D.C. Circuit takes broad view of attorney privilege, bails out KBR – again

August 11, 2015

For the second time in 14 months, the District of Columbia U.S. Circuit Court of Appeals has rescued KBR from having to turn over documents from an internal investigation of kickback allegations to a whistleblower suing the company under the False Claims Act. And, more importantly for corporations other than KBR, the appeals court has once again rejected trial court rulings that would have bored holes in the shield of attorney-client privilege.

On Tuesday, D.C. Circuit Judges David Tatel, Robert Wilkins and David Sentelle granted KBR’s motion for a writ of mandamus against U.S. District Judge James Gwin, vacating Gwin’s 2014 rulings that the company had waived privilege by permitting an in-house lawyer to review documents from the internal investigation before his deposition and by referring to the outcome of the investigation in a motion for summary judgment. (Gwin is a Cleveland federal judge but was designated to oversee the KBR case in 2011.)

Last June, a different three-judge panel of the D.C. Circuit undid Gwin’s previous holding that whistleblower Harry Barko was entitled to see privileged KBR documents because the primary purpose of the company’s internal investigation was not to obtain legal advice but to comply with U.S. regulations for government contractors.

The judges in Tuesday’s opinion, like last year’s panel, said Gwin’s rulings suffered from the “fundamental flaw” of creating uncertainty about the application of attorney-client and work-product privilege to internal investigations. If the appeals court had allowed Gwin’s decisions to stand, Tuesday’s opinion said, his rulings “would ring alarm bells in corporate general counsel offices throughout the country about what kinds of descriptions of investigatory and disclosure practices could be used by an adversary to defeat all claims of privilege and protection,” the opinion said. “These alarm bells would be well founded. If all it took to defeat the privilege and protection attaching to an internal investigation was to notice a deposition regarding the investigations  we would expect to see such attempts to end-run these barriers to discovery in every lawsuit in which a prior internal investigation was conducted relating to the claims.”

KBR’s lawyer, John Elwood of Vinson & Elkins, said in an email that the D.C. Circuit’s opinion “preserves the integrity and effectiveness of corporate internal investigations.” Michael Kohn of Kohn Kohn & Colapinto, who argued for whistleblower Barko at the appeals court, said in a statement that KBR had “used the attorney-client privilege to hide evidence of misconduct from the government,” and that it’s now up to the Justice Department to reopen its investigation of the company.

Judge Gwin’s privilege rulings were based on testimony from KBR in-house lawyer Christopher Heinrich, whom the company had designated as an expert on its internal investigation of allegations that KBR overbilled the government for subpar work by Iraqi subcontractors. Heinrich said at the deposition that he had reviewed privileged documents from the investigation in preparation for his testimony. Gwin subsequently ruled that Barko’s lawyers could see whatever privileged documents Heinrich relied upon.

He also ruled that KBR had implicitly waived privilege when it cited Heinrich’s testimony in a motion for summary judgment the company filed five days after the deposition. KBR said in a footnote that in the past, when its internal investigations have turned up any “reasonable” evidence of improper kickbacks, it has reported the evidence to the government but that it made no such disclosure after the Iraqi subcontractor investigation. Judge Gwin said KBR was trying to have its cake and eat it too: claiming privilege over the results of the internal probe but suggesting those results justify tossing the case.

The D.C. Circuit easily disposed of Gwin’s first ruling, which it said was counter to 1981 U.S. Supreme Court precedent in Upjohn v. United States. “The district court’s balancing would allow the attorney-client privilege and work product protection covering internal investigations to be defeated routinely by a counter-party noticing a deposition on the topic of the privileged nature of the internal investigation,” it said. Such uncertainty, the opinion said, would create the “widely varying application” of privilege that Supreme Court counseled against in Upjohn.

The appeals court called “absurd” the whistleblower’s argument that KBR should not have permitted Heinrich to review the privileged internal documents himself but instead should have received a summary from someone else. “This makes no sense,” the opinion said. “Such a rule would encourage entities to provide less knowledgeable corporate representatives for deposition, thus defeating the purpose of civil discovery.”

Gwin’s second justification for ordering the documents to be turned over to the whistleblower was not so easily disregarded, according to the D.C. Circuit opinion. But the appeals court ultimately decided that KBR had not asked Judge Gwin to draw an “unavoidable inference” by contrasting its response to the Iraq investigation to its previous reports to the government of possible violations of the anti-kickback statute. The judge could have inferred that KBR engaged in a coverup, the appeals court said, instead of drawing the inference that the company didn’t find evidence of wrongdoing. Moreover, it said, because KBR has moved for summary judgment, all inferences were supposed to be drawn against the company. And the footnote appeared only in the brief’s recitation of facts, the opinion said, “not in an argument or claim concerning the privileged documents’ contents.”

The appeals court did refuse to assign a new judge to the case, just as it did last year when it issued its first mandamus against Judge Gwin. One reason? “We trust that this opinion will conclusively resolve the issue on which this case has seemed stuck as with a scratch on a broken record,” the court said.

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