Scope of Privilege for Environmental Compliance Audits

Many companies conduct periodic self-audits concerning compliance with environmental regulations. While these internal reviews are useful in efforts to maintain regulatory compliance, one consideration in the preparation of such reports is whether the self-audit report is a privileged document if an issue arises over disclosure of its findings. In this setting, informal inspections may be useful prior to formal audits with a written report.  

Many companies consider self-audit reports and investigations to be privileged because they are often prepared under the direction of attorneys. Such companies thus expect that they can claim a privilege if disclosure of such internal investigations arises in litigation. Since such reports are often shared widely within an organization,  the attorney-client privilege argument has often been waived. Moreover, as such reports are typically conducted as a routine procedure rather than in anticipation of litigation, the audits are often not even subject to protection by the attorney-client privilege or the work product doctrine. 

In response to the limitations of the attorney-client and work product privilege doctrines, the concept of a privileged self-critical audit was developed. Initially, this privilege was applied to medical malpractice claims as an incentive for hospitals to identify and address future medical problems, as the Court recognized in Bredice v. Doctors Hospital, Inc. 50 F.R.D 249 (D.DC 1970).  
  
The self-audit privilege was also applied in an environmental cost-recovery lawsuit concerning the remediation of hazardous materials released into the environment in Reichold Chemicals, Inc. v. Textron, 157 F.R.D. 522 (N.D. FL. 1994). The Court determined that the privilege applied to self-audit reports prepared after the fact for the purpose of self-evaluation and analysis. Another court applied this privilege in Reid v. Lockheed Martin Aeronautics Co., 199 F.R.D. 379 (N.D. Ga. 2001), where the Court stated:  

“(S)elf-critical analysis privilege has been recognized as a qualified privilege which protects from discovery certain critical self-appraisals ... [and] allows individuals or businesses to candidly assess their compliance with regulatory and legal requirements without creating evidence that may be used against them by their opponents in future litigation.” The court further noted that the privilege “generally protects reflective materials that analyze and seek to improve the employer's comprehensive approach to equal employment opportunity.”

Although the courts in Reichold and Reid applied privilege to self-critical audits for environmental compliance practices, other courts have not recognized the privilege. This conflict results in part from the EPA rejecting the concept of a self-audit privilege for environmental compliance. Rather, the EPA’s policy regarding environmental self-audits is that if a party self-reports a violation, the penalty will be lower than if the violation is subsequently discovered. 

Although twenty states have enacted statutes that provide some form of self-audit privilege, such statutes do not inherently provide privilege protection. Such self-audit privilege was rejected by the Court in Sierra Club v. Woodville Pellets LLC, 553 F.Supp.3d 378 (E.D. TX 2021) notwithstanding the Texas Environmental, Health, and Safety Audit Privilege Act (“Audit Act”). The federal lawsuit concerned alleged violations of the Clean Air Act. The defendants claimed that their test reports concerning air emissions and portions of their permit documents were privileged under the Texas Audit Act, which shielded documents collected during an environmental self-audit from discovery and made them privileged and inadmissible as evidence in a civil action. The Court acknowledged the privilege under state law privilege but found that the Audit Act did not create a similar privilege in federal courts. Its conclusion was based heavily on the EPA’s opposition to such a privilege. The Court stated:

The Agency remains firmly opposed to statutory and regulatory audit privileges and immunity. Privilege laws shield evidence of wrongdoing and prevent States from investigating even the most serious environmental violations.... Audit privilege and immunity laws are unnecessary, undermine law enforcement, impair protection of human health and the environment, and interfere with the public's right to know of potential and existing environmental hazards.

Statutory audit privilege and immunity run counter to encouraging the kind of openness that builds trust between regulators, the regulated community, and the public. For example, privileged information on compliance contained in an audit report may include information on the cause of violations, the extent of environmental harm, and what is necessary to correct the violations and prevent their recurrence. Privileged information is unavailable to law enforcers and to members of the public who have suffered harm as a result of environmental violations.

Courts have also rejected the application of the self-critical audit privilege in the following cases. 

• In Cooper Crouse-Hinds, LLC v. City of Syracuse, New York, 2022 WL 976903, (N.D. N.Y. 2022), the Court held that environmental compliance audits were not privileged under the self-critical analysis privilege or the work product doctrine.

• In Bell v. Lockheed Martin Corporation, 2011 WL 13238270 (D.N.J. 2011), the Court held that the privilege did not apply in a class action concerning alleged gender discrimination under Title VII of the Civil Rights Act. 

• In United States ex rel. Sanders v. Allison Engine Company, Inc., 196 F.R.D. 310 (S.D. Ohio 2000), the Court held that the concept of a self-critical analysis/self-evaluative privilege was nonexistent.  

• Similarly, the Court found no such privilege in a Clean Water Act enforcement action in U.S. v. Dexter Corp., 132 F.R.D. 8 (D. Conn. 1990).   

Given this conflicting legal authority, there is no guarantee that a company’s self-critical audit report concerning environmental compliance will be protected as a privileged document in civil litigation or regulatory enforcement. A company should thus exercise caution to ensure that its operations and conditions are in regulatory compliance before initiating a formal written self-critical audit report. While any non-compliance issues observed during an informal review may still be subject to deposition testimony if litigation occurs, creating formal documentation of such conditions would be avoided.