Asher Blog

By Asher Lovitz

Asher Blog

          As if the attorney-client privilege was not already a near absolute, in Employees’ Retirement System of Rhode Island v. Facebook Inc., the Delaware Court of Chancery reaffirmed the mountainous burden a plaintiff must climb to override the privilege.  The attorney-client privilege is a foundational pillar within the practice of law.  It ensures that the communications between attorneys and their clients remain confidential to promote the provision of candid legal advice.  However, certain exceptions will enable a plaintiff to compel a court order to produce documents and/or communications protected by the attorney-client privilege.  One such exception that arises in the corporate context is the Garnerexception.  This exception was first articulated by the Fifth Circuit Court of Appeals in the seminal case Garner v. Wolfinbarger.[1]  Under the Garner exception, plaintiff stockholders can overcome the assertion of the attorney-client privilege by corporate management upon a sufficient showing of “good cause.”[2]  Since the Garner decision, Delaware Supreme Court jurisprudence has established the Garner exception as “narrow, exacting, and intended to be very difficult to satisfy,” thus affording the attorney-client privilege the most stringent protections.[3]  With the Court of Chancery’s recent decision in Employees’ Retirement System of Rhode Island v. Facebook Inc., Delaware is standing firm on its convictions.

          This suit arose in the aftermath of the Facebook-Cambridge Analytica data breach scandal.  In short, in early 2018, it was revealed through multiple global media sources that Facebook mishandled the personal data of millions of its users and the data analytics firm, Cambridge Analytica, was now using that data to create profiles of United States voters.[4]  This prompted an investigation by the Federal Trade Commission (“FTC”), in 2019, into (i) Facebook’s data privacy issues, (ii) its involvement with Cambridge Analytica, and (iii) whether Facebook violated a 2011 Consent Decree with the FTC.[5]  The FTC investigation concluded that Facebook had violated the 2011 Consent Decree along with several consumer privacy laws.[6]  In the ensuing settlement negotiations, Facebook agreed to pay a record-breaking $5 billion to absolve both the company and Zuckerberg.[7]  As the owner of 163,000 shares of Facebook common stock, the Employees’ Retirement System of Rhode Island (“ERSRI”), the largest public employee retirement system in the state, initiated this action.[8]

          ERSRI filed a demand pursuant to Title 8, Section 220 of the Delaware Code against Facebook, Inc. arguing it was entitled to inspect certain privileged and non-privileged documents in regard to its investigation of wrongdoing relating to whether Facebook had overpaid in its 2019 settlement with the FTC where Facebook agreed to a $5 billion settlement to protect its CEO, Mark Zuckerberg, from considerable personal liability.[9]  Section 220 of the Delaware Code concerns the inspection of books and records, and enables a stockholder to inspect such books and records upon a showing that “each category of books and records is essential to [the] accomplishment of the stockholder’s articulated purpose for inspection.”[10]  This is a fact-specific determination dependent upon the shareholder’s inspection demand, and “books and records satisfy this standard if they address the crux of the shareholder’s purpose and if that information is unavailable from another source.”[11]  In response to this demand, Facebook refused to produce certain documents that ERSRI requested, arguing that these disputed documents were “not necessary and essential to ERSRI’s stated purposes for inspection” and “that inspection of certain of the [d]isputed [d]ocuments is precluded under the attorney-client privilege or the work product immunity.”[12]

          The Court provided separate analyses regarding the privileged and non-privileged information that ERSRI sought to compel Facebook to produce.  The non-privileged material sought to be inspected by ERSRI concerned “electronic communications sent from, to, or copied to a member of the Board concerning Facebook’s negotiations of the 2019 Settlement with the FTC, collected from a subset of Board members identified as custodians … as well as from certain custodians in the office of the Company’s general counsel.”[13]  ERSRI argued that these communications were necessary and essential to assess the decision-making process of the Board in reaching the 2019 settlement and “to determine the extent to which the Board deliberately caused Facebook to pay more in the settlement in order to protect Zuckerberg from personal liability.”[14]  As previously noted, in order “to prevail on a demand to inspect books and records under Section 220, a stockholder ‘bears the burden of proving that each category of books and records is essential to [the] accomplishment of the stockholder’s articulated purpose for the inspection.’”[15]  Relying on the Delaware Supreme Court’s holding in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, the Delaware Court of Chancery concluded that the non-privileged electronic communications detailing the FTC settlement negotiations were necessary and essential to ERSRI’s articulated purpose for inspection.[16]  In reaching this decision, the Court of Chancery examined the records, documents, and communications that Facebook did produce to ERSRI.[17]  Upon this examination, the Court concluded that these materials were bereft of any probative value to ERSRI’s stated investigatory purpose and did not allow them to “engage in the kind of investigation contemplated by Section 220.”[18]  As such, Facebook was required to produce these non-privileged documents to enable ERSRI to proceed with its investigation.[19]

          In addition, ERSRI also sought the production of documents protected by attorney-client privilege and work product immunity.  The motivation for the production of these privileged documents was largely the same as its request for the non-privileged documents, “namely to discern the information available to the Board as it weighed its alternatives to settlement, and to acquire some insight into the Board’s deliberations regarding whether the Company should cover Zuckerberg’s personal exposure.”[20]  A corporation may assert attorney-client privilege where it has sought legal advice, but this privilege is not insurmountable and may be overcome through the Garner exception.[21]  For a stockholder seeking the disclosure of privileged communications to succeed under the Garner exception, they must overcome the burden of establishing “good cause” why the attorney-client privilege should not apply.[22]  When applying the Garner exception, a court will consider several factors when assessing whether a stockholder has demonstrated “good cause”: “(i) whether the claim is colorable; (ii) the necessity or desirability of information and its availability from other sources; and (iii) the extent to which the information sought is identified as opposed to [a] blind fishing expedition.”[23]

