Wal-Mart Must Turn Over Documents, Delaware High Court Adopts 'Garner' Doctrine

By Che Odom    

July 24 -- The Delaware Supreme Court ordered Wal-Mart Stores Inc. to hand over internal documents about what directors and officers knew about alleged bribes made by executives at its subsidiary in Mexico.

In affirming the Court of Chancery, the state's high court July 23 held for the first time that the Garner doctrine, which recognizes an exception to the attorney-client privilege when a “corporation is in suit against its stockholders on charges of acting inimically to stockholder interests,” applies in plenary stockholder/corporation proceedings, as well as in Delaware General Corporation Law Section 220 actions like the instant case.

The Delaware Supreme Court decision stems from a May 20, 2013 chancery court decision in a Section 220 action brought by the Indiana Electrical Workers Pension Trust Fund IBEW.

In an oral opinion, then-Chancellor Leo Strine, now chief justice of the Supreme Court, ordered Wal-Mart to hand over certain internal files that concerned what its directors knew about claims that executives paid bribes to facilitate Mexican real estate deals, in violation of the Foreign Corrupt Practices Act .

The retailer appealed, claiming the documents are protected attorney-client communications. The pension fund filed a cross-appeal, claiming that Strine's order should have included more whistle-blower documents.

The justices denied both appeals.

Documents 'Necessary and Essential.'

The Supreme Court ruled that the pension fund demonstrated that the documents it was seeking were “necessary and essential” to its investigation of the bribery and how the company conducted its internal probe of it. The pension fund is investigating whether Wal-Mart directors and executives attempted to cover up the alleged wrongdoing.

“Today's ruling was limited to procedural questions about whether plaintiffs had the right to inspect certain company documents,” Brooke Buchanan, a Wal-Mart spokeswoman, said in an e-mail. “It had nothing to do with the merits of the allegations.”

The company's internal investigation hasn't reached a final conclusion, she said.

Wal-Mart already has turned over more than 30,000 documents to the pension fund, but refused to hand over many others, citing attorney-client privilege or the work-product doctrine, and arguing they were beyond the scope of a inquiry under Section 220.

'Garner' Doctrine Applies

Although Wal-Mart did not preserve its arguments at the trial level, the justices decided to address the company's arguments regarding the chancery court's application of the Garner doctrine.

Wal-Mart pointed out that the Supreme Court had never before adopted Garner, first articulated in 1970 by the Fifth Circuit Court of Appeals in Garner v. Wolfinbarger, and argued that, in any case, the chancery court failed to apply it correctly.

Having only previously recognized Garner in dicta, the Supreme Court nonetheless held that it would adopt the doctrine and determined that the trial court had properly evaluated the pension fund's claim.

According to the opinion, under the doctrine the court should consider several factors when evaluating whether the stockholder has met its “good cause” burden to show the exception should apply.

In a Section 220 proceeding, “the necessary and essential inquiry must precede any privilege inquiry because the necessary and essential inquiry is dispositive of the threshold question--the scope of document production to which the plaintiff is entitled under Section 220,” the court ruled.

What Documents Reveal

Internal documents showed Wal-Mart's Mexican unit used a state governor in Mexico to facilitate $156,000 in bribes, Bloomberg News reported in 2013. The files were released by Rep. Henry Waxman (D-Calif.) and Rep. Elijah Cummings (D-Md.), who are also investigating the matter .

Based in Bentonville, Ark., Wal-Mart said in March that it spent $439 million over the past two years in connection with investigations into allegations that employees paid foreign bribes. Federal prosecutors also have looked into possible illegal payments made by Wal-Mart officials in China, India and Brazil.

U.S. and Mexican prosecutors are investigating the bribery allegations. Those probes were started after The New York Times reported that officials of Wal-Mart's Mexican unit alerted the retailer in 2005 about bribes paid to get new stores and warehouses built.

The IBEW lawsuit has been combined with shareholder lawsuits filed by pension funds in California and New York.

Wal-Mart was represented by Donald J. Wolfe Jr., Stephen C. Norman and Tyler Leavengood of Potter Anderson & Corroon LLP, Wilmington, Del.; Theodore J. Boutrous Jr. of Gibson Dunn & Crutcher LLP, Los Angeles; Jonathan C. Dickey and Brian M. Lutz of Gibson Dunn & Crutcher LLP, New York; and Mark A. Perry of Gibson Dunn & Crutcher LLP, Washington.

The pension fund was represented by Stuart M. Grant, Michael J. Barry, Nathan A. Cook and Bernard C. Devieux of Grant & Eisenhoffer, P.A., Wilmington, Del.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com  

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The opinion is available at http://courts.delaware.gov/opinions/download.aspx?ID=209130.