Privilege and patents in a consolidating industry.

• Author: Jacobs, Kevin

THE PAST two years have brought unprecedented consolidation to the pharmaceutical industry. Within the first few months of 2009, Merck acquired Schering-Plough for a reported $41 billion, Pfizer acquired Wyeth for a reported $68 billion, and Roche purchased Genentech for a reported $47 billion. (1) In addition to these outright acquisitions, 2009 was highlighted by significant joint development agreements, such as an agreement between Athersys and Pfizer for the development of MultiStem[R] (2) or the settlement and agreement between Medicis and Perrigo for ongoing development. (3) Increasing competition in the pharmaceutical industry, higher research and development costs, tightening credit markets, and fewer innovative products were key drivers in this ever more competitive landscape as well-established pharmaceutical companies looked to acquire new technology from newer companies to reload product pipelines. (4)

Newer companies often are formed and begin to develop around an idea or a particular area of research. This intellectual property, usually in the form of patents, may comprise the majority (or entirety) of the new company's assets and make the company an appealing prospect for a joint development, merger, or acquisition. However, after the transaction--perhaps even many years later--the purchasing company may find itself in litigation or arbitration regarding the technology or patents it acquired.

In almost all subsequent litigation, issues over attorney-client privilege arise. This is particularly characteristic of patent litigation, but also true in products liability and commercial litigation. For example, from its inception, a patent's drafting, filing, and prosecution involve substantial attorney involvement. Subsequent decisions to license, enforce, or sell patented technology also involve extensive legal analyses. During its lifespan, a patented technology may be the subject of dozens or hundreds of privileged communications that may impact future litigation concerning the patent or related technology.

A company, prior to the sale of its assets, may also create legal documents evaluating the assets or assessing its own position in the market. These documents may also assess the patent strength of its own enterprises, or those of its competitors, and may analyze patent infringement contentions or defenses. If the company is later acquired, or its assets purchased, risks exist that these documents may be discoverable in later disputes despite assumptions about their privileged character.

For example, suppose the following fact pattern:

1. a particular technology is developed by a subsidiary of Company A,

2. the developing subsidiary is then dissolved as part of a corporate restructuring with the activities divided among two or more other subsidiaries, and

3. Company B later acquires that technology from one of these other subsidiaries.

In any litigation over this technology, will Company B be able to assert privilege to any pre-acquisition documents involving the technology or when witnesses are questioned about the technology?

Similarly, suppose that Company X and Company Y agree to jointly develop a technology, and midway through development, Company Y transfers a portion of its interest in that joint development to Company Z for a needed cash infusion. Will privilege be waived if Company Z receives documents prepared by counsel?

Understanding the way particular structures of business transactions impact the application of privilege and the steps that can preserve its protection is essential in later litigation (as well as in the structuring of potential transactions). If the transaction is structured as an outright merger, privilege will generally be preserved for the surviving entity. (5) Conversely, when the transaction is structured as a purchase of assets, the purchaser very well may not have standing to assert attorney-client privilege, as the privilege does not accompany the acquisition of the patent. (6) More interesting, as discussed below, is the line of cases dealing with fact patterns that fall in the middle of the spectrum between the acquisition of a single patent on one end, and that of an entire corporation on the other end.

1. Clear Cases Do Exist

   Acquisitions generally appear somewhere on a continuum based on the amount of the company purchased as a result of the transaction. Outright acquisitions and mergers of an entire company can be found on one end of the spectrum. This includes instances where one corporation acquires another, perhaps as a subsidiary, which continues to carry on its business. On the other end of the spectrum are the individual asset sales which may concern a piece of equipment, a patent, or a similar piece of property. These polar opposite examples provide clear answers--the acquisition of an entire company carries with it the privilege, while the acquisition of an individual technology or patent does not.

   1. Acquisitions of the Company

      In Commodity Futures Trading Commission v. Weintraub, the U.S. Supreme Court articulated the basic rule for determining who may assert the attorney-client privilege on behalf of an entity: a corporation's officers and directors (or a partnership's management) have the power to assert or waive the attorney-client privilege belonging to the corporation or partnership. (7) Specifically, the current officers and directors have the right (as well as the responsibility) to assert the attorney-client privilege belonging to that corporation. Accordingly, it follows that "when control of the corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege...