Corporations Must Limit Distribution of Advice to Maintain Attorney-Client Privilege

In this post, guest blogger M. Kay Martin describes a recent California appellate court opinion illustrating what corporations must to do avoid waiving attorney client privilege.

The decision, Zurich American, holds that in order to avoid waiver, corporations should limit distribution of attorney advice, opinions and strategy to those who “need to know,” and recipients should be cautioned not to indiscriminately forward the document to others who may not fall within that description.

Case: Zurich American Ins. Co. v. Superior Court (Watts Industries, Inc.), Case No. B194793 (Cal. Ct. App. 10/11/07)

The One Sentence Summary: The attorney-client privilege applies to internal corporate communications that discuss legal advice and strategy even if the corporation’s attorneys are not directly involved in the communications, so long as the communications are shared only with persons present to further the interest of the client in the consultation or to whom disclosure is reasonably necessary to transmit the information or to accomplish the purpose for which the lawyer was consulted.

What They Were Fighting About: Watts Industries sued its insurer, Zurich American, for bad faith arising out of Zurich’s failure to defend and indemnity Watts in underlying litigation, and Zurich sought declaratory relief under the policies. Watts moved to compel production of documents from Zurich’s claims file, including documents related to loss reserves and reinsurance, that had been withheld based on attorney-client privilege and the attorney work product doctrine. The trial court ordered that the documents had to be produced, ruling that internal documents concerning reserves and reinsurance matters were not privileged, even though many of them discussed internal litigation plans and strategy, because the privilege was limited to direct communications between the client and attorney.

California Court of Appeal Holdings:
The Court of Appeal held that the trial court “used an overly restrictive standard for application of the attorney-client privilege” and directed the trial court to re-review the disputed documents applying the following principles:

First, the court must determine whether the document discusses legal advice, opinions or strategy of counsel. If so, the document is privileged.

Second, the court must then decide whether the privilege was waived by distributing the advice within the corporation. The privilege would be maintained so long as the document was shared only with those “present to further the interest of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted” and there is a showing that the document “was to be treated as confidential.”

Providing additional guidance, the Court of Appeal also noted that merely copying counsel on correspondence or memoranda does not confer a privilege; that relevant facts may not be withheld just because they are incorporated in a communication involving an attorney; and that the attorney-client privilege does not apply where the attorney is acting as a business agent, i.e., giving business advice or acting as a negotiator.

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Taking of Correspondence and Bid Information Needed for Time Sensitive Construction Projects Allows Trade Secret Claims to Proceed to Trial

Case: San Jose Construction, Inc. v. S.B.C.C., Inc., (Cal. App. 6th Distr. No. H031066 10/12/07)

The One Sentence Summary: A project manager's taking of binders of correspondence and bids for time sensitive construction projects created questions of fact requiring a trial on trade secret, interference with prospective economic advantage and unfair competition claims by the former employer against the new employer.



California Sixth Appellate District Holdings:

• The plaintiff had presented sufficient evidence to avoid summary judgment. The binders of correspondence and bids were more than just client lists and could be trade secrets with independent economic value. Even though much of the information in the binders came from third party subcontractors who were willing to submit new bids to another company, the compilation of work present in these binders was a "completed puzzle" that had independent economic value.
• Defendant's argument that the projects that moved with the former project manager would have moved simply due to the relationship with the project manager could not be accepted on summary judgment. Material questions of fact existed as to whether the need for the projects to proceed without delay would have allowed the former employer construction company to keep the projects absent the taking of project information that allowed the new employer to commence the projects without delay.
• There were fact questions as to whether the information in the binders could be recreated through "reverse engineering." There was evidence that the actual "reverse engineering" through the collection of new subcontractor bids was a slow process that took longer than the time available to meet the customer needs for proceeding without delay.
• Trade secret misappropriation claims could proceed despite claims that the new company did not use the binders because wrongful acquisition of a trade secret even without use can be misappropriation.
• Interference with prospective economic advantage and unfair competition claims should be tried in light of evidence that the customers would not have switched if the project manager had not taken the information necessary to start the jobs without delay.
  
  

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Trademark Trial and Appeal Board No Substitute for Federal Court When Infringement Action is Threatened

Case: Rhoades v. Avon Products, Inc., Case No. 05-56047 (9th Cir. 10/15/07)

The One Sentence Summary: Allegations of threats sufficient to create "reasonable apprehension" of an infringement suit stated an actual controversy for purposes of declaratory judgment jurisdiction and plaintiffs were not required to wait for the completion of Trademark Trial and Appeal Board (TTAB) proceedings before seeking declaratory relief.


What They Were Fighting About: Plaintiffs sought a declaration that their trademarks on skin-care products like DermaNew did not infringe Avon's trademarks on a skin-care product line called ANEW.

Ninth Circuit Holdings:

• In the Ninth Circuit, an action seeking a declaration that a patent or trademark is invalid, or that plaintiff is not infringing, presents a justiciable case or controversy if the plaintiff has a real and reasonable apprehension that he will be subject to liability. The Ninth Circuit takes a flexible approach and, unlike the Federal Circuit, does not require concrete or explicit threats by the patent or trademark owner. In this case, however, plaintiffs alleged that Avon made three concrete threats of infringement litigation and the court must accept that as true at the motion to dismiss stage.


