In March, the U.S. District Court of the District of Columbia ordered defense contractors Kellogg Brown and Root Inc. and Halliburton’s (“KBR”) legal department to produce internal investigative reports that KBR contended were privileged – even though the reports were prepared with the supervision of counsel, and in response to employee complaints of contracting fraud.  It would seem that these facts alone would be sufficient to keep the documents protected.  Not so – and the district court’s opinion provides additional guidelines for ensuring that such materials are safely kept from an opposing party.  The case is U.S. ex rel. Barko v. Halliburton Company, et al., No. 1:05–CV–1276, 2014 WL 1016784 (D.D.C. March 6, 2014). 

In Barko, Plaintiff filed a False Claims action alleging that KBR overcharged the U.S. Army for services performed in Iraq by its subcontractor, Daoud and Partners (“D&P”), which it also alleged received favoritism in the procurement process and overcharged KBR.  The U.S. government declined to intervene, and the matter proceeded as a qui tam case.

Barko requested that KBR produce any internal “audits, inspections, studies, or self-evaluations” related to compliance with contracting regulations. KBR produced 100,000 pages of documents, including complaints made to its grievance hotline about D&P’s improper billing, conflicts of interest, and poor performance.  KBR had also prepared investigative reports in response to these calls, which it withheld based on the attorney-client privilege and the work product doctrine.  Barko claimed that the reports were generated not in preparation for litigation but for business reasons, because KBR was required by 48 CFR § 203.7000 to establish a code of ethics and investigate reports of misconduct. KBR asserted that they were prepared at the direction and with the supervision of internal lawyers, and that all the reports were routed to and overseen by in-house counsel.

The D.C. Circuit found that the reports were not privileged because they were “ordinary business records” created “pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice,” and were merely “a routine corporate [] compliance investigation required by regulatory law.”  The Court cited the following facts in support of its finding:

• In-house counsel did not confer with outside counsel in drafting the reports;

• Employees who were interviewed as part of the investigations were not warned that the investigation was for the purpose of obtaining legal advice;

• The investigation was performed by non-attorneys.

The case is currently on appeal to the U.S. Court of Appeals for the District of Columbia.  If affirmed, it could have far-reaching implications for many businesses, which are required by statute, regulation or internal policy to receive and investigate complaints — especially publicly-traded companies subject to Sarbanes-Oxley.  Arguably almost every “compliance investigation” carries the risk of leading to litigation.

How do you investigate compliance irregularities and yet minimize the risk of being compelled to produce privileged investigatory documents?  Companies may want to consider implementing the following measures:

• Be aware of the heightened scrutiny courts apply when internal investigations are conducted by in-house counsel or employees.

• Retain outside counsel to manage an internal investigation, either from the start or when the investigation appears to be more than merely “routine;”

• Alternatively, at least consult with outside counsel regarding the scope and structure of the investigation.

• Do not delegate investigatory interviews to non-lawyers.

• Non-lawyers who are present during interviews should be clearly designated as agents or subordinates of legal counsel who are present to assist in rendering legal assistance.

• Plainly state during employee interviews (and perhaps have interviewees acknowledge in writing) that the purpose of the investigation is to provide legal advice to the company and, where appropriate, in anticipation of litigation.

• Similarly, all privileged documentation regarding the investigation should plainly state the same purpose: the document is prepared in connection with or for the purpose of obtaining legal advice.

• Ensure that any attorney conducting an employee interviews states that he or she represents the company, not the employee.