On March 6, 2014, the District Court for the District of Columbia issued an opinion in United States ex rel. Barko v. Halliburton Company et al. that should serve as a wake-up call for all companies conducting internal compliance investigations to evaluate whether those investigations are structured in a manner to maximize the protections of the attorney-client privilege and work product doctrines.  The court ordered Kellogg, Brown and Root (“KBR”), a Halliburton subsidiary, to produce documents related to an internal Code of Business Conduct (“COBC”) investigation.  The court found that these documents were not protected under the attorney-client privilege or the work product doctrine because the investigation was conducted to comply with Federal Acquisition Regulation (“FAR”) Mandatory Disclosure requirements and internal policy “rather than for the purpose of obtaining legal advice.”  Critical to the court’s reasoning was that the investigation was conducted by non-lawyers without the involvement of the legal department.

The court’s rationale that the investigation reports are not privileged because they were prepared in response to regulatory compliance requirements has met controversy because even internal investigations prompted by compliance requirements carry a significant risk of future litigation, especially where potential fraud is uncovered.  However, the structure and method by which KBR conducted the investigations lacked many of the traditional hallmarks of attorney-client privileged investigations, which buttressed the court’s rationale that they were conducted in a business, not legal, capacity.  KBR used non-attorneys to decide what investigations to conduct, to conduct the investigations, and to draft the investigation reports without involving the legal department.  Moreover, on the face of the documents, no legal advice was requested or offered in any of the reports or investigation-related documents and emails.  Thus, although the opinion has raised significant concerns for compliance investigations in regulated industries, it has also provided helpful guidance on how to maximize protection.

Background

In June 2007, plaintiff-relator Henry Barko, a former contract administrator for KBR in Iraq, filed aqui tam False Claims Act (“FCA”) lawsuit against Halliburton and its former subsidiary KBR.  Barko alleged that KBR provided preferential treatment to subcontractors to inflate the costs of construction services on military bases in Iraq.  The complaint alleged that KBR would pass the inflated costs along to the U.S. government and receive additional awards under the Logistics Civil Augmentation Program (“LOGCAP III”).

Prior to Barko’s complaint, which was unsealed in 2009, Halliburton had independently investigated these allegations from 2004 to 2006 based on an internal report of a potential COBC violation.  Non-attorney COBC investigators interviewed witnesses and reviewed documents related to the allegations and prepared reports on their findings.  Once final, the reports were forwarded to the Law Department.

During discovery, Barko requested production of documents related to KBR’s internal audits and investigations related to the allegations in the complaint.  KBR eventually confirmed that documents responsive to Barko’s request existed and were being withheld on attorney-client privilege and work-product grounds.

After it conducted an in camera review of the investigation documents, the court ordered KBR to produce them.

Attorney-Client Privilege

The court rejected KBR’s argument that the COBC investigation materials were protected from disclosure by the attorney-client privilege based on its rationale that KBR conducted the investigations to comply with FAR mandatory disclosure requirements and internal COBC policies, not to obtain legal advice.  In this case, the Halliburton Director of Business Conduct received a tip of a violation and opened a COBC investigation.  The investigation was not initiated by attorneys, nor was it conducted by attorneys.  The court contrasted the COBC investigation against the internal investigation in Upjohn Co. v. United States, 449 U.S. 383 (1981), which was conducted only after attorneys from the legal department conferred with outside counsel on whether and how to conduct an internal investigation.  The court concluded that the COBC investigations would have been conducted regardless of whether legal advice was sought because of the company’s need to comply with government regulations.

The court also found that the following factors weighed against the attorney-client privilege in this case: (1) the employees who were interviewed were never informed that the purpose of the interview was to assist KBR in obtaining legal advice; (2) the confidentiality agreement employees signed never mentioned the attorney-client privilege or that the purpose of the investigation was to obtain legal advice; (3) the interviewers and investigators were not attorneys; and (4) the investigators wrote the reports when no litigation had been filed.

Work-Product Doctrine

Similarly, the court found that the work-product doctrine did not protect the investigation materials because the investigations would have been conducted in the ordinary course of business regardless of the prospect of litigation.  Moreover, as with the attorney-client privilege, the court found that the use of non-attorney investigators made it harder for KBR to assert the documents were prepared in anticipation of litigation.

