Federal Court Upholds Attorney-Client Privilege in Discovery Dispute
Investment Management Update
Date: May 25, 2017
The U.S. District Court for the Northern District of Illinois has made it more difficult to pierce the attorney-client privilege between fund trustees and their counsel by requiring shareholders to show “good cause” to invoke the fiduciary exception to the privilege. This ruling diverges from the course set by the Western District of Washington a few months earlier when it took a more permissive view of the fiduciary exception and required fund trustees to comply with a subpoena issued by shareholders’ counsel.
Prior Case Law
In November 2016, a federal court in Washington decided that independent trustees to a registered investment company owed a fiduciary duty to shareholders who required the disclosure of attorney-client communications to a shareholder plaintiff in a Section 36(b) excessive fee litigation. In Kenny v. Pac. Inv. Mgmt. Co., fund trustees attempted to withhold from plaintiffs communications between the trustees and their counsel discussing matters of board governance, preparation for board meetings, integration and retirement of trustees, and advisory contracts approvals, noting that none of the parties involved disputed that the communications sought were privileged. The trustees further argued that no court had ever recognized the “fiduciary exception” in the mutual fund industry or in the 45-year history of Section 36(b) litigation.
Nevertheless, the court in Kenny ordered the trustees to produce the withheld communications because the documents at issue contained legal advice for managing the fund, and that advice was not sought in anticipation of litigation. The court further noted that the fund paid legal counsel’s fees, and that legal advice concerning the fund was ultimately for the shareholders’ benefit. Therefore, the Washington federal court decided that the fiduciary exception to the attorney-client privilege applied.
In April 2017, an Illinois district court expounded upon the Kenny analysis in a similar discovery dispute arising from another Section 36(b) excessive fee litigation. In Calamos Growth Fund v. Calamos Advisors LLC, the court held that a party invoking the fiduciary exception must demonstrate more than just a fiduciary relationship. The party seeking discovery must also have good cause for overcoming the attorney-client privilege.
Demonstrating good cause is a high threshold for shareholders seeking to discover trustees’ communications with counsel. The Calamos court ruled that the key factors in establishing good cause are the necessity of the information to the discovering party’s case and the availability of the information from non-privileged sources. In Illinois, federal courts will pierce the attorney-client privilege only when the discovering party establishes that the information sought is both critical to its case and “otherwise unavailable.” The relevant inquiry is not whether the specific privileged documents are available elsewhere, but whether the information needed for the lawsuit is available from sources other than the privileged documents. Courts will not indulge “fishing expeditions” and will require “more than mere conjecture” to satisfy the good-cause prong.
Given the comprehensive public record of a board’s deliberations in managing a fund and executing its statutory and fiduciary duties, the Calamos court’s addition of a good cause requirement makes it difficult for shareholders to invoke the fiduciary exception. Indeed, the Calamos court upheld the attorney-client privilege and denied the shareholders’ motion to compel. Although Calamos did not overrule Kenny, it casts doubt on Kenny’s precedential value and makes clear that not all courts are willing to forgo the protections of the attorney-client privilege at a shareholder’s request.
The attorney-client privilege protects the free flow of communications between independent trustees and their counsel, including communications regarding contract renewals, compliance, compensation and other governance matters. While the Illinois federal court decision fortifies the shield of the attorney-client privilege against disclosure that the earlier Washington court decision threatened to eradicate, the possibility remains that a court will apply the fiduciary exception to require production of documents containing communications between trustees and their counsel. In light of this, it is better to be circumspect and discuss sensitive issues with counsel verbally, either in person or otherwise.
FOR MORE INFORMATION
For more information, please contact:
Philip B. Sineneng
Andrew J. Davalla
Donald S. Mendelsohn
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