PITTSBURGH HISTORY AND LANDMARKS FOUNDATION, A PENNSYLVANIA NON-PROFIT CORPORATION; LANDMARKS FINANCIAL CORPORATION, A PENNSYLVANIA NON-PROFIT CORPORATION; HENRY P. HOFFSTOT, JR.; DAVID E. BARENSFELD; PETER H. STEPHAICH; PATRICK R. WALLACE; ALEXANDER SPEYER; AND HENRY P. HOFFSTOT, III v. ARTHUR P. ZIEGLER, JR.; MARK S. BIBRO; JACK R. NORRIS; PITTSBURGH HISTORY AND LANDMARKS FOUNDATION, A PENNSYLVANIA NON-PROFIT CORPORATION; AND LANDMARKS FINANCIAL CORPORATION, A PENNSYLVANIA NON-PROFIT CORPORATION
No. 53 WAP 2017
IN THE SUPREME COURT OF PENNSYLVANIA WESTERN DISTRICT
JANUARY 23, 2019
SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ. ARGUED: April 11, 2018
PITTSBURGH HISTORY AND LANDMARKS FOUNDATION, A PENNSYLVANIA NON-PROFIT CORPORATION; LANDMARKS FINANCIAL CORPORATION, A PENNSYLVANIA NON-PROFIT CORPORATION; HENRY P. HOFFSTOT, JR.; DAVID E. BARENSFELD; PETER H. STEPHAICH; PATRICK R. WALLACE; ALEXANDER SPEYER; AND HENRY P. HOFFSTOT, III : No. 53 WAP 2017 : Appeal from the Order of the Commonwealth Court entered April 21, 2017 at No. 113 CD 2016, vacating the Order of the Court of Common Pleas of Allegheny County entered September 21, 2015 at No. GD 13-23355, and remanding.
v.
ARTHUR P. ZIEGLER, JR.; MARK S. BIBRO; JACK R. NORRIS; PITTSBURGH HISTORY AND LANDMARKS FOUNDATION, A PENNSYLVANIA NON-PROFIT CORPORATION; AND LANDMARKS FINANCIAL CORPORATION, A PENNSYLVANIA NON-PROFIT CORPORATION
APPEAL OF: ARTHUR P. ZIEGLER JR., MARK S. BIBRO, JACK R. NORRIS, PITTSBURGH HISTORY AND LANDMARKS FOUNDATION AND LANDMARKS FINANCIAL CORPORATION
PITTSBURGH HISTORY AND LANDMARKS FOUNDATION, A PENNSYLVANIA NON-PROFIT CORPORATION; LANDMARKS FINANCIAL CORPORATION, A PENNSYLVANIA NON-PROFIT CORPORATION; HENRY P. HOFFSTOT, JR.; DAVID E. BARENSFELD; PETER H. STEPHAICH; PATRICK R. WALLACE; ALEXANDER SPEYER; AND HENRY P. HOFFSTOT, III : No. 54 WAP 2017 : Appeal from the Order of the Commonwealth Court entered April 21, 2017 at No. 113 CD 2016, vacating the Order of the Court of
v.
ARTHUR P. ZIEGLER, JR.; MARK S. BIBRO; JACK R. NORRIS; PITTSBURGH HISTORY AND LANDMARKS FOUNDATION, A PENNSYLVANIA NON-PROFIT CORPORATION; AND LANDMARKS FINANCIAL CORPORATION, A PENNSYLVANIA NON-PROFIT CORPORATION
APPEAL OF: HENRY P. HOFFSTOT, JR.; DAVID E. BARENSFELD; PETER H. STEPHAICH; PATRICK R. WALLACE; ALEXANDER SPEYER; AND HENRY P. HOFFSTOT, III
OPINION
JUSTICE BAER DECIDED: JANUARY 23, 2019
Before this Court are questions involving the applicability of the attorney-client privilege in a corporate derivative action lawsuit brought by former board members of two nonprofit corporations against current board members. As explained more fully herein, we respectfully reject, for purposes of proceedings related to a motion to dismiss derivative litigation, the Commonwealth Court‘s adoption of a qualified attorney-client privilege as set forth in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), which we view as inconsistent with our prior caselaw emphasizing predictability in the application of the attorney-client privilege. We, however, affirm the Commonwealth Court‘s decision
I. Introduction
While a detailed discussion of the law is set forth infra, we initially provide an introduction to the basic legal concepts applicable to the subject dispute. As noted, this case involves questions of how the attorney-client privilege should apply in the context of derivative litigation. Generally, in derivative litigation, dissenting shareholders (in the case of a for-profit company) or dissenting members (in the case of a nonprofit corporation) attempt to assert claims as derivative plaintiffs on behalf of the corporation often alleging misdeeds by its current management. In such cases, both the derivative plaintiffs and current management claim to be acting in the interest of the corporation, which as an inanimate entity cannot act on its own. Taken to the extremes, courts are therefore faced with balancing the need to protect current management from baseless harassing litigation brought by disgruntled derivative plaintiffs with the need to allow derivative plaintiffs acting in good faith an opportunity to litigate legitimate derivative actions to protect the corporation from nefarious acts of current management.
