In what is being lauded by industry as the first decision of its kind, the U.S. District Court of the Northern District of Florida Sept. 20, 1994 extended the "self-critical analysis" privilege to protect the confidentiality of an internal environmental compliance audit.
In Reichold Chemicals, Inc. v. Textron, Inc.,the court balanced the value of performing environmental compliance audits with the chilling effect that would be felt if the results of such audits could not be kept confidential. In the court's own words, the privilege keeps a company from facing the Hobson's choice of performing an audit that may create a "self-incriminating record" or "deliberately avoiding making a record" in order to avoid possible liability. While industries, especially those that operate in a highly regulated jurisdiction like New Jersey, wait to see if other courts will adopt the Reichold reasoning, they continue to be faced with the choice between creating what may be a self-incriminating record or avoiding voluntary audits completely.
An environmental compliance audit is intended primarily to identify areas of compliance and noncompliance with laws and regulations. An audit also typically documents measures taken to correct instances of noncompliance, if any. An audit also may serve to increase corporate awareness of environmental requirements in order to diminish environmental violations and quicken responses whenever they do occur. Aside from the expense and commitment of resources, the most significant deterrent to conducting an audit is the lack of confidentiality of the results.
Without confidentiality, disclosure of the findings of compliance audits presumably increases the risk of civil enforcement and criminal prosection for environmental transgressions. Accordingly, as the Reichold court suggests, many companies remain reluctant to undertake audits in order to avoid potential liability.
Industry leaders united
The confidentiality of audit results has been debated in the environmental community for years, and continues to rage. Two months before the Reichold opinion, the U.S. Environmental Protection Agency (EPA) held public hearings to discuss its use of self-evaluative materials in enforcement proceedings. At the hearings, industry leaders spoke as one in support of a new federal policy protecting the confidentiality of environmental compliance audits.
There is no indication how, if at all, EPA will react to industry's position. Understandably, certain policy-oriented groups within the agency favor a program that would create and sustain the confidentiality of environmental compliance audits. On the other hand, enforcement-minded officials believe such protection will undermine EPA's efforts to assertively enforce environmental laws. In fact, within EPA's audit policy statement of July 9, 1986, the agency states that although it strongly encourages voluntary audits, it will not forego any enforcement tools in return for the performance of a compliance audit. to the contrary, EPA contends a strong enforcement program is the perfect incentive for more voluntary environmental auditing.
The U.S. Department of Justice (DOJ), as a corollary to the EPA policy, released a policy statement in July 1991 designed to encourage compliance audits and voluntary disclosure of violations. The statement, "Factors in Decisions on Criminal Prosecution For Environmental Violations in the Context of Significant Voluntary Compliance or Disclosure Efforts By the Violator," outlines mitigating factors that may be considered in the prosecution of federal environmental crimes. According to DOJ, while the existence of a comprehensive environmental audit program may reduce the risk of criminal prosecution, an audit program is not a defense to any crime, and the results of such audits are not confidential.
States take action
While EPA continues to consider whether to revise its 8-year-old policy and offer the protection industry is seeking, several states have responded to the controversy by adopting legislation that offers qualified protection of environmental audits from discovery in civil, criminal and administrative proceedings. Colorado, Indiana, Kentucky and Oregon have enacted laws that establish a privilege for environmental audits. Legislatures in 10 other states (Arizona, California, Idaho, Illinois, New York, North Carolina, Ohio, Pennsylvania, Rhode Island and Virginia) are considering similar legislation.
Even the Congress is wrestling with the issue of environmental audit privilege. Sen. Mark Hatfield (R-Ore.) has introduced a bill modeled after an Oregon law that would establish confidentiality of audit results in federal courts and agencies. No action was taken on the bill this session, but Hatfield and Sen. Hank Brown (R-Colo.) have promised to introduce a new bill when the 104th Congress convenes in 1995.
Privilege rarely extended
While the attorney-client privilege protects the confidential nature of communications between client and attorney, the privilege rarely has been extended to cover environmental compliance audits, even if performed at the direction of counsel. For example, in United States v. Chevron U.S.A., Inc., the federal government, while pursuing civil penalties under the Clean Air Act, sought disclosure of certain biannual "environmental compliance review status reports" prepared by Chevron. Chevron claimed the attorney-client privilege applied to block disclosure of the reports because one of the three audit team members was an in-house attorney for Chevron. Chevron also claimed the report was prepared in an effort to assess Chevron's compliance with applicable environmental laws. In denying Chevron's claim of privilege, he court determined Chevron had failed to prove the in-house attorney was acting in his capacity as counsel, rather than as a business adviser, and that it was unclear from the evidence whether the primary purpose of the audit was to obtain legal advice.
