RSS Feed LinkedIn Instagram Twitter Facebook
FMG Law Blog Line

Archive for February, 2015

Delaware Supreme Court Rules Shareholders Can Pierce Corporation’s Attorney-Client Privilege for Good Cause

Posted on: February 27th, 2015

By: Michael Wolak, III

The attorney-client privilege is a fixture in American jurisprudence and the oldest recognized privilege.  The privilege, however, is not absolute.  The Delaware Supreme Court recently adopted an exception to the attorney-client privilege that gives shareholders the pre-litigation right to inspect privileged and otherwise inaccessible internal investigation documents upon a showing of “good cause.”  Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014).  Wal-Mart is a cautionary reminder of how fragile the privilege is where shareholders, purporting to act derivatively on behalf of the corporation, seek internal documents to corroborate their claim that directors or officers breached their fiduciary duties to the corporation.

Wal-Mart involved a demand by IBEW (a Wal-Mart stockholder) under Delaware law to inspect Wal-Mart’s records concerning an alleged bribery scandal involving Wal-Mart’s Mexican subsidiary.  IBEW’s stated purpose for its demand was to investigate the possibility of mismanagement and breaches of fiduciary duty by Wal-Mart executives in connection with the bribery allegations, and to determine whether pre-suit demand on the Wal-Mart board would be futile as part of a derivative lawsuit on behalf of the corporation.  In response to Wal-Mart’s production, which withheld certain documents based on the attorney-client privilege and/or work product doctrine, IBEW filed a lawsuit pursuant to Section 220 of the Delaware Code to enforce its inspection rights as a shareholder.  IBEW claimed that Wal-Mart’s production was deficient and that privileged documents were necessary to determine whether the company’s directors and officers had knowledge of the bribery allegations and breached their fiduciary duties.

The Court of Chancery held that IBEW was entitled to documents protected by the attorney-client privilege and ordered Wal-Mart to produce its internal investigation documents concerning the bribery allegations, including officer-level documents that were never provided to Wal-Mart’s board or to any executive committee.  In ordering production of privileged documents, the Court of Chancery invoked the “Garner Doctrine,” which was articulated in a 1970 decision of the Fifth Circuit Court of Appeals that recognized a fiduciary duty exception to the attorney-client privilege.  Garner v. Wolfinbarger, 430 F.2d 1093, 1103-04 (5th Cir. 1970).  Garner held that shareholders suing derivatively to redress alleged breaches of fiduciary duties by officers and directors can pierce the corporation’s attorney-client privilege upon a showing of “good cause.”  The Garner court listed several factors that should be considered when evaluating whether the plaintiff has shown “good cause,” including:

  • The number of shareholders and stock percentage they represent;
  • The bona fides of the shareholders;
  • The nature of the shareholders’ claim and whether it is “obviously colorable;”
  • The apparent necessity of the information and its availability from other sources;
  • Whether the alleged misconduct is criminal in nature; and
  • The extent to which the communications are identified, or whether the shareholders are “blindly fishing.”

The Delaware Supreme Court affirmed the Chancery Court’s invocation of the Garner doctrine, finding that IBEW showed “good cause” to invade the privilege because, among other factors, the information sought by IBEW concerned the board’s handling of the bribery allegations, including whether a cover-up took place, and was “necessary and essential” to IBEW’s proper purposes.

The Wal-Mart decision is critical for many reasons.  First, the Delaware Supreme Court directly endorsed Garner for the first time, holding that the doctrine “should be applied in plenary stockholder/corporation proceedings” and Section 220 actions.  Prior to Wal-Mart, the Delaware high court had only tacitly endorsed the doctrine in dicta on two prior occasions.  Second, the Wal-Mart Court made clear that the Garner doctrine’s fiduciary exception to the attorney-client privilege is “narrow, exacting, and intended to be very difficult to satisfy,” and does not apply to work product.  The Court’s directive helps achieve a proper balance between the competing interests at play – the encouragement of full and frank communication between attorneys and their clients, on the one hand, and the protection of the interests of stockholders, the corporation, and of the public, on the other hand.

