(applying the "practical consequences" test in concluding that the buyer of a company's assets may waive or assert privilege protection; finding that Tekni-Plex did not apply, because that case involved a corporate acquisition; also holding that the defendants had established that an accountant retained by his tax lawyers was inside privilege protection; "In 2011 and 2012, Apollo entered into asset purchase agreements ("APAs") with a Nevada corporation, Scio Diamond Technology Corporation ("Scio"). See generally ADI APA; ADGC APA. The agreements contemplated transfer of 'certain of the property, assets, rights, and privileges of [ADI] related to, used in, or otherwise associated with the assets on the terms and subject to the conditions set forth in this [APA]' and 'certain of the property, inventory, and assets, rights, and privileges of [ADGC] related to, used in, or otherwise associated with the previous operation of [ADGC] on the terms and subject to the conditions set forth in this [APA].' ADI APA at 1; ADGC APA at 1. Each agreement purported to exclude certain tangible and intangible items and each provided for a Scio entity's purchase of Apollo's intellectual property, diamond growing equipment, and inventory. Mem. in Supp. at 6-7. In explaining the arrangement to the Securities and Exchange Commission ("SEC"), Mr. Adams's law partner testified that the Apollo shareholders were most excited about owning a part of a company that would exploit the existing diamond technology 'in a company that was capitalized and had a myopic focus on manufacturing versus [the] kind of research and development that Apollo had done a lot of over the years.' Gov't Ex. 3 at 4, ECF No. 109-3."; "The Court must determine whether the sale of Apollo's assets gave Scio the authority to assert or waive Apollo's attorney-client privilege. Ordinarily, a mere transfer of assets does not pass the privilege to the acquiring corporation except where: (1) the sale also transferred control of the business; and (2) the acquiring corporation's management continues the selling corporation's business. . . . But 'a transfer of the [attorney-client] relationship can occur in situations involving the sale of less than all the organization's assets.'"; "Courts look to the 'practical consequences' of an asset sale rather than formalities of the transaction to determine whether the authority to assert or waive the attorney-client privilege transferred to the acquiring corporation. Am. Intern. Specialty Lines Ins. Co. v. NWI-I, Inc., 240 F.R.D. 401, 403 (N.D. Ill. 2007); Coffin v. Bowater Inc., No. 03-cv-227-P-C, 2005 U.S. Dist. LEXIS 9395, 2005 WL 5885367, at *2 (D. Me. May 13, 2005); Soverain Software LLC v. The Gap, Inc., 340 F. Supp. 2d 760, 762 (E.D. Tex. 2004). In Soverain, for example, although the transfer occurred through a purchase agreement that covered some but not all of the business's assets, the acquiring corporation obtained the authority to assert and waive the sellers' corporate privilege where the buyer purchased a particular software business, sold the acquired software as its principal business, retained the patents for the software, serviced customers who used the software, and took steps to update a new version of the software. 340 F. Supp. 2d at 763-64."; "The language of the APAs themselves specifies that Scio acquired all of Apollo's intellectual property rights, website, equipment, machinery, and inventory, as well as numerous other tangible and intangible assets. ADI APA at 10-11; ADGC APA at 6-7. This constitutes essentially every asset which would be needed for the continuation of Apollo's business. Each APA also includes a clause that suggests transfer of the business. Both the ADI APA and the ADGC APA contain clauses requiring 'preservation of purchased assets and business' by Apollo prior to closing. . . . Such clauses would serve little purpose if Scio had only been interested in the assets themselves and not in continuing the business operations of Apollo."; "There is no evidence before the Court that Apollo continued operating in any meaningful way. For instance, Mr. Adams, who bears the burden of establishing the application of privilege in this matter, has offered no proof that Apollo sold any products after the Scio transaction, continued to pay any employees (perhaps other than Mr. Adams), honored contracts to provide diamonds or related materials to any customers, or otherwise carried on as a viable business enterprise. Indeed, it is difficult to see how Apollo, a company that had developed and attempted to monetize diamond-making technology, could continue in business having sold all of its intellectual property to another company. The practical consequence of the so-called asset acquisition was for Scio to 'continue the pre-existing operation.'"; "Mr. Adams points to several facts which he says indicate that the right to assert attorney-client privilege did not pass to Scio, but his arguments are unpersuasive when viewed against the practical realities of the Apollo-Scio transactions. First Mr. Adams suggests that control did not pass to Scio because the APAs provide that Apollo retained certain 'Excluded Assets.'. . . But this argument improperly elevates the formalities of the transactions as described in the APAs over the functional realities that surrounded the sale."; "Mr. Adams correctly notes that '[t]here is no dispute that the asset purchase agreements excluded all of Apollo's liabilities." Reply at 12, ECF No. 110. But retention of liabilities is not sufficient to defeat the transfer of corporate control and resultant passing of the privilege to Scio."; "In addition to the practical realities of the Apollo-Scio transactions, statements made by the individuals and businesses involved in the transactions further support the conclusion that they effectively constituted the sale of a business that transferred control of the privilege as well. Communications with stockholders describing the transactions do the same."; "Mr. Adams argues that even if the attorney-client privilege passed to Scio in part, Apollo retained the privilege with regard to negotiations surrounding the asset purchase transactions themselves. Mem. in Supp. at 18. He bases this assertion on a New York Court of Appeals case, Tekni-Plex, Inc. v. Meyner & Landis, 89 N.Y.2d 123, 674 N.E.2d 663, 651 N.Y.S.2d 954 (N.Y. Ct. App. 1996). Id. Unfortunately for Mr. Adams, the Tekni-Plex decision has no bearing on the instant case. In Tekni-Plex, 'the agreement between the parties . . . contemplated that, in any dispute arising from the merger transaction, the rights of the acquired corporation . . . relating to the transaction would remain independent from and adverse to the rights of [the acquiring corporation].' 674 N.E.2d at 672. The court there held that the new company could not assert the privilege for communications regarding the merger transaction itself, but did so '[i]n light of the facts of this particular transaction and the structure of the underlying agreement.' Id. In marked contrast, Mr. Adams has not identified any language in either APA similar in any way to the very specific language in Tekni-Plex. The Court finds the reasoning of the New York Court of Appeals inapplicable here.")
| Case Date |
Jurisdiction |
State |
Cite Checked |
| 2018-03-12 |
Federal |
MN |
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