Authored by Esther H. Lim and Tryn T. Stimart
The world of due diligence presents particularly challenging privilege questions arising from communication between buyers and sellers before the consummation of deals. Adding to this thorny issue is the breakneck speed of the deals necessitating urgent sharing and disclosure of highly sensitive corporate information with third-party investors or buyers. For instance, during a due-diligence investigation of a target company's intellectual property (IP), the buyer must assess its strength and value, much of it based on internal information that is not publicly available. The need to share company-sensitive data, however, must be balanced against the possible ramifications of sharing privileged and confidential information with third parties. This article highlights issues surrounding communication among parties to a due-diligence transaction and provides suggestions on the sharing of confidential information.
II. Intellectual Property Due Diligence
An IP due diligence involves the complex and challenging process of examining intangible assets—patents, trademarks, copyrights and trade secrets. The circumstances of every IP due diligence differ depending on the nature of the transaction, the parties, the timing and the technology. Regardless of the type of transaction, an IP due diligence may evaluate the claim language, freedom to operate, validity, enforceability, ownership and potential to harvest additional IP. A full evaluation requires the seller to provide a significant amount of information.
Especially for technology-driven deals, an IP due diligence is conducted at an early stage of a transaction, e.g., purchase or license, and typically defines much of the negotiation strategy. Typically, the acquiring party can collect a great deal of publicly available information within the United States and worldwide (e.g., from U.S. and European patent offices). In the patent context, such information includes issued patents, pending applications, prosecution histories, related court documents, regulatory submissions (e.g., the U.S. Food and Drug Administration), publications and articles. As the evaluation progresses, the need for additional information increases. For example, to determine ownership, the buyer must review the seller's internal documents, such as employment contracts and joint development agreements or underlying employment agreements of consultants.
Inevitably, an IP due diligence may require the examination of confidential or privileged information or both. For example, when analyzing the buyer's freedom to operate under the acquired IP asset, seller's opinions of counsel and patent-counsel files may provide critical information. Sharing this information, however, raises the thorny issue of disclosing privileged information and potentially waiving attorney-client privilege. Naturally, the buyer will want as much information as possible to facilitate its decision making. On the other hand, the seller may remain hesitant to potential waiver of privilege, particularly in situations where the deal might fall through. Thus, careful consideration is necessary before disclosing privileged information. No single answer provides a clear solution. Competing interests will often arise requiring a separate discussion on how confidential information will be used, who will have access to it, and what will be done with the information upon completion of the due diligence. Regardless of the outcome, attention to preserving confidential information and perhaps more importantly the attorney-client privilege should always be at the forefront of any information disclosure.
III. Risks Associated with Sharing Information During a Due Diligence
Conventional wisdom suggests that a seller of an asset would want to disclose as much information as necessary to attract an offer or to continue business discussions. In today's fast-paced market economy, there is considerable pressure to make a deal happen quickly, further prompting open and frank communications between parties. If the deal falls through, however, the consequences of sharing will take on great importance. Take, for example, a negotiation where a buyer is evaluating a patent portfolio and, during the due diligence, the seller shares an opinion of counsel on whether a party's product infringes a patent in the portfolio. Before such disclosure, the opinion is protected under attorney-client privilege. If the parties part ways, and the patent becomes the subject of a suit, a third party may assert waiver of privilege and seek discovery of the opinion.
Achieving the proper balance of disclosure, at the appropriate time, requires considerable forethought. Blindly disclosing information with the hope that sharing will foster negotiations is short-sighted. On the other hand, protracting the time for disclosure or refusing to share may force an otherwise interested party to walk away from the deal.
In addition to privileged information, there is a vast array of confidential information that might be sensitive. For example, the buyer may seek information on products in the pipeline that are related to the IP of interest. The buyer may also seek information on market surveys and consumer data to determine how products are viewed by the general public or the best way to approach a new market. Sharing confidential strategic business information presents different risks than those posed by sharing privileged information. In some sectors, confidential business information may be vitally more important than information related to litigation defenses or positions. In either scenario, the challenge facing businesses is when and how to disclose and what level of access should be given.
IV. The Attorney-Client Privilege, Work Product and Waiver
The attorney-client privilege protects confidential communications between an attorney and a client for the purpose of obtaining legal advice or services. The privilege shields from discovery advice given by the attorney to the client as well as communications from the client to the attorney. Voluntary disclosure of privileged communications to a third party results in waiver of the attorney-client privilege unless an exception applies. For fairness reasons, the scope of the waiver extends beyond the document initially produced so that a party is prevented from disclosing communications that support its position while simultaneously concealing communications that do not. There is no clear cut guidance on the scope of the subject matter waived, but courts weigh the circumstances of the disclosure, the nature of the legal advice sought, and the prejudice to the parties of permitting or prohibiting further disclosures.
