Scope of Privilege: When a Company's Business Is Litigation

Patent litigation is often very document intensive. When reviewing documents for production in a litigation, a number of questions must be addressed for each document. For example, is the document relevant to the issues in the case? Does the document contain confidential information that should only be produced subject to a protective order? Does the document contain confidential information of a third party that requires permission from that third party before production? While all of these are important considerations, perhaps the most important inquiry is the question of privilege: Is the document privileged and thus can be withheld from production?

Too often, the complex question of privilege devolves into a simple inquiry: Is the author or recipient of the document an attorney? This shortcut analysis assumes that documents authored or received by an attorney are privileged, while documents exchanged between business people are not. However, as with all shortcuts there tend to be flaws.

First, the mere question of whether the author or recipient is an attorney does not include all of the legal requirements for a privilege to attach. For example, the attorney-client privilege only applies to communications seeking or providing legal advice; the attorney work-product doctrine only applies to documents created in anticipation of litigation. The shortcut breaks down almost completely when the attorneys and business people are one and the same. Such a situation is likely to arise in the case of patent holding companies whose only business is the licensing and enforcement of patent rights. These companies are frequently staffed with attorneys who make both business and legal decisions.

The Diagnostics Systems Decision

The U.S. District Court for the Central District of California was recently confronted with precisely this issue, and its determination of the scope of the relevant privileges is informative of how other courts may rule on similar issues. In Diagnostics Systems Corp. v. Symantec Corp. et al., plaintiff Diagnostics Systems Corp. (“DSC”) asserted several patents related to certain database technology against multiple defendants. See Order Adopting Report of Special Master/Discovery Referee with Some Modifications, Case No. 06-cv-01211 (C.D. Cal. Aug. 12, 2008). As stated by the court, “DSC's only business is to analyze, investigate, and attempt to enforce the patents-in-suit.” During the time in question, DSC's management team included five attorneys. In addition to their legal function, these attorneys also functioned as executives directing the business of DSC.

In the course of the litigation, one of the defendants, NetScout Systems, Inc., filed a motion to compel DSC to produce certain of the 1,302 documents identified in DSC's privilege log that DSC claimed were protected under the attorney-client privilege and work product doctrine. The court assigned a special master to review those documents, in camera, to determine whether they were protected by the attorney-client privilege and/or work product doctrine. Following a report from the special master, the court issued its order finding that some 550 of the documents that were the subject of the motion to compel were not privileged and ordered their production. The court noted that “Plaintiff has set up its business in such a way to allow Plaintiff to argue that many documents, including those central to Plaintiff's primary business, are privileged documents,” but found that DSC had failed to carry its burden of showing that the factual requirements of those privilege claims were met.

In finding that many of the documents were not privileged, the court explicitly rejected the contention that the documents were privileged simply because the individuals involved were attorneys. See, e.g., Id. at 10, 13. Instead, the court (and special master) analyzed the factual basis for each of the privilege claims, focusing in particular on two factual issues.

First, the court distinguished between documents created in connection with a business function and documents created in connection with a legal function. While the court acknowledged that DSC's only business is monetizing the patents-in-suit through licensing or litigation, it distinguished between privileged and non-privileged aspects of DSC's business by applying the holding from United States v. ChevronTexaco Corp., 241, F. Supp.2d 1065 (N.D. Cal. 2002), that the attorney-client privilege attaches when the “primary purpose of the communication was securing legal advice.” The court found that for those documents for which DSC could not show that the primary purpose was securing legal advice, the privilege did not apply regardless of whether DSC's in-house counsel was involved in the transaction. For example, the court noted that documents regarding the process DSC uses to evaluate patents to acquire and targets to assert those patents against, related to a business function rather than a legal one.

Second, the court distinguished between documents created in anticipation of litigation and documents created in the ordinary course of DSC's business. Relying on a number of cases, the court excluded documents related to ordinary business functions from the scope of the work product doctrine because they were not prepared in anticipation of litigation. For example, the court found that sending letters containing offers to license is part of DSC's business model, and DSC could not have anticipated litigation against every company to which it sent such a letter. The court expressly noted that under DSC's argument “virtually all activities engaged in by a company premised entirely on licensing and/or enforcing patents via litigation would be classified as ' work product.”

Conclusion

This ruling contains a number of potential lessons for both in-house and outside counsel. Generally, courts are unlikely to uphold broad privilege claims based solely on the fact that the author or recipient of a document is an attorney. In-house attorneys should therefore be careful of including statements that they would not want in front of a jury in any document that does not clearly meet all of the requirements of the privilege. Outside counsel should be prepared to pursue broad privilege claims by opposing parties and if necessary move to compel production ' here, DSC was ordered to produce more than 40% of the documents it had withheld on privilege grounds. Furthermore, the court's reasoning is not necessarily limited to independent patent holding companies like DSC; it may also be applicable to other entities that are staffed with attorneys in dual roles, such as licensing departments or patent holding companies that are subsidiaries of larger companies.

Paul T. Qualey, an associate in the Washington, DC office of Kenyon & Kenyon LLP, specializes in patent litigation and counseling, primarily in electrical engineering and computer-related fields. He is Assistant Editor of this newsletter.

