Pgh History v. Ziegler, Appeal of: Hoffstot ( 2019 )

[J-26A-2018 and J-26B-2018]
IN THE SUPREME COURT OF PENNSYLVANIA
WESTERN DISTRICT
SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.
PITTSBURGH HISTORY AND : No. 53 WAP 2017
LANDMARKS FOUNDATION, A :
PENNSYLVANIA NON-PROFIT : Appeal from the Order of the
CORPORATION; LANDMARKS : Commonwealth Court entered April
FINANCIAL CORPORATION, A : 21, 2017 at No. 113 CD 2016,
PENNSYLVANIA NON-PROFIT : vacating the Order of the Court of
CORPORATION; HENRY P. HOFFSTOT, : Common Pleas of Allegheny County
JR.; DAVID E. BARENSFELD; PETER H. : entered September 21, 2015 at No.
STEPHAICH; PATRICK R. WALLACE; : GD 13-23355, and remanding.
ALEXANDER SPEYER; AND HENRY P. :
HOFFSTOT, III : ARGUED: April 11, 2018
:
:
v. :
:
:
ARTHUR P. ZIEGLER, JR.; MARK S. :
BIBRO; JACK R. NORRIS; PITTSBURGH :
HISTORY AND LANDMARKS :
FOUNDATION, A PENNSYLVANIA NON- :
PROFIT CORPORATION; AND :
LANDMARKS FINANCIAL :
CORPORATION, A PENNSYLVANIA :
NON-PROFIT CORPORATION :
:
:
APPEAL OF: ARTHUR P. ZIEGLER JR., :
MARK S. BIBRO, JACK R. NORRIS, :
PITTSBURGH HISTORY AND :
LANDMARKS FOUNDATION AND :
LANDMARKS FINANCIAL :
CORPORATION :
PITTSBURGH HISTORY AND : No. 54 WAP 2017
LANDMARKS FOUNDATION, A :
PENNSYLVANIA NON-PROFIT : Appeal from the Order of the
CORPORATION; LANDMARKS : Commonwealth Court entered April
FINANCIAL CORPORATION, A : 21, 2017 at No. 113 CD 2016,
PENNSYLVANIA NON-PROFIT : vacating the Order of the Court of
CORPORATION; HENRY P. HOFFSTOT, : Common Pleas of Allegheny County
JR.; DAVID E. BARENSFELD; PETER H. : entered September 21, 2015 at No.
STEPHAICH; PATRICK R. WALLACE; : GD 13-23355, and remanding.
ALEXANDER SPEYER; AND HENRY P. :
HOFFSTOT, III : ARGUED: April 11, 2018
:
:
v. :
:
:
ARTHUR P. ZIEGLER, JR.; MARK S. :
BIBRO; JACK R. NORRIS; PITTSBURGH :
HISTORY AND LANDMARKS :
FOUNDATION, A PENNSYLVANIA NON- :
PROFIT CORPORATION; AND :
LANDMARKS FINANCIAL :
CORPORATION, A PENNSYLVANIA :
NON-PROFIT CORPORATION :
:
:
APPEAL OF: HENRY P. HOFFSTOT, JR.; :
DAVID E. BARENSFELD; PETER H. :
STEPHAICH; PATRICK R. WALLACE; :
ALEXANDER SPEYER; AND HENRY P. :
HOFFSTOT, III :
OPINION
JUSTICE BAER DECIDED: JANUARY 23, 2019
Before this Court are questions involving the applicability of the attorney-client
privilege in a corporate derivative action lawsuit brought by former board members of two
nonprofit corporations against current board members. As explained more fully herein,
we respectfully reject, for purposes of proceedings related to a motion to dismiss
derivative litigation, the Commonwealth Court’s adoption of a qualified attorney-client
privilege as set forth in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), which we
view as inconsistent with our prior caselaw emphasizing predictability in the application
of the attorney-client privilege. We, however, affirm the Commonwealth Court’s decision
[J-26A&B-2018] - 2
not to apply the fiduciary or co-client exceptions to the attorney-client privilege under the
facts at bar. Accordingly, we vacate the orders of the trial court and the Commonwealth
Court and remand the matter to the trial court for further proceedings consistent with this
opinion.
I. Introduction
While a detailed discussion of the law is set forth infra, we initially provide an
introduction to the basic legal concepts applicable to the subject dispute. As noted, this
case involves questions of how the attorney-client privilege should apply in the context of
derivative litigation. Generally, in derivative litigation, dissenting shareholders (in the case
of a for-profit company) or dissenting members (in the case of a nonprofit corporation)
attempt to assert claims as derivative plaintiffs on behalf of the corporation often alleging
misdeeds by its current management. In such cases, both the derivative plaintiffs and
current management claim to be acting in the interest of the corporation, which as an
inanimate entity cannot act on its own. Taken to the extremes, courts are therefore faced
with balancing the need to protect current management from baseless harassing litigation
brought by disgruntled derivative plaintiffs with the need to allow derivative plaintiffs acting
in good faith an opportunity to litigate legitimate derivative actions to protect the
corporation from nefarious acts of current management.
In our decision in Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997), see infra at 29,
we implemented a paradigm for addressing derivative litigation by adopting Sections
7.02-7.10 and 7.13 of the American Law Institute, Principles of Corporate Governance:
Analysis and Recommendations (1994) (“ALI Principles”). Cuker clarified that derivative
plaintiffs, who believe that current management are acting against the interests of the
corporation, should present the corporation with a “demand” that it pursue litigation or
other action for the benefit of the corporation, often against current management. In
[J-26A&B-2018] - 3
response, the corporation, acting through its current management, may form an
independent committee to investigate the claims and determine whether to pursue the
action demanded. If it declines to take action and the derivative plaintiffs pursue their
own derivative action in court, the corporation acting through its current management can
file a motion to dismiss the case based upon the committee’s determination. In such a
case, a court will review the committee’s determination not to pursue the derivative
litigation, giving substantial deference to the committee’s decision pursuant to the
business judgment rule.1
The question presented in the case at bar concerns to what extent current
management, after filing a motion to dismiss based upon the committee’s
recommendation, must provide derivative plaintiffs with access to materials that would
otherwise not be subject to discovery pursuant to the attorney-client privilege. At base,
the issue is who should be deemed to hold the attorney-client privilege for the corporation
and what is the extent of the privilege, when arguably both the derivative plaintiffs and the
current management claim to be acting on behalf of the corporation. Current
management would argue that they hold an absolute privilege, subject only to limited
disclosure as specifically required by our adoption of the ALI Principles, as will be
discussed herein. Derivative plaintiffs would contend that the attorney-client privilege
should not apply to them based upon the idea that they are bringing the claim for the
1 As explained in more detail infra, this Court officially adopted the “business judgment
rule” in Cuker. We explained that “the business judgment rule reflects a policy of judicial
noninterference with business decisions of corporate managers, presuming that they
pursue the best interests of their corporations, insulating such managers from second-
guessing or liability for their business decisions in the absence of fraud or self-dealing or
other misconduct or malfeasance.” Cuker, 692 A.2d at 1046.
[J-26A&B-2018] - 4
corporation, who is the “client,” and by asserting exceptions established in our caselaw
such as the fiduciary exception and/or the co-client exception.2
In Cuker, we adopted in bulk several sections of the ALI Principles including
Section 7.13(e), which specifically addresses attorney-client privilege as it relates to a
motion to dismiss derivative litigation. However, we did not discuss the provision in detail
nor did we address the Comments to Section 7.13(e), which invoke the seminal decision
of Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). The court in Garner essentially
provided a middle ground for applying the attorney-client privilege in which current
management could assert the privilege against the derivative plaintiffs, but the privilege
would be subject to the right of the derivative plaintiffs to show “good cause” why the
privilege should not apply. The Court of Appeals then set forth a non-exclusive list of nine
factors for courts to consider when determining whether the plaintiffs demonstrated good
cause. The Garner good cause analysis has been characterized as creating a “qualitied
2 Briefly, the fiduciary exception provides that the attorney-client privilege cannot be
invoked by a trustee of a trust against the beneficiary of a trust where the legal advice
was obtained to guide trust management, given that trustees are tasked with providing
beneficiaries with information regarding the management of the trust.
Similarly, the attorney-client privilege cannot be invoked by one client against another
client where the clients have been represented jointly by an attorney (“co-client” or “joint-
client”) or where the clients have pursued a common defense through separate counsel
(“common interest”). In such cases, the clients are deemed to have waived the privilege
during the period of joint representation or shared defense.
While Pennsylvania courts have applied the fiduciary and common interest exceptions, it
does not appear that this Court has specifically addressed them. See, e.g., Follansbee
v. Gerlach, 56 Pa. D. & C. 4th 483, 485 (Allegheny C.C.P. 2002); In re Condemnation by
City of Philadelphia in 16.2626 Acre Area, 981 A.2d 391, 397 (Pa. Cmwlth. 2009). This
Court has previously applied the joint-client exception. See, e.g., Tracy v. Tracy, 105
A.2d 122, 125 (Pa. 1954) (observing that the privilege does not apply “if the attorney
represented both parties to the transaction, in which case no communications in relation
to the common business are privileged in favor or against either, but only against a
common adversary”).