Despite the grudgingly narrow standard emphasized by the Court, it remains to be seen what impact Wal-Mart will have in the area of derivative and D&O claims and whether other states will follow Delaware and endorse the Garner doctrine.  Garner has rarely been followed by courts.  For example, California rejects the Garner doctrine and precludes shareholders from discovering privileged information and documents despite good cause.  Holes v. Superior Court, 157 Cal. App. 3d 1199 (1984).  Wal-Mart, however, may trigger an increase – in Delaware and in other jurisdictions – in shareholder derivative actions and shareholder demands to inspect corporate records concerning purported corporate mismanagement and/or breaches of fiduciary duty.  An increase in such claims could lead other jurisdictions to endorse the Garner doctrine, especially because corporate decisions from Delaware courts often influence the corporation law adopted by other jurisdictions.

As we await the judicial impact of Wal-Mart, there are cautionary takeaways that need no waiting.  As shareholders continue to scrutinize the actions and inaction of directors and officers concerning compliance issues, corporate decision-makers (including corporate counsel) should not assume that internal investigation materials related to possible corporate misconduct or other wrongdoing are protected from disclosure in pre-suit discovery.  Corporate counsel must be cognizant of the fact that a court may order the disclosure of privileged investigation materials and communications to shareholders seeking to substantiate their claim of breach of fiduciary duty.  With that risk of disclosure in mind, and to avoid allegations or proof that the board was deprived of its ability to take effective remedial action to protect the company’s interests, corporations should implement internal control measures designed to ensure that internal investigations are handled with proper oversight by high level officers and directors, and that all material information concerning possible corporate violations or misconduct is shared with the board.


Do Bilingual Language Requirements Constitute National Origin Discrimination Under Title VII in the Eleventh Circuit?

Posted on: February 26th, 2015

By: Amanda K. Hall


In today’s global society, many businesses are finding that their customers are bilingual or do not speak English.  Therefore, it is becoming more and more common for employers to require their employees to be bilingual or speak another language in order to be qualified for their job.  Given its geographic location, this issue is particularly relevant to employers in the Eleventh Circuit.  This blog examines the question of whether such requirements may give rise to a claim of national origin discrimination under Title VII of the Civil Rights Act of 1964.

The former Fifth Circuit, whose opinions are binding on the Eleventh Circuit, held, in the context of determining whether an English-only policy violated Title VII, that “[n]either the statute [Title VII] nor common understanding equates national origin with the language that one chooses to speak.”  The former Fifth Circuit noted, however, that “[l]anguage may be used as a covert basis for national origin discrimination.”    

A court in the Southern District of Florida stated that a policy requiring employees to speak a language other than English could create problems in that it “works to eliminate American-born applicants who speak only English.”  In dicta, that court noted that such a policy may be suspect “where it is geared primarily to benefit employees, rather than customers, who are not proficient in English.”

A bilingual requirement could be challenged as direct or circumstantial evidence of discrimination.  For example, in one case, anon-Brazilian employee of the Brazilian air carrier Varig brought a failure to promote claim against Varig alleging that she was discriminated against on the basis of her national origin when Varig refused to promote her to a cargo sales representative position that had a Portuguese-language requirement.  The plaintiff claimed that the requirement constituted both direct and circumstantial evidence of national origin discrimination.

Rejecting the plaintiff’s claim that the requirement, as posted, was direct evidence of national origin discrimination, the court noted that the Eleventh Circuit has held that direct evidence of discrimination is evidence that “if believed, proves [the[ existence of a fact without inference or presumption.” The court then held that the policy could not constitute direct evidence of discrimination because it required at least two inferences: (1) “an inference that the requirement was actually intended to limit the applicant pool to only native-born speakers of a particular country, rather than to include all those who speak the language in other countries or who learned the language regardless of their place of birth” and (2) “it requires the fact finder to conclude that the language requirement has no legitimate purpose other than to weed out candidates based on national origin.”

The court then analyzed the language requirement in accordance with the McDonnell Douglas framework for claims involving circumstantial evidence of discrimination.  After finding it “unlikely” that the plaintiff could establish a prima facie case of national origin discrimination because she could not show that she was qualified for the promotion, the court went on to conclude that, even if the plaintiff could establish a prima facie case, she could not rebut Varig’s legitimate, non-discriminatory reason for the policy — namely that Varig did business with many Brazilian companies whose employees only spoke Portuguese and that the employee hired for the position would need to communicate in Portuguese with personnel at Varig’s head office in Brazil.  Citing the well-known proposition that an employee may not quarrel with an employer’s business judgment, the court held that “[t]he question for this court is not whether Portuguese fluency and literacy were actually required for the position, but rather whether Varig’s stated reason for including the requirement is an honest explanation of its decision.” As another court in the Eleventh Circuit stated, “[t]he wisdom of defendant’s decision to make Spanish fluency a skill requirement is not properly before this court.”

