Federal District Court: Documents Created During an In-House Corporate Compliance Investigation Are Not Privileged
- In a noteworthy decision in Barko v. Hallilburton Co., a federal court has ruled that a company's internal investigations are not privileged and must be produced to a whistleblower.
- In light of the ruling in Barko, government contractors and others in regulated industries should consider taking steps to improve their chances of successfully asserting the attorney-client privilege and carefully review their compliance programs.
A recent federal court decision makes a company's internal investigation documents fair game in litigation, particularly when federal regulations, such as the Federal Acquisition Regulation (FAR), require the company to maintain a compliance program and to investigate potential misconduct.
The case has direct applicability to federal contractors, but is potentially significant in other regulated industries as well. This alert summarizes the court's decision and identifies for companies several areas where further consideration of its impact is warranted.
The Barko Opinion
Corporations, like individuals, may claim the protections of the attorney-client privilege and the attorney work product doctrine. "Admittedly," however, as the U.S. Supreme Court wrote in a 1981 ruling, "complications in the application of the privilege arise when the client is a corporation."1 A decision issued on March 6, 2014 by the U.S. District Court for the District of Columbia, United States ex rel. Barko v. Halliburton Co.,2 has added to the complications faced by companies and their in-house counsel.
In Barko, Judge Gwin's succinct opinion held that documents, including witness interview notes, created by non-lawyer in-house investigators during an internal investigation, were not protected by the attorney-client privilege or the attorney work product doctrine. According to the court, the "investigations were undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice."3 Although the decision arose in the federal government contracting context, it poses new challenges for all organizations wishing to protect internal investigations from disclosure in litigation, particularly those that are required by law to maintain compliance programs.
Barko is a False Claims Act, qui tam (i.e., whistleblower) case. The opinion recently issued in the case stemmed from a privilege dispute over certain documents created by the case's defendants (collectively referred to by the court as Kellogg, Brown & Root (KBR) during internal investigations KBR instituted pursuant to its Code of Business Conduct (COBC). As described by the court, KBR had well-established procedures for investigating potential violations of the company's COBC.4 Tips received by the company were routed to the Director of the Code of Business Conduct. The Director would decide whether to open a COBC File to investigate further. If an investigation was opened, COBC investigators – who are not lawyers – would interview relevant personnel and review pertinent documents, and add their findings to the COBC File. The investigators would then prepare a COBC Report, which would then be transmitted to KBR's Law Department. The Barko plaintiff challenged KBR's claim of privilege over the COBC investigative materials, including the COBC Reports.
The court noted that the COBC Reports "are eye-openers" and then held that they were not protected by the attorney-client privilege.5 In contrast to communications made "for the purpose of securing primarily either an opinion on law or legal services or assistance in some legal proceeding,"6 "the COBC investigations were undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice."7 The court reasoned that the company was required to implement a corporate compliance program and investigate misconduct as a condition of participating in government contracting, so "the investigations would have been conducted regardless of whether legal advice were sought."8
The Barko court then turned to KBR's claim of work product protection and held that it, too, did not apply. It found that the COBC investigations were spurred by government regulations requiring investigations of fraud and the company's business interests in identifying potential problems, as opposed to the prospect of litigation.9 The court drew support for its findings from the fact that the investigation preceded the unsealing of the plaintiffs' qui tam complaint by several years and was not conducted by attorneys.10
Assessing the Purpose of the Investigation
The court called attention to Department of Defense regulations11 that required contractors to maintain a compliance program, and found that KBR's COBC and investigation practices "merely implement these regulatory requirements."12 It also noted that interviewed employees were never told the purpose of the inquiry was to allow the company to obtain legal advice and that confidentiality agreements they were asked to sign never reference that the purpose of the investigation is to obtain legal advice. The court also concluded that employees would not be able to infer that the interviews were for the purpose of obtaining legal advice, as they were conducted by non-lawyers.
The language used by the court seems to place dispositive importance on the fact that KBR's internal investigation was required by law and corporate policy adopted to comply with those legal requirements. This reasoning will certainly be used by other litigants, especially qui tam relators, seeking internal investigation documents. The likely argument will be that wherever government regulation requires investigatory action, the attorney-client privilege does not apply. Read broadly, the court's holding could allow regulations, and not just those applicable to government contractors, to annex zones of communication that might otherwise be protected by the privilege.
Perhaps even more troubling is a finding necessarily implied by the court's reasoning: namely, that compliance activity taken pursuant to regulatory requirements, including investigations, is inherently not legal activity. The DFARS regulations noted by the court required such actions as the "timely discovery and disclosure of improper conduct," and "internal controls for compliance."13 Those DFARS provisions have now been subsumed in the broader FAR requirements mandating contractor ethics and compliance programs in both civilian and defense agencies.14 These new FAR requirements were enacted in late 2008, and make the compliance and investigative requirements for contractors even more explicit and robust. Stretched to its logical conclusion, the court's decision would appear to have even broader application under the current FAR provisions.
