Opinion
C.A. No. 19328.
Submitted: September 2, 2004.
Decided: September 17, 2004.
Philip A. Rovner, Esquire, Potter, Anderson Corroon, Wilmington, DE.
M. Duncan Grant, Esquire, Pepper Hamilton LLP, Wilmington, DE.
Dear Counsel:
Baxter International Inc. and Baxter Healthcare Corporation ("Baxter") have moved for summary judgment. In addition, Baxter has moved to compel the production of certain purportedly privileged documents, and to strike an affidavit submitted in opposition to their summary judgment motion. Rhône-Poulenc Rorer Inc. ("RPR") and Aventis Behring L.L.C. (collectively "Aventis") have cross-moved for summary judgment. For the reasons set forth herein, the court denies both motions for summary judgment, grants the motion to strike, and directs Aventis to submit certain documents for an in camera inspection in connection with the motion to compel.
Baxter filed its complaint on December 27, 2001. On May 12, 2003, Baxter moved for partial summary judgment. That motion was denied. On May 7, 2004, Baxter filed its motion to compel. On June 18, 2004, Baxter filed a renewed motion for summary judgment. On August 27, 2004, Baxter filed its motion to strike.
Aventis filed its motion for summary judgment on June 18, 2004.
The Contractual Dispute
This action arises from a dispute over royalty obligations under a 1993 Settlement Agreement ending patent litigation between Baxter and RPR. The Settlement Agreement provides that Baxter was required to make royalty payments to RPR and later to Aventis (RPR's assignee) based on Baxter's sale of two products developed for patients suffering from hemophilia.
Under Sections 9.1 and 9.2 of the Settlement Agreement, Baxter was to make royalty payments to Aventis based on foreign and United States sales of product until Baxter paid the then net present value of $67 million in royalties. After Baxter paid the $67 million in royalties, it was no longer required to pay royalties on product sold in the United States. Furthermore, after reaching the $67 million threshold, Baxter was only required to pay royalties on sales outside the United States ("foreign sales"), if the product was sold or "manufactured" in a country with a granted and unexpired patent.
Section 9.1 of the Settlement Agreement states:
When cumulative royalties and processing fees (including minimum royalties) paid under this agreement reach a net present value of 67 million dollars (measured at a discount rate of 10% per annum from the Effective Date of this Agreement), no further royalty or processing fee shall be owed or payable by BHC [Baxter] for Factor VIII Product that is sold in the United States or in any country where there is no granted unexpired Z-F patent.
Section 9.2 of the Settlement Agreement states:
BHC [Baxter] will continue to pay a royalty or processing fee pursuant to 7.1 beyond the amount set forth in 9.1 for Factor VIII Products that are sold for use in a country other than the United States, provided that
(a) there is a granted unexpired Z-F Patent in the country where the Factor VIII Product is sold, or, if the Factor VIII Product is manufactured outside the United States, there is a granted unexpired Z-F Patent in the country where Factor VIII Product is manufactured or sold, and
(b) the applicable Z-F Patent has a product claim of the same or broader scope as the European Product Claims or otherwise covers said Factor VIII Product.
(emphasis added).
In 1997, Baxter reached the $67 million threshold and discontinued paying royalties on product sold in the United States. However, from late 1997 until 2000, Baxter continued to pay royalties based on sales in certain foreign countries that did not have granted and unexpired patents. The product sold in those foreign countries was produced in the United States, and then shipped to foreign countries (such as Belgium) where it was packaged and labeled, and where there existed a granted, unexpired patent for the product.
In 2001, Baxter, believing that it had mistakenly overpaid, requested the return of the royalties paid from late 1997 to 2000 on sales of such products in countries that did not have granted, unexpired patents. Discussions between Aventis and Baxter ensued, and, in early October 2001, the parties agreed to an audit to confirm the precise amounts of the disputed payments during this period. PricewaterhouseCoopers L.L.C. ("PwC") was retained to conduct the audit. Following the audit, Aventis informed Baxter that Aventis was entitled to the royalty payments because it contended the phrase "manufactured outside the United States" in Section 9.2(a) of the Settlement Agreement covered packaging and labeling in foreign countries. After the parties failed to come to an accord, Baxter filed this suit in December 2001.
