Court Rejects Privilege for Attorney’s Due-Diligence Investigation Reply

In litigation over an alleged breach of an exclusive-rights acquisition agreement, the SDNY ruled that the attorney–client privilege did not protect portions of the acquiring company’s lawyer’s due diligence investigation.  Vector Capital Corp. v. Ness Technologies, Inc., 2014 WL 171160 (S.D.N.Y. Jan. 9, 2014).   I"m afraid it's bad news....You may access the opinion here.

Vector entered into an exclusive agreement to negotiate the acquisition of Ness Technologies, Inc., but later sued claiming that Ness failed to provide relevant information during Vector’s due diligence investigation.  Ness sought production of documents that Vector’s attorneys obtained during the due diligence phase, but Vector objected on grounds that the attorney–client privileged protected this information from discovery.

In this diversity action, the SDNY correctly applied New York state law governing application of the attorney–client privilege in this situation.  See my article for a detailed review of rules and issues pertaining to conflict-of-privilege-laws.

The documents at issue were communications between Vector and its outside counsel made during the due diligence investigation.  The communications contained factual information that Vector’s outside counsel obtained from Ness and third parties.  But the communications also contained outside counsel’s analysis of the factual information and legal advice based on that information.

Upon in camera review of the communications, the court ruled that, in obtaining due diligence information, Vector’s outside counsel was acting “principally for the business purpose of determining whether the acquisition was a sound investment.”  And the court offered this cautionary proclamation regarding an attorney’s due diligence work:

This fact-acquisition process in the course of a business transaction is no more protected by privilege when conducted by an attorney than if conducted by an accountant, engineer or head of a business unit. The factual information presented is not privileged merely by the use of an attorney as a conduit for the information.

The court ordered production of the communications, but allowed Vector to redact the communications’ legal-analysis portions because the attorney–client privilege protected that information.

PoP Analysis.  The permitted redaction is hardly a victory in this situation.  Had the court determined that outside counsel’s communications were “predominantly legal,” then it likely would have ruled that the privilege protected from disclosure all portions of the communications.

Counsel involved in due diligence investigations should relay the information in one of two ways: (1) with a short transmittal letter or email that contains little, if any, commentary; or (2) communications that are marked “privileged and confidential,” with an opening statement that the communication is confidential and for the purpose of rendering legal advice to the company. Statements such as these should help persuade courts reviewing communications in camera that the privilege applies. For more information on establishing and protecting the corporate attorney–client privilege, see this article.

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