In contrast with the Chevron decision, a District Court in California more recently had little trouble applying the attorney-client privilege to protect discovery of audit memoranda. In finding the privilege applicable, the court in Olen Properties Corp. v. Sheldahl relied solely on a witness's affidavit attesting that the subject memorandum was prepared for in-house counsel to assist him in evaluating compliance with relevant environmental regulations. In a departure from the approach taken by other courts, the court in Sheldahl affirmed the attorney-client privilege based solely upon the affiant's statement.
Work-product doctrine inapplicable
Although the work-product doctrine commonly is asserted to protect the confidentiality of documents prepared by an attorney in anticipation of litigation, the doctrine has had virtually no application to environmental audits. This is no doubt due to the fact that environmental compliance audits, by their nature, are undertaken in the ordinary course of business, rather than in contemplation of litigation.
Without the certain availability of either the attorney-client or the work-product privilege, many companies have sought to apply the emerging common-law privilege of self-critical analysis in an effort to protect environmental audit results. Even though the Reichold decision gives industry some comfort, the law relating to this privilege remains relatively undeveloped. It is difficult, therefore, to counsel a client to perform an audit if confidentiality to the results is a concern. Further, as the Reichold case involved a demand by a private party litigant for the production of documents, that court did not consider whether the privilege is available when the government seeks disclosure of audit results.
The most publicized position taken on this issue by the executive branch of state government was a May 1992 statement by then New Jersey Attorney General Robert J. Del Tufo and then New Jersey Environmental Prosector Steven J. Madonna, titled "The New Jersey Voluntary Environmental Audit/Compliance Guidelines." Like DOJ's policy, the guidelines instruct state and country prosecutors to consider the existence of an environmental audit program as a mitigating factor during the investigation, and possible prosecution, of environmental violations. Recently, as part of its Sept. 30, 1994 press release on its "Air Permit Amnesty Program," the state Department of Environmental Protection (DEP) stated it hoped to encourage and promote voluntary audits. More significant, the agency said it "intends to establish, in the near future, a permanent enforcement response policy for all types of violations discovered by a regulated entity as the result of a voluntary compliance and audit program."
DEP's statement was conspicuously silent on the issue of confidentiality of audits. In fact, the agency seems not to favor a policy that would protect audit confidentiality. The DEP instead, rather like DOJ, seeks to encourage audits through their use as a mitigating factor in enforcement proceedings, an approach that stops far short of assigning confidentiality to audit results.
In the judicial arena, one New Jersey court has rejected the self-critical analysis privilege in the context of environmental litigation, despite recognizing the validity of the privilege in other situations. In CPC International, Inc. v. Hartford Accident and Indemn. Co., the Superior Court denied the privilege in an environmental insurance coverage action. The court applied the criteria for the self-critical analysis as used most widely in New Jersey and as set forth in Wylie v. Mills. The Wylie court, in sustaining the privilege, found an important public policy for encouraging safety improvements.
Nonetheless, after surveying the manner in which other jurisdictions have addressed the self-critical analysis privilege in environmental cases, the CPC International court denied the privilege because the "public need for disclosure of documents relating to environmental pollution and the circumstances of such pollution outweighs the public's need for confidentiality in such documents." Even if New Jersey's courts were persuaded to adopt the Reichold ruling, there is certainly no reason to believe they would extend the privilege to instances where the government seeks disclosure for enforcement purposes.
Legislation needed
Finally, as noted earlier, although four states have enacted audit privilege laws and 10 others are contemplating such laws, no similar bill has been introduced in New Jersey. Quite simply, in light of the CPC International decision, legislation explicitly establishing the confidentiality of environmental audits is essential to establishing the privilege in this jurisdiction.
Even though undertaking environmental compliance audits often makes good business sense, the manifest concern over the confidentiality of their results understandably discourages many companies from undertaking audits. As New Jersey's courts and executive branch seem unwilling to establish confidentiality, industry would be well-advised to seek legislative action to bring New Jersey into the ranks of progressive jurisdictions that have enacted environmental audit privilege laws.
