IN RE LULULEMON ATHLETICA INC. 220 LITIGATION
Submitted: December 1, 2014
Carmella Keener, Esq., Jessica Zelden, Esq., P. Bradford deLeeuw, Esq., ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; Blake A. Bennett, Esq., COOCH & TAYLOR, P.A., Wilmington, Delaware; Joshua Littlejohn, Esq., Max Gruetzmacher, Esq., Mt. Pleasant, South Carolina; Gustavo Bruckner, Esq., Ofer Ganot, Esq., POMERANTZ LLP, New York, New York; Attorneys for Plaintiff Laborers' District Council Construction Industry Pension Fund and Plaintiff Hallandale Beach Police Officers and Firefighters' Personnel Retirement Fund.
John L. Reed, Esq., Scott B. Czerwonka, Esq., DLA PIPER LLP (US), Wilmington, Delaware; Stellman Keehnel, Esq., Andrew Escobar, Esq., DLA PIPER LLP (US), Seattle, Washington; Attorneys for Defendant lululemon athletica inc.
PARSONS, Vice Chancellor.
In this books and records action under 8 Del C. § 220, I previously ordered the defendant corporation to produce books and records relating to the plaintiffs' investigation of potential insider trading or Brophy claims against the company's founder and then-chairman of the board of directors, as well as potential claims for mismanagement against the other directors. The company produced documents pursuant to that order, but the plaintiffs found the production inadequate and moved to enforce the Court's order. Their motion presents several questions for resolution: (1) whether the company must search its non-employee directors' personal email accounts for documents responsive to my previous order; (2) whether certain documents properly were designated as privileged; and (3) even if those documents are privileged, whether the plaintiffs have shown "good cause" under the circumstances to obtain them anyway.
For the reasons stated in this Memorandum Opinion, I deny in part and grant in part the plaintiffs' motion to enforce. Specifically, I conclude that ordering the company to search its non-employee directors' personal email accounts is not warranted, but I find that the plaintiffs have demonstrated "good cause" to access certain documents withheld as privileged.
Defendant, lululemon athletica, inc. (the "Company" or "lululemon"), is a Delaware corporation with its principal place of business in Vancouver, British Columbia, Canada. Lululemon is a designer and retailer of athletic apparel and operates throughout North American and Australia. Its stock is traded on the NASDAQ.
Plaintiffs, Hallandale Beach Police Officers and Firefighters' Personnel Retirement Fund ("Hallandale") and Laborers' District Council Construction Industry Pension Fund ("LDC"), are both lululemon stockholders.
On December 12, 2012, Dennis Wilson, lululemon's founder and then-Chairman of the Board of Directors, entered into a trading plan pursuant to Securities and Exchange Commission ("SEC") Rule 10b5-1 to sell up to 5.7 million of his shares of lululemon common stock over a period of up to eighteen months (the "Trading Plan"). Wilson's broker at Merrill Lynch had complete discretion to sell the shares during that period consistent with the terms of the Trading Plan. Specifically, Merrill Lynch could sell 300, 000 shares at market price beginning January 10, 2013. From that point through June 30, 2014, the broker could sell up to 1 million shares per month at a minimum price of $81.25 per share. Between January 10 and January 14, 2013, the broker sold 300, 000 shares at an average price of $70.92. In May and June, 2013, Wilson's broker sold one million shares each month, all at prices above $81.25. Whenever Merrill Lynch sold shares under the Trading Plan, it sent an email notification to lululemon Controller David Negus and Tina Swinton, among others. Swinton was the CFO of Wilson's "Family Office, " which operated as his personal investment company.
Of particular importance are the trades that occurred on June 4 and 7, 2013. On June 5, Christine Day, lululemon's then-CEO, informed Wilson that she planned to resign. She informed the Board to that effect on Friday, June 7. On that same day, Wilson's broker sold 607, 545 shares of Wilson's lululemon stock, over 200, 000 shares more than he had sold on any other day during the first six months of the Trading Plan. By selling such a quantity, Wilson reached his one-million-share-per-month cap only seven days into June. On June 10, 2013, the Company publicly announced Day's resignation, and the per-share price for lululemon stock dropped roughly 22%. After June 7, 2013, Wilson's broker did not make any additional sales under the Trading Plan, and it expired at the end of June 2014.
On June 12, 2013, the Wall Street Journal (the "WSJ") emailed the Company about Wilson's June 2013 trades, which appeared incredibly well-timed. The WSJ sought confirmation of certain facts for a story regarding Wilson's trades. As relevant to the pending motion, individuals from lululemon and Wilson's Family Office, including both Wilson's personal attorney and lululemon's attorney, corresponded by email about a coordinated response to the WSJ's inquiry (the "WSJ Email Chain"). The participants in the WSJ Email Chain included, among others, Wilson and Swinton. Some of the emails in that chain were authored either by Wilson's personal attorney or by lululemon's outside counsel. Wilson's Family Office ultimately released a statement regarding the trades,  but the Company did not comment on it. In addition, on July 2, 2013, Erin Nicholas, lululemon's corporate secretary and one of its in-house counsel, responded to an email from lululemon director Jerry Stritzke about whether Wilson's trades had complied with the Trading Plan (the "Nicholas Email").
