Following a series of English High Court decisions that upended standard practice for lawyers conducting internal investigations in the UK, a recent ruling suggests the British assault on privilege may be reaching its end, but the bounds of protection remain unclear.

Starting with 2016's In re RBS Rights Issue Litigation [2016] EWHC 3161 (Ch) (RBS) and continuing through last year's Serious Fraud Office v. Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (ENRC), the English High Court dramatically limited privilege protections in the context of internal investigations. Taken together, the decisions held that English legal advice and litigation privileges frequently do not protect attorney notes and interview memoranda generated in UK-based internal investigations, allowing disclosure of such materials to both private litigants and UK prosecutors.

Where RBS and ENRC raised alarm among practitioners, the recently decided Bilta (UK) Ltd v. Royal Bank of Scotland [2017] EWCH 3535 (Ch) (Bilta) offers hope. The decision sets limits on the principles articulated in ENRC and gives crucial guidance for attorneys seeking to protect their investigative materials. It does not, however, overrule its predecessors, and significant uncertainty about the scope of privilege in the investigations context remains.

Litigation Privilege

The British recognize two forms of legal professional privilege. Legal advice privilege protects written or oral communications between attorney and client generated for the purpose of providing or seeking legal advice. Litigation privilege provides broader protections, encompassing communications between attorney and client as well as third parties, but only when (1) the litigation is “in progress or in contemplation”; (2) the communications are made “for the sole or dominant purpose of conducting that litigation”; and (3) the litigation is “adversarial, not investigative or inquisitorial.” ThreeRivers District Council v. Governor & Company of the Bank of England (No 6) [2005] 1 AC 610.

In ENRC, the High Court held that litigation privilege did not protect materials generated by ENRC's outside solicitors and accountants during an internal investigation that kicked off in response to an anticipated criminal investigation by the UK's Serious Fraud Office (SFO). In rejecting ENRC's privilege claim, the court held that:

• Reasonable anticipation of a criminal investigation did not equate to reasonable contemplation of litigation (a prosecution). Finding that the litigation privilege applies solely to materials generated when the company reasonably contemplates a prosecution, the court found that ENRC needed a factual basis to expect that the prosecutor could secure a conviction before it could claim privilege. The mere likelihood (or existence) of the investigation was not enough.

• Documents created for the purpose of responding to the investigation or dissuading prosecutors from bringing charges were not made for the “dominant purpose” of conducting litigation. To satisfy the second prong, the court held that materials must be created for the purpose of conducting a defense to a prosecution.

• Discussions with the prosecutor during an investigation were not “adversarial litigation.” Even an investigation conducted under a well-grounded fear of a criminal investigation did not qualify as “adversarial litigation.”

ENRC created a conundrum. In its wake, privilege attaches to an internal investigation responding to a criminal investigation only when the company determines there is enough “truth in the accusations” to make prosecution “a real prospect.” But to get to that stage, of course, the company must investigate without privilege protection.

'Bilta' Pushes Back

Limiting its holding in ENRC, the High Court in Bilta ruled that, under certain circumstances, litigation privilege can apply to documents generated in this context.

In Bilta, liquidators suing the Royal Bank of Scotland (RBS) for fraud sought discovery of documents created by RBS' solicitors in an internal investigation triggered when Her Majesty's Revenue and Customs (HMRC) sent a letter (1) alleging that RBS' participation in fraudulent transactions created fraudulent tax claims, and (2) permitting RBS to respond before HMRC made its assessment. Relying on ENRC, Bilta argued that privilege did not apply because the investigation was not undertaken for the dominant purpose of conducting litigation, but rather to inform RBS of its exposure to the allegations, to cooperate with HMRC, and to convince HMRC not to issue an assessment.

Rejecting these arguments, the court found that the approach taken in ENRC could not be applied to all scenarios involving companies conducting investigations in the shadow of a prosecutorial or regulatory action. Instead, it emphasized that courts should “take a realistic, indeed commercial, view of the facts” when assessing the sole or dominant purpose of an investigation.

In further contrast to ENRC, in Bilta the court held that where investigations have multiple purposes, the privilege could apply, provided litigation is the dominant purpose. (The court recognized that preparing for litigation can subsume the “inseparable purpose” of avoiding litigation.)

Based on its analysis of the commercial reality of RBS' situation, the court concluded that its investigation's dominant purpose was to defeat the litigation that would follow HMRC's “almost inevitable” assessment. The holding hinged on the following findings:

• The HMRC letter was a “watershed moment”: It cited sufficient evidence for an assessment and gave RBS reason to believe it was highly likely that an assessment would follow. The letter thus signified a shift from an investigation to a tax dispute, making it unlikely that RBS' response to the letter would dissuade HMRC from issuing an assessment.

• RBS' decision to retain external solicitors with expertise in tax litigation to help lead the investigation “strongly suggest[ed]” that it contemplated an assessment and was preparing to defend a claim.

• Other evidence also showed that RBS' lead officials considered it highly likely that an assessment would be issued.

• RBS' “ostensibly collaborative and cooperative” interactions with HMRC after receipt of the letter—including RBS' submission of a report detailing why HMRC should not make an assessment—did not preclude it from being conducted for the dominant purpose of litigation.

In sum, the court concluded that the “commercial reality” was that RBS' internal protocols and statutory obligations compelled it to cooperate with HMRC despite RBS' knowledge that there was an “overwhelming probability” HMRC would make an assessment. In that context, the report was consistent with the “overarching purpose” of preparing for litigation to challenge the assessment.

In contrast to ENRC, where efforts to settle the litigation precluded a finding that litigation was the dominant purpose, the Bilta court held that a comprehensive view of the facts in light of the company's commercial reality compelled a finding that RBS would not have made such significant expenditures on legal fees in the hopes of dissuading HMRC from issuing an “almost inevitable” assessment, but rather did so for the primary purpose of preparing a robust defense.

The Path Forward

The tension between ENRC and Bilta will remain at least until the Court of Appeals decides ENRC's appeal (scheduled for hearing in July 2018). In the meantime, taken together the two cases suggest a number of best practices for attorneys looking to protect materials generated during a UK internal investigation:

• Before commencing an internal investigation—particularly concerning allegations with potential criminal exposure—attorneys should preliminarily assess whether litigation is in reasonable contemplation. If it is, attorneys should consider documenting the bases for this conclusion, detailing the context that create a fear of prosecution.

• Retain external legal counsel with a specialty in the subject matter of the litigation to help manage the investigation. The engagement letter should describe the scope of work in light of the purpose to defend against the anticipated claims, supporting a finding that the dominant purpose of the investigation was to prepare a defense.

• After commencing an investigation, attorneys and other personnel should keep clear records of the purpose of the investigation and the circumstances that prompted it, including records of any correspondence with potential adversaries or other evidence that reflects a strong probability that litigation will ensue.

• Absent a well-documented and objective expectation that litigation is highly probable, documents created for the purpose of settling or discouraging a regulator from initiating litigation, or advising the client on how best to avoid litigation, may preclude a finding that litigation is the dominant purpose. Accordingly, attorneys drafting such materials should do so with the knowledge that if resolution is deemed a primary goal of the investigation, protection may be lost.

While Bilta suggests the High Court may have pulled back from the most troubling aspects of ENRC, unless and until the UK's Court of Appeals weighs in, practitioners should consider the above, understanding that materials unquestionably deemed privileged in the U.S. could well garner no such protection in the UK.

Roger A. Burlingame, Steven G. Kobre and Rachel E. Goldstein are lawyers at Kobre & Kim.