In addition to the attorney-client privilege, information may be protected by the work-product doctrine. The work-product doctrine is broader than the attorney-client privilege and protects any documents prepared in anticipation of litigation by or for the attorney. The work-product doctrine seeks to allow an attorney the ability to "assemble information, sift what he considers to be the relevant from the irrelevant facts, prepare his legal theories and plan his strategy without undue and needless interference . . . to promote justice and protect [his] clients' interests."1 The doctrine's broadest protection is reserved for materials that reveal the legal strategies or mental impressions of an attorney.
In contrast to the absolute protection afforded by the attorney-client privilege, the work-product doctrine recognizes a qualified evidentiary protection and may be overcome by a showing of substantial need. But like the attorney-client privilege, it may be waived. A party waives the doctrine's protections as to all adversaries when it discloses privileged materials to an adversary and such disclosure does not further the doctrine's underlying goals.
Waiving the attorney-client privilege and work-product doctrine could present significant risks. Because waiver extends not only to communication but also to related material, confidential information that otherwise would never have been shared could become discoverable during litigation. This includes other legal opinions, product research, marketing research and other valuable business information.
V. Protecting Disclosure During a Due Diligence: Common Interest Doctrine
Waiving privilege or the work-product doctrine is potentially disastrous, but exceptions exist. Courts have identified circumstances involving due diligence where the benefit of sharing confidential communication and thereby upholding privilege outweighs the negative impact of waiver. For example, as shown below, courts have upheld privilege where there is a common interest between the parties. The common-interest doctrine extends the attorney-client privilege to allow parties represented by different counsel to share information without waiving privilege. It applies generally when parties have a common legal interest, for example when they are co-defendants or are involved in or anticipate joint litigation. Generally, the doctrine applies where there is a legitimate legal interest and should not apply where parties are merely involved in arms-length negotiations over the sale or license of an asset.2
Despite the potential of sharing information without waiving privilege, companies involved in a due diligence cannot assume that a court will find an exception to waiver. As discussed below, a sampling of federal district court cases indicates that courts carefully analyze the circumstances, the steps taken to preserve the confidential, and the privileged nature of the information. The following discussion highlights cases in which the court applied the common-interest doctrine and others where the court refused to do so in due-diligence contexts.
1. Cases Applying Common Interest Doctrine
(a) Hewlett-Packard Co. v. Bausch & Lomb Inc.
In Hewlett-Packard v. Bausch & Lomb Inc.,3 the District Court for the Northern District of California did not find a waiver of the attorney-client privilege when Bausch & Lomb voluntarily disclosed an opinion letter from its patent counsel with a potential third-party purchaser, GEC. Before the litigation with Hewlett-Packard, Bausch & Lomb had entered into discussions with GEC about purchasing one of Bausch & Lomb's divisions. As part of the due diligence, Bausch & Lomb provided to GEC an opinion it had received regarding whether Hewlett-Packard's LaBarre patent was valid and infringed by Bausch & Lomb. Hewlett-Packard argued that Bausch & Lomb had waived attorney-client privilege and that compelling disclosure of the opinion letter would assist in determining whether Bausch & Lomb was taking inconsistent positions in its defense. Bausch & Lomb argued that it had a common legal interest with GEC when it disclosed the opinion letter because it anticipated litigation over the LaBarre patent and any purchaser of its Houston Instruments Division would also be under threat of suit by Hewlett-Packard.