In our decision in Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997), see infra at 29, we implemented a paradigm for addressing derivative litigation by adopting Sections 7.02-7.10 and 7.13 of the American Law Institute, Principles of Corporate Governance: Analysis and Recommendations (1994) (“ALI Principles“). Cuker clarified that derivative plaintiffs, who believe that current management are acting against the interests of the corporation, should present the corporation with a “demand” that it pursue litigation or other action for the benefit of the corporation, often against current management. In
The question presented in the case at bar concerns to what extent current management, after filing a motion to dismiss based upon the committee‘s recommendation, must provide derivative plaintiffs with access to materials that would otherwise not be subject to discovery pursuant to the attorney-client privilege. At base, the issue is who should be deemed to hold the attorney-client privilege for the corporation and what is the extent of the privilege, when arguably both the derivative plaintiffs and the current management claim to be acting on behalf of the corporation. Current management would argue that they hold an absolute privilege, subject only to limited disclosure as specifically required by our adoption of the ALI Principles, as will be discussed herein. Derivative plaintiffs would contend that the attorney-client privilege should not apply to them based upon the idea that they are bringing the claim for the
In Cuker, we adopted in bulk several sections of the ALI Principles including Section 7.13(e), which specifically addresses attorney-client privilege as it relates to a motion to dismiss derivative litigation. However, we did not discuss the provision in detail nor did we address the Comments to Section 7.13(e), which invoke the seminal decision of Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). The court in Garner essentially provided a middle ground for applying the attorney-client privilege in which current management could assert the privilege against the derivative plaintiffs, but the privilege would be subject to the right of the derivative plaintiffs to show “good cause” why the privilege should not apply. The Court of Appeals then set forth a non-exclusive list of nine factors for courts to consider when determining whether the plaintiffs demonstrated good cause. The Garner good cause analysis has been characterized as creating a “qualitied
II. Factual and Procedural Background
The nonprofit corporations involved in this matter are the Pittsburgh History and Landmarks Foundation (“the Foundation“) and its subsidiary, the Landmarks Financial Corporation (“the Corporation“), which manages the Foundation‘s endowment of approximately $100 million. The plaintiffs are five former members of the Boards of Trustees (“Boards“) of the Foundation and the Corporation who allege that they were improperly and ineffectively removed from the Boards in an attempt to thwart their oversight of the Foundation‘s president, whom they believed was engaging in actions that were improper and not in accord with the Foundation‘s mission (hereinafter “Derivative
The Derivative Plaintiffs’ claims in the underlying derivative litigation stem from Current Management‘s actions in 2012-2013. Reduced to its essence, in June 2012, the Foundation‘s Board created a Governance Task Force to review various practices of the Foundation. In addition to a variety of other improvements, the Task Force recommended that both Boards be reduced substantially in number. The Foundation Board approved this recommendation and removed all trustees then serving from both Boards; subsequently, significantly smaller boards were elected (hereinafter we will refer to the old and new boards of both entities as the “Original Board(s)” and the “Reconstituted Board(s),” respectively).5 As a result of these consolidations, Derivative Plaintiffs lost their seats on the Boards.
Derivative Plaintiffs view the above actions as an improper scheme by the Foundation President to avoid supervision by the Original Board members, especially in regard to investments favored by the President. They contend that the absence of supervision could harm the Foundation and the Corporation. Moreover, they maintain that the removal of the original trustees and reconstitution of the smaller boards with new trustees was improper under the entities’ bylaws; accordingly, they refer to their removal as “purported” and contend that the Original Board remains the true board. Conversely,
In accord with standard procedures for bringing a derivative action adopted by this Court in Cuker, Derivative Plaintiffs filed a written demand on the Foundation and the Corporation in October 2013 to bring an action against Current Management, which attached a draft complaint setting forth derivative claims against Current Management. As is appropriate when faced with a demand, the Reconstituted Boards of the Foundation and the Corporation met separately and agreed to form a joint Independent Investigation Committee (“Committee” or “IIC“), in November 2013, to investigate the allegations made in Derivative Plaintiffs’ demand. The Committee was charged with determining whether it was in the Foundation‘s and the Corporation‘s best interest to engage in litigation against Current Management or to take other action.
After Current Management sent Derivative Plaintiffs a letter indicating that the Committee would be composed of Reconstituted Board members rather than Original Board members, Derivative Plaintiffs filed their complaint against Current Management in the trial court in December 2013 without waiting for the Committee to complete its investigation of their demand. This action was in accord with their view that the Reconstituted Board was invalid and therefore could not appoint its own members to act as an independent reviewing entity, essentially evaluating the propriety of its own existence.
Counts I and II of the complaint presented derivative claims of breach of fiduciary duty brought on behalf of the Foundation and the Corporation, respectively, asserting that Current Management‘s actions in removing the Original Board members were contrary to the bylaws and the interests of the Foundation and Corporation and, alternatively, that the actions were intended to solidify the President‘s power and silence his critics, which
In January 2014, Derivative Plaintiffs served on Current Management a First Set of Requests for Production. This set of requests resulted in extensive discussions between counsel in regard to the production of electronically stored information, including a searchable database to address the potentially immense production and the applicability of the attorney-client privilege to the requested production. While Current Management produced a large volume of information, the information they withheld serves as the basis for the current dispute.
