A recent ruling out of the U.S. Court of Appeals for the D.C. Circuit could change the way that companies conduct internal investigations.  In the case of In re: Kellogg Brown & Root, the district court ruled that documents created in the course of an internal investigation were not covered by the attorney-client privilege.  That decision was then vacated by the Court of Appeals.

In the underlying suit, Harry Barko, Jr. brought a qui tam action against Kellogg Brown & Root (KBR) under the false claims act, alleging that KBR had overcharged the U.S. Army. During discovery, Barko sought documents regarding KBR’s compliance with government contracting regulations.  KBR produced some documents reflecting employees’ tips to its ethics hotline, but it withheld the documents created during its investigation of those tips asserting attorney-client privilege over them.  The district court ruled that those investigation documents were not protected by privilege. Dispositive to the court’s analysis was that federal regulations required KBR to implement a system of internal compliance controls and to timely report any misconduct to the government. The court thus, concluded that the documents were created “pursuant to a compliance investigation required by regulatory law” and not “for the purpose of obtaining legal advice.”

KBR’s investigation was conducted, in part, by non-attorney employees, and those interviewed for the investigation were not told that the investigation’s purpose was obtaining legal advice.  Further, while KBR utilized its in-house counsel for the investigation, it did not employ outside counsel. The court noted all of these factors in determining that the investigation was not subject to attorney-client privilege.

Here, the district court seemingly applied a but-for test, meaning that communications are privileged if, and only if, the communication was madesolely for the purpose of obtaining legal advice.  The circuit court was uncomfortable with this rigid standard, instead preferring a primary purpose test.  Under the primary purpose standard, a communication is privileged so long as its primary purpose was to seek or give legal advice (even if it had other purposes as well). In the modern business world, most communications serve multiple purposes and given that, the circuit court felt that the but-for test was too restrictive.

In a ruling delivered June 27, 2014, the Circuit Court concluded that the district court’s privilege ruling constituted clear legal error, and vacated the ruling. Despite this ruling, companies should still be careful in conducting their investigations to ensure privilege is protected.  The major takeaways from this decision:  

       ·       Have general counsel direct the investigation

      ·       Have an attorney conduct all employee interviews

      ·       Before all interviews, clarify that the purpose is for the company to gather facts to obtain legal advice

      ·       Engage outside counsel. Because outside counsel’s only function is legal advice, the primary purpose of any communication will necessarily be obtaining legal advice.

See the full article on this decision here: http://digital.todaysgeneralcounsel.com/Vizion5/viewer.aspx?issueID=26&pageID=54