The field of due diligence raises especially difficult issues of privilege resulting from contact before the consummation of transactions between buyers and sellers. The breakneck pace of deals involving urgent sharing and disclosure of highly confidential corporate information with third-party investors or purchasers is an addition to this thorny problem. For instance, the buyer must determine its intensity and value during a due-diligence investigation of the intellectual property (IP) of a target company, most of it based on internal knowledge that is not publicly accessible. Nevertheless, the need to share company-sensitive data must be balanced against the potential implications of sharing privileged and confidential data with third parties. This paper highlights problems related to contact between parties to a due-diligence transaction and offers recommendations for sensitive information sharing.
The dynamic and difficult method of reviewing intangible properties such as patents, trademarks, copyrights and trade secrets requires IP due diligence. Depending on the essence of the deal, the parties, the timing and the technology, the circumstances of any IP due diligence vary. Regardless of the form of transaction, the claim language, freedom to function, legitimacy, enforceability, ownership and capacity for harvesting additional IP may be assessed by IP due diligence. A complete assessment requires a large amount of information to be given by the seller.
An IP due diligence is performed at an early stage of a transaction, e.g., purchase or license, especially for technology-driven transactions, and usually determines much of the negotiating strategy. Usually, within the United States and internationally, the acquiring party will gather a lot of publicly accessible information (e.g., from U.S. and European patent offices). Such data includes patents published, pending applications, litigation reports, relevant court papers, regulatory submissions (e.g., the U.S. Food and Drug Administration), publications and articles in the patent sense. The need for additional details increases as the assessment progresses. In order to assess ownership, for instance, the buyer must review the internal records of the seller, such as employment contracts and joint development agreements or consultants’ underlying employment agreements.
Inevitably, due diligence of an IP could involve the analysis of sensitive or privileged data or both. For example, the views of the seller of counsel and patent-counsel files can provide crucial information when evaluating the buyer’s freedom to operate under the acquired IP asset. However, sharing this data poses the thorny problem of exposing confidential information and probably waiving attorney-client privilege. Naturally, in order to facilitate its decision making, the consumer would want as much data as possible. The seller, on the other hand, may remain reluctant to possibly waive right, particularly in circumstances where the deal may fall through. Thus, before revealing privileged information, proper thought is required. A straightforward solution gives no single response. Competing interests also require a separate debate about how to use sensitive information, who will have access to it, and what will be done with the information after due diligence is completed. Regardless of the result, vigilance should always be at the forefront of every information disclosure to protect sensitive information and, even more importantly, the attorney-client privilege.
Conventional wisdom indicates that an asset seller would want to share as much details to attract a bid or continue business negotiations as appropriate. There is tremendous pressure to make a deal happen quickly in today’s fast-paced market economy, further prompting transparent and frank contact between parties. However, if the agreement falls through, the ramifications of sharing would take on considerable significance. Take, for example, a transaction where a buyer assesses a patent portfolio and the seller expresses an opinion of counsel during due diligence on whether the product of a party infringes a patent in the portfolio. The opinion is secured by attorney-client privilege prior to such publication. A third party can claim a waiver of privilege and demand discovery of the opinion if the parties part ways and the patent becomes the subject of a suit.
Achieving the right balance of disclosure requires great forethought at the appropriate time. It is short-sighted to blindly disclose data in the expectation that disclosure would facilitate negotiations. In the other side, it may cause an otherwise involved party to walk away from the agreement by extending the time for disclosure or refusing to disclose.
There is a huge amount of confidential information that may be sensitive, in addition to privileged information. For example, information about products in the pipeline that are connected to the IP of interest may be sought by the buyer. In order to decide how goods are perceived by the general public or the best way to address a new market, the buyer can also pursue market polling information and customer data. There are different threats to revealing sensitive strategic business information than those raised by sharing privileged information. Confidential business information may be crucially more relevant in certain industries than information relating to litigation defenses or roles. The problem facing companies in either scenario is when and how to report and what degree of access should be provided.
For the purposes of receiving legal advice or services, the attorney-client privilege covers confidential correspondence between an attorney and a client. The protection protects from the client’s discovery advice provided by the solicitor as well as the client’s correspondence to the attorney. Unless an exemption exists, voluntary disclosure of confidential messages to a third party results in the waiver of the attorney-client privilege. The reach of the waiver extends beyond the originally created document for fairness purposes, so that a party is prohibited from releasing communications that support its stance while simultaneously hiding communications that do not. There is no straight cut guidance on the degree of the subject matter waived, but the courts take into account the circumstances of the disclosure, the essence of the legal advice requested, and the prejudice to enabling or barring further disclosures on the part of the parties.
Knowledge could be shielded by the work-product doctrine, in addition to the attorney-client privilege. The theory of work-product is wider than the right of attorney-client and covers all documents prepared by or for the attorney in preparation of litigation. “The doctrine of the work-product seeks to enable an attorney to “assemble information, sift from the irrelevant facts what he considers important, prepare his legal theories and plan his strategy without unnecessary and needless intervention. “To promote justice and protect the interests of [his] clients.” The broadest defense of the doctrine is reserved for documents disclosing an attorney’s legal tactics or mental experiences.
Contrary to the full rights provided by the right of the attorney-client, the doctrine of the work-product acknowledges a competent protection of proof that can be resolved by a statement of significant need. Just like the attorney-client privilege, it can be waived. A party waives the security of the doctrine as regards all adversaries when it discloses confidential materials to an opponent and such disclosure does not further the underlying aims of the doctrine.
Waiving the right of the attorney-client and work-product doctrine could present serious risks. Because the waiver applies not only to correspondence but also to relevant content, during litigation, sensitive information that would otherwise never have been exchanged may become discoverable. Certain legal opinions, product analysis, marketing research and other important business data are included.