Garner v. Wolfinbarger

United States District Court for the Southern District of Alabama · 1960 · Corporations

CorporationsAttorney-Client PrivilegeShareholder Derivative ActionsDiscoverycorporate attorney-client privilegeshareholder suitgood causederivative action

Facts

Plaintiff shareholders sued FAL, its officers, and directors alleging fraud, securities-law violations, waste of corporate assets, and wrongdoing in connection with the offering and sale of FAL securities. In discovery, FAL and attorney R. R. Schweitzer refused to answer deposition questions and produce documents concerning legal advice about the stock offering, asserted securities-registration problems, use of counsel’s name in prospectuses, and related conduct, claiming attorney-client privilege. Evidence at the hearing showed possible illegality in the offering, advice from SEC staff and counsel not to proceed, continued sales activity, allegations that FAL’s assets were diverted for the benefit of its parent, and that key witnesses had invoked the Fifth Amendment. No trade secrets or improper purpose by the shareholder plaintiffs were shown.

Issue

When a corporation is sued by its own shareholders for alleged misconduct by management, may the corporation invoke the attorney-client privilege to withhold communications with corporate counsel from those shareholders? More specifically, did the shareholder plaintiffs show good cause to defeat FAL’s privilege claim here?

Rule

In shareholder litigation charging the corporation’s officers and directors with acting inimically to shareholder interests, a corporation has no absolute right to assert the attorney-client privilege against its own shareholders. The privilege is subject to the shareholders’ right to show good cause why it should not be invoked in the particular instance, and the court may consider factors including the necessity or desirability of the information, availability from other sources, the apparent illegality of the conduct, whether the communications concern past or prospective acts, the number and percentage of shareholders seeking disclosure, and whether disclosure would risk revealing trade secrets or other legitimately confidential information.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Minority shareholders of Lakefront Biologics, Inc., a Delaware corporation headquartered in Chicago, file a derivative suit alleging that senior managers knowingly violated state licensing rules in launching a medical-device line. In discovery, they seek pre-suit emails between the company and outside counsel about the legality of the launch; the company claims privilege, but the managers who approved the launch refuse to answer deposition questions on Fifth Amendment grounds.

How should the court most likely rule on the shareholders' motion to compel?

Explanation. The majority opinion rejects both extremes: the corporation has no absolute privilege against its own shareholders, but shareholders also have no automatic right to disclosure. Instead, the court applies a good-cause inquiry, considering factors such as the necessity of the information, availability from other sources, and the apparent illegality of the conduct. Here, alleged illegality plus key witnesses invoking the Fifth Amendment makes the information especially necessary, so disclosure is likely warranted. (Derived from Garner v. Wolfinbarger (1960).)