Primary Purpose, Privilege, And The Corporate Internal Investigation

Tuesday, August 19, 2014 - 08:37

When our legal system’s fact-finding purpose collides with the attorney-client privilege, the results can often be unpredictable. This collision can arise in virtually any type of case, but it often occurs in the context of corporate internal investigations.

As a general rule, the attorney-client privilege applies to communications between an attorney and a client where the communication is intended to remain confidential and falls within the scope of either seeking or providing legal advice. Preserving the sanctity of the confidentiality of a client’s disclosures to his attorney promotes an open atmosphere of trust, and this policy consideration has long remained an important facet of our legal system. When analyzing privilege, courts generally rely on a “primary purpose” test: whether the communication’s primary purpose was to seek or provide legal advice.[1] Thus, a communication that does not primarily request legal assistance or primarily convey information reasonably related to the legal assistance is not privileged.

The U.S. Supreme Court’s decision in Upjohn Co. v. United States[2] is the leading authority on the scope of the attorney-client privilege in the corporate context. The case arose after Upjohn, a pharmaceutical manufacturing firm, had conducted an internal audit and investigation that revealed potentially illegal payments made to foreign officials in exchange for business. Upjohn voluntarily notified the IRS of the illegal payments, and the IRS then sought certain information that Upjohn had collected during the investigation, including internal questionnaires sent to managerial employees. Upjohn withheld the documents on the basis that they were protected by the attorney-client privilege and attorney work product doctrine, which protects materials prepared in anticipation of litigation from discovery. The United States Supreme Court agreed with Upjohn and held that, while all privilege determinations were to be made on a case-by-case basis, the attorney-client privilege generally applies to corporations and protects communications made between company employees and company attorneys during internal investigations. In contrast with formerly conflicting rules throughout our nation’s circuit courts, Upjohn provided a new and flexible framework to identify when employee communications with corporate counsel in the course of investigations qualify as protected attorney-client exchanges.

Upjohn held that each case would need to be evaluated to determine whether application of attorney-client privilege would further the underlying purpose of the privilege, which is to encourage candid communications between client and counsel for the purpose of rendering legal advice. Specifically, the Court emphasized that the privilege would apply when “[t]he communications concerned matters within the scope of the employees’ corporate duties, and the employees themselves were sufficiently aware that they were being questioned in order that the corporation could obtain legal advice.” This emphasis on considering the extent of the employees’ awareness has grown into what are now commonly referred to as “Upjohn warnings” – in general terms, notice before the employee interview begins that informs the employee of the nature of the interview and the fact that the communications made therein are privileged.

The fact-sensitive and sometimes unpredictable nature of the privilege analysis was recently highlighted in United States ex rel. Barko v. Halliburton Co.[3] In that case, plaintiff Harry Barko (a former Kellogg Brown & Root, Inc. “KBR” employee) alleged in a False Claims Act lawsuit that KBR (a defense contractor) had defrauded the U.S. government in connection with defense contracts in Iraq. During discovery, Barko sought KBR’s reports of its own internal investigation into the alleged fraud. KBR had conducted the investigation pursuant to its Code of Business Conduct, which is overseen by the company’s law department. Notably, KBR’s Code of Business Conduct was implemented due to certain federal regulatory requirements. KBR argued that the internal investigation had been conducted for the purpose of obtaining legal advice, and the reports were therefore protected by the attorney-client privilege. Barko argued that the reports were unprivileged business records that he was entitled to in discovery.

The district court reviewed the documents in camera and applied a unique “but for” test to determine whether they were privileged, i.e., whether the primary purpose was to obtain legal advice. The district court held that since the documents and materials failed the “but for” test, i.e., even “but for” the purposes of obtaining legal advice, the documents nevertheless would have been created pursuant to federal regulations requiring defense contractors to maintain compliance programs and conduct investigations, the privilege did not apply. The district court’s opinion rested on the fact that KBR’s “investigations were undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”

On June 27, 2014, the U.S. Court of Appeals for the D.C. Circuit reversed the district court’s holding.[4] The court of appeals rejected the district court’s “but for” analysis and clarified the appropriate standard for attorney-client privilege analysis: was the procurement of legal advice one of the significant purposes of the communications? The court of appeals was explicit in that it is improper for a court to presume that a communication can have only one primary purpose; rather, courts should ask whether obtaining or providing legal advice was a primary purpose of the communication, i.e., one of the significant purposes. As of the date of this article’s writing, the KBR decision has not been appealed.

