Attorney-Client Privilege in Derivative Litigation; Fiduciary, Common Interest, & Garner Exceptions
Former members of boards of trustees (Plaintiffs) of two related nonprofit corporations, Pittsburgh History and Landmarks Foundation and Landmarks Financial Corporation, filed a derivative action against the president and chairpersons of the nonprofit boards (Defendants), alleging a breach of fiduciary duty stemming from allegedly mishandled funds and corporate mismanagement.
Prior to filing suit, the Plaintiffs formally demanded that the nonprofit corporations secure enforcement of their claims on behalf of the nonprofit corporations. In response, each Board of Trustees adopted a resolution to appoint a joint Investigating Committee, comprised of sitting members of the Boards of Trustees, advised by independent counsel, with the charge of investigating the allegations made in Plaintiffs’ demand. During this process, Plaintiffs brought suit in the name of the nonprofit corporations. Meanwhile, the Investigating Committee completed its investigation and recommended against the prosecution of the derivative action.
Trial Court Order
During the discovery phase of the lawsuit, Plaintiffs sought disclosure of all information provided to the Investigating Committee as part of its investigation, including possibly privileged material consisting of legal opinions and communications provided to the Committee. Defendants resisted such disclosure, claiming the material sought was protected under the attorney-client and work product privileges. Plaintiffs filed a motion to compel. The Court of Common Pleas, Allegheny County, granted Plaintiff’s motion and entered a discovery order providing:
(1) Defendants[/Appellants] will provide Plaintiffs[/Appellees] with all materials provided to or generated by the [Investigating Committee], including all related legal opinions and communications. Privilege in such opinions and communications is retained by Nominal Defendants as to all persons and entities not a party to this action.
(2) Decision on further release of purportedly privileged material is reserved, as such production is disproportionate to the nature and scope of this litigation at this time. See Pa. R.C.P. [No.] 4009.1 (Explanatory Comment) (2012). After production and analysis of materials provided to the [Investigating Committee], further action on these materials may be requested by motion, upon showing that such production would be proportional to the issues at stake at that time.
(3) Plaintiffs[/Appellees] may discuss with Anne Nelson the legal advice that she provided to the [Investigating Committee] and communications with the [Investigating Committee], as well as any non-privileged subjects.
Slip Op., at 5.
Defendants appealed the discovery order, and the trial court filed an opinion in response to Defendant’s statement of errors. In its opinion, the trial court clarified the basis and extent of its discovery order as supported by ALI Principle of Corporate Governance § 7.13(e), providing:
ALI Principle of Corporate Governance § 7.13(e), which the Supreme Court of Pennsylvania adopted in [Cuker, 692 A.2d at 1049], states in relevant part, ‘Plaintiff’s counsel should be furnished a copy of related opinions received by the board or committee if any opinion is tendered to the court under § 7.13(a).’
Comment e to § 7.13 explains the logic behind this rule:
‘The established law of the attorney-client privilege has long provided that invocation of the reliance-on-counsel defense waives the privilege… Thus, it would be unfair if the board or committee could rely on legal advice from its counsel that the actions was [sic] not meritorious as a ground for dismissing the action and then deny plaintiff access to the substance of that advice.’
The applicable case law also illustrates the longheld principle that derivative litigation should not be dismissed based on privileged documents. In Cuker, the Supreme Court held that the factors that courts should take into account when determining the sufficiency of a special litigation committee’s investigation in a derivative suit include: ‘whether the board or its special litigation committee was disinterested, whether it was assisted by counsel, whether it prepared a written report, whether it was independent, whether it conducted an investigation, and whether it rationally believed its decision was in the best interests of the corporation.’ Cuker, 692 A.2d at 1048. See also Joy v. North, 692 F.2d 880, 893 (2d Cir. 1982) (‘We simply do not understand the argument that derivative actions may be routinely dismissed on the basis of secret documents’).
