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April 28, 2017 Top Story

Reduction in Price for Company Facing Litigation Is Discoverable

Arms-length negotiations involving third parties can become subject to discovery

By Stephen Carr

Litigants can discover a change in a party's company price when the decreased price resulted from arms-length negotiations. In reaching this conclusion, a magistrate from the U.S. District Court Northern District of Illinois determined such negotiations were not "in anticipation of litigation"—a key standard for protection from discovery. The decision highlighted the contrast between the fact of a negotiated sale, a discoverable fact, and an attorney's opinion about trial strategy, and a privileged opinion.

Litigation Leads to a Purchase Price Discount

The dispute began when Lynk Labs claimed Juno Lighting misused several of its patents and broke an agreement between the two companies not to share their mutual patents. Schneider Electric, the parent company of Juno, agreed to sell Juno to a third company, Acuity Brands Lighting, soon after Lynk sued Juno. When Schneider sold Juno to Acuity, the two companies negotiated a price for the company, including an estimate of how much the Lynk lawsuit reduced the value of Juno.

During discovery, Juno provided Lynk a copy of the Acuity purchase agreement. Juno intended to black out the litigation discount. But Juno only redacted the amount in the first instance where it was mentioned. Once Juno discovered its mistake, it moved to claw back the purchase-price reduction.

Juno feared the information would give Lynk an advantage in settlement negotiations by knowing Juno's own estimate of the cost of the litigation. Juno argued the price was privileged work product. Because the price reflected the opinion of Juno's attorneys about the litigation cost, Lynk could not discover the price, the company argued.

Judge Rejects Attorney Work-Product Privilege

Judge Mary M. Rowland rejected Juno's arguments for several reasons. First, she noted the purchase price did not relate to counsel's opinion about his client's liability. The figure reflected, instead, an agreed-on price arrived at through negotiations between Juno, Schneider, and Acuity, who was not then a party to the lawsuit. The price did not show Juno's trial strategy or legal theory of the case.

Also, the price represented a bare fact—how much Juno agreed to lower the value of the company. The sale was a historical event, not simply an attorney's impression of the case. Parties may discover such historical facts.

Furthermore, although the price related to the litigation, the price's main purpose concerned the sale of Juno—not preparation for litigation. Juno negotiated the price to help it complete a business transaction, not to alter its trial strategy. Thus, Lynk could discover the purchase price.

Juno did prevail, however, on one issue. Judge Rowland determined the purchase agreement itself remained "highly confidential." Under local rules and Juno and Lynk's protective order, Juno's attorneys could not share the purchase agreement with their clients. The court noted the agreement would create a competitive harm because the agreement contained sensitive material that could give Juno's executives an unfair competitive advantage.

Discovering the Limits of Rule 26: Facts v. Opinions

The opinion involved applying an important privilege, the attorney work-product privilege, codified in Federal Rule of Civil of Procedure 26(b)(3)(A). Although Rule 26 provides broad discovery of "any nonprivileged matter that is relevant to any party's claim or defense," the Rule protects "documents and tangible things that are prepared in anticipation of litigation or for trial." The purchase price was certainly relevant to the claim—it reflected the value of the claim. But the issue came down to whether Juno had prepared the price for trial. The answer was no.

While past decisions have held that attorneys' estimates of the cost of defending a lawsuit are privileged, this decision showed an important limit to that principle. When the price results from a market sale, not trial strategy, the opposing party may discover it. "The decision highlights the fact that parties need to be aware that the facts generated as a result of a business transaction ultimately may be discovered in later litigation," explained Kenneth M. Klemm, New Orleans, LA, cochair of the ABA Section of Litigation's Pretrial Practice & Discovery Committee.

Rule 26 encourages attorneys to come up with creative strategies to help their clients in litigation. Privileges protect attorneys' opinions and strategies, such as when the attorney develops the opinion to use during litigation. "The parties here negotiated a purchase-price reduction as a component of the deal. The court indicated that the amount of the reduction, in and of itself, did not reveal any protected information about the litigation exposure," Klemm explained.

Litigation Price Discount Discoverable, But Confidential

Finally, the court's ruling involved the confidentiality agreement between the parties. The court decided that although Juno should produce the price it was "highly confidential," meaning Lynk's attorneys could not share it with their clients.

By keeping the purchase price confidential, Juno avoided the possibility of giving its opponent an advantage in settlement negotiations. The court noted the purchase agreement contained detailed, sensitive information about Lynk's business.

Information subject to discovery can often provide important insights into a company's business. Attorneys engaged in all litigation, especially commercial and IP litigation, must work to protect their client's important information during a lawsuit.

"Attorneys should be very careful in scrutinizing confidentiality agreements. Avoiding boilerplate forms and taking time to understand the client's most important information will help avoid potentially damaging information being disclosed during discovery," explained Angela Foster, North Brunswisk, NJ, cochair of the Section of Litigation's Intellectual Property Litigation Committee.


Stephen Carr is a contributing editor for Litigation News.

Keywords: discovery, work-product, Rule 26

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