It’s Okay To Smell A Rat: Internal Investigations, Attorney-Client Privilege and the KBR Decision

Skeptical of the role of lawyers.

Skeptical of the role of lawyers.

Post-recession, we are living through an era of regulators’ grimaces and prosecutors’ giddiness. Editorialists and bloggers want business scalps, especially scalps of individuals (as opposed to simple monetary fines for corporations), and most especially scalps of those in banking and finance.  In the wake of the GM report and other stories about lawyers, the role of business lawyers is as suspect in the public mind as it has been for decades.  It’s as though everybody smells a rat.

On the other hand, faced with ever-increasing and increasingly complex regulation, companies’ need to conduct self-reviews and internal investigations is unavoidable. Indeed, in many industries, the governing set of rules require companies to self-investigate and, under certain conditions, reveal those investigatory results to the Government.  This is especially the case if the company wishes to be seen as a good citizen and a cooperator. (We have discussed the ups and downs of cooperation here and here).

In this environment, it was refreshing to see the decision of the United States Court of Appeals for the District of Columbia Circuit in In re Kellogg Brown & Root, Inc.  In KBR, the D.C. Circuit considered a district court’s denial of the protection of the attorney-client privilege to a company that conducted an internal investigation.
The district court based its decision in part on the ground that the internal investigation had been “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice,” attempting to distinguish the ur-case in this area, Upjohn Co. v. United States, 449 U.S. 383 (1981)

 

Business people (and internal business-lawyers) wear many hats.  Some of the hats don’t fit neatly (or comfortably).  Many activities undertaken by corporations have multiple purposes: business, political, legal and otherwise.  If this view of internal-investigations law had been allowed to stand, it would be virtually impossible for a company subject to even the most rudimentary level of regulatory oversight to maintain its attorney-client privilege.

It is worth quoting the D.C. Circuit here at some length, given the clarity and forcefulness of the holding:
KBR’s assertion of the privilege in this case is materially indistinguishable from Upjohn’s assertion of the privilege in that case. As in Upjohn, KBR initiated an internal investigation to gather facts and ensure compliance with the law after being informed of potential misconduct. And as in Upjohn, KBR’s investigation was conducted under the auspices of KBR’s in-house legal department, acting in its legal capacity. The same considerations that led the Court in Upjohn to uphold the corporation’s privilege claims apply here.
The District Court in this case initially distinguished Upjohn on a variety of grounds. But none of those purported distinctions takes this case out from under Upjohn’s umbrella.
First, the District Court stated that in Upjohn the internal investigation began after in-house counsel conferred with outside counsel, whereas here the investigation was conducted in-house without consultation with outside lawyers. But Upjohn does not hold or imply that the involvement of outside counsel is a necessary predicate for the privilege to apply. On the contrary, the general rule, which this Court has adopted, is that a lawyer’s status as in-house counsel “does not dilute the privilege.” In re Sealed Case, 737 F.2d at 99. As the Restatement’s commentary points out, “Inside legal counsel to a corporation or similar organization . . . is fully empowered to engage in privileged communications.” 1 RESTATEMENT § 72, cmt. c, at 551.
Second, the District Court noted that in Upjohn the interviews were conducted by attorneys, whereas here many of the interviews in KBR’s investigation were conducted by non-attorneys. But the investigation here was conducted at the direction of the attorneys in KBR’s Law Department. And communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege. See FTC v. TRW, Inc., 628 F.2d 207, 212 (D.C. Cir. 1980); see also 1 PAUL R. RICE, ATTORNEY-CLIENT PRIVILEGE IN THE UNITED STATES § 7:18, at 1230-31 (2013) (“If internal investigations are conducted by agents of the client at the behest of the attorney, they are protected by the attorney-client privilege to the same extent as they would be had they been conducted by the attorney who was consulted.”). So that fact, too, is not a basis on which to distinguish Upjohn.
Third, the District Court pointed out that in Upjohn the interviewed employees were expressly informed that the purpose of the interview was to assist the company in obtaining legal advice, whereas here they were not. The District Court further stated that the confidentiality agreements signed by KBR employees did not mention that the purpose of KBR’s investigation was to obtain legal advice. Yet nothing in Upjohn requires a company to use magic words to its employees in order to gain the benefit of the privilege for an internal investigation. And in any event, here as in Upjohn employees knew that the company’s legal department was conducting an investigation of a sensitive nature and that the information they disclosed would be protected. Cf. Upjohn, 449 U.S. at 387 (Upjohn’s managers were “instructed to treat the investigation as ‘highly confidential’”). KBR employees were also told not to discuss their interviews “without the specific advance authorization of KBR General Counsel.” United States ex rel. Barko v. Halliburton Co., No. 05-cv-1276, 2014 WL 1016784, at *3 n.33 (D.D.C. Mar. 6, 2014).
In short, none of those three distinctions of Upjohn holds water as a basis for denying KBR’s privilege claim.
More broadly and more importantly, the District Court also distinguished Upjohn on the ground that KBR’s internal investigation was undertaken to comply with Department of Defense regulations that require defense contractors such as KBR to maintain compliance programs and conduct internal investigations into allegations of potential wrongdoing. The District Court therefore concluded that the purpose of KBR’s internal investigation was to comply with those regulatory requirements rather than to obtain or provide legal advice. In our view, the District Court’s analysis rested on a false dichotomy. So long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion.
In the context of an organization’s internal investigation, if one of the significant purposes of the internal investigation was to obtain or provide legal advice, the privilege will apply. That is true regardless of whether an internal investigation was conducted pursuant to a company compliance program required by statute or regulation, or was otherwise conducted pursuant to company policy.

