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United States v. ISS Marine Services, Inc.

United States District Court, District of Columbia

November 21, 2012

UNITED STATES of America, et al., Petitioners,

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[Copyrighted Material Omitted]

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Brian P. Hudak, U.S. Attorney's Office, Washington, DC, for Petitioners.

Alan William Hugh Gourley, Justin P. Murphy, Crowell & Moring, LLP, Washington, DC, for Respondent.


BERYL A. HOWELL, District Judge.

The petitioners United States of America and United States Department of Defense (collectively, " the Government" ) bring this Petition against the respondent ISS Marine Services, Inc. (" ISS Marine" ) to enforce the respondent's compliance with an administrative subpoena duces tecum issued by the Inspector General of the U.S. Department of Defense on March 28, 2011 (the " Subpoena" ). In particular, the petitioners ask the Court to require the respondent to produce the contents of a March 2008 internal audit report (the " Audit Report" ). The primary question presented by the Government's Petition is whether the Audit Report enjoys the protection of either the attorney-client privilege or the work-product doctrine.[1]

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ISS Marine is a United States affiliate of Inchcape Shipping Services Holdings, Ltd. (" Inchcape" ), which is a company incorporated in the United Kingdom. See Decl. of Simon Tory (" Tory Decl." ) ¶ 2, ECF No. 4-1; Pet. for Enforcement of Inspector General Subpoena & to Compel Produc. of Audit Report & Related Rs. (" Petition" ) ¶ 6, ECF No. 1. ISS Marine " contracts with the [Department of Defense], through the U.S. Navy, to provide ship husbanding and other port services and goods to the Navy, Coast Guard, and other Government-owned ships." [2] Petition ¶ 6.

A. The Audit Report

One of the places where Inchcape contracted to provide husbanding services to the U.S. Government was in the Middle East. See generally Petition Ex. 1, ECF No. 1-2. In December 2007, two Inchcape employees traveled to Dubai and Bahrain to attend a corporate workshop and to inspect Inchcape facilities. See Decl. of Larry Cosgriff (" Cosgriff Decl." ) ¶ 4, ECF No. 16. During this trip, the Inchcape employees reported " a variety of practices that Inchcape was engaging in" that raised concern about " potential liability for fraudulent conduct." Id. ¶ 5. In response, Larry Cosgriff, who was then Senior Vice-President of Government Services for Inchcape, brought the allegations to the attention of a partner at the Washington, D.C. law firm Arnold & Porter, LLC (" A & P" ), with whom Inchcape regularly consulted. Id. ¶¶ 6-7.

The A & P partner subsequently spoke directly to the two employees who reported on the questionable Inchcape practices, id. ¶ 7, and to the CEO of Inchcape, Claus Hyldager, id. ¶ 8. On January 21, 2008, A & P sent a draft engagement letter to Cosgriff and Hyldager, proposing the retention of A & P to conduct an internal investigation. See id. Thereafter, Cosgriff, Hyldager, and Simon Tory, the Group Company Secretary for Inchcape's subsidiary ISS Group Holdings Limited (" ISS Group" ), met to discuss the draft engagement letter. Id. ¶ 9. According to Cosgriff, Hyldager " expressed dismay, both orally and in writing, that [Cosgriff] had involved counsel in th[e] matter," and both Hyldager and Tory " rejected [Cosgriff's] recommendation that [Inchcape] retain A & P to conduct an investigation." Id. ¶¶ 9-10. Instead, Cosgriff states that Hyldager informed him " that [Hyldager], Mr. Tory and the Inchcape Board of Directors had decided that Mr. Tory would institute an internal audit of Inchcape's billing and accounting practices" and that " Inchcape's Board of Directors would utilize the audit findings to determine how it would proceed in addressing the matter." Id. ¶ 11. Since " the internal audit would be carried out by Inchcape internal auditor Bharat Khadalia, under the direction of Mr. Tory," Cosgriff states that he cautioned Hyldager and Tory that " the investigation itself and its findings would not be protected by attorney client privilege," and he asserts " [b]oth men stated that they understood that fact." Id. ¶¶ 11-12. According to Cosgriff, A & P sent a second draft engagement letter to Hyldager on

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January 29, 2008, which " stated that A & P would support the investigation for purposes of advising Inchcape of its legal obligations, [but] the engagement letter did not provide for any role by A & P in the conduct of the investigation." Id. ¶ 13. Ultimately, it was Cosgriff's understanding that " Messrs. Hyldager and Tory undertook this internal audit to obtain information to enable Messrs. Hyldager and Tory, the Inchcape audit committee and the Inchcape Board of Directors to make a business decision as to what further action, if any, Inchcape would take to address" the allegations raised by the two Inchcape employees. Id. ¶ 15.

