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Aug. 14 — Kellogg Root & Brown Inc. did not lose the attorney-client privilege or work product protection for internal investigation materials by using them to prep a corporate witness for testimony in a whistle-blower case, the U.S. Court of Appeals for the District of Columbia Circuit decided Aug. 11.
Like the previous appellate ruling in this case, the decision will cheer companies throughout the United States and lawyers handling internal investigations by strengthening corporations' attempts to keep their probes of purported corporate misconduct private.
The court also ruled that KBR did not trigger an implied “at issue” privilege waiver by saying in court filings that it had performed the internal probe but had not reported wrongdoing to the government after doing so.
The decision by Judge Robert L. Wilkins marks the second time the appeals court has overturned discovery orders requiring KBR to provide whistle-blower Harry Barko with 89 sensitive documents the company developed in its in-house inquiry into allegations that KBR defrauded the government by inflating costs and taking kickbacks while administering military contracts in Iraq.
Wilkins said the district court's decisions on remand suffered from the same flaw spotted in the previous appeal: “They run contrary to precedent by injecting uncertainty into application of attorney-client privilege and work product protection to internal investigations.”
“If allowed to stand, the District Court's rulings would ring alarm bells in corporate general counsel offices throughout the country about what kinds of descriptions of investigatory and disclosure practices could be used by an adversary to defeat all claims of privilege and protection of an internal investigation,” Wilkins said.
The ruling is “important for companies nationwide” and “preserves the integrity and effectiveness of corporate internal investigations,” John P. Elwood, who argued for KBR, said in an Aug. 12 e-mail to Bloomberg BNA. He is a partner with Vinson & Elkins LLP in Washington, D.C.
“As the D.C. Circuit explained, the district court’s ruling rang ‘alarm bells' in general counsel’s offices ‘around the country' and would have allowed an ‘end-run' around longstanding protections for attorney-client privileged information and work product—particularly in the context of internal investigations,” Elwood said.
The opinion also provides important guidance on “at issue” waiver, which a leading expert has described as ‘perhaps the most dangerous privilege principle,'” Elwood said.
Of course, Barko's lawyers don't see it the same way. Stephen D. Kohn, one of Barko's lawyers, characterized the decision as “a defeat for all honest taxpayers.”
In an Aug. 11 statement provided to Bloomberg BNA and posted online, Kohn said “it is now perfectly clear that KBR used the attorney client privilege to hide evidence of misconduct from the government.”
“We certainly hope that the government understands that when companies like KBR hide behind the attorney client privilege to keep internal investigatory files secret, those investigations should, as the appeals court noted, ‘not be accepted as full disclosures’ pursuant to government contracting rules,” Kohn said.
Privilege expert Thomas E. Spahn of McGuireWoods LLP told Bloomberg BNA the decision is “very beneficial for corporate clients.” Spahn is the author of The Attorney-Client Privilege and the Work Product Doctrine: A Practitioner's Guide, which the court quoted in its opinion.
Spahn particularly lauded the court's ruling that KBR did not lose the attorney-client privilege under Fed. R. Evid. 612 by using privileged materials during witness preparation for the deposition of a corporate representative under Fed. R. Civ. P. 30(b)(6).
Rule 612 provides that when a witness has used a writing to refresh his memory before testifying, the adverse party is entitled to have it produced and to introduce in evidence any portion that relates to the witness's testimony, if “justice requires the party to have those options.”
The court was correct in concluding that “simply reviewing a privileged document as a 30(b)(6) witness shouldn't waive the privilege for the document under Rule 612,” Spahn said. The ruling is probably aligned with how other courts would rule, he said.
Spahn said most lawyers would be astounded at the idea that if they show privileged materials to a top executive of a corporate client to prepare for a 30(b)(6) deposition, those documents might have to be produced if the interests of justice are found to require disclosure under Rule 612.
“Rule 612 is a shock, but the court's analysis is favorable to corporations,” Spahn said.
KBR's designated 30(b)(6) witness testified at his deposition that in preparing for his testimony he reviewed privileged materials from the internal investigation. In light of this testimony, the district court applied a balancing test to conclude that fairness considerations required disclosure of the documents under Rule 612.
The appeals court disagreed. “The balancing test was inappropriate in the first instance,” Wilkins said. Even when a witness consults a document while testifying, Wilkins said, the adverse party is not entitled to see it unless the document influenced the witness's testimony.
Moreover, Wilkins said that even if the balancing test had been appropriate, the test “failed to give due weight to the privilege and protection attached to the internal investigation materials.”
The balancing test runs counter to Upjohn Co. v. United States, 449 U.S. 383 (1981), Wilkins said, because it “would allow the attorney-client privilege and work product protection covering internal investigations to be defeated routinely by a counter-party noticing a deposition on the topic of the privileged nature of the internal investigation.”
Wilkins said it was absurd for Barko to argue that to avoid privilege waiver KBR should have prepared its designated witness by having someone give him a summary of the privileged materials rather than having him personally review the documents. Such a rule would encourage entities to provide less knowledgeable corporate representatives for deposition, he said.
Spahn told Bloomberg BNA he was “pleasantly surprised” that the appeals court overturned the district court's “at issue” waiver finding.
Although the appeals court overturned the waiver finding, another court might go the other way, Spahn said. Corporations have lost the attorney-client privilege through findings of at issue waiver in other recent cases, he noted.
