A hotly contested discovery dispute in United States ex rel. Barko v. Halliburton Co., a False Claims Act (FCA) qui tam action, has recently grabbed the headlines. In early March, a federal district judge in the District of Columbia ordered the production of documents that were created in the course of an internal investigation into potential fraud at Kellogg Brown & Root (KBR), a government defense contractor. Pursuant to its corporate policy, KBR had launched an internal investigation after it received information that some of its employees may have taken bribes from a subcontractor and “fixed” construction contracts for the U.S. military in Iraq.[1] A KBR investigator interviewed employees “with potential knowledge of the allegations” and obtained confidential witness statements.[2]
The relator, a former KBR employee, moved to compel production of documents relating to the internal investigation. In opposition, KBR asserted that the documents were protected by the attorney-client privilege and work-product doctrine. After in camera review, the judge held that the attorney-client privilege did not apply. Under circuit precedent limiting attorney-client privilege to communications that “would not have been made ‘but for’ the fact that legal advice was sought,” the judge determined that the “investigations were undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”[3] As the judge explained, KBR had set up a code of business conduct and internal controls for reporting misconduct affecting government contracts to the authorities, in accordance with the Federal Acquisition Regulation’s mandatory disclosure provision.[4] The internal investigation, in his view, proceeded from this compliance obligation. The judge contrasted KBR’s “routine corporate, and apparently ongoing, compliance investigation required by regulatory law and corporate policy” to the investigation in Upjohn Co. v. United States,[5] where the “internal investigation was conducted only after attorneys from the legal department conferred with outside counsel on whether and how to conduct an internal investigation.”[6] Because the KBR investigations “would have been conducted regardless of whether legal advice were sought,” the Halliburton court ruled that they did not meet the but-for test and were therefore not privileged.[7] Similarly, the judge found that the work-product doctrine did not apply because the internal investigation was “in the ordinary course of business irrespective of the prospect of litigation.”[8]
This surprising decision has abruptly upended long-held expectations about internal FCA investigations. Although the decision is not the last word in this controversy, businesses in heavily regulated industries may want to rethink their FCA compliance programs with a view toward bolstering privilege, confidentiality and other protections. This article provides practical pointers to companies wishing to avoid the issues identified in the Halliburton decision and minimize the risk of adverse discovery rulings. The recommendations cover a variety of FCA compliance issues, from organizational structure and internal ethics rules to investigative procedures, internal reporting and interview design and implementation.
Organizational Structure
While many considerations affect the design of a business’s FCA investigation structure, protecting privilege should be foremost among them. FCA investigations are ultimately geared toward assessing the legal liability of the company for potentially false claims submitted to the government. Because of their underlying legal objective, FCA investigations should be conducted by the legal department, a specialized unit within it, or by outside counsel. Additionally, a corporation’s attorneys should be responsible for deciding whether to start an investigation based on credible information received from whistleblowers. Such an organizational structure signals to the employees internally that the company treats FCA investigations as communications made for the purpose of securing legal advice. Indeed, to preserve privilege, it is crucial for the employees to be “sufficiently aware that they were being questioned in order that the corporation could obtain legal advice.”[9]
Internal Rules
A company’s internal rules are informed by legal, professional and business requirements. In the area of government contracting in particular, companies must establish special safeguards to comply with various statutory and regulatory obligations. Government contractors, for example, must set up rules and institutional mechanisms for the internal investigations and disclosure of business misconduct.[10] But whatever the source of these obligations, a company should specify when an FCA investigation is being undertaken to secure legal advice. The investigation of alleged FCA violations is a necessary first step toward making legal determinations.[11] Based on the facts found, in-house or outside counsel must determine whether a violation has occurred, whether the violation must be disclosed pursuant to the applicable laws and regulations, whether the company is liable, and what legal course the company should take in its defense. The Halliburton court appears to have glossed over this underlying legal purpose by framing compliance as a goal that exists independently from internal investigations. Whether the end goal is compliance, assessing liability or preparing for litigation, however, when the immediate purpose of internal investigations is to secure legal advice,[12] a company’s internal procedures and communications should state so explicitly.
