Delaware Business Litigation Report

When Is Advice of Counsel a Defense You Can Raise, but Not Disclose?

Authored by Edward M. McNally
This article was originally published in the Delaware Business Court Insider | April 24, 2013

 Most defendants in corporate fiduciary duty litigation want to say, "My lawyer said it was all right." They usually avoid making that point for fear of waiving the attorney-client privilege. A recent Court of Chancery decision suggests that it is possible to say your lawyer advised you without opening the door to disclosure of exactly what the lawyer said. Doing so involves walking a tightrope. One slip and you're waiving your privilege. Yet, the benefits may be worth the risk.

At least in Delaware corporate litigation, in claims that the directors breached their duty to stockholders, the directors' good faith is critical to the outcome. Usually, the corporation will have the provision in its certificate of incorporation authorized by the Delaware General Corporation Law that exculpates directors for honest errors of judgment. However, that provision cannot bar claims for directors who don't act in good faith. Hence, being able to say you relied on a lawyer's advice may be important to demonstrating you acted in good faith. Nonetheless, corporations do not often make the "reliance on counsel" claim for fear of waiving their attorney-client privilege. Whether that fear is really justified by the consequences is another matter, particularly if the lawyer's advice is sound, complete and consistently favorable. Here, we want to only examine if you can say "advice of counsel," but not waive the privilege.

In re Comverge Shareholders Litigation, Del. Ch. C.A. 7368-VCP (April 10, 2013), suggests that asserting "advice of counsel" will not alone waive the privilege. Comverge involved a claim that the defendant, Comverge Inc., had violated a nondisclosure agreement with H.I.G. Capital. The plaintiffs asserted that Comverge had not even sought legal advice before taking the action that allegedly violated the H.I.G.-Comverge agreement. Comverge responded it had "sought legal advice ... on multiple occasions." Predictably, the plaintiffs then demanded to see that advice.

The Court of Chancery decided that merely asserting "legal advice" in defense did not waive the attorney-client privilege. The court applied a two-part test. First, the court ruled that privilege may be waived by the party that interjects the existence of an attorney's advice into the litigation. Because it was the plaintiffs that had first alleged "no attorney advice," Comverge was not the party that had interjected that issue into the litigation. That seems only fair.

Second, the court determined whether reviewing the substance of the attorney's advice was necessary to decide an issue already in the litigation. For example, if a defendant in patent litigation seeks to avoid exemplary damages for infringement by claiming it had a noninfringement opinion from patent counsel, the substance of that opinion must be disclosed. Applying this test is where things get tricky for corporate defendants in fiduciary breach litigation.

The defendants only said they had "sought legal advice" before completing the transaction under attack. They did not say what that advice was, such as to prove they were fully informed. After a careful review of precedent, the Court of Chancery ruled the attorney-client privilege was not waived. Now you might ask, what good did it do to say you "sought legal advice" when you failed to disclose the advice that supported your action? After all, for corporate defendants claiming they acted in good faith, the disclosure of the substance of the legal advice they received would seem to be necessary. Is there any value then in doing less than disclosing the actual advice?

Sure, there is. The plaintiffs in Comverge apparently believed that by arguing Comverge had not had legal advice, they would taint the court's view of Comverge. Portraying your opponent as a scofflaw is an age-old tactic that does work sometimes. Moreover, defense counsel is often confronted by an outraged client that cannot understand why such accusations of lawlessness are unrebutted out of some seemingly hypertechnical fear of waiving the attorney-client privilege.

Now under the Comverge ruling, counsel probably should assert the client did "seek legal advice," at least when the opposition claims the client acted without such advice. Of course, that assertion of advice received must be true; even better if you can name counsel recognized for their expertise in the law involved. Indeed, after the Comverge decision, the failure to rebut a claim of failure to seek appropriate advice may now be taken as an admission the claim is true. Hiding behind a fear of waiving the attorney-client privilege will no longer work to avoid the sting of such a claim.

Finally, it is important to recognize the limits of the Comverge decision. The Court of Chancery was undoubtedly affected by the unfairness of letting the plaintiffs' allegations go unanswered. The defendants' response was limited "fairly assiduously" to "assertions that the board sought, obtained, received or considered the advice of counsel," but no more. Going beyond that may be a run off the cliff.

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