Protections Afforded to Internal Investigation Materials - D.C. Circuit Reaffirms Protections Afforded to Internal Investigation - But There Are Lessons to be Learned

by Bilzin Sumberg

At least since the U.S. Supreme Court handed down its seminal 1981 decision in Upjohn Co. v. U.S., 449 U.S. 383 (1981), the conventional wisdom has been that companies can rest assured that materials prepared during internal investigations are privileged and not subject to disclosure absent extraordinary circumstances.  That conventional wisdom came under serious attack by the District Court for the District of Columbia in its decision in U.S. ex rel. Barko v. Halliburton Co. et al, No. 05-cv-1276, 2014 WL 929430 (D.D.C. Mar. 11, 2014) (“Barko”), where the trial court ordered KBR to turn over notes stemming from an internal investigation relating to fraud during the performance of government contracts.  Such was the impact of the district court’s opinion that the D.C. Circuit Court of Appeals characterized it as “generat[ing] substantial uncertainty about the scope of the attorney-client privilege in the business setting.”  In re Kellogg Brown & Root, Inc. et al., No. 14-5055, 2014 WL 2895939 (D.C. Cir. Jun. 27, 2014) (“In re KBR”).  Ultimately, as discussed below, the D.C. Circuit repudiated the district court’s reasoning and essentially reaffirmed the protections afforded to internal investigation materials by Upjohn and its progeny. 

That said, companies may attempt to avoid some of the issues raised by the district court in Barko by instituting protocols that will remove any doubt that the communications and information prepared during the course of internal investigations are protected and not subject to disclosure.  Among these, companies should take steps to ensure that the internal investigation is being conducted at the behest, and under the supervision, of internal or external counsel, even if the investigation otherwise is mandated by statute or corporate policy (i.e., as part of a corporate compliance plan).  Companies also would do well to ensure that at least one of the significant purposes for the internal investigation is to seek or provide legal advice in order to blunt any argument that the investigation is being conducted solely for the purpose of the provision or solicitation of business advice.

In Barko, the plaintiff-relator was a former employee of KBR who filed a False Claims Act lawsuit claiming that KBR and certain subcontractors had defrauded the United States while managing military contracts during the Iraq conflict.  In re KBR, 2014 WL 2895939 at * 1.  During discovery, Barko requested that KBR produce certain documents relating to KBR’s “Code of Business Conduct” (“COBC”) investigation into allegations of fraud and other mismanagement.  Barko, 2014 WL 929420, at * 1.  After examining the documents in camera, the district court found that the materials were subject to disclosure as they were not protected by either the attorney-client privilege or the attorney work product doctrine.  Of particular significance to the district court was the fact that the COBC investigation was undertaken pursuant to Department of Defense contracting regulations and KBR’s own COBC -- and that the internal investigation purportedly was not undertaken pursuant to instructions from the legal department or outside counsel.  Put another way, for the district court, the COBC investigation was a “routine corporate, and apparently ongoing, compliance investigation required by regulatory law and corporate policy.”  Id. at * 3.  Taking the analysis further, the district court found that the attorney-client privilege did not apply because the internal investigations would have been conducted “regardless of whether legal advice was sought,” and therefore failed what the district court characterized as the applicable “but for” test.  Id. at * 3-4.  The district court also found that the “purpose” of the investigation was not to obtain legal because the investigation interviews were conducted by non-lawyers, the interviewees apparently were not notified that the interviews were being conducted pursuant to an internal investigation, and the non-disclosure agreements that the interviewees signed did not mention that the interviews were conducted for the purpose of obtaining legal advice.  Id. at * 3.  In summarizing its position, the district court found that, “because the COBC investigation was not for the primary purpose of seeking legal advice, [KBR] is not entitled to the protection of the attorney client privilege.”  Id. at * 4.  Applying much of the same reasoning, the district court also found that the materials were not protected from disclosure by the attorney work product doctrine. Id. at * 4-5. 

After failing to have the district court revisit its ruling, KBR filed a petition for writ of mandamus.  KBR’s position was supported by various industry groups, including the U.S. Chamber of Commerce, while Barko’s position was supported by the United States.  The D.C. Circuit, in a well-reasoned, 18-page opinion, soundly rejected the district court’s reasoning, holding that mandamus was warranted because the district court’s privilege ruling was legally erroneous.  In re KBR at * 2.  The D.C. Circuit began its analysis with some apt policy points that first were provided by the Supreme Court in its 1981 Upjohn decision -- the attorney-client privilege is necessary for organizations trying to navigate complex regulatory regimes and “the first step to the resolution of any legal problem is ascertaining the factual background and sifting through the facts with an eye to the legally relevant.”  Id. at * 2 (citing Upjohn, 449 U.S. at 390-91).

In perhaps the more significant part of its opinion, the appellate court found that the district court had employed the wrong legal test when considering KBR’s claims of privilege, holding that the “but-for” test employed by the district court essentially “would eradicate the attorney-client privilege for internal investigations conducted by businesses that are required by law to maintain compliance programs, which is now the case in a significant swath of American industry.”  Id. at * 4-5.  The In re KBR court held, instead, that the proper test is whether one of the significant purposes of the communication was to seek legal advice.  Id. at * 5.  As held by the appellate court, “[s]ensibly and properly applied, the test boils down to whether obtaining or providing legal advice was one of the significant purposes of the attorney-client communication.”  Id. (emphasis added).  The appellate court further determined that this was the proper test to be applied “regardless of whether an internal investigation was conducted pursuant to a company compliance program required by statute or regulation, or was otherwise conducted pursuant to company policy.”  Id.

The In re KBR court also addressed, and rejected, each of the main arguments employed by the district court to arrive at its decision.  First, the appellate court held that Upjohn does not stand for the proposition that internal investigation information may be disclosed unless the investigation occurs after consultation with external counsel.  Id. at * 3.  The appellate court reaffirmed the well-settled proposition that a lawyer’s status as in-house counsel “does not dilute the privilege.”  Id. (internal citation omitted).  Second, the appellate court held that the fact that the internal investigation communications were made by and to non-attorneys was of no moment -- they are protected.  Id.  Third, the In re KBR court also held that companies need not use “magic words” when interfacing with its employees to ensure that internal investigation materials are protected -- in that case, the investigation was initiated at the request of the KBR legal department and that was sufficient for the appellate court.  Id.

In summary, KBR ultimately was able to protect its internal investigation materials, but not before expending significant resources and, unfortunately, not before having the contents of its COBC investigation reports generally discussed by the district court in its decision (in its petition, KBR bitterly complained that the district court had improperly characterized the COBC reports as “eye-openers,” implying that misconduct indeed had occurred).  Although the D.C. Circuit reaffirmed Upjohn’s principles, companies can attempt to neutralize future disputes by ensuring that its internal or external counsel initiate and supervise the internal investigations, and by ensuring that at least one of the purposes of conducting the investigation was for the provision or receipt of legal advice.


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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