Protecting Privilege While Still Getting the Deal Done in Technology Transactions

September 20, 2023

Whether in merger and acquisition, early-stage venture investing, or a technology license, due diligence plays an essential role in evaluating the economics of any technology-centric deal. The due diligence processtypically involves sharing significant information and documents, many of which will be confidential and some of which may involve privileged information and attorney work product. 

Given the speed at which these deals often take place, the volume of shared information, and the inherent risks of sharing this legally protected information, parties should know the potential ways privilege and work product protections can be safeguarded and lost in the due diligence process.

Consider this a best practices guide for founders and investors in due diligence of technology companies and technology transactions. Following these guidelines will help minimize the risk of unintentional waiver of attorney-client privilege and work product protections. First off, it’s helpful to start with some basic understanding.

What Is Attorney-Client Privilege?

The attorney-client privilege recognizes the importance of keeping certain communications between the lawyer and client private. The protection attaches to confidential communications between an attorney and a client or potential client to seek legal advice and rarely applies to non-legal advice. The attorney-client privilege is distinct from other legal protections, such as joint-defense privilege or attorney work product.

What Is Work Product Protection and How Does It Differ from the Attorney-Client Privilege?

Work product includes documents and other tangible items prepared in anticipation of litigation. This can include a legal opinion, a document legally analyzing potential claims or counterclaims, and other assessments of a client’s legal position, and the protection extends even if the attorney communicated the information to the client (although not necessarily to the information within the documents or tangible items). By comparison, the attorney-client privilege applies to communications, written or otherwise.

Other distinctions include:

  • Attorney-client privilege is indefinite in length unless waived, but work product protections may cease to exist when the litigation or threat of litigation has subsided.
  • The effects of a waiver can be different. For example, while disclosure to third parties can result in a waiver (at least concerning those third parties), a waiver of privileged communications is typically broader than a waiver for work product (generally limited to the information disclosed in the work product and not more broadly to the topic of the work product).
  • Attorney-client privilege belongs to the client, and only the client can waive it. But any party may invoke and maintain work product protections. For instance, even if the client has waived the work product protection, the attorney may still shield internal documents prepared for litigation from disclosure and pursue work product protections if doing so does not hurt the client’s interests.

The Presence of Third Parties

Privilege and work product protection can be at risk whenever a third party is granted access to those protected/privileged materials or conversations. Generally, communication in the presence of or to a third party will waive the privilege, but there are exceptions:

  • The third party is a consultant whose involvement is essential to the legal advice.
  • The third party is the functional equivalent of the client/employee.
  • The client and the third party share a common interest (a common legal interest).

Some states recognize other exceptions, and those listed above are not all recognized to the same extent in every state or judicial circuit. Therefore, you need to know which exceptions apply to your specific case. In addition, the privilege protections (especially the common interest protections) vary dramatically by jurisdiction, so communications protected in one jurisdiction may be discoverable in another.

Many federal courts (like the Federal Circuit and Second Circuit) have rejected the idea that anticipated litigation is the only way to invoke the common interest privilege, which opens the door for the protection to attach to communications in purely transactional matters if the common interests are legal in nature. 

State courts have taken contrary positions, too. New York’s state courts have rejected outright the idea that common interest protections can exist without reasonably anticipated litigation. Although Delaware is a business-friendly state, its courts have rejected the idea that common interest privilege attaches when the common interests between the company and the acquirer in an M&A transaction are primarily economic and not legal. (See also 10X Genomics v. Celsee where a Delaware federal court allowed discovery of the defendant’s communications regarding the litigation shared with an acquirer). California state courts have broadly recognized common interest privilege protections in the M&A context.

Getting the Deal Done Without Losing Privilege

In the mergers and acquisitions context, during diligence regarding an IP license, within the private equity fundraising process, or as part of the ongoing working relationships between private fund managers and their portfolio companies, there is a genuine risk of unintentionally waiving privilege over certain communications. 

Sharing privileged documents or communications may be unavoidable when trying to do the deal, but there are steps one can take to reduce the risk of losing those protections. The protections will strongly depend on the jurisdiction where the ultimate dispute will be decided, so choice of law and venue provisions in subsequent agreements can also strongly affect protections.

So how can you protect privilege? Consider these key questions:

  • Will you share privileged information at all?
  • When will this information be shared?
  • How will it be shared?
  • With whom will it be shared?
  • How important is the transaction to you if the other side walks away because you’ve chosen not to share the information? 
  • How relevant is the privileged information to the transaction? 

Maybe the data is irrelevant to the specific transaction, and you can simply explain that to the other party.

Even if the information is pertinent to the transaction, you may discuss it with the other party and agree that the risk of losing privilege outweighs the probative benefit. Unless it changes the deal materially, it may not be worth the risk of sharing.

In my experience on the investor side, I’ve also counseled companies during diligence where they were unwilling to share any insight or information on IP-related matters, such as freedom to operate analysis of a key competitor. Such a blanket refusal to share information can kill the deal or delay the diligence. Conversely, mindlessly sharing all the privileged information with potential acquirers often and early is not advisable. So how can you accomplish the deal while recognizing the need to protect the privilege best?

It is always advisable to enter into a carefully drafted confidentiality and non-disclosure agreement before sharing any privileged communications. Such agreements should identify the confidential and privileged nature of the material. By listing categories of information that are privileged and limited, even under a non-disclosure agreement (NDA), the document allows the parties to:

  • Restrict specific information to specific recipients with a need to know.
  • Stage the timing of the disclosure to ensure other potential deal hurdles are cleared (such as the need to disclose at an appropriate stage of the diligence if a successful deal is likely and the privileged information is relevant for the next steps).
  • Focus on sharing underlying facts and not legal conclusions or communications.
  • Articulate the parties’ common interest, ensuring it is beyond the deal’s financials and relates primarily to the shared legal stake.

Signing an NDA before beginning diligence with a funder is strongly recommended. The NDA identifies the confidential and privileged nature of the information you share and articulates the funder’s obligation to maintain confidentiality. During diligence, avoid disclosure of information that falls under the attorney-client privilege. And before you sign an NDA or funding agreement, make sure it contains language describing the funder’s interest in the litigation outcome and using the term of art “common interest,” if applicable in your jurisdiction.

It is critical to demonstrate that the parties involved recognize the importance of disclosure and protecting the privilege. You may also wish to consider sharing certain information only after the diligence has reached a particular milestone or phase, and even then, you might limit the disclosure of certain highly confidential or sensitive privileged details to specific individuals with a need to know.

Proceed Cautiously

Attorney-client privilege and work product protection are essential safeguards for what is often a company’s most sensitive information. Sharing privileged information and attorney work product with third parties can jeopardize those protections, but it may be unavoidable when trying to move forward with a deal. Know there are proactive steps one can take to protect the information and minimize the risk of waiver. 

The attorneys at JMIN have helped many companies and investors navigate complex technology transactions involving highly confidential and privileged information. We understand how to balance these protections with the need to get the deal done.

Contact us today if you need a partner in the due diligence phase of your transaction.