[J-26A&B-2018] - 5
attorney-client privilege.” While the Garner good cause analysis has been followed by
the majority of courts that have considered it, it has been rejected by several courts and
criticized by scholars as creating uncertainty in the application of the attorney-client
privilege. We now consider its applicability under Pennsylvania law in the context of a
corporation’s motion to dismiss derivative litigation.3
II. Factual and Procedural Background
The nonprofit corporations involved in this matter are the Pittsburgh History and
Landmarks Foundation (“the Foundation”) and its subsidiary, the Landmarks Financial
Corporation (“the Corporation”), which manages the Foundation’s endowment of
approximately $100 million. The plaintiffs are five former members of the Boards of
Trustees (“Boards”) of the Foundation and the Corporation who allege that they were
improperly and ineffectively removed from the Boards in an attempt to thwart their
oversight of the Foundation’s president, whom they believed was engaging in actions that
were improper and not in accord with the Foundation’s mission (hereinafter “Derivative
3 We recognize that the General Assembly recently amended both the Business
Corporation Law and the Nonprofit Corporations Law by adopting Subchapter F, entitled
“Derivative Actions,” within the relevant chapter addressing issues relating to “Officers,
Directors and [Shareholders or Members].” 15 Pa.C.S. §§ 1781-84, 15 Pa.C.S. §§ 5781-
84, respectively. These provisions generally codified, with some alterations, preexisting
Pennsylvania jurisprudence, as adopted in Cuker, regarding derivative actions.
Moreover, the amendments explicitly apply the paradigm to nonprofit corporations. See,
e.g., 15 Pa.C.S. § 5781 cmt. (explaining that “this subchapter generally follows the
sections of the ALI Principles adopted in Cuker, while elaborating and revising certain
portions of those sections of the ALI Principles as they apply to nonprofit corporations”).
The new statutory provisions do not expressly include Section 7.13(e) of the ALI
Principles, which addresses the attorney-client privilege in regard to motions to dismiss
derivative actions. As the new enactment became effective during the appellate
proceedings in this case, the parties have not presented argument regarding the
applicability of the new statutes. We defer to the trial court in the first instance to
determine the relevance of the new provisions on remand.
[J-26A&B-2018] - 6
Plaintiffs”).4 The defendants are the aforementioned long-time president of the
Foundation (the “President”), the chair of the Foundation’s Board of Trustees at the time
the Derivative Plaintiffs were removed from the Boards, and the subsequent chair of the
Foundation’s Board of Trustees (hereinafter “Current Management”).
The Derivative Plaintiffs’ claims in the underlying derivative litigation stem from
Current Management’s actions in 2012-2013. Reduced to its essence, in June 2012, the
Foundation’s Board created a Governance Task Force to review various practices of the
Foundation. In addition to a variety of other improvements, the Task Force recommended
that both Boards be reduced substantially in number. The Foundation Board approved
this recommendation and removed all trustees then serving from both Boards;
subsequently, significantly smaller boards were elected (hereinafter we will refer to the
old and new boards of both entities as the “Original Board(s)” and the “Reconstituted
Board(s),” respectively).5 As a result of these consolidations, Derivative Plaintiffs lost
their seats on the Boards.
Derivative Plaintiffs view the above actions as an improper scheme by the
Foundation President to avoid supervision by the Original Board members, especially in
regard to investments favored by the President. They contend that the absence of
supervision could harm the Foundation and the Corporation. Moreover, they maintain
that the removal of the original trustees and reconstitution of the smaller boards with new
trustees was improper under the entities’ bylaws; accordingly, they refer to their removal
as “purported” and contend that the Original Board remains the true board. Conversely,
4While we recognize that the individual plaintiffs were members of either the Foundation
Board or the Corporation Board and that the distinction would matter as to the discovery
attainable by each individual plaintiff, we need not distinguish between the plaintiffs for
purposes of this appeal.
5 Derivative Plaintiffs also allege that the Board did not adopt various recommendations
in the Task Force’s report that the President disfavored.
[J-26A&B-2018] - 7
Current Management maintain that the process was proper and that the Reconstituted
Board is the true board.
In accord with standard procedures for bringing a derivative action adopted by this
Court in Cuker, Derivative Plaintiffs filed a written demand on the Foundation and the
Corporation in October 2013 to bring an action against Current Management, which
attached a draft complaint setting forth derivative claims against Current Management.
As is appropriate when faced with a demand, the Reconstituted Boards of the Foundation
and the Corporation met separately and agreed to form a joint Independent Investigation
Committee (“Committee” or “IIC”), in November 2013, to investigate the allegations made
in Derivative Plaintiffs’ demand. The Committee was charged with determining whether
it was in the Foundation’s and the Corporation’s best interest to engage in litigation
against Current Management or to take other action.
After Current Management sent Derivative Plaintiffs a letter indicating that the
Committee would be composed of Reconstituted Board members rather than Original
Board members, Derivative Plaintiffs filed their complaint against Current Management in
the trial court in December 2013 without waiting for the Committee to complete its
investigation of their demand. This action was in accord with their view that the
Reconstituted Board was invalid and therefore could not appoint its own members to act
as an independent reviewing entity, essentially evaluating the propriety of its own
existence.
Counts I and II of the complaint presented derivative claims of breach of fiduciary
duty brought on behalf of the Foundation and the Corporation, respectively, asserting that
Current Management’s actions in removing the Original Board members were contrary to
the bylaws and the interests of the Foundation and Corporation and, alternatively, that
the actions were intended to solidify the President’s power and silence his critics, which
[J-26A&B-2018] - 8
was not in the interest of the Foundation and the Corporation. In Count III, Derivative
Plaintiffs sought a declaratory judgment that Current Management acted improperly in
removing the Original Boards. Finally, in Count IV, Derivative Plaintiffs asserted that
Current Management’s actions violated the Foundation’s and Corporations’ bylaws,
resulting in a breach of their contract to comply with the bylaws. As the remedy for all
counts, Derivative Plaintiffs asked for an injunction preventing the operation of the
Reconstituted Boards and an order restoring the Original Boards, which would include
Derivative Plaintiffs.6
In January 2014, Derivative Plaintiffs served on Current Management a First Set
of Requests for Production. This set of requests resulted in extensive discussions
between counsel in regard to the production of electronically stored information, including
a searchable database to address the potentially immense production and the
applicability of the attorney-client privilege to the requested production. While Current
Management produced a large volume of information, the information they withheld
serves as the basis for the current dispute.
While the litigation continued on Derivative Plaintiffs’ claims, the Committee issued
its report to the Foundation and the Corporation in August 2014 with an addendum in
March 2015. The Committee concluded that reconstitution of the Boards was proper and
consistent with the business judgment rule.7 Accordingly, the Committee concluded that
6Derivative Plaintiffs also sought a declaratory judgment that the removal of the Original
Board and reinstatement of the Reconstituted Board was improper as part of Count III.
As Counts III and IV are not before this Court, we will not address these claims herein.
7 In a prior motion, the parties had disputed whether the business judgment rule, as
defined supra at 4 n.1, applied to nonprofit corporations, with Derivative Plaintiffs claiming
that it did not apply. The trial court ultimately determined that the business judgment rule
applied to nonprofit corporations. Derivative Plaintiffs are not seeking review of that issue
in the current appeal because it is not reviewable as part of this interlocutory appeal. Pls.’
Br. at 14 n.3.
[J-26A&B-2018] - 9
it would not be in the best interest of the Foundation and the Corporation to pursue the
derivative claims submitted by Derivative Plaintiffs. Current Management provided the
report and addendum to Derivative Plaintiffs’ counsel. In response to the Committee’s
report, the Boards separately voted to reject the Plaintiffs’ demand.
Subsequently, in April 2015, Current Management filed a motion to dismiss Counts
I and II of the Derivative Plaintiffs’ derivative action. They observed that the motion to
dismiss was filed in compliance with the procedure for addressing derivative claims
adopted by this Court in Cuker. Current Management emphasized that the opinion in
Cuker instructed trial courts to engage in limited review of board decisions to terminate
derivative litigation under specified criteria relating to the independence and legitimacy of
an investigating committee, see infra at 29. Current Management asserted that those
standards had been satisfied in this case by the Committee’s extensive and independent
investigation and report. Therefore, they maintained that both Boards had properly
exercised their business judgment in accepting the Committee’s recommendation to
terminate the litigation demanded by Derivative Plaintiffs. Accordingly, Current
Management argued that they had satisfied the requirements of Cuker and that Counts I
and II of Derivative Plaintiffs’ litigation should be dismissed. This motion to dismiss is
apparently still pending in the trial court.
While Current Management’s motion to dismiss was pending in the trial court,
Derivative Plaintiffs filed a motion to compel in June 2015 that is directly at issue in the
current appeal. Derivative Plaintiffs sought to compel Current Management to produce
the following items which Current Management had withheld claiming attorney-client
privilege:
(1) all materials involving [Foundation and Corporation
attorneys] whose purported status as counsel has been used
as a basis to withhold materials responsive to Derivative
Plaintiffs’ First Set of Requests for Production,
[J-26A&B-2018] - 10
(2) all materials provided to or generated by the Independent
Investigation Committee including but not limited [to] all legal
opinions given to the IIC relating to the subject of the IIC
Report, and
(3) to complete their document production responsive to
Derivative Plaintiffs’ First Set of Requests for Production.