The court also pointed to the timing of the investigation as another fact supporting its conclusion that the investigation was not conducted in anticipation of litigation.  The investigations were conducted between 2004 and 2006 whereas the complaint was not unsealed until 2009.

Contents of the Investigation Reports

The court termed KBR’s COBC reports “eye-openers” because, in its view, the reports contained both direct and circumstantial evidence of fraud.  The court observed that the investigation reports concluded that a KBR subcontractor had paid off KBR employees to receive more business.  The court’s in camera review likely swayed its decision on the privilege and work product assertions because KBR had previously argued in a summary judgment motion that the investigative reports did not evidence any misconduct.

Denial of KBR’s Motion for Certification of an Interlocutory Appeal

In light of the court’s order to produce the investigation documents, KBR filed a motion to certify the issue for interlocutory appeal and to stay the March 6 order pending appellate review.  In a March 11, 2014 opinion, the court denied the motion and again emphasized that the documents “were not created to obtain or receive legal advice.”

This ruling is significant because it is unusual for courts to deny certification of an interlocutory appeal where it relates to attorney-client privilege and work product protections since decisions related to these issues tend to be determinative at trial.  In this case, the court stated, “The Court is confident that other courts conducting a similar in camera review would come to the same conclusion [that the primary purpose of the investigations was to comply with federal defense contractor regulations, not to secure legal advice].”  Further, the court found that if the interlocutory appeal were permitted, it would prolong an already lengthy litigation that is close to the end of discovery.  The court stated that KBR could appeal a final decision at trial and the Court of Appeals could vacate and remand for a new trial if it finds an improper disclosure of privileged material.

The court also questioned whether KBR had waived any attorney-client privilege claims or work-product protection by putting the contents of the investigation documents at issue.  KBR filed a motion for summary judgment before the court ordered the investigation materials be produced for in camera review.  In its motion, KBR argued that the investigation documents showed no evidence of improper conduct.  Because the court saw evidence of such improper conduct in the documents it reviewed, the court stated that KBR could not now “hide behind attorney-client privilege claims to avoid allowing the other side to test those facts.”  Although the court made no final conclusion on the waiver issue, it found the fact that KBR put the investigation materials at issue supported its rationale that no substantial ground existed to appeal.

Guidance On Conducting Internal Investigations

The court’s decision serves as a critical reminder that internal investigations, particularly compliance investigations in regulated industries, must be structured and performed with both the protections and limitations of the attorney-client privilege and work product doctrines in mind.  When an investigation is conducted by a company’s non-attorney personnel without involvement of outside counsel and without input from or a request for investigation by the company’s in-house attorneys, the courts are far more likely to reject later attempts to shield the work product or results of that investigation from discovery based on the attorney-client privilege or work product doctrines.

Although the determination of whether the attorney-client privilege and work product doctrines apply in any given case are fact dependent, and no particular measure can be viewed as providing a safe haven, the following guidelines should generally be followed to help maximize the protections of the attorney-client privilege and work product doctrine:

• When feasible and appropriate, involve outside counsel.  Outside counsel are far more likely to be viewed as operating within the confines of the attorney-client privilege and work product doctrines, as opposed to in-house attorneys who occasionally perform tasks in a business capacity.

• Structure compliance department investigations and reporting such that the company’s in-house attorneys or outside counsel are involved early in the assessment and investigation of allegations.

• Use Upjohn letters to formally document the initiation of an internal investigation for the purposes of requesting or providing legal advice to the company.  When non-attorneys will be involved in gathering information for the investigation, document that such actions are at the direction and under the supervision of the company’s legal counsel for the purposes of providing legal advice to the company and defending against possible litigation.

• Give Upjohn warnings to all interview subjects and clearly explain that the interviewers are acting at the direction of the company’s legal counsel, that the contents of the interview will be shared with legal counsel, and that the purpose of the interview is to gather information in order to provide legal advice to the company and defend against possible litigation.

• Ensure that all attorney-client privileged communications and attorney work product generated in the course of an investigation are conspicuously marked as such, on every page of the document if possible.

Preservation of the attorney-client privilege and work product doctrine is just one of the considerations necessary when instituting an internal investigation but it is an important issue that should be addressed from the start.