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Special Master Holds Information Relating to Company’s Internal Investigation Performed by Outside Counsel Is Not Privileged

In In Re FirstEnergy Corp. Securities Litigation, case number 2:20-cv-03785 pending in the U.S. District Court for the Southern District of Ohio, the special master granted a motion to compel discovery of documents relating to an internal investigation performed by outside counsel for defendant FirstEnergy Corp. (“First Energy”) regarding the company’s role in an alleged bribery scheme.  Because of a lack of admissible supporting evidence, the special master rejected the company’s position that the materials were protected by the attorney-client privilege and work-product doctrine and ordered FirstEnergy to produce all documents related to the internal investigation.

Investors in First Energy brought suit alleging that the company and its executives engaged in a bribery scheme to influence state elections and ultimately bail out two of the company’s failing nuclear energy plants.  The investors alleged that when FirstEnergy’s role in the scheme came to light, the price of its stock fell sharply, causing substantial losses to investors.  Parallel to the civil litigation, the government brought criminal charges against several of FirstEnergy’s executives who were allegedly involved in the bribery scheme.

Multiple internal investigations were performed by FirstEnergy’s outside counsel to determine the company’s degree of involvement in the bribery scheme.  The investors sought documents and information related to the internal investigations, but FirstEnergy withheld the documents invoking attorney-client privilege and work-product protection.  The investors then filed a motion to compel, arguing that the internal investigations were conducted primarily for business purposes and would have been conducted regardless of any legal proceedings, thus the documents and information were not privileged.  FirstEnergy argued that the investigations were performed to respond to the criminal subpoenas, develop legal strategy, and defend against the civil actions and were therefore privileged as they were conducted for the purpose of obtaining legal advice. 

Attorney-client privilege shields documents only when legal advice is sought, and the work-product doctrine typically protects documents from discovery only when prepared in anticipation of litigation.  The Sixth Circuit has adopted the “because of” test to determine whether the standard for work-product is met – that is, the asserting party must prove that the item was “prepared or obtained because of the prospect of litigation.”  Items prepared in the ordinary course of business, pursuant to public requirements unrelated to litigation, or for non-litigation purposes are not protected by the work-product doctrine.  The special master thus summed up the issue as “whether documents were prepared or obtained because of the prospect of litigation as opposed to those prepared in the ordinary course of business, or pursuant to public requirements unrelated to litigation.” 

In support of their position that the investigations were performed in anticipation of litigation, FirstEnergy relied primarily on a declaration from a company director with personal knowledge, explaining that the investigations were conducted because of concerns regarding the potential criminal liability and the civil litigation.  The special master held, however, that the declaration did not contain all of the language required by 28 U.S.C. § 1746.  Specifically, while the declaration provided that it was made under penalty of perjury, it did not state that the contents therein were true.  Accordingly, the court held that declaration was invalid and must be excluded from the record evidence.

The special master then went on to hold, “FirstEnergy’s argument falls apart without the [] Declaration. The company’s job here was to present persuasive evidence establishing that the investigation’s purpose made it protected, and the lack of sufficient persuasive evidence left the company’s factual allegations almost totally unsupported – and therefore unconvincing.”  On the other hand, the special master held that the investors had presented evidence that “firmly and predominantly grounds the early investigation in the business necessity and human resources/public relations arena, even if those same issues also logically overlap with anticipated litigation.”  Accordingly, the special master held that the discovery sought was not protected by attorney-client privilege or the work-product doctrine and granted the investors’ motion to compel, ordering FirstEnergy to produce all documents related to the investigation, and further ordering that witnesses must answer all fact-related questions about the internal investigations.

FirstEnergy has since filed a motion to stay all discovery in the case, arguing that given the "extraordinary nature" of the special master's decision, a stay is necessary to forestall any "severe and irreparable harm" to the company which would result from the disclosure of the materials.  Regardless of whether FirstEnergy’s anticipated challenge to this ruling is ultimately successful, this opinion serves as a reminder that investigations performed by legal counsel may not always be privileged, particularly where the investigation overlaps with regulatory requirements.  All parties involved should take care throughout the investigative process to demonstrate within written materials the legal purpose for which the investigation is being conducted in order to best support any future privilege claim.