Internal Investigations: The Spotlight Is On The Role Of The Attorney-Client Privilege

Tuesday, September 23, 2014 - 15:27

The continuing ripples from the 2008 financial industry collapse and the elevated focus on corporate compliance have created an upsurge in internal investigations across diverse industries, from professional sports to automotive and healthcare sectors. The attorney-client privilege, well-recognized as “the oldest of the privileges known to the common law,” is an integral part of any internal investigation. Under the privilege, any communication between a client and an attorney for the purpose of obtaining legal advice is confidential. More than thirty years ago in Upjohn Co. v. United States, 449 U.S. 383 (1981), the Supreme Court confirmed that the attorney-client privilege extends to corporations and their employees. This privilege exists not only to protect the advice a lawyer gives to a client, but also to ensure a full and candid discussion of strategy and facts. As corporate self-disclosures, internal investigations, and parallel proceedings are on the rise, greater scrutiny has been placed on the scope of the attorney-client privilege, with some recent positive and not so positive developments.

A recent decision by the U.S. Court of Appeals for the D.C. Circuit affirmed the vitality of the attorney-client privilege for internal investigations. In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014). It reversed the District Court in United States ex rel. Barko v. Halliburton Co., 2014 U.S. Dist. LEXIS 30866 (D.D.C. Mar. 11, 2014), where a former employee (the “relator”) brought a qui tam action under the False Claims Act against Kellogg Brown & Root, Inc. (“KBR”), a division of Halliburton. The former employee alleged that KBR and its subcontractors defrauded the government by inflating costs and accepting kickbacks for military contracts. During discovery, the plaintiff requested certain reports created by KBR’s internal legal counsel during KBR’s internal fraud investigation. KBR argued that the reports were protected by the attorney-client privilege.

Prior to the appeal to the D.C. Circuit, the District Court held that the attorney-client privilege did not apply. The District Court characterized the investigation as a “routine corporate, and apparently ongoing, compliance investigation required by regulatory law and corporate policy.” The District Court reasoned that, because KBR would have been required to conduct the investigations, the documents produced pursuant to the internal investigation were not privileged. The District Court held that KBR failed to demonstrate that “the communication would not have been made 'but for' the fact that legal advice was sought.” This “but for” test adopted by the District Court essentially meant that if a document or communication was not made solely for the purpose of legal advice, then the attorney-client privilege argument was void.

The D.C. Circuit reversed. It ruled that the denial of attorney-client privilege protections during an internal investigation was irreconcilable with Upjohn. The D.C. Circuit Court explained that the “but for” test employed by the District Court was improper. The D.C. Circuit clarified that so long as obtaining legal advice was a “significant purpose” of an internal investigation, the attorney-client privilege applied even in the case of an investigation mandated by a regulation.

Importantly, the D.C. Circuit highlighted how it may be impossible to find the “primary” purpose of a communication under the “but for” test to determine whether the attorney-client privilege applies. Indeed, there may not be just one “primary” purpose, as a legal document can also have a business purpose. In the D.C. Circuit’s view, a test that required there to be just one primary purpose to a document was an unrealistic standard for determining the application of attorney-client privilege, especially when corporate policy mandates ongoing compliance. Overall, the D.C. Circuit found that the requested documents were part of an investigation conducted for a “significant purpose” of receiving legal advice.

The Kellogg Brown & Root, Inc. decision is well reasoned and takes into account the legal theory as well as practical issues involved in internal investigations. However, other jurisdictions, New York, California, and Florida, have employed the standard that the “primary purpose” of an investigation must be to obtain legal advice in order for the attorney-client privilege to apply. See MapleWood Partners, L.P. v. Indian Harbor Ins. Co., 295 F.R.D. 550 (S.D. Fla. 2013); In re CV Therapeutics, Inc., 2006 WL 1699536, at *3-4 (N.D. Cal. June 16, 2006); First Chicago Int’l v. United Exch. Co., 125 F.R.D. 55, 57 (S.D.N.Y. 1989). The D.C. Circuit Court interpreted the “primary purpose” to mean whether one of the significant “purposes” was to obtain legal advice. Whether this analysis is adopted by the other circuits, or the different terminology leads to divergent results, will be an important development to follow.

