Richards Layton & Finger
 

Teleglobe USA Inc. v. BCE Inc.

July 19, 2007

In Teleglobe USA Inc. v. BCE Inc. (In re Teleglobe Commc'ns Corp.), -- F.3d --, 2007 (3d Cir. July 17, 2007) ("In re Teleglobe"), the United States Court of Appeals for the Third Circuit made several important rulings regarding the scope and application of the attorney-client privilege under Delaware law in the context of a dispute between a parent company and its former subsidiaries. The Court also provided important guidance for in-house counsel regarding how best to preserve the privilege in potential parent-subsidiary transactions. The Third Circuit's opinion arose from a June 2006 District Court order requiring defendant BCE, Inc. ("BCE") to turn over to a group of Debtor plaintiffs who were former subsidiaries of BCE ("Debtors") all documents withheld by BCE based on claims of privilege.

In an issue of first impression under Delaware law, the Third Circuit ruled that in situations where the interests of parties jointly represented by counsel become adverse, all communications made during the course of the joint representation are discoverable as between the joint clients, even where the joint clients are owned, either wholly or partially, by the same person or entity. In In re Teleglobe, the Third Circuit remanded the case to the District Court to consider whether any attorneys jointly represented BCE and the Debtors on matters of common interest.

In a matter certain to be of interest to in-house counsel nationwide, the Third Circuit discussed the responsibilities of in-house counsel to protect a parent company's attorney-client privilege. Premised on the ruling that a parent corporation cannot shield from its subsidiary communications concerning matters in which the parent and subsidiary are jointly represented, the Court placed the burden on in-house counsel, which is equally applicable to outside counsel, "not to begin joint representations except when necessary, to limit the scope of joint representations, and seasonably to separate counsel on matters in which subsidiaries are adverse to the parent." (Op. at 60-61).

The Third Circuit also made significant rulings with respect to the fiduciary exception to the attorney-client privilege, at times referred to as the Garner doctrine. In the typical Garner case, shareholders -- upon a showing of good cause -- are permitted access to a corporation's privileged communications to prove that those in control of the corporation breached their fiduciary duties. The Third Circuit determined that the Garner fiduciary exception would be expanded under Delaware law to situations where a controlling corporation is alleged to have breached its fiduciary duties to its subsidiaries at a time in which the subsidiaries were insolvent or in the "zone of insolvency." The Third Circuit remanded the case to the District Court for the purpose of determining when the Debtors became insolvent.

Finally, the Debtors argued in the context of the privilege dispute that BCE's severe over-designation of documents as privileged warranted a sanction from the District Court that required BCE to turn over all documents withheld from the Debtors on privilege grounds. The Third Circuit ruled that a trial court could in fact prevent a party from asserting the attorney-client privilege as a sanction for discovery abuse if the District Court determined that the withholding party acted in bad faith, willfully, or was at fault. (Op. at 92). The Third Circuit asked the District Court to consider on remand whether such a sanction against BCE is appropriate under the circumstances extant in the Debtors' case.

The Circuit Court's decision, while important for its groundbreaking legal rulings, will likely be more widely read for its practical guidance to modern corporate law departments and the excellent job it does of untangling often misunderstood privilege concepts as they apply in the parent-subsidiary context.