Tory, however, recalls these events somewhat differently. He states that ISS Group " engaged [A & P] to provide legal advice with respect to concerns about alleged practices of one of its associate companies in the Persian Gulf region," and that A & P not only recommended conducting an internal investigation but also " prepared a list of documents necessary to more fully assess the issues identified" and " prepared a legal memorandum ... summarizing the potential criminal and civil liability implicated by the activities as reported." Tory Decl. ¶ 3. Furthermore, Tory states that, after reviewing A & P's memorandum and recommendations, Hyldager " instructed [Tory] to pursue the internal investigation ... in consultation with outside counsel and using the legal and investigation guidance that [A & P] had provided." Id. ¶ 4. Tory asserts that " [o]ur purpose was to obtain the facts [A & P] indicated it needed to provide the company with legal advice." Id.

The internal investigation was conducted over the next few weeks by Bharat Khadalia, " an internal auditor" at Inchcape, who prepared a draft report of his findings that was completed on March 5, 2008. Id. ¶¶ 5-6. The Audit Report was marked " Confidential," Tory Decl. ¶ 6, but was not marked as privileged, Cosgriff Decl. ¶ 16. After the draft of the Audit Report was complete, Khadalia sent it to Hyldager and Tory. See id.; Tory Decl. ¶¶ 5-6. After reviewing the draft report, " Hyldager decided to follow up directly with some of the witnesses to ensure that the information provided to [A & P] was complete," which took " approximately two additional months." Tory Decl. ¶ 7. Then, on May 6, 2008, Hyldager sent the final version of the Audit Report via e-mail to A & P, Cosgriff, and Tory and described the report as " our internal auditor[']s report." See Cosgriff Decl. ¶ 16; Tory Decl. ¶ 8; see also Petition Ex. 10, ECF No. 1-11. Tory asserts that Hyldager sent the Audit Report to A & P " for its review and further assessment," as an attachment to an e-mail " marked ‘ Attorney Client Privileged’ because we were sending it to the law firm for legal advice." Tory Decl. ¶ 8. Several months later, on October 25, 2008, Cosgriff forwarded Hyldager's e-mail, with the Audit Report attached, to Noah Rudolph who was the Chief Operating Officer for Inchcape's Government Services Division. Cosgriff ¶ 17; Petition Ex. 10.

B. Government Investigation and Subpoena

Sometime after the Audit Report was completed, the Government began " investigating whether Inchcape charged the Navy more than the amounts permissible under its contracts and whether Inchcape failed to make required reconciliation payments to the Navy for amounts overbilled on an interim basis." Pet'rs' Mem. at 4. The Government informed Inchcape's counsel of this investigation by letter dated September 2, 2010. See Petition Ex. 11, ECF No. 1-12. As a part of that investigation, the Office of the Inspector General of the Department of Defense issued a subpoena to ISS Marine dated March 28,

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2011, which sought the production of several categories of documents, including " [a]ll documents concerning any audit, study, or investigation of ISS regarding goods provided or services performed" under Inchcape's contracts with the U.S. Government.[3] Petition Ex. 2, at 10. The Subpoena listed the return date for the documents as May 20, 2011 at 10 A.M., and it instructed ISS Marine that " [i]f a claim of privilege is asserted in response to any document requested by this subpoena ... you are directed to provide a privilege log wherein you identify ... the specific privilege being asserted." Id. at 1, 5.

ISS Marine and the Government agreed that ISS Marine would produce any nonprivileged, hard-copy documents on a rolling basis, starting May 20, 2011. See Resp't's Opp'n to Pet. for Enforcement of Inspector General Subpoena & to Compel Produc. of Audit Report & Related Rs. (" Resp't's Opp'n" ) at 3, ECF No. 8; see also id. Ex. 1, at 1, ECF No. 4-2 (" As discussed with [government counsel], we will produce non-privileged responsive materials on a rolling basis." ). ISS Marine completed its production of non-privileged, hard-copy documents on July 29, 2011. See Resp't's Opp'n at 3; see also id. Ex. 3, at 1, ECF No. 4-3. ISS Marine and the Government also " agreed that electronic document collection and search would commence after they had mutually agreed on a search protocol." Resp't's Opp'n at 4.

