COURTS REFINE THE LIMITS OF ATTORNEY-CLIENT PRIVILEGE FOR COMMUNICATIONS WITH IN-HOUSE COUNSEL

Many clients believe that if an attorney is part of an internal communication that communication becomes privileged. Recent court decisions dispel this notion and remind us that for the attorney-client privilege to apply to communications with an in-house attorney, she must do more than receive and review a communication―the attorney must perform legal services with respect to the communication for the privilege to apply. In Re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014); ExxonMobil Corp. v. Hill, 751 F.3d 379 (5th Cir. 2014); but see Hamdan v. Indiana Univ. Health North, LLC, No. 1:13-cv-00195-WTL-MJD, 2014 WL 2881551 (S.D. Ind. June 24, 2014).

The District of Columbia Circuit decision in Brown & Root involved an internal investigation conducted by in-house counsel for Kellogg, Brown & Root (“Brown & Root”) to determine if his client had violated the federal False Claims Act. Plaintiff, a whistleblower, filed a False Claims Act complaint against Brown & Root, asserting that Brown & Root had defrauded the U.S. Government by inflating costs and accepting kickbacks while administering military contracts in war-time Iraq. The whistleblower sought documents related to Brown & Root’s internal investigation of alleged misconduct that was the subject of his lawsuit.

Brown & Root argued that the internal investigation had been conducted for the purpose of obtaining legal advice and that communications incidental to its internal investigation were protected by the attorney-client privilege. The whistleblower argued that the documents were simple business records of an internal investigation required by law and unprivileged.

After reviewing the disputed documents in camera, the district court ruled that the internal investigation of Brown & Root was not protected by the attorney-client privilege. In arriving at this conclusion, the district court gave a very narrow interpretation to the “primary purpose” doctrine used to protect attorney-client communications of in-house counsel from disclosure. The district court said that for the attorney-client privilege to apply to a communication involving in-house counsel, the “primary purpose” of the communication must be solely to obtain or provide legal advice. If there was any other purpose behind the communication, the attorney-client privilege did not apply. Because the “primary purpose” of Brown & Root’s internal investigation was to comply with its obligations to report improper conduct to the Department of Defense, the district court held that the “primary purpose” of the internal investigation was to comply with federal contractor regulations, not to secure legal advice.

In reversing the district court, the D.C. Circuit ruled that so long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies to communications with in-house counsel, even if there were other purposes for the communication and even if the investigation was mandated by government regulation rather than simply an exercise of company discretion. The court rejected the district court’s application of the ‘primary purpose” test that required the sole purpose of a communication be to obtain or provide legal advice. The appellate court explained the proper application of the “primary purpose” test to protect in-house counsel’s attorney-client communications:

It is thus not correct for a court to presume that a communication can have only one primary purpose. It is likewise not correct for a court to try to find the one primary purpose in cases where a given communication plainly has multiple purposes. Rather, it is clear, more precise and more predictable to articulate the test as follows: was obtaining or providing legal advice (a) the primary purpose of the communication, meaning one of the significant purposes of the communication?

Applying its “primary purpose” test, the D.C. Circuit concluded that there was no serious dispute that the internal investigation of Brown & Root by its in-house counsel was protected by the attorney-client privilege.

The U.S. Fifth Circuit recently ruled that a memorandum prepared by Exxon Mobil’s in-house counsel in contract negotiations was subject to the attorney-client privilege and vacated a contrary ruling by the district court. Exxon Mobil Corp v. Hill, 751 F.3d 379 (5th Cir. 2014). The memo was prepared during negotiations between Exxon Mobil and a contractor that cleaned oilfield tubulars for it. These tubulars contained “naturally occurring radioactive material” or NORM, and the cleaning contractor claimed it had a new device that would clean NORM from the tubulars.

During contract negotiations, Exxon Mobil had an industrial hygienist conduct tests to see if the cleaning device worked to clean NORM as the contractor represented and wrote a confidential report of the test results for the NORM-cleaning device. Exxon Mobil’s in-house counsel reviewed the test results during the contract negotiations and recommended a partial disclosure of the test results done by Exxon Mobil, a disclaimer of any warranty as to the data’s accuracy, and a statement that the data was created solely for Exxon Mobil’s internal use.

In-house counsel’s advice to his client was recorded in a memorandum that became known as the “Stine Memo.” It was inadvertently produced in litigation involving NORM exposures in which Exxon Mobil was sued. Exxon Mobil sought an appellate ruling that the Stine Memo was a privileged attorney-client communication.

Instead of applying the “primary purpose” test, the Fifth Circuit looked to the context in which the Stine Memo was prepared and held it was privileged:

The document was prepared during contract negotiations in which both sides were assisted by legal counsel. The negotiations, according to the record, involved a number of legal issues, including indemnity for down-stream tort claims, storage and handling of nuclear residue, licensure, trade secrets and other issues. . . . All of this is to say that the context in which the Stine memo was produced―even before we say anything of the memorandum itself―strongly suggests that ExxonMobil was approaching its in-house counsel for just the sort of lawyerly thing one would expect of an in-house lawyer: advice on transactional matters.

Id. at 382.

The court concluded that the obvious reason Exxon Mobil sought its lawyer’s advice was to deal with any potential legal liability, disclosure of data, and to hedge against any liability from warranties, and, therefore, the attorney-client privilege applied.

NOTE: In Hamdan v. Indiana Univ. Health North, LLC, No. 1:13-cv-00195-WTL-MJD, 2014 WL 2881551 (S.D. Ind. June 24, 2014), a magistrate judge recently held that communications that were simply copied to an in-house counsel were not privileged because:

• There was no request for legal advice in any of the e-mails;
• The e-mails merely communicated facts about the business matter on which in-house counsel was copied; and
• There was no indication the e-mails were created for the purpose of seeking advice from attorneys.

Based upon application of the seminal Supreme Court decision, Upjohn Co. v. U.S., 449 U.S. 383, 389 (1981), the court held simply communicating the underlying facts to an attorney by copying the attorney on an e-mail does not transform the e-mail into a privileged communication as no legal advice was sought by the e-mails nor were they related to the purpose of seeking legal advice.