Internal investigations are a vital way for companies to respond to allegations of impropriety.
This approach is used in a wide range of claims, from political issues such as the recent “Bridgegate” scandal involving New Jersey Gov. Chris Christie to violations of the Foreign Corrupt Practices Act and breaches of data privacy.
In structuring an internal investigation, companies often retain outside independent counsel to conduct the investigation, examine documents and e-mails and consult with a company’s management or board of directors as it makes findings and recommendations. Indeed, internal investigations are becoming increasingly important and prevalent as the government has increased enforcement actions and as private civil actions, such as False Claims Act cases, have surged.
An important aspect of internal investigations is the protection offered by the attorney-client privilege. Under the privilege, any communications between a client and an attorney for the purpose of obtaining legal advice are confidential and not discoverable by outside parties. The protection of the attorney-client privilege is crucial, particularly when companies subject to government enforcement actions are also facing parallel private litigation.
As internal investigations have become more frequent and more important, greater scrutiny has been placed on the scope of the attorney-client privilege. In U.S. ex rel. Barko v. Halliburton Co., et al., No. 1:05-CV-1276 (D.D.C. 2014), a former employee brought a qui tam action under the False Claims Act against KBR, a division of Halliburton. During discovery, the plaintiff requested certain reports created by counsel during KBR’s internal fraud investigation. KBR argued that the reports were protected by the attorney-client privilege.
The federal court found that the documents were not privileged. The court characterized the investigation as a “routine corporate, and apparently ongoing, compliance investigation required by regulatory law and corporate policy.” The court reasoned that, because KBR would have been required to conduct the investigations regardless of whether it sought legal advice or engaged in litigation, the documents produced pursuant to the internal investigation were not privileged. Further, the employees were never told that the interviews were for the purpose of providing legal advice to the company.
Another area of increased scrutiny relates to the role that in-house counsels play in compliance matters. Courts are concerned where in-house counsels mingle their role as legal advisers and business advisers. In U.S. ex rel. Baklid-Kunz v. Halifax Hosp. Med. Ctr., 2012 U.S. Dist. LEXIS 158944 (M.D. Fla. Nov. 6, 2012), a whistleblower filed a False Claims Act claim against a hospital and sought e-mails between the hospital’s in-house counsel and compliance department personnel.
The federal court found that many of these e-mails were not privileged, observing that “in-house legal counsel participates in and renders decisions about business, technical, scientific, public relations, and advertising issues as well as purely legal issues. As such, general business advice, unrelated to legal advice, is not protected by the privilege even though conveyed by an attorney to the client.” Given this increased scrutiny, companies with in-house attorneys should address legal questions to them and clearly indicate that the communication is seeking legal advice and guidance — especially when there is an ongoing internal review.
Explaining to employees interviewed during an internal investigation the role of the attorney-client privilege is another area of internal investigations subject to increased scrutiny. In Upjohn Co. v. U.S., 449 U.S. 383 (1981), the Supreme Court confirmed that the attorney-client privilege extends to a corporation and its employees when they act in their corporate role. However, the privilege does not apply to corporate employees in their personal capacities. As a result, attorneys conducting internal investigations typically give Upjohn warnings, explaining that the attorneys do not represent the employees individually and that information gleaned during the interview may be disclosed by the company to the government or another third party, even without the employee’s permission.
The goal is to make clear that employees, in their individual capacities, cannot claim that they are the holder of the attorney-client privilege. Without giving proper Upjohn warnings, an attorney conducting an internal investigation may create problems down the road. In U.S. v. Ruehle, 583 F.3d 600 (9th Cir. 2009), the chief financial officer of a company was accused of improperly backdating stock options, something discovered during an internal investigation. The CFO claimed that the statements made to company attorneys were privileged and that he did not remember receiving an Upjohn warning. Although the 9th U.S. Circuit Court of Appeals found that the statements were not privileged, Ruehle demonstrates that “watered-down” Upjohn warnings constitute “a potential legal and ethical mine field.” Under Seal v. U.S. (In re Grand Jury Subpoena: Under Seal), 415 F.3d 333, 340 (4th Cir. 2005).
As these cases show, the attorney-client privilege cannot be taken for granted during internal investigations. In order to ensure successful internal investigations, attorneys should make sure to conform with the prerequisites for the privilege.
As internal investigations are used in more complex areas, the scrutiny of these issues will only become more intense.