Privilege Ownership in High-Stakes Corporate Contexts: Part I

May 16, 2018

Under the traditional so-called “bright-line” test:  (1) selling or otherwise transferring a corporation’s stock transferred its privilege ownership; while (2) selling or otherwise transferring its assets did not.  But most if not all courts now apply a more common sense approach, frequently called the “practical consequences” test.

In United States v. Adams, Case No. 0:17-CR-00064-DWF-KMM, 2018 U.S. Dist. LEXIS 41165 (D. Minn. Mar. 12, 2018), the government seized emails between defendant (and lawyer) Adams and his former clients (“Apollo”).  Many of the emails deserved privilege protection, but the government argued that the privilege belonged to Scio, a company which earlier had purchased (in the words of the asset purchase agreement) “certain of [Apollo’s] property, assets, rights and privileges.”  Id. at *3.  The government noted that Scio was willing to waive its privilege.  Adams argued that although defunct, Apollo “retained the authority to waive,” and could therefore assert, the privilege.  Id. at *5.  The court applied the “practical consequence[s]” test, and thus focused on the “practical realities of the Apollo-Scio transactions.”  Id. at *11.  The court noted that:  (1) Apollo had sold Scio “all of its intellectual property” (id.); (2) the transactional parties’ contemporaneous communications “support the conclusion that [the transactions] effectively constituted the sale of a business that transferred control of the privilege as well” (id. at *14); and (3) there was no evidence that after the transactions “Apollo continued operating in any meaningful way.”  Id. at *10.  The court ultimately concluded that Scio owned and could therefore waive the privilege – even though Apollo continued to exist as a corporate entity.

Courts’ adoption of the “practical consequences” test should prompt transactional lawyers to carefully negotiate privileged communications’ ownership in any asset transaction.  Next week’s Privilege Point will address privilege ownership when a corporate board splits into rival camps.