdoing. Therefore, the purpose of KBR’s internal investigation was to comply with those regulatory requirements rather than to obtain or provide legal advice.  As the court of appeals said, though, 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 the investigation was mandated by regulation and not simply an exercise of company discretion.

The “Primary Purpose” Test

The District Court began its analysis by reciting the “primary purpose” test, which many courts have used to resolve privilege disputes when attorney client communications may have had both legal and business purposes.  But the district court then said that the primary purpose of a communication is to obtain or provide legal advice only if the communication would not have been made “but for” the fact that legal advice was sought.  In other words, if there was any other purpose behind the communication, the attorney-client privilege would not apply.

The court of appeals said this but-for test was not appropriate for attorney-client privilege analysis.  This approach would eliminate the privilege for (1) numerous communications that are made for both legal and business purposes and that heretofore have been regarded as privileged; and (2) internal investigations conducted by the many businesses that are legally required to maintain compliance programs.  The court said that under this construction of the privilege, businesses would be less likely to disclose facts to their attorneys and to seek legal advice, which would “limit the valuable efforts of corporate counsel to ensure their client’s compliance with the law.”

The D.C. Circuit also said the primary purpose test, does not draw a rigid distinction between a legal purpose on the one hand and a business purpose on the other.  Indeed, trying to find a single primary purpose for a communication motivated by two sometimes overlapping purposes (one legal and one business, for example) can be an inherently impossible and infeasible task.  The court of appeals phrased the test this way: Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?  If obtaining or providing legal advice was one of the significant purposes of the attorney-client communication, the privilege will apply.

What Companies Can Take from This Decision

The district court’s opinion had left companies – especially those in regulated industries where compliance programs are common – in a state of great uncertainty regarding the attorney-client privilege as it applied to their internal investigations.  Companies using Judge Gwin’s opinion as a guide would have been required:

  • to inform employees that interviews are being conducted in order to gather facts that will help company counsel provide legal advice to the company;

  • to ensure that internal investigations are overseen by outside counsel or at a minimum inside lawyers whose functions do not substantially involve managing business operations; and

  • to the extent that non-lawyers conduct witness interviews during internal investigations, to ensure that they do so at the express (and documented) direction of the company’s lawyers.

These are still generally good ideas, and only the beginning of the precautions a company should take in an internal investigation.  But the D.C. Circuit’s decision takes much of the edge off the anxiety created by the district court.  Outside counsel do not have special privilege powers that are unavailable to in-house counsel.  Interviewers do not have to recite magical language to corporate employees to get the benefit of the attorney-client privilege.  Perhaps most importantly, companies with programs that separately require investigation to ensure regulatory compliance can breathe easier.  The court has made clear that as long as obtaining or providing legal advice is one of the significant purposes of the communication, the attorney-client privilege will apply.

The opinion doesn’t apply across the nation.  Other district courts have used the but-for test rejected here.  But I suspect this opinion will quickly become the standard for examining the attorney-client privilege as it applies to internal corporate investigations.  Companies engaged in them should study it and apply it going forward.


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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