          However, the necessity/unavailability factor is often considered the most dispositive factor and Delaware courts have been disinclined to apply the Garner exception when a stockholder is unable to satisfy this factor.[24]  The question then turns to whether the plaintiff stockholder has exhausted every possible avenue of acquiring the communications or information that they seek.[25]  Here, ERSRI admitted that it could not demonstrate that the privileged information it sought was not available from another source because it had not yet seen the non-privileged information that Facebook had previously withheld.[26]  Consequently, as it was likely the non-privileged information that Facebook was now compelled to produce could shed light onto the main purpose of ERSRI’s investigation; the Court concluded  ERSRI had not overcome the “heavy burden to justify a court order compelling the production of documents protected by the attorney-client privilege.”[27]  Thus, the Court held that where information protected by the attorney-client privilege is concerned, a plaintiff must truly have no alternative means of acquiring the privileged information and even a mere scintilla of the possibility of alternative acquisitional means is not sufficient to overcome the burden to justify the production of privileged information.[28]

          The Delaware Court of Chancery’s decision in Employees’ Retirement System of Rhode Island v. Facebook Inc.serves as a stark reminder of the indispensable degree of deference given to protecting the attorney-client privilege.  This decision furthers the line of Delaware cases exacting the most stringent protections for the privilege and the onerous burden a plaintiff must mantle to compel production of privileged information.  While it is hard to say that the Court of Chancery’s conclusion on the matter is surprising given the exacting obstacles placed before a plaintiff seeking to override the attorney-client privilege, this decision narrows the scope of what constitutes “good cause” to compel inspection of privileged information.  Even where a plaintiff stockholder has shown that privileged information is essential to the accomplishment of its purpose of inspection, the ultimate availability of that information from another source will render the “good cause” burden not met.  Looking forward, one could expect similar outcomes in Section 220 actions concerning inspection of privileged information, as the Delaware Court of Chancery has affirmatively taken its stance.  This decision is a beacon.  And the signal it is sending is that the Garner exception is a weighty burden to overcome, and the Delaware courts will not lightly overturn the attorney-client privilege.

[1] See, Peter J. Walsh Jr. & Jacqueline A. Rodgers, Delaware Court of Chancery Examines the Garner Exception to the Attorney-Client Privilege, American Bar Association (Jul. 16, 2018), are-court-chancery-examines-garner-exception-attorney-client-privilege/.

[2] See, Robert R. Summerhays, The Problematic Expansion of the Garner v. Wolfinbarger Exception to the Corporate Attorney-Client Privilege, 31 Tulsa L.J. 275, 286 (1995).

[3] Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1278 (Del. 2014).

[4] See, Cathy Lee, The Aftermath of Cambridge Analytica: A Primer on Online Consumer Data Privacy, 48 Aipla Q. J. 529, 531 (2020).

[5] Id.

[6] See, Employees’ Ret. Sys. of Rhode Island v. Facebook, Inc., C.A. No. 2020-0085-JRS, 2021 WL 529439, at *3 (Del. Ch. Feb. 10, 2021).

[7] Id.

[8] Id. at *2.

[9] Id. at *1.

[10] Pettry v. Gilead Scis., Inc., C.A. No. 2020-0132-KSJM, 2020 WL 6870461, at *23 (Del. Ch. Nov. 24, 2020).

[11] Pettry, 2020 WL 6870461, at *23.

[12] Employees’ Ret. Sys., 2021 WL 529439, at *2.

[13] Id. at *5.

[14] Id.

[15] Id. at *4 (quoting Pettry, 2020 WL 6870461, at *23).

[16] Employees’ Ret. Sys., 2021 WL 529439, at *8; see also, Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1278 (Del. 2014)(“In a Section 220 proceeding, the necessary and essential inquiry must precede any privilege inquiry because the necessary and essential inquiry is dispositive of the threshold question–the  scope of document production to which the plaintiff is entitled under Section 220.”)

[17] Employees’ Ret. Sys., 2021 WL 529439, at *8

[18] Id. at *6-7.

[19] Id. at *8.

[20] Id.

[21] Employees’ Ret. Sys., 2021 WL 529439, at *8

[22] See, Garner v. Wolfinbarger, 430 F.2d 1093, 1102-1104 (5th Cir. 1970).

[23] In re Oracle Corp. Derivative Litig., C.A. No. 2017-0337-SG, 2019 WL 6522297, at *18 (Del. Ch. Dec. 4, 2019); see also, Garner, 430 F.2d at 1104.

[24] Employees’ Ret. Sys., 2021 WL 529439, at *9.

[25] See, Buttonwood Tree Value Partners, L.P. v. R.L. Polk & Co., C.A. No. 9250-VCG, 2018 WL 346036, at *6 (Del. Ch. Jan. 10, 2018)

[26] Employees’ Ret. Sys., 2021 WL 529439, at *9.

[27] Id. at *10.

[28] Id. at *9.