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Dueling Cases Re SCO's Privilege Log Documents
Sunday, December 11 2005 @ 05:12 AM EST

IBM's Motion to Compel Production of Documents on SCO's Privilege Log has turned into a matter of dueling cases. It's complex enough that I thought it would be useful to make a chart to keep track of, first, what IBM said in its Memorandum in Support of its motion, second, SCO's Opposition Memorandum, and third, IBM's Reply.

As you will see, IBM opened with 6 cases. SCO responded with six of its own, plus it commented on IBM's six. IBM then replied, rebutting SCO's attempts to distinguish IBM's original cases, then shows why SCO's six cases are not useful to them, and then adds a startling case of its own, clearly saving the best until last: Caldera v. Microsoft. They quote from a transcript of one of the hearings in that case, in which Caldera tried to make the same argument SCO is making here, and lost.

IBM lays down its argument in its opening memorandum:

In this case, SCO claims that documents created by or for four entirely different companies, AT&T, USL, Novell, and Santa Cruz, are privileged as to SCO. Although SCO has nowhere articulated the precise basis for such a claim, SCO apparently contends that it may assert an attorney-privilege belonging to other companies still in existence because these companies, like SCO, once owned certain of the UNIX assets at issue in this and other litigation.2 SCO cannot properly claim attorney-client privilege over documents originating with other corporations and their attorneys. The transfer of assets from one entity to another does not transfer the attorney-client privilege as well. Instead, control of the entity possessing the privileges must pass to the purchaser for the privilege to pass. It is undisputed that SCO does not control any of the corporations - AT&T, USL, Novell, or Santa Cruz - whose privilege it now claims. To the extent documents that were once privileged as to these corporations have been transferred to SCO, any privilege in them has been waived.

SCO's counters:

As the successor to the UNIX business, SCO is also a successor to the attorney-client privilege attending that business. SCO therefore has properly asserted the privilege over documents related to that business that were privileged in the hands of its predecessors AT&T, USL, Novell, and Santa Cruz.

IBM argues that SCO may not assert the privilege because it and Santa Cruz "never obtained corporate control of the entity from whom they acquired" the UNIX assets. IBM Mem. at 6. That premise misstates the law. A change of control is sufficient to transfer the privilege, but it is not necessary....

In sum, as the cases that SCO cites demonstrate, the attorney-client privilege attaches to and passes with the transfer of the business enterprise. Those are the transfers by which SCO owns the UNIX business enterprise.

And IBM finishes:

In opposing IBM's motion, SCO argues that it is entitled to the privilege of the previous owners of certain UNIX assets on the grounds that the UNIX assets SCO acquired from Santa Cruz represent a "business". However, the mere fact that SCO considers its UNIX assets to be a separate line of business is insufficient to result in passage of the privilege. Virtually any set of assets could be labeled a "business", as illustrated by the fact that numerous companies have UNIX businesses, all of which are different. In any event, neither SCO nor its predecessors-in-interest acquired UNIX assets constituting an entire line of business. They merely acquired some but not all of the UNIX assets of their predecessors.....

Even if the sale of a mere "business" (as opposed to a corporate entity) could transfer the privilege, the transactions at issue here did not involve the sale of an entire business, as SCO contends. Thus, SCO's privilege claims as to the documents at issue cannot survive scrutiny even under its own rule (which is not the law in this district). . . .

Contrary to SCO's contention, Novell did not sell its entire "UNIX business" to Santa Cruz, and Santa Cruz did not sell its entire "UNIX business" to SCO.... Similarly, Santa Cruz did not sell an entire business to SCO. SCO acquired less than all of the assets of Santa Cruz's Server Software and Professional Services Division. SCO's 2003 Annual Report expressly acknowledged that it acquire[d] substantially all [but not all] of the assets and operations of the server and professional services groups" of Santa Cruz. (Ex. 3 (The SCO Group Inc., Annual Report (Form 10-K) (Jan. 28, 2004)) at 4.) SCO did not even acquire all of the UNIX assets owned by Santa Cruz. Santa Cruz excluded from the sale certain assets relating to OpenServer and products traditionally bundled with OpenServer and UnixWare7....

