Regulators, the professions and their clients: recent guidance on LPP

The Court of Appeal has recently handed down a number of important judgments addressing the scope of Legal Professional Privilege (LPP).¹ In Sports Direct International plc v Financial Reporting Council,² a unanimous Court of Appeal found that the Financial Reporting Council (FRC) did not have the power to compel the production of privileged material from either an auditor or the client of an auditor for the limited purpose of an FRC investigation. Even where a client suffers no or, at most, a technical prejudice from the disclosure of privileged material, the threshold for finding a statutory override is a high one. The judgment will be broadly welcomed by corporates, which can now be assured that privileged material shared with their auditor under a limited waiver of LPP will not be disclosable to the FRC. The court’s general observations on the scope and nature of LPP and on pre-existing material are also relevant to corporate entities faced with similar requests from other regulators.

The role and powers of the FRC

The FRC is a semi-governmental supervisory body whose role includes investigating the statutory audit work carried out by auditors. The UK government is set to replace the FRC with a new statutory regulator with enhanced powers, yet for the time being the FRC remains the supervisory body for auditors in the UK and in the Republic of Ireland.³ The SATCAR regulations⁴ provide for the FRC’s investigative powers in relation to the statutory audit of annual accounts of any ‘public interest entity’, i.e. an issuer whose transferable securities are admitted to trading on a regulated market.⁵ Under SATCAR, the FRC may give notice to an auditor subject to its supervision and to any public interest entity requiring the provision of information, production and creation of documents for such an investigation.⁶ However, this is subject to the express proviso that such notice may not require a person to disclose material covered by LPP.⁷

The facts

The FRC had issued a SATCAR notice to Sports Direct International plc (Sports Direct), a public interest entity, in the context of an investigation into its former auditor. The notice contained details for electronic searches to be run across emails (relevance, date, custodian and search terms), and for responsive documents to be disclosed, alongside any attachments. Sports Direct did produce some 2,000 documents, but withheld another 40 on the basis that they were covered by LPP, specifically legal advice privilege.⁸ The FRC took issue with Sport Direct’s refusal to produce those documents and sought an order from the High Court accordingly. There were two key issues:⁹

1. The ‘infringement issue’: The FRC’s case was that because the former auditor (not Sports Direct) was the target of its investigation, Sports Direct would not face any adverse consequences from the compulsory disclosure of privileged material. Such material had to be treated confidentially by the FRC, and exclusively for its statutory investigative duties. Alternatively, any infringement of Sport Direct’s LPP was at most ‘technical’ in nature.
   
   
2. The ‘communication issue’: The FRC submitted that, regardless of whether the privileged emails were disclosable, any pre-existing material attached to those emails would in any event have to be disclosed.
   

At first instance, the High Court (Mr Justice Arnold) found in favour of the FRC on both grounds, notwithstanding the SATCAR proviso on LPP material – ‘the production of documents to a regulator by a regulated person solely for the purposes of a confidential investigation by the regulator into the conduct of the regulated person is not an infringement of any legal professional privilege of clients of the regulated person in respect of those documents.’ The judge also found that pre-existing documents attached to a privileged communication did not themselves attract LPP. Sports Direct appealed both issues to the Court of Appeal.

(1) The ‘infringement issue’: Compulsory disclosure of third-party privileged material in regulatory proceedings

The Court of Appeal’s starting point was that the justification for LPP required that it last indefinitely – once privileged, always privileged.¹⁰ LPP is fundamental to the administration of justice, and a human right.¹¹ However, there are two exceptions to LPP: (1) the crime/fraud/iniquity exception arising at common law, and (2) specific statutory exceptions. Such statutory exceptions are not readily inferred by the courts. Rather, the legislative intent to override LPP must be clear on the face of the statute, or that intent must necessarily be implied, such that the statute would otherwise be inconsistent.¹² The FRC argued in effect for a further exception to LPP, where a regulator seeks production of material privileged in the hands of a third party for the purpose of an investigation into a body subject to regulation, where the threshold for a statutory override ought to be lower than necessary implication. The Court of Appeal did not accept this further exception to LPP.

