Privilege Reinstated for KBR in False Claims Case

WASHINGTON (CN) - Defense contractor KBR need not turn over attorney-client privileged documents to a whistle-blower, the D.C. Circuit ruled.

Harry Barko sued KBR in 2005 when it was a Halliburton subsidiary called Kellogg Brown & Root Services, claiming that the company inflated contracts and accepted kickbacks in Iraq.

Asked to release documents related to the company's prior internal investigations, Halliburton balked, claiming that the investigation was done to obtain legal advice and was therefore protected by attorney-client privilege. Barko claimed that the documents were unprivileged business records.

Though a federal judge ruled in March that the attorney-client privilege did not apply because KBR failed to show that "the communication would not have been made 'but for' the fact that legal advice was sought," and that the internal investigation was "undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice."

KBR had "vehemently opposed" the ruling but the court ordered KBR to produce the documents within days, according to a June 27 ruling in the case.

After granting KBR a stay, the D.C. Circuit reversed last week, finding that the lower court's order "would have potentially far-reaching consequences" that "would potentially upend certain settled understandings and practices."

Writing for a three-judge panel, Judge Brett Kavanaugh noted that several organizations had filed an amicus brief in support of KBR that said affirming the ruling would discourage companies from conducting internal reviews.

The brief was signed by the U.S. Chamber of Commerce, National Association of Manufacturers, Coalition for Government Procurement, American Forest & Paper Association, and the Association of Corporate Counsel.

One problem with the document-production order was the District Court's attempt to distinguish KBR's case from the 1981 U.S. Supreme Court case Upjohn v. U.S.

The trial court had said that in Upjohn the internal investigation began after in-house counsel conferred with outside counsel. It said in KBR's case the investigation was conducted in-house without consulting outside lawyers.

"But Upjohn does not hold or imply that the involvement of outside counsel is a necessary predicate for the privilege to apply," Kavanaugh wrote. "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.'"

The trial court had also noted that attorneys had conducted the interviews in Upjohn, while non-attorneys conducted many of KBR's investigations.

Rejecting this distinction, Kavanaugh said the investigation "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," he added.

The D.C. Circuit also found it immaterial that KBR had not informed interviewed employees that their answers were part of an effort to obtain legal advice. The confidentiality agreements that KBR employees signed did not disclose this either.

"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," Kavanaugh wrote.

The Department of Defense requires defense contractors to conduct internal investigations when allegations of potential misconduct arise, but the appellate court rejected the notion that this requirement was the true basis for KBR's investigation.

"In our view, the District Court's analysis rested on a false dichotomy," Kavanaugh wrote. "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."

Kavanaugh continued: "Under the District Court's approach, the attorney-client privilege apparently would not apply unless the sole purpose of the communication was to obtain or provide legal advice. That is not the law."

Affirming the lower court's ruling would "eliminate the attorney-client privilege for numerous communications that are made for both legal and business purposes and that therefore have been covered by the attorney-client privilege," Kavanaugh added.

"The District Court's novel approach would eradicate the attorney-client privilege for internal investigations conducted by business that are required by law to maintain compliance programs, which is now the case in a significant swath of American industry," the 18-page opinion states. "In turn, businesses would be less likely to disclose facts to their attorneys and to seek legal advice, which would 'limit the valuable efforts of corporate counsel to ensure their client's compliance with the law."

Privilege may cause the loss of material evidence from a case, "but our legal system tolerates those costs because the privilege 'is intended to encourage "full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and the administration of justice,"'" Kavanaugh concluded.

Last year U.S. District Court Judge James Gwin, who took over the Washington, D.C., case by designation from his court in Cleveland, also vacated a protective order covering documents that could disclose trade secrets.

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