DC Circuit Rejects Narrow View Of Attorney-Client Privilege In Internal Company Investigations

by Proskauer - Government Contractor Compliance & Regulatory Update
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On June 27, 2014, the D.C. Circuit granted Kellogg Brown & Root’s (“KBR’s”) petition for a writ of mandamus and vacated a federal district court order requiring KBR to produce 89 documents related to an internal investigation. Relying on Upjohn Co. v. United States, 449 U.S. 383 (1981), the D.C. Circuit ruled that the documents were protected by the attorney-client privilege because the company conducted its internal investigation for the “significant purpose” of obtaining legal advice. The decision provides more clarity to employers about the circumstances in which the attorney-client privilege applies to internal investigations, particularly in situations where mandatory disclosure obligations are potentially implicated.

Background

In 2005, a KBR employee filed a False Claims Act suit against the company. The employee alleged that KBR and its subcontractors had defrauded the federal government by inflating bills and accepting kickbacks in connection with Iraq War military contracts. In discovery, the employee sought KBR documents created in connection with KBR’s internal investigation of the employee’s allegations.  KBR asserted that the attorney-client privilege protected the documents.

The District Court reviewed the documents in camera to assess whether the documents were created for the “primary purpose” of obtaining legal advice. Relying on a “but for” formulation of the “primary purpose test,” the court held that KBR could not assert the attorney-client privilege because the company failed to demonstrate the only purpose for the investigation was to seek legal advice. The court reasoned that KBR conducted the internal investigation in the ordinary course of business to comply with Department of Defense mandatory disclosure obligations and corporate policy.

The D.C. Circuit’s Decision

KBR filed a writ of mandamus in the D.C. Circuit, arguing that the District Court applied an incorrect legal standard. The D.C. Circuit agreed, concluding that the “but for” formulation of the “primary purpose test” was too stringent. The Court ruled that so long as “a significant purpose” of the investigation was to assist in the formulation of attorney advice to the company, the privilege could apply. The D.C. Circuit, relying on Upjohn, determined that the fact that the investigation was required by government mandatory disclosure regulations and the company’s internal policies was not sufficient to preclude the application of the attorney-client privilege.

In its ruling issuing the writ, the D.C. Circuit focused on the potential destabilizing effect of the District Court’s broad interpretation of the “primary purpose test.” The Court emphasized that the “but for” test adopted by the District Court may have prevented any contractor subject to mandatory disclosure obligations and similar regulatory obligations from ever invoking the attorney-client privilege.

Takeaway

The D.C. Circuit’s decision provides additional clarity to the scope of the attorney-client privilege afforded to employers conducting internal investigations. Employers should continue to exercise caution and consult in-house and/or outside counsel before undertaking any such investigations. In addition, while the D.C. Circuit’s decision adopted the “significant purpose” standard for asserting the attorney-client privilege, employers should undertake the steps that enhance the application of the privilege. Employers should document when an investigation is being conducted to obtain legal advice and/or in anticipation of potential litigation, including entering into a retainer agreement with outside counsel specifically requesting advice in connection with the investigation. Employers should also advise employees who are interviewed or otherwise involved that the investigation is privileged and confidential. Also, legal advice provided during the course of the investigation should only be disclosed to those corporate officers and officials involved in the resolution of the issues raised by the investigation. Finally, employers should understand that the privilege does not shield the entire investigation from discovery. Plaintiffs may still be entitled to disclosure of the underlying “facts” uncovered as part of the investigation.

 

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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