Caldera, Inc. v. Microsoft Corp. ( Notably, SCO's predecessor-in-interest made the same arguments that SCO makes here in essentially the same circumstances before this very Court in another case. In Caldera, Inc. v. Microsoft Corp., Civil No. 2:96-CV-00645B, Caldera, Inc., SCO's predecessor, argued that it had acquired not just assets in a transaction, but a full business, and was thereby entitled to claim privilege over documents that were transferred with the assets. Magistrate Judge Boyce rejected the argument. He found that because transfer of the entity holding the privilege had not occurred, it was "a simple waiver situation" and granted a motion to compel the documents. (Ex. 1 (Transcript of Jan. 28, 1998 hearing) at 19.)1) .....

The mere fact that SCO or its predecessors might have viewed the assets as a line of business lends no support to SCO's position, as Judge Boyce ruled in the Caldera case.

And so, with that introduction, let's take a look at the cases each side uses to try to carry the day.

*******************************

IBM Memo SCO Opposition IBM Reply
Intervenor v. United States - (Under settled principles of corporate law, "privilege resulting from communications between corporate officers and corporate attorneys ... belongs to the corporation and not to the officer.") Intervenor v. United States ( the privilege belongs to the corporation and not its officers) No reply.
Commodity Futures Trading Comm'n v. Weintraub ("When control of a corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege passes as well.") Commodity Futures Trading Commission v. Weintraub (the privilege passes to new management with a change of control) No reply.
In re Grand Jury Subpoenas (But when a corporation merely sells or transfers assets to another corporation, without transferring control of the corporation, the attorney-client privilege does not also pass to the purchasing company. "A transfer of assets ... is not sufficient to effect a transfer of the privileges; control of the entity possessing the privileges must also pass for the privileges to pass.") In re Grand Jury Subpoenas (IBM not only cites Grand Jury Subpoenas for a proposition it does not state, but also misquotes that case in the parenthetical to its citation. The quoted excerpt should read, "A transfer of assets, without more, is not sufficient to effect a transfer of the privileges; control of the entity possessing the privileges must also pass for the privileges to pass." (Emphasis added.) Quoted in full, that statement reflects the court's recognition that a transfer of assets (with "more") will also transfer the privilege. If this were not the case, then the words "without more" would lack meaning.2) In re Grand Jury Subpoenas ( ("A transfer of assets...is not sufficient to effect a transfer of the privileges; control of the entity possessing the privileges must also pass for the privileges to pass."),) ... 2SCO attempts to distinguish these cases are unavailing. With regard to both Grand Jury Subpoenas and In-Store Advertising, SCO focuses on irrelevant quotation quibbles. Neither the presence nor absence of the words "without more" and "therefore" changes the correct rule stated in those cases: "control of the entity possessing the privileges must also pass for the privileges to pass," Grand Jury Subpoenas, 734 F. Supp. at 1211 n.3, and "the power to invoke or waive a corporation's privileges is an incident of control of the corporation," In-Store Advertising, 163 F.R.D. at 458. With regard to McAtee, the language SCO quotes (distinguishing the management of an entity from liquidation) does not come from the McAtee opinion itself, but rather from a different case that the opinion is quoting, and furthermore was not part of that court's analysis of the privilege issues, but instead merely a general description of the role of a bankruptcy trustee. See F.R.D. 662, 664 (D. Kan. 1988). Even if SCO were correct that the McAtee court would have reached a different conclusion had the FDIC not liquidated the pre-existing entity, it would be unavailing since neither SCO nor any of its so-called predecessor-in-interest were bankruptcy trustees when they received the UNIX assets; nor were any of the selling entities in bankruptcy at the time of the sale.
Federal Deposit Ins. Corp. v. McAtee ("The transfer of assets from one entity to another does not generally transfer the attorney-client privilege.") Federal Deposit Insurance Corp. v. McAtee (As the qualifier implies, the court recognized that there are instances when the sale of assets transfers the privilege. Indeed, even a cursory review of the opinion suggests that the Court would have found that the FDIC did succeed to the privilege had it maintained (as opposed to liquidated) "the pre-existing entity, managing its affairs." ) Federal Deposit Ins. Corp. v. McAtee ( ("The transfer of assets from one entity to another does not generally transfer the attorney-client privilege."). Instead, "the power to invoke or waive a corporation's privilege privileges is an incident of control of the corporation." )
