It is easy to waive attorney-client privilege inadvertently while negotiating intellectual property (“IP”) transactions. For example, when an IP owner seeks to sell a patented product, potential buyers often ask for any opinions of counsel that concern the patent. The IP owner must decide whether or not to disclose the privileged opinions to the potential buyer. Such opinions might be essential to the deal itself. Many potential buyers request IP opinions in order to assess both the value and the strength of the seller’s IP portfolio. Without these opinions, a potential buyer might simply walk away from a deal—not knowing sufficient information to make an informed decision regarding the propriety of the transaction. However, while potentially essential to the transaction, such a disclosure of an opinion of counsel can waive the attorney-client privilege. This creates a tension between a need to disclose the opinions to further the business transaction and a need to maintain attorney-client privilege over the opinions of counsel.
As discussed below, if the disclosure of the privileged material is done carefully, it is possible to both disclose the privileged material to a potential business partner and maintain the attorney-client privilege. We first discuss a recent case where Quinn Emanuel successfully upheld the attorney-client privilege despite disclosure of opinions of counsel to several potential deal partners.
Quinn Emanuel Upholds Attorney-Client Privilege Under Common-Interest Doctrine
Quinn Emanuel recently encountered this issue in a case before Judge Stark in the District of Delaware. The firm’s client, in the course of due diligence preceding a potential business transaction, disclosed validity and freedom-to-operate opinions to a select set of potential buyers. In defending against a claim of waiver, Quinn Emanuel explained to Judge Stark that this was not a case where our client had voluntarily disclosed privileged information without concern for retaining its confidentiality. To the contrary, our client had been involved in discussions with a large number of potential suitors but disclosed the privileged information to only a few prospective buyers after they had conducted a series of negotiations and due diligence exchanges. In addition to being in a position where the deal was largely “locked up,” our client also had strict confidentiality agreements in place with each potential buyer. Moreover, the privileged documents were provided with an understanding that they were to be used to further the common legal interest both parties had in valid and enforceable patents should they choose to complete the transaction.
Perhaps most importantly, Quinn Emanuel argued the negative policy implications that would have followed if Judge Stark had found a waiver of the attorney-client privilege. After Quinn Emanuel argued that business transactions involving intellectual property would not occur absent such protection, Judge Stark frankly asked opposing counsel to explain the effects on negotiations if he were to rule against preserving our client’s privilege. Opposing counsel was largely speechless in its reply, and we summed it up quite readily—the negotiations simply would not occur. Heeding the caution of other courts, Judge Stark agreed with Quinn Emanuel’s position that waiver would chill similar business negotiations and upheld our client’s privilege under the common-interest doctrine.
Next, we provide an overview of the common-interest doctrine and discuss the factors that go into an analysis of whether the common-interest doctrine will prevent a waiver of the attorney-client privilege.
The Common-Interest Doctrine as Applied to Business Transactions
Courts focus on five factors in determining whether or not to uphold the privilege based on the common-interest doctrine. Those factors are: (1) the nature of the shared interest; (2) whether the privilege holder disclosed the information under an expectation of confidentiality; (3) whether the privilege holder and third party can reasonably anticipate joint litigation; (4) the stage of the diligence proceedings when the privileged information was disclosed; and (5) the policy considerations concerning the consequences that accompany waiver.
1. Nature of the Interest: The nature of the interest each party has during the due diligence and negotiations that surround a potential transaction is perhaps the most compelling factor in the common-interest analysis. As originally applied, the common-interest doctrine required that “the nature of the [parties’] interest be identical, not similar, and be legal, not solely commercial.” Libbey Glass, Inc. v. Oneida, Ltd., 197 F.R.D. 342, 348 (N.D. Ohio 1999). This principle has been relaxed in some jurisdictions—requiring only a “substantially identical” or “substantially similar” interest. See e.g., In re Teleglobe Commcn’s Corp., 493 F.3d 345, 365 (3d Cir. 2007); In re Regents of Univ. of California, 101 F.3d 1386, 1390 (Fed. Cir. 1996).