At a meeting on June 9, 2011— while the production of non-privileged, hard-copy documents was still ongoing— counsel for ISS Marine and the Government met to discuss the production, and counsel for ISS Marine stated in that meeting that " all responsive audits, including the March 2008 audit report, were prepared at the request of counsel, and thus, appeared to assert that such documents were subject to both attorney-client privilege and protection as attorney work-product." Petition Ex. 3, at 1. The Government, meanwhile, had previously obtained a copy of the Audit Report from an unnamed source. Petition ¶ 16; see also Pet'rs' Mem. at 5; Petition Ex. 3, at 1-2. After the June 9, 2011, meeting, the Government " segregated and sealed all prior-obtained copies of the March 2008 audit report" and " wrote a July 6, 2011, letter to ISS counsel to inform ISS of the Government's prior collection and review of the audit report." Petition ¶ 21. ISS Marine responded to the Government's July 6, 2011, letter in a letter of its own dated December 1, 2011, which summarized ISS Marine's position that the Audit Report was privileged and that ISS Marine had invoked its privilege in a timely fashion. See Resp't's Opp'n Ex. 4, ECF No. 4-4.

The parties remain at an impasse about the production of the Audit Report. As a result, the Government filed the Petition in this miscellaneous action on September 11, 2012, asking the Court to order ISS Marine to produce the Audit Report (and any other " documents and materials related to that audit report within [ISS Marine's] possession, custody, and control" ), and to allow the Government to " use and review a previously obtained copy of that report." Petition at 6.[4] For the reasons discussed below, the Court grants the Government's Petition.


A " ‘court's role in a proceeding to enforce an administrative subpoena is a

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strictly limited one.’ " Resolution Trust Corp. v. Frates, 61 F.3d 962, 964 (D.C.Cir.1995) (quoting FTC v. Texaco, Inc., 555 F.2d 862, 871-72 (D.C.Cir.1977) (en banc)). " An administrative subpoena must be enforced if the information sought ‘ is within the authority of the agency, the demand is not too indefinite and the information sought is reasonably relevant.’ " Resolution Trust Corp. v. Walde, 18 F.3d 943, 946 (D.C.Cir.1994) (quoting United States v. Morton Salt Co., 338 U.S. 632, 652, 70 S.Ct. 357, 94 L.Ed. 401 (1950)). " Under the law of this Circuit, a subpoena issued pursuant to federal law is governed by the federal law of privilege." United States v. Cal. Rural Legal Assistance, Inc., 824 F.Supp.2d 31, 43 (D.D.C.2011) (citing Linde Thomson Langworthy Kohn & Van Dyke, P.C. v. Resolution Trust Corp., 5 F.3d 1508, 1513 (D.C.Cir.1993)).

" It is well established that the proponent of a privilege bears the burden of demonstrating facts sufficient to establish the privilege's applicability." In re Subpoena Duces Tecum Issued to Commodity Futures Trading Comm'n (" In re CFTC Subpoena " ), 439 F.3d 740, 750 (D.C.Cir.2006); accord In re Lindsey, 158 F.3d 1263, 1269 (D.C.Cir.1998) (" It is settled law that the party claiming the privilege bears the burden of proving that the communications are protected." ); In re Slack, 768 F.Supp.2d 189, 193 (D.D.C.2011) (" A person who withholds otherwise discoverable material or testimony based upon a claim of privilege bears the burden of demonstrating that the privilege applies and that withholding is excused." ). " The basis of [a] privilege must be adequately established in the record, through evidence sufficient ... to establish the privilege ... with reasonable certainty." In re CFTC Subpoena, 439 F.3d at 750-51 (alterations in original) (citations and internal quotation marks omitted). To discharge this burden, the proponent of a privilege " must adduce competent evidence in support of its claims" and " must offer more than just conclusory statements, generalized assertions, and unsworn averments of its counsel." In re Veiga, 746 F.Supp.2d 27, 33-34 (D.D.C.2010).


The respondent resists production of the Audit Report on two grounds. The Court will first discuss the respondent's claim to attorney-client privilege and then will address its claim under the work-product doctrine. Finally, the Court will address the ...

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