Another Court Deals with Privileged Communications’ Ownership after a Corporate Transaction

November 4, 2015

Most if not all courts recognize that selling a corporation’s stock transfers ownership of the corporation’s privileged communications. These can include even communications about the sale transaction. Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013). Asset sales present a more subtle analysis.

In HunterHeart Inc. v. Bio-Reference Laboratories, Inc., Case No. 5:14-cv-04078-LHK, 2015 U.S. Dist. LEXIS 123921, at *2 (N.D. Cal. Sept. 16, 2015), Hunter Laboratories sold “the bulk of its assets” to defendant. The asset purchase agreement explicitly identified the transferred assets as including Hunter’s “computer equipment,” software, e-mail addresses and “other records, data and communications . . . in the cloud.” Id. (internal citation omitted). Hunter’s owner used the company email system both before and after the asset sale. Hunter’s remaining business (now called HunterHeart) later sued defendant, and sought a protective order preventing defendant from using privileged communications on the servers and other systems the defendant had purchased. The court denied the protective order, finding that as for the pre-transaction privileged communications: (1) Hunter waived its privilege “when it agreed to hand over all of its servers, files and communications”; and, if not, (2) the “[privilege] passed from Hunter to [Defendant] by virtue of the [asset purchase agreement]’s transfer of the other company assets.” Id. at *5, *6. The court then held that post-transaction communications never deserved privilege protection, because Hunter’s owner who continued to use the email system “could not have expected these emails to remain confidential.” Id . at *7.

Many lawyers remember from law school that selling a company’s stock transfers the privilege, but selling its assets does not. Courts increasingly apply what is called the “practical consequences test” when analyzing privilege ownership, under which selling assets can also convey privileged communications.