A recent Delaware Court of Chancery decision is essential reading for anyone who seeks to apply the exception to the attorney/client privilege known as the Garner exception. Salberg v. Genworth Financial, Inc., C.A. No. 2017-0018-JRS (Del. Ch. July 27, 2017). Garner is known to corporate litigation practitioners as an exception to the general prohibition on the production of privileged communications between attorney and client.
The Garner exception applies in certain circumstances where corporate fiduciaries who are defending claims brought against them by those to whom the fiduciary duty is owed, based on the application of a multitude of factors in which it is determined by the court that the documents otherwise withheld, should produce otherwise privileged documents.
The court in this opinion makes it clear that the application of the Garner exception is factually determinative, and even if all of the various factors apply, whether or not a fiduciary exception to the privilege will be recognized is within the discretion of the court.
The context of this case was a Section 220 demand made more complicated because it was preceded by a derivative action which was still pending at the time of this Section 220 case. During the pendency of the previously filed derivative action, a merger of Genworth was announced. The Section 220 case sought records regarding the valuation of the pending derivative action as part of the decision to merge.
One of the factors that made it more challenging in this case for the application of the Garner exception, was the acknowledgement by the parties that they were seeking, at least arguably, in the Section 220 action, documents that they would not otherwise be entitled to obtain in the pending derivative action against the same company.
This opinion is must reading for anyone seeking to have a complete and nuanced understanding of the Garner fiduciary exception to the attorney/client privilege. The court also discusses Delaware Rule of Evidence 502(b) in the context of the analysis, as well as the Delaware Supreme Court’s Section 220 decision in Wal-Mart Stores, Inc., in 2014, highlighted on these pages here, which endorsed the application of Garner, which had been applied for many years previously by the Court of Chancery.
In addition to the nine factors that the Garner case requires to be considered as informing the court about whether “good cause” exists, the Delaware courts have identified three of those as having particular significance. See footnotes 18 and 19. Even though the Garner factors, including the three that the Delaware courts focus on, were arguably met, the biggest problem that the claimants faced in this case, and a key reason for the court’s decision, was that they were seeking to obtain in a Section 220 action what they otherwise would not be able to obtain through the previously filed and still pending derivative action.
The court emphasized that even if all of the Garner factors apply, they are not “talismanic” and that the court must use its discretion based on the unique circumstances of every case. The court in this case was troubled that the documents sought would contain the mental impressions and assessments of the defendants and their counsel in the derivative action regarding the strengths and weaknesses of the derivative claims. The company’s board would be understandably concerned that the production of those sensitive documents would give the plaintiffs an unfair advantage in the derivative action. The general articulation of the Garner fiduciary exception recognizes that:
“Where the corporation is in suit against its stockholders on charges on acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public requires that the availability of the privilege be subject to the right of the stockholders to show “good cause” why the privilege should not apply.” See footnotes 10 and 11.
The exception is intended to be difficult to satisfy and generally does not entitle the party to the mental impressions about trial strategy of the lawyers regarding the lawsuit at issue. In sum, the court refused to apply the Garner exception in this case.