Court Again Applies Garner in a Section 220 Records Request but Exact Reach of Section Remains Unclear

As discussed in an earlier post, the Delaware Court of Chancery in Indiana Electrical Workers Pension Trust Fund IBEW v. Wal-Mart Stores Inc. found that the Garner exception to attorney-client privilege applies to Section 220 records requests, meaning that attorney-client privilege will not necessarily prevent an order being granted requiring their production. In In Re Lululemon Athletica Inc. 220 Litigation, confirmed this approach but left the exact reach of the section unclear.

At issue were two sets of emails—some that Lululemon claimed were subject to attorney-client privilege and therefore need not be produced in response to a Section 220 request and somecontained in non-employee personal emails that Lululemon claimed were outside the reach of Section 220. 

With regard to the emails asserted to be privileged, the Court confirmed the finding of Indiana Electrical Workers Pension Trust Fund IBEW v. Wal-Mart Stores Inc. stating that those emails were

properly designated as privileged, and that privilege was not waived as to either  [but that] Plaintiffs have shown good cause to access those documents under the fiduciary exception as articulated in Garner and Wal-Mart.

Underlying the fiduciary exception is the importance of ―balanc[ing] the legitimate assertion of the attorney-client privilege by corporate fiduciaries in furtherance of full and frank communications with counsel on the one hand, with the right of a [stockholder] to discover what advice was given . . . when a breach of duty by those same fiduciaries is alleged.

Garner itself enumerated a number of factors that illustrate ―good cause to set aside privilege. The Supreme Court in Wal-Mart adopted and applied that analysis, identifying the following as relevant factors:

 [1] the number of shareholders and the percentage of stock they represent; [2] the bona fides of the shareholders; [3] the nature of the shareholders‘ claim and whether it is obviously colorable; [4] the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; [5] whether, if the shareholders‘ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; [6]whether the communication is of advice concerning the litigation itself; [7] the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and [8] the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.

Thus, it is clear that under Delaware law, if plaintiffs satisfy the requirements of showing good cause, attorney-client privilege will not block the production of documents.

With regard to the emails of the non-employee directors, the Court was less definitive.  It left the door open for both plaintiffs and defendants to argue over whether such documents should be subject to a Section 220 request, noting that a court would have to conduct a careful review of the circumstances of the case, and in particular the facts relating to whether the sought-after documents were within the corporation’s possession, custody, or control.

It did not engage in that analysis in this case (and hence did not resolve whether such documents could be reached) because it found that non-employee emails were not necessary for plaintiff’s proper purpose (because plaintiffs could obtain the same information from other emails subject to a production order.)  Importantly however, the Court did not say that such emails could never be subject to a Section 220 production order and hence one can anticipate a future claim of this sort.  In fact, the Court was careful to note that the issue remains open

In Wal-Mart, this Court ordered that certain officers and directors who were designated as custodians in the Section 220 discovery had to search their personal devices and computers for responsive documents. (Defendant shall: . . . Collect and review data from the personal computers and devices of all Custodians.) Then -Chancellor Strine‘s ruling in Wal-Mart I did not announce a per se rule that directors‘ personal emails always are subject to discovery under Section 220; rather, it left open the possibility that, depending on Wal-Mart‘s policy for use of company information and documents on non-company devices, information residing in the directors‘ personal computers may or may not have to be produced.

Furthermore, while the Delaware Supreme Court affirmed then-Chancellor Strine‘s judgment en toto, the specific issue of whether Section 220 reaches directors‘ personal documents was not briefed or argued by the parties on appeal.

Given the importance of Section 220 actions, any open issue is bound to be the subject of future claims.  So where are we now?  We know that attorney-client privilege will not necessarily block the production of some documents, but are left unsure of whether non-employee documents can be obtained or not.  I trust we will see the issue played out at some point in the future.

Celia Taylor