Maintaining the Attorney-Client and Work-Product Privileges in an Internal Investigation

Internal investigations conducted without outside counsel risk not being protected by the attorney-client or work-product privileges.  On March 6, 2014, the District Court for the District of Columbia ordered production of documents related to an internal investigation directed by Kellogg, Brown and Root’s (“KBR”) internal law department, rejecting the company’s claims of attorney-client and work product privilege over the materials.  United States ex rel. Barko v. Halliburton Co. et al., No. 1:05-CV-1276 (D.D.C.)

In concluding that the investigation was not primarily designed to obtain legal advice and, thus, not protected by either privilege, the court highlighted the fact that KBR’s in-house counsel did not consult with outside counsel on whether to perform the investigation.  According to the court, this distinguished KBR’s investigation from traditional Upjohn investigations, as the investigation failed the “but for” test – i.e., whether it would have been performed “but for” the desire to obtain legal advice.

The Barko Decision
In 2005, Henry Barko, Jr. filed suit under the qui tam provision of the False Claims Act against KBR and its former parent, Halliburton, alleging that KBR passed on to the United States government inflated construction and services costs in support of military operations in Iraq.  The complaint remained under seal until 2009.

Independent of the suit, KBR implemented a Code of Business Conduct (“COBC”) program to investigate allegations of improper conduct in connection with its various war-zone contracts.  The COBC was administered by the company’s Law Department.  The program allowed KBR employees to report allegations either directly to the Law Department or through other channels.  However reported, these tips were directed to an in-house attorney who would determine whether an investigation should be opened.  Such investigations were conducted by non-attorney investigators working under the direction of KBR’s Law Department.  Witness statements and reports generated in a COBC investigation were marked “attorney-client privilege” and were provided to the Law Department, which was tasked with deciding whether further action, including a possible self-disclosure to the government, was necessary.

Barko moved to compel production of documents related to KBR’s internal investigation of conduct tied to the contract at issue in his case.  KBR claimed attorney-client privilege over the materials, arguing that the investigations were performed at the direction of counsel with the intent of facilitating legal advice.  The company also maintained the documents were protected as work product since the investigations were conducted with a reasonable anticipation of litigation, noting that KBR had been sued 22 times for purported violations of war-zone contracts.

On March 6, 2014, the Honorable James S. Gwin, sitting by designation for the U.S. District Court for the District of Columbia, delivered his ruling.¹  Judge Gwin was unpersuaded by KBR’s arguments and ordered the production of the documents.

Judge Gwin’s Memorandum and Order contains a careful review of the facts.  He reviewed KBR’s internal files and called them “eye-openers” because of the volume of fraud claims they contained.  In delivering his ruling, he held that the attorney-client privilege did not apply because KBR performed the investigations “pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice,” and he concluded that COBC policies “merely implement” the Defense Department’s regulatory requirements for contractor compliance programs.

Importantly, the court distinguished KBR’s investigations from a traditional Upjohn investigation on the basis that KBR’s in-house attorneys did not confer with outside counsel on whether and how to conduct the investigation.  Accordingly, the court concluded, the investigations “would have been conducted regardless of whether legal advice were sought” and, thus, were not performed “primarily” for the purpose of obtaining legal advice.

The court found further support for its conclusion in the fact that witnesses interviewed in the investigation were not told that the purpose of the interview was to assist KBR in obtaining legal advice and that the confidentiality agreements they signed warned of possible business impact from disclosure of the investigation.  In addition, the court highlighted the fact that the investigators were not attorneys and, thus, employees could not have inferred the “legal nature of the inquiry[.]”

In rejecting KBR’s claim of work product protection, the court cited the same rationale, but also noted the fact that the investigation was conducted prior to the unsealing of the complaint as inconsistent with a claim that the work was performed in anticipation of litigation.

Barko Is Not Alone
Barko joins a growing chorus of decisions in which courts have required disclosure of internal investigation materials, despite the role of in-house counsel. In Allied Irish Banks v. Bank of Am., N.A., the court for the Southern District of New York concluded that attorney-client privilege did not apply to in-house counsel’s investigation because counsel would have produced investigative materials in essentially the same form to address non-litigation purposes. 03-CV- 3748 (DAB) (GWG) (S.D.N.Y. Mar. 26, 2008).  In United States v. ISS Marine, No. 12-481 (D.D.C. Nov. 12, 2012), the District Court for the District of Columbia refused to find an internal investigation report created by in-house counsel privileged where it relied upon interviews performed by a non-lawyer auditor. In In re County of Erie, 473 F.3d 413 (2d Cir. 2007), the Second Circuit applied the so-called “predominant purpose” test to parse in-house government counsel email, upholding privilege for some, while disregarding privilege for others based upon the content of the email.

Aside from the waiver of privilege, employers may also be subject to sanctions for failing to turn over in-house counsel's investigation notes. In EEOC v. Spitzer, the District Court for the Northern District of Ohio ordered a mistrial after it learned that the investigating in-house attorney failed to turn over notes related to the employee’s complaints of discrimination. Nos. 1:06-CV-2337, 1:08-CV-1326, 1:08-CV-1542 (N.D. Ohio May 22, 2013). In its decision to sanction the employer over $300,000 in fees, the court referenced the conflict of interest inherent when an employer uses in-house counsel to conduct such an investigation.

KBR filed an emergency motion on March 7 to seal Judge Gwin’s decision.  But even if KBR is ultimately successful on appeal, it is becoming increasingly clear that investigations conducted purely by in-house counsel increase the risk of courts disregarding the application of the attorney-client privilege.

Lessons from Barko in Conducting Internal Investigations
Whether or not Barko survives on appeal, it is an important reminder of the steps companies should consider taking in order to increase the chances that a court will uphold their claim of attorney-client privilege over materials relating to internal investigations. 

Companies should be clear that they are conducting such investigations for the primary purpose of obtaining legal advice.  Towards that end, companies should consider consulting with outside counsel about the purpose and scope of an investigation before initiating the investigation and involving outside counsel in the investigation itself. It should be clear to all those involved in an investigation, including the investigators and the witnesses, that the company is seeking the information to assist its lawyers in providing legal advice on any further actions the company should take.  Companies should consider the direct involvement of attorneys in conducting witness interviews – particularly interviews of the most important witnesses.  In addition, materials produced in the investigation, including witness statements and investigative reports, should not only be marked “attorney-client privilege,” but should be treated as the company would treat any other privileged materials, ensuring their confidentiality and preventing disclosure to third parties.

1. Nominated by President Clinton in 1997, Judge Gwin normally presides in the Northern District of Ohio.  See http://www.ohnd.uscourts.gov/home/judges/judge-james-gwin/.  He took over the KBR litigation by designation from his court in Cleveland.  See Judge Chucks Protective Order for Halliburton, Courthouse News Service (July 10, 2013) (found at <http://www.courthousenews.com/2013/07/10/59247.htm>).

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