N.C. Courts Speak on Privilege Consequences of Required Investigations and Legal Purpose. We Should Listen.

Companies often have policies requiring internal investigations of alleged misconduct.  A common example is a company’s policy to investigate all claims of sexual harassment.  And when companies engage outside counsel to conduct these investigations, thorny privilege issues—to the surprise of many—can arise.  The question arises whether a policy-mandated internal investigation can ever be a “privileged investigation.”  In other words, are investigations for legal-advice purposes and investigations pursuant to policies mutually exclusive, with the privilege protecting the former but not the latter?

Public policy supports both efforts.  If misconduct occurs within a company, whether supervisor harassment, bribery of foreign officials, and the like, mandatory-investigation policies fulfill the public policy of identifying and eradicating bad behavior.  Public policy also promotes the company’s need for optimal legal advice on how to handle the investigation results, which can only occur when company employees have candid discussions with company lawyers.  The attorney–client privilege implements that public policy.

The D.C. Circuit Viewpoint

You will find a good discussion of this issue in a D.C. Circuit opinion, In re Kellogg Brown & Root, 756 F.3d 754 (D.C. Cir. 2014), authored by then-Judge Kavanaugh.  In that case, a company policy and a Department of Defense regulation required the company to investigate a bribery allegation.  Yet, the court—applying federal privilege law—held that the attorney–client privilege nevertheless protected the investigation-related communications.  The court said—

In the context of an organization’s internal investigation, if one of the significant purposes of the internal investigation was to obtain or provide legal advice, the privilege will apply. That is true regardless of whether an internal investigation was conducted pursuant to a company compliance program required by statute or regulation, or was otherwise conducted pursuant to company policy.

You may read more about this important decision in my post, Significant D.C. Circuit Decision for Attorney–Client Privilege and Internal Investigations.

The North Carolina Situation

To be sure, other courts eschew the D.C. Circuit’s “one of the significant purposes” standard in favor of “the primary purpose” benchmark.  In 2021, the North Carolina Supreme Court, in an unpublished opinion, affirmed a Business Court ruling stating that, “when communications contain intertwined business and legal advice, courts consider whether the ‘primary purpose’ of the communication was to seek or provide legal advice.”  Window World of Baton Rouge, LLC v. Window World, Inc., 2019 WL 3995941, at *25 (N.C. Super. Aug. 16, 2019), aff’d per curiam, Window World of Baton Rouge, LLC v. Window World, Inc., 857 S.E.2d 850 (N.C. 2021).

A Policy, an Investigation, and a Coverage Dispute

The law firm Buckley, LLP maintains a Harassment-Free Policy that has this investigation requirement:

All reported or reasonably suspected occurrences of harassment will be investigated … in a confidential manner and as promptly and thoroughly as is practicable and necessary.

After a Buckley employee accused one of the firm’s senior lawyers of harassment, the firm retained Latham & Watkins to investigate.  Following the investigation, Buckley sought coverage from its insurance carrier, and sued the carrier when it denied responsibility.  The insurance company sought communications arising from Latham’s investigation, but Buckley refused, asserting that the attorney–client privilege protected those communications from discovery.

Investigation’s Purpose

The privilege question turned on whether Buckley retained Latham because the firm’s policy mandated it (business purpose) or so the firm could obtain Latham’s legal advice on how to deal with the investigation’s results (legal purpose).

We know that a law firm’s engagement agreement can provide evidence of an investigation’s purpose.  For example, the University of Iowa lost a privilege battle, in part, due to its law firm’s engagement letter while an Illinois company won a privilege clash, in part, because of a lawyer’s engagement letter.

So, would Latham’s engagement letter persuade the judge that its investigation was for legal-advice reasons and, therefore, privileged?

Engagement Letter, Lawyer’s Affidavit, and Contrary Testimony

Latham’s engagement letter, which you may read in full here, contained two succinct statements about the scope if its representation.  It opened with this description of “Legal Services”:

The letter also described its responsibilities as follows:

To buttress that the investigation pertained to legal advice, a Latham lawyer submitted a declaration, which you may review in full here, describing the firm’s legal functions this way—

But in deposition testimony, one of the Buckley partners said this about the investigation:

Business Court Ruling

In its opinion, available here, the Business Court first noted that, generally, company materials created “pursuant to a company policy” are discoverable.  Then, citing in part to then-Judge Kavanaugh’s Kellogg opinion, the court stated that “the relevant question is not whether” Buckley retained an attorney “to conduct an investigation, but rather, whether this investigation was related to the rendition of legal services.”  Thus, “an investigating attorney’s communications in the course of an investigation are not necessarily cloaked with privilege.”

Note the phrase “not necessarily.”