Baxter has "reimbursed" itself the alleged overpayments by offsetting continuing royalty obligations indisputably owed to Aventis, plus interest, and now seeks a declaratory judgment that, by doing so, Baxter is not in breach of the Settlement Agreement.
The cross motions for summary judgment focus on the construction of Section 9.2 of the Settlement Agreement and, in particular, on the question whether the packaging and labeling of product in foreign countries with granted, unexpired patents constitutes "manufacturing" in that country under the Settlement Agreement.
The court's review of the factual record submitted in connection with the cross motions for summary judgment reveals the existence of material issues of fact relating to the history of the negotiation and performance of the Settlement Agreement. The court offered to resolve these questions of fact on a paper record, but the parties have not agreed to proceed in this manner, as is their right. Thus, the court concludes that it is necessary to deny both motions for summary judgment and proceed to trial on the existing schedule.
The Discovery Dispute
Baxter has moved to compel the production of 13 emails that are listed in the privilege log supplied by Aventis. Baxter contends that Aventis has wrongfully withheld these emails based on the attorney-client and work-product privileges.
The disputed emails are listed in Aventis's privilege log as entries 60-72. They reflect communications among members of Aventis's management and its inhouse counsel. Ten of these emails were purely internal emails, circulated only among the management at Aventis and its in-house lawyers (the "internal emails"); while three of the emails (60, 63 and 68) were also sent to PwC auditors Blaise Coleman and Jeffery Williams (the "PwC emails").
According to Baxter, these emails should be produced because they relate to whether Aventis "always believed" that the term "manufacturing" included packaging and labeling or, instead, developed this interpretation as a litigation strategy. Furthermore, Baxter claims that the emails may give insight into who first developed the interpretation supported by Aventis, and whether this interpretation was developed by PwC after conducting their audit.
Are The Emails Privileged?
Under the attorney-client privilege, a party may refuse to disclose confidential communications made for the purpose of facilitating the rendition of legal services to the party. Under the work product rule, documents and tangible things prepared in anticipation of litigation need not be produced unless the party requesting production shows a substantial need for the materials and the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means.
Del. R. Evid. 502(b); see also Texaco, Inc. v. Phoenix Steel Corp., 264 A.2d 523 (Del.Ch. 1970) (noting that the attorney-client privilege has long existed in Delaware as part of the common law).
Ch. Ct. R. 26(b)(3), see also Riggs Nat'l Bank v. Zimmer, 355 A.2d 709, 715 (Del.Ch. 1976) (recognizing and applying the work-product rule).
The emails in dispute were circulated on October 16 and October 17, 2001, slightly more than two months before Baxter brought this suit. The emails contained communications among members of Aventis's management and inhouse counsel relating to the royalty dispute. Furthermore, they came on the heels of the disputed PwC audit and were sent in the context of the recent royalty reimbursement imbroglio. It is clear that they were prepared in anticipation of litigation and were meant to advise the management of Aventis about the dispute. As such, these materials are privileged.
Do The Communications Fall Within The "Facts" Exception?
In Cincinnati Bell Cellular Sys. Co. v. Ameritech Mobile Phone Serv. of Cincinnati Inc., then Vice-Chancellor Chandler held that the attorney-client privilege can be relied upon "to prevent discovery of any communications with legal counsel," but that it cannot be relied upon to block inquiry into facts. The rationale behind the facts exception is to preclude a party from hiding discoverable information behind the wall of the attorney-client privilege by communicating it to an attorney.
1995 WL 347799 at *2 (Del.Ch. May 17, 1995).
See also Upjohn Co. v. United States, 449 U.S. 383, 395 (1981) ("The protection of the [attorney-client] privilege extends only to communications and not to facts").
Id.
