LITIGATION
By Richard B. Kapnick
and Courtney A. Rosen
COURTNEY A. ROSEN IS A PARTNER AT
SIDLEY AUSTIN LLP. SHE IS AN EXPERIENCED ATTORNEY WHOSE PRACTICE
INCLUDES COMPLEX LITIGATION MATTERS INCLUDING MATTERS INVOLVING
THE STATE AND FEDERAL SECURITIES
LAWS, DIRECTORS’ AND OFFICERS’
LIABILITY AND MERGERS AND ACQUISITIONS TRANSACTIONS. COURTNEY CAN
BE REACHED AT [email protected].
RICHARD (“BRAD”) B. KAPNICK IS A
PARTNER AT SIDLEY AUSTIN LLP. HE IS
AN EXPERIENCED ATTORNEY SERVING
AS LEAD COUNSEL IN COMPLEX LITIGATION MATTERS INCLUDING MATTERS
INVOLVING THE STATE AND FEDERAL
SECURITIES LAWS, DIRECTORS’ AND OFFICERS’ LIABILITY AND MERGERS AND
ACQUISITIONS TRANSACTIONS. BEFORE
JOINING SIDLEY, BRAD WAS A LAW
CLERK TO ASSOCIATE JUSTICE JOHN
PAUL STEVENS, UNITED STATES SUPREME COURT. BRAD CAN BE REACHED
AT [email protected].
Litigation: Business strategy immunity may
postpone discovery of highly confidential corporate strategies
Business strategy cases typically turn on several factual issues
W
hen the client expresses
concerns that discovery in
litigation of highly confidential corporate strategies will cause competitive harm to the company, the business strategy
immunity may afford protection. This doctrine is
an application in specific factual circumstances
of the balancing test for the terms of a protective
order under Federal Rule of Civil Procedure 26(c)
or under the comparable state rule. The business
strategy immunity originally arose in the context
of hostile takeovers in the 1980s and was then
known as the “white knight” privilege. The courts
limited hostile offerors from taking discovery of
the target company’s strategies in defending and
considering alternatives to the hostile offer. Over
the years, the business strategy immunity has
been applied more broadly to any circumstance
where the premature discovery of a confidential
corporate strategy may cause severe harm. It has
been applied to limit and postpone discovery in
a wide variety of types of litigation: shareholder
derivative lawsuits, proxy contests, trust administrations, competitive bidding contests, labor
union actions, patent infringement litigation, and
bankruptcy or insolvency proceedings.
An early application of business strategy
immunity was BNS, Inc. v. Koppers Co., Inc.
In that case, the board of directors of the target
company had rejected two hostile offers of $45
and $56 per share and was actively considering
the adequacy of a $60 offer. The offeror sought
discovery of board information and defensive
measures actively being considering. The court
weighed the harm to the target from producing
the information against the offeror’s need for the
information and found that balance in favor of the
target. The bidder had no need for the information until the board took a position with respect to
the $60 offer and the target’s “ability to act in the
best interests of shareholders” would be severely
impaired by premature disclosure of the board’s
view of the pending offer and the defensive
measures it was actively considering in response.
Business strategy cases typically turn on
several factual issues:
First, while many cases refer to this doctrine
as a “privilege,” that is a misnomer. Unlike the
attorney-client privilege, the business strategy
immunity from discovery is temporary. The
business strategy doctrine is more akin to a
qualified immunity from discovery like the work
product doctrine. The immunity only postpones
production and must be reevaluated during the
litigation to confirm that this treatment remains
warranted. The immunity lasts only so long as the
strategy is under active consideration. Once the
strategy is adopted or rejected, the adversary may
demand discovery of it.
Second, a finding of business strategy
immunity is highly dependent upon the relevance
of the information sought in discovery to the
issues in the litigation. Where the information
is highly relevant to issues in the proceeding,
the court may well deny immunity and order
discovery. On the other hand, when the information sought has less relevance to the litigation,
or is only relevant to issues that do not need to
be litigated immediately, the court more likely
will find immunity and postpone discovery. This
finding is especially likely in cases where there
is evidence that the adversary has a motive of
advancing its business interests outside of the
litigation through the discovery of highly confidential strategies. Either way, the court may tailor
specific discovery to the issues in the litigation.
Third, the degree of the harm to the producing
party also affects the business strategy decision. The
primary question is whether disclosure of the information will cause severe harm to a non-litigation
interest, such as the party’s position in negotiations with the adversary. For example, if a hostile
bidder has access to the target’s internal valuation
information before the target has rejected the offer,
arms-length bargaining is impaired.
Fourth, the courts frequently deny the business
strategy immunity when the party has already
partially disclosed the strategy. To do otherwise
would allow a party to choose to disclose the facets
of the strategy that favor it in public forums while
at the same time cloaking facets of the strategy
that some stakeholders may consider disfavorable.
This sort of cherry picking is disfavored.
The business strategy immunity recognizes
that a confidentiality agreement is insufficient to
protect highly confidential business strategies. As
the Delaware Chancery Court emphasized in an
early case:
“I do not regard confidentiality orders as
providing absolute protection. If they did,
there would be no need to attempt to evaluate
competing claims in this setting, for the words
written on a page would afford the protection of
a guarded vault. We must operate, however, in a
world more closely aligned with reality in which
mistakes occur and in which trust is sometimes
abused for advantage.”
Even an order limiting discovery to attorneys
may not eliminate the risk of misuse. Some information is so critical to a matter that no attorney
can put it out of mind in making decisions. Only
by postponing discovery can the court protect the
business interests of the party.