Court Addresses Waiver Implications of a Target’s Due Diligence Disclosures to its Ultimate Acquirer

August 2, 2017

Acquiring companies predictably seek information from their acquisition targets, such as descriptions of the targets’ ongoing litigation. During their due diligence, the acquirer may demand the target’s documents or communications protected by the attorney-client privilege, the work product doctrine, or both.

In RKF Retail Holdings, LLC v. Tropicana Las Vegas, Inc., Case Nos. 2:14-cv-01232- & 2:15-cv-01446-APG-GWF, 2017 U.S. Dist. LEXIS 80436 (D. Nev. May 25, 2017), plaintiff RKF sued Tropicana in 2014, alleging that Tropicana wrongfully terminated an exclusive agency contract. In 2015, Penn Gambling acquired Tropicana. RKF then sought discovery of “information about [its] lawsuits” that Tropicana disclosed to Penn Gaming before the acquisition. Id. at *5. The court found that Tropicana’s due diligence disclosures waived privilege protection but not work product protection. In finding a privilege waiver, the court rejected Tropicana’s argument that it shared a “common interest” with acquirer Penn Gaming — noting that the “majority of courts have rejected application of the [common interest] doctrine where the disclosure was made for business purposes rather than for the purpose of pursuing a common legal effort.” Id. at *10. The court concluded that “Tropicana provided information about the lawsuit so that Penn Gaming could make a business decision whether to proceed with the acquisition.” Id. at *14. In contrast, the court found that Tropicana did not waive its work product protection by disclosing work product to Penn Gaming during the due diligence process. The court correctly noted that unlike the fragile privilege protection, work product protection “is not waived if the disclosing party has a reasonable basis to believe that the recipient will keep the disclosed materials confidential and not reveal them to the disclosing party’s adversary.” Id. at *17. The court concluded that Penn Gaming had a vital interest in preserving as confidential Tropicana’s disclosure about RKF’s suit because Penn Gaming “would, directly or indirectly, assume Tropicana’s potential liability if the merger went through.” Id. at *18.

Other courts have reached the identical two-part conclusion in addressing pre-acquisition due diligence disclosures – which dramatically highlights the contrast between the fragile privilege protection and the robust work product protection.