Is There Coverage Where an Insurer Unilaterally Removes Property from a Policy Without the Policyholder’s Consent?

Posted on: February 20th, 2015

By: Joyce M. Mocek

In a recent circuit court decision, Acuity v. Johnson, 2015 WL 177041 ((8th Cir. 2015), the Court reviewed the appropriate standards to be applied when an insurer and policyholder dispute whether a change has been requested by a policyholder to a policy.  The Court also considered whether a potential excess insurer had standing to challenge the interpretation and application of the contract terms between a policyholder and primary insurer, even if it was not a party to the contract.

In this case, there was an auto accident  involving a particular tractor-trailer unit and resulting claims.  The insurer of the tractor, Acuity, denied that it was required to pay the claims and contended that the policyholder had requested that the subject tractor be removed from the policy.    Acuity further contended that the insurer of the trailer involved in the accident, Western National, should provide primary coverage for the accident because the tractor had been removed from the Acuity policy.  Acuity filed a declaratory judgment action against the policyholder and the insurer of the trailer, claiming that the Western National policy was primary and required to reform its policy.  The policyholder claimed that Acuity made a unilateral change to the policy by removing the subject tractor as the policyholder contended that it had not requested the removal of the tractor.      Western National argued that Acuity was required to “reform” the Acuity policy to include the subject tractor.  Acuity contended that since it had settled, Western National lacked standing to contend that it should reform its policy.

The Eighth Circuit concluded that the validity of whether a change was requested to a policy should be governed by basic contract principles relating to mutual assent, and not by principles of reformation.  Thus, the insurer, Acuity, bore the burden of proving that the policyholder requested the change, and the district court had properly considered evidence at trial on whether the insurer, Acuity, had unilaterally removed the subject tractor from the policy without the policyholder’s consent.  It also held that Western National, as the potential excess insurer, had standing to dispute the removal of the subject tractor from the Acuity policy.  This decision has far reaching implication for insurers, as it reiterates that the burden is placed on the insurer to substantiate a change to a policy resulting in a reduction in coverage, and it also permits insurers standing in situations where basic contract principles may not permit it.

Prison Grooming Policy Changes Coming in the Wake of Holt v. Hobbs

Posted on: February 16th, 2015

By: Coleen Hosack

Native American men imprisoned in the United States will probably be the first to notice institutional changes to prison policies regarding whether prisoners can grow their hair long, following the Holt v. Hobbs decision by the United Supreme Court on January 20, 2015.  Long hair, for Native American men, is not a matter of appearance, style, or grooming; but a religious practice. Natives believe that long hair represents the strength of their spirit; the longer the hair, the stronger the spirit.  When a native does cut his hair, it is usually only for mourning the death of a loved one. See – web page devoted to the discussion of political, social, and economic issues affecting the indigenous peoples of the United States, like Native American men.

In Holt, the Religious Land Use and Institutionalized Persons Act (RLUIPA) finally cut its teeth in a unanimous opinion by the United States Supreme Court.  Gregory Holt, an inmate and devout Muslim incarcerated in an Arkansas prison, sought and was denied permission to grow a ½-inch beard in accordance with his religious beliefs due to a prison policy that forbid prisoners from growing beards unless they could show a dermatological condition.  The Court concluded under RLUIPA, the Department’s policy substantially burdened his religious exercise and that the Department failed to show the policy was the least restrictive means of furthering its compelling interest of prison safety.

Congress enacted RLUIPA to provide broader protection for religious liberties because the Free Exercise clause failed to reach laws that incidentally burdened the free exercise of religion, like grooming policies in federal prisons. Following the Court’s application of RLUIPA in this setting, prisons must justify that their policies [policies that substantially burden an inmate’s ability to exercise his religious beliefs] are the least restrictive means of furthering a compelling governmental interest. In other words, these policies are subject to strict scrutiny. While courts can certainly continue to respect a prison official’s expert opinion or position on the purpose of such a policy; that opinion can no longer stand as the only justification for the policy.

