WAL-MART STORES, INC., Defendant Below, Appellant/Cross-Appellee,
INDIANA ELECTRICAL WORKERS PENSION TRUST FUND IBEW, Plaintiff Below, Appellee/Cross-Appellant
Submitted July 10, 2014
[Copyrighted Material Omitted]
Court Below-Court of Chancery of the State of Delaware. C.A. No. 7779.
Donald J. Wolfe, Jr., Esquire, Stephen C. Norman, Esquire, Tyler Leavengood, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Theodore J. Boutrous, Jr., Esquire, Gibson Dunn & Crutcher LLP, Los Angeles, California, Jonathan C. Dickey, Esquire, Brian M. Lutz, Esquire, Gibson Dunn & Crutcher LLP, New York, New York, Mark A. Perry, Esquire (argued), Gibson Dunn & Crutcher LLP, Washington, DC, for appellants.
Stuart M. Grant, Esquire (argued), Michael J. Barry, Esquire, Nathan A. Cook, Esquire, Bernard C. Devieux, Esquire, Grant & Eisenhoffer, P.A., Wilmington, Delaware, for appellees.
Before HOLLAND, BERGER, and RIDGELY, Justices and BUTLER and WALLACE, Judges, constituting the Court en Banc.
The Defendant Below/Appellant-Cross Appellee Wal-Mart Stores, Inc. (" Wal-Mart" or the " Company" ) appeals from a final judgment of the Court of Chancery identifying specific steps Wal-Mart must take in searching for documents, and specific categories of documents Wal-Mart must produce, in response to a demand made by Plaintiff Below/Appellee-Cross Appellant Indiana Electrical Workers Pension Trust Fund IBEW ( " IBEW" or " Plaintiff" ) pursuant to title 8, section 220 of the Delaware Code.
The Court of Chancery conducted a Section 220 trial on the papers to determine whether Wal-Mart had produced all responsive documents in reply to IBEW's demand. The Court of Chancery entered a Final Order and Judgment, which required Wal-Mart to produce a wide variety of additional documents, including ones whose content is privileged or protected by the work-product doctrine.
Wal-Mart appeals the Court of Chancery's Final Order with regard to its obligations to provide additional documents. IBEW filed a cross-appeal, arguing that the Court of Chancery erred in failing to require Wal-Mart to correct the deficiencies in its previous document productions and in granting in part Wal-Mart's motion to strike its use of certain Whistleblower Documents.
We conclude that all of the issues raised in this appeal and cross-appeal are without merit. Therefore, the judgment of the Court of Chancery must be affirmed.
IBEW is a retirement system that provides retirement benefits to electrical workers in Indiana. Wal-Mart is a Delaware corporation that has its headquarters in Bentonville, Arkansas. Wal-Mart operates stores in 27 different countries and employs about 2.2 million people worldwide. The Company's stock is listed on the NYSE. Wal-Mart de Mexico, S.A. de C.V. (" WalMex" ) is a subsidiary of Wal-Mart in which Wal-Mart owns a controlling interest. WalMex is not a party to this action. At all times IBEW has been a stockholder of appellant, Wal-Mart.
On April 21, 2012, The New York Times, in an article titled Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle (the " Times Article" ), described a scheme of illegal bribery payments made to Mexican officials at the direction of then-WalMex CEO, Eduardo Castro-Wright, between 2002 and 2005. The Times Article revealed that Wal-Mart executives were aware of the conduct no later than September 21, 2005, and suggested that Wal-Mart's responses were deficient. IBEW summarized the Times Article in its answering brief, as follows:
In exchange for the bribes, WalMex received benefits ranging from zoning changes to rapid and favorable processing
of permits and licenses for new stores. The Company was aware of this illegal conduct by no later than September 21, 2005, when an executive of WalMex, Sergio Cicero Zapata (" Cicero" ), informed the general counsel of Wal-Mart International, Maritza I. Munich (" Munich" ), of " 'irregularities' authorized by 'the highest levels' at [WalMex]."
Munich initiated the investigation (the " WalMex Investigation" ), first hiring a Mexican attorney to interview Cicero and evaluate his allegations, and then working with Willkie Farr & Gallagher LLP (" Willkie Farr" ) to develop an independent investigation plan. Wal-Mart's senior leadership in the
___U.S.___, however, rejected Willkie Farr's November 2005 proposal for a " thorough investigation," and instead chose a " far more limited" internal two-week " Preliminary Inquiry" involving Wal-Mart's Corporate Investigations Department and International Internal Audit Services (" IAS" ) departments. The " Preliminary Inquiry" work-plan provided that, among other things, a progress report would be given to Wal-Mart's management and the Chairman of the Audit Committee, Roland Hernandez (" Hernandez" ), on November 16, 2005.