The motivating factor behind the relaxed standard derives from the acknowledgement by some courts that pre-deal diligence involving intellectual property will necessarily involve both a business and legal component. For example, parties arguing that disclosure of privileged advice during an IP transaction waived attorney-client privilege often rely upon the business component of the disclosure—that the disclosure was made to increase the value of the transaction or to entice the other party to complete the transaction. This might help contribute to closing the deal or aid in negotiating a purchase price that is more favorable to the seller. The privilege-holder seeking protection will vigorously fight to rebut this view because in jurisdictions that require the nature of the parties’ interest to be identical, the existence of the business component of the transaction will weigh in favor of a finding of waiver of the attorney-client privilege. Indeed, the privilege holder will most likely argue that the materials were disclosed solely in support of a “shared legal interest” between the buyer and seller in valid and enforceable patents.
Many courts have struggled with the issue of whether the parties to the negotiations have a “shared legal interest.” To address that issue, it is often necessary to make a prediction as to what would happen should the potential transaction come to a head. If the deal were to close, then both parties could potentially have concurrent rights in the intellectual property, i.e., in the case of a merger. Another possibility is that the seller of the intellectual property and the potential buyer could face joint litigation in the future if the products covered by the IP infringed another’s patent. The seller would face liability based on its rights before the sale, and the buyer based on its right subsequent the sale. See e.g., Hewlett-Packard Co. v. Bausch & Lomb, Inc., 115 F.R.D. 308, 310 (N.D. Cal 1987).
This leaves open the question of what happens when the seller extinguishes all its rights in its intellectual property portfolio upon completion of the business transaction. In such circumstances, some courts have still been inclined to uphold privilege assertions.
For example, in Fresenius Med. Care Holdings, Inc. v. Roxane Labs., Inc., No. 05-889, 2007 WL 895059, at *4 (S.D. Ohio Mar. 21, 2007), the district court held that the common-interest doctrine survived an asset purchase agreement where the seller disclosed privileged information to the buyer in connection with the sale of the asset.
Based on the case law, therefore, privileged information should only be disclosed in potential transactions when both parties have a common legal interest in obtaining, maintaining, protecting, and enforcing valid and enforceable patents.
2. Expectation of Confidentiality: Confidentiality is a key component in any privilege analysis. This issue often turns on whether a confidential disclosure agreement was in place before the privileged information was disclosed. If confidentiality is not maintained, courts have often found the privilege to be waived. In cases of due diligence associated with IP transactions, however, where parties voluntarily disclose privileged information, but do not intend to cause a waiver, courts have determined that they must investigate the “explicit or implicit undertaking by the recipient of the information to hold [the disclosed information] in confidence.” Hewlett-Packard, 115 F.R.D. at 311. This is not to say that the responsibility for protecting against waiver falls solely upon the potential buyer receiving the privileged information. The seller must take steps of its own to impress upon the potential buyer the confidential nature of the information. Id.
For example, in Hewlett-Packard, the court found that voluntary disclosure of privileged information did not vitiate the attorney-client privilege. In particular, the court found that Bausch & Lomb did everything it reasonably could to protect the confidentiality of the legal opinion it disclosed to GEC. Specifically, “[o]nly two copies of the [opinion] letter were transmitted to GEC; GEC was instructed that no further copies were to be made; both copies were returned to [B&L’s] counsel; and the letter was not disclosed to others.” Id. at 311. Indeed, leading cases denying application of the common-interest doctrine take care to specifically point out that the disclosing party did nothing to protect the alleged confidentiality of the disclosed privileged documents. See, e.g., Net2Phone, Inc. v. Ebay, Inc., No. 06-2469, 2008 WL 8183817, at *9 (D.N.J. June 26, 2008) (distinguishing Hewlett-Packard on the ground that the parties in that case were under a confidentiality agreement). Thus, a confidentiality agreement weighs in favor of common-interest applicability.