Under RLUIPA, Hobbs shouldered the initial burden of proving the policy implicated his religious exercise. It protects “any exercise of religion, whether or not compelled by, or central to, a system of religious beliefs.” §2000cc-5(7)(A). A prisoner’s request for an accommodation must be sincerely based on a religious belief and not some other motivation. See Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751, 2774, n. 28 (2014).  Rejecting the District Court’s finding that the grooming policy did not substantially burden his religious exercise, the Court held that the availability of alternatives means of practicing religion, like being provided a prayer rug or given information on distributors of Islamic material, was not the appropriate standard under RLUIPA, although it is in First Amendment cases involving prisoner’s rights. See. e.g. O’Lone v. Estate of Shabazz, 482 U.S. 342, 351-352 (1987); see also Turner v. Safley, 482 U.S. 78, 90 (1987).  The Court held that under RLUIPA, Hobbs easily satisfied his burden of showing the policy substantially burdened the exercise of religion because the Department policy subjected him to serious disciplinary action if he contravened the policy by keeping his beard. RLUIPA focuses on the burden to the religious practice sought to be exercised, not whether the inmate can practice his religion in other ways.

The burden then shifted to the Department to show its refusal to allow him to grow a ½-inch beard was in furtherance of a compelling governmental interest and was the least restrictive means of furthering that interest. The Department claimed two interests: that the no-beard policy prevented prisoners from hiding contraband and the policy prevented prisoners from disguising their identities. Agreeing that both of these interests were compelling; the Court rejected the Department’s argument that it had chosen the least restrictive means to achieve its goals.  For instance, the Department already searched hair and clothing, so why could it not search ½-inch beards too.  As for the goal of preventing prisoners from disguising identities, the Department could take before-beard and after-beard photographs that could then be used for identification purposes under any circumstance.

While Holt involved the application of a prison no-beard policy, I think the decision will have a ripple effect on all prison grooming policies. Whether prisons will simply rescind their no-long hair policies altogether, like Arkansas just did,, or whether they will create additional religious exemptions for inmates to grow their hair, like Native Americans want to do for religious purposes, will remain to be seen.  Either way, I think they are coming.


Tennessee Employers – Beware of Employment Eligibility Requirements

Posted on: February 12th, 2015

By: Josh Lott


On January 1, 2013, the third phase of the Tennessee Lawful Employment Act (“TLEA”) went into effect, giving Tennessee employers with 6 to 199 employees the option of either enrolling in the federal E-Verify program or obtaining and maintaining an approved work eligibility document on all newly hired employees and independent contractors.   Below is the list of approved work eligibility documents.

  1. A valid (unexpired) Tennessee driver’s license or photo identification;
  2. A valid (unexpired) driver’s license or photo identification from another state;
  3. A valid (unexpired) U.S. passport;
  4. A birth certificate issued by a U.S. state,  jurisdiction or territory;
  5. A certified birth certificate issued by the U.S.  government;
  6. A U.S. certificate of birth abroad;
  7. A U.S. certificate of citizenship;
  8. A U.S. certificate of naturalization;
  9. A U.S. citizen identification card;
  10. A U.S. lawful permanent resident card; or
  11. A valid alien registration documentation or other proof of current immigration registration recognized by the U.S. Department of Homeland Security.

Under the TLEA, the Commissions of Department of Labor and Workforce Development is authorized to conduct inspections on employers to verify compliance with the Act’s requirements.  If the Commissioner determines that an employer has violated the Act, employers face significant penalties: $500 for a first offense; $1,000 for a second offense; and $2,500 for a third and any subsequent offenses.  On top of these penalties, the TLEA imposes additional penalties of $500 per worker not properly verified for a first violation; $1,000 per worker not properly verified for a second violation; and $2,500 per worker not properly verified for any additional violations.  Employers who violate the TLEA may even face suspension of their business license.

Many states have enacted laws similar to the TLEA in an attempt to combat illegal immigration within their borders. As the law in this area is in flux and full of traps for the unwary, employers should review their employment verification practices to ensure compliance with both federal and state law.