4th Circ. Contractor Privilege Order Protects Disclosure Rule
The U.S. Court of Appeals for the Fourth Circuit recently took the rare step of granting a petition for a writ of mandamus to overturn a district court’s discovery orders and thereby protect privileged information relating to a government contractor’s investigation pursuant to the mandatory disclosure rule.
The lower court’s orders, issued by the U.S. District Court for the Eastern District of Virginia in Anderson v. Fluor Intercontinental Inc., had held that a contractor’s disclosure under the mandatory disclosure rule constituted a waiver of the contractor’s attorney-client and work product privileges as to information developed during the company’s internal investigation conducted at the direction of counsel. The Fourth Circuit’s decision vacated the district court’s ruling.
The mandatory disclosure rule, implemented in Federal Acquisition Regulation 52.203-13, requires contractors to timely disclose to the government credible evidence of potential violations of criminal statutes and the civil False Claims Act, as well as significant overpayments. The rule is intended to encourage contractors to proactively investigate potential wrongdoing and come forward with candid, well-documented disclosures.
The lower court's decision in Anderson had threatened to undercut these laudable policy goals by discouraging contractors from making fulsome disclosures under the mandatory disclosure rule, out of concern that the disclosures might subsequently be deemed a waiver of crucial privileges to which the contractor would otherwise be entitled.
The Fourth Circuit’s writ of mandamus preserves these protections and enables contractors to fully comply with the mandatory disclosure rule without jeopardizing privilege.
Fluor’s Investigation and Disclosure
The Anderson case involved Fluor’s internal investigation of the plaintiff’s suspected conflicts of interest with a potential subcontractor. Fluor disclosed the results of its investigation to the U.S. Department of Defense Office of Inspector General pursuant to the mandatory disclosure rule, and later terminated the plaintiff’s employment.
The plaintiff sued Fluor for wrongful termination, defamation and negligence, among other claims, alleging that Fluor failed to conduct a fair and impartial investigation and reported inaccurate and false information to the OIG.
During discovery, the plaintiff moved to compel Fluor to produce documents, interrogatory responses and deposition testimony relating to the company’s internal investigation, arguing that Fluor’s disclosure under the mandatory disclosure rule constituted a waiver of attorney-client and work product privileges as to information relating to the subject matter of the investigation.
Lower Court’s Discovery Order and Denial of Fluor’s Motion for Reconsideration
On Nov. 8, 2019, the court issued an order holding that Fluor waived attorney-client privilege as to communications made in its disclosure under the mandatory disclosure rule, the subject matter of the disclosure, and the underlying details. The order further held that Fluor waived privilege as to fact work product regarding its disclosure.
In ruling that the contractor had waived its privilege, the court relied on four statements in Fluor’s disclosure that, in the court’s view, were not mandated by the mandatory disclosure rule. Because these statements were therefore, according to the court, not mandatory but voluntary, providing that information constituted a waiver of privilege as to the subject matter of the statements.
Notably, the court held that the mandatory disclosure rule does not require disclosure of evidentiary findings, the credible evidence that triggers the requirement, a summary or any details. All that was required by the mandatory disclosure rule, the court held, was mere notice that a contractor had committed a violation.
By going beyond this bare notice requirement, the court concluded that Fluor waived privilege. The court further noted that Fluor was judicially bound by several references in its answer describing its disclosure as voluntary.
Fluor moved for reconsideration, arguing that the court misconstrued the mandatory disclosure rule’s requirements. The court denied the motion on Dec. 20, 2019, again stating that Fluor was bound by its judicial admissions of voluntariness and that Fluor’s disclosures exceeded mandatory disclosure rule requirements, which do not require a comprehensive disclosure.
Although the court acknowledged that a contractor is obligated to report certain unlawful activity, it stated that a disclosure made before the contractor determines there is credible evidence of a violation — e.g., a disclosure made out of an abundance of caution — “is not a mandatory disclosure, but a voluntary one.”
