Businesses Say Latest KBR Rulings Threaten Internal Probes, Compliance Efforts

Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...

By Yin Wilczek

Feb. 5 — A group of business associations is urging a federal appeals court to vacate two of the district court's latest rulings in the ongoing litigation between Kellogg Brown & Root Inc. and whistle-blower Harry Barko, saying the decisions undermine internal investigations and compliance efforts.

In a joint Jan. 30 amicus filing in the U.S. Court of Appeals for the District of Columbia, the associations faulted in particular the district court's conclusion that factual reports prepared by a non-attorney investigator acting under the direction of KBR's legal department were not protected by the attorney-client privilege.

“Many compliance investigations involve technical questions requiring expert analysis beyond the competence of attorneys; others require fact-gathering in hazardous, far-flung regions to which lawyers cannot be routinely dispatched,” the brief stated. “Denying the privilege to factual reports prepared by attorney-directed investigators will inhibit corporate compliance efforts by” impeding companies in gathering facts after they discover potential misconduct.

Influential Groups 

The associations—including the U.S. Chamber of Commerce, the Association of Corporate Counsel and the National Association of Manufacturers—represent some of the largest companies and government contractors in the U.S.

They submitted their brief in support of a mandamus petition filed in December by KBR asking the D.C. Circuit to vacate rulings issued Nov. 20 and Dec. 17 by U.S. District Court for the District of Columbia Judge James Gwin. KBR also asked the appellate court to reassign the case to a different judge.

This is the second mandamus petition filed by KBR involving the same 89 documents generated during the company's internal investigations of the relationship between certain KBR employees and the awarding of contracts to a Jordanian subcontractor, Daoud & Partners.

Barko, a former KBR employee, in 2005 sued KBR and then-KBR parent Halliburton under the qui tam provisions of the False Claims Act. He alleged that KBR “used a subcontract procedure which vastly inflated the costs of constructing laundry facilities and providing laundry services” on three military bases in Iraq. The whistle-blower sought the 89 documents to support his lawsuit.

The D.C. Circuit granted the first mandamus petition. In June 2014, the appellate court reversed Gwin's ruling that the attorney-client privilege did not apply because KBR had not conducted its investigation for “the primary purpose” of securing legal advice. 

The U.S. Supreme Court subsequently denied Barko's certiorari petition to review the D.C. Circuit's decision.

Most of the business groups that are weighing in on KBR's second mandamus petition also submitted a joint amicus filing in the KBR I litigation.

‘KBR I' Eroded 

In their latest amicus filing, the business associations charged that Gwin “eroded” KBR I's guidance in several ways.

Among other problems, “the District Court created a wholly new test, under which a court must parse whether an investigator is more like an ordinary employee or an attorney’s alter ego,” the filing stated. “Of perhaps greatest concern, this aspect of the District Court’s holding will force attorneys to guess whether a court will find a particular investigator to be more like an ordinary employee or more like an in-house attorney's alter ego—replacing KBR I’s clear and predictable rule with needless uncertainty.”

The associations also faulted the judge for “finding an implied waiver of the attorney-client privilege based on a standard that appears to be wholly unprecedented.”

“Under the District Court’s novel approach, a party’s mere reference to the fact of an internal investigation, coupled with a routine denial of wrongdoing, creates an irrevocable waiver as to confidential communications produced in the course of that investigation,” they argued. “This unpredictable standard creates a substantial risk that even conscientious companies will inadvertently waive the privilege, permitting their adversaries to use the products of their internal investigations against them in litigation.”

Significant Impact 

Jeffrey Robertson, special counsel in Schulte, Roth & Zabel LLP's Washington office, told Bloomberg BNA that the case already has had a substantial impact on internal investigations, by “confirming that investigations undertaken for multiple purposes, not just to provide legal advice, may be privileged even when conducted by non-lawyers.”

The most recent litigation raises equally important issues, Robertson said, including the ability of companies embroiled in litigation to reference facts related to their internal investigations without risking waiver of attorney-client privileges and work-product protections.

Robertson said it will be a “tough call” to predict whether the D.C. Circuit will grant mandamus. “Obtaining mandamus even on issues like privilege where it's difficult to put the genie back in the bottle is more difficult than merely obtaining reversal,” he said.

However, the petition and amicus brief do raise significant, complex questions, he added. “Given its prior involvement, the D.C. Circuit may again feel compelled to weigh in.”

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The amicus filing is available at http://www.bloomberglaw.com/public/document/In_re_Kellogg_Brown__Root_Inc_et_al_Docket_No_1405319_DC_Cir_Dec_.