Pls.’ Br. in Supp. of Mot. to Compel at 4. In addition, Derivative Plaintiffs sought
permission to speak with Attorney Anne Nelson, who was General Counsel to the
Foundation and Corporation between 2007 and December 2012. Derivative Plaintiffs
wanted to discuss with Attorney Nelson the substance of her potential testimony in the
case.8
Derivative Plaintiffs argued that Current Management should provide them access
to all the documents which Current Management provided to the Committee to develop
the report, given that Current Management is relying upon the Committee’s report to
argue for the dismissal of Derivative Plaintiffs’ claims. These documents would include
those allegedly related to the dissolution and reconstitution of the Boards as well as the
President’s alleged attempt to suppress the Derivative Plaintiffs’ criticism of his actions.9
Derivative Plaintiffs asserted several bases for the inapplicability of the attorney-
client privilege that they continue to advance before this Court. They interpreted ALI
8 According to Derivative Plaintiffs, Attorney Nelson provided one of the Derivative
Plaintiffs with her notes while he was a trustee and she was General Counsel. Derivative
Plaintiffs assert that those notes support their claims relating to the process leading to the
dissolution and reconstitution of the Boards.
9 Derivative Plaintiffs assert that they did not seek the communications with the
Foundation’s or Corporation’s counsel relating to the current litigation other than those
specifically allowed under Cuker’s adoption of ALI Principles Section 7.13, discussed
infra. Pls.’ Br. in Supp. of Mot. to Compel at 12, 17.
[J-26A&B-2018] - 11
Principles Section 7.13(e),10 as adopted in Cuker, to require Current Management to
produce all documents given to the Committee that related to legal opinions regarding the
subject matter of the Committee’s report and also claimed that they could demonstrate
good cause why the privilege should not apply to this derivative action. As discussed in
detail infra, Derivative Plaintiffs additionally invoked the fiduciary and the co-client
exceptions.11
In response to the motion to compel, Current Management framed Derivative
Plaintiffs’ argument as essentially claiming that the attorney-client privilege did not apply
in derivative litigation. They argued that Derivative Plaintiffs failed to provide any caselaw
for their broad pronouncement. Current Management instead averred that this Court
already provided a framework for addressing the attorney-client privilege in derivative
10While the ALI Principles, including Section 7.13(e) and its Comments, are discussed in
detail infra at 31, the subsection provides in full as follows:
§ 7.13 Judicial Procedures on Motions to Dismiss a Derivative
Action Under § 7.08 or § 7.11
****
(e) Privilege. The plaintiff’s counsel should be furnished a
copy of related legal opinions received by the board or
committee if any opinion is tendered to the court under
§ 7.13(a). Subject to that requirement, communications, both
oral and written, between the board or committee and its
counsel with respect to the subject matter of the action do not
forfeit their privileged character, and documents, memoranda,
or other material qualifying as attorney’s work product do not
become subject to discovery, on the grounds that the action
is derivative or that the privilege was waived by the production
to the plaintiff or the filing with the court of a report, other
written submission, or supporting documents pursuant to
§ 7.13.
11 In the course of the litigation, the parties have referenced various related doctrines
including the co-client, joint-client, and common interest exceptions, see supra at 5 n.2.
We will adopt the use of the term “co-client exception” to refer to the general argument
presented by Plaintiff and use the more specific terms when relevant.
[J-26A&B-2018] - 12
litigation by adopting the ALI Principles in Cuker. In contrast to Derivative Plaintiffs’
interpretation of ALI Principles Section 7.13(e), which would essentially require Current
Management to give Derivative Plaintiffs all of the documents given to the Committee,
Current Management argued that Section 7.13(e) entitled Derivative Plaintiffs only to “a
copy of the [Committee] Reports (and all supporting documentation filed with the Court)
and, to a more limited extent, formal legal opinions that were provided to [the Committee].”
Defs.’ Br. in Opp’n to Pls.’ Mot. to Compel at 5. Current Management also rejected
Derivative Plaintiffs’ application of the fiduciary exception and the co-client exception to
the derivative litigation scenario and asserted that the Garner good cause doctrine, see
infra at 35, was inconsistent with Pennsylvania’s attorney-client privilege.
III. Decisions of the Trial Court and Commonwealth Court
In September 2015, the trial court granted Derivative Plaintiffs’ motion to compel
in substantial part by ordering Current Management to provide “all materials provided to
or generated by the [Committee], including all related legal opinions and communications”
and allowed Derivative Plaintiffs to “discuss with Anne Nelson the legal advice that she
provided to the [Committee] and communications with the [Committee], as well as any
non-privileged subjects.” Tr. Ct. Order dated Sept. 18, 2015.
After Current Management appealed the order, the trial court provided an opinion
in support of its decision. In short, the court adopted Derivative Plaintiffs’ argument that
the attorney-client privilege does not apply in derivative actions. Tr. Ct. Op. at 2-3. The
court opined “that in order to determine the independence and investigative adequacy of
a special litigation committee such as the IIC, Plaintiff[s’] counsel must be allowed to
access documents to which the committee itself had access.” Id. at 11. The court also
favored Derivative Plaintiffs’ broad interpretation of Section 7.13(e), opining that it did not
[J-26A&B-2018] - 13
expressly recognize attorney-client protection for “documents that existed before the
creation of the IIC and were not generated by counsel to the IIC,” but instead only
specifically exempted communications between the committee and its counsel. Id. at 11.
Therefore, it concluded that “pre-existing documents submitted to the [Committee] must
be produced once the [Committee’s] report was submitted to the court.” Id. at 12.
The trial court additionally addressed Current Management’s arguments relating
to the fiduciary and the common interest exceptions. The trial court summarized the
fiduciary exception as providing that a trustee of a trust cannot invoke the privilege against
the trust’s beneficiary and instead has a duty “to furnish the beneficiaries with full and
complete information regarding the trust.” Id. at 13 (citing Follansbee v. Gerlach, 56 Pa.
D. & C. 4th 483, 486-87 (Allegheny C.C.P. 2002)). The trial court opined that the fiduciary
exception applied here “because this is a derivative action involving a trust.” Id. at 12.
The trial court then concluded that the provision applied even though the Derivative
Plaintiffs were not beneficiaries of a trust because they were acting for the benefit of the
Foundation and the Corporation, which held the attorney-client privilege.
The trial court also determined that the “common interest exception applies
because Plaintiffs were members of [the Foundation and/or Corporation] at the time the
materials in question were generated.” Id. It viewed the exception as providing “that
when parties with a common interest have counsel and later become adverse, neither
party can assert the attorney-client or work product privileges as to materials during the
period of common interest.” Id. at 14.
Finally, the trial court granted Derivative Plaintiffs’ request for permission to speak
to Attorney Nelson, the Foundation’s former General Counsel, prior to her deposition. It
observed that Attorney Nelson only served as General Counsel while Derivative Plaintiffs
were still members of the Boards. Therefore, under the common interest analysis set
[J-26A&B-2018] - 14
forth above, it concluded that attorney-client privilege did not apply to preclude Derivative
Plaintiffs access during the relevant time period because “[Attorney] Nelson and Plaintiffs
had a common interest at the time she represented” the Foundation. Id. at 16.
In April 2017, a unanimous, en banc panel of the Commonwealth Court vacated
the trial court’s order and remanded the matter for further proceedings.12 In re: Pittsburgh
History and Landmarks Foundation, 161 A.3d 394 (Pa. Cmwlth. 2017). As explained
below, the court concluded that the trial court erred in ordering Defendants to produce to
Plaintiffs all the documents that had been provided to the Committee based upon the trial
court’s erroneous conclusion that the fiduciary and common interest exceptions applied
and instead remanded for consideration of whether more limited discovery would be
justified under the Garner good cause analysis.
To analyze the question, the Commonwealth Court turned to the ALI Principles
adopted in Cuker, recognizing that they provide a paradigm for derivative litigation. It
explained that Section 7.13(e) specifically addressed the attorney-client privilege. The
Commonwealth Court observed that the Comment to Section 7.13(e), as well as the
Reporter’s Note, referenced the nine-factor Garner “good cause” analysis as an
“accepted doctrine” applicable to attorney-client privilege in derivative litigation. Id. at
12 The Current Management originally filed the appeal in the Superior Court which
transferred the case to the Commonwealth Court in December 2015, because the
Commonwealth Court has appellate jurisdiction over “[a]ll actions or proceedings relating
to corporations not-for-profit arising under Title 15 (relating to corporations and
unincorporated associations)” and actions involving the corporate affairs of not-for-profit
corporations. 42 Pa.C.S. § 762(5). The Commonwealth Court ordered the parties to brief
the basis for an appeal of the order given that the order appealed was not final. Cmwlth.
Ct. Order of Feb. 22, 2016.
