D.C. Circuit Revives Attorney-Client Privilege Protection for Internal Fraud Investigations
» Posted July 21, 2014 Publications
by Kirk E. Niemi, Partner
On March 6, 2014, alarms sounded throughout the federal contractor community following a decision by the District Court for the District of Columbia (See United States ex rel. Barko v. Halliburton Co., No. 05-cv-1276 (D.D.C. March 6, 2014) holding that internal corporate investigations into potential government fraud, as required by the contractor code of conduct mandated by the Federal Acquisition Regulations, were not protected by the attorney-client privilege, even if performed under the direction of in-house counsel. The trial court ordered the contractor to produce to a qui tam plaintiff all internal records pertaining to the contractor’s internal investigation of potential fraud. Fortunately, on appeal the Circuit Court of Appeals for the District of Columbia revived the attorney-client privilege by holding that documents concerning an internal investigation into possible government contract fraud were protected by the privilege, provided at least one of the significant purposes of the internal investigation was to obtain or provide legal advice, even if the investigation was conducted pursuant to a company compliance program required by federal statute or regulation. In re. Kellogg Brown & Root, Inc., No. 05-cv-1276 (D.C. Cir. June 27, 2014).
The case arose from a qui tam lawsuit filed under the False Claims Act by an employee of a federal government contractor alleging that certain subcontractors defrauded the U.S. government while administering military contracts in Iraq. The employee sought documents in discovery relating to the contractor’s internal investigation that was conducted pursuant to its code of business conduct. The contractor objected to producing the documents based on the attorney-client privilege and work-product doctrine. The trial court held that the privileges were inapplicable because the contractor’s primary purpose for conducting the investigation was to comply with government rules requiring defense contractors to discover and report fraud involving government contracts. Accordingly, the trial court held the documents were created in the ordinary course of business and not protected by the attorney-client privilege or work product doctrine.
The D.C. Circuit Court of Appeals held that the district court had employed an erroneous interpretation of the “primary purpose test,” which is used by many courts, including the D.C. Circuit, when attorney-client communications have both a legal and business purpose. There was no authority for the trial court’s holding that the attorney-client privilege did not apply unless the sole purpose of a communication was obtaining or providing legal advice. Rather, the Circuit Court held that the attorney-client privilege applies so long as one of the “significant purposes” of the internal investigation was to obtain or provide legal advice. The D.C. Circuit further held “[t]hat is true regardless of whether an internal investigation was conducted pursuant to a company compliance program required by statute or regulation, or was otherwise conducted by company policy.” Because obtaining legal advice was at least one of the significant purposes of the internal investigation, the trial court erred by ordering the documents to be produced.
The D.C. Circuit also disagreed with the trial court’s analysis distinguishing the contractor’s privilege claim with that in Upjohn Co. v. United States, 449 U.S. 383 (1981), in which the Supreme Court held that the attorney-client privilege applies to internal corporate investigations and covers communications between company employees and company attorneys. First, the Circuit Court held it did not matter that the contractor’s investigation was initiated solely by in-house counsel, whereas the Upjohn investigation began after in-house counsel conferred with outside counsel. The D.C. Circuit clarified that Upjohn “does not hold or imply that the involvement of outside counsel is a necessary predicate” for the attorney-client privilege and the general rule is that a lawyer’s status as in-house counsel does not dilute the privilege. Second, it also did not matter that the interviews in Upjohn were conducted by attorneys, whereas the interviews in this investigation were conducted by non-attorneys, because the investigation was conducted at the direction of attorneys in contractor’s legal department. The court stated that communications made by and to non-attorneys serving as “agents of attorneys” are routinely privileged.
Despite the D.C. Circuit’s reversal and reinstatement of the attorney-client privilege with respect to internal investigations, government contractors are well advised to employ several safeguards. First, the contractor, whether through in-house or outside counsel, should create a written record that a “significant purpose” of the internal investigation is to obtain and provide legal advice. Second, at a minimum, in-house counsel should oversee the investigation and document that oversight. Third, documents obtained or created as part of the investigation should be marked as subject to the attorney-client privilege and work product doctrine. Fourth, when possible, counsel should participate in any interviews. When this is not possible, a written record should be created to evidence that those performing the interviews are doing so at the direction of counsel. Finally, interviewees should be advised that the interview is being conducted at the direction of counsel and all subject matter from the interview should be kept confidential.
The D.C. Circuit’s reversal of the trial court was applauded throughout the federal contractor community. Notwithstanding this good news, the trial court’ erroneous decision should not be ignored and contractors should ensure they proceed with caution and implement safeguards to protect all applicable privileges.