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August 26, 2011 Articles

Attorney-Client Privilege and Former Directors and Officers

What happens to attorney-client and work-product privilege if a director or officer leaves the corporation and then becomes adverse to it in litigation?

by Joshua Heidelman and Michael J. Schrier

It is black-letter law that where a corporation is the client, the attorney-client and work-product privileges (for convenience, both will be referred to here as the "privilege") extend to the executives, directors, and other members of the corporation's "control group" (or whatever label a particular jurisdiction assigns to such individuals). The necessity for such a rule is fairly obvious—a corporation can only communicate and act through its directors and officers. But what happens to the privilege if a director or officer leaves the corporation and then becomes adverse to it in litigation? Must the corporation produce privileged documents to the director or officer that were created or communicated during that person's tenure, or can the otherwise privileged documents be withheld? What if the director or officer is demanding production of documents he or she actually created or received while still with the corporation?

Consider the following two scenarios. In Scenario No. 1, you represent a corporation in a suit against a former officer who has formed a competing company, usurped corporate opportunities, and otherwise breached his or her fiduciary duties. In Scenario No. 2, a former officer or director sues the corporation you represent, either for wrongful termination or based on some other corporate misconduct or waste (to which he or she, of course, had a front-row seat). In both scenarios, the director or officer seeks production of correspondence and other work product received from or sent to outside counsel. When the corporation claims privilege and the former director or officer moves to compel, what is the result?

The answer depends on which jurisdiction's law applies, because the law on this issue is in a state of flux. The flux may be partly explained by what appear to be competing absurdities on each side of the debate. At one extreme, if the privilege is upheld, the corporate officer is denied access to documents he or she may have previously received, read, or perhaps even have written—hardly in keeping with the policy goals of preventing the disclosure of legal advice (assuming an appropriate protective order could be entered). At the other extreme, if the privilege is not upheld, documents the officer received only because of her corporate position are freely available to her, despite the fact that she is now in an adverse position.

The Joint-Client Rule

The line of cases holding that a corporation may not invoke the privilege as to former directors or officers appears to originate from the Delaware case of Kirby v. Kirby, 1987 Del. Ch. LEXIS 463 (1987). In Kirby, three of the four siblings who controlled a charitable corporation sued the fourth sibling after they were allegedly ousted as directors. Kirby at *7. The ousted siblings sought a declaration that they were still directors and, in discovery, sought production of various privileged documents—some created before their ouster and some after. The documents pertained to various corporate legal matters but do not appear to have related to the specific issues in the litigation (at least, the opinion makes no such claim). When the corporation refused to produce the documents and the ousted siblings moved to compel, the Delaware Court of Chancery tried to strike a balance. It ordered production of all documents created prior to the ouster, and for those documents created after the ouster, the court ordered an in camera review to see if they met the traditional standards for "good cause."

According to Kirby, the issue of privilege turned on "whether the directors, collectively, were the client at the time the legal advice was given." Answering in the affirmative, the court held that a corporation and its individual directors are "joint clients" "when legal advice is rendered through one of its officers and directors." Id. at *7. The court explained that "[t]he directors are all responsible for the proper management of the corporation, and it seems consistent with their joint obligations that they be treated as the 'joint client' when legal advice is rendered to the corporation through one of its officers." Id. at *7; see also Moore Business Forms v. Cordant Holdings, 1996 WL 307444, *6 (Del. Ch. June 4, 1996).

The Kirby rule appears straightforward, but can lead to seemingly absurd results. If a corporation and its directors or officers are "joint clients" whenever "legal advice is rendered through one of its officers or directors," won't they always be joint clients? How can outside counsel render legal advice to a corporation without communicating to or with at least one of its officers or directors? Who would receive the email, letter, memo, etc.? Yet the Kirby opinion offers no other explanation, nor does Kirby provide any evidence that outside counsel did, in fact, jointly represent both the corporation and its individual directors. Perhaps Kirby is best understood in the specific context of small, closely held businesses.

If Kirby was intended to apply only in a limited context, however, the court in the frequently cited Gottlieb v. Wiles, 143 F.R.D. 241 (D. Colo. 1992), applied no such limitations. There, a former CEO sued his corporation and sought privileged documents created while he was still at the company. Adopting Kirby's joint-client rule, the District of Colorado held that just as when "parties with a common interest retain a single attorney," they later cannot claim privilege if their interests become adverse, stating that "[t]he policy underlying the work product doctrine would not be advanced by now denying [the plaintiff] access to documents which he could have seen upon request at the time they were generated." Gottlieb, 143 F.R.D. at 247. As in Kirby, the Gottlieb court cited no evidence of actual joint representation, such as a joint retention agreement.