While the litigation continued on Derivative Plaintiffs’ claims, the Committee issued its report to the Foundation and the Corporation in August 2014 with an addendum in March 2015. The Committee concluded that reconstitution of the Boards was proper and consistent with the business judgment rule.7 Accordingly, the Committee concluded that
Subsequently, in April 2015, Current Management filed a motion to dismiss Counts I and II of the Derivative Plaintiffs’ derivative action. They observed that the motion to dismiss was filed in compliance with the procedure for addressing derivative claims adopted by this Court in Cuker. Current Management emphasized that the opinion in Cuker instructed trial courts to engage in limited review of board decisions to terminate derivative litigation under specified criteria relating to the independence and legitimacy of an investigating committee, see infra at 29. Current Management asserted that those standards had been satisfied in this case by the Committee‘s extensive and independent investigation and report. Therefore, they maintained that both Boards had properly exercised their business judgment in accepting the Committee‘s recommendation to terminate the litigation demanded by Derivative Plaintiffs. Accordingly, Current Management argued that they had satisfied the requirements of Cuker and that Counts I and II of Derivative Plaintiffs’ litigation should be dismissed. This motion to dismiss is apparently still pending in the trial court.
While Current Management‘s motion to dismiss was pending in the trial court, Derivative Plaintiffs filed a motion to compel in June 2015 that is directly at issue in the current appeal. Derivative Plaintiffs sought to compel Current Management to produce the following items which Current Management had withheld claiming attorney-client privilege:
- all materials involving [Foundation and Corporation attorneys] whose purported status as counsel has been used as a basis to withhold materials responsive to Derivative Plaintiffs’ First Set of Requests for Production,
all materials provided to or generated by the Independent Investigation Committee including but not limited [to] all legal opinions given to the IIC relating to the subject of the IIC Report, and - to complete their document production responsive to Derivative Plaintiffs’ First Set of Requests for Production.
Pls.’ Br. in Supp. of Mot. to Compel at 4. In addition, Derivative Plaintiffs sought permission to speak with Attorney Anne Nelson, who was General Counsel to the Foundation and Corporation between 2007 and December 2012. Derivative Plaintiffs wanted to discuss with Attorney Nelson the substance of her potential testimony in the case.8
Derivative Plaintiffs argued that Current Management should provide them access to all the documents which Current Management provided to the Committee to develop the report, given that Current Management is relying upon the Committee‘s report to argue for the dismissal of Derivative Plaintiffs’ claims. These documents would include those allegedly related to the dissolution and reconstitution of the Boards as well as the President‘s alleged attempt to suppress the Derivative Plaintiffs’ criticism of his actions.9
Derivative Plaintiffs asserted several bases for the inapplicability of the attorney-client privilege that they continue to advance before this Court. They interpreted ALI
In response to the motion to compel, Current Management framed Derivative Plaintiffs’ argument as essentially claiming that the attorney-client privilege did not apply in derivative litigation. They argued that Derivative Plaintiffs failed to provide any caselaw for their broad pronouncement. Current Management instead averred that this Court already provided a framework for addressing the attorney-client privilege in derivative
III. Decisions of the Trial Court and Commonwealth Court
In September 2015, the trial court granted Derivative Plaintiffs’ motion to compel in substantial part by ordering Current Management to provide “all materials provided to or generated by the [Committee], including all related legal opinions and communications” and allowed Derivative Plaintiffs to “discuss with Anne Nelson the legal advice that she provided to the [Committee] and communications with the [Committee], as well as any non-privileged subjects.” Tr. Ct. Order dated Sept. 18, 2015.
After Current Management appealed the order, the trial court provided an opinion in support of its decision. In short, the court adopted Derivative Plaintiffs’ argument that the attorney-client privilege does not apply in derivative actions. Tr. Ct. Op. at 2-3. The court opined “that in order to determine the independence and investigative adequacy of a special litigation committee such as the IIC, Plaintiff[s‘] counsel must be allowed to access documents to which the committee itself had access.” Id. at 11. The court also favored Derivative Plaintiffs’ broad interpretation of Section 7.13(e), opining that it did not
The trial court additionally addressed Current Management‘s arguments relating to the fiduciary and the common interest exceptions. The trial court summarized the fiduciary exception as providing that a trustee of a trust cannot invoke the privilege against the trust‘s beneficiary and instead has a duty “to furnish the beneficiaries with full and complete information regarding the trust.” Id. at 13 (citing Follansbee v. Gerlach, 56 Pa. D. & C. 4th 483, 486-87 (Allegheny C.C.P. 2002)). The trial court opined that the fiduciary exception applied here “because this is a derivative action involving a trust.” Id. at 12. The trial court then concluded that the provision applied even though the Derivative Plaintiffs were not beneficiaries of a trust because they were acting for the benefit of the Foundation and the Corporation, which held the attorney-client privilege.
The trial court also determined that the “common interest exception applies because Plaintiffs were members of [the Foundation and/or Corporation] at the time the materials in question were generated.” Id. It viewed the exception as providing “that when parties with a common interest have counsel and later become adverse, neither party can assert the attorney-client or work product privileges as to materials during the period of common interest.” Id. at 14.
Finally, the trial court granted Derivative Plaintiffs’ request for permission to speak to Attorney Nelson, the Foundation‘s former General Counsel, prior to her deposition. It observed that Attorney Nelson only served as General Counsel while Derivative Plaintiffs were still members of the Boards. Therefore, under the common interest analysis set
In April 2017, a unanimous, en banc panel of the Commonwealth Court vacated the trial court‘s order and remanded the matter for further proceedings.12 In re: Pittsburgh History and Landmarks Foundation, 161 A.3d 394 (Pa. Cmwlth. 2017). As explained below, the court concluded that the trial court erred in ordering Defendants to produce to Plaintiffs all the documents that had been provided to the Committee based upon the trial court‘s erroneous conclusion that the fiduciary and common interest exceptions applied and instead remanded for consideration of whether more limited discovery would be justified under the Garner good cause analysis.
