Delaware’s Adoption of Garner — and Practical Ways to Respond

The Garner Exception to the Attorney-Client Privilege

Over 40 years ago, the Fifth Circuit in Garner held that a stockholder, upon a showing of good cause, could overcome a corporation’s attorney-client privilege when suing the corporation for acting “inimically” to the stockholder’s interests.³ The plaintiffs in Garner had asserted class claims (under the Securities Act of 1933 and the Securities Exchange Act of 1934, among other statutes), all arising out of a corporation’s allegedly fraudulent public offering of stock; the corporation, in turn, had asserted derivative cross-claims against various of its directors, officers and control persons.

Discovery quickly focused on the corporation’s president, who at the time of the offering had served as its lawyer. The plaintiffs sought, and the defendants resisted, discovery aimed at the legal advice the then-lawyer had given the corporation about the securities offering. The district court held that the corporation could not invoke the attorney-client privilege. On an interlocutory appeal, the Fifth Circuit vacated the order and remanded, holding that while the corporation could invoke the privilege, the privilege was neither “inflexibly absolute” nor “totally unavailable.”⁴

The Garner court aimed to develop a rule between these two extreme positions, balancing the injury resulting from disclosure against the benefit gained in the “correct disposal of litigation.” Reasoning that corporate “management has duties which run to the benefit ultimately of the stockholders,” the court noted that corporate management, much like the trustee of a trust, often should act “wholly or partly in the interests of others,” namely, the shareholders.

Having so ruled, the Garner court remanded, providing a list of factors that should be considered in determining the presence or absence of good cause, including “the number of shareholders and the percentage of stock they represent ... the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources … whether the communication is of advice concerning the litigation itself … [and] the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.”

The court also commended the use of in-camera inspection, oral examination and protective orders, presumably to ensure that the wrong materials are not produced, and that the materials that are produced do not fall into the wrong hands.⁵

Often cited but less often followed, the Garner decision has met with a mixed response. At last check, it has been cited in 373 opinions, of which 41 disapprove it or limit its application.⁶ New York courts, for example, apply Garner in both derivative and nonderivative suits.⁷ By contrast, California courts “do not recognize Garner” and do not “permit shareholders to discover privileged communications upon a showing of good cause,”⁸ on the ground that they “are not free to create new privileges as a matter of judicial policy and must apply only those which have been created by statute.”⁹

Academic criticism of the result began even before the Fifth Circuit ruled¹⁰ and has continued to date.¹¹ As recently as February 2014, a law review article stated that “many commentators are highly critical of Garner, noting that the inconsistencies in applying the exception have often made it difficult for parties to discern whether or not the attorney- client privilege will attach to communications between corporate management and counsel.”¹²

Download: Delaware’s Adoption of Garner — and Practical Ways to Respond

1. ___ A.3d ___, 2014 WL 3638848 (Del. July 23, 2014). “Section 220 litigation” refers to litigation brought pursuant to Section 220 of the Delaware General Corporation Law, 8 Del. Code § 220, by a stockholder seeking to inspect a corporation’s books and records. Such actions often precede shareholder litigation
2. 430 F.2d 1093 (5th Cir. 1970)
3. Id. at 1100-04 (“[W]here the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance.”).
4. Id. at 1097.
5. Id. at 1097, 1101, 1104.
6. KeyCite, WestlawNext, last accessed Aug. 11, 2014.
7. Stenovich v. Wachtell Lipton Rosen & Katz, 195 Misc. 2d 99, 756 N.Y.S.2d 367 (N.Y. Sup. Ct. 2003); Hoopes v. Carota, 142 A.D.2d 906, 531 N.Y.S.2d 407 (1988), aff’d,, 74 N.Y.2d 716, 543 N.E.2d 73 (1989).
8. Swortwood v. Tenedora de Empresas SA de C.V., 13CV362-BTM (BLM), 2014 WL 895456 (S.D. Cal. Mar. 6, 2014).
9. Id.; Hoiles v. Superior Court, 157 Cal. App. 3d 1192, 1199, 204 Cal. Rptr. 111 (1984) (California does not afford an “extraordinary avenue … to petitioners to pierce the privilege in their capacity as shareholders.”).
10. The Attorney-Client Privilege in Shareholders’ Suits, 69 Colum. L. Rev. 309, 319 (1969).
11. Stephen A. Saltzburg, Corporate Attorney-Client Privilege in Shareholder Litigation and Similar Cases: Garner Revisited, 12 Hofstra L. Rev. 817, 828, 841-43 (1984); Robert R. Summerhays, The Problematic Expansion of the Garner v. Wolfinbarger Exception to the Corporate Attorney-Client Privilege, 31 Tulsa L.J. 275, 279 (1995); Is the Garner Qualification of the Corporate Attorney-Client Privilege Viable After Jaffee v. Redmond?, 55 Bus. Law. 243, 266 (1999); Craig C. Martin & Matthew H. Metcalf, The Fiduciary Exception to the Attorney-Client Privilege, 34 Tort & Ins. L.J. 827, 844, 846 (1999).
12. 12 Benjamin Cooper, An Uncertain Privilege: Reexamining Garner v. Wolfinbarger and Its Effect on Attorney-Client Privilege, 35 Cardozo L. Rev. 1217, 1220 (2014).