In its subsequent opinion, the Commonwealth Court concluded that the case presented
an appealable collateral order involving the discovery of materials that were potentially
subject to the attorney-client privilege and work product doctrine. In re: Pittsburgh History
and Landmarks Foundation, 161 A.3d 394, 397 (Pa. Cmwlth. 2017) (citing
Commonwealth v. Blystone, 119 A.3d 306 (Pa. 2015)).
[J-26A&B-2018] - 15
407. The court quoted the Fifth Circuit Court of Appeals in Garner as opining that, in
derivative actions by stockholders, the protections of the stockholders’ interests “as well
as those of the corporation and of the public require that the availability of the privilege
be subject to the right of the stockholders to show cause why it should not be invoked in
the particular instance.” Id. at 406 (quoting Garner, 430 F.2d at 1103 - 04).
The Commonwealth Court additionally considered the applicability of Section 85
of the Restatement (Third) of the Law Governing Lawyers, entitled “Communications
Involving a Fiduciary Within an Organization.”13 The court recognized that this Court has
often relied upon the Restatement (Third) of the Law Governing Lawyers when
addressing the parameters of the attorney-client privilege. Id. at 407 (citing Gillard v. AIG
Ins. Co., 15 A.3d 44 (Pa. 2011)). It opined that, like the ALI Principles, Section 85
13 In full, Section 85, entitled “Communications Involving a Fiduciary Within an
Organization,” provides:
In a proceeding involving a dispute between an organizational
client and shareholders, members, or other constituents of the
organization toward whom the directors, officers, or similar
persons managing the organization bear fiduciary
responsibilities, the attorney-client privilege of the
organization may be withheld from a communication
otherwise within § 68 if the tribunal finds that:
(a) those managing the organization are charged with breach
of their obligations toward the shareholders, members, or
other constituents or toward the organization itself;
(b) the communication occurred prior to the assertion of the
charges and relates directly to those charges; and
(c) the need of the requesting party to discover or introduce
the communication is sufficiently compelling and the threat to
confidentiality sufficiently confined to justify setting the
privilege aside.
Restatement (Third) of the Law Governing Lawyers § 85 (2000).
[J-26A&B-2018] - 16
“essentially adopts the Garner potential exception to the attorney-client privilege in suits
where there is a fiduciary relationship.” Id.
The Commonwealth Court then interpreted Section 7.13 of the ALI Principles and
Section 85 of the Restatement (Third) of the Law Governing Lawyers as allowing courts
to withhold the “the attorney-client privilege for a communication that occurred prior to the
assertion of charges [by derivative plaintiffs] and relating directly to those charges” and,
importantly, viewed it to be “in addition to the limited waiver of the attorney-client privilege
to legal opinions based on the submission to the trial court of an investigating committee’s
report in support of a motion to dismiss.” Id. at 408 (emphasis removed).
Accordingly, the Commonwealth Court vacated the trial court’s order and
remanded for that court to engage in a Garner good cause analysis to determine whether
the attorney-client privilege should be withheld in this case. The court seemed to
contemplate that discovery could be allowed regarding several categories of information
sought by the Derivative Plaintiffs.14 The court opined, however, that the discovery
allowed under the Garner good cause analysis would be more limited than the discovery
previously ordered by the trial court, specifically emphasizing that it would not provide for
discovery related to counsels’ advice regarding the pending litigation. Id. at 410.
The court also interpreted a key phrase of Section 7.13(e), which provides for
discovery of “related legal opinions,” as only requiring the current management in
derivative litigation to produce to derivative plaintiffs’ formal legal opinions given to the
Independent Committee “‘pertaining to the same general subject matter’ as the
[Independent Committee's] counsel's formal opinion.” Id. at 411 (quoting ALI Principles
14 Specifically, the Commonwealth Court opined that the trial court could order discovery
related to legal advice about “efforts to pack the nonprofit corporation boards,” about
specified investments of the board, and “about whether a Board could vote out all existing
Trustees and elect successors based on a state statute, where a Board by-law only
provided for termination of directors for cause,” if the advice was “rendered at about the
time of those alleged events and before the current suit was pending.“ Id. at 410.
[J-26A&B-2018] - 17
§ 7.13(e) cmt. e). The court recognized that this terminology related to the process
contemplated by other provisions of Section 7.13 under which management submits to
the court, in support of its motion to dismiss, a formal legal opinion that the committee
has relied upon to conclude that the derivative litigation is not in the best interests of the
corporation. The Commonwealth Court recognized that Section 7.13(e)’s requirement
that current management provide derivative plaintiffs with “related legal opinions” was
“intended to discourage opinion shopping” whereby current management would only
disclose to the trial court and the derivative plaintiffs those legal opinions that supported
dismissal of the derivative action. The Commonwealth Court presumed that Current
Management had to produce legal opinions that pertain to “whether continuing the current
litigation is in the best interest of the nonprofit corporations.” Id. The court, however,
warned that it did not provide for the general disclosure of “any legal opinion from any
time,” which had been provided to the Committee. Id.
The Commonwealth Court next addressed the question of whether Derivative
Plaintiffs should be permitted to talk with Attorney Nelson, the former General Counsel.
The court remanded the issue to the trial court to apply the Garner good cause analysis
to determine whether to withhold the attorney-client privilege but also cautioned that, even
if the trial court deemed it permissible, any discussion with Attorney Nelson should be
limited to “communications that were roughly contemporaneous with the events giving
rise to the litigation,” which would relate to the time period she served as General Counsel
between 2009-2012. Id.
The Commonwealth Court also briefly addressed the Derivative Plaintiffs’
assertion of the fiduciary exception to the attorney-client privilege. The court faulted the
trial court for failing to recognize that the fiduciary exception as expressed in Section 84
of the Restatement (Third) of the Law Governing Lawyers requires the existence of a
[J-26A&B-2018] - 18
trust. Instead, it agreed with the court in Garner, which used the fiduciary exception as a
“starting point,” but “struggled . . . to characterize corporate management’s duties as
being co-extensive with those of a common law trustee.” Id. at 412 (quoting Garner, 430
F.2d at 1101 - 02).
Finally, the Commonwealth Court considered Derivative Plaintiffs’ assertion of the
co-client exception to the attorney-client privilege. The court opined that the Plaintiffs’
claim was based upon an exception provided in Section 75 of the Restatement (Third) of
the Law Governing Lawyers, addressing the situation where clients are “jointly
represented by the same lawyer in a matter.” Id. at 412 (quoting Restatement (Third) of
the Law Governing Lawyers § 75 (2000)). The Commonwealth Court summarized this
section as providing “that the privilege cannot be raised by one co-client against another
in subsequent adverse proceedings between them.” Id. at 413 (citing In re Teleglobe
Communications Corp., 493 F.3d 345 (3d Cir. 2007)).
The Commonwealth Court concluded that the application of the co-client exception
was problematic in the case at bar. Based upon the pleadings in the current case, the
Commonwealth Court opined that any co-client relationship between Derivative Plaintiffs
and Current Management, as jointly represented by Attorney Nelson, likely dissolved
sometime between 2009 and 2012, when the interests of the parties diverged such that
there was no “common” interest. Observing that all parties agreed that the Foundation
was the true client of Attorney Nelson, the court further noted that precedent addressing
legal representation of corporations recognized that “corporations must act through
persons” and that “control of the privilege passes with control of the corporation.” Id.(citing In re Teleglobe Communications Corp., 493 F.3d at 362).
As applied to this case, the court concluded that, because Current Management
had control of the Foundation and the Corporation, they also held the privilege for the
[J-26A&B-2018] - 19
entities. The court, therefore, rejected application of the co-client exception to the current
litigation and remanded the case to the trial court to engage in a Garner analysis to
determine if Derivative Plaintiffs demonstrated good cause why the attorney-client
privilege should not prevent their discovery of the requested documents.
IV. Parties’ Arguments
The parties filed cross-petitions for allowance of appeal raising four issues, which
this Court granted. Current Management challenged the Commonwealth Court’s
adoption of the “good cause” analysis as set forth in Garner and Section 85 of the
Restatement.15 Derivative Plaintiffs cross-appealed challenging the Commonwealth
Court’s refusal to apply the fiduciary exception and the co-client exception as basis for
deeming the attorney-client privilege inapplicable to the documents they seek.16
15 Current Management raised the following Issues:
a. Whether, in the context of derivative litigation, the
Commonwealth of Pennsylvania will adopt the qualified
attorney-client privilege, the scope of which is subjectively
determined, as articulated in the often criticized decision of
Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert.
denied, 401 U.S. 974 (1971), and as articulated in the
Restatement (Third) of the Law Governing Lawyers, § 85,
where the ambiguous and uncertain scope of such a privilege
is inconsistent with Pennsylvania Supreme Court precedent
and in conflict with the Pennsylvania statute codifying the
attorney-client privilege.
b. Whether, even if this Court adopts Garner’s qualified
attorney-client privilege as the law of Pennsylvania, such a
privilege is applicable to derivative litigation that arises out of
disputes between former Board members and current Board
members with no corresponding fiduciary relationship.