Missing from the court's analysis, however, is explicit recognition that the types of activity the regulations require contractors to address and investigate are by their nature potential violations of law, including violations of the False Claims Act or "possible contractor violation[s] of Federal criminal law."15 Determining whether a possible violation of law has occurred fundamentally involves undertaking legal analysis and making a legal judgment. Thus, in most cases, it would seem that such an investigation would by definition be for the purpose of obtaining legal advice, even if it was also instituted "to comply with government regulations."16 Read in this context, compliance and investigatory activities would seem to be protected by the attorney-client privilege and work product doctrine. After all, as the Supreme Court noted in Upjohn, "[i]n light of the vast and complicated array of regulatory legislation confronting the modern corporation, corporations, unlike most individuals, constantly go to lawyers to find out how to obey the law, particularly since compliance with the law in this area is hardly an instinctive matter."17
Implications for Companies
Barko underscores some of the basic principles that companies should follow to improve their chances of successively asserting the attorney-client privilege. The court noted the following in finding no privilege or protection:
- that outside counsel was not consulted on whether and how to conduct the internal investigation18
- that the investigation was conducted by compliance staff rather than attorneys19
- that employees were never informed that their interviews were being conducted pursuant to a company request for legal advice20
- that employees' confidentiality agreements did not include language stating that their interviews were being conducted pursuant to a company request for legal advice (or were privileged, for that matter)21
As for the court's conclusions, their importance cannot be understated for organizations subject to mandatory compliance regulations. The court reasoned that the attorney-client privilege and work product protection does not apply to investigatory documents when the investigation was conducted pursuant to regulation and company policy, which company policy is itself likely influenced by regulatory requirements. In this instance, the regulations requiring investigation were those found in the DFARS,22 but the court's reasoning would seem to apply to any organization subject to a similar legal regime requiring investigation and reporting. These include the following:
- organizations subject to the code of conduct and mandatory disclosure provisions of the Federal Acquisition Regulation23
- organizations subject to the mandatory compliance program requirements of the Patient Protection and Affordable Care Act24
- organizations subject to the Medicare Modernization Act's requirement to implement compliance programs to reduce the risk of fraud and abuse25
- organizations subject to the Health Insurance Portability and Accountability Act's (HIPAA) requirement to have privacy and security procedures in place to protect access to confidential health information26
- organizations subject to the Sarbanes-Oxley Act of 2002's requirement to establish compliance procedures to better promote the integrity of the company's internal accounting controls and financial reporting27
- organizations subject to the Bank Secrecy Act's mandate to adopt programs to prevent the laundering and deposit of proceeds from illegal activities28
Even when not operating under a mandated compliance program, organizations investigating non-compliance based on their voluntary implementation of a compliance program should be aware of Barko's potential implications. Across many industries it is a recognized best practice to implement a corporate compliance program and promptly investigate potential non-compliance. Several enforcement agencies also encourage companies to implement effective compliance programs.29 Effective compliance programs have been known to help shield a company from prosecution.30Moreover, the U.S. Sentencing Commission Guidelines instruct that an effective compliance program is a mitigating factor when assessing a company's culpability.31
Ultimately, having a compliance program and policies in place to effectively investigate non-compliance is not only a best business practice, but also a means to promote compliance with the law and to protect the company's legal interest. However, in light of this opinion, litigants and qui tam relators in particular seeking internal investigation documents have a basis to assert that these proactive steps to promote compliance are routine business practices and should viewed as a basis to limit the protection of the attorney-client privilege.
Protecting the Attorney-Client Privilege Post-Barko
Barko suggests that prudent organizations should undertake a careful review of their compliance programs. Fortunately, by pointing out the shortcomings in KBR's policies and practices (at least as perceived by the court), the decision illuminates a pathway for protecting the corporate attorney-client privilege in internal investigations. To improve the odds of protecting the privilege, a company should review its compliance policies related to investigations and consider addressing the factors identified by the court before embarking on an investigation. At a minimum, such a review should include the following:
- updating compliance policies and associated documents to reference explicitly that certain investigations are undertaken by the company for the purpose of obtaining legal advice
- for reported potential misconduct that could result in legal liability for the company, consulting outside counsel from the outset to determine whether an investigation is needed
- having attorneys – whether outside or in-house counsel – conduct the actual work of the investigation, or at the very least making clear that the investigation is being led by and conducted at the direction of counsel
- conducting the investigation with all of the trappings of privilege: hold notices, Upjohn warnings prior to interviews, and appropriate protective legends on documents, communications and employee confidentiality agreements
- preparing and memorializing the rationale for the investigation to demonstrate that the primary purpose of an investigation is to provide legal advice, rather than to meet business needs or regulatory requirements (this rationale might take the form of a carefully prepared, contemporaneous explanation that the investigation is being conducted for the purpose of obtaining legal advice on whether a violation has occurred); such an explanation could also explain the specific threats and general risks of litigation that are anticipated in light of the facts potentially at issue in the investigation
Barko represents a significant development in the law that may disrupt many organization's assumptions about the status of their compliance efforts. Organizations that have shifted substantial portions of their investigative efforts outside their legal departments, especially those that rely on non-law firm outsourced consultants to investigate non-compliance, should pay special attention to this development. Prudent organizations should undertake a careful review of their compliance programs, including incident investigations, in light of this new opinion.