To analyze the question, the Commonwealth Court turned to the ALI Principles adopted in Cuker, recognizing that they provide a paradigm for derivative litigation. It explained that Section 7.13(e) specifically addressed the attorney-client privilege. The Commonwealth Court observed that the Comment to Section 7.13(e), as well as the Reporter‘s Note, referenced the nine-factor Garner “good cause” analysis as an “accepted doctrine” applicable to attorney-client privilege in derivative litigation. Id. at
The Commonwealth Court additionally considered the applicability of Section 85 of the Restatement (Third) of the Law Governing Lawyers, entitled “Communications Involving a Fiduciary Within an Organization.”13 The court recognized that this Court has often relied upon the Restatement (Third) of the Law Governing Lawyers when addressing the parameters of the attorney-client privilege. Id. at 407 (citing Gillard v. AIG Ins. Co., 15 A.3d 44 (Pa. 2011)). It opined that, like the ALI Principles, Section 85
The Commonwealth Court then interpreted Section 7.13 of the ALI Principles and Section 85 of the Restatement (Third) of the Law Governing Lawyers as allowing courts to withhold the “the attorney-client privilege for a communication that occurred prior to the assertion of charges [by derivative plaintiffs] and relating directly to those charges” and, importantly, viewed it to be “in addition to the limited waiver of the attorney-client privilege to legal opinions based on the submission to the trial court of an investigating committee‘s report in support of a motion to dismiss.” Id. at 408 (emphasis removed).
Accordingly, the Commonwealth Court vacated the trial court‘s order and remanded for that court to engage in a Garner good cause analysis to determine whether the attorney-client privilege should be withheld in this case. The court seemed to contemplate that discovery could be allowed regarding several categories of information sought by the Derivative Plaintiffs.14 The court opined, however, that the discovery allowed under the Garner good cause analysis would be more limited than the discovery previously ordered by the trial court, specifically emphasizing that it would not provide for discovery related to counsels’ advice regarding the pending litigation. Id. at 410.
The court also interpreted a key phrase of Section 7.13(e), which provides for discovery of “related legal opinions,” as only requiring the current management in derivative litigation to produce to derivative plaintiffs’ formal legal opinions given to the Independent Committee “‘pertaining to the same general subject matter’ as the [Independent Committee‘s] counsel‘s formal opinion.” Id. at 411 (quoting ALI Principles
The Commonwealth Court next addressed the question of whether Derivative Plaintiffs should be permitted to talk with Attorney Nelson, the former General Counsel. The court remanded the issue to the trial court to apply the Garner good cause analysis to determine whether to withhold the attorney-client privilege but also cautioned that, even if the trial court deemed it permissible, any discussion with Attorney Nelson should be limited to “communications that were roughly contemporaneous with the events giving rise to the litigation,” which would relate to the time period she served as General Counsel between 2009-2012. Id.
The Commonwealth Court also briefly addressed the Derivative Plaintiffs’ assertion of the fiduciary exception to the attorney-client privilege. The court faulted the trial court for failing to recognize that the fiduciary exception as expressed in Section 84 of the Restatement (Third) of the Law Governing Lawyers requires the existence of a
Finally, the Commonwealth Court considered Derivative Plaintiffs’ assertion of the co-client exception to the attorney-client privilege. The court opined that the Plaintiffs’ claim was based upon an exception provided in Section 75 of the Restatement (Third) of the Law Governing Lawyers, addressing the situation where clients are “jointly represented by the same lawyer in a matter.” Id. at 412 (quoting Restatement (Third) of the Law Governing Lawyers § 75 (2000)). The Commonwealth Court summarized this section as providing “that the privilege cannot be raised by one co-client against another in subsequent adverse proceedings between them.” Id. at 413 (citing In re Teleglobe Communications Corp., 493 F.3d 345 (3d Cir. 2007)).
The Commonwealth Court concluded that the application of the co-client exception was problematic in the case at bar. Based upon the pleadings in the current case, the Commonwealth Court opined that any co-client relationship between Derivative Plaintiffs and Current Management, as jointly represented by Attorney Nelson, likely dissolved sometime between 2009 and 2012, when the interests of the parties diverged such that there was no “common” interest. Observing that all parties agreed that the Foundation was the true client of Attorney Nelson, the court further noted that precedent addressing legal representation of corporations recognized that “corporations must act through persons” and that “control of the privilege passes with control of the corporation.” Id. (citing In re Teleglobe Communications Corp., 493 F.3d at 362).
As applied to this case, the court concluded that, because Current Management had control of the Foundation and the Corporation, they also held the privilege for the
IV. Parties’ Arguments
The parties filed cross-petitions for allowance of appeal raising four issues, which this Court granted. Current Management challenged the Commonwealth Court‘s adoption of the “good cause” analysis as set forth in Garner and Section 85 of the Restatement.15 Derivative Plaintiffs cross-appealed challenging the Commonwealth Court‘s refusal to apply the fiduciary exception and the co-client exception as basis for deeming the attorney-client privilege inapplicable to the documents they seek.16
A. Current Management‘s Appeal - Applicability of Good Cause Analysis
Current Management assert that the good cause analysis as described in Garner and Section 85 of the Restatement is contrary to the Pennsylvania statute codifying the attorney-client privilege,
Current Management maintain that the Garner good cause analysis is fundamentally different from any exceptions to the attorney-client privilege that have been countenanced under Pennsylvania jurisprudence. With other exceptions, Current 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 Derivative Plaintiffs were unquestionably Trustees.
b. 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 Derivative Plaintiffs were unquestionably Trustees.