Patent litigation is often very document intensive. When reviewing documents for production in a litigation, a number of questions must be addressed for each document. For example, is the document relevant to the issues in the case? Does the document contain confidential information that should only be produced subject to a protective order? Does the document contain confidential information of a third party that requires permission from that third party before production? While all of these are important considerations, perhaps the most important inquiry is the question of privilege: Is the document privileged and thus can be withheld from production?

Too often, the complex question of privilege devolves into a simple inquiry: Is the author or recipient of the document an attorney? This shortcut analysis assumes that documents authored or received by an attorney are privileged, while documents exchanged between business people are not. However, as with all shortcuts there tend to be flaws.

First, the mere question of whether the author or recipient is an attorney does not include all of the legal requirements for a privilege to attach. For example, the attorney-client privilege only applies to communications seeking or providing legal advice; the attorney work-product doctrine only applies to documents created in anticipation of litigation. The shortcut breaks down almost completely when the attorneys and business people are one and the same. Such a situation is likely to arise in the case of patent holding companies whose only business is the licensing and enforcement of patent rights. These companies are frequently staffed with attorneys who make both business and legal decisions.

The Diagnostics Systems Decision

The U.S. District Court for the Central District of California was recently confronted with precisely this issue, and its determination of the scope of the relevant privileges is informative of how other courts may rule on similar issues. In Diagnostics Systems Corp. v. Symantec Corp. et al., plaintiff Diagnostics Systems Corp. (“DSC”) asserted several patents related to certain database technology against multiple defendants. See Order Adopting Report of Special Master/Discovery Referee with Some Modifications, Case No. 06-cv-01211 (C.D. Cal. Aug. 12, 2008). As stated by the court, “DSC's only business is to analyze, investigate, and attempt to enforce the patents-in-suit.” During the time in question, DSC's management team included five attorneys. In addition to their legal function, these attorneys also functioned as executives directing the business of DSC.

In the course of the litigation, one of the defendants, NetScout Systems, Inc., filed a motion to compel DSC to produce certain of the 1,302 documents identified in DSC's privilege log that DSC claimed were protected under the attorney-client privilege and work product doctrine. The court assigned a special master to review those documents, in camera, to determine whether they were protected by the attorney-client privilege and/or work product doctrine. Following a report from the special master, the court issued its order finding that some 550 of the documents that were the subject of the motion to compel were not privileged and ordered their production. The court noted that “Plaintiff has set up its business in such a way to allow Plaintiff to argue that many documents, including those central to Plaintiff's primary business, are privileged documents,” but found that DSC had failed to carry its burden of showing that the factual requirements of those privilege claims were met.

In finding that many of the documents were not privileged, the court explicitly rejected the contention that the documents were privileged simply because the individuals involved were attorneys. See, e.g., Id. at 10, 13. Instead, the court (and special master) analyzed the factual basis for each of the privilege claims, focusing in particular on two factual issues.

First, the court distinguished between documents created in connection with a business function and documents created in connection with a legal function. While the court acknowledged that DSC's only business is monetizing the patents-in-suit through licensing or litigation, it distinguished between privileged and non-privileged aspects of DSC's business by applying the holding from United States v. ChevronTexaco Corp., 241, F. Supp.2d 1065 (N.D. Cal. 2002), that the attorney-client privilege attaches when the “primary purpose of the communication was securing legal advice.” The court found that for those documents for which DSC could not show that the primary purpose was securing legal advice, the privilege did not apply regardless of whether DSC's in-house counsel was involved in the transaction. For example, the court noted that documents regarding the process DSC uses to evaluate patents to acquire and targets to assert those patents against, related to a business function rather than a legal one.

Second, the court distinguished between documents created in anticipation of litigation and documents created in the ordinary course of DSC's business. Relying on a number of cases, the court excluded documents related to ordinary business functions from the scope of the work product doctrine because they were not prepared in anticipation of litigation. For example, the court found that sending letters containing offers to license is part of DSC's business model, and DSC could not have anticipated litigation against every company to which it sent such a letter. The court expressly noted that under DSC's argument “virtually all activities engaged in by a company premised entirely on licensing and/or enforcing patents via litigation would be classified as ' work product.”

Conclusion

This ruling contains a number of potential lessons for both in-house and outside counsel. Generally, courts are unlikely to uphold broad privilege claims based solely on the fact that the author or recipient of a document is an attorney. In-house attorneys should therefore be careful of including statements that they would not want in front of a jury in any document that does not clearly meet all of the requirements of the privilege. Outside counsel should be prepared to pursue broad privilege claims by opposing parties and if necessary move to compel production ' here, DSC was ordered to produce more than 40% of the documents it had withheld on privilege grounds. Furthermore, the court's reasoning is not necessarily limited to independent patent holding companies like DSC; it may also be applicable to other entities that are staffed with attorneys in dual roles, such as licensing departments or patent holding companies that are subsidiaries of larger companies.

Paul T. Qualey, an associate in the Washington, DC office of Kenyon & Kenyon LLP, specializes in patent litigation and counseling, primarily in electrical engineering and computer-related fields. He is Assistant Editor of this newsletter.