 

It is noteworthy that the D.C. Circuit clarifies the rule such that it applies in all contexts: civil, criminal and administrative.  The attorney-client privilege is, to some degree, in derogation of the search for the truth, at least in the first instance.  Yet, lawyers learn things from clients that the lawyers then do not have to reveal because we believe that, on balance, “truth” is ultimately best served in an adversarial system by a tool that encourages clients to tell their lawyers the truth.

This is an often overlooked point.  Frequently, clients do not tell lawyers the whole truth, at least the first time a discussion arises. This is particularly the case in criminal representations, but it is not uncommon in the civil arena.  Sometimes, this reticence arises from a client’s knowledge of his, her or its wrongdoing, and a concomitant desire to hide or destroy evidence.

More often, however, that initial reticence arises from much more innocuous sources: embarrassment, shame, misunderstanding, fear of losing a job or worry about how superiors or colleagues might react.  In those contexts, it is the privilege itself that is most solicitous of the truth, and allows the truth to eventually out.

How To Avoid Being GM’ed: The Wrongs and Rights of Clients and Lawyers

A general malaise?

A general malaise?

The GM internal-investigation report  about ignition-switch problems raises a host of issues, one of which is its unusually sharp criticism of GM internal lawyers.  Criticism of lawyers is nothing new, of course.  Lawyer-jokes always blame lawyers; lawyers’ spouses frequently blame lawyers; clients sometimes blame lawyers.

But public reports drafted by lawyers infrequently blame lawyers, so this one merits attention, most especially by internal lawyers in large organizations; by the outside counsel who serve them; and by the businesspeople who are the true clients.

 

What are the key takeaways?

The Normal, Uneasy.   Skim the report.  (Just skim it — it’s too long to read cover to cover without heroin.  If you have heroin, you have other issues besides ignition recalls and attorney ethics).  On a practical, professional level, what’s your reaction?

One reaction is, Not much.  It is remarkable how normal the actions of GM’s outside counsel and internal lawyers seem, and how characteristic of the operation of large organizations that are at once diffuse, sprawling and “siloed” (to use the term du jour).  Anybody who works in or serves a large organization will recognize the course of events, the mis-allocation (or absence) of resources, the personal dynamics and the outcomes described the GM report.  Despite expressions of editorial shock and Congressional indignation, the lawyer-narrative laid out in the GM report is, in many important ways, more normal than aberrant.

 

Advising on this quarter's numbers.

Advising on this quarter’s numbers.

The Uneasy Normal, Uneasier.  Prepare for a change in the public perception — and, perhaps, in regulation — of commonplace concepts of attorney-client privilege and the general confidentiality of lawyers’ work.  Prepare also for a coordinate change in internal-lawyers’ reporting obligations within the corporation.  Perceptions of  lawyers are mixed, and we should generalize with caution, but jury consultants regularly note the suspicion and distrust with which lawyers are viewed —  especially lawyers for big companies.  Elsewhere, we have explained how laypeople see corporate counsel as mob lawyers.

 

 

Preparing for summer hearings.

Preparing for summer hearings.

Summertime, and the Congressional Livin’ Is Easy.  Congress is composed of laypersons who are political animals and who are no great respecters of privilege and confidentiality.  As a former oversight-and-investigations lawyer for a House committee, I can testify: summer is the high season for O&I hearings.  Nothing is going on legislatively, O&I hearings don’t require lobbyists or constituents, it is hot as hell but most House and Senate hearing rooms have good air-conditioning these days and, if you get some hearings under your belt in June and July, you’ll have plenty as a Member to talk about in your district or state.

It is by no means inconceivable that bills will be introduced seeking to impose, in GM-like situations, a Sarbanes-Oxley style “reporting” requirement on internal lawyers (or outside counsel, or both), coupled with a “private attorney general” concept and whistleblower bounties.  As in the SOX, internal-investigation world, if the matter is sufficiently serious, you may need two law firms: one firm that does an investigation and prepares a report that we all know will end up in the hands of the Government, and one firm that provides advice to the company (or the board, or a committee of the board) and over whose work we hope to maintain privilege.  We have addressed internal investigations and related problems before.