It follows from these cases that in order to determine the independence and investigative adequacy of a special litigation committee such as the [Investigating Committee], [Plaintiffs’/Appellees’] counsel must be allowed to access documents to which the committee itself had access. Here, denying Plaintiffs’[/Appellees’] counsel access to pre-existing materials provided to the [Investigating Committee] for the purpose of producing the [Investigating Committee] report or to the report itself would create the exact problem that the Cuker and Joy courts sought to avoid: potentially dismissing a derivative action on the basis of secret documents.
Id. at 6-7.
Additionally, the trial court found the fiduciary duty and common interest exceptions to the attorney-client privilege and work product protection applied and authorized Plaintiffs to speak with Anne Nelson, the former General Counsel of one of the nonprofit corporations. The trial court reasoned that because Plaintiffs were sitting members of the Boards of Trustees while Ms. Nelson was counsel, Plaintiffs shared a common interest with Ms. Nelson that negated the attorney-client privilege; therefore, Ms. Nelson could discuss her legal advice to, and communications with, the Investigating Committee.
Defendants’ Appeal, Plaintiffs Response
Defendants appealed as of right under the collateral order doctrine, presenting the following issues for consideration by the Commonwealth Court:
(1) Whether the attorney-client or work product privileges may be asserted as to communications during the time period when the individual Plaintiffs were still members of the Boards of the nonprofit corporations;
(2) Whether the privileges may be asserted as to communications between Defendants and counsel for the Investigating Committee;
(3) Whether the common interest exception and the fiduciary duty exception apply to this case.
(4) Whether the privileges may be asserted in derivative litigation brought by former Board members; and
(5) Whether Plaintiffs have a right to interview Anne Nelson, the former General Counsel of one of the nonprofit corporations, regarding her communications with the Investigating Committee.
Defendants argued that the trial court misinterpreted the ALI principles adopted by the Pennsylvania Supreme Court in Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997) to require disclosure of privileged material based on an exception to attorney-client privilege in derivative actions as provided in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert. denied, 401 U.S. 974 (1971), which Defendants argued is inconsistent with Pennsylvania Supreme Court precedent and in conflict with the Pennsylvania statute codifying the attorney-client privilege. Rather, Defendants argued, the ALI principles merely provide that plaintiffs should be provided copies of what is submitted to the court. Defendants further argued that even if the Garner-exception is the law of Pennsylvania, such a privilege is not applicable to derivative litigation that arises out of disputes between former Board members and current Board members with no corresponding fiduciary relationship.
In response, Plaintiffs argued “that because the members of the Investigating Committee had an interest in perpetuating their continued service on the Boards of the nonprofit corporations, their recommendations should be challenged by a review of all the materials ‘that were supposedly considered by that [C]ommittee.’” Slip Op., at 11. In addition to the Garner-exception, Plaintiffs argued that the fiduciary and common interest exceptions applied to Defendants claims of privilege when the corporation received and/or paid for the advice in question which was given while the Plaintiffs were still members of the Board.
Commonwealth Court Decision
The Commonwealth Court first addressed the issue of whether the Garner-exception to attorney-client privilege is the law of Pennsylvania, beginning with an analysis of comment e to Section 7.13. The court noted comment e extensively discusses the Garner line of cases and restates a non-exclusive list of the considerations for a trial court before applying the Garner potential exception to the privilege in a derivative action. Furthermore, comment e specifically provides: “Garner’s good faith exception to the privilege in a derivative action ‘has become accepted doctrine.’” Id. at 21. As further support, the court noted Section 85 of the Restatement (Third) essentially adopted the reasoning and procedure of the Garner line of cases. Finally, the court noted that the Pennsylvania Supreme Court in Cuker sought to provide broad, specific guidance on managing derivative litigation, “and the ALI Principles provided that guidance,” including the ALI-recognized Garner-exception as the law of Pennsylvania. Id. at 24.