Munich kept senior Wal-Mart officials in Arkansas apprised of the preliminary inquiry in a series of emails and detailed memoranda. In December 2005, an internal Wal-Mart report on the preliminary inquiry's findings was sent to Wal-Mart executives describing evidence " corroborat[ing] the hundreds of gestor payments [ i.e., payments to 'fixers'], the mystery codes, the rewritten audits, the evasive responses from [WalMex] executives, the donations for permits, the evidence gestores [ i.e., 'fixers'] were still being used." The report's conclusion was grave: " There is reasonable suspicion to believe that Mexican and USA laws have been violated."
Rather than expand the investigation, Wal-Mart executives chastised the investigators for being " overly aggressive . . . ." On February 3, 2006, Scott ordered the prompt development of a " modified protocol" for internal investigations. As a result, control over the WalMex Investigation was transferred to " one of its earliest targets," José Luis Rodríguezmacedo, WalMex's general counsel (" Rodríguezmacedo" ). Munich complained to senior Wal-Mart executives, noting that " [t]he wisdom of assigning any investigative role to management of the business unit being investigated escapes me," and resigned from the Company shortly thereafter. Rodríguezmacedo quickly cleared himself and his fellow WalMex executive of any wrongdoing, " wrapp[ing] up the case in a few weeks, with little additional investigation[,]" and concluding that " [t]here is no evidence or clear indication of bribes paid to Mexican government authorities with the purpose of wrongfully securing any licenses or permits."
On June 6, 2012, Wal-Mart received a letter from IBEW (the " Demand" ). The letter requested inspection of broad categories of documents relating to the bribery allegations described in the Times Article (the " WalMex Allegations" ). The purpose of the Demand, as explained in the letter, was to investigate: (1) mismanagement in connection with the WalMex Allegations; (2) the possibility of breaches of fiduciary duty by Wal-Mart or WalMex executives in connection with the bribery allegations; and (3) whether a pre-suit demand on the
board would be futile as part of a derivative suit.
On June 13, 2012, Wal-Mart responded to the Demand, agreeing, subject to certain conditions, to make available to IBEW Board materials such as minutes, agendas, and presentations, relating to the WalMex Allegations, as well as existing policies relating to Wal-Mart's Foreign Corrupt Practices Act (" FCPA" ) compliance. Wal-Mart declined to provide documents that it determined were not necessary and essential to the stated purposes in the Demand or that were protected by the attorney-client privilege and work-product doctrine.
On August 1, 2012, Wal-Mart produced over 3,000 documents to IBEW, consisting of: policies relating to FCPA compliance, all Board and Audit Committee minutes and materials referencing the WalMex Allegations dating back to when those allegations arose in 2005, and Board and Audit Committee minutes and materials relating to Wal-Mart's FCPA policy and compliance program. However, most of those documents were highly redacted without any explanation for the redactions.
On August 13, 2012, IBEW filed a Complaint in the Court of Chancery pursuant to Section 220, alleging various deficiencies relating to Wal-Mart's confidentiality designations and redactions in its production, and asserting that certain documents falling within the scope of the Demand had not been produced. In an attempt to satisfy IBEW, Wal-Mart provided an additional production on August 28, 2012, which included additional documents, less redacted material, and provided the reasons for the redactions that remained.
On September 10, 2012, IBEW noticed depositions of certain Wal-Mart records custodians to gain information about documents that it believed should have been disclosed. IBEW noticed depositions of a current senior officer, a former senior officer, and a Rule 30(b)(6) witness. In response, Wal-Mart moved for a protective order, alleging that the deposition notices encompassed virtually every document that might relate in any way to the WalMex Allegations.
At an October 12, 2012 hearing, the Court of Chancery granted Wal-Mart's motion for a protective order in part and restricted the scope of the depositions noticed by IBEW. To comply with the Court of Chancery's October 12 ruling, Wal-Mart reviewed more than 160,000 documents. To locate any additional responsive documents, Wal-Mart also interviewed a number of current and former employees, officers, and directors, and it searched the data of eleven custodians. Wal-Mart then provided IBEW with a further supplemental production and an updated privilege log. On December 6, 2012, IBEW conducted a Rule 30(b)(6) deposition.