For similar reasons, Current Management argue for the rejection of Section 85 of the Restatement (Third) of the Law Governing Lawyers. They view Section 85 as providing even less predictability than the Garner good cause analysis because, rather than utilizing Garner‘s nine factors, the Restatement provides for a court to consider whether the “need of the requesting party . . . is sufficiently compelling and the threat to confidentiality sufficiently confined to justify setting the privilege aside.” Defs.’ Br. at 33 (quoting Restatement (Third) of the Law Governing Lawyers § 85), Defs.’ Second Br. at 27.
Current Management next explain that the adoption of Section 7.13 of the ALI Principles by this Court in Cuker does not equate to an adoption of the Garner good cause analysis. Instead, they contend that the adoption of Section 7.13 can and should be interpreted to conform to Pennsylvania‘s attorney-client privilege law. They highlight, as did the Commonwealth Court, that Section 7.13(e) provides for the limited production of “related legal opinions” to derivative plaintiffs if the corporation‘s current management
In contrast, Derivative Plaintiffs urge this Court to follow the lead of our sister courts that have adopted the Garner good cause analysis. They propose that the Garner good cause analysis provides “a mechanism to handle attorney-client privilege and work product within the unique realm of shareholder derivative litigation involving fiduciary aspects.” Pls.’ Br. at 20. To refute Current Management‘s reliance on Pennsylvania‘s statutory attorney-client privilege, they emphasize that other states have incorporated the Garner good faith analysis despite having a similar statutory privilege, including Delaware in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014).
Derivative Plaintiffs reject Current Management‘s complaint that the Garner good cause analysis would create uncertainty and inconsistency in application. They assert that the detailed nine-factor good cause analysis in Garner provides the necessary guidance and observe that the test has been adopted and applied by a number of jurisdictions. Id. at 32 (compiling cases adopting Garner).
Derivative Plaintiffs argue that application of the Garner good cause analysis is appropriate in the current case where both Derivative Plaintiffs and Current Management were fiduciaries of the Foundation and the Corporation at the time of the relevant communications between counsel and the Foundation and Corporation. Derivative Plaintiffs assert that they are exercising their fiduciary duties in bringing the derivative action for the benefit of the Foundation and the Corporation, which are identified in the caption as both plaintiffs and defendants.
Derivative Plaintiffs additionally support the adoption of the Garner good cause analysis by reference to Section 85 of Restatement (Third) of Law Governing Lawyers, which, in their view, incorporates a test similar to the Garner good cause analysis, see supra at 16 n.13. They highlight that this Court has relied upon this Restatement, generally, in the past in regard to other questions related to the attorney-client privilege. Id. at 36 (citing Gillard, 15 A.3d at 52). Derivative Plaintiffs contend that this Court in
B. Derivative Plaintiffs Cross-Appeal
In the event that the Court declines to adopt the Garner good cause analysis, Derivative Plaintiffs argue in the alternative for the application of the fiduciary exception and the co-client exception. In response, Current Management seek to refute the underlying premise of both of Derivative Plaintiffs’ asserted exceptions, which they view as based upon Derivative Plaintiffs’ attempts to align themselves with the Foundation and Corporation as the clients holding the attorney-client privilege, when Current Management argue that Derivative Plaintiffs are merely former board members.
1. Fiduciary Exception
Derivative Plaintiffs explain that under the fiduciary exception, the attorney-client privilege cannot be asserted by a trustee against a trust‘s beneficiaries where the attorney provided advice regarding the management of the trust in which the beneficiaries hold an interest. Pls.’ Br. at 49-50 (relying upon Follansbee, 56 Pa. D. & C. 4th 483). Likewise, Derivative Plaintiffs argue that Current Management, as trustees owing a fiduciary duty to the Foundation and the Corporation, cannot assert the attorney-client privilege against the Foundation and the Corporation. They claim that the legal advice sought in this case was provided to the Foundation and the Corporation, and those entities hold the privilege through all the trustees, including Derivative Plaintiffs. Derivative Plaintiffs assert that they are bringing the claims for the privilege-holding Foundation and Corporation, and therefore, the privilege cannot be asserted by Current Management against them.
In contrast, Current Management maintain that the fiduciary doctrine can be invoked only by one who could be considered a beneficiary of a trust and owed a fiduciary duty by the trustee. Explaining the underlying logic of the fiduciary exception, Current Management contend that trustees of a trust “are functioning as proxies for the beneficiary, and in accordance with the terms of the trust instrument. By definition, communications between a trustee and trust counsel are legally equivalent to communications with the beneficiaries.” Defs.’ Second Br. at 44. Current Management assert that the trust paradigm does not apply to Derivative Plaintiffs who are not the beneficiaries of a trust. For the fiduciary exception to be relevant, Current Management contend that Derivative Plaintiffs would have to show that Current Management or the Foundation/Corporation owed Derivative Plaintiffs a fiduciary duty. They assert that this case “involves the reverse scenario” where Derivative Plaintiffs, as former members of
2. Co-Client/ Exception
Additionally, Derivative Plaintiffs continue to assert the applicability of the co-client or common interest exception. They summarize these similar doctrines as providing that “[w]hen parties with a common interest have counsel and later become adverse, neither party can assert the attorney-client privilege or attorney work product privileges as to materials generated during the period of common interest.” Pls.’ Br. at 53. They additionally assert that our sister courts have applied the common interest and the co-client doctrine “to require a corporation to produce otherwise attorney-client privileged materials in suits involving directors of the corporation.” Id. at 54-55 (collecting cases).