• A letter in the settlement context promising that Avon will "initiate whatever additional proceedings or litigation is necessary" was admissible to satisfy the jurisdictional requirements of an action for declaratory relief because Federal Rule of Evidence 408 only precludes evidence from settlement negotiations when offered to "prove liability for, invalidity of, or amount of a claim . . . or to impeach."


• Whether a district court should defer, on primary jurisdiction grounds, a trademark declaratory relief action pending the completion of related TTAB proceedings was an issue of first impression in the Ninth Circuit. Adopting approaches from the First and Second Circuits, the Ninth Circuit reasoned that declining to hear a declaratory relief action on a primary jurisdiction rationale is sensible only if the agency is better equipped to handle the action. Where there is potential infringement litigation, federal courts are particularly well-suited to handle the claims. While the powers of the TTAB are limited to determining and deciding the respective rights of trademark registration, a federal district court may also determine infringement and grant damages and injunctive relief.


• Avon's evidence of plaintiffs' "bad faith"was irrelevant or de minimis and did not undermine the case and controversy established by the complaint. Avon's bad faith argument had three incorrect premises: 1) the assumption that Avon would prevail on the trademark dispute, 2) that DermaNew's years of participation in settlement talks evidenced bad faith, and 3) that DermaNew's action was an attempt to avoid TTAB discovery.
  
  

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Northern District of California Considering Changes to Its Local Patent Rules

At the Northern District of California's annual Patent Law Roundtable held on October 2, 2007, a panel including judges Marilyn Hall Patel, Ronald Whyte, Susan Illston, and Elizabeth Laporte discussed patent law developments.

One of the items discussed was an effort to revise the Northern District's local rules for patent cases. These rules guide the course of patent litigation in the court and have led other districts to adopt similar rules.

A draft version of the rule changes indicates that the committee is considering several changes, including consolidation of the preliminary and final infringement and invalidity contentions into a single filing which can be amended by order of the Court upon a timely showing of good cause.

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Northern District of California Adopts Revised Model Jury Instructions for Patent Cases

The Northern District of California has adopted revised model jury instructions for patent cases. The instructions reflect recent developments in patent cases including the changes in obviousness law from the Supreme Court's KSR decision.

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Summary Judgment of Noninfringement Reversed Where Defendants Challenged Only Precision, and Not Validity, of Testing Methods

Case: Warner-Lambert Co. v. Purepac Pharmaceutical Co., Case No. 2006-1572 (Fed. Cir. 9/21/07)

The One Sentence Summary: Summary judgment of noninfringement was reversed where the Federal Circuit, while affirming the district court's claim construction, rejected defendants' arguments which had focused on the precision of testing methods, rather than validity, to support findings of noninfringement.

What They Were Fighting About: The district court had granted summary judgment finding no infringement of plaintiff's patent for a process for producing an epilepsy drug. The Federal Circuit affirmed the district court's claim construction, but reversed summary judgment on infringement, finding material issues of fact as to whether defendants' products used the process claimed by Warner Lambert's patent.

Federal Circuit Holdings:

• The district court had found on summary judgment that Warner Lambert failed to meet its burden of showing defendants products used two key limitations which were part of the patent, and thus found no infringement. The Federal Circuit found genuine issues of material fact warranting reversal of that judgment
• The Federal Circuit focused on test results provided by Warner Lambert's expert, and the fact that Defendants had challenged only the precision of the testing method, not whether the test itself produced scientifically meaningful results.
• With respect to testing precision, the Federal Circuit noted that within the range of testing error, several test results showed that the sample met the claim limitation in the allegedly infringed patent, and thus these tests did not support granting summary judgment and finding no infringement.
• The Federal Circuit further rejected the argument that, because plaintiff had drafted its claim in quantitative terms (specifying "less than 20 ppm of an anion of a mineral acid"), proving infringement required a test that quantified the level of acidic chloride in the sample. The Court reasoned that the testing method used allowed an inference that the quantitative limitation was met, and defendants had waived any challenge to the validity of that test method.
• Defendants had also challenged the claim construction in arguing there was no infringement. First, the Federal Circuit agreed with the district court's construction that "anion of a mineral acid" meant "anion derived from a mineral acid," rather than any anion, because otherwise the phrase "of a mineral acid" added nothing to the claim. Second, the Federal Circuit concurred with other aspects of the claim construction, rejecting defendants' arguments.
  

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Former Employer Who Disclaimed Interest in Former Employee's Patent Was Not a Necessary Party

Case: IpVenture, Inc. v. Prostar Computer, Inc. (Fed. Cir. No. 2006-1012, 2006-1081 9/28/07)

The Two Sentence Summary: The district court erred in dismissing a former HP employee's patent claim where HP had disclaimed all interest in the patent despite an employee agreement requiring assignment of inventions. HP's retroactive disclaimer of interest meant that HP was not a necessary party and did not have rights under the patent even though the disclaimer was executed after commencement of the lawsuit.

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