In re In-Store Advertising Securities Litigation ("the power to invoke or waive a corporation's privileges is an incident of control of the corporation."..."Where confidential attorney-client communications are transferred from a corporation selling assets to the corporation buying the assets, the privilege is waived as to those communications." Id.) In-Store Advertising (Like Grand Jury Subpoenas and In-Store Advertising those cases involve the sale of "mere assets, without more" - not assets constituting a business enterprise. Thus, such cases do not address, much less conflict with, the case law recognizing that the transfer of a continuing business entity through an asset sale also transfers the privilege.) 2 IBM then seeks to build on that omission by misquoting In re In-Store Advertising, 163 F.R.D. 452 (S.D.N.Y. 1995), out of context. IBM quotes the opinion to say, "Where confidential attorney-client communications are transferred from a corporation selling assets to the corporation buying the assets, the privilege is waived as to those communications." In fact, the first word in that sentence is "Therefore," and that sentence follows a quotation to the very same excerpt from Grand Jury Subpoenas that IBM quotes. Thus, even In-Store advertising recognizes that only "a transfer of assets, without more" fails to transfer the privilege. In any event, because the assets transferred in In-Store Advertising did not constitute a continuing business, the misquoted statement is dictum and that case is distinguishable. In re In-Store Advertising Sec. Litig. ("Where confidential attorney-client communications are transferred from a corporation selling assets to the corporation buying the assets, the privilege is waived as to those communications.")
Zenith Electronics Corporation v. WH-TV Broadcasting Corporation Atteberry v. Longmont United Hospital (In Zenith Electronics Corporation v. WH-TV Broadcasting Corporation, 2003 WL 21911066 (N.D. Ill.), attached hereto as Exhibit A, the district court correctly refused to recognize a transfer of the attorney-client privilege between the buyer and the seller of assets relating to a substantial corporate division of Zenith Electronics Corporation ("Zenith"). Id. at *1. The court found that the transfer of Zenith's privileged documents to the buyer waived any privilege in the documents: "The court disagrees that the attorney-client privilege is a corporate asset that can be sold .... [M]ere transfer of some assets from one corporation to another - as was done in this case - does not transfer the attorney-client privilege." Id. (citations omitted).7) *** For example, Entry No. 340 on SCO's privilege log describes a "discussion among client representatives" which reflect an "attorney's legal advice regarding IBM contract discussions." The attorney identified in the entry, however, is Steve Sabbath, in-house counsel for Santa Cruz and later Tarantella.9 Moreover, Mr. Sabbath represented Santa Cruz during a time when its interests were adverse to SCO, namely during the sale of its UNIX assets to SCO. For the reasons set forth above, IBM is aware of no basis for SCO to claim privilege over Mr. Sabbath's advice to Santa Cruz. There is even less reason to do so for advice provided to Santa Cruz when it was in an adverse posture with SCO. Similarly, Entry No. 1580 describes an April 28, 1994 email as an "[a]ttorney edit of document reflecting legal advice regarding Draft letter from Novell to IBM regarding UnixWare." While the entry identifies attorney Burton Levine as the email's recipient, Mr. Levine only represented AT&T and later USL and Novell, but never SCO, or, for that matter, Santa Cruz, as far as IBM is aware. In short, the privilege claim at issue in Entry No. 1580 and the scores of entries just like it simply are not SCO's to make..... And even if SCO were capable of establishing that its purchase of the UNIX assets it bought from Santa Cruz could somehow qualify as a change in corporate control of Santa Cruz, which it cannot, it also cannot show that the documents were passed from company to company over a period of decades pursuant to an unbroken chain of transfer of control of each seller to each buyer. To the extent documents once privileged as to AT&T, USL, Novell, or Santa Cruz are now in SCO's hands, any privilege in them has been waived. Zenith Elecs. Corp. v. WH-TV Broad. Corp. (In that case, however, the proponent of the privilege did not argue, and the court did not find, that the transferred assets constituted a business.) Zenith Electronics Corp. v. WH-TV Broadcasting Corp. (3 SCO also attempts unsuccessfully to distinguish Zenith Electronics Corp. v. WH-TV Broadcasting Corp., No. 01C4366, 2003 WL 21911066 (N.D. Ill. Aug. 7, 2003). The fact that, in Zenith, the "proponent of the privilege did not argue, and the court did not find, that the transferred assets constituted a business" (SCO's Memorandum of Law In Opposition to IBM's Motion to Compel Production of Documents on SCO's Privilege Log ("SCO Br."), dated October 21, 2005, at 10) is not an indication that the case is distinguishable. It is an indication that SCO's distinction between assets and a "business" is irrelevant in this context, where control of the corporation is the essential factor.
-- Graco Children's Prods. v. Regalo Int'l LLC (buyer of only some of seller's assets had "the authority to assert the attorney client privilege" because the lawyer's former representation of seller "was in the interest of" those assets) Graco Children's Products, Inc. v. Regalo Intern, LLC Tekni-Plex, Inc. v. Meyner & Landis Pilates, Inc. v. Georgetown Body Works Deep Muscle Massage Cntrs., Inc.(court found no basis for the claim of attorney-client privilege and ordered the documents at issue produced)
( SCO relies on six cases in an attempt to circumvent Judge Boyce's decision. Not only are they not from this district, but they are also plainly inapposite. Three of the cases, Graco Children's Products, Inc. v. Regalo Intern, LLC, (1999 WL 553478 (E.D. Pa. 1999), _In re I Successor Corp. (321 B.R. 640 (S.D.N.Y. 2005), and Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), concern attorney disqualification, not privileged documents.)