Derivative Plaintiffs assert that they share a common interest with the Foundation and the Corporation because their “interests never diverged since the [Derivative Plaintiffs] are discharging the duty placed upon them by the Bylaws to ‘administer, manage, preserve and protect the property’ of the corporation.” Id. at 52. They emphasize that they have not sought any recovery for themselves as individuals.
Derivative Plaintiffs further contest the Commonwealth Court‘s utilization of the presumption that only the current management of a corporation should be deemed to hold the privilege for the corporation. Instead, they argue that the presumption should not apply when plaintiffs are alleging that the current management obtained control improperly.
Current Management respond by arguing that Derivative Plaintiffs have conflated two doctrines, which they contend are distinct in that “[t]he common interest doctrine applies when multiple clients are represented by separate counsel, and the [co-client] privilege applies when a single lawyer represents multiple clients.” Defs.’ Second Br. at
Turning to the co-client doctrine, Current Management recognize that it applies where a single attorney represents multiple clients. For the doctrine to apply, Current Management claim that the clients have to share “an identical or nearly identical legal interest, so that their shared attorney can represent them with the candor and loyalty required by the ethical rules.” Id. at 51. Current Management assert that no Pennsylvania court has ever applied this concept “to eliminate the distinction between a corporation‘s officers and directors and the corporation itself,” id., in contrast to other states which employ a “collective corporate client” approach in which directors are treated as co-clients of the corporate counsel. Id. at 52-53. They argue that this approach is antithetical to Pennsylvania, which instead employs the “entity is the client” approach. Id. at 54. Current Management explain that the “entity is the client” approach recognizes that the entity acts through its current management, and not through former directors, such as Derivative Plaintiffs. Id. at 55.
Moreover, Current Management express concern with a rule that would essentially waive the privilege anytime a person in management leaves their position: “To rule otherwise would defeat the expectation of confidentiality, and would chill the willingness of corporate management to speak candidly about privileged matters, knowing that
V. Analysis
A. Cuker and the ALI Principles
Prior to addressing the questions in this case, we first review our decision in Cuker and the ALI Principles adopted therein addressing derivative litigation. In Cuker, a group of shareholders made a demand on the company to pursue litigation against some of the company‘s directors and officers, claiming mismanagement. As in the case at bar, the company created a special litigation committee to consider the demand. While the committee was investigating, a second group of shareholders filed suit against the company‘s officers and directors raising similar issues to those of the original shareholders’ demand. Subsequently, the special litigation committee concluded that pursuing the derivative litigation was not in the corporation‘s best interest, a decision later adopted by the board. The board‘s denial precipitated a second action filed by the first group of shareholders. Both groups of shareholders litigated the claims on separate tracks resulting in inconsistent verdicts, which this Court addressed under our King‘s Bench powers.
First, the Court in Cuker clarified that, while no Pennsylvania court had overtly adopted the business judgment rule, it had been applied by our courts for over a century. The Court summarized the doctrine: “[T]he business judgment rule reflects a policy of judicial noninterference with business decisions of corporate managers, presuming that they pursue the best interests of their corporations, insulating such managers from second-guessing or liability for their business decisions in the absence of fraud or self-dealing or other misconduct or malfeasance.” Id. at 1046. Next, the Court held that the business judgment rule applied to management decisions related to derivative litigation,
The Court acknowledged confusion in Pennsylvania law caused by the absence of a “procedural mechanism for implementation and judicial review of the board‘s decision” to terminate the derivative litigation. Id. Accordingly, the Court provided the following structure: “Without considering the merits of the action, a court should determine the validity of the board‘s decision to terminate the litigation; if that decision was made in accordance with the appropriate standards, then the court should dismiss the derivative action prior to litigation on the merits.” Id. The Court noted that the judicial intervention should be minimized and instructed that only limited discovery should be permitted in such cases. It provided six factors for trial courts to consider in evaluating a board‘s decision to terminate derivative litigation.18 If the factors are met, then “the business judgment rule applies and the court should dismiss the action.” Id.
While Cuker addressed the general process of derivative litigation in Pennsylvania through the application of the business judgment rule and the adoption of the relevant ALI Principles, we now consider in detail one of the adopted sections, specifically Section 7.13, as we grapple with the role of attorney-client privilege in derivative litigation. We recognize the conceptual difficulties of the attorney-client privilege in derivative litigation where both sides profess to represent the corporation, which is the true client and holder of the privilege but which cannot act on its own. Nevertheless, we also observe that Pennsylvania courts have utilized the presumption set forth in Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 348-49 (1985), that current management of a solvent corporation has the authority to act on behalf of the corporation, including in regard to the attorney-client privilege. See Maleski by Chronister v. Corporate Life Ins. Co., 641 A.2d 1, 3 (Pa. Cmwlth. 1994) (citing
Section 7.13, which has been adopted in Pennsylvania, broadly addresses judicial procedures for adjudicating motions to dismiss the derivative litigation following management‘s decision to adopt an independent committee‘s recommendation to decline to pursue the derivative claims demanded by plaintiffs. Subsection 7.13(a) mandates that the corporation “file with the court a report or other written submission setting forth the procedures and determinations of the board or committee” in support of the motion to dismiss. ALI Principles § 7.13(a). It further requires that “[a] copy of the report or other written submission, including any supporting documentation filed by the corporation, shall be given to the plaintiff‘s counsel.” Id.