[Full disclosure moment: My law firm does a lot of products-liability work, all of it on the defense side (that is, on behalf of the people who make the products that allegedly cause the complained-of injury).  We are not involved in the matters described in the report, but we have in the past represented and continue today to represent automotive manufacturers.  I do little products work; the primary way I judge a car is by its air-conditioning.  Nevertheless, consider my biases as you read].

 

Doubts about who the client is?

Doubts about who the client is?

A change in the way we view lawyers and their roles.  We may be faced with an evolving re-definition of that law school chestnut: Who is the client?  Is the client now the Government?  This is a critical threshold question. In the narrative laid out in the GM report, the “client” of the internal lawyers and of the outside counsel is not the government, or a government agency or a regulator.  The client is not the buyer of a GM car or the passenger in a GM car.  The client is not a Member of Congress, an editorial writer or a blogger.  The lawyer — at least while she or he is acting as counsel — owes a duty only to the client, a client which, in this situation, is a non-natural person called a “corporation.”

Professor Peter Henning is generally right on the money with regard to white-collar matters, but he jumps the gun when he so quickly blames lawyers in this kind of situation:

 

In the aftermath of the savings and loan scandal, Judge Stanley Sporkin asked how a once-prominent financial institution could engage in a pattern of misconduct. “Where were the professionals when these clearly improper transactions were being consummated?” he asked.

For General Motors, the negligence and incompetence that resulted in at least 13 deaths and multiple injuries from a faulty ignition switch is equally troubling. Numerous lawyers were on the scene, but none took responsibility for making sure their client did not continue to keep defective cars on the road.

Most people, when they pay for a lawyer, want that lawyer to be their lawyer and not someone else’s.  Indeed, that concept of loyalty is a foundation of the conflict-of-interest rules (rules, by the way, far more demanding than what is considered normal in the marketplace).  Under current law and rules, and with few exceptions, lawyers internal and external have neither a duty nor a warrant to serve multiple masters simultaneously.  The most relevant provision is Rule 1.13  (“Organization As Client”) of the ABA Model Rules of Professional Conduct, which are restrictive about what a lawyer representing an organization may and may not reveal.

Even the “reporting up” obligations, which are limited, are focused on the client:

If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances to the highest authority that can act on behalf of the organization as determined by applicable law.

This question is distinct, of course, from what is wise, merciful or sane from a business or spiritual standpoint, and one could make an argument that losing track of the ignition problem was “likely to result in substantial injury to the organization.”  But if the question is, Where were the lawyers?, the answer is, They were right there.

 

A file too far.

A file too far.

A Forest-and-Trees Cliche.  In future litigation, if wholesale problems still get lost in the retail landscape, they will imperil your job.  If the GM report is accurate, there was never a genuine “visibility” problem about the ignition switch.  “Visibility” was not the problem.  “Irritability” was the problem.  Lawyers tend to deal with the irritant at hand; they put out the fire first that is closest and hottest.  They are trained to do so — first in law school, by “spotting issues” instead of looking at a scenario as a whole, and then in private practice, with the demarcation of work into mostly fenced-off fields (called “cases”) and of compensation into fractions of time (called “tenths of an hour”).  In addition, for internal lawyers, a combination of too many demands, insufficient resources and a corporate focus on the monthly or the quarterly has the same grinding effect.  An in-house friend, a accomplished lawyer at a large corporation with a good reputation, says that her only criticism of her job is that she never — ever — has time to actually think.

So what, as a practical matter, can we do — internal lawyers, outside counsel and businesspeople?

Grow Real Ethics.  There is no substitute for actual ethics, opposed to consultant-thick compliance programs and ever-muddied regulation.  We have written on the compliance versus ethics problem before.

Senior Citizens Unite.  Older lawyers – internally and externally — have to speak up.  Young lawyers lack professional and financial traction, as noted in at least one instance in the GM report.

 

Team A v. Team B

Team A v. Team B

Be A Spook.  When faced with “serial” litigation, try the CIA Team B approach of pitting two teams — one internal, one external – against each other on the same topic or issue.  (Outside law firms are useful for this exercise, if there is money in the budget).  As a way of addressing the Soviet strategic threat, Team B has had many critics, but alternative, competitive thought is always worth considering (and is always more expensive).

Misery Loves Company.  Outside lawyers are proficient at CYA.  Consider ways to put your outside law firms more firmly on the ethical hook.

 * * * *

Without the right budget and the right approach, none of this may matter, but give it some thought.  By itself, the fact that we all believe that we are serving our clients won’t keep us from getting “GM’ed.”