Employees’ Retirement System of Rhode Island v. Facebook, Inc., C.A. No. 2020-0085-JRS (Del. Ch. Feb. 10, 2021) (Slights, V.C.)
In this Section 220 action, the Delaware Court of Chancery granted a stockholder the right to inspect limited documents for the purpose of investigating whether Facebook overpaid in its $5 billion Federal Trade Commission (“FTC”) settlement in order to protect its CEO from substantial personal liability. The stockholder sought electronic communications regarding negotiations with the FTC and privileged documents (including electronic communications and unredacted copies of board and committee minutes) concerning the FTC negotiations. The Court concluded that limited non-privileged electronic communications were essential to the stockholder’s purpose, but that the stockholder had not shown good cause under the Garner fiduciary exception to the attorney-client privilege to compel inspection of privileged documents.
Plaintiff, a stockholder of Facebook, served its demand to inspect nine categories of Facebook’s books and records. The purposes for inspection included an intent to investigate wrongdoing related to Facebook’s 2019 FTC settlement and an intent to communicate with other stockholders regarding “changes in management policies.” Facebook agreed to produce some, but not all, of the requested documents. Following extensive meet-and-confer discussions, Facebook agreed to produce almost 3,000 documents, but refused to produce certain board-level hard-copy and electronic communications concerning Facebook’s negotiations with the FTC. Plaintiff then filed its complaint to compel inspection of Facebook’s books and records.
After suit was filed, the parties conferred further and narrowed the disputed documents to two categories: (i) electronic communications concerning the FTC negotiations; and (ii) privileged documents (including both electronic communications and unredacted copies of board and special committee minutes) concerning the FTC negotiations. Facebook objected to producing these documents on two grounds: (1) the documents were not necessary and essential to Plaintiff’s stated purpose for inspection; and (2) inspection of certain of the documents was precluded under the attorney-client privilege or the work product immunity.
The Court first held that Plaintiff had demonstrated that limited non-privileged electronic communications were necessary and essential to achieve its stated purpose of investigating potential wrongdoing. The Court first reasoned that the documents already produced were “bereft of any information concerning the substance of Facebook’s non-privileged discussions with the FTC,” which the Court found “particularly curious” given a white paper sent by Facebook’s outside counsel to the FTC outlining their view that Facebook’s maximum exposure was well below the $5 billion Facebook ultimately agreed to pay. The Court next noted that the documents already produced lacked any information as to why Facebook conditioned any settlement with the FTC on the FTC’s agreement to release Facebook’s CEO Mark Zuckerberg from liability. The Court reasoned that the absence of such information in Facebook’s more traditional board materials indicated strongly that, if such information existed, it would be in the requested non-privileged electronic communications.
The Court next held, however, that Plaintiff had not demonstrated good cause under the Garner fiduciary exception to the attorney-client privilege to justify compelling Facebook to produce privileged documents for inspection. Under the Garner exception, the stockholder seeking disclosure of privileged communications bears the burden of establishing “good cause” to overcome the assertion of privilege. The Court typically focuses the good cause inquiry on three factors: “(i) whether the claim is colorable, (ii) the necessity or desirability of information and its availability from other sources and (iii) the extent to which the information sought is identified as opposed to a blind fishing expedition.” Plaintiff argued the privileged documents in question were not available from other sources because communications about settlement negotiations were likely to be privileged. Plaintiff admitted, however, that it could not demonstrate the privileged information it sought was unavailable elsewhere because it had not seen the responsive, non-privileged electronic communications that Facebook was withholding, which Plaintiff’s counsel acknowledged at trial may well be sufficient to satisfy Plaintiff’s purposes. The Court thus concluded that Plaintiff had not carried its heavy burden to justify a court order compelling the production of privileged documents.