United States: Somebody’s Watching: Chancery Court Rules That Communications Between Director And His Personal Counsel Via Company Email Address Are Not Privileged

On September 5, 2013, the Delaware Court of Chancery, on a matter of first impression, ruled that a director's emails with his personal attorney were not privileged because the director used his company email address to communicate with counsel and he was aware of the company's policy that all work emails were accessible by the company. See In re Info. Mgmt. Svcs., Inc. S'holder Litig., C.A. No. 8168-VCL, slip op. (Del. Ch. Ct. Sept. 5, 2013). The Court emphasized that its holding was limited to its facts and that in different factual settings the outcome might be different. Nonetheless, the Court's decision raises uncertainties, at least in Delaware, about preservation of privilege, which has important implications for directors and their counsel, particularly for directors who serve on special committees that have retained separate, independent counsel. As with all issues of privilege, it is best to err on the side of caution, and in light of the Court's decision in Info Management, directors and their independent counsel should be mindful of the following issues:

  • If a director is serving on a committee that has retained separate, independent counsel—e.g., a special committee of independent, disinterested directors formed to evaluate a conflict of interest transaction—the director should avoid using his company email address to communicate with counsel on matters intended to be privileged.
  • Directors serving on special committees should also consider using non-company email to communicate with committee counsel because, in the event of a dispute between the company and the committee members, communications made through work email may be deemed company property, depending in part on the company's internal policies.
  • Directors, by virtue of their position, are unlikely to be able to withhold communications over work email with their independent counsel on privilege grounds merely by arguing that they were not aware of the company's email monitoring policy.

I. BACKGROUND

Information Management Services, Inc. ("IMS" or "Company") is a private company owned by two families, the Lakes and the Burtons. Its board of directors is comprised of four members (two from each family) and its executive officers are William, Andrew, and Jean Lake. Jean and Andrew Lake also serve on IMS's board. In 2012, the Burtons filed a complaint against the Lakes, alleging that William breached his fiduciary duties as an officer of IMS by mismanaging the Company and that Jean and Andrew, as officers and directors, breached their fiduciary duties by allowing William to stay in control. "During discovery, IMS advised the [Burtons] that William and Andrew used their work email accounts both before and after the filing of the lawsuit to communicate with their personal attorneys and advisors." Op. at 5. After IMS refused to produce those emails on the basis of the Lakes' assertion of attorney-client privilege, the Burtons moved to compel production, arguing that attorney-client privilege did not apply because William and Andrew used their Company email accounts to communicate with their personal counsel. Id. IMS's policy manual cautions all employees: "You should assume files and Internet messages are open to access by IMS staff. After hours you may use IMS computers for personal use, but if you want the files kept private, please save them offline." Id. While IMS (according to the Lakes) did not actually engage in email monitoring, it was undisputed that the Lakes were aware of the policy. Id. at 5-6.

II. THE COURT'S RULING

In ruling on the Burtons' motion to compel, the Court began with Delaware Rule of Evidence 502(a)(2), which sets forth the requirements for invoking the attorney-client privilege, including that the communication at issue must be intended to be "confidential." Id. at 7. The Court noted that "[a] party's subjective expectation of confidentiality must be objectively reasonable," and thus the Burtons' motion to compel presented a novel issue because "Delaware courts have not addressed whether an employee has a reasonable expectation of privacy in a work email account." Id. The Court held that whether an employee has a reasonable expectation of privacy in work email should be evaluated on a case-by-case basis, guided by the four-factor test identified in In re Asia Global Crossing, Ltd., 322 B.R. 247, 257 (Bankr. S.D.N.Y. 2005): "(1) does the corporation maintain a policy banning personal or other objectionable use, (2) does the company monitor the use of the employee's computer or e-mail, (3) do third parties have a right of access to the computer or e-mails, and (4) did the corporation notify the employee, or was the employee aware, of the use and monitoring policies." Id. at 9.

Factor 1: Policy on Personal Use. The Court first explained that courts lean in favor of production "when the employer has a clear policy banning or restricting personal use, where the employer informs employees that they have no right of personal privacy in work email communications, or where the employer advises employees that the employer monitors or reserves the right to monitor work email." Id. at 10-11. If, however, there is no clear policy or practice regarding personal use or email monitoring, the Court noted, then the first factor weighs against production. Id. at 12. According to the Court, the Company manual's warning that employees should assume their emails are accessible to IMS and that personal files should be saved offline "sufficiently put IMS employees on notice that their work emails were not private," thus weighing in favor of production. Id. at 13.

Factor 2: Email Monitoring Practice. The Court then looked to whether IMS, in practice, monitored emails. Id. While the Lakes submitted affidavits stating that IMS never monitored emails, the Court noted that William had acknowledged in certain emails that his work email was not private and that he used personal email for private matters. Id. at 15. The Court treated this factor as neutral due to the conflict between William's acknowledgment of the lack of privacy in his work email and IMS's lack of email monitoring. Id. at 16.

Factor 3: Ease of Third Party Access. "This is a straightforward case involving work email," explained the Court: "IMS, a third party to the communication, had the right to access William's and Andrew's emails when they communicated using their work accounts." Id. at 17. Because it found that neither William nor Andrew took significant, meaningful steps to prevent third party access to their emails with counsel (such as using their private email accounts rather than, as they did, using their Company accounts and putting "attorney-client privilege" in the subject line), the Court found that this factor weighed in favor of production.

Factor 4: Employee's Knowledge of Monitoring Policies. According to the Court, this factor weighs against production if the employee was unaware of the company's email monitoring policy and the company cannot prove that it notified the employee of that policy. Id. The Court noted, however, that knowledge of the company's policy is often imputed to officers and directors by virtue of their position. Id. at 19. Because "William and Andrew were two of the three most senior officers at IMS, and they [did] not deny knowing about the Company's policies," the Court held that this factor weighed in favor of production. Id.

Applying the Asia Global factors, the Court found that William and Andrew did not have a reasonable expectation of privacy in their IMS email accounts, and thus could not have reasonably expected that their communications with their separate counsel through those accounts would be kept confidential. The Court ordered the production of "the emails and attachments otherwise protected by the attorney-client privilege that William and Andrew exchanged with their personal attorneys and advisors using their work email accounts." Id. at 31.

III. CONCLUSION

While the Court held that the Lakes' use of Company email accounts to communicate with their personal counsel defeated privilege in this case, it cautioned that its holding should not be interpreted as a broad-based rule, especially in the context of shareholder derivative suits involving large public companies. Id. at 27. The Court emphasized that its analysis hinged on the fact that this case "involves a dispute between two families, each possessing 50% of the stock and enjoying equal representation on the Board." Id. "It is far from clear whether a 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." Id. This is because "[t]hose outside the corporation," such as public shareholders, "cannot routinely access work email accounts," and thus "[t]he corporation and its employees [or directors] should be on different and stronger ground when those outside the corporation seek to compel production of otherwise privileged documents that employees [or directors] have sent using work email." Id. at 28. Nonetheless, directors and their separate, independent counsel should view Info Management as creating uncertainty as to whether privilege will be preserved under other fact patterns. Therefore they should act with caution and err on the side of communicating through non-company email on privileged matters.

Originally published in the December edition of The American Lawyer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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