Investigative Procedures
Investigations into false claim allegations are the necessary precursor of an assessment of liability. Even if the investigations are part of a routine compliance program mandated by law, they should be case specific and tailored to the allegations made. The closer the fit between the questions asked and the elements of an FCA claim, the stronger the argument that the investigation is being conducted for the purpose of securing legal advice. The Halliburton decision emphasized the distinction between routine compliance and the ad hoc investigation in Upjohn.[13] Although the distinction is not airtight – indeed, compliance procedures can be tailored to case-specific allegations – Halliburton is a reminder that FCA investigations should be approached on a case-by-case basis. For example, once an allegation of a false claim surfaces, in-house attorneys (or outside counsel, depending on the magnitude of risk) should be consulted before designing an investigation protocol that answers legally relevant questions. Early involvement of attorneys, especially outside counsel, also strengthens the argument that FCA investigations are being conducted in anticipation of litigation and are therefore protected by the work-product doctrine. In Halliburton, the judge highlighted the involvement of non-attorneys in conducting the investigation as “another indication that the documents were not prepared in anticipation of litigation.”[14]
Internal Reporting
To increase the chances of a successful privilege assertion, the company must ensure that communications between investigators and attorneys in the legal department remain ongoing throughout the investigative process. Attorney input at the beginning and end of the investigation is not sufficient. At KBR, the law department was apparently involved at the beginning of the investigation, when whistleblowing tips first surfaced, and at the end, when the non-attorney investigators sent their final report to the general counsel’s office.[15] Investigators’ reports, unlike discrete materials generated by accountants and other experts, should be an integral part of the legal communications between counsel and the company. Attorneys from the legal department should review and finalize draft reports, check them for completeness, and revise the interview protocol as the investigation unfolds. Otherwise, a court, like the judge in Halliburton, could mistakenly view these preliminary inquiries as divorced from the legal advice the company needs to assess its litigation liability and fulfill its reporting obligations.
Further, internal reporting must evidence a legal purpose. In Halliburton, the judge emphasized that the final report did not “request legal advice,” nor did it “identify possible legal issues for further review.”[16] As a result, the judge inferred that the report and related materials were simply “the result of a factual investigation made for the KBR Defendants’ records.”[17] In other words, the investigative reports appeared to be stand-alone factual documents disconnected from the legal questions that informed them. Investigators – with the guidance of attorneys if possible – should frame internal reports to answer legally relevant questions. Additionally, internal reports drafted in conjunction with attorneys or at the request of counsel should contain disclaimers on confidentiality and privilege, even though these provisos do not confer talismanic protection from discovery.[18]
Interviews
Investigators need to preserve privilege not only over their internal reports but also over the underlying employee interviews. The question boils down to whether the interviewed employee understands that the interview is for the purpose of securing legal advice. Best practice suggests giving notice through an “Upjohn warning,” named after the aforementioned Supreme Court case.[19] A proper Upjohn warning discloses the interviewer’s identity and affiliation to the corporation, notifies the employee that the purpose of the interview is to advise the corporation, and clearly states that the communications are protected by the attorney-client privilege and that the privilege belongs to and can be waived by the corporation.[20] The interviewers in Halliburton did not follow these guidelines. As the judge observed, “employees who were interviewed were never informed that the purpose of the interview was to assist KBR in obtaining legal advice.”[21] In fact, the confidentiality agreement that the employees signed upon taking the interview “never mentions that the purpose of the investigation is to obtain legal advice,” focusing instead on the need for confidentiality because of business sensitivities.[22] One factor that weighed significantly in Halliburton was the identity of the interviewer. The judge noted that the employee was unlikely to have notice of the legal purpose of the communications given that “the interviewer . . . was a non-attorney.”[23] Interviews should be conducted by attorneys if possible. Alternatively, attorneys from the legal department should train interviewers about preserving privilege and confidentiality.