C. Procedural History
On May 3, 2013, Hallandale commenced its 8 Del. C. § 220 ("Section 220") action against lululemon. On October 25, 2013, LDC filed a separate Section 220 action. I heard argument on the Company's motion to dismiss the Hallandale action on February 5, 2014, and held a trial in the LDC action on February 19, 2014. On April 2, 2014, I issued an oral ruling regarding both actions (the "April 2014 Order"). I concluded that Plaintiffs had a proper purpose under Section 220 to seek books and records regarding Wilson's June 7, 2013 trades because there was a credible basis to infer wrongdoing by Wilson and lululemon. Specifically, in addition to a possible Brophy claim against Wilson,  I concluded that Plaintiffs had demonstrated a credible basis to infer possible mismanagement by the Company in connection with their oversight as to the questionable trading.
Based on those findings, I ordered the Company to produce, among other documents: (1) the Trading Plan; (2) any emails from Wilson to lululemon's compliance office regarding the Trading Plan; (3) any changes to the Trading Plan; (4) all documents concerning Wilson's June trades; and (5) all documents concerning any inquiry by the board or any member of the board regarding Wilson's trades between June 1 and June 30, 2013. On April 18, 2014, lululemon produced 195 pages of documents. The next day, it produced a privilege log referencing sixteen documents it had withheld under the attorney-client privilege. The Nicholas Email and the WSJ Email Chain comprise five of the documents identified on that log.
On June 11, 2014, I consolidated the Hallandale and LDC actions to facilitate enforcement of the April 2014 Order, and two days later, Plaintiffs filed this motion to enforce the April 2014 Order. On July 23, before briefing in connection with this motion had concluded, the Delaware Supreme Court decided Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW. In Wal-Mart II, the Supreme Court held for the first time that the so-called fiduciary exception to attorney-client privilege based on the Garner v. Wolfinbarger decision applied to Section 220 actions. Because Plaintiffs relied extensively on Wal-Mart II in their August 26, 2014 reply brief, I accepted as a sur-reply Defendant's November 24, 2014 letter addressing the implications of the Wal-Mart II decision. This Memorandum Opinion represents my ruling on Plaintiffs' motion to enforce.
D. Parties' Contentions
Plaintiffs assert that the dearth of certain documents in lululemon's production indicates that the Company has not complied with the April 2014 Order. In particular, Plaintiffs seek: (1) "all communications authored or received by any Board member (including e-mails located in non-Company e-mail accounts) in June 2013 concerning Wilson's June 2013 stock sales"; (2) "all communications authored or received by any Board member (including e-mails located in non-Company e-mail accounts) concerning any inquiry or investigation into Wilson's June 2013 trade"; and (3) information "concerning the 'disagreement' between Wilson and Day that culminated into [sic] Day's resignation on June 5, 2013." At argument, Plaintiffs waived their request as to item (3), but they persisted in seeking to compel production of additional documents under items (1) and (2), if any exist.
In that regard, Plaintiffs argue that lululemon must search the personal email accounts of the Board members who are not Company employees (the "Non-Employee Directors"),  and produce any documents contained therein that fall within the relevant categories of the April 2014 Order. Plaintiffs contend that it is immaterial that the email accounts are not Company accounts, because the directors use them to conduct lululemon business. Lululemon counters that there is no precedent to support requiring such a search in the context of a Section 220 action, and that, under the circumstances of this case, any documents that might come up in a search of the directors' personal emails are not necessary and essential to the purpose of Plaintiffs' demand, making a costly and time-consuming search unwarranted.
Additionally, Plaintiffs seek production of the Nicolas Email and the WSJ Email Chain, contending that they were improperly designated as privileged. Plaintiffs dispute the privilege claim as to the Nicholas Email because they maintain that Nicholas was not acting as an attorney when she responded to an inquiry about the trading plan. They similarly contend that the WSJ Email Chain is not privileged because any privilege was waived by the inclusion of third-parties Wilson and Swinton on the emails. In the alternative, Plaintiffs assert that, under Garner and Wal-Mart II, the five withheld documents are not privileged as to them.
As to the privilege issues, lululemon responds that the Nicholas Email was properly withheld because Nicholas, as one of lululemon's in-house counsel, was giving legal advice. With respect to the WSJ Email Chain, lululemon argues that it did not waive privilege through disclosure because it shared a common interest with Wilson and Wilson's representatives in connection with responding to the WSJ inquiry. Finally, lululemon contends that Plaintiffs waived any argument regarding the Garner exception because they failed to raise the argument in their opening brief. Furthermore, even ...