Citing Buckley’s mandatory-investigation policy, the court found the evidence “clear” that “the investigation Buckley retained Latham to perform was one required under Buckley’s firm policies as part of Buckley’s internal complaint procedure.”  The court also found that the investigation was “consistent with Buckley’s business practice” because of the Buckley partner’s testimony that the investigation “was the right thing to do” and consistent with the firm handbook.

“As such, the evidence shows that the investigation was initiated and pursued in the ordinary course of Buckley’s business,” the court concluded.

But a Law Firm Investigated!

Buckley’s retention of a law firm did “not change this fact.”  And while the Latham lawyer’s affidavit stated that the firm performed legal functions, the court stated that this “testimony on its own does not serve to cloak all of Latham’s investigatory work with attorney–client privilege.”

Yet that testimony was not “on its own”—the court had Latham’s engagement letter stating that Buckley retained Latham to provide legal services related to its investigation.  But that letter, according to the court, “cannot reclassify nonprivileged communications as ‘legal services’ in order to invoke the attorney–client privilege.”

Despite this business-purpose finding, the court also found that Buckley retained Latham to provide legal services “apart from its investigative efforts.”  While not expressly clear, it appears the Business Court found that there was no legal-advice purpose for Latham’s investigation but there was a legal-advice purpose for other services.

In camera Review—Why?

Following briefing and oral argument, the Business Court ordered Buckley to submit the 157 documents for in camera review. But why?  If Latham’s investigation was for business purposes, then the court could have simply ordered Buckley to produce investigation-related communications and designate the non-investigation communications on a privilege log.

The court was skeptical of Buckley’s privilege designations, not because of any bad faith, but because “determinations required in assessing whether … outside investigatory counsel has engaged in business or legal advice can be difficult to make and that reasonable minds can differ in good faith.”  You may read the in camera order here.

The court reviewed the 157 documents and designated them as privileged and nonprivileged, with most falling in the nonprivileged category.

The Appeal

The ruling troubled Buckley because it interpreted the Business Court’s ruling as establishing a bright line—if a company maintains a policy requiring an investigation upon the occurrence of some event, then the company can never claim privilege over the investigation.  This, in Buckley’s view, would deter companies from establishing mandatory-investigation policies.

On the one hand, the court said an attorney’s communications during an investigation are “not necessarily privileged.”  But on the other hand, it effectively held that Buckley’s mandated-investigation policy meant that the privilege does not protect investigation-related communications.

N.C. Supreme Court Ruling

In a three-page, per curiam opinion, the Supreme Court adopted the Business Court’ opinion without much additional elaboration, and said this—

In today’s business world, investigations of alleged violations of company policy, including policies prohibiting sexual harassment or discrimination, are ordinary business activities and, accordingly, the communications made in such investigations are not necessarily made in the course of giving or seeking legal advice for a proper purpose.

Again, note the “not necessarily” phrase.

So, the Court continued, “when communications contain intertwined business and legal advice, courts consider whether the primary purpose of the communication was to seek or provide legal advice.”

The Court found that the Business Court “properly interpreted North Carolina law” when it determined that Latham’s investigation “had both business and legal purposes” and conducted in camera review to distinguish between the two for each communication.

Buckley, LLP v. Series 1 of Oxford Ins. Co., NC, LLC, 2020 WL 6696138 (N.C.B.C. Nov. 9, 2020), aff’d, 876 S.E.2d 248 (N.C. 2022).  You may read the short opinion here.

POP Analysis

Lawyers can reasonably have concern about this ruling due to what appear to be express and subtle inconsistencies.  The Business Court found that Buckley retained a law firm to conduct an investigation for a business purpose—to fulfill its policy obligations. Yet the Supreme Court stated that the lower court ruled that the law firm led the investigation for business and legal purposes and approved of the primary purpose test to determine whether the privilege applied.

The Business Court cited approvingly of Kellogg, which rejected the primary purpose test in favor of a “one of the significant purposes” test, but nevertheless applied the primary purpose test without explaining its rationale. One can reasonably conclude that the court would have ruled that the privilege covered the investigation had it applied the Kellogg standard.

For now, the decision should cause lawyers to reconsider the beginning of internal investigations.  Those seeking disclosures of a company’s internal investigation will focus heavily on whether the company maintains a mandatory-investigation policy and claim “no privilege!” when it finds one. Companies with those policies can either discard them, which is antithetical to good business practice, or be more deliberate about the purpose of their investigation through well-worded engagement letters with outside counsel or investigation-initiation documents for investigations led by in-house lawyers, identifying and documenting the legal purpose for the investigation, and maintaining good privilege practice during those investigation interviews, summaries, and reports.