The fact that the company’s top executive was accused of potentially serious misconduct by itself provided some evidence to support inside counsel’s claim that his purpose in conducting an investigation was to provide the company with legal advice.
In a lawsuit by Barnes & Nobles’ former CEO alleging breach of contract and defamation, a federal court in New York denied in part his attempt to compel the company to turn over certain documents related to the investigation into a sexual harassment claim against him and his subsequent discharge. While investigation notes drafted by the company’s general counsel and a senior vice president were protected by attorney-client privilege, the general counsel’s notes from a meeting with a potential acquiring company were not. Drafts of press releases regarding the CEO’s termination that were sent to the general counsel and outside counsel for review and legal advice also were protected by attorney-client privilege, but documents circulated among non-attorney executives must be produced. Communications with outside counsel regarding the CEO’s conduct, the drafts of the memo it prepared, the memo itself, and the discussion of the memo by the board of directors were also protected from disclosure by the privilege (Parneros v. Barnes & Noble, Inc., October 4, 2019, Gorenstein, G.).
Allegation. When Barnes & Noble’s CFO informed the company’s general counsel (GC) in May 2018 that a female executive assistant told him the CEO had sexually harassed her, the GC met with her and prepared notes documenting the meeting. That same day, he engaged outside counsel. As part of an investigation directed by the GC, a senior VP and the company founder met with the executive assistant and the CEO. The GC directed the VP to provide him with notes of the meetings.
Apology meeting. Not long after, at a meeting attended by the VP, CEO, and executive assistant, the CEO apologized for his conduct. Shortly before that meeting, the GC learned that the CEO had been accused of bullying the CFO. In mid-June, a meeting was held between Barnes & Noble executives, including the CEO, and the executives of another company that was interested in acquiring Barnes & Noble. At the meeting, the CEO allegedly engaged in a long, rambling monologue in which he painted the company in an unduly negative and harsh light. The next day, the company withdrew its offer.
Termination. In late June, the GC reviewed drafts of a memo by outside counsel prepared to provide Barnes & Noble’s board of directors with legal advice regarding the CEO’s potential termination and the board voted to terminate the CEO. The GC and outside counsel both attended the meeting. Several days later, the company fired the CEO and refused to pay him severance. The next day, it issued a press release stating that it had fired the CEO for "violations of the Company’s policies," and that the "action was taken by the Company’s Board of Directors who were advised by" outside counsel. The CEO subsequently sued for breach of contract and defamation and the company asserted counterclaims for breach of the fiduciary duties of loyalty and good faith.
Documents related to investigation. Moving to compel, the CEO first sought the production of documents related to the investigation of the sexual harassment allegations, including notes taken by the GC and others during the investigation. Here, the court found it significant that on the day the GC learned of the allegations against the CEO, he engaged outside counsel to advise the company "on potential litigation issues." Further, he had ongoing communications with the law firm. That the company’s "top executive was being accused of potentially serious misconduct by itself provides some circumstantial evidence" to support the GC’s claim his purpose in conducting the investigation was to provide the company with legal advice, observed the court, noting that "Courts have often found the retention of outside litigation counsel to advise an internal investigation to be an important factor in determining whether an internal investigation is being conducted for the purpose of obtaining legal advice for the company."
Further, the GC testified that he asked the VP to assist him in the investigation and thus her notes, if prepared for him in order to facilitate his provision of ongoing legal advice, fell within the privilege, said the court, rejecting the CEO’s assertion that where a non-lawyer assists in an internal investigation, the employee must have some expertise in investigations in order for communications to be privileged.
Business vs. legal purpose. And while the CEO argued that the investigative documents were created for business rather than legal purposes and thus were not privileged, the court noted that although the GC’s meeting with the executive assistant may have advanced the business purpose of appropriately responding to her complaint, that did not change that the predominate purpose of the investigation appeared to be to gather facts for the GC so he could provide legal advice to the company. Accordingly, the court found that investigation notes drafted by the GC and VP at his direction were protected by the attorney-client privilege.
Notes from meeting with potential acquirer. But the notes prepared by the GC concerning the CEO’s conduct at the meeting with the potential acquirer were not protected, said the court, noting that he had no idea in advance anything extraordinary would occur, which suggested there was a business purpose to his presence at the meeting. Nor were they protected by the work product privilege as he never claimed he took the notes in anticipation of litigation. Thus, the court ordered Barnes & Noble to produce these notes.
