CORPORATE ALARM: John Elwood (foreground) of Vinson & Elkins argued before the D.C. Circuit that “the very core of the attorney-client privilege is at stake.” He represents Kellogg Brown & Root in the case.
CORPORATE ALARM: John Elwood (foreground) of Vinson & Elkins argued before the D.C. Circuit that “the very core of the attorney-client privilege is at stake.” He represents Kellogg Brown & Root in the case. (Diego M. Radzinschi / NLJ)

A federal appellate court in Wash­ington has waded into a closely watched dispute that has cast into question the confidentiality of corporate communications with in-house lawyers.

A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit on May 7 heard from lawyers for Kellogg Brown & Root Services Inc. and a whistleblower in their battle over a trial judge’s order compelling the company to disclose certain documents.

Stephen Kohn of Kohn, Kohn & Colapinto, representing whistleblower Harry Barko, argued that KBR must reveal 89 documents related to the False Claims Act suit he brought against the company. Citing attorney-client privilege, John Elwood of Vinson & Elkins, KBR’s counsel, fought disclosure.

At stake, according to the Association of Corporate Counsel (ACC), the U.S. Cha­mber of Commerce and other ­business groups, is the privilege and its use by in-house counsel in internal investigations.

D.C. Circuit judges Thomas Griffith, Brett Kavanaugh and Sri Srinivasan, who heard the case, seemed to take the matter seriously — they allowed oral arguments to stretch to 52 minutes, almost twice the time scheduled.

“If we write an opinion here, we are going to be setting a precedent that people are going to follow carefully,” Kavanaugh said. “It’s going to be important to get the semantics exactly right.”

At issue are papers concerning KBR’s investigation into whether it and a subcontractor, Daoud & Partners Inc., maintained an inappropriate relationship that involved kickbacks. Daoud built and staffed laundry facilities in Iraq for the U.S. military.

‘EYE-OPENERS’

In a March 6 ruling, the enforcement of which the D.C. Circuit has stayed, U.S. District Judge James Gwin in Washington called the records “eye-openers,” revealing, he said, a KBR investigator found Daoud “received preferential treatment.”

Gwin concluded the privilege didn’t apply because KBR hadn’t conducted its probe for “the primary purpose” of securing legal advice — a requisite, he said, for its protection. Instead, he wrote, the probe involved a “routine corporate, and apparently ongoing, compliance investigation required by regulatory law and corporate policy.” The investigation would have happened regardless of whether the company sought legal advice regarding it, he added.

KBR’s lawyers asked Gwin to remove his ruling from the public docket, on the ground it included material they’re trying to protect under the attorney-client privilege. Gwin denied the request on March 11. The company’s legal team, which includes solo practitioner John Faust and Craig Margolis of Vinson & Elkins in addition to Elwood, filed an appeal the next day.

The distinction Gwin drew, Elwood argued, made no sense.

“The confidential communication between a corporate client and its attorney for purposes of paying legal advice about allegations that an employee engaged in illegal conduct is at the very core of the attorney-client privilege,” he said. “The district court mistakenly concluded that a corporation loses that privilege whenever it has a policy of investigating such allegations or when it is required by law to report violations to the federal government.”

‘ABSOLUTELY NO ERROR’

Kohn maintained, however, that Gwin had made “absolutely no error.” KBR left the investigation in the hands of nonlawyers, he said. “The investigators wrote the questions, not the lawyers,” said Kohn, handling the case with David Colapinto and Michael Kohn, also of Kohn, Kohn & Colapinto.

The Chamber and ACC, plus the National Association of Manufacturers, Coalition for Government Procurement and American Forest & Paper Association, support KBR in its appeal. ACC chief legal strategist Amar Sarwal warned the dispute strikes at the “very heart of what it means to be an in-house lawyer.

“The groups filed an amicus brief arguing that Gwin’s ruling “threatens to work a sea change in the well-settled rules governing internal corporate investigations.” If companies turned investigations over to in-house lawyers, they would risk losing the protection of attorney-client privilege, the groups wrote. With outside counsel, however, they’d lose the benefit of in-house lawyers who could use their influence to improve compliance policies. Moreover, outside counsel communications might lose the protection of attorney-client privilege if they concerned regulatory law or corporate policy compliance, the organizations said.

Sarwal, who attended the oral arguments, said he wasn’t sure how the D.C. Circuit would act. But he said the court’s interest in the minutia of the dispute has meant a lot. “It’s very gratifying,” he said.

Contact Andrew Ramonas at aramonas@alm.com.