Awareness of the potential pitfalls relating to the attorney-client privilege with respect to a transfer of patent rights can be critically important in patent infringement lawsuits. Patents are frequently transferred from their original owners or inventors to subsequent owners that ultimately assert the patents in litigation.
Today, a substantial number of patent infringement lawsuits are brought by the transferees of the litigated patents. Many of these transferees are non-practicing-entities ("NPEs") — patent owners who do not practice/commercialize their patented inventions and instead aim to monetize their patents principally through pursuing licenses and litigation against companies that are practicing the patented inventions.
Throughout the prosecution and life of a patent, legal analyses relating to patentability, infringement and validity are often conducted (by the patent owner and/or third parties), and such analyses may be subject to protection under the attorney-client privilege and/or the work product doctrine. In the context of a patent transfer, though, some courts have suggested that under certain circumstances, the transferee of the patent might arguably lack standing to assert the attorney-client privilege held by the previous owners.
Determining whether privilege survives a given patent assignment is important, because if it were found not to, obtaining discovery of these previous analyses could prove to be a ripe source of evidence for a defendant or licensing target who might use such evidence to make anti-patentee arguments related to the interpretation, validity and enforceability of a patent.
I. A Naked Assignment Of Patent Rights Might Not Transfer The Attorney-Client Privilege
Whether a transfer of patent rights also transfers the attorney-client privilege related to those rights has been considered by several courts. Those courts have found that a "naked" transfer of patent rights, without more, does not result in the transfer of the related attorney-client privilege. The conclusions reached by courts that have considered the issue and implied such a result all base their reasoning on a United States Supreme Court decision, wherein the Court stated that “when control of a corporation passes to new management, the authority to assert and waive the corporation’s attorney-client privilege passes as well.”1 The lower courts' suggestion is that, by contrast, a naked transfer (a transfer of patent rights without control of corporate management of the patent-originating company) does not meet this supposed threshold.
In the context of an ownership transfer of a patent, courts have reached inconsistent results in determining when “control of a corporation passes to new management.” These courts do agree, however, on the following: (i) an assignment of a patent, without anything more, generally does not also transfer the assignor’s attorney-client privilege concerning the patent — the privilege is retained by the assignor; and (ii) a corporate acquisition of a company, such as a merger or a takeover, results in a corresponding acquisition of the attorney-client privilege previously held by the acquired company.
However, when a patent is assigned in conjunction with some but not all other assets and/or liabilities, rather than a bare assignment or complete transfer of control of the corporation and its business, the specific facts involved may determine whether a corresponding transfer of the attorney-client privilege also results.
In Telectronics Proprietary, the United States Court of Appeals for the Federal Circuit tangentially considered the issue in the context of a motion to disqualify an attorney, stating that “the assignment of a patent does not transfer an attorney-client relationship” and “attorneys represent clients— not legal positions or patents.”2 At least one district court has cited Telectronics Proprietary in support of a determination that an “assignment [of patent rights] did not transfer to plaintiff any right to invoke the attorney-client privilege.”3
In Yosemite Investment, the United States District Court for the Southern District of Ohio was not persuaded that purchase of patent rights gave rise to an effective transfer of the attorney-client privilege.4 Yosemite Investment involved the transfer of “substantially all of [a] business and assets,” including patent rights.5
Acknowledging that the attorney-client privilege would transfer in conjunction with a change in corporate control (e.g., a merger or a takeover), the court stated that it was not persuaded that privilege should transfer under the present facts.6 Interestingly, the court also noted that the plaintiff did not contend that the purchase of assets resulted in a de facto corporate merger, seemingly implying that the attorney-client privilege would only follow a transfer of assets that qualifies as a de facto merger.7 Other courts have reached similar conclusions when confronted with the assignment of patent rights.8
In Soverain Software, Judge Davis in the United States District Court for the Eastern District of Texas reached a different conclusion.9 Judge Davis rejected a proposed bright-line rule that would hold that a transfer of assets can never result in a transfer of privilege, and instead looked to “practical consequences rather than the formalities of the particular transaction.”10 The plaintiff in Soverain Software purchased a business from two companies, which included a software product named “Transact,” the patents covering that product, and contracts with customers regarding that product. The court found that this sale amounted to more than a mere naked transfer of assets, and that the plaintiff was the successor to the Transact business.11 Accordingly, the court found the attorney-client privilege relating to the Transact business was transferred to the successor of that business.12
More recently, Magistrate Judge Everingham in the Eastern District of Texas applied the reasoning from Soverain Software to reach a similar determination.13 In Crane, Judge Everingham looked toward the practical considerations, rather than formalities, and found that the purchaser, who continued to operate the same business, own the patents, inventory, machinery and equipment, and succeeded to the contracts, agreements and warranty obligations of the business, could assert the privilege.14
When faced with an infringement assertion or lawsuit brought by an entity who is not the original owner of the patents, it is likely advisable for defendants to investigate or press for discovery of any communications from or to the original patent owner related to those patents, even if such communications may originally have been subject to the attorney-client privilege. Credible arguments might be raised that subsequent owners arguably lack standing to assert any privilege related to these materials and thus could potentially be forced to disclose them in discovery. Obtaining access to this information, which could include candid discussions and advice regarding the patents’ strengths and weaknesses, could provide critical guidance in defending against a patent infringement lawsuit.
Conversely, companies faced with an opportunity to sell or acquire a patent may wish to pay heed to practical considerations associated with the form of the acquisition—with an emphasis on structuring it as something clearly more than a transfer in gross of patents without any other aspects of the business activities that related to or generated those patents—in order to increase the odds that the attorney-client privilege may reliably follow with the transfer of ownership.