In the corporate context, the attorney-client privilege’s application is rarely straightforward. When tested in court, the privilege’s very existence often turns on crucial questions that may not have been considered at the time of the communication. Was the advice primarily business or legal? Which employees qualify as “clients”? Was the advice rendered to assist in the commission of a transaction that might later be viewed as fraudulent?
Now let’s add another question: is management seeking legal advice to advance the best interests of the company? If not, an investor may be able to pierce the attorney-client privilege in a litigation against the company. This exception to the privilege is known as the “fiduciary exception,” but is also referred to as the “good cause” exception and, in the corporate context, as the “Garner Doctrine.”
Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert. denied, 401 U.S. 974 (1971) extended the “fiduciary exception” to the attorney-client privilege from the traditional trustee context to corporations. Recently, New York’s influential intermediate appellate court, the Appellate Division, First Department, adopted Garner’s formulation of the factors for the “fiduciary exception” in NAMA Holdings, LLC v. Greenberg Traurig LLP, __ A.D.3d __, 2015 N.Y. Slip. Op. 07346 (N.Y. App. Div. Oct. 8, 2015). Corporate lawyers should take note.
The “fiduciary exception” comes into play in any litigation by investors against a company (or its agents) where the claim is that management had acted in a manner inimical to investor interests, e.g., for breach of fiduciary duty or similar wrongdoing. The doctrine has been applied to derivative actions, class actions, and individual direct claims, as well as to other types of fiduciary relationships, such as those between union negotiators and union member and between controlling shareholders and creditors, where the company is insolvent.
The “fiduciary exception” involves a balancing of important interests. See Sandberg v. Virginia Bankshares, Inc., 979 F.2d 332, 351 (4th Cir. 1992). On the one hand, society has an interest in having company managers and directors consult candidly with lawyers to obtain legal advice for the company, which requires an assurance of confidentiality. Id. at 351, 352. On the other hand, management is required to “exercise the privilege in a manner consistent with their fiduciary duty to act in the best interests of the corporation and not of themselves as individuals.” Id. As such, where the corporation’s officers or directors have acted inimically to shareholder interests, the shareholders may show “good cause” why the corporation or its officers should not be permitted to invoke the attorney-client privilege. Garner, 430 F.2d at 1103-04.
The “fiduciary exception” does not automatically apply to every dispute between investors and the companies they own. Indeed, once the privilege is established by the company, it is presumptively enforceable, unless the party seeking disclosure (i.e., the investors) can show “good cause”; in other words, the burden is on the investors to show that the “fiduciary exception” applies. Garner identifies a list of non-exclusive factors that a court should consider in evaluating whether “good cause” exists.
It is easy to dismiss casually any privilege exception that implies immorality. Most executives would reject out of hand any suggestion that they would ever engage in activities that are contrary to the best interests of the company or in furtherance of a crime or fraud. And that may well be so. But it is also beside the point. Exceptions to the privilege are often decided before trial during discovery, and are thus resolved on plaintiff’s allegations in pleadings not proven facts.
The upshot is that Garner and NAMA serve as important reminders about the limits of the protections of the attorney-client privilege in the corporate context. The key points include:
- The attorney-client privilege is not absolute. It is an exception to the general principle that the public has the right to “every man’s evidence,” and it can be pierced or waived under numerous circumstances.
- The “client” of a company’s in-house and outside lawyers is the company, not the individual officers and directors.
- Officers and directors might take comfort in the fact that even though the privilege does not belong to them, they control the company that owns the privilege. Under the fiduciary exception, however, this protection is illusory; others may gain control on a showing of “good cause.” These “others” include shareholders, investors, and even creditors in the case of insolvency.
- A company’s attorney-client privilege as to communications with counsel by officers and directors extends only so far as they are acting in the interests of the company.