Under subsection (c), discovery is permissible only “if the plaintiff has demonstrated that a substantial issue exists whether the applicable standards of § 7.08, § 7.09, § 7.10, § 7.11, or § 7.12 have been satisfied and if the plaintiff is unable without undue hardship to obtain the information by other means.”20 Id. at § 7.13(c). The subsection also cautions trial courts to grant only limited discovery “in the absence of special circumstances” and to allow it only in regard to what the court views as relevant to the applicable standards of the listed sections and “consistent with an expedited resolution of the motion” to dismiss the derivative litigation. Id.
As noted, Section 7.13 addresses the attorney-client privilege in subsection (e) in regard to motions to dismiss derivative litigation based upon the recommendation of the independent committee, providing in full as follows:
§ 7.13 Judicial Procedures on Motions to Dismiss a Derivative Action Under § 7.08 or § 7.11
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(e) Privilege. The plaintiff‘s counsel should be furnished a copy of related legal opinions received by the board or committee if any opinion is tendered to the court under § 7.13(a). Subject to that requirement, communications, both oral and written, between the board or committee and its counsel with respect to the subject matter of the action do not forfeit their privileged character, and documents, memoranda, or other material qualifying as attorney‘s work product do not become subject to discovery, on the grounds that the action is derivative or that the privilege was waived by the production to the plaintiff or the filing with the court of a report, other written submission, or supporting documents pursuant to § 7.13.
Relevantly, the first sentence of subsection (e) requires the corporation to provide plaintiff‘s counsel not only with the committee‘s report which was submitted to the court in support of dismissing the derivative litigation under subsection (a), but also a “copy of related legal opinions” reviewed by the board or committee, even if not relied upon in the dismissal recommendation.21 The Comment to subsection (e) explains that the written submission of the committee‘s report in favor of dismissing the derivative litigation “waives the privilege as to such documents and, to a more limited extent, as to the process of their preparation.”22 Id. at cmt. e.
As Current Management in the case at bar accept, the Comment explains that the disclosure to derivative plaintiffs of the other “related legal opinions” is consistent with long-standing attorney-client jurisprudence involving a party‘s utilization of the “reliance on counsel defense.” Courts have recognized that a party cannot defend an action by claiming reliance upon an attorney‘s advice and then refuse to provide the opposing side
Comment (e) additionally discusses the nine-factor Garner good cause analysis.23 Notably, Comment (e) acknowledges that the Garner good cause analysis has been widely adopted by courts confronted with the scenario where a derivative plaintiff is attempting to represent the corporation that is the “client” in the attorney-client relationship. It explains that the good cause analysis does not deem the privilege to be wholly unavailable. Instead, it merely allows plaintiffs to demonstrate “‘good cause’ why the privilege should not be applied against” them and provides courts with criteria to determine whether plaintiffs have demonstrated the necessary good cause. Id. at cmt. e.
Comment (e) to Section 7.13, however, does not necessarily adopt the Garner good cause analysis. Instead, the Comment focuses on only two of the nine Garner factors, specifically “whether the communication is of advice concerning the litigation itself and whether the communication related to past or prospective actions.” Id. (quoting Garner, 430 F.2d at 1104) (internal quotation marks removed). The Comment emphasizes that the cases applying Garner in regard to these two factors have withheld the privilege in relation to materials that were “roughly contemporaneous with the events
The Comment highlights that the Garner line of cases, therefore, does not conflict with Section 7.13(e) which provides similar protections for communications between committee and its counsel concerning the pending litigation and “only requires disclosure to the plaintiff of the report or other written submission to the court and any supporting documentation,” under subsection 7.13(a) for purposes of adjudicating a motion to dismiss derivative litigation. Id. Notably, the Comment does not speak to the other seven factors, nor does it expressly adopt the test in full.24 Accordingly, we conclude that this Court‘s adoption in Cuker of Section 7.13 does not equate to an adoption of the Garner test, which we consider and ultimately reject in the next sections of this opinion.
B. The Garner Good Cause Analysis
As noted, Derivative Plaintiffs urge the Court to adopt the Garner good cause analysis. In Garner, the United States Court of Appeals for the Fifth Circuit considered the assertion of the attorney-client privilege by a corporation‘s current management against derivative shareholders, who brought claims on behalf of the corporation alleging that the current management engaged in, inter alia, securities violations and fraud to the detriment of the corporation as well as the shareholders.
The Garner court recognized the tension inherent in the attorney-client privilege in derivative litigation. It acknowledged that the privilege encourages current management
In weighing the equities, the Garner court ultimately rejected a view of the attorney-client privilege as absolute in derivative litigation and instead reasoned as follows:
The attorney-client privilege still has viability for the corporate client. The corporation is not barred from asserting it merely because those demanding information enjoy the status of stockholders. But where 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.
Id. at 1103-04. The court then provided nine factors to consider in determining whether derivative plaintiffs have demonstrated good cause for piercing the attorney-client privilege.25
C. Garner and the Attorney-Client Privilege in Pennsylvania
We now consider whether to affirm the Commonwealth Court‘s adoption of the Garner good cause analysis in light of Pennsylvania‘s attorney-client privilege jurisprudence.26 We have often recognized the conflict inherent in the attorney-client privilege. On the one hand, our precedent disfavors evidentiary privileges which are “in
The attorney-client privilege as codified by the General Assembly,
In an often-cited explanation, the United States Supreme Court detailed that the purpose of the privilege “is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law
With this framework in mind, we consider the applicability of the Garner good cause analysis to Pennsylvania‘s attorney-client privilege in the context of a motion to dismiss derivative litigation pursuant to ALI Principle 7.13 as adopted by this Court in Cuker. We acknowledge that the Garner analysis is an understandable attempt to provide balance in the unusual scenario of derivative litigation where both the defendants, in the form of current management, and the plaintiffs, asserting claims for the benefit of the corporation, are attempting to speak for the corporation. At its most basic, the nine-factor analysis attempts to evaluate if derivative plaintiffs have created enough of a question regarding current management‘s actions to justify the withholding of the attorney-client privilege for the benefit of the corporation, as the true client.
