In King Drug Co. v. Cephalon, Inc., No. 2:06-cv-1797, 2011 U.S. Dist. LEXIS 71806 (E.D. Pa. July 5, 2011), U.S. District Judge Mitchell S. Goldberg compelled a generic drug manufacturer defendant to produce documents that the defendant asserted were protected by the community-ofinterest privilege. Although the defendant and one if its suppliers had supposedly entered into a formal joint defense agreement, the court held that the privilege did not apply because the joint defense never actually materialized and the communications at issue were not made in furtherance of the joint defense.
The dispute in King Drug involved "reverse payment settlement" antitrust allegations concerning patent infringement suits related to the drug Provigil. Specifically, the plaintiffs alleged that Cephalon, Inc., the manufacturer of the name brand drug Provigil, conspired with four generic manufacturers to delay non-name brand versions of the drug from going to market by paying more than $200 million in settlements to those manufacturers. The plaintiffs sