No Privilege for Consultations Via Work E-Mails, Del. Court Rules
The Delaware Chancery Court Sept. 5 ruled that senior officers of a biomed firm facing breach of fiduciary duty claims may not invoke attorney-client privilege over consultations with their attorneys using work e-mail accounts (In re Info. Mgmt. Servs., Inc. Derivative Litig. , Del. Ch., Consol. C.A. No. 8168-VCL, 9/5/13).
In so ruling, Vice Chancellor J. Travis Laster ruled that the corporate officials did not have a reasonable expectation of privacy in a work e-mail account. This is an issue of apparent first impression, the court said.
A different set of facts might lead to a different result, the court said.
The court said that the company had the right to access the disputed e-mails when the officers communicated using their work accounts. In other specifics, the court said that although the two officers took the precautionary step of putting the phrase “’subject to the attorney client privilege’” in the subject line, “they failed to take more significant and meaningful steps to defeat access such as shifting to a webmail account or encrypting their communications.”
The court said that Information Management Services Inc. is a Delaware-incorporated, Maryland-based concern that provides products used to evaluate clinical trials for biomedical research. The Burton family and the Lake family each beneficially own 50 percent of the company’s common stock.
The Burton family owns its half through two trusts–the EB Trust and the IMS Trust. Evelyn Burton is the sole trustee of the EB Trust; Michael Burton is the sole trustee of the IMS Trust. The Lake Family owns the other half through the William H. Lake Grantor Trust. William Lake Jr. and his brother Andrew Lake are co-trustees of the Lake Trust. Their mother, Jean Lake, is a beneficiary of the Lake Trust.
In late 2012, the court continued, the Burton Trusts filed a complaint charging that William breached his fiduciary duties as an officer of IMS by mismanaging the company, and that Jean and Andrew breached their fiduciary duties by enabling William to continue running the company. Meanwhile, the Lake Trust filed a complaint of its own alleging claims against Evelyn and Michael. The two actions were consolidated.
During discovery, the court recounted, IMS advised the Burton parties that William and Andrew used their work e-mail accounts to communicate with their personal attorneys and advisors. The company collected the e-mails, and William and Andrew asserted attorney-client privilege, the court said.
The Burton Trust moved to compel IMS to produce the e-mails, the court continued, arguing that the attorney client privilege did not apply because William and Andrew communicated using work e-mail accounts on the IMS servers.
Asia Global Factors
The “motion to compel is granted,” the court determined.
The court said that Delaware courts “have not addressed whether an employee has a reasonable expectation of privacy in a work e-mail account.”
The court determined, after application of the In re Asia Global Crossing, Ltd., 322 B.R. 247 (Bankr S.D.N.Y. 2005) factors, that “William and Andrew cannot invoke the attorney-client for communications exchanged with their personal attorneys and advisors using their work e-mail accounts.”
Among other specifics, the policy manual given to all IMS employees included a section on computer privacy. That section states that employees are to assume files and Internet messages are open to access by IMS staff. The court added that the fact that IMS “has not historically monitored e-mails does not conflict with its implicit reservation of the right to do so.” Meanwhile, the court determined after review that various federal and state statutes do not support a reasonable expectation of privacy in work e-mail.
On a “cautionary note,” the court said that although the case has been “postured as a consolidated derivative action, it actually involves a dispute between two families, each possessing 50 [percent] of the stock and enjoying equal representation on the Board.”
The court declared it far from clear whether the court “would analyze privilege similarly in a more traditional derivative action involving a stockholder plaintiff with a relatively nominal stake and a board comprising individuals without any affiliation with the suing stockholder.”
The court thus granted the motion to compel.
Raymond J. DiCamillo, Scott W. Perkins, Richards, Layton & Finger, P.A., Wilmington, Del.; J. Christian Word, Katherine A. Schettig, Latham & Watkins LLP , Washington, represented the plaintiffs.
Peter B. Ladig, Katherine J. Neikirk, Morris James LLP, Wilmington, Del.; J. Stephen McAuliffe, III, Miles & Stockbridge P.C., Rockville, Md.; Scott Wilson, Miles & Stockbridge P.C., Baltimore, represented the defendants.
Barry M. Klayman, Cozen O’Connor, Wilmington, Del.; Donald N. Sperling, Jeffrey M. Schwaber, Jamie M. Hertz, Stein Sperling Bennett De Jong Driscoll PC, Rockville, Md. represented attorneys for nominal defendant, Information Management Services, Inc.