SimpleAir, Inc. v. Microsoft Corp.: Changing Nature of Business Does Not Preclude Transfer of Privilege

Category: Civil Procedure 
By: Eric Paul Smith, Contributor   
TitleSimpleAir, Inc. v. Microsoft Corp., No. 2:11-cv-416-JRG (E.D. Tex. Aug. 27, 2013).
IssueGoogle seeks to compel SimpleAir, Inc. ('SimpleAir') to produce four documents listed as entried 205, 206, 207, and 208 ('Withheld Documents') in SimpleAir's privilege log. Each of the Withheld Documents is correspondence involving AirMedia, Inc. ('AirMedia'), the predecessor-in-interest to SimpleAir, dated between 1998 and 1999." SimpleAir at *1 (citations omitted).
Holding"[T]he Court finds that SimpleAir's assertion of attorney-client privilege over the Withheld Documents, at the time they were created, is meritorious." Id. at *2. "[C]ontrol of a business cannot be divorced from ownership of substantially all of the business assets, even if the nature of such business changes direction over time. Control follows ownership and not the other way around. The Court is not persuaded that the transfer[s] of the Asserted Patents . . . amounted to only a mere transfer of some assets through which the privilege failed to survive. . . . AirMedia's attorney-client privilege as relates to the Withheld Documents has survived the transfers discussed above and is now properly vested in SimpleAir." Id. at *7.

Procedural History"The Court heard arguments from counsel during a hearing . . . at which time counsel for SimpleAir submitted the Withheld Documents to the Court for in camera inspection. . . . Having established such documents as privileged communications at the time they originated, the Court next turns to the parties' dispute over whether the privilege enjoyed by AirMedia transfers and survives through the resulting chain of title to the ultimate purchaser of U.S. Patent Nos. 6.021,433 and 7,035,914 ("the Asserted Patents"), the plaintiff in this case." SimpleAir at *2.
Legal Reasoning (Gilstrap)
Facts"The facts surrounding the chain of title to the Asserted Patents are essentially undisputed. AirMedia owned the Asserted Patents and was practicing some of the embodiments . . . until shortly before it filed bankruptcy . . . . Wireless Internet, Inc. ('WI') acquired all of AirMedia's assets . . . . WI was formed by several former shareholders and directors of AirMedia . . . [and] financed the purchase . . . through a secured loan made by Verus International Group, Limited ('Verus'). WI did not practice the Asserted Patents and it too later filed bankruptcy . . . . Verus . . . foreclose[d] its security interest in the collateral securing its loan . . . and . . . purchased all of the assets related to the original AirMedia Live services, including the Asserted Patents. . . . SimpleAir was formed by . . . two of the named inventors of the Asserted Patents [and] acquired the vast majority of the original AirMedia assets through a purchase from Verus. This purchase included the two Asserted Patents and twenty-five pending patent applications. The remaining minority of the assets, which included on pending patent application and a set of trademarks and domain named, was purchased by . . . the former CEO of AirMedia. SimpleAir is presently engaged in the patent enforcement business. It does not practice the Asserted Patents in the same was as AirMedia did prior to its bankruptcy . . . ." SimpleAir at *3.
Legal Standard"[T]his Court concludes that whether a transfer of assets preserves a claim of privilege is a question of fact that should be answered upon the totality of the circumstances and examined on a case-by-case basis." Id. at *3-4.
Google's Arguments"Google relies on Soverain for the proposition that a transfer of merely 'some assets or a single patent from one corporation to the other does not transfer the attorney-client privilege.' Soverain Software LLC v. Gap, Inc., 340 F. Supp. 2d 760, 763 (E.D. Tex. 2004). Google portrays the current facts in a light most favorable to its own reading of Soverain, and in doing so, characterizes this case as a series of transactions where the pool of AirMedia assets is divided in a disjointed fashion. Google underscores its argument by emphasizing the transformation of AirMedia's business from the original communciation service and software development business into something entirely different." Id. at *4.
SimpleAir's Arguments"SimpleAir describes its version of these acquisitions to be of substantially all assets of the entire 'AirMedia business,' which has endured change but is essentially on-going." Id. at *4.
Control of a Business Not Divorced from Substantially All Assets
Whether the facts constitute "a mere transfer of some assets"
"AirMedia's . . . assets appear to have been divided only once along the subsequent chain of title, when Verus sold the two Asserted Patents and twenty-five pending patent applications to SimpleAir and separately sold one pending patent application and a set of trademarks and domain names to David Rose. [C]ounsel for Google represtented that David Rose paid $15,000 for his share of the AirMedia assets . . .[; C]ounsel for SimpleAir stated that . . . Verus agreed to receive a structured percentage of future monies recovered by SimpleAir through patent enforement . . . [and] that, to date, Verus has received several 'tens of millions' of dollars from SimpleAir by means of their purchase agreement. This stark and overwhelming numerical difference is significant. Not only is SimpleAir the present successor-in-interest and owner of substantially all of AirMedia's original patent portfolio, the now established value of SimpleAir's portion of AirMedia's assets dwarfs the portion acquired by David Rose." SimpleAir at *5.
"SimpleAir was formed by two of the named inventors on the Asserted Patents—John Payne and Tim von Kaenel. It is notable that John Payne was the President and CEO of AirMedia between 1994 and 1999, and is currently the President of SimpleAir. Tim von Kaenel was an employee at AirMedia in 1998 and is now an employee of SimpleAir. Plainly, there is a significant degree of continuity in the areas of corporate knowledge, management, and experience between AirMedia and SimpleAir. Likewise, John Payne and Tim von Kaenel's interest in preserving their privilege claims on behalf of SimpleAir is unchanged from their former interest in such privilege as representatives of AirMedia." Id. at *6.
"The Court next considers whether SimpleAir's patent enforcement practice (as opposed to continuing AirMedia's original business) is alone sufficient to prevent survival of the asserted privilege given the other circumstances in this case. . . . [T]he pool of interested purchasers at a bankruptcy liquidation sale ordinarily do not want to continue practicing a failed business model. Instead the value is in the assets sold; particularly when those assets can be used in a new way that is not tainted by past business failures. This Court believes that bankruptcy liquidation sales in general could by severly hindered if potential buyers are forced to choose between continuing the failed model . . . or forfeiting claims of vital privileges such as those at issue here. . . . [D]espite Google's emphasis on the disparate business models between the 'then' and 'now' owners of the Asserted Patents, the Court does not find that difference alone to constitute an outright forfeiture of the privilege." Id. at *6-7.
Google’s Motion to Compel Production of Documents Withheld as Privileged (Dkt. No. 334) is hereby DENIED. SimpleAir at *7.
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