In reaching its decision, the court acknowledged that "[t]his is a close question, on both sides of which are substantial competing interest."4 Despite the fact that GEC ultimately did not purchase the Houston Instruments Division, the court relied heavily on the fact that Bausch & Lomb and GEC anticipated joint litigation over the LaBarre patent where both parties would share a common interest. Additionally, the court found important that Bausch & Lomb "did everything within its powers to impress upon GEC the importance of maintaining the confidentiality of the opinion letter, and GEC, in turn, seemed to have undertaken to hold the letter in confidence."5 In addition to its legal analysis, the court relied on equitable considerations noting that finding a waiver could adversely affect business transactions by limiting communication between buyers and sellers and that legal "doctrine that impedes frank communication between buyers and sellers also sets the stage for more lawsuits, as buyers are more likely to be unpleasantly surprised by what they receive."6
(b) Tenneco Packaging Specialty & Consumer Products v. S.C. Johnson & Son
Similarly, in Tenneco Packaging Specialty & Consumer Products v. S.C. Johnson & Son,7 the District Court for the Northern District of Illinois denied Tenneco's motion to compel an opinion of counsel based on waiver of attorney-client privilege. Tenneco sought to compel the production of a March 1997 opinion drafted by Robert O'Keefe, a patent lawyer, for DowBrands. Tenneco argued that it was entitled to review the opinion and ask O'Keefe about what he meant when he opined about certain terms in one of the patents at issue in the litigation. Tenneco argued that the attorney-client privilege was waived when DowBrands shared the opinion with S.C. Johnson (SCJ) in a due diligence for the purchase of rights related to the patents in suit. SCJ argued that the opinion was disclosed during the course of due diligence when the deal was largely completed. Moreover, SCJ noted that DowBrands took substantial steps to ensure that the opinion would remain confidential. For example, "access to the opinion was controlled by specific procedures designed to prevent dissemination of its contents" and "DowBrands showed the opinion to a limited number of SCJ representatives, and then only after they acknowledged that disclosure was subject to a confidentiality agreement."8 Although the court did not expressly explain, the actions taken by DowBrands and the timing of the disclosure proved sufficient for the court to find that the attorney-client privilege had not been waived.
2. Cases Refusing to Apply the Common Interest Doctrine
(a) Libbey Glass, Inc. v. Oneida, Ltd.
In contrast, the District Court for the Northern District of Ohio in Libbey Glass, Inc. v. Oneida, Ltd.,9 took a more restrictive view of the common-interest doctrine and held that the attorney-client privilege had been waived when Oneida disclosed information from its counsel to a third party. Here, Libbey Glass brought suit against Oneida for trade dress infringement. Before the suit, Oneida had sought to increase its market share and contacted a Turkish manufacturer, Pasabahce Cam Sanayii VE Ticaret (Pasabahce), to manufacture glassware that Oneida would purchase, allowing competition with Libbey. During the negotiations, Pasabahce became concerned with the similarities between Oneida's design and Libbey's glassware. To ease concerns, Oneida provided Pasabahce an opinion by Oneida's counsel that indicated manufacturing the glassware would not infringe Libbey's design. Pasabahce was not represented by counsel and did not appreciate the importance of the opinion and the attorney-client privilege. Libbey argued that Oneida's sharing of its opinion waived the attorney-client privilege and all communications related to the transaction. Oneida countered and relied in part on the common-interest doctrine.
The district court agreed with Libbey, moved away from the more expansive view set forth in Hewlett Packard and Tenneco, and held that the opinion shared with Pasabahce was related to Oneida's commercial gain and not legal position. In reaching its decision, the court examined the steps taken by Oneida and Pasabahce noting that "only Oneida involved an attorney" and "no steps [were] taken by Oneida's lawyers or its employees or [Pasabahce) to ensure that the privileged communication would remain confidential."10 Perhaps even more important, however, was the court's belief that even if steps had been taken to preserve confidentiality "the shared communications were ancillary to the negotiation of a business agreement."11 The court further placed future litigants on notice that "[t]he burden belongs on the party claiming privilege to have avoided uncertainty, and to have undertaken effective steps to ensure that all participants were aware of the need to maintain confidentiality, and to those that mechanisms were in place to accomplish that objective before the information was shared."12
(b) Katz v. AT&T Corp.
Another district court also took a more restrictive view of the common-interest doctrine. In Katz v. AT&T Corp.,13 the District Court for the Eastern District of Pennsylvania upheld a special master's determination that the common-interest doctrine did not apply to protect the sharing of information during a license negotiation. In this case, Ronald Katz sought to license his patents directed to interactive telephones. Katz formed a company, Ronald A Katz Technology Licensing, L.P., and entered into negotiations with MCI. During the negotiations, Katz disclosed the opinion of his patent counsel related to patents involved in a previous litigation. Katz and MCI ultimately entered into an exclusive licensing agreement whereby MCI received a nonexclusive license to Katz's patent portfolio and an exclusive right to enforce the portfolio against its competitor AT&T.14
Later, Katz and AT&T began litigating patents in the Katz portfolio and AT&T propounded interrogatories directed to information related to the opinions of Katz's counsel. AT&T argued that the voluntary disclosure of the patent opinion involving a previous litigation waived the attorney-client privilege. Katz relied on the common-interest doctrine and the fact that he had entered into a licensing agreement 144th MCI. Due to the complex nature of the case, the district court appointed a special master to oversee discovery. The special master issued a report ordering Katz to produce the opinion, finding that Katz and MCI had not entered into the license agreement before Katz's disclosure of the opinions.