Gottlieb's reference to "the policy underlying the work product doctrine" is really just the court picking its favored absurdity—if the attorney-client privilege is designed to protect the secrecy of such communications, why deny access to someone who was privy to the communications in the first place? Other jurisdictions appear to follow the Kirby and Gottlieb lines of cases. See, e.g., Inter-Fluve v. Montana Eighteenth Judicial Dist. Ct., 327 Mont. 14, 112 P.3d 258 (2005); Rush v. Sunrise Senior Living, Inc., CL-07-11322 2008 Va. Cir. LEXIS 21 (Va. Cir. Feb. 12, 2008); SPSS, Inc. v. Carnahan-Walsh, 641 N.E.2d 984 (Ill. App. Ct. 1994).

Documents Placed "In Issue"

One scenario that makes the most sense under the Kirby line of cases occurs when the privileged communication is actually at issue in the litigation. For example, in Carnegie Hill Financial v. Krieger, 2000 WL 10446 (E.D. Pa. 2000), a corporation sued two former officers and directors for, among other things, breach of fiduciary duty and corporate waste. The defendants were the sole officers and directors at the time and sought production of privileged communications between themselves and outside counsel. Following Kirby and Gottlieb, the court held that the former officers and directors "were in a position to obtain legal advice from corporate counsel for the benefit of the corporation," and, as such, "joint client" principles applied. Id. at *2. Perhaps more importantly, the court pointed out that the corporation admitted its "cause of action is derived, in part, from the defendants' alleged conduct while utilizing the legal services of [corporate counsel]." Id. Thus, while Krieger refused to apply the privilege, invoking the joint-client theory, it also relied on the more traditional "at issue" exception to privilege.

Criticism of the Joint-Client Rule

A number of courts have criticized the Kirby and Gottlieb line of cases, relying on one of the more famous corporate client privilege cases, Commodity Future Trading Comm'n v. Weintraub, 471 U.S. 343 (1985), to attack the Kirby and Gottlieb premise that a corporation and its directors and officers are joint clients when legal advice is rendered through them.

In Weintraub, the U.S. Supreme Court addressed the issue of who controls a corporation's privilege in bankruptcy, holding that that the attorney-client privilege belongs solely to the corporation, and, as such, former officers have no authority to assert or waive the privilege. Weintraub, 471 U.S. at 349. For the Gottlieb court, however, who has the power to assert or waive privilege

is not the issue before the court. The fact that former officers and directors lack the power to waive the corporate privilege does not resolve the question of whether they themselves are precluded by the attorney-client privilege or work product doctrine from inspecting documents generated during their tenure.

Gottlieb, 143 F.R.D. at 247. Thus, the Gottlieb court did not believe it ran afoul of Weintraub. Instead, the officers held their own privilege independent of any held by the corporation.

Perhaps the most frequently cited case criticizing Kirby and Gottlieb and explicitly incorporating the general principles set forth in Weintraub is Milroy v. Hanson, 875 F. Supp. 646, 648–50 (D. Neb. 1995). There, a current director of a closely held corporation sued the corporation and its other directors for corporate waste, breach of fiduciary duty, and civil RICO violations. The plaintiff director sought privileged documents from the corporation's outside law firm. Relying on Kirby and Gottlieb, the magistrate judge ordered production of the documents. On review, however, the district judge reversed, finding that the corporation could assert the privilege against the plaintiff, despite the fact that he was still an officer and director:

With all due respect, cases like [Kirby and Gottlieb] make a fundamental error by assuming that for a corporation there exists a "collective corporate client" which may take a position adverse to "management" for purposes of the attorney-client privilege. There is but one client, and that client is the corporation.

Milroy, 875 F. Supp. at 649 (quoting Weintraub, 471 U.S. at 348–49). The Milroy plaintiff had not claimed he was in fact a joint client, and corporate "management" (the remaining directors and officers) had not waived the privilege. One dissident director could not override their decision not to waive privilege. Id.

If anything, the Milroy plaintiff, as a currentdirector, was in a stronger position than the parties in Kirby and Gottlieb. Could he not simply invoke his right to access corporate records? At least in Milroy, the court said no, because the plaintiff "filed suit, in major part, to benefit himself," a fact that would be true in many cases. The court did note that the Milroy plaintiff failed to argue (or could not argue) that he was entitled to the documents "in his fiduciary role as a corporate director." Id. at 650–51. The court did not signal how it would have ruled under that scenario, perhaps leaving an opening for a party in a jurisdiction following Milroy.

