In a shot heard round the business world, a DC district court judge in March denied attorney-client privilege protection to documents prepared in connection with an internal company investigation. The judge found the privilege did not apply because the investigation was mandated by government regulation and not simply an exercise in company discretion. The DC Circuit last week — in In re: Kellogg Brown & Root — found this to be a “false dichotomy” and granted the “drastic and extraordinary” remedy of mandamus to vacate the lower court’s ruling.
The underlying action was brought by Harry Barko, a former employee of the defense contractor KBR, under the whistleblower provisions of the False Claims Act. Barko alleged that KBR defrauded the US government by inflating costs and accepting kickbacks while administering military contracts in wartime Iraq. In discovery, Barko sought documents related to an internal investigation KBR conducted into the alleged fraud. The Department of Defense requires its defense contractors to undertake these investigations when faced with allegations of wrongdoing. KBR refused to produce the documents, claiming the internal investigation, even though government mandated, was for the purpose of obtaining legal advice and thus covered by the attorney-client privilege. The district court rejected KBR’s argument and ordered the immediate production of the documents.
The DC Circuit disagreed with the lower court’s decision, finding it “irreconcilable” with the Supreme Court’s broad holding in Upjohn v. United States that the attorney-client privilege protects confidential employee communications during an internal investigation led by company lawyers. According to the DC Circuit, that was precisely the kind of documents over which KBR was claiming privilege and thus readily fell under the Upjohn umbrella.
But the DC Circuit went even further with its decision, wanting to leave no uncertainty as to what it views as the proper approach for assessing privilege when it comes to internal investigations:
In the context of an organization’s internal investigation, if one of the significant purposes of the internal investigation was to obtain or provide legal advice, the privilege will apply. That is true regardless of whether an internal investigation was conducted pursuant to a company compliance program required by statute or regulation [as was the case with KBR], or was otherwise conducted pursuant to company policy.
It was the distinction the lower court made between the basis for the internal investigation — whether by statutory mandate or by discretionary company policy — that the DC Circuit seemed to fine most troubling. According to the Court, the reason for the internal investigation is irrelevant when it comes to determining privilege. Otherwise, it would “disable most public companies from undertaking confidential internal investigations” since so many of them these days — defense contractors like KBR included — are now subject to this kind of mandatory internal compliance procedure.
The bottom line for the DC Circuit was that if left to stand, the district court’s ruling would for “a significant swath of American industry” severely limit, if not completely eviscerate the ability of in-house counsel to ensure their client’s compliance with the law. This was not an outcome the DC Circuit was willing to fathom. Nor did it want to leave any confusion in this critical area of the privilege law because as the Supreme Court made clear in Upjohn, “uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all.”
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