The KBR analysis turned on the issue of a communication’s “primary purpose,” and this was not the only time that the primary purpose issue has recently come up. Another case concerned whether and when communications between in-house counsel and other company employees are privileged, and ultimately held that a communication with multiple purposes (e.g. a communication providing both business advice and legal advice) would likely not be privileged. In United States ex rel. Elin Baklid-Kunz v. Halifax Hospital Medical Center,[5] a hospital’s former director of physician services alleged that the hospital engaged in fraud and false claims and, in discovery, filed a motion to compel the production of certain documents that Halifax had deemed privileged. The U.S. District Court for the Middle District of Florida ordered Halifax to produce the documents at issue. The district court employed the “primary purpose” test and held that a communication that does not primarily request legal assistance or convey information reasonably related to the requested legal assistance is not privileged. The court held that e-mails to or from in-house counsel that seek both legal and business advice will often fail to satisfy that requirement. Similarly, e-mails that list both an attorney and a non-attorney in the “To” field may not be privileged if they are deemed to be for both a business and a legal purpose. The Halifax court also held that communications from compliance employees not acting at the direction of attorneys are not deemed privileged just because the compliance department reports to or operates under the supervision and oversight of the legal department.

As illustrated by these two cases, there is a conflict. To be protected by the attorney-client privilege, does legal advice have to be the single primary purpose of a communication, or need it be only a significant purpose among other purposes? Can there be multiple primary purposes? Given that privilege determinations are made on a case-by-case basis, the answer is unpredictable and will be fact specific. Thus, in the absence of a hard and fast rule, all counsel should stay cognizant and take certain steps to best ensure that privileged communications stay that way and to avoid costly litigation on discovery matters. Specifically, with respect to corporate internal investigations, consider the following practices:

  • Conduct investigations at the direction of and under the supervision of legal counsel. Where a company’s compliance department is separate from the legal department, the departments should communicate directly, and all legal advice sought and obtained should be clearly documented.
  • It is always best to engage outside counsel for internal investigations. There is a presumption that privilege applies when outside counsel is employed. 
  • In written communications, reports and memoranda relating to the investigation, make clear that a primary purpose of the investigation is to gather information in order to obtain legal advice. 
  • Always mark documents as subject to the attorney-client privilege and attorney work product protection. While these notations will not be determinative in the event of a dispute, they will at the very least show the parties’ intent. Moreover, these practices will establish a record to support a claim of privilege.
  • When conducting employee interviews, provide employees with Upjohn warnings by (1) explicitly indicating that the interviewer is acting at the direction of or on behalf of legal counsel, (2) informing the interviewee that the information collected from the interviews will be used by counsel to formulate a legal opinion, and (3) documenting these warnings in any notes or memoranda summarizing the conversations/interviews. The best practice is to have outside counsel conduct the interviews, rather than non-attorneys or members of a company’s legal department.
  • If non-attorneys must handle aspects of the investigation, be sure to establish protocols whereby the non-attorneys regularly report to and/or consult with an attorney. Document these meetings and make sure they occur regularly.

The tension that exists between the attorney-client privilege and the fact-finding purpose of our legal system is inescapable.  In the wake of decisions like KBR and Halifax, corporate in-house counsel – and all attorneys – will best serve their clients by staying abreast of these issues as future court decisions will further refine – or further conflate – the treatment of privileged communications.

 



[1] In re Vioxx Prods. Liab. Litig., 501 F. Supp. 2d 789, 799-812 (E.D. La. 2007).

[2] 449 U.S. 383 (1981).

[3] No. 1:05-CV-1276 (D.D.C. March 6, 2014).

[4] In re: Kellogg Brown & Root, Inc., et al., No. 1:05-cv-1276 (D.C. Cir. June 27, 2014).

[5] No. 6:09-cv-1002-Orl-31TBS (M.D.Fla. Nov. 6, 2012).

 

Anthony Argiropoulos is Co-Chair of the Sills Cummis & Gross P.C. Litigation Practice Group. Cristina F. Caratzola is an Associate in the Group. The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of Sills Cummis & Gross P.C.

Please email the authors at  aargiropoulos@sillscummis.com or ccaratzola@sillscummis.com with questions about this article.