The court also stated that the regulatory privilege protection pertaining to the full cooperation requirement in FAR 52.203-13(c) applies only to government requests for information and is not part of the mandatory disclosure rule.
Fluor's Motion to Amend Its Answer
Fluor moved to amend its answer to remove references to its voluntary disclosure and add several affirmative defenses. The magistrate judge granted the motion but also ordered Fluor to produce witness statements, reports and summaries of interviews from the investigation due to what the court believed was Fluor’s privilege waiver. However, the magistrate judge held the order in abeyance pending Fluor’s potential interlocutory appeal.
The plaintiff filed objections to the magistrate’s order, and on February 26, the district court issued an order reversing the magistrate judge. In rejecting Fluor’s proposed amendment, the court stated that amending the answer post-discovery would be prejudicial to the plaintiff who was entitled to and did rely upon Fluor’s alleged admissions of voluntariness.
The court further noted that Fluor had not shown exceptional circumstances sufficient to retract its prior admissions given that they were “neither clearly untrue nor mistakes.” The court also reversed the magistrate’s order staying production of documents subject to the privilege waiver, explaining that Fluor was unlikely to succeed on the merits of an appeal, Fluor would not be irreparably harmed because it could pursue post-judgment appeals, and a stay would prejudice the plaintiff with trial only three months away.
Accordingly, the court ordered Fluor to produce the documents at issue by March 4.
Fluor's Petition for a Writ of Mandamus
On March 2, Fluor filed a petition for a writ of mandamus with the Fourth Circuit, requesting that it direct the district court to vacate the Nov. 8, 2019, Dec. 20, 2019, and Feb. 26 orders compelling disclosure of privileged documents and information.
Following briefing, the Fourth Circuit on March 13 issued an order granting Fluor’s petition and directing the lower court to vacate those portions of its orders requiring Fluor to disclose privileged information from the investigation relating to the subject matter of the four statements at issue. The order indicated that a full opinion containing the court’s rationale would follow.
The Fourth Circuit’s decision is significant given the rarity of mandamus orders, which are reserved for unusual and extraordinary cases and issued only as a last resort. The Fourth Circuit’s decision to intervene signals the critical importance of this issue, the serious error in the lower court’s orders and the potential for irreparable harm if left uncorrected.
Further underscoring the potential adverse impacts of the lower court’s decision, the U.S. Chamber of Commerce, the National Association of Manufacturers and the Association of Corporate Counsel moved for leave to file an amicus brief in support of Fluor, citing the concerns of the government contracting community and other industry groups. The court denied their motion, perhaps indicating its comfort in disposing of the issue without further guidance.
Why the Fourth Circuit Got It Right
Although the Fourth Circuit has not yet issued an opinion explaining its rationale, there are several arguments that support its decision to protect privilege — particularly the need to preserve the mandatory disclosure regime.
The mandatory disclosure rule is intended to encourage contractors to proactively investigate and fully disclose to the government potential wrongdoing. The lower court’s reasoning — that detailed disclosures under the mandatory disclosure rule which go beyond mere notice may risk a privilege waiver — would frustrate this purpose by potentially punishing fulsome disclosures, thereby incentivizing contractors to make disclosures under the mandatory disclosure rule that are devoid of meaningful details.
Rather than facilitating full and frank communications between contractors and the government, the lower court’s holding would encourage contractors to provide bare minimum disclosures and wait for the government to request additional information because, according to the district court, this is when the full cooperation requirement allegedly kicks in and protects against a privilege waiver.
The lower court’s holding that the mandatory disclosure rule does not require a comprehensive disclosure is also at odds with long-standing U.S. Department of Justice and agency guidance. Far from the court’s suggestion that mere notice is required, the government has consistently said that it expects companies to provide a complete description of the facts and circumstances surrounding the incident, including names of individuals involved, dates, locations, how the matter was discovered, corrective actions, etc.
For example, the DOJ’s most recent cooperation credit guidelines require contractors to (1) identify individuals substantially involved in or responsible for misconduct, (2) apprise the government of relevant facts obtained through the company’s investigation, and (3) provide timely updates and rolling disclosures of relevant documents and information.
