November 06, 2019 Top Story

Attorney-Client Privilege May Extend to Investors

Communications between company and its investors may not waive privilege

By Stephen Carr

A  recent decision could significantly expand the attorney-client privilege in commercial litigation to include communications with outside investors with some stake in the litigation. The decision in SecurityPoint Holdings, Inc., v. Transportation Security Administration, involving a contentious patent dispute, finds that a non-party “equity investor” still shared “a common legal interest in the validity of the patent-in-suit” so that communications between the investor and the plaintiff did not waive claims of privilege.

The IP dispute began when a company claimed the TSA violated a patent on using carts to move trays at security checkpoints

The IP dispute began when a company claimed the TSA violated a patent on using carts to move trays at security checkpoints

iStockphoto by Getty Images

While the opinion declined to decide whether a simple agreement to fund litigation between two parties could be enough to establish shared interest in litigation, the court noted that an equity investor with a stake in the disputed property had more than a “merely commercial” relationship with the party—although the court said little more.

“The court came to the conclusion that there was a common legal interest in the validity of the intellectual property at issue,” explains Dr. Angela Foster, North Brunswick, NJ, cochair of the ABA Section of Litigation’s Trial Evidence Committee. “Because both companies had a vested legal right in the patents, they would need to be able to speak confidentially about legal issues regarding the patents,” concludes Foster.

IP Investor Gets Involved in Long-running Dispute

The dispute began almost eight years ago with a claim by SecurityPoint Holdings, Inc., that the Transportation Safety Administration (TSA) violated the company’s 2002 patent on using carts to move trays at security screeners at airports. The TSA admitted that it violated the patent—it does, in fact, use carts to move trays—but claimed that the invention was obvious.

The Court of Federal Claims disagreed with the TSA after a trial, finding the invention was not obvious. The parties then focused on SecurityPoint’s damages.

In an effort to learn about the company’s internal finances and valuation to help establish damages, the government sought many documents from SecurityPoint, including communications between SecurityPoint and an outside equity investor called Raptor.

Raptor’s interest in the case was based on a pre-existing equity agreement that gave it an ownership interest in the patents-at-issue as well as a “litigation funding agreement” that permitted SecurityPoint to receive financing for the case while giving Raptor a priority claim to the proceeds from the suit if SecurityPoint were to prevail.

SecurityPoint objected to the TSA’s request for communications with Raptor, claiming that the communications were privileged because the two companies shared a common legal interest in the validity of the patent. SecurityPoint also argued the communications related to legal matters, not commercial matters. While TSA conceded that the documents related to privileged legal matters, the government contended that SecurityPoint waived its privilege claim by sharing the communications with Raptor, a third party.

A Common Interest That Never Waivers

The court explained that, in most circumstances, disclosing communications related to legal advice with a third party “waives the attorney-client privilege as to the subject of that communication.” But the common-interest doctrine protects communications if the third party is “allied in a common legal cause” with the party to the suit.

The court went on to explain that for the common-interest doctrine to apply, the shared interest between the parties “must be a legal one, not merely commercial.” And the communication must be made in “furtherance of that common purpose.” The court also noted that the common-interest doctrine only protects communications “regarding this lawsuit and other legal questions concerning the patent.”

Applying these principles, the court found that Raptor, as an equity investor in SecurityPoint, had a legal interest in SecurityPoint’s patents and thus a common interest “sufficient to protect its communications with SecurityPoint (and vice versa) regarding this lawsuit and other legal questions concerning the patent.”

The decision was consistent with the basic goals of intellectual property law, according to Michael D. Steger, New York, NY, cochair of the Section of Litigation’s Intellectual Property Litigation Committee. “Various statutes dealing with intellectual property are based on the idea that protecting IP rights will promote the development of the arts and sciences. It makes sense then that the law would provide people who have aligned incentives in protecting their IP with the ability to discuss legal issues related to validity,” Steger explains.

The court declined to decide whether the litigation funding agreement between the companies, standing alone, would be enough to establish the common-interest exception to excuse a privilege waiver.

Importance of Maintaining Privileged Documents

The decision highlights the importance of developing and implementing strategies to preserve privileged information, especially in complicated commercial litigation where the lines between third parties and insiders can be murky.

“To minimize the potential for waiver,” litigants should “clearly label privileged documents, keeping them in separate files; designate requests for legal advice explicitly; and keep privileged business email communications separate,” recommends Foster.

Email communications can pose particular challenges in the context of complex commercial litigation where parties are discussing many issues and working in multiple roles. “If parties outside the privileged relationship need to be included in a conversation, begin a new email chain rather than simply forwarding an email that contains privileged information,” counsels Foster.

 

Stephen Carr is an associate editor for Litigation News.


Hashtags: #IPlaw, #attorneyclient, #legaltwitter

Related Resources


Copyright © 2019, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).