D.C. Circuit Rejects ‘Destabilizing’ Ruling on Privilege for Internal Corporate Probes

By Samson Habte  

June 27 — The U.S. Court of Appeals for the District of Columbia Circuit June 27 vacated a federal judge's “destabilizing” ruling that the attorney-client privilege will protect documents generated during an internal corporate investigation only if “the sole purpose of the communication was to obtain or provide legal advice,” and will not apply to communications “made for both legal and business purposes”.

“[T]he District Court's novel approach would eradicate the attorney-client privilege for internal investigations conducted by businesses that are required by law to maintain compliance programs, which is now the case in a significant swath of American industry,” Judge Brett M. Kavanaugh wrote.

Industry Win

The ruling vacates a discovery order by U.S. District Court Judge James S. Gwin, who is presiding over a qui tam suit filed by a former employee who accused defense contractor Kellogg Brown & Root (KBR) of defrauding the government by inflating costs and taking kickbacks while administrating military contracts in Iraq.

That March 6 order granted a motion to compel the production of documents from an internal investigation into the alleged scheme.

“Helping a corporation comply with a statute or regulation—although required by law—does not transform quintessentially legal advice into business advice.”Judge Brett M. Kavanaugh

Business groups strongly criticized the ruling. The U.S. Chamber of Commerce, Association of Corporate Counsel and other amici said the “decision threatens to work a sea change in the well-settled rules governing internal corporate investigations.”

The appeals court agreed. “As KBR explained, the District Court's decision ‘would disable most public companies from undertaking confidential internal investigations,'” it said.

‘Irreconcilable With Upjohn.'

The appellate panel found that Gwin's ruling was irreconcilable with Upjohn Co. v. United States, 449 U.S. 383 (1981), which “held that the attorney-client privilege protects confidential employee communications made during a business's internal investigation led by company lawyers.”

The district judge said Upjohn was inapplicable for several reasons.

He focused primarily on the fact that federal regulations require contractors to “maintain compliance programs and conduct internal investigations into allegations of wrongdoing.” Accordingly, he concluded, KBR's files were unprivileged “business records,” and not confidential attorney-client communications, because the investigation was “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”

The appellate panel rejected that reasoning.

“In our view, the District Court's analysis rested on a false dichotomy,” it said. “So long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion.”

Emergency Relief Warranted

KBR filed a mandamus petition and emergency motion to stay after Gwin declined to certify the privilege question for immediate appeal.

Gwin also refused to seal his order, which quoted from KBR reports and described them as “eye-openers” that contained “direct and circumstantial evidence” of kickbacks and fraud. “That KBR may be embarrassed by what its own business records show does not make this Court's ruling of ‘special importance,'” he wrote.

The appeals court said emergency relief is warranted because Gwin's privilege ruling could “have potentially far-reaching consequences.”

“In distinguishing Upjohn, the District Court relied on a number of factors that threaten to vastly diminish the attorney-client privilege in the business setting,” Kavanaugh said. “Perhaps most importantly, the District Court's distinction of Upjohn on the ground that the internal investigation here was conducted pursuant to a compliance program mandated by federal regulations would potentially upend certain settled understandings and practices.”

“Helping a corporation comply with a statute or regulation—although required by law—does not transform quintessentially legal advice into business advice,” Kavanaugh said.

Other Distinctions Rejected

The panel rejected three other factors relied upon to distinguish Upjohn.

First, the district judge found it significant that Upjohn involved an investigation that began after in-house counsel conferred with outside counsel, whereas KBR's investigation was conducted in-house without consultation with outside lawyers.

“But Upjohn does not hold or imply that the involvement of outside counsel is a necessary predicate for the privilege to apply,” Kavanaugh wrote. “On the contrary, the general rule, which this Court has adopted, is that a lawyer's status as in-house counsel ‘does not dilute the privilege.'”

The district court said Upjohn was also distinguishable because many materials sought here were produced during interviews conducted by non-attorneys. “But the investigation here was conducted at the direction of the attorneys in KBR's Law Department,” Kavanaugh noted. “And communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege.”

“Third, the District Court pointed out that in Upjohn the interviewed employees were expressly informed that the purpose of the interview was to assist the company in obtaining legal advice, whereas here they were not,” Kavanaugh said. “Yet nothing in Upjohn requires a company to use magic words to its employees in order to gain the benefit of the privilege for an internal investigation,” he noted.


Clarifying ‘Primary Purpose' Test

The panel said that the most worrisome aspect of the district court's ruling was the confusion that could result from its misapplication of the “the ‘primary purpose' test, which many courts (including this one) have used to resolve privilege disputes when attorney-client communications may have had both legal and business purposes.”

The “key move” that led to the error was the district court's conclusion that “the primary purpose of a communication is to obtain or provide legal advice only if the communication would not have been made ‘but for' the fact that legal advice was sought,” Kavanaugh explained.

“The District Court erred because it employed the wrong legal test,” the panel concluded. No appellate authority, it said, supports the notion that “the attorney-client privilege apparently would not apply unless the sole purpose of the communication was to obtain or provide legal advice.”

“Given the evident confusion in some cases,” Kavanaugh said, “we also think it important to underscore that the primary purpose test, sensibly and properly applied, cannot and does not draw a rigid distinction between a legal purpose on the one hand and a business purpose on the other.”

“Rather,” the court explained, “it is clearer, more precise, and more predictable to articulate the test as follows: Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?”

The court expressly adopted the formulation in Section 72 of the Restatement (Third) of the Law Governing Lawyers (2000), which states: “In general, American decisions agree that the privilege applies if one of the significant purposes of a client in communicating with a lawyer is that of obtaining legal assistance.”

“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, or was otherwise conducted pursuant to company policy,” the court stated.

Mandamus Granted

Concluding that the conditions for a writ of mandamus were met, the court vacated the district court's order.

The Supreme Court's decision in Mohawk Indus., Inc. v. Carpenter, 2009 BL 263790, 558 U.S. 100,  (2009), which held that an order to disclose privileged materials is not immediately appealable under the collateral order doctrine, does not invariably preclude mandamus review in attorney-client privilege cases, the court said.

Judges Thomas B. Griffith and Srikanth Srinivasan joined in the opinion.

John P. Elwood of Vinson & Elkins LLP, Washington, D.C., argued for KBR. Stephen M. Kohn of Kohn, Kohn & Colapinto, Washington, D.C., argued for plaintiff-relator Harry Barko.

To contact the reporter on this story: Samson Habte in Washington at shabte@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com

Full text at http://www.bloomberglaw.com/public/document/IN_RE_KELLOGG_BROWN_ROOT_INC_ET_AL_PETITIONERS_No_145055_2014_BL_.

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