United States of America v. Iss Marine Services, Inc.
905 F.Supp.2d 121, 84 Fed. R. Serv. 3d 384, 2012 WL 5873682 (2012)
Rule of Law:
Attorney-client privilege does not apply to internal corporate investigations conducted by non-attorneys without direct legal supervision or clear communication to employees regarding the legal purpose of the inquiry. Furthermore, work-product protection is inapplicable under the 'because of' test if the document would have been created in the ordinary course of business to fulfill contractual obligations, regardless of potential litigation.
Facts:
- ISS Marine Services, Inc. (ISS Marine) and its affiliate Inchcape contracted with the U.S. Navy to provide port services in the Middle East.
- In December 2007, two Inchcape employees inspected facilities in Dubai and Bahrain and discovered potential fraudulent overbilling practices.
- Larry Cosgriff, a Senior Vice-President, reported these findings to outside counsel at Arnold & Porter (A&P), who proposed conducting an internal legal investigation.
- Inchcape's CEO rejected A&P's proposal to lead the investigation due to concerns about cost and employee morale.
- Instead, the CEO ordered an internal audit to be conducted by Bharat Khadalia, a company auditor and non-attorney, under the direction of the Company Secretary.
- Khadalia conducted the investigation and drafted the 'Audit Report' in March 2008 without A&P participating in interviews or reviewing documentary evidence.
- Two months after the report was finalized, the CEO emailed it to A&P, marking it 'Attorney Client Privileged' for the first time.
- The audit was undertaken to determine if the company owed reconciliation payments to the Navy under their contract.
Procedural Posture:
- The Inspector General of the Department of Defense issued an administrative subpoena duces tecum to ISS Marine.
- ISS Marine produced non-privileged hard-copy documents but withheld the Audit Report, asserting attorney-client privilege and work-product protection.
- The United States (Petitioner) filed a Petition in the U.S. District Court for the District of Columbia to enforce the subpoena and compel production of the Audit Report.
- ISS Marine (Respondent) filed an opposition to the Petition and a motion to seal the proceedings.
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Issue:
Is an internal audit report entitled to attorney-client privilege or work-product protection when the investigation was conducted by a non-attorney employee without direct supervision from counsel, and the report was created pursuant to a business necessity rather than primarily for legal advice?
Opinions:
Majority - Judge Beryl A. Howell
No, the Audit Report is not protected by attorney-client privilege or the work-product doctrine because it was a business document created by non-attorneys without sufficient legal supervision. The Court reasoned that the company engaged in a 'gimmick' by rejecting a lawyer-led investigation to save money while attempting to cloak the resulting business audit in privilege by forwarding it to counsel later. Under the Supreme Court's Upjohn standard, privilege in a corporate context requires that employees be aware they are being questioned for the purpose of the corporation obtaining legal advice. Here, the employees were not warned, and the investigation was conducted by a non-lawyer. Regarding work-product, the Court applied the 'because of' test. Since ISS Marine had a contractual duty to identify overpayments, the report would have been created in the ordinary course of business regardless of litigation. Additionally, even if work-product protection applied, the Government demonstrated 'substantial need' because the report provided a unique snapshot of what executives knew and when they knew it, and the underlying documents were overseas and inaccessible.
Analysis:
This decision serves as a critical warning to corporate counsel regarding the limits of privilege in internal investigations. It establishes that corporations cannot create privilege merely by keeping outside counsel 'in the loop' or by forwarding final reports to attorneys. To maintain privilege, the investigation must be structured primarily for legal advice, ideally led by attorneys who provide Upjohn warnings to interviewed employees. The ruling also clarifies the application of the 'because of' test in the D.C. Circuit, emphasizing that if a document has a dual purpose (business and litigation), it loses work-product protection if it would have been created for business reasons anyway. This effectively raises the bar for claiming privilege over internal audits triggered by compliance issues.
