Internal Investigation’s Privilege Upheld by New York Federal Court

The privilege boundaries of an internal investigation cause restless nights for any lawyer tasked with keeping an internal investigation privileged. On Thursday, the U.S. District Court for the Eastern District of New York (Magistrate Judge Locke) largely upheld the privilege of an internal investigation performed by Company A concerning conduct by Company B that potentially raised concerns relating to the Foreign Corrupt Practices Act (FCPA). Specifically Company B is a Chinese corporation that markets and distributes medical devices, among which include devices manufactured by Company A. After Company A stopped selling to Company B purportedly because it uncovered evidence that Company B‘s practices were potentially not compliant with the FCPA, Company B brought a lawsuit for breach of contract.

In the case, Company B brought a motion to compel “all documents pertaining to [Company A’s] purported investigation(s) concerning conduct by [Company B] that purportedly raised issues or concerns relating to the FCPA.” Company B emphasized that Company A‘s Form 8-K SEC filing specifically referenced that the Board’s Audit Committee engaged outside counsel to conduct an internal investigation and that the company had no current information from the ongoing investigation to suggest that previously reported financial statements were incorrect in any material respect. Specifically Company B argued that the law firm was not retained to provide core legal advice but was retained to perform an investigation that could have been performed by non-counsel and that the investigation documents were not privileged because they were prepared for the primary purpose of permitting Company A to file required Form 10-K and 10-Q statements.

The court’s in-depth opinion dissects whether Company A commissioned the investigation for the purpose of obtaining legal advice. The court placed significant weight on an affidavit from the outside counsel that ran the investigation to determine that the primary purpose of the investigation was to provide legal advice. The court concluded that all communications with counsel stemming from Company A’s internal investigation were protected by the attorney-client privilege. The court also found that the investigatory materials were prepared in anticipation of litigation and thus protected by the work product doctrine.

Notably, this holding applied equally to the investigatory notes of interviews with two executives of Company B.  The court determined there was not a substantial need for the interview notes given that the two executives “should be able to share their recollection of factual details with [Company B].”

The court did rule that to the extent that Company A has shared any investigatory materials or other information to the SEC that had not been previously produced to Company B, Company A must make such production.

The case is No. 17-cv-1642 pending in the U.S. District Court for the Eastern District of New York.

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