On the specific grounds of appeal, the Court of Appeal found that:

• There was an infringement of Sport Direct’s LPP, even though it would not be prejudiced by the disclosure.
• The infringement was not merely technical, such that a lower threshold for finding a statutory override should apply.¹³ The SATCAR proviso exempting LPP material from disclosure means ‘exactly what it says.’¹⁴ 
• There is no gradation of threshold tests for the disclosure of LPP material. The FRC’s submission that a distinction should be drawn between privileged material held by the target of the investigation (the former auditor) and a third party (Sports Direct) was rejected.¹⁵
  

(2) The ‘communication issue’: Disclosure of pre-existing documents

The Court of Appeal, having upheld the LPP in the parent emails under the infringement issue, ordered the pre-existing attachments to be disclosed. These did not attract LPP merely by virtue of being sent under cover of a privileged communication. This follows a long line of authority.¹⁶ There are exceptions to the principle – documents prepared with the intention to communicate to a lawyer will be privileged, as will pre-existing documents selected by the lawyer, where disclosure of the selection would betray the trend of legal advice.¹⁷ Similarly, litigation privilege may be claimed over copies of pre-existing documents collected by a lawyer from third parties as part of the evidence-gathering process.¹⁸

However, none of these narrow exceptions applied to the documents attached to the Sports Direct emails. Only the privileged emails, immune from disclosure, were responsive to the criteria in the FRC notice. The attachments were not responsive and fell within the disclosure request only because they were attached to responsive communications. The Court of Appeal nevertheless applied the general rule, and ordered that the attachments be disclosed.

Conclusion

• There is no gradation of threshold tests for deciding whether a statutory provision overrides LPP for the purposes of disclosure.
• If a regulator seeks to compel production of privileged material, it has the burden to show that its statutory powers expressly or by clear implication permit this. The specific powers of the FRC do not.
• Even in the absence of an express proviso, it is likely that LPP protections will be implied, such that privileged material is immune from disclosure unless the legislation clearly authorizes this.
• Even where regulatory powers allow privileged material to be compelled, there are likely to be express or implied restrictions on subsequent use of the material.
• A regulator’s claim that non-production would have a ‘disruptive effect’ on an investigation is not a good enough reason to set aside LPP protections.¹⁹
• Pre-existing documents attached to a privileged communication will not be covered by LPP, and must be disclosed even where they are disclosable only by virtue of being attached to a responsive communication.
  

How Dechert can help

Dechert has experience advising corporates on various types of regulatory and criminal investigations in different jurisdictions. We are particularly well-placed to advise on disclosure obligations and how best to manage and respond to authority requests.

Footnotes

1) Lee Victor Addlesee v Dentons Europe LLP [2019] EWCA Civ 1600; Raiffeisen Bank International AG v Asia Coal Energy Ventures & Anor [2020] EWCA Civ 11; R (Jet2.com) v Civil Aviation Authority [2020] EWCA Civ 35.
2) [2020] EWCA Civ 177.
3) The new regulator will be known as the Audit, Reporting and Governance Authority, and follows an independent review by Sir John Kingman. See generally, Audit regime in the UK to be transformed with new regulator.
4) Statutory Auditors and Third Country Auditors Regulations (SATCAR) 2016, S.I. 2016/649, implementing Regulation (EU) 537/2014 on specific requirements regarding statutory audit of public interest entities (OJ L 158/77 27 May 2014).
5) SATCAR 2016, reg. 2.
6) SATCAR 2016, Sched 2, para 1(3).
7) SATCAR 2016, Sched 2, para 1(8), which provides in its material part: ‘A notice … does not require a person to provide any information or create any documents which the person would be entitled to refuse to provide or produce … in proceedings in the High Court on the grounds of legal professional privilege.’
8) The group was composed of 19 privileged emails and 21 attachments, many of which were pre-existing documents.
9) A third issue featured initially before the High Court (the ‘limited waiver issue’): The FRC argued that, because Sports Direct had voluntarily waived LPP over the communications when it shared them with their former auditor, it too was entitled to see the material. Although the waiver was limited, it was argued to extend to an FRC investigation. This argument was rejected by the High Court, and did not feature before the Court of Appeal. [2018] EWHC 2284 (Ch), at [56].
10) R v Derby Magistrates Court, ex p B [1996] AC 487, 503 (HL). The adage can be found as early as Calcraft v Guest [1898] 1 QB 759, 761.
11) R v Derby Magistrates Court, ex p B [1996] AC 487, 507 (HL).
12) R (Morgan Grenfell) v Special Commissioner of Income Tax [2003] 1 AC 563 (HL), at [8] and [45].
13) [2020] EWCA Civ 177, at [24].
14) [2020] EWCA Civ 177, at [44].
15) [2020] EWCA Civ 177, at [47].
16) Notably Ventouris v Mountain [1991] 1 WLR 607 (CA); see also Pearce v Foster (1885) 15 QBD 114, 118-9 (CA); Dubai Bank Ltd v Galadari [1990] Ch 1980 (CA); Sumitomo Corp v Credit Lyonnais Rouse Ltd [2002] 1 WLR 479 (CA).
17) Lyell v Kennedy (No 3) (1884) 27 Ch.D. 1 (CA).
18) The Palermo (1883) 9 PD 6 (CA); Watson v Cammell Laird & Co Ltd [1959] 1 WLR 702 (CA).
19) [2020] EWCA Civ 177, at [48].