3. Anticipation of Litigation: There is considerable disagreement between courts regarding whether or not the common-interest doctrine applies when there is no anticipation of joint litigation in situations where legal and business interests are intertwined. For example, a more relaxed approach only considers whether there is some substantially identical legal interest accompanying an identical business interest, irrespective of whether or not the parties will embark on a joint litigation. See, e.g., In re Regents, 101 F.3d at 1390 (Fed. Cir. 1996) (the common interest doctrine “is not limited to joint litigation preparation efforts”); Fresenius Med., 2007 WL 895059, at *3 (S.D. Ohio Mar. 21, 2007) (“[T]he community of interest doctrine is not limited to joint litigation situations, but may also apply in connection with patent rights.”). On the other hand, some courts have expressly disclaimed the use of the common-interest doctrine as a shield to waiver of the attorney-client privilege when there is no anticipation of joint litigation. See e.g., Net2Phone, 2008 WL 8183817, at *7 (D.N.J. June 26, 2008) (no common-interest “where the third-party’s interest does not appear to be that of a potential co-defendant”); Nidec Corp. v. Victor Co. of Japan, 249 F.R.D. 575, 579-80 (N.D. Cal. 2007) (distinguishing Hewlett-Packard on the grounds that there was “a common legal interest because of anticipated joint litigation”).
4. Stage of Diligence: Where there is a potential business transaction, “the common interest doctrine protects privileged and work-product materials even if there is no ‘final’ agreement or if the parties do not ultimately unite in a deal.” Katz v. AT&T Corp., 191 F.R.D. 433, 437 (E.D. Pa. 2000). However, the common-interest doctrine will not likely be upheld if the privilege-holder freely conducts pre-deal discussions regarding its privileged materials with a host of potential suitors. The decision to disclose information, therefore, must be carefully made and only undertaken when a deal is nearing its final steps. See e.g., Morvil Tech., LLC v. Ablation Frontiers, Inc., No. 10-2088, 2012 WL 760603, at *3 (S.D. Cal. Mar. 8, 2012) (upholding the party’s privilege and noting that “both parties were committed to the transaction and working towards its successful completion”).
This factor is intertwined with the expectation of confidentiality. If a party freely discloses information to a large number of potential buyers early in the diligence process, the privilege-holder is likely to be viewed as not having taken adequate steps to protect the confidentiality of its materials. Accordingly, voluntary disclosure of privileged materials should be undertaken only near the completion of a transaction, when the parties are ready to move towards consummation.
5. Policy Considerations: There can be no doubt that opposing counsel has a great interest and desire in gaining access to an adversary’s privileged and confidential information, especially when it concerns IP that is the subject of an ongoing lawsuit. Application of the common-interest doctrine in the context of due diligence aids in deterring “the tendency of some lawyers, especially in intellectual property cases, to spend an inordinate amount of time attempting to gain an advantage in the litigation by making use of the adversary attorney’s words and opinions.” Hewlett-Packard, 115 F.R.D. at 311. As the court in Hewlett-Packard observed, it is important to keep the focus of the court’s infringement and invalidity analysis “on the real world, on the similarity of the products involved in the dispute and on the history of relevant inventions and commercial conduct.” Id. Freely granting waiver based on disclosures made in the course of negotiating IP transactions would undoubtedly invite the expenditure of time and judicial resources litigating collateral privilege issues.
Moreover, the common-interest doctrine serves to deter the chilling effects on potential business transactions that would occur if waiver were freely granted. See Hewlett-Packard, F.R.D. 115 at 311. Furthering this purpose, many courts find that “[u]nless it serves some significant interest courts should not create procedural doctrine that restricts communication between buyers and sellers, erects barriers to business deals, and increases the risk that prospective buyers will not have access to important information that could play key roles in assessing the value of the business or product they are considering buying.” See, e.g., id.; BriteSmile, Inc. v. Discus Dental Inc., No. 02-3220, 2004 WL 2271589, at *2 (N.D. Cal. Aug. 10, 2004).