16 Derivative Plaintiffs asserted the following issues:
a. Whether the fiduciary duty exception to the attorney-client
privilege is applicable to discovery sought by either the
derivative not-for-profit corporate Plaintiff or the purportedly
[J-26A&B-2018] - 20
A. Current Management’s Appeal - Applicability of Good Cause Analysis
Current Management assert that the good cause analysis as described in Garner
and Section 85 of the Restatement is contrary to the Pennsylvania statute codifying the
attorney-client privilege, 42 Pa.C.S § 5928,17 and the caselaw interpreting it. They view
the statutory privilege as unequivocally instructing that “counsel shall not be competent
or permitted to testify to confidential communications made to him by his client, nor shall
the client be compelled to disclose the same.” Defs.’ Br. at 22 (quoting 42 Pa.C.S.
§ 5928).
Current Management maintain that the Garner good cause analysis is
fundamentally different from any exceptions to the attorney-client privilege that have been
countenanced under Pennsylvania jurisprudence. With other exceptions, Current
removed Trustees of the not-for-profit corporation who are
bringing the derivative action, when the corporation received
and/or paid for the advice in question which was given
regarding and at the time of events occurring while the
individual Derivative Plaintiffs were unquestionably Trustees.
b. Whether the common interest or co-client exception to the
attorney-client privilege is applicable to discovery sought by
either the derivative not-for-profit corporate Plaintiff or the
purportedly improperly removed Trustees of the not-for-profit
corporation who are bringing the derivative action, when the
corporation received and/or paid for the advice in question,
which was given regarding and at the time of events occurring
while the individual Derivative Plaintiffs were unquestionably
Trustees.
17 Section § 5928, entitled “Confidential communications to attorney,” provides in full,
In a civil matter[,] counsel shall not be competent or permitted
to testify to confidential communications made to him by his
client, nor shall the client be compelled to disclose the same,
unless in either case this privilege is waived upon the trial by
the client.
42 Pa.C.S. § 5928.
[J-26A&B-2018] - 21
Management observe that there is certainty as to whether the privilege applies based on
the subject matter at the time of the communication. For example, the fiduciary exception
applies only if a fiduciary relationship of a trust exists. Moreover, Current Management
emphasize that if the privilege applies, then it applies absolutely. In contrast, Current
Management argue that the good cause analysis is not an exception but rather a different
type of attorney-client privilege, which they view as a “qualified privilege.” They contend
that the Garner good cause analysis involves “a purely subjective analysis, subjecting
both counsel and the client to uncertain outcomes of the analysis.” Defs.’ Br. at 31, see
also id. at 29-30 (reviewing scholarly and judicial criticism of the good cause analysis).
According to Current Management, the inconsistency engendered would erode the ability
of clients and counsel to communicate freely about issues relating to the corporation.
For similar reasons, Current Management argue for the rejection of Section 85 of
the Restatement (Third) of the Law Governing Lawyers. They view Section 85 as
providing even less predictability than the Garner good cause analysis because, rather
than utilizing Garner’s nine factors, the Restatement provides for a court to consider
whether the “need of the requesting party . . . is sufficiently compelling and the threat to
confidentiality sufficiently confined to justify setting the privilege aside.” Defs.’ Br. at 33
(quoting Restatement (Third) of the Law Governing Lawyers § 85), Defs.’ Second Br. at
27.
Current Management next explain that the adoption of Section 7.13 of the ALI
Principles by this Court in Cuker does not equate to an adoption of the Garner good cause
analysis. Instead, they contend that the adoption of Section 7.13 can and should be
interpreted to conform to Pennsylvania’s attorney-client privilege law. They highlight, as
did the Commonwealth Court, that Section 7.13(e) provides for the limited production of
“related legal opinions” to derivative plaintiffs if the corporation’s current management
[J-26A&B-2018] - 22
submits a legal opinion to the court in support of its motion to dismiss the derivative
litigation. Current Management emphasize that the phrase “related legal opinions” does
not require the production of all legal opinions received by the corporation, including those
sought by the Plaintiffs that preexisted the formation of the committee investigating the
derivative action. They maintain that this limited production is logical because the ALI
Principles come into play only in the context of a defendant’s motion to dismiss a
derivative action based upon the recommendation of the independent committee.
Additionally, Current Management emphasize that a court’s review of the board’s or
committee’s determination to terminate the derivative litigation involves not the merits of
the decision but only whether “the board's or committee's determinations fail to satisfy the
requirements of the business judgment rule.” Defs.’ Second Br. at 31-32 (quoting ALI
Principles § 7.10). Accordingly, they aver that any production of privileged documents
that preexisted the formation of the Committee should be considered under standard
attorney-client privilege rather than under Section 7.13(e)’s provision for the production
of “related legal opinions.”
In contrast, Derivative Plaintiffs urge this Court to follow the lead of our sister courts
that have adopted the Garner good cause analysis. They propose that the Garner good
cause analysis provides “a mechanism to handle attorney-client privilege and work
product within the unique realm of shareholder derivative litigation involving fiduciary
aspects.” Pls.’ Br. at 20. To refute Current Management’s reliance on Pennsylvania’s
statutory attorney-client privilege, they emphasize that other states have incorporated the
Garner good faith analysis despite having a similar statutory privilege, including Delaware
in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, 95 A.3d
1264 (Del. 2014).
[J-26A&B-2018] - 23
Derivative Plaintiffs maintain that the Commonwealth Court correctly concluded
that Section 7.13 and its Comments incorporated the Garner good cause analysis.
Derivative Plaintiffs reject Current Management’s assertion that this Court in Cuker
adopted Section 7.13 only to the extent it is consistent with preexisting Pennsylvania’s
attorney-client privilege law. In contrast, Derivative Plaintiffs argue that our holding in
Cuker does not suggest a piecemeal adoption of Section 7.13, but rather adopts it in full.
Pls.’ Br. at 25.
Derivative Plaintiffs reject Current Management’s complaint that the Garner good
cause analysis would create uncertainty and inconsistency in application. They assert
that the detailed nine-factor good cause analysis in Garner provides the necessary
guidance and observe that the test has been adopted and applied by a number of
jurisdictions. Id. at 32 (compiling cases adopting Garner).
Derivative Plaintiffs argue that application of the Garner good cause analysis is
appropriate in the current case where both Derivative Plaintiffs and Current Management
were fiduciaries of the Foundation and the Corporation at the time of the relevant
communications between counsel and the Foundation and Corporation. Derivative
Plaintiffs assert that they are exercising their fiduciary duties in bringing the derivative
action for the benefit of the Foundation and the Corporation, which are identified in the
caption as both plaintiffs and defendants.
Derivative Plaintiffs additionally support the adoption of the Garner good cause
analysis by reference to Section 85 of Restatement (Third) of Law Governing Lawyers,
which, in their view, incorporates a test similar to the Garner good cause analysis, see
supra at 16 n.13. They highlight that this Court has relied upon this Restatement,
generally, in the past in regard to other questions related to the attorney-client privilege.
Id. at 36 (citing Gillard, 15 A.3d at 52). Derivative Plaintiffs contend that this Court in
[J-26A&B-2018] - 24
Gillard refused a strict construction of the statutory attorney-client privilege and instead
extended the privilege to include communications from attorneys to clients as well as from
clients to attorneys, as encompassed in Section 69 of the Restatement. They thus urge
this Court to look to Section 85 of the Restatement.
B. Derivative Plaintiffs Cross-Appeal
In the event that the Court declines to adopt the Garner good cause analysis,
Derivative Plaintiffs argue in the alternative for the application of the fiduciary exception
and the co-client exception. In response, Current Management seek to refute the
underlying premise of both of Derivative Plaintiffs’ asserted exceptions, which they view
as based upon Derivative Plaintiffs’ attempts to align themselves with the Foundation and
Corporation as the clients holding the attorney-client privilege, when Current
Management argue that Derivative Plaintiffs are merely former board members.
1. Fiduciary Exception
Derivative Plaintiffs explain that under the fiduciary exception, the attorney-client
privilege cannot be asserted by a trustee against a trust’s beneficiaries where the attorney
provided advice regarding the management of the trust in which the beneficiaries hold an
interest. Pls.’ Br. at 49-50 (relying upon Follansbee, 56 Pa. D. & C. 4th 483). Likewise,
Derivative Plaintiffs argue that Current Management, as trustees owing a fiduciary duty
to the Foundation and the Corporation, cannot assert the attorney-client privilege against
the Foundation and the Corporation. They claim that the legal advice sought in this case
was provided to the Foundation and the Corporation, and those entities hold the privilege
through all the trustees, including Derivative Plaintiffs. Derivative Plaintiffs assert that
they are bringing the claims for the privilege-holding Foundation and Corporation, and
therefore, the privilege cannot be asserted by Current Management against them.
[J-26A&B-2018] - 25
Derivative Plaintiffs seek the reversal of the Commonwealth Court’s conclusion
that the fiduciary duty exception is inapplicable absent a trust. Derivative Plaintiffs claim
that the trustees of a nonprofit corporation serve functions similar to trustees for a trust.
They observe that nonprofit corporations are granted tax-exempt status because they are
organized to benefit the public, as a trust is organized for the benefit of the beneficiaries.
