Delaware Supreme Court recognizes “good cause” exception to attorney-client privilege in derivative litigation.

In a derivative action a shareholder of a corporation or member of an LLC or other entity beings suit claiming that the entity has failed to assert rights belonging to the entity to the detriment of its shareholders or members.  Recovery in a derivative action inures to the benefit of the entity.  See FRCP 23.1, SCRCP 23(b)(1).

The plaintiff in a derivative action will often seek communications between the entity and its counsel related to the subject of the litigation.  Are such materials protected by the attorney-client privilege?  More than 40 years ago in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), the Fifth Circuit recognized a “good cause” exception to the attorney-client privilege in derivative actions.  Recently, the Delaware Court Supreme Court, whose decisions are particularly influential in business litigation, adopted the Garner decision and allowed the plaintiff stockholders to inspect documents concerning a corporation’s internal investigation even if those documents would otherwise be subject to the attorney-client privilege.  See Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014).

Several caveats are worth noting. First, the decision does not abrogate the privilege in derivative actions; the plaintiff must establish “good cause” to obtain privileged information, which depends on analysis of a number of factors.  The Garner decision lays out a number of these factors.  Second, Garner  and  Wal-Mart do not apply to work product, rather than privileged materials, although an established exception for work product is substantial need for the materials coupled with the inability to obtain such materials without undue hardship. Third, Garner and presumably Wal-Mart could be extended beyond corporations to analogous situations, such as “derivative” claims by beneficiaries on behalf of a trust. Finally, Garner was and remains a controversial decision not adopted in all jurisdictions.  Wal-Mart may lead to greater adoption of this exception to the attorney-client privilege, but that remains to be seen.

Read Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014) at http://courts.delaware.gov/opinions/download.aspx?ID=209130

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