Written by Brian Dunphy
A recent decision from the D.C. Circuit Court of Appeals, one of the most important courts in the nation, reaffirmed that a company’s internal investigations—if structured properly—are protected from disclosure in litigation by the attorney-client privilege. The Court’s decision In re: Kellogg, Brown, and Root, Inc. has significant practical application, especially for companies operating in heavily regulated environments that may be required to conduct internal investigations, and it offers a roadmap for structuring an internal investigation to protect the privilege.
Relator’s False Claims Act Lawsuit
The relator filed a lawsuit under the False Claims Act (“FCA”) against Kellogg, Brown, and Root, Inc. (“KBR”), among others, asserting that they overcharged the government by inflating costs and accepting kickbacks while administering government contracts in wartime Iraq. KBR conducted an internal investigation of the alleged fraud under the direction of in-house counsel.
During discovery in the FCA lawsuit, the relator sought documents and communications from KBR’s internal investigation. KBR refused to provide the materials, asserting that the investigation had been conducted for the purpose of obtaining legal advice and was therefore protected from disclosure by the attorney-client privilege.
The District Court Says the Attorney-Client Privilege Does Not Apply
The district court rejected KBR’s argument, decided that the attorney-client privilege did not apply to the investigation materials, and directed the company to turn over the investigation-related documents to relator. According to the district court, KBR failed to show that a “primary purpose” of the communication was to obtain legal advice, because it did not demonstrate that “the communication would not have been made ‘but for’ the fact that legal advice was sought.” In other words, the district court thought that the documents and communications were not made strictly to obtain legal advice. In fact, the district court concluded that KBR’s investigation was “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”
The lower court’s decision rightly concerned not only KBR, but employers everywhere. In response, KBR asked the D.C. Appeals Court to review the decision immediately. The Court obliged, holding that “[t]he novelty of the District Court’s privilege ruling, combined with its potentially broad and destabilizing effects in an important area of law, convinces us that granting the writ [of mandamus] is ‘appropriate under the circumstances.’”
The D.C. Circuit Court Steps in and Applies the Proper Privilege Test
The D.C. Circuit Court of Appeals decided that the district court’s “but for” articulation of the “primary purpose” test was the wrong standard to assess whether a communication is privileged. First, the district court’s test “would eliminate the attorney-client privilege for numerous communications that are made for both legal and business purposes.” Second, the test “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 its stead, the Court clarified the “significant purpose” test. Under that standard, the key inquiry is: “[w]as obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?” Applied to an organization’s internal investigation, the privilege applies if one of the “significant purposes” of the internal investigation was to obtain or provide legal advice. KBR had no issue satisfying that test here and the Court vacated the lower court’s document production order.
Structuring an Investigation Consistent with the Court’s Decision
The D.C. Circuit’s reasoning also provides guidance for in-house and outside counsel about how to structure an internal investigation to ensure that documents and communications generated in connection with the investigation are protected by the privilege. In rejecting each of the lower court’s reasons that the attorney-client privilege did not apply to KBR’s investigation materials, the appeals court reaffirmed the well-known principles from Upjohn v. United States, 449 U.S. 383 (1981), where the United States Supreme Court held that the attorney-client privilege protects confidential communications made during a company’s internal investigation led by company lawyers. And the D.C. Circuit’s opinion makes apparent several factors for companies to consider to protect the privilege when undertaking an internal investigation.
- An investigation must be conducted under the direction of counsel, but outside counsel need not always be involved. The court decided that a lawyer’s status as in-house counsel “does not dilute the privilege.” Indeed, Upjohn does not require the involvement of outside counsel for the privilege to apply.
- Employee interviews need not be conducted by lawyers, but they must be conducted at the direction of counsel. Many of the interviews in KBR’s investigation were conducted by non-attorneys, but KBR’s investigation was conducted at the direction of the attorneys in the company’s legal department. As a result, the communications were protected because the “communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege.”
- Employees were informed that the legal department was conducting an investigation. Even though KBR did not expressly inform the interviewed employees that the purpose of the interview was to assist the company in obtaining legal advice (as was the case in Upjohn) KBR’s employees signed a confidentiality agreement, and they knew that the company’s legal department was conducting an investigation of a sensitive nature and that the information they shared would be protected.
- The privilege applies even if the investigation must be undertaken to comply with regulatory requirements or a company’s compliance program. Although the district court decided that KBR’s internal investigation was undertaken to comply with Department of Defense regulations requiring defense contractors to maintain compliance programs and conduct internal investigations—rather than to obtain legal advice—that analysis rested on a “false dichotomy.” As long as obtaining legal advice was one of the significant purposes of the internal investigation, the privilege applies, even if the investigation had other purposes.
Fortunately, the D.C. Circuit Court of Appeals brought certainty back to this important area of the law. For companies that operate in a heavily regulated environment like health care providers or financial institutions, the advice of legal counsel is integral to ensuring compliance with myriad governing laws and regulations. The attorney-client privilege protects legal advice from disclosure to regulatory agencies, enforcement authorities, and opposing parties in litigation, including whistleblowers in FCA cases. So having certainty about the application of the privilege is crucial. So long as companies properly structure their internal investigations, they will be able to investigate potential compliance, employment, or other issues without fearing that their efforts could later be used against them in a legal proceeding.