What is a Kovel engagement, and what did United States v. Kovel actually hold?
A Kovel engagement is a forensic accountant retained by counsel rather than by the company, so that the accountant works as counsel’s agent in the giving of legal advice. The name comes from United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), decided 5 December 1961 in an opinion by Judge Henry Friendly. Louis Kovel was a former Internal Revenue agent with accounting skills, employed since 1943 by a tax law firm; subpoenaed before a grand jury investigating one of the firm’s clients, he refused to answer on privilege grounds and was held in criminal contempt.
The Second Circuit reasoned by analogy to an interpreter. “Accounting concepts are a foreign language to some lawyers in almost all cases, and to almost all lawyers in some cases,” it wrote, so the accountant’s presence “is necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit.” The operative sentence is narrower than the case’s reputation: “What is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer.” If what is sought is only accounting service, “or if the advice sought is the accountant’s rather than the lawyer’s, no privilege exists.”
Kovel did not win outright. The court vacated the contempt judgment and remanded, because the record did not show how the client came to be communicating with the accountant rather than with the lawyer, and it held that the burden of going forward with evidence supporting the claim of privilege had shifted to Kovel. That is the practical shape of these disputes: the party asserting the privilege has to come forward with evidence supporting it, even where — as in a prosecution for criminal contempt — “the ultimate burden of persuasion on the issue of privilege remains the Government’s.” An engagement letter naming Kovel begins that showing rather than completing it.
Why is work the company already did on its own usually discoverable?
Because the accountant brings no privilege into the room. Couch v. United States, 409 U.S. 322 (1973), decided 9 January 1973 in an opinion by Justice Powell, records the federal position: “no confidential accountant-client privilege exists under federal law, and no state-created privilege has been recognized in federal cases.” Some states recognize an accountant privilege by statute in their own courts, which is a separate question of state law that federal courts have not imported.
Kovel drew the same line going forward. Judge Friendly acknowledged that the holding “draws what may seem to some a rather arbitrary line” between the client who communicates first to his own accountant — no privilege as to those communications, citing Gariepy v. United States, 189 F.2d 459, 463 (6th Cir. 1951), even though he later consults his lawyer on the same matter — and the client who consults a lawyer who retains an accountant. Sequence and purpose are fixed by events, not by paperwork written afterward. A reconciliation run by the controller, or a memorandum prepared for the board before anyone called a lawyer, exists as ordinary business material, and re-signing the accountant under counsel later does not convert it. Should our company hire the forensic accountant, or should our lawyers? works the same question from the engagement side.
Are interviews with the company’s own employees privileged?
They can be, and Upjohn Co. v. United States, 449 U.S. 383 (1981) is what made that true below the executive suite. Decided 13 January 1981 in an opinion by Justice Rehnquist, Upjohn arose from an internal investigation: the General Counsel, having learned that a foreign subsidiary made questionable payments to foreign government officials, sent questionnaires to managers abroad, and the Internal Revenue Service then summonsed the questionnaires and the interview notes. The Court of Appeals had applied the control group test, under which communications from officers and agents not responsible for directing the company’s response to legal advice were not the client’s at all. The Supreme Court rejected it, reasoning that the privilege protects not only the giving of advice to those who can act on it but also the giving of information to the lawyer so that he can advise soundly.
Upjohn also supplies the limit that surprises companies most: “The privilege only protects disclosure of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorney.” The government remained free to question the employees themselves. On work product the Court held that Rule 26(b)(3) applies in summons enforcement and that materials revealing the attorneys’ mental processes could not be produced simply on a showing of substantial need and undue hardship, remanding for that higher standard to be applied. It declined to announce a broad rule, noting that “[a]n uncertain privilege … is little better than no privilege at all.”
Who is the client in an internal investigation interview, and what is an Upjohn warning?
The client is the organization, not the employee across the table, and the warning is the practice of saying so before the interview begins. Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343 (1985), decided 29 April 1985 in an opinion by Justice Marshall, sets out what follows: the power to waive the corporate privilege rests with management and is normally exercised by officers and directors, and when control of the corporation passes, the authority to assert and waive the privilege passes with it. The Court held that a bankruptcy trustee, whose role is most closely analogous to that of a solvent corporation’s management, may waive the privilege as to prebankruptcy communications. An employee speaking candidly to company counsel is speaking into a privilege somebody else controls.
The warning is professional practice rather than a rule of evidence. In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014), decided 27 June 2014 in an opinion by then-Judge Kavanaugh, answered a district court that had relied partly on its absence: “nothing in Upjohn requires a company to use magic words to its employees in order to gain the benefit of the privilege for an internal investigation.” Kellogg also confirmed the point that matters to the accountant — the investigation there was directed by the company’s Law Department though many interviews were conducted by non-attorneys, and communications by and to non-attorneys serving as agents of attorneys are routinely protected. What the record of the interview supplies is evidence of purpose, which is the thing actually in dispute. See Conducting the Investigation for the order of work.
What happens to a document that has both a business purpose and a legal purpose?
It is decided under a test that still differs by circuit, which is the largest open risk in structuring an investigation nationally. In In re Grand Jury, 23 F.4th 1088 (9th Cir. 2022) — an appeal by a company and a law firm held in contempt over grand jury subpoenas — the Ninth Circuit held that the primary-purpose test governs attorney-client privilege claims for dual-purpose communications, and declined to import the broader “because of” test used in the work-product context. It expressly left open whether the standard should be “a primary purpose” rather than “the primary purpose,” as the D.C. Circuit had held in Kellogg, writing that Kellogg’s reasoning in the specific context of corporate internal investigations does not apply with equal force in the tax context.
Kellogg is the more protective rule for investigations: “So long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion.” The Supreme Court took the question and let it go, granting certiorari in In re Grand Jury, No. 21-1397, hearing argument on 9 January 2023, and issuing a one-sentence per curiam on 23 January 2023, reported at 598 U.S. 15: “The writ of certiorari is dismissed as improvidently granted.” Nothing was decided. What a company can still control is the contemporaneous record of purpose — which questions counsel asked, and what legal advice the work was assembled to support.
Can a company put a Kovel structure in place after the work is done?
No, and it is the most expensive ordinary mistake in the sequence. Privilege attaches, if at all, to a communication made in confidence for the purpose of obtaining legal advice from the lawyer, which is a fact about the communication at the moment it was made; Kovel placed communications a client makes first to his own accountant outside it even where a lawyer is consulted later on the same matter. Two further limits belong in the same breath. The underlying records are not privileged because they passed through a lawyer — bank statements, the general ledger and vendor files are facts, and Upjohn protects the communication rather than the fact. And whether the accountant is a consulting or a testifying expert is decided at retention, not at trial; Does a forensic accountant tracing bank records have to be disclosed as an expert? takes up the disclosure side.
Nothing here is legal advice or an opinion on whether privilege attaches in any matter, which is a question for counsel. Nor is anything on this site an opinion that fraud occurred or that any person did anything — American Institute of Certified Public Accountants Statement on Standards for Forensic Services No. 1 provides at paragraph 10 that “[t]he ultimate decision regarding the occurrence of fraud is determined by a trier of fact; therefore, a member performing forensic services is prohibited from opining regarding the ultimate conclusion of fraud,” as Can a forensic accountant testify that someone committed fraud? explains. What a loss is worth, once the records question is answered, belongs to our Economic Damages Institute rather than here.