In a “not” so positive development, the Supreme Court of Delaware’s decision in Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 2014 Del. LEXIS 336, 95 A.3d 1264, 2014 WL 3638848 (Del. 2014) weakened the attorney-client privilege for internal investigations of corporations with shareholders. In July 2014, the Delaware court adopted the Garner doctrine, a fiduciary exception to the attorney-client privilege first announced in a Fifth Circuit decision in 1970. Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). The Garner doctrine allows a shareholder, upon a showing of good cause, to overcome a corporation’s attorney-client privilege when suing the corporation for acting “inimically” to the shareholder’s interests. Although a corporation is not barred from asserting attorney-client privilege, privileged communications may nonetheless become discoverable to shareholders under the Garner doctrine.

The Wal-Mart case evolved from a 2012 New York Times exposé regarding an alleged bribery by Wal-Mart’s Mexican subsidiary of Mexican government officials. The Indiana Electrical Workers Pension Trust Fund IBEW, a Wal-Mart shareholder, requested to inspect corporate documents related to the alleged bribery and cover-up investigation. Under Delaware Corporation Law Section 220 and per the Delaware Court of Chancery’s discretion, shareholders are entitled to review books and records that are “necessary and essential” and for a proper purpose when those documents are unavailable from another source. The shareholder alleged production deficiencies from Wal-Mart, and the lower Court of Chancery applied the Garner doctrine. The Court of Chancery found that the shareholder was entitled to documents formerly withheld on the grounds of attorney-client privilege and that Wal-Mart was also required to produce documents protected by the attorney work-product doctrine.

The Delaware Supreme Court affirmed the Court of Chancery’s decision and adopted the Garner doctrine. Although Wal-Mart argued that Garner had never been applied to a similar proceeding, the Delaware Supreme Court noted that the Court of Chancery had applied Garner in the past, and plenary stockholder/corporation proceedings were the very type of situations the doctrine was meant to cover. The Delaware Supreme Court acknowledged how “critical” attorney-client privilege was to encouraging communication between attorneys and clients. Nonetheless, it reasoned that Garner was “narrow, exacting, and intended to be very difficult to satisfy” and a good way to balance competing interests between shareholders and corporations. Because the Court of Chancery determined the communications were “necessary and essential” and considered the Garner factors in its decision, the Delaware Supreme Court found that the Court of Chancery properly applied the Garner doctrine when ordering inspection of the documents covered by attorney-client privilege. The Delaware Supreme Court did, however, clarify that the Court of Chancery had ordered work-product privileged documents produced on the basis of Delaware procedural rules, and not because of Garner, which only applies to attorney-client privilege.

The attorney-client privilege is vital to an effective internal investigation. As these decisions illustrate, the applicability and scope of the privilege continues to be intensely scrutinized. It remains unknown to what extent the Wal-Mart decision will reinvigorate Garner in other jurisdictions. As scrutiny of corporate conduct remains high after the financial crisis, counsel for internal investigations should monitor whether the potential application of Garner may require the disclosure of privileged communications. These recent decisions should remind counsel of the need to document the establishment of the attorney-clients privilege as well as understand potential pitfalls when embarking on an internal investigation.

Jonathan S. Feld is a Member in Dykema’s Business Litigation Practice Group who practices out of the firm’s Chicago and Washington, DC offices. He focuses his practice on complex civil and criminal matters, including antitrust, health care, financial and antibribery actions. He represents companies, directors and officers in investigations and enforcement actions by the U.S. Department of Justice (DOJ), Securities and Exchange Commission (SEC), the U.S. Department of Housing and Urban Development (HUD), the Food and Drug Administration (FDA) and other regulatory agencies. Eric S. Klein, resident in Dykema’s Bloomfield Hills office, is a Senior Attorney in the firm’s Health Care Practice Group. He focuses his practice on representing clients in the health care sector with respect to corporate and regulatory issues, including hospitals, physician groups, long-term care facilities, continuing care retirement communities (CCRCs), and ambulatory surgery centers (ASCs), hospice providers, and home health agencies. Suzanne Alton is an Associate in Dykema’s Chicago office who is awaiting admission to the bar.

Please email the authors at jfeld@dykema.com, eklein@dykema.com or salton@dykema.com with questions about this article.