Months earlier, in May 2012, IBEW's counsel received an anonymous package containing high-level Wal-Mart documents that were mentioned in the Times Article and pertained to the WalMex Investigation (the " Whistleblower Documents" ). Pursuant to the ethics rules, IBEW's counsel immediately notified Wal-Mart's counsel, who stated that the documents were stolen by a former employee. Wal-Mart took no other action regarding the Whistleblower Documents, but moved to strike the documents and prevent IBEW from using them.
IBEW advised the Court of Chancery that Wal-Mart's document production did not comply with its October 12 ruling. The parties agreed to conduct a Section 220 trial on the basis of a paper record. The sole issue presented for judicial determination was whether Wal-Mart had produced all of the documents that were responsive to IBEW's Demand.
On May 20, 2013, the Court of Chancery heard oral argument and ordered Wal-Mart to produce all documents in the custody of eleven custodians whose data Wal-Mart had previously searched relating to (1) the WalMex Allegations, (2) policies and procedures regarding FCPA compliance, and (3) policies and procedures relating to internal investigations. The Court of Chancery's ruling also required Wal-Mart to produce documents in the files of Roland A. Hernandez, a former director and former Chairman of Wal-Mart's Audit Committee. In addition, the Court of Chancery ordered Wal-Mart to search the files of any person who served as an assistant to any of the twelve custodians. The Court of Chancery further held that IBEW was entitled to documents protected by the attorney-client privilege, invoking the exception articulated in Garner v. Wolfinbarger  (the " Garner doctrine" ). The Court of Chancery also ordered Wal-Mart to produce documents protected by the attorney work-product doctrine.
At a June 4, 2013 hearing on the parties' competing forms of order, the court also addressed IBEW's request for production of documents from Wal-Mart's disaster recovery (or " backup" ) tapes, which was made for the first time at the June 4 hearing.
On October 15, 2013, the Court of Chancery entered the Final Order and Judgment. The Final Order requires Wal-Mart to produce: (1) officer (and lower)-level documents regardless of whether they were ever provided to Wal-Mart's Board of Directors or any committee thereof; (2) documents spanning a seven-year period and extending well after the timeframe at issue; (3) documents from disaster recovery tapes; and (4) any additional responsive documents " known to exist" by the undefined " Office of the General Counsel." The Final Order also requires the production of, among other things, " contents of Responsive Documents that are protected by the attorney-client privilege . . . and the contents that are protected by the attorney work-product doctrine under Court of Chancery Rule 26(b)(3)," but subject to the condition that IBEW " take appropriate steps to protect the confidentiality of [Wal-Mart's] privileged documents, including filing and maintaining any such document as confidential." 
The Court of Chancery also granted Wal-Mart's motion to strike IBEW's use of the Whistleblower Documents in part, allowing IBEW only to use those documents that were posted on The New York Times website or to the congressional website, or referenced in Wal-Mart's public filings. The Court of Chancery ruled that IBEW's request for Wal-Mart to correct the deficiencies in its previous productions had been waived.
In its appeal, Wal-Mart contends that the Court of Chancery erred in ordering Wal-Mart to produce documents that " far exceed" the proper scope of a Section 220 request. Wal-Mart cites four ways in which the Court of Chancery's Final Order is beyond the proper scope of a Section 220 proceeding: first, it requires Wal-Mart to produce officer-level documents; second, it requires Wal-Mart to produce
documents spanning a seven-year period, which is longer than the period in which the wrongdoing is alleged to have occurred; third, it requires Wal-Mart to search disaster recovery tapes for data from two custodians; and fourth, it requires Wal-Mart to produce documents " known to exist" by Wal-Mart's Office of the General Counsel.
Wal-Mart further submits that the Court of Chancery improperly and incorrectly applied the Garner doctrine to documents that it asserts are protected by the attorney-client privilege. Additionally, Wal-Mart contends that the Court of Chancery erred by improperly applying the Garner doctrine to other documents that Wal-Mart asserts constitute protected attorney work product.
In its cross-appeal, IBEW argues that the Court of Chancery erred by not ordering Wal-Mart to correct deficiencies in its search for, and collection of, books and records. The Court of Chancery held that IBEW waived this argument. IBEW submits, however, that because there was no prejudice to Wal-Mart, the issue should be decided on the merits.
In its cross-appeal, IBEW also contends that the Court of Chancery's conclusion that the Whistleblower Documents are subject to conversion is not supported by the record. According to IBEW, Wal-Mart bore the burden of proof on this conversion theory and did not provide the Court of Chancery with any record to support its ruling. IBEW argues that the Court of Chancery's inference that because the ...