Baxter argues that it seeks only the "facts" contained in the emails, and not the "communications" contained therein. Specifically, Baxter wants to know "who within Aventis (or PwC) first articulated the definition of `manufactured' as including packaging and labeling and when that first occurred."
Pl. Op. Br. at 12 (emphasis in original).
Baxter had ample opportunity to discover these facts through other, nonprivileged means such as depositions and interrogatories. Of the ten individuals who were party to the emails, Baxter chose to depose only two: Jennifer Evans Stacey, Aventis's then general counsel, and Leonard Puzzuoli, Aventis's Manager of Finance for the Hemophilia API Business Unit. It is therefore inaccurate for Baxter to argue, as it does, that the "only" source of these facts is the emails. Since the facts could have been discovered in another fashion, the underlying rationale of the facts exception would not be served by compelling production of the communications.
Do The Emails Fall Within The "At Issue" Exception?
The "at issue" exception to the attorney-client privilege applies when the party holding the privilege waives the privilege in one of two basic ways: (1) the party injects the communications into the litigation, or (2) the party injects an issue into the litigation, the truthful resolution of which requires an examination of the confidential communications. The "at issue" exception is based on the principles of waiver and of fairness, so that the party holding the privilege cannot use it as both a sword and a shield. That exception has also been described as a "waiver . . . where the issue was lack of good faith."
Hoechst Celanese Corp. v. Nat'l Union Fire Ins. Co., 623 A.2d 1118, 1122 (Del.Super. 1992).
Id.
Ramada Inns v. Drinkhall, 490 A.2d 593, 597 (Del.Super. 1985).
Aventis has not injected the communications into the litigation. The existence of the emails was raised by Baxter, not Aventis. Aventis is not inequitably using the attorney-client privilege as a sword. Additionally, while the subject matter of the emails may be at issue (as is often the case with privileged material), the communications themselves are not. Finally, there is no alleged bad faith on the part of Aventis. Therefore, the balance of equities does not require Aventis to disclose the communications under the at issue exception.
Has Aventis Waived Its Privilege Protection?
Baxter claims that Aventis waived its privilege protection with respect to the PwC emails by sending them to Messrs. Coleman and Williams, thereby destroying the confidentiality of the communications.
In order for a communication to be privileged, it must be confidential. A communication made in furtherance of the rendition of professional legal services to the client is a confidential communication unless the client intends the information to be disclosed to non-confidential persons. When the client makes a communication with the intention or expectation that it will be revealed to another person who is not necessary for the rendition of the legal services or communication, this element of confidentiality is lacking.
Hoechst, 623 A.2d at 1122.
Ramada Inns v. Dow Jones Co., 523 A.2d 968, 972 (Del.Super. 1986).
Hoechst, 623 A.2d at 1122.
As discussed, supra, the emails were made in furtherance of the rendition of professional legal services. Therefore, unless Aventis intended the information to be disclosed to non-confidential persons, the emails were confidential.
Furthermore, as a general matter, when information is communicated to an attorney in the presence of a third party, the communication is not privileged. However, when disclosure to a third party is necessary for the client to obtain informed legal advice, courts have recognized exceptions to the rule that disclosure waives the attorney-client privilege.
Constar Int'l, Inc. v. Cont'l Pet Techs., Inc., 2003 WL 21132, at *1 (D.Del. Nov. 19, 2003); see also Westinghouse Elec. Corp. v. Republic of Phil., 951 F.2d 1414, 1424 (3d Cir., 1991) ("[V]oluntary disclosure to a third party of purportedly privileged communications has long been considered inconsistent with an assertion of the privilege").
Id.
There is a two-part inquiry as to whether Aventis has waived the attorney-client privilege with respect to the PwC emails. First, did Aventis intend that the emails remain confidential? If so, were the communications to PwC "necessary" to provide legal service to Aventis? Aventis has waived its privilege and must produce the PwC emails if either of these questions is answered in the negative.
In order for the court to answer either of these questions, it is necessary to actually see the PwC emails. Therefore, Aventis should immediately submit the PwC emails to court for in camera review.
