Although its roots are in 19th century English law, the fiduciary exception to the attorney-client privilege was first recognized in the United States in Garner v. Wolfinbarger. The fiduciary exception permits shareholder plaintiffs in certain circumstances to pierce the corporation’s attorney-client privilege and gain access to privileged materials upon a showing of “good cause.” The theory is that because management ultimately manages the corporation for the benefit of its shareholders, the shareholders may pierce the privilege upon a proper showing. This Garner exception has been adopted by the federal courts and most state courts, and has been applied in a variety of fiduciary relationships, including ERISA administrators and beneficiaries, estates, trusts, banks and joint ventures, as well as direct shareholder litigation under limited circumstances. The fiduciary exception does not apply to attorney work product. Piercing of attorney work product is governed by the “substantial need/undue hardship” test.
Garner involved a shareholder derivative action alleging fraud by corporate management and a direct action alleging fraud and violations of securities laws. The plaintiff shareholders sought to depose the former in-house counsel who advised the company on the transactions in issue. Although these communications were privileged, the court held that in the context of a derivative action, shareholders may seek the production of privileged communications relevant to a lawsuit against company management because of the fiduciary duty owed by the corporation to its shareholders. Under the facts of this case, the court held that the former in-house counsel could be compelled to testify about privileged communications, i.e. his advice to the company concerning the matters that were the subject of the litigation.
The Garner court created a balancing test with respect to the interests of the corporation and plaintiff shareholders, and set forth nine non-exclusive factors to evaluate whether “good cause” exists:
- the number of plaintiff shareholders and the percentage of stock they represent;
- the bona fides of those shareholders;
- the nature of the shareholders’ claim and whether it is obviously colorable;
- the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources;
- whether, if the shareholders’ claim is of wrongful action by the corporation, the action was criminal, illegal but not criminal, or of doubtful legality;
- whether the communication related to past or to prospective actions;
- whether the communication is of advice concerning the litigation itself;
- the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and
- the risk of revelation of trade secrets or other information in which the corporation has a confidentiality interest for independent reasons.
The burden is on the plaintiff shareholder to establish these factors. The plaintiff need not prove the existence of each of these factors; the factors are neither prerequisites nor dispositive but may contribute to a finding of good cause. All of these factors are to be considered, but four have emerged as particularly significant.
Colorability of the claim: In determining whether a claim is colorable, most courts consider whether it has already survived a motion to dismiss. A claim that has not survived a motion to dismiss weighs strongly against a finding of “good cause.” Although surviving a motion to dismiss (or for summary judgment) is not dispositive, that does bolster a finding of “good cause.”
Identified communication versus blindly fishing: To the extent that the information requested is specifically identified and/or its existence is grounded in the record, a court is more likely to find that good cause exists. By contrast, blanket requests for privileged communications identified only by subject matter or persons are likely to be denied as fishing expeditions.
Necessity of information and availability from other sources: Information that is highly relevant to important issues in the plaintiff shareholder’s case weighs toward a finding of good cause; if it relates to issues that are “not particularly important” to the case, then it weighs against. As to availability, not only does the existence of other possible sources for the information sought weigh against a finding of good cause, it generally will lead courts to deny the plaintiff’s motion to pierce the privilege. Courts have denied such motions based on the availability of depositions, interrogatories, and non-privileged documents.
Number of plaintiff shareholders and the percentage of stock represented: While the basic premise is clear — the greater the percentage of stock owned by the plaintiff the more likely a finding of “good cause” — the exact line is unclear. For instance, ownership of a “substantial majority” of shares by the plaintiff is evidence that good cause exists, while ownership of 2 percent or less is evidence that good cause does not exist. In the case of closely held corporations, seemingly low ownership has been found to support good cause. In addition, some courts have limited Garner’s application to plaintiffs who were shareholders at the time the privileged communications at issue were made, reasoning that only such plaintiffs had the fiduciary relationship necessary to overcome assertions of privilege.
In short, to invoke the fiduciary exception, a plaintiff must demonstrate that a fiduciary relationship exists between the parties, and that good cause exists for overcoming the privilege. While courts have found the factors discussed above to be most dispositive, each case turns on the particular facts involved. All of the facts and circumstances of the case, the applicable law and the forum must each be carefully considered to evaluate whether the fiduciary exception may be invoked.