A particularly thorough discussion of the Kirby/Gottlieb and Milroy debate is set forth in Dexia Credit Local v. Rogan, 231 F.R.D. 268, 276-280 (N.D. Ill. 2004). There, a bankrupt corporation's largest creditor sued the former CEO for fraud, and the CEO moved to compel production of privileged documents to which he had access while still at the company. The court denied the former CEO's motion to compel for two distinct reasons. First, it disagreed with the Kirby and Gottlieb. Second, it believed the policy underlying corporate privilege would be thwarted if former directors and officers were permitted access to documents after their separation.

Addressing Kirby and Gottlieb, the Dexia court reaffirmed that "the privilege does not belong to the individual agents of the corporation seeking the advice, because the corporation is the client." Dexia, 231 F.R.D. at 277. Thus,

[a]lthough an agent may be on the 'inside' at the time the confidential communications were made between the corporation (on whose behalf the agent was acting) and counsel, once this agent leaves the corporation's employ, the privilege, and the legal rights associated with it, do not leave with this agent. Rather the privilege remains with the corporation, because it belongs to the corporation. Thus, once [the CEO's] status terminated, so too did his right of access to privileged documents of the corporation.

Id. The Dexia court then explained that Gottlieb "failed to address the fact that the reason former control group members may not waive the corporate privilege is because the privilege was never theirs in the first place . . . there was no attorney-client privilege between attorneys and control group members personally, and thus no continuing right to exercise a privilege once they were no longer members." Id. at 277–78. For the Dexia court, there never was a joint client relationship, and, as such, once the CEO stepped out of his role as corporate officer/director, he lost any access to privileged materials.

Turning to policy, the Dexia court offered its own competing policy to that expressed in Kirby/Gottlieb:

People may come and go within a control group, but a corporation has a legitimate expectation that a person who leaves the control group no longer will be privy to privileged information. To rule otherwise would defeat that expectation, and could chill the willingness of control group members to speak candidly on paper (or these days, in electronic media) about privileged matters, knowing that some day one of their number may leave the control group and become adverse (whether through litigation or business activity) to the corporation.

Id. Dexia's policy argument thus illustrates the other competing absurdity referenced at the beginning of this article in that it seems absurd to allow a former officer or director, whose interest is now clearly adverse to the corporation, to have access to privileged documents by virtue of the fact that he/she was once a member of the corporation's control group. Many jurisdictions have followed the Dexia and Milroy reasoning or have otherwise rejected Kirby and Gottlieb. See, e.g., Bushnell v. Vis. Corp., No. C-95-04256, 1996 WL 506914 (N.D. Cal. Aug. 29, 1996); Lane v. Sharp Packaging Sys., Inc., 640 N.W. 2d 788, 800, (Wis. 2002); Genova v. Long Peak Emergency Physicians, 72 P. 3d 454, 462 (Colo. Ct. App. 2003); American S.S. Owners Mut. Prot. and Indem. Ass'n, Inc. v. Alcoa S.S. Co., Inc., 232 F.R.D. 191, 197 (S.D.N.Y. 2005); Montgomery v. eTreppid Technologies, LLC, 548 F.Supp.2d 1175 (D. Nev. 2008).

A final example that perhaps illustrates a retreat from Kirby came in Barr v. Harrah's Entertainment, 2008 WL 906351 (D.N.J. 2008). The Barr plaintiff was the CEO of Caesars Entertainment until Caesars merged with Harrah's. Later, the CEO became the named plaintiff in a class action of former Harrah's employees asserting breach of a stock incentive plan. Because Delaware law applied, the CEO invoked Kirby and moved to compel production of privileged documents to which he had access while still at Caesars. Noting that Kirby had been criticized and doubtless trying to prevent a former CEO from abusing his former position, the court sought to distinguish Kirby on its facts: "Kirby does not address a former officer or director's right of access to a corporation's documents when the officer or director is acting as a class representative in a class action lawsuit asserting a breach of contract claim." Id. at *6. A fairly limited parsing of Kirby, it would seem—perhaps done to achieve the "right" result.


On balance, it appears that the Milroy and Dexia line of cases are gaining ground as the case law on this topic develops. However, counsel involved in litigation between directors or officers and their former corporations should be aware of the jurisdictional split in this area, and the Kirby and Gottlieb line of cases is still the law in multiple jurisdictions.

Keywords: litigation, commercial, business, attorney-client privilege, work-product privilege

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