Similar to trustees of a trust, the trustees on the Foundation’s and Corporation’s Boards
are required by the bylaws to “administer, manage, preserve and protect the property” of
the nonprofit corporations. Id. at 47. Derivative Plaintiffs also cite a federal decision
recognizing that the fiduciary exception has been applied outside of the trust context to
relationships between “unions and members, lawyers and other lawyers, banks and
clients, and general partners in both general and limited partnerships.” Pls.’ Reply Br. at
12-13 (quoting Lugosch v. Congel, 219 F.R.D. 220, 243 (N.D.N.Y. 2003)).
In contrast, Current Management maintain that the fiduciary doctrine can be
invoked only by one who could be considered a beneficiary of a trust and owed a fiduciary
duty by the trustee. Explaining the underlying logic of the fiduciary exception, Current
Management contend that trustees of a trust “are functioning as proxies for the
beneficiary, and in accordance with the terms of the trust instrument. By definition,
communications between a trustee and trust counsel are legally equivalent to
communications with the beneficiaries.” Defs.’ Second Br. at 44. Current Management
assert that the trust paradigm does not apply to Derivative Plaintiffs who are not the
beneficiaries of a trust. For the fiduciary exception to be relevant, Current Management
contend that Derivative Plaintiffs would have to show that Current Management or the
Foundation/Corporation owed Derivative Plaintiffs a fiduciary duty. They assert that this
case “involves the reverse scenario” where Derivative Plaintiffs, as former members of
[J-26A&B-2018] - 26
the Board of Trustees, owed fiduciary duties to the Foundation or the Corporation. Id. at
3.
2. Co-Client/ Exception
Additionally, Derivative Plaintiffs continue to assert the applicability of the co-client
or common interest exception. They summarize these similar doctrines as providing that
“[w]hen parties with a common interest have counsel and later become adverse, neither
party can assert the attorney-client privilege or attorney work product privileges as to
materials generated during the period of common interest.” Pls.’ Br. at 53. They
additionally assert that our sister courts have applied the common interest and the co-
client doctrine “to require a corporation to produce otherwise attorney-client privileged
materials in suits involving directors of the corporation.” Id. at 54-55 (collecting cases).
Derivative Plaintiffs assert that they share a common interest with the Foundation
and the Corporation because their “interests never diverged since the [Derivative
Plaintiffs] are discharging the duty placed upon them by the Bylaws to ‘administer,
manage, preserve and protect the property’ of the corporation.” Id. at 52. They
emphasize that they have not sought any recovery for themselves as individuals.
Derivative Plaintiffs further contest the Commonwealth Court’s utilization of the
presumption that only the current management of a corporation should be deemed to hold
the privilege for the corporation. Instead, they argue that the presumption should not
apply when plaintiffs are alleging that the current management obtained control
improperly.
Current Management respond by arguing that Derivative Plaintiffs have conflated
two doctrines, which they contend are distinct in that “[t]he common interest doctrine
applies when multiple clients are represented by separate counsel, and the [co-client]
privilege applies when a single lawyer represents multiple clients.” Defs.’ Second Br. at
[J-26A&B-2018] - 27
48. First, addressing the common interest doctrine, Current Management explain that the
doctrine is “an extension of the attorney-client privilege” in which clients represented by
separate attorneys waive their privilege in regard to each other to allow counsel to
coordinate their defense, but do not waive the privilege as to third parties. Id. Current
Management assert that the parties in this case did not utilize separate counsel to
coordinate a defense against a common adversary. They assert that the doctrine simply
does not apply to the facts.
Turning to the co-client doctrine, Current Management recognize that it applies
where a single attorney represents multiple clients. For the doctrine to apply, Current
Management claim that the clients have to share “an identical or nearly identical legal
interest, so that their shared attorney can represent them with the candor and loyalty
required by the ethical rules.” Id. at 51. Current Management assert that no Pennsylvania
court has ever applied this concept “to eliminate the distinction between a corporation’s
officers and directors and the corporation itself,” id., in contrast to other states which
employ a “collective corporate client” approach in which directors are treated as co-clients
of the corporate counsel. Id. at 52-53. They argue that this approach is antithetical to
Pennsylvania, which instead employs the “entity is the client” approach. Id. at 54. Current
Management explain that the “entity is the client” approach recognizes that the entity acts
through its current management, and not through former directors, such as Derivative
Plaintiffs. Id. at 55.
Moreover, Current Management express concern with a rule that would essentially
waive the privilege anytime a person in management leaves their position: “To rule
otherwise would defeat the expectation of confidentiality, and would chill the willingness
of corporate management to speak candidly about privileged matters, knowing that
[J-26A&B-2018] - 28
someday one of their number may leave and become adverse to the corporation.” Id. at
59.
V. Analysis
A. Cuker and the ALI Principles
Prior to addressing the questions in this case, we first review our decision in Cuker
and the ALI Principles adopted therein addressing derivative litigation. In Cuker, a group
of shareholders made a demand on the company to pursue litigation against some of the
company’s directors and officers, claiming mismanagement. As in the case at bar, the
company created a special litigation committee to consider the demand. While the
committee was investigating, a second group of shareholders filed suit against the
company’s officers and directors raising similar issues to those of the original
shareholders’ demand. Subsequently, the special litigation committee concluded that
pursuing the derivative litigation was not in the corporation’s best interest, a decision later
adopted by the board. The board’s denial precipitated a second action filed by the first
group of shareholders. Both groups of shareholders litigated the claims on separate
tracks resulting in inconsistent verdicts, which this Court addressed under our King’s
Bench powers.
First, the Court in Cuker clarified that, while no Pennsylvania court had overtly
adopted the business judgment rule, it had been applied by our courts for over a century.
The Court summarized the doctrine: “[T]he business judgment rule reflects a policy of
judicial noninterference with business decisions of corporate managers, presuming that
they pursue the best interests of their corporations, insulating such managers from
second-guessing or liability for their business decisions in the absence of fraud or self-
dealing or other misconduct or malfeasance.” Id. at 1046. Next, the Court held that the
business judgment rule applied to management decisions related to derivative litigation,
[J-26A&B-2018] - 29
concluding that such decisions are “business decisions as much as any other financial
decisions.” Id. at 1048.
The Court acknowledged confusion in Pennsylvania law caused by the absence
of a “procedural mechanism for implementation and judicial review of the board’s
decision” to terminate the derivative litigation. Id. Accordingly, the Court provided the
following structure: “Without considering the merits of the action, a court should determine
the validity of the board's decision to terminate the litigation; if that decision was made in
accordance with the appropriate standards, then the court should dismiss the derivative
action prior to litigation on the merits.” Id. The Court noted that the judicial intervention
should be minimized and instructed that only limited discovery should be permitted in
such cases. It provided six factors for trial courts to consider in evaluating a board’s
decision to terminate derivative litigation.18 If the factors are met, then “the business
judgment rule applies and the court should dismiss the action.” Id.
18 The Court set forth the following six considerations:
[1] whether the board or its special litigation committee was
disinterested,
[2] whether it was assisted by counsel,
[3] whether it prepared a written report,
[4] whether it was independent,
[5] whether it conducted an adequate investigation, and
[6] whether it rationally believed its decision was in the best
interests of the corporation (i.e., acted in good faith).
Id. at 1048.
[J-26A&B-2018] - 30
To implement this broad framework, the Court specifically adopted ALI Principles
Sections 7.02-7.10 and 7.13,19 which it found relevant to the case before it, concluding
that those “sections set forth guidance which is consistent with Pennsylvania law and
precedent, which furthers the policies inherent in the business judgment rule, and which
provides an appropriate degree of specificity to guide the trial court in controlling the
proceedings.” Id. at 1049. In so doing, the Court noted that it had previously relied upon
the scholarship of the ALI and that the ALI Principles are “generally consistent with
Pennsylvania precedent.” Id.
While Cuker addressed the general process of derivative litigation in Pennsylvania
through the application of the business judgment rule and the adoption of the relevant ALI
Principles, we now consider in detail one of the adopted sections, specifically Section
7.13, as we grapple with the role of attorney-client privilege in derivative litigation. We
recognize the conceptual difficulties of the attorney-client privilege in derivative litigation
where both sides profess to represent the corporation, which is the true client and holder
of the privilege but which cannot act on its own. Nevertheless, we also observe that
Pennsylvania courts have utilized the presumption set forth in Commodity Futures
Trading Commission v. Weintraub, 471 U.S. 343, 348-49 (1985), that current
management of a solvent corporation has the authority to act on behalf of the corporation,
including in regard to the attorney-client privilege. See Maleski by Chronister v. Corporate
Life Ins. Co., 641 A.2d 1, 3 (Pa. Cmwlth. 1994) (citing 15 Pa.C.S. § 1721 (providing that
all powers . . . vested by law in a business corporation shall be exercised by or under the
authority of . . . a board of directors”); see also Red Vision Systems, Inc. v. National Real
19 The Court summarized the relevant provisions: “Sections 7.02 (standing), 7.03 (the
demand rule), 7.04 (procedure in derivative action), 7.05 (board authority in derivative
action), 7.06 (judicial stay of derivative action), 7.07, 7.08, and 7.09 (dismissal of
derivative action), 7.10 (standard of judicial review), and 7.13 (judicial procedures).” Id.
at 1049.