-- Tekni-Plex. Inc. v. Meyner & Landis (A change of control is sufficient to transfer the privilege, but it is not necessary.) (whether the privilege transfers "turns on the practical consequences rather than the formalities of the particular transaction")(privilege transferred with assets because the business "remained unchanged, with the same products, clients, suppliers and non-managerial personnel") (because the asset purchaser "possessed all of the rights, privileges, liabilities and obligations," the privilege "that it might need to defend against these liabilities or pursue any of these rights" was transferred) ( SCO relies on six cases in an attempt to circumvent Judge Boyce's decision. Not only are they not from this district, but they are also plainly inapposite. Three of the cases, Graco Children's Products, Inc. v. Regalo Intern, LLC, (1999 WL 553478 (E.D. Pa. 1999), _In re I Successor Corp. (321 B.R. 640 (S.D.N.Y. 2005), and Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), concern attorney disqualification, not privileged documents.)
-- Soverain Software LLC v. Gap. Inc. (("If the practical consequences of the transaction result in the transfer of control of the business and the continuation of the business under new management, the authority to assert or waive the attorney-client privilege will follow as well.").1 Even the sale of some assets, if they make up a continuing business, transfers the privilege. Soverain, 340 F. Supp. 2d at 763 (rejecting "bright-line rule" that transfer of "some assets" precludes the transfer of the privilege); In Soverain Amazon argued that Soverain could not assert the privilege because it had purchased three patents - "a small portion" of the sellers' assets - and therefore was not the "corporate successor" to the sellers. 340 F. Supp. 2d at 762. Soverain countered that it had acquired a "software business" that was "the commercial embodiment of the patents." Id. Noting that Soverain continued to operate that business by servicing the same customers and contracts and relying on the same engineers and consultants, the court concluded that Soverain was "a successor to the Transact business and the attorney-client privilege that attended that business." ((because the buyer continued to operate the same business it acquired by purchasing some of the seller's assets, the transaction did not amount to "a mere transfer of assets").) Soverain Software LLC v. The Gap, Inc. ( That leaves SCO with Soverain Software LLC v. The Gap, Inc. That case, however, arose in bankruptcy, and the court specifically cited bankruptcy policy concerns in making its decision. 340 F. Supp. 2d 760, 763-64 (E.D. Tex. 2004) ("The Court is reluctant to adopt a principle that unnecessarily inhibits the effective administration of bankruptcy estates"). Judge Boyce likewise considered, and rejected, authority arising in the bankruptcy context. See Ex. 1 at 18-19 ("The analogies to the Supreme Court's decision with regard to its successor of interest, such as a Trustee in bankruptcy, are an imperfect analogy. That case simply does not apply.") ) In none of these cases did the court rule that the privilege passes where a business entity sells one or more of its corporate divisions and continues to exist as a solvent business entity.
-- In re I Successor Corp., 321 B.R. 640, 653 (S.D.N.Y.2005) ("But if Intrepid had purchased assets as an ongoing entity, then it would have acquired the attorney-client privilege of Interliant as to the assets it acquired and would continue to operate.") ( SCO relies on six cases in an attempt to circumvent Judge Boyce's decision. Not only are they not from this district, but they are also plainly inapposite. Three of the cases, Graco Children's Products, Inc. v. Regalo Intern, LLC, (1999 WL 553478 (E.D. Pa. 1999), _In re I Successor Corp. (321 B.R. 640 (S.D.N.Y. 2005), and Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), concern attorney disqualification, not privileged documents.)
-- Pilates. Inc. v. Georgetown Bodyworks Deep Muscle Massage Ctrs., Inc., 201 F.R.D. 261, 263-64 (D.C. 2000) (recognizing that sale of substantial assets transfers the privilege) ( SCO relies on six cases in an attempt to circumvent Judge Boyce's decision. Not only are they not from this district, but they are also plainly inapposite. Three of the cases, Graco Children's Products, Inc. v. Regalo Intern, LLC, (1999 WL 553478 (E.D. Pa. 1999), _In re I Successor Corp. (321 B.R. 640 (S.D.N.Y. 2005), and Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), concern attorney disqualification, not privileged documents.)
-- R.G. Egan Equip., Inc. v. Plymag Tek. Inc., 758 N.Y.S.2d 763, 769 (N.Y. Sup. Ct. 2002) (stating that "the practical consequences of the transaction must show that the pre-existing operation of a business entity is continued in order for the attorney-client relationship to transfer to the new owners of the business or the assets"). R.G. Egan Equip., Inc. v. Plymag Tek, Inc. ( The court in R.G. Egan Equip., Inc. v. Plymag Tek, Inc. similarly denied a privilege claim.)
-- -- Caldera, Inc. v. Microsoft Corp. ( Notably, SCO's predecessor-in-interest made the same arguments that SCO makes here in essentially the same circumstances before this very Court in another case. In Caldera, Inc. v. Microsoft Corp., Civil No. 2:96-CV-00645B, Caldera, Inc., SCO's predecessor, argued that it had acquired not just assets in a transaction, but a full business, and was thereby entitled to claim privilege over documents that were transferred with the assets. Magistrate Judge Boyce rejected the argument. He found that because transfer of the entity holding the privilege had not occurred, it was "a simple waiver situation" and granted a motion to compel the documents. (Ex. 1 (Transcript of Jan. 28, 1998 hearing) at 19.)1) .....