This is consistent with the prior cooperation credit policy in the Yates memorandum, which similarly required companies to identify “all individuals involved in or responsible for the misconduct at issue ... and provide ... all facts relating to that misconduct, [including] complete factual information about individual wrongdoers.”
Contractors providing only bare-bones notice, as suggested by the lower court, run the risk that the government may consider the disclosures not to be in compliance with mandatory disclosure rule requirements.
The lower court’s decision would thus create a dilemma for contractors. If their disclosures were too detailed, they would risk a waiver of privilege, but if they were insufficiently detailed, they would risk a conclusion by the government that the contractor had not fully complied with mandatory disclosure rule requirements.
The Virginia district court's decision left companies with little guidance as to how to achieve the proper balance between protecting privilege and satisfying disclosure requirements.
The lower court’s decision would also discourage contractors from submitting “abundance of caution” or preliminary disclosures to meet the mandatory disclosure rule’s timely disclosure requirement. In many instances, company disclosures do not admit to credible evidence of a violation, but nevertheless disclose out of a so-called abundance of caution.
With a potential privilege waiver, there are serious risks to erring on the side of disclosure. Similarly, contractors have less incentive to make early, pre-internal investigation disclosures. Companies may therefore wait until they are further along in their investigations to determine whether disclosure is truly necessary, or decline initiating an investigation in the first place. The decision would also have disincentivized companies from developing robust corporate compliance programs.
The lower court’s decision also appears to misconstrue FAR 52.203-13. The disclosure requirement in paragraph (b) of FAR 52.203-13 should fairly be read together with the full cooperation requirement in paragraph (c) — rather than segregating the two requirements, as the court does.
The government expects cooperation from all companies with which it does business. There is no basis for the district court’s claim that the disclosure itself does not require full cooperation, but that any subsequent responses to government document requests, and information exchanges with the government, would.
Aside from the mandatory disclosure rule, there are a myriad of other regulatory schemes that use a disclosure mechanism and that would be negatively impacted by the district court’s ruling. For example, a contractor’s voluntary self-disclosure of violations of export controls under the export administration regulations and the international traffic in arms regulations may be considered as a mitigating factor when determining penalties.
The U.S. Department of Health and Human Services similarly offers a voluntary self-disclosure process with reduced penalties for grant recipients. Under the Virginia district court's interpretation, privilege would be waived under these regimes if the disclosure was triggered by an internal investigation directed by or coordinated with counsel. In addition to the numerous regulatory disclosure programs, the lower court's decision would disrupt even the routine disclosures public companies make to auditors and other financial and industry authorities after conferring with counsel.
Until the Fourth Circuit issues its opinion, we will not know whether these points may have resonated with the court, or whether it rested its analysis on other considerations. It is also unclear whether other circuits will reach the same conclusion as the Fourth Circuit with respect to disclosure requirements under the mandatory disclosure rule and privilege waiver.
If other courts instead follow the Virginia district court's example, it could significantly alter current practice regarding disclosures under the mandatory disclosure rule, and create a potential dilemma for contractors seeking to comply with mandatory disclosure rule requirements without risking a waiver of privilege.
Pending rulings by other courts regarding this issue, prudence dictates that contractors outside the Fourth Circuit be vigilant about protecting privileges and circumspect in making disclosures under the mandatory disclosure rule.
It would be unwise, for example, for a contractor to identify statements it makes in disclosures under the mandatory disclosure rule as voluntary, which was a key factor in the court’s conclusion that privilege had been waived.
Time will tell if parties in other jurisdictions attempt similar waiver arguments to obtain protected information and whether other courts will recognize the importance of protecting these critical privileges, as the Fourth Circuit appears to have done.
"4th Circ. Contractor Privilege Order Protects Disclosure Rule," by David M. Nadler, Sara N. Gerber, and Robyn N. Burrows was published in Law360 on March 16, 2020.
 Anderson v. Fluor Intercontinental Inc., No. 1:19-cv-00289.