Source: https://www.jdsupra.com/legalnews/pa-supreme-court-rejects-exception-to-58041/
Timestamp: 2019-04-21 16:59:25+00:00

Document:
In a rare opinion on derivative litigation issues, the Pennsylvania Supreme Court on January 23 reversed a lower court decision to reject the “good cause” exception to attorney-client privilege as set forth in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), which requires production of otherwise privileged materials to plaintiffs in a derivative case upon a determination that the nine-factor test in Garner is met. The court’s ruling in Pittsburgh History & Landmarks Foundation v. Ziegler rested on the inconsistency between the Garner “good cause” exception and the basic tenets of Pennsylvania’s attorney-client privilege law because of the shadow of uncertainty the exception would cast over the privilege.
The court began its analysis with a discussion of its previous adoption of certain ALI Principles in Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997), explaining that even prior to adopting them in Cuker, the court had previously relied upon the ALI principles and they are “generally consistent with Pennsylvania precedent.” Despite a reference to Garner in the comments of ALI Principles Section 7.13 (relating to judicial procedures on a motion to dismiss a derivative action), the court concluded that its adoption of Section 7.13 in Cuker “does not equate to an adoption of the Garner test.” The court then discussed the Garner case, explaining that the US Court of Appeals for the Fifth Circuit rejected the notion of an absolute attorney-client privilege, “recogniz[ing] the tension inherent in the attorney-client privilege in derivative litigation” that results from the competing interests of current management, who should seek guidance from counsel without fear of later disclosure of those communications to disgruntled shareholders, and shareholders, for whose benefit management is purporting to act and therefore “are arguably the clients for purposes of the privilege.” The Garner court accordingly outlined nine factors to consider in determining whether a derivative plaintiff has demonstrated good cause for setting aside the attorney-client privilege. The court noted that a number of courts outside of Pennsylvania have adopted Garner, including the Delaware Supreme Court in Wal-Mart Stores Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014), but also recognized a number of courts that have rejected Garner as inconsistent with their attorney-client privilege precedent, including Pennsylvania’s own Allegheny Court of Common Pleas.
The court went on to discuss Garner in the context of Pennsylvania’s attorney-client privilege jurisprudence. It discussed that the attorney-client privilege, as codified in 42 Pa.C.S. § 5928, “is intended to foster open discussion between counsel and client.” Importantly, the court found that, “[w]hile the absence of the privilege curtails frank discussion and the resulting legal advice, so too does uncertainty regarding the application of the privilege.” With this backdrop, the court concluded that the Garner good cause analysis is inconsistent with Pennsylvania’s attorney-client privilege jurisprudence “because it eliminates the necessary predictability of the privilege.” “Rather than providing clarity and certainty,” the court explained, “the Garner test requires attorneys and client to speculate how a court in the future will weigh the nine subjective and amorphous factors in an attempt to discern whether a derivative plaintiff has brought a sufficient claim to allow the abrogation of the current management’s assertion of the attorney-client privilege in regard to legal advice provided by the corporation’s lawyers.” In short, because the Garner factors leave no meaningful way for management or the corporation’s attorneys to know what communications would later be protected by privilege in a derivative litigation, they would be less willing to speak candidly, resulting in corporate managers acting “without necessary legal guidance in an already complicated legal environment.” The court further declined to adopt Section 85 of the Restatement (Third) of the Law Governing Lawyers, which, like Garner “utilizes a nebulous analysis” of whether the plaintiff has established a sufficient need to set aside the privilege. The court concluded that the ALI Principles adopted in Cuker provide a sufficient framework for addressing attorney-client privilege in derivative litigation by permitting production of certain legal opinions prepared in connection with an independent committee’s decision not to pursue derivative litigation, making Garner unnecessary.
The court also affirmed the Commonwealth Court’s decision not to apply the fiduciary or co-client exceptions to attorney-client privilege because they were inapplicable to the derivative relationships at issue in this case.
Justices Sallie Mundy and Debra Todd each concurred in the majority’s ruling affirming that the fiduciary and co-client exceptions to attorney-client privilege do not apply, but also dissented from the majority’s Garner analysis primarily on the basis that the majority’s consideration of Garner was premature. They reasoned that, because the underlying case had not yet proceeded beyond a motion to dismiss, discovery into the underlying merits should be precluded at this stage and so Garner’s good cause analysis could not apply, and therefore considering it was premature.
The court’s rejection of Garner in Pennsylvania allows for certainty for corporate management and corporate attorneys that their confidential communications will not be later subject to discovery in derivative litigation, providing comfort in the integrity of Pennsylvania’s historically strong attorney-client privilege. This decision represents the Pennsylvania Supreme Court’s first major ruling on issues affecting derivative litigation since its 1997 decision in Cuker.
 Pittsburgh History & Landmarks Foundation v. Ziegler, No. 53 WAP 2017, 54 WAP 2017, J-26A-2018, J-26B-2018 (Pa 2019) (Slip. Op.) at 2.
 Mundy Concurrence at 6; Todd concurrence at 2 (joining in Mundy opinion).

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