The mere fact that SCO or its predecessors might have viewed the assets as a line of business lends no support to SCO's position, as Judge Boyce ruled in the Caldera case.

In Caldera, Inc. v. Microsoft Corp., Caldera similarly sought to assert a privilege with regard to documents that it had obtained in a purchase of assets from Novell via an Asset Purchase Agreement similar to the one between Novell and Santa Cruz. Caldera argued that it had not acquired "a simple asset" in the transaction, but rather "a fully operational business division", and claimed that it "thereby acquired the right to exercise privileges associated with that business". (Ex. 2, Mem. In Opp. to Def. Motion to Compel (12/15/97) at 2, 6-11.) Magistrate Judge Boyce flatly rejected Caldera's argument:

I don't think I really need argument on the attorney-client privilege matter. I've done a lot of work on that, and I'm satisfied that the claim of attorney-client privilege is not valid. When the Novell documents were turned over to Caldera, that destroyed the privilege. Caldera is not the alter ego or successor-in-interest in the legal context of those materials. The analogies to the Supreme Court's decision with regard to its successor of interest, such as a Trustee in bankruptcy, are an imperfect analogy. That case simply does not apply.

It's a simple waiver situation. You have separate entities, and one entity hands over all of the technology and information and materials covered by an attorney- client privilege. Without some type of additional protection that privilege is gone, and so the Motion to Compel will be granted with regard to those documents.

(Ex. 1 at 18-19.) In fact, after this ruling, counsel for Caldera stated that it had already determined that it was going to concede the issue. (Id. at 19.)

Judge Boyce reaffirmed this view when Novell attempted to intervene in the case to claim a work product privilege as to certain documents it had given to Caldera. In denying Novell's motion, Judge Boyce noted that "Caldera has no basis to assert a work product or attorney/client privilege with respect to the materials at issue" and that its only interest in the privilege was "as a means of prohibiting discovery". Caldera, Inc. v. Microsoft Corp., 181 F.R.D. 506, 508 (D. Utah 1998). The same is true of SCO here, who offered to produce to IBM all of the documents at issue so long as IBM would agree not to argue that production of the documents constituted a subject-matter waiver. This Court should follow Judge Boyce and order SCO to turn over all of the documents created by and for third parties that SCO is currently withholding under an invalid claim of privilege.


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