1 Upjohn Co. v. United States, 449 U.S. 383, 390 (1981).
2 No. 1:05-CV-1276 (D.D.C. slip op. issued March 6, 2014) [hereinafter "Barko, slip op."].
3 Id. at 5.
4 Id. at 3–4.
5 Id. at 2, 5.
6 Id. at 5 (internal numerals omitted) (quoting United States v. ISS Marine Servs., Inc., 905 F. Supp. 2d 121, 127 (D.D.C. 2012) (internal citation omitted)).
8 Id. at 6.
9 Id. at 7–8.
10 See id. at 8 ("[T]he fact that the investigation was conducted by non-attorney investigators makes it harder for KBR to assert the documents were prepared in anticipation of litigation. Although documents produced by non-attorneys can be protected under the work-product doctrine, the fact that non-attorneys are conducting the investigation is another indication that the documents were not prepared in anticipation of litigation." (citing ISS Marine, 905 F. Supp. 2d at 138)).
11 The underlying activity took place between 2004 and 2006 and KBR's contracts were subject to then-active provisions of the Defense Federal Acquisition Regulation Supplement (DFARS) requiring DOD contractors to adopt compliance programs. See 48 C.F.R. 203.7000, et seq. (2001 edition).Those DFARS provisions were superseded by the changes to the FAR that became final in late 2008 mandating a Contractor Code of Business Ethics and Conduct for all FAR-covered agencies, and including "Mandatory Disclosure" provisions. See 48 C.F.R. Subpart 3.10; see also 48 C.F.R. § 52.203-13.
12 Barko,slip op. at 6.
13 Id. at 5–6 (citing 48 C.F.R. § 203.7000-.7001(a) (Oct. 1, 2011 ed.).
14 48 C.F.R. Subpart 3.10
15 48 C.F.R. § 3.1003(b).
16 Id. at 6.
17 Upjohn, 449 U.S. at 392 (internal quotation marks and citation omitted).
18 Barko, slip op. at 6 (citing Upjohn, 449 U.S. at 386-87).
19 Id. at 7, 8.
20 Id. at 6.
22 See id. at 5–6, 8.
23 See 48 C.F.R. § 52.203-13. As noted above, these provisions replaced the DFARS requirements cited by the Barko Court.
24 See Pub. L. No. 111-148 (2010), § 6401(a)(3), codified at 42 U.S.C. § 1395cc(j)(7) (Medicare); id. § 6401(b)(1)(B), codified at 42 U.S.C. § 1396a(kk)(5) (Medicaid).
25 See 42 C.F.R. § 423.504(a)(vi) (stating that Medicare Part D Plan sponsors must “adopt and implement an effective compliance program,” and at a minimum this "must include a description of how potential compliance issues are investigated and resolved by the . . . sponsors.").
26 See HIPAA, Pub. L. No. 104-191, 110 Stat. 1936 (Aug. 21, 1996); 45 C.F.R. §§164.316(a), 164.530.
27 See Sarbanes Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.
28 See 12 U.S.C. §§ 1818(s), 1829(b), 1951–1959; 31 U.S.C. §§ 5311–5330; 12 C.F.R. §21.21.
29 For example, the Office of Inspector General for the Department of Health and Human Services has issued guidance for pharmaceutical manufacturers to develop policies and procedures to investigate identified instances of non-compliance. See 68 Fed. Reg. 23731 (May 5, 2003).
30 See Press Release No. 2013-65, SEC, SEC Announces Non-Prosecution Agreement with Ralph Lauren Corporation Involving FCPA Misconduct (Apr. 22, 1013), http://tinyurl.com/ls2eldp (noting the agreement to a Non-Prosecution Agreement was based on the company's "level of self-policing along with its self-reporting and cooperation . . . ."); see also Erica Teichert, Good FCPA Compliance Plans Can Halt Prosecutions: DOJ, Law 360 (Feb. 13, 2013), http://tinyurl.com/q3en36h.
31 See U.S. Sentencing Guidelines Manual, § B2.1(a) (acknowledging that one of the fundamental elements of an effective compliance program is the prevention of criminal conduct).