When Your 'Client' Is Your Company's Investor - The 'Fiduciary Exception' To The Attorney-Client Privilege

In the corporate context, the attorney-client privilege's application is rarely straightforward. When tested in court, the privilege's very existence often turns on crucial questions that may not have been considered at the time of the communication. Was the advice primarily business or legal?1 Which employees qualify as "clients"?2 Was the advice rendered to assist in the commission of a transaction that might later be viewed as fraudulent?3

Now let's add another question: is management seeking legal advice to advance the best interests of the company? If not, an investor may be able to pierce the attorney-client privilege in a litigation against the company.4 This exception to the privilege is known as the "fiduciary exception," but is also referred to as the "good cause" exception and, in the corporate context, as the "Garner Doctrine."5

THE GARNER DOCTRINE

The Garner Doctrine arises from the Fifth Circuit's decision in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert. denied, 401 U.S. 974 (1971), which extended the "fiduciary exception" to the attorney-client privilege from the traditional trustee context to corporations. See also Wachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007) (discussing origins of "fiduciary exception").

Recently, New York's influential intermediate appellate court, the Appellate Division, First Department, adopted Garner's formulation of the factors for the "fiduciary exception" in NAMA Holdings, LLC v. Greenberg Traurig LLP, __ A.D.3d __, 2015 N.Y. Slip. Op. 07346 (N.Y. App. Div. Oct. 8, 2015). Corporate lawyers should take note.

The "fiduciary exception" to the attorney-client privilege originated in the law of trusts.6 But it now can come into play in any litigation by investors against a company (or its agents) where the claim is that management had acted in a manner inimical to investor interests, e.g., for breach of fiduciary duty or similar wrongdoing. The doctrine has been applied in derivative actions, class actions, and individual direct claims, In re Pfizer Inc. Secs. Litig., No. 90 Civ. 1260 (SS), 1993 WL 561125, at *11 (S.D.N.Y. Dec. 23, 1993) (collecting cases); but see Weil v. Investments/Indicators, Research & Mgmt., 647 F.2d 18 (9th Cir. 1981) (limiting the "fiduciary exception" in the corporate context to derivate actions), and is well established in federal and state courts around the country. Solis v. Food Employers Labor Relations Ass'n, 644 F.3d 221 (4th Cir. 2011). The doctrine also potentially applies in any case where fiduciary relationships exist, including, for example, between union negotiators and union members, Cox v. Adm'r U.S. Steel & Carnegie, 17 F.3d 1386 (11th Cir. 1994), and controlling shareholders and creditors, where the company is insolvent, In re Teleglobe Commc'ns Corp., 493 F.3d 345 (3d Cir. 2007); see, generally, Matter of Stenovich v. Wachtell, Lipton, Rosen & Katz, 195 Misc.2d 99, 112, 756 N.Y.S.2d 367, 380-381 (Sup. Ct. N.Y. County 2003) (collecting cases).

The "fiduciary exception" involves a balancing of important interests. See Sandberg v. Virginia Bankshares, Inc., 979 F.2d 332, 351 (4th Cir. 1992). On the one hand, society has an interest in having company...