We conclude that the Garner good cause analysis is inconsistent with the attorney-client privilege under Pennsylvania jurisprudence because it eliminates the necessary predictability of the privilege. Rather than providing clarity and certainty, the Garner test requires attorneys and clients to speculate how a court in the future will weigh the nine subjective and amorphous factors in an attempt to discern whether a derivative plaintiff has brought a sufficient claim to allow the abrogation of the current management‘s
Moreover, we conclude that the ALI Principles adopted by this Court in Cuker, and specifically Section 7.13(e) addressing attorney-client privilege in regard to motions to dismiss derivative actions, provide an appropriate framework for derivative litigation, making the subjective Garner factors unnecessary.29 This framework provides the derivative plaintiff with a path to challenge the validity of an independent committee‘s decision not to pursue derivative litigation and allows limited discovery, including some
In addition to rejecting the Garner good cause analysis, we likewise decline to incorporate Section 85 of the Restatement (Third) of the Law Governing Lawyers, which, like Garner, utilizes a nebulous analysis of whether the plaintiffs’ needs are “sufficiently compelling and the threat to confidentiality sufficiently confined to justify setting the privilege aside.” Restatement (Third) of the Law Governing Lawyers § 85
D. Applicability of the Fiduciary and Co-Client Exceptions
Regarding Derivative Plaintiffs’ invocation of the fiduciary and co-client exceptions, we observe that Derivative Plaintiffs’ argument is essentially based upon their claim that they are asserting the rights of the Foundation and the Corporation as clients in the attorney-client relationship to whom both Current Management and Derivative Plaintiffs owe a fiduciary duty as trustees or former trustees. We agree with the Commonwealth Court, however, that the derivative relationship involved in this case does not fit within the construct of either exception, as the Derivative Plaintiffs are neither owed a fiduciary duty by the corporate entities or Current Management nor were Derivative Plaintiffs co-clients with the corporate entities or Current Management. Rather than attempt to force the derivative fact pattern into these ill-fitting constructs, we instead utilize the procedures specifically designed for derivative litigation adopted by this Court in Cuker, which we view as providing the appropriate balance between protecting current management under the business judgment rule and allowing derivative plaintiffs to assert claims on behalf of the corporation.
VI. Summary
Chief Justice Saylor and Justices Donohue, Dougherty and Wecht join the opinion.
Justice Todd files a concurring and dissenting opinion.
Justice Mundy files concurring and dissenting opinion in which Justice Todd joins.
Notes
§ 7.13 Judicial Procedures on Motions to Dismiss a Derivative Action Under § 7.08 or § 7.11
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(e) Privilege. The plaintiff‘s counsel should be furnished a copy of related legal opinions received by the board or committee if any opinion is tendered to the court under § 7.13(a). Subject to that requirement, communications, both oral and written, between the board or committee and its counsel with respect to the subject matter of the action do not forfeit their privileged character, and documents, memoranda, or other material qualifying as attorney‘s work product do not become subject to discovery, on the grounds that the action is derivative or that the privilege was waived by the production to the plaintiff or the filing with the court of a report, other written submission, or supporting documents pursuant to § 7.13.
Restatement (Third) of the Law Governing Lawyers § 85 (2000).In a proceeding involving a dispute between an organizational client and shareholders, members, or other constituents of the organization toward whom the directors, officers, or similar persons managing the organization bear fiduciary responsibilities, the attorney-client privilege of the organization may be withheld from a communication otherwise within § 68 if the tribunal finds that:
(a) those managing the organization are charged with breach of their obligations toward the shareholders, members, or other constituents or toward the organization itself;
(b) the communication occurred prior to the assertion of the charges and relates directly to those charges; and
(c) the need of the requesting party to discover or introduce the communication is sufficiently compelling and the threat to confidentiality sufficiently confined to justify setting the privilege aside.
a. 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.
b. 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.
a. 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
In a civil matter[,] counsel shall not be competent or permitted to testify to confidential communications made to him by his client, nor shall the client be compelled to disclose the same, unless in either case this privilege is waived upon the trial by the client.
- 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 adequate investigation, and
- whether it rationally believed its decision was in the best interests of the corporation (i.e., acted in good faith).
Comment (f), which addresses the work product doctrine, explains that “counsel‘s notes, internal drafts, correspondence with witnesses, and similar materials should normally be protected from disclosure under the work product doctrine, regardless of the availability of the attorney-client privilege.” ALI Principles § 7.13 cmt f.
[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 related to past or to prospective actions; [7.] whether the communication is of advice concerning the litigation itself; [8.] the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; [and] [9.] the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.
Id. at 1104.National Bank of West Grove v. Earle, 46 A. 268, 269; see also Gillard, 15 A.3d at 49.[If the privilege did not apply], then a man about to become involved in complicated business affairs, whereby he would incur grave responsibilities, should run away from a lawyer rather than consult him. If the secrets of the professional relation can be extorted from counsel in open court, by the antagonist of his client, the client will exercise common prudence by avoiding counsel.