The Commonwealth Court moved on to reject Defendants’ argument that the Garner-exception did not apply because Plaintiffs are no longer members of the Boards of the nonprofit corporations, reasoning:
If Plaintiffs/Appellees are no longer members of the Boards (an as-yet undecided fact that goes to the underlying merits) it was not because of any voluntary action on their part [and] some of the legal advice they wish to discover was allegedly given while they were unquestionably members of the Boards. See In re Int’l Sys. & Controls Corp. Sec. Litig., 693 F.2d 1235, 1239 n.3 (5th Cir. 1982) (allowing former shareholders to seek application of potential Garner exception).
Id. at 26.
Having established that the Garner-exception may apply to the privileged material in question, the court nonetheless vacated the trial court’s discovery order due to the trial court failure to undertake the “good cause” inquiry required by Garner and subsequent cases “which would include consideration of the non-exclusive factors discussed in Garner and cases following it, largely focusing on communications that were roughly contemporaneous with the events giving rise to the litigation.” Id. at 28.
Having set forth the applicability and scope of the Garner exception, the Commonwealth Court summarily rejected the trial court’s application of the fiduciary duty exception, holding that the Garner exception captured the relationship among the parties in this derivative action when a trust or beneficiaries are not involved better than the fiduciary duty exception.
Lastly, the Commonwealth Court addressed the issue of the applicability of the common interest exception. First, the court noted that concept of “common interest” could be problematic under the facts:
it is very possible, perhaps likely, that sometime between 2009 and February 2013, any legal interests previously shared between the individual Plaintiffs/Appellees and the individual Defendants/Appellants had diverged too much to be viewed as “common.” Assuming for this point only that Plaintiffs/Appellees and Defendants/Appellants were co-clients, between themselves and with the corporations, a finding of de facto lack of common interest would obscure the legal basis for compelling disclosure of communications to and from a corporate attorney.
Id. at 36.
Additionally, the court found difficulty in identifying the co-clients of the corporations to support the application of a common interest exception in this case. Noting the Garner court faced the same conceptual problems, the Commonwealth Court found Garner’s “more targeted exception to the attorney-client privilege in cases of derivative litigation” was more appropriate here. Id. at 37 (citing Garner, 430 F.2d at 1103-1104).
The Pennsylvania Supreme Court granted allocatur on the following issues, as stated by the Parties:
Petitioners’ Issues at 199 WAL 2017:
(1) Whether, in the context of derivative litigation, the Commonwealth of Pennsylvania will adopt the qualified attorney-client privilege, the scope of which is subjectively determined, as articulated in the often criticized decision of Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert. denied, 401 U.S. 974 (1971), and as articulated in the Restatement (Third) of the Law Governing Lawyers, § 85, where the ambiguous and uncertain scope of such a privilege is inconsistent with Pennsylvania Supreme Court precedent and in conflict with the Pennsylvania statute codifying the attorney-client privilege. [199 WAL 2017 and 219 WAL 2017]
(2) Whether, even if this Court adopts Garner’s qualified attorney-client privilege as the law of Pennsylvania, such a privilege is applicable to derivative litigation that arises out of disputes between former Board members and current Board members with no corresponding fiduciary relationship.
Respondents’ Issues at 219 WAL 2017:
(1) Whether the fiduciary duty exception to the attorney-client privilege is applicable to discovery sought by either the derivative not-for-profit corporate Plaintiff or the purportedly removed Trustees of the not-for-profit corporation who are bringing the derivative action, when the corporation received and/or paid for the advice in question which was given regarding and at the time of events occurring while the individual Plaintiffs were unquestionably Trustees.
(2) Whether the common interest or co-client exception to the attorney-client privilege is applicable to discovery sought by either the derivative not-for profit corporate Plaintiff or the purportedly improperly removed Trustees of the not-for-profit corporation who are bringing the derivative action, when the corporation received and/or paid for the advice in question, which was given regarding and at the time of events occurring while the individual Plaintiffs were unquestionably Trustees.