Aventis's Honaker Defense
Trial is scheduled to begin on October 12, 2004 and, pursuant to the Fourth Amended Scheduling Order, discovery closed on May 7, 2004. On June 18, 2004, more than a month after the close of discovery, in its opening brief in support of its motion for summary judgment, Aventis first raised an equitable estoppel defense based on the decision of the Delaware Supreme Court in Home Ins. Co. v. Honaker. The defense recognized in that case is based on the equitable principle of detrimental reliance. In order to prove this defense, a defendant must show, at the very least, that it changed position in reliance on the plaintiff's actions. In support of that defense, Aventis submitted the affidavit of James E. Fickenscher, a former Aventis employee, that lays out the extensive factual basis for Aventis's claim of detrimental reliance. Baxter moves to strike the Fickenscher Affidavit and to bar the assertion of the defense on grounds that it was not given fair notice of this purported defense or an opportunity to take discovery relating to it.
480 A.2d 652 (Del. 1984).
Honaker, 480 A.2d at 654.
Aventis's Fourth Affirmative Defense contains the rote and entirely uninformative assertion that: "[Baxter's] claims are barred in whole or in part by the doctrines of estoppel, waiver, and laches." During discovery, Baxter made discovery requests for the factual basis for Aventis's Fourth Affirmative Defense. In response, Aventis stated: "[t]he basis for the defense is that the plaintiffs have always had full and complete access to the information that they needed in order to determine the proper amount of each quarterly royalty payment that Baxter Healthcare has made under the Settlement Agreement." This was the full extent of Aventis's response to Baxter's request for discovery pursuant to this defense, before the close of discovery. As a consequence, the discovery record is a total void in relation to the issue raised in the Fickenscher Affidavit. Indeed, that affidavit, which contains numerous references to detailed financial information, is itself devoid of reference to a single interrogatory answer, response to request for admission or deposition transcript.
Resp. to Baxter's Interrog. No. 13, served on Aug. 16, 2002.
At argument, Aventis counsel admitted that he first considered raising a defense based on Honaker in October of 2003, and that he worked with his client to determine if there was a factual basis for raising this affirmative defense. Apparently, those efforts were delayed by the press of other business and, although counsel stated that the factual inquiry was complete in April 2004, Aventis never supplemented its discovery responses to reflect the information learned.
Tr. Sept. 2, 2004, at 47-48.
In view of this history, the court concludes that Baxter's objection to the Fickenscher Affidavit and the assertion of the Honaker defense are well taken. It is simply not reasonable or appropriate to expect Baxter to undertake an extensive additional discovery program to explore the matters set forth in the Fickenscher Affidavit at this stage of this 2½ year old case. Aventis had more than ample opportunity to develop its theories during discovery. It failed to do so, instead interjecting a new, intensely factual theory of defense after the close of discovery, in connection with the summary judgment proceedings, and only shortly before the scheduled trial.
For these reasons, the court will grant the motion to strike and will preclude Aventis from relying on Honaker or any of the factual matters raised in the Fickenscher Affidavit.
The decision to preclude this defense is unlikely to work any hardship or inequity on Aventis since the Honaker case is very likely inapposite. In Honaker, an insurance company for another party paid a victim of a car accident (Honaker) $24,907, even though the coverage limit of the policy was $10,000. Honaker spent the money on his living and medical expense, and on the living and medical expenses of his child. 480 A.2d at 653. The insurance company sued for restitution and the Delaware Supreme Court held that the unusual equities of the situation, including Honaker's innocent belief that he was entitled to the money and his substantial change of position, supported a defense to the claim. Id. at 654-55.
This court must, and will, consider all relevant equities in resolving a claim for restitution. Nevertheless, it is hard to imagine a finding that considerations of equity prevent the repayment of $5-10 million dollars by one multi-billion dollar company to another. This is particularly true when, as is true in this case, there is no suggestion that the party seeking restitution has acted inequitably in making the overpayment at issue.