The district court affirmed the special master's report and ordered Katz to produce confidential opinions provided by counsel in a previous litigation. The court acknowledged Hewlett-Packard for the concept that a final agreement is not required to apply the common-interest agreement.15 Nonetheless, the court held that "[tlhe fact that a final or formal agreement is not required, however, does not establish that the requisite identity of interest exists. To take advantage of the common interest doctrine the plaintiffs must still satisfy their burden of proving first that the material is privileged and second that the parties had an identical legal, and not solely commercial, interest."16 Because Katz shared the opinion from his patent counsel while still in "arms-length negotiations," the court agreed with the special master that there was not a common identity of interest.
VII. Suggestions for Protecting Privileged Information During Due Diligence
As explained above, parties are at risk when sharing information during negotiations. Although some courts have accepted the common-interest doctrine and refused to find waiver of privileged information, other courts have taken a much more restrictive view of the doctrine. The substantial uncertainty presents unwelcome risk for parties negotiating about IP assets. While risk of waiver cannot be eliminated completely from due diligence, various proactive steps can be taken to minimize the potential of producing privileged information.
Thus, before entering into negotiations, it may be advisable that the parties sign a confidentiality or nondisclosure agreement. The existence of a confidentiality agreement may demonstrate to a court that the parties took seriously the risk of sharing of information. The terms of the agreement could include, for example, what information will be shared, who has access to it, what will happen to the information at the end of the negotiation, and the duration of the agreement. The agreement may also specie that in the event of litigation, privileged information previously shared would not be compelled for production during discovery.
A possible method of restricting access is to create a data room where only a select group of individuals is allowed to review information. The individuals may be permitted to review confidential information without making copies of the documents. Another reasonable approach is sharing different levels of information as the negotiation reaches certain milestones. Such graduated approach facilitates better information control.
Because due diligence presents considerable risks in sharing of confidential and privileged information, companies should carefully consider what information they wish to share balanced against the hefty price of potential waiver and disclosure. Failure to do so at the forefront of any due diligence may result in waiver of attorney-client privilege. Although courts are split on whether the common-interest doctrine provides an exception to waiver during due diligence, incorporating some of the suggestions provided by the courts may mitigate risk and allow for effective information sharing.
1 Hickman v. Taylor, 329 U.S. 495, 510, 67 S. Ct. 385, 91 L. Ed. 451 (1947). See also Fed. R. Civ. P. 26(b) (3).
2 See, e.g., Duplan Gorp. v. Deering Milliken, Inc., 397 F. Supp. 1146, 1172 (D.S.C. 1975) stating that "where [the parties] have an identical legal interest with respect to the subject matter of a communication between an attorney and a client concerning legal advice . . . [t]he key consideration is that the nature of the interest be identical, and be legal, not solely commercial."; Bank Brussels Lambert v. Credit Lyonnais (Suisse) S.A., 160 F.R.D. 435, 447 (S.D.N.Y. 1995) ("[T]he common interest doctrine does not encompass a joint business strategy which happens to include as one of its elements a concern about litigation.").
3 Hewlett-Packard Co. v. Bausch & Lomb lnc., 115 F.R.D. 308 (N.D. Cal. 1987).
4 Id. at 309.
5 Id. at 311.
7 No. 98 C 2679,1999 WL 754748 (N.D. Ill. Sept. 14, 1999).
8 Id. at *2.
9 197 F.R.D. 342 (N.D. Ohio 1999).
10 Id. at 348.
12 Id. at 349.
13 191 F.R.D. 433 (E.D. Pa. 2000).
14 Id. at 435.
15 The court also acknowledged Katz's reliance on In re Regents of Univ. of Cal., 101 F.3d 1386 (Fed. Cir. 1996). In that case, the Court of Appeals for the Federal Circuit issued an extraordinary writ reversing the district court's determination that a patentee and a nonexclusive licensee did not share the requisite community of interests to allow the patentee to invoke the attorney-client privilege with respect to communications with the licensee. Despite this guidance, the district court held that MCI was not a licensee when it reviewed the opinions from Katz's counsel. The court noted that a licensee and a patentee may have the requisite identity of interests in some cases but that "it does not follow a fortiori that a patentee has the requisite identity of interests with a potential licensee or a party with which the patentee is negotiating a licensing agreement." 191 F.R.D. at 437-38 n.4.
16 Id. at 137.
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