Conclusion
The recommendations outlined in this article are subject to important caveats. The holding in Halliburton is far from settled: KBR has lodged a petition for a writ of mandamus with the D.C. Circuit, which has stayed the lower court's March 6 and 11 orders in the interim. Halliburton, as a lower court opinion, is not binding precedent, so it might be premature for a company to restructure its FCA investigations according to the conclusions drawn by a single judge in an isolated case. Further, given Halliburton’s expansive holding, it is not clear that KBR’s documents would have been protected even if the above precautions had been taken. Nevertheless, the decision is certainly a wake-up call to all companies that their internal FCA investigations might become exposed if they do not take measures to strengthen privilege and other protections.
[1] Plaintiff-Relator’s Motion to Compel Discovery and Memorandum of Points and Authorities in Support Thereof at 6, United States ex rel. Barko v. Halliburton Co. (Halliburton I), No. 1:05-CV-1276, 2014 WL 1016784 (D.D.C. Mar. 6, 2014), ECF No. 135.
[2] KBR Defendants’ Opposition to Relator’s Motion to Compel at 3-5, 6-7, Halliburton I, No. 1:05-CV-1276, 2014 WL 1016784, ECF No. 139.
[3] Halliburton I, 2014 WL 1016784, at *2-3.
[4] Id. at *3; see 48 C.F.R. §§ 203.7000-.7001 (2001) (current version at 48 C.F.R. § 3.1002-.1004 (2013)).
[5] 449 U.S. 383, 390-91 (1981).
[6] Halliburton I, 2014 WL 1016784, at *3.
[7] Id.
[8] Id. at *4.
[9] Upjohn, 449 U.S. at 394; see also United States v. ISS Marine Servs., Inc., 905 F. Supp. 2d 121, 131 (“For the results of an internal investigation to enjoy the attorney-client privilege, the company must clearly structure the investigation as one seeking legal advice and must ensure that attorneys themselves conduct or supervise the inquiries and, at the very least, the company must make clear to the communicating employees that the information they provide will be transmitted to attorneys for the purpose of obtaining legal advice.”).
[10] See 48 C.F.R. § 3.1002-.1004 (2013).
[11] See Upjohn, 449 U.S. at 390-91 (“The first step in the resolution of any legal problem is ascertaining the factual background and sifting through the facts with an eye to the legally relevant.”).
[12] Cf. id. at 392 (“The narrow scope given the attorney-client privilege by the court below not only makes it difficult for corporate attorneys to formulate sound advice when their client is faced with a specific legal problem but also threatens to limit the valuable efforts of corporate counsel to ensure their client’s compliance with the law.”).
[13] Halliburton I, 2014 WL 1016784, at *3.
[14] Id. at *4.
[15] See United States ex rel. Barko v. Halliburton Co. (Halliburton II), No. 1:05CV1276, 2014 WL 929430, at *2 (D.D.C. Mar. 11, 2014) (“At the end of the investigation, the investigator drafted a final memorandum and submitted it to the General Counsel’s office.”); Halliburton I, 2014 WL 1016784, at *2 (“Once the investigation is complete, COBC investigators write a COBC Report. The COBC Report is then transmitted to the Law Department.” (footnote omitted)). That said, KBR alleged that if a new issue arose, “the investigator would contact the COBC attorney to disclose the new issue and receive further instructions.” KBR Defendants’ Opposition to Relator’s Motion to Compel at 4, Halliburton I, No. 1:05-CV-1276, 2014 WL 1016784, ECF No. 139.
[16] Halliburton II, 2014 WL 929430, at *2.
[17] Id. at *6.
[18] Furthermore, attorneys should be mindful that “[t]he privilege only protects disclosure of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorney.” Upjohn, 449 U.S. at 395.
[19] Id. at 386 (1981).
[20] See United States v. Nicholas, 606 F. Supp. 2d 1109, 1116 (C.D. Cal. 2009).
[21] Halliburton I, 2014 WL 1016784, at *3.
[22] Id.
[23] Id.
Published April 25, 2014.