[J-26A&B-2018] - 31
Estate Information Services, L.P., 108 A.3d 54, 60-61 (Pa. Super. 2015) (discussing
Weintraub, 471 U.S. 343).
Section 7.13, which has been adopted in Pennsylvania, broadly addresses judicial
procedures for adjudicating motions to dismiss the derivative litigation following
management’s decision to adopt an independent committee’s recommendation to decline
to pursue the derivative claims demanded by plaintiffs. Subsection 7.13(a) mandates that
the corporation “file with the court a report or other written submission setting forth the
procedures and determinations of the board or committee” in support of the motion to
dismiss. ALI Principles § 7.13(a). It further requires that “[a] copy of the report or other
written submission, including any supporting documentation filed by the corporation, shall
be given to the plaintiff's counsel.” Id.
Under subsection (c), discovery is permissible only “if the plaintiff has
demonstrated that a substantial issue exists whether the applicable standards of § 7.08,
§ 7.09, § 7.10, § 7.11, or § 7.12 have been satisfied and if the plaintiff is unable without
undue hardship to obtain the information by other means.”20 Id. at § 7.13(c). The
subsection also cautions trial courts to grant only limited discovery “in the absence of
special circumstances” and to allow it only in regard to what the court views as relevant
to the applicable standards of the listed sections and “consistent with an expedited
resolution of the motion” to dismiss the derivative litigation. Id.
As noted, Section 7.13 addresses the attorney-client privilege in subsection (e) in
regard to motions to dismiss derivative litigation based upon the recommendation of the
independent committee, providing in full as follows:
§ 7.13 Judicial Procedures on Motions to Dismiss a Derivative
Action Under § 7.08 or § 7.11
****
20 The listed sections generally address standards for dismissing litigation.
[J-26A&B-2018] - 32
(e) Privilege. The plaintiff’s counsel should be furnished a
copy of related legal opinions received by the board or
committee if any opinion is tendered to the court under
§ 7.13(a). Subject to that requirement, communications, both
oral and written, between the board or committee and its
counsel with respect to the subject matter of the action do not
forfeit their privileged character, and documents, memoranda,
or other material qualifying as attorney’s work product do not
become subject to discovery, on the grounds that the action
is derivative or that the privilege was waived by the production
to the plaintiff or the filing with the court of a report, other
written submission, or supporting documents pursuant to
§ 7.13.
Relevantly, the first sentence of subsection (e) requires the corporation to provide
plaintiff’s counsel not only with the committee’s report which was submitted to the court
in support of dismissing the derivative litigation under subsection (a), but also a “copy of
related legal opinions” reviewed by the board or committee, even if not relied upon in the
dismissal recommendation.21 The Comment to subsection (e) explains that the written
submission of the committee’s report in favor of dismissing the derivative litigation “waives
the privilege as to such documents and, to a more limited extent, as to the process of
their preparation.”22 Id. at cmt. e.
As Current Management in the case at bar accept, the Comment explains that the
disclosure to derivative plaintiffs of the other “related legal opinions” is consistent with
long-standing attorney-client jurisprudence involving a party’s utilization of the “reliance
on counsel defense.” Courts have recognized that a party cannot defend an action by
claiming reliance upon an attorney’s advice and then refuse to provide the opposing side
21The remaining portions of subsection (e) address communications between the board
or the committee and its counsel and that counsel’s work product in regard to the
derivative litigation. Derivative Plaintiffs assert that they are not seeking this category of
documents. Accordingly, we will not discuss those provisions.
22Given the length of Comment (e), we will summarize the relevant portions rather than
reproducing it in full.
[J-26A&B-2018] - 33
with that advice. Likewise, the Comment reasons that “it would be unfair if the board or
committee could rely on legal advice from its counsel that the action was not meritorious
as a ground for dismissing the action and then deny plaintiff access to the substance of
that advice.” Id. According to the Comment, this process protects against “opinion
shopping without chilling the board’s or committee’s access to confidential legal advice.”
Id. Nevertheless, as indicated in the Reporter’s Note, “additional discovery of the board’s
or committee’s counsel is not intended by § 7.13(e), even though the tender of the opinion
to the court might be deemed a waiver of the privilege under traditional formulations of
the privilege.” Id. at Reporter’s Note 4.
Comment (e) additionally discusses the nine-factor Garner good cause analysis.23
Notably, Comment (e) acknowledges that the Garner good cause analysis has been
widely adopted by courts confronted with the scenario where a derivative plaintiff is
attempting to represent the corporation that is the “client” in the attorney-client
relationship. It explains that the good cause analysis does not deem the privilege to be
wholly unavailable. Instead, it merely allows plaintiffs to demonstrate “‘good cause’ why
the privilege should not be applied against” them and provides courts with criteria to
determine whether plaintiffs have demonstrated the necessary good cause. Id. at cmt. e.
Comment (e) to Section 7.13, however, does not necessarily adopt the Garner
good cause analysis. Instead, the Comment focuses on only two of the nine Garner
factors, specifically “whether the communication is of advice concerning the litigation itself
and whether the communication related to past or prospective actions.” Id. (quoting
Garner, 430 F.2d at 1104) (internal quotation marks removed). The Comment
emphasizes that the cases applying Garner in regard to these two factors have withheld
the privilege in relation to materials that were “roughly contemporaneous with the events
23 The Garner factors are set forth in full infra at 36 n.25.
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giving rise to the litigation” but refused to allow plaintiffs access to communications related
to the pending derivative litigation. Id.
The Comment highlights that the Garner line of cases, therefore, does not conflict
with Section 7.13(e) which provides similar protections for communications between
committee and its counsel concerning the pending litigation and “only requires disclosure
to the plaintiff of the report or other written submission to the court and any supporting
documentation,” under subsection 7.13(a) for purposes of adjudicating a motion to
dismiss derivative litigation. Id. Notably, the Comment does not speak to the other seven
factors, nor does it expressly adopt the test in full.24 Accordingly, we conclude that this
Court’s adoption in Cuker of Section 7.13 does not equate to an adoption of the Garner
test, which we consider and ultimately reject in the next sections of this opinion.
B. The Garner Good Cause Analysis
As noted, Derivative Plaintiffs urge the Court to adopt the Garner good cause
analysis. In Garner, the United States Court of Appeals for the Fifth Circuit considered
the assertion of the attorney-client privilege by a corporation’s current management
against derivative shareholders, who brought claims on behalf of the corporation alleging
that the current management engaged in, inter alia, securities violations and fraud to the
detriment of the corporation as well as the shareholders.
The Garner court recognized the tension inherent in the attorney-client privilege in
derivative litigation. It acknowledged that the privilege encourages current management
24The remaining paragraphs of Comment (e) address issues relating to whether the filing
or production of documents under Section 7.13(e) results in the waiver of the privilege in
regard to third parties, including the press. As this issue is not before this Court, we will
not address it.
Comment (f), which addresses the work product doctrine, explains that “counsel's notes,
internal drafts, correspondence with witnesses, and similar materials should normally be
protected from disclosure under the work product doctrine, regardless of the availability
of the attorney-client privilege.” ALI Principles § 7.13 cmt f.
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to seek the guidance of counsel without the fear that the content of the discussions will
later be divulged to disgruntled shareholders. Nevertheless, it also observed that
management acts not for its own benefit but for the shareholders’ benefit, such that the
shareholders are arguably the clients for purposes of the privilege. Garner, 430 F.3d at
1101.
In weighing the equities, the Garner court ultimately rejected a view of the attorney-
client privilege as absolute in derivative litigation and instead reasoned as follows:
The attorney-client privilege still has viability for the corporate
client. The corporation is not barred from asserting it merely
because those demanding information enjoy the status of
stockholders. But where the corporation is in suit against its
stockholders on charges of acting inimically to stockholder
interests, protection of those interests as well as those of the
corporation and of the public require that the availability of the
privilege be subject to the right of the stockholders to show
cause why it should not be invoked in the particular instance.
Id. at 1103 - 04. The court then provided nine factors to consider in determining whether
derivative plaintiffs have demonstrated good cause for piercing the attorney-client
privilege.25
25 The nine factors are as follows:
[1.] the number of shareholders and the percentage of stock
they represent; [2.] the bona fides of the shareholders; [3.] the
nature of the shareholders’ claim and whether it is obviously
colorable; [4.] the apparent necessity or desirability of the
shareholders having the information and the availability of it
from other sources; [5.] whether, if the shareholders’ claim is
of wrongful action by the corporation, it is of action criminal, or
illegal but not criminal, or of doubtful legality; [6.] whether the
communication related to past or to prospective actions; [7.]
whether the communication is of advice concerning the
litigation itself; [8.] the extent to which the communication is
identified versus the extent to which the shareholders are
blindly fishing; [and] [9.] the risk of revelation of trade secrets
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As noted, a number of courts that have considered the issue have adopted this
framework for attorney-client privilege in derivative litigation. See, e.g., Wal-Mart Stores,
Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014); see
also John W. Gergacz, Attorney-Corporate Client Privilege § 6:2 n.2 (3d, 2018-2 ed.).