Press release drafts. As to drafts of press releases sent to the GC and/or outside counsel, the GC swore they were sent to him for his "review and legal advice" and were sent to "outside counsel concerning the wording of the announcement for their review and legal advice." Thus, the company sufficiently established that communications between the corporate employees and the GC and outside counsel were protected by the attorney-client privilege.
And while Barnes & Noble contended that a series of emails and draft press releases sent among non-attorney executives were protected by the work product doctrine, the GC stated that he reviewed the releases concerning the CEO’s departure from the company. While work product protection is available for non-attorneys even when they act without the direction of an attorney to prepare materials in anticipation of litigation, here there was no evidence that any of the individuals who were circulating press releases did so because they anticipated litigation and therefore, Barnes & Noble was ordered to produce these documents.
Report prepared by outside counsel and board meeting minutes. Next, the court found that communications with outside counsel regarding the CEO’s conduct, the drafts of the memo it prepared, the memo itself, and the discussion of the memo by the board were also protected from disclosure by the attorney-client privilege. The GC communicated regularly with the firm to provide information to enable it to provide legal advice, he confirmed that the firm rendered legal advice concerning the CEO’s employment, his misconduct, and potential grounds for his termination, and he received and reviewed drafts of the memo prepared by outside counsel for the board of directors, which provided legal advice to the board. Further, an attorney from outside counsel attended the board meeting and rendered legal advice. Finally, the GC confirmed that he prepared the minutes of the meeting after the CEO had been terminated and that the redacted portion of the minutes contained outside counsel’s advice to the board and the board’s discussion of that advice.
Waiver. While the CEO argued that Barnes & Noble’s press release regarding his firing waived any privilege because the company selectively disclosed counsel’s advice by stating that the action was taken by the company’s board of directors who were advised by the outside law firm, under New York law, disclosure of the mere fact of a consultation with an attorney is no basis for a waiver as to the content of that consultation. Because the press release did not disclose the substance of counsel’s advice, but rather only disclosed the fact of counsel’s consultation, there was no waiver based on the inclusion of the statement in the press release.
At-issue waiver. Also rejected was the CEO’s assertion that the company waived any privilege over these documents by placing the advice of counsel at issue in the litigation. He argued that the company implicitly waived the privilege essentially for two reasons: (1) its answer stated that "[t]he Board’s July 3, 2018 announcement that Plaintiff had been terminated ‘for violations of the Company’s policies’ and would not receive severance was clearly accurate and clearly made in good faith;" and Barnes & Noble intended to oppose any effort by him to establish that it "acted in a grossly irresponsible manner without due consideration for the standards of information gathering and dissemination ordinarily followed by responsible parties."
As to the first reason, Barnes & Noble disclaimed any intention to assert a good faith defense and thus the statement in its answer was not significant. Turning to the second argument, the court noted that the company admitted that it intended to counter any claim that it acted in a "grossly irresponsible manner" when it announced that the CEO had violated company policies by affirmatively offering evidence he in fact violated company policies through his harassing conduct. Thus, said the court, Barnes & Noble was not asserting an affirmative defense of any kind here, as is typically the case where the "at issue" waiver doctrine is applied in the absence of reliance by the opposing party on attorney-client communications. Whether it acted in a "grossly irresponsible manner" must be proven by the CEO and can be shown by him exclusively through objective proof, the court stated, finding no "at issue" waiver.
Deposition testimony. Nor did the deposition testimony of a board member waive any privilege. While he testified to factual information he had regarding the CEO’s conduct, he was just one of many directors of the corporation and Barnes & Noble did not take steps to inject the contents of the privileged material into the record. Rather, one of its directors was responding to questions. Thus, said the court, it could not "deduce from the muddled transcript that there was any deliberate effort by Barnes & Noble during the deposition to disclose portions of the privileged memoranda through the testimony of the director—particularly given that there are copious other sources of non-privileged information about" the CEO’s conduct which were available to him.
The case is No. 7834 (JGK) (GWG).
Attorneys: Anne L. Clark (Vladeck, Raskin & Clark) for Demos Parneros. Jay Cohen (Paul, Weiss, Rifkind, Wharton & Garrison) for Barnes & Noble, Inc.
Companies: Barnes & Noble, Inc.
Cases: Procedure Discharge EvidenceDiscovery SexualHarassment StateLawClaims NewYorkNews
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