As examples Spahn pointed to Apple Inc. v. Samsung Elecs. Co., 2015 BL 198245, No. 11-CV-01846-LHK (N.D. Cal. June 19, 2015), which held that Samsung's law firm Quinn Emanuel triggered an at issue waiver by making certain statements and arguments in defending against Apple's motion for sanctions, and Skyline Steel, LLC v. Pilepro, LLC, 2015 BL 234899, No. 13-CV-8171 (JMF) (S.D.N.Y. July 22, 2015), which found that a defendant waived privilege by arguing that its patent infringement accusations against the plaintiff were grounded in a good-faith belief that the plaintiff had infringed its patent.
A litigant can trigger an at issue waiver, Spahn said, by asserting a position that necessarily implicates privileged communications. The idea is that the privilege can't be used as both a sword and a shield.
“At issue waiver is the scariest of all waivers,” Spahn said. They are the most extreme example of implied waivers, which do not involve the actual disclosure of privileged communications, he stated.
The district court ruled that KBR lost protection for the internal investigation materials under the doctrine of at issue waiver by noting in various filings that it made no report to the government after it investigated the fraud allegations.
By making these statements the company was affirmatively using the documents to build a positive inference about their contents and can't thereafter hide them from Barko, the district court found.
The appeals court held that KBR did not create an at issue waiver when the company's designated witness testified to the fact of the internal investigation and KBR's reporting duties. Nor was there a waiver when KBR referenced that testimony in a statement of undisputed facts that was filed as a companion to the company's summary judgment motion, it said. Those filings cannot themselves give rise to inferences that place privileged materials at issue, Wilkins said.
Calling it “a more difficult question,” the court also ruled that KBR did not trigger an at issue waiver by stating in a footnote in the introductory portion of its summary judgment memorandum that it makes disclosures to the government when an internal investigation uncovers kickbacks, and that it performed an investigation into the allegations here and made no report.
In rejecting the district court's at issue finding, Wilkins emphasized the context of the passage—that it was merely a recitation of facts and not an argument or claim concerning the contents of the privileged document.
In a separate opinion and order, the district court directed KBR to produce internal investigation records—including summaries of statements by KBR employees—on the alternative basis that the materials were fact work product for which Barko showed substantial need.
The appeals court said the district court misapplied the law by treating all of the materials as fact work product, which doesn't enjoy the almost absolute protection that opinion work product receives.
Some of the documents were attorney-client privileged, and other records were opinion work product that reflected investigators' mental impressions, it noted. The district court failed to distinguish between fact and opinion work product in the documents, Wilkins added.
The court made clear that not everything produced in an internal investigation is necessarily covered by the attorney-client privilege.
Communications from a company's in-house investigators are not privileged merely because the investigators are employees communicating something to the company's lawyers, it said. Rather, that material is protected work product so long as it is prepared in anticipation of litigation.
Materials produced by an attorney's agent are privileged only to the extent they contain information obtained from the client, Wilkins said.
“The attorney-client privilege and opinion work product protection separately operate as barriers to compelled disclosure, and there is nothing to be gained by sloppily insisting on both or by failing to distinguish between them,” the court said.
The court found that mandamus relief was appropriate because the district court's rulings “would erode the confidentiality of an internal investigation in a manner squarely contrary to the Supreme Court's guidance in Upjohn and our own recent prior decision in this case.”
The rulings would generate substantial uncertainty about the scope of the corporate attorney-client privilege if allowed to stand, Wilkins said.
“If all it took to defeat the privilege and protection attaching to an internal investigation was to notice a deposition regarding the investigations (and the privilege and protection attaching them), we would expect to see such attempts to end-run these barriers to discovery in every lawsuit in which a prior internal investigation was conducted relating to the claims,” he said.
Absent Supreme Court intervention, the decision appears to end Barko's chances of getting sensitive records from KBR's internal investigation. “[W]e trust that this opinion will conclusively resolve the issue on which this case has seemed stuck as with a scratch on a broken record,” Wilkins wrote.
KBR's in-house counsel conducted the investigation under the company's Code of Business Conduct. In the earlier phase of the discovery dispute, the district court ruled that the records were not privileged because they were undertaken in light of regulatory law and corporate policy rather than for the purpose of obtaining legal advice.
The appeals court vacated, holding that the privilege will apply in the context of a company's internal investigation if one of the significant purposes of the probe was to obtain or provide legal advice, regardless of whether the investigation was conducted pursuant to a compliance program required by law. See 30 Law. Man. Prof. Conduct 432.
Spahn noted that this holding was embraced by another court in In re Gen. Motors LLC Ignition Switch Litig., 2015 BL 9476, No. 14-MD-2543 (JMF), 31 Law. Man. Prof. Conduct 25 (S.D.N.Y. Jan. 15, 2015).
In that case, Judge Jesse M. Furman found that interview materials assembled by lawyers who conducted an internal investigation for General Motors were privileged even though GM's purpose in producing the report was partly to address a public relations fiasco.
Obtaining legal advice need be only “one of the significant purposes” of the internal probe for the privilege to attach,” Furman said.
Spahn said that although this view of privilege is great for corporations, they can't be certain that other courts will take the same approach. Many corporate investigations are found not to have been conducted for the primary purpose of seeking legal advice, he said.
Judges David S. Tatel and David B. Sentelle joined Wilkins in the decision.
Elwood argued for KBR. Michael D. Kohn, of Kohn, Kohn & Colapinto LLP, Washington, argued for Barko.
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