In a significant legal development, a U.S. District Court Judge recently ordered KBR Inc. (KBR) to produce internal investigation materials addressing allegations of misconduct under a government contract for military support in Iraq.  Having conducted the investigations under the direction of in-house counsel, KBR sought protection of the investigative materials through the attorney-client privilege and attorney-work product doctrine.  But the court ordered their production and reasoned that the KBR investigators were not attorneys and that the investigations were undertaken “pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”

If left standing, the court’s decision may undercut traditional protections afforded internal fraud and Federal Acquisition Regulation (FAR) Mandatory Disclosure investigations.  The decision also underscores the need for active involvement of legal counsel to preserve the privileged nature of internal investigations.

KBR Case Background

Henry Barko brought a False Claims Act (FCA) lawsuit against Halliburton and its former subsidiary, KBR, alleging that a KBR subcontractor performed substandard work and inflated construction costs, which it passed along to the government.  United States ex rel. Barko v. Halliburton Co., No. 1:05-CV-1276 (D.D.C).  Separately, KBR performed internal investigations into alleged war-zone contract misconduct pursuant to its Code of Business Conduct (COBC), which KBR instituted and administered through its Law Department.

When KBR received a report of a potential COBC violation and opened an investigation, non-attorney investigators interviewed witnesses, reviewed documents and prepared reports for the Law Department.  Barko moved to compel production of investigation files addressing war-zone misconduct allegations.

On March 6, 2014, the court granted Barko’s motion to compel the production of the internal investigation documents.  The court concluded that the investigation materials were not protected by the attorney-client privilege because KBR performed the investigations to comply with “regulatory and corporate policy” requirements, not to obtain legal advice.  The court distinguished the KBR investigations from traditional Upjohn investigations, reasoning that, unlike the KBR investigations, in-house attorneys in Upjohn investigations confer with outside counsel on whether and how to conduct an internal investigation.  The court also concluded that the privilege did not apply because the interviewers were not attorneys, and the confidentiality statements signed by the interviewees mentioned business reasons, not legal reasons, for limiting the disclosure of information.

The court also rejected KBR’s attempt to protect the documents under the work-product doctrine, finding that KBR conducted the investigations in the ordinary course of business.  The court concluded held that KBR was not motivated by litigation, but undertook the investigation as a “responsible business organization” faced with allegations of fraud, waste or abuse in its operations.

Next Steps in the Aftermath of the KBR Decision

The rationale of the KBR decision is questionable at best. 

An internal investigation does not shed its cloak of privilege simply because it is performed to comply with government regulations.  The court also did not seem to consider the feasibility of requiring government contractors with modest Law Department staff and legal budgets to conduct FAR Mandatory Disclosure investigations with legal counsel, even those in war-zone areas.  The KBR decision also may have a chilling effect on the frank and candid reporting of internal investigation findings, a result squarely at odds with the FAR Mandatory Disclosure rules. 

Applied broadly, the KBR decision will hamper the ability of government contractors to protect sensitive internal investigations performed in connection with the FAR Mandatory Disclosure rules and other regulatory requirements.  Government contractors should review their Mandatory Disclosure programs and compliance procedures to ensure the early and active involvement of counsel in all internal investigations.  Contractors should also make clear in their procedures that internal company investigations provide the foundation for legal advice concerning potential disclosure to the government of allegations of contractual, regulatory or statutory violations. 

Unless the KBR decision is reversed on appeal, government contractors who conduct good faith investigations to meet mandatory compliance and disclosure requirements are vulnerable to the production of sensitive, privileged information through discovery, particularly in FCA cases.  Opportunistic qui tam plaintiffs with nebulous case theories may seek production of FAR Mandatory Disclosure investigation files to refashion their cases to survive dismissal, which could potentially embrace non-public allegations without running afoul of the FCA public disclosure bar.  Regardless of the outcome in KBR, contractors should now take affirmative steps to protect themselves.

© 2014 Perkins Coie LLP