Pgh History v. Ziegler, Appeal of: Hoffstot

• Court: Supreme Court of Pennsylvania
• Decided: January 23, 2019
• Docket: 54 WAP 2017
• Status: Published

Opinion

[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.

[J-26A&B-2018] - 34 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.

[J-26A&B-2018] - 35 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

[J-26A&B-2018] - 36 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).

[J-26A&B-2018] - 37 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.

[J-26A&B-2018] - 38 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

[J-26A&B-2018] - 39 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.

[J-26A&B-2018] - 40 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

[J-26A&B-2018] - 41 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.

[J-26A&B-2018] - 42