Attorney-Client Privilege Applies to Corporate Internal Investigations
The U.S. Court of Appeals for the District of Columbia Circuit recently held that the attorney-client privilege applies to internal investigations concerning alleged fraud in the performance of government contracts, even if the investigation was conducted pursuant to a compliance program mandated by federal regulation. In re Kellogg Brown & Root Inc., D.C. Cir., No. 14-5055, (slip op. June 27, 2014).
The case involved allegations of fraud asserted under the False Claims Act by Harry Barko, a former employee of Kellogg, Brown & Root (“KBR”), a defense contractor. Barko alleged that KBR and certain subcontractors inflated costs and accepted kickbacks while administering contracts in wartime Iraq. In discovery, Barko sought documents related to KBR’s internal investigation into the alleged fraud. The D.C. Circuit took the extraordinary step of granting KBR’s request for a writ of mandamus, which it described as a “drastic and extraordinary” remedy, and vacated the District Court’s order to produce the materials.
In this powerful opinion, the D.C. Circuit held that the attorney-client privilege articulated by the Supreme Court in Upjohn Co. v. United States, 449 U.S. 383 (1981) applies to internal investigations undertaken in compliance with DoD regulations that require contractors to maintain compliance programs and conduct internal investigations into potential wrongdoing. In so ruling, the D.C. Circuit ensured smooth continuation of internal contractor investigations in support of contractor disclosures. Otherwise, the ability to conduct those investigations would be undermined and the government’s interest in well-informed contractor disclosures would be frustrated. The opinion will be studied carefully by contractors and their counsel to ensure that the bases of the privilege are preserved.
Significantly, the Court held that the privilege applied if legal advice was a significant purpose of the investigation: “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 regulation rather than simply an exercise of company discretion.”
Thus, the Circuit Court held that the District Court applied the wrong test when it held that “the primary purpose” of the internal investigation “was to comply with federal defense contractor regulations, not to secure legal advice.” As the appellate court noted, “… the District Court’s novel approach 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. In turn, 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.’” (citing Upjohn).
The D.C. Circuit held that the proper test is as follows: “Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?” (Emphasis in original.)
The Court said that to hold, as the District Court did, that the privilege did not apply because “the internal investigation here was conducted pursuant to a compliance program mandated by federal regulations would potentially upend certain settled understandings and practices. Because defense contractors are subject to regulatory requirements of the sort cited by the District Court, the logic of the ruling would seemingly prevent any defense contractor from invoking the attorney-client privilege to protect internal investigations undertaken as part of a mandatory compliance program.”
The same result, the Circuit Court noted, would apply not only to defense contractors, but more generally to investigations conducted pursuant to other requirements of federal law. The Circuit Court stated: “And because a variety of other federal laws require similar internal controls or compliance programs, many other companies likewise would not be able to assert the privilege to protect the records of their internal investigations. In fact, the District Court’s decision would disable most public companies from undertaking confidential internal investigations.” (Emphasis in original, citing KBR Pet. 19).
The Court also held that the privilege applied to statements made by and to non-attorneys assisting in-house KBR attorneys in the investigation. The court noted that “many of the interviews in KBR’s investigation were conducted by non-attorneys. But the investigation here was conducted at the direction of the attorneys in KBR’s Law Department. And communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege.”