Other courts, however, have rejected the analysis as inconsistent with their precedent
relating to the attorney-client privilege. See, e.g., Shirvani v. Capital Investing Corp. Inc.,
112 F.R.D. 389 (D. Conn. 1986); see also Gergacz, §6.2 n.1. Of particular note, Judge
Wettick of the Allegheny County Court of Common Pleas considered the application of
the Garner good case analysis in Agster v. Barmada, 43 Pa. D. & C. 4th 353 (Allegheny
C.C.P. 1999). He rejected the analysis on the basis that “Pennsylvania has a stronger
attorney-client privilege than the privilege recognized in those jurisdictions that use a
balancing approach.” Id. at 370. He held that “[a] qualified attorney-client privilege is
inconsistent with the rulings of the Pennsylvania Supreme Court that the purpose of the
privilege is to guarantee the confidentiality of an attorney-client communication.” Id. at
371.
C. Garner and the Attorney-Client Privilege in Pennsylvania
We now consider whether to affirm the Commonwealth Court’s adoption of the
Garner good cause analysis in light of Pennsylvania’s attorney-client privilege
jurisprudence.26 We have often recognized the conflict inherent in the attorney-client
privilege. On the one hand, our precedent disfavors evidentiary privileges which are “in
or other information in whose confidentiality the corporation
has an interest for independent reasons.
Id. at 1104
26 As we have previously observed, questions involving application of the attorney-client
privilege are questions of law. Accordingly, our standard of review is de novo and our
scope of review is plenary. See, e.g., In re: Thirty-Third Statewide Investigating Grand
Jury, 86 A.3d 204, 215 (Pa. 2014).
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tension with the truth-determining process of the justice system,” as they result in the
exclusion of evidence. Levy v. Senate of Pennsylvania, 65 A.3d 361, 368 (Pa. 2013).
Nevertheless, we have emphasized the need for protection of various types of
communications though the establishment of privileges. Of these privileges, the attorney-
client privilege is often considered “the most revered.” In re: Investigating Grand Jury of
Philadelphia County, 593 A.2d 402, 405 (Pa. 1991).
The attorney-client privilege as codified by the General Assembly, 42 Pa.C.S.
§ 5928, and applied by our courts is intended to foster open discussion between counsel
and client. Only with full information from the client can an attorney provide relevant and
sound legal advice. A client, however, will not reveal all necessary information to counsel
if she fears that the information could later be disclosed.27 Indeed, we have observed
that application of the attorney-client privilege does not actually result in the loss of
evidence in the truth-determining process because “the client would not have written or
uttered the words absent the safeguards of the attorney-client privilege.” Levy, 65 A.3d
at 371 (quoting Paul R. Rice, Attorney-Client Privilege in the United States, § 2:3 (2012)).
In an often-cited explanation, the United States Supreme Court detailed that the
purpose of the privilege “is to encourage full and frank communication between attorneys
and their clients and thereby promote broader public interests in the observance of law
27This Court aptly described the rationale underlying attorney-client privilege over a
century ago,
[If the privilege did not apply], then a man about to become
involved in complicated business affairs, whereby he would
incur grave responsibilities, should run away from a lawyer
rather than consult him. If the secrets of the professional
relation can be extorted from counsel in open court, by the
antagonist of his client, the client will exercise common
prudence by avoiding counsel.
National Bank of West Grove v. Earle, 46 A. 268, 269; see also Gillard, 15 A.3d at 49.
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and administration of justice.” Upjohn Co. v. United States, 449 U.S. 383, 389 (1981);
see also Levy, 65 A.3d at 368; Gillard, 15 A.3d at 47 n.1. While the absence of the
privilege curtails frank discussion and the resulting legal advice, so too does uncertainty
regarding the application of the privilege. We fully agree that “[a]n uncertain privilege, or
one which purports to be certain but results in widely varying applications by the courts,
is little better than no privilege at all.” Upjohn Co., 449 U.S. at 393, see also Levy, 65
A.3d at 371; Gilliard, 15 A.3d at 51 n.5. To decide whether to engage in communications,
attorneys and clients must be able to predict whether those communications are protected
by the privilege.
With this framework in mind, we consider the applicability of the Garner good
cause analysis to Pennsylvania’s attorney-client privilege in the context of a motion to
dismiss derivative litigation pursuant to ALI Principle 7.13 as adopted by this Court in
Cuker. We acknowledge that the Garner analysis is an understandable attempt to provide
balance in the unusual scenario of derivative litigation where both the defendants, in the
form of current management, and the plaintiffs, asserting claims for the benefit of the
corporation, are attempting to speak for the corporation. At its most basic, the nine-factor
analysis attempts to evaluate if derivative plaintiffs have created enough of a question
regarding current management’s actions to justify the withholding of the attorney-client
privilege for the benefit of the corporation, as the true client.
We conclude that the Garner good cause analysis is inconsistent with the attorney-
client privilege under Pennsylvania jurisprudence because it eliminates the necessary
predictability of the privilege. Rather than providing clarity and certainty, the Garner test
requires attorneys and clients 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
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assertion of the attorney-client privilege in regard to legal advice provided by the
corporation’s lawyers. The reality is that this weighing of the factors would result in current
managers and the corporation’s attorneys having no meaningful way of determining
whether their otherwise privileged communications would be later divulged in derivative
litigation discovery. As a result, corporate management would be less willing to discuss
issues with corporate counsel, and corporate counsel would caution corporate
management not to speak with her candidly. As a matter of simple logic, this will result
in corporate managers being forced to act without necessary legal guidance in an already
complicated legal environment. We conclude that this is inconsistent with the revered
nature of the attorney-client privilege in Pennsylvania, and the clarity of it, which has been
codified by our legislature and applied continuously by our courts. 28
Moreover, we conclude that the ALI Principles adopted by this Court in Cuker, and
specifically Section 7.13(e) addressing attorney-client privilege in regard to motions to
dismiss derivative actions, provide an appropriate framework for derivative litigation,
making the subjective Garner factors unnecessary.29 This framework provides the
derivative plaintiff with a path to challenge the validity of an independent committee’s
decision not to pursue derivative litigation and allows limited discovery, including some
28 Our holding herein should be read against the facts and legal questions presented in
the case currently before the Court, which solely concerns whether the Commonwealth
Court was correct in remanding for a Garner good-cause analysis in a case where the
current management of a corporation has filed a motion to dismiss the litigation based
upon an independent committee’s recommendation. Although we acknowledge that the
consideration of whether Garner is consistent with Pennsylvania attorney-client privilege
jurisprudence may have applicability in other scenarios, we reserve judgment on such
questions, which deserve to be considered independently as they may well raise different
considerations.
29 As previously mentioned, see supra 6, n.3, the General Assembly has codified our
adoption of the ALI Principles to some extent. We do not address the exact contours of
the recently adopted provisions but generally recognize that the statutory provisions, like
the ALI Principles, provide a framework to address the tensions inherent in derivative
litigation.
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privileged material which would otherwise not be permissible in standard litigation.
Nevertheless, as noted, the ALI Principles protect the current management team through
application of the business judgment rule, which has long been a part of Pennsylvania
jurisprudence.
In addition to rejecting the Garner good cause analysis, we likewise decline to
incorporate Section 85 of the Restatement (Third) of the Law Governing Lawyers, which,
like Garner, utilizes a nebulous analysis of whether the plaintiffs’ needs are “sufficiently
compelling and the threat to confidentiality sufficiently confined to justify setting the
privilege aside.” Restatement (Third) of the Law Governing Lawyers § 85
D. Applicability of the Fiduciary and Co-Client Exceptions
Regarding Derivative Plaintiffs’ invocation of the fiduciary and co-client exceptions,
we observe that Derivative Plaintiffs’ argument is essentially based upon their claim that
they are asserting the rights of the Foundation and the Corporation as clients in the
attorney-client relationship to whom both Current Management and Derivative Plaintiffs
owe a fiduciary duty as trustees or former trustees. We agree with the Commonwealth
Court, however, that the derivative relationship involved in this case does not fit within the
construct of either exception, as the Derivative Plaintiffs are neither owed a fiduciary duty
by the corporate entities or Current Management nor were Derivative Plaintiffs co-clients
with the corporate entities or Current Management. Rather than attempt to force the
derivative fact pattern into these ill-fitting constructs, we instead utilize the procedures
specifically designed for derivative litigation adopted by this Court in Cuker, which we
view as providing the appropriate balance between protecting current management under
the business judgment rule and allowing derivative plaintiffs to assert claims on behalf of
the corporation.
VI. Summary
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Accordingly, we vacate the orders of the trial court and the Commonwealth Court.
We additionally remand the matter to the trial court for reconsideration of Derivative
Plaintiffs’ motion to compel in a manner that is consistent with this opinion.
Chief Justice Saylor and Justices Donohue, Dougherty and Wecht join the opinion.
Justice Todd files a concurring and dissenting opinion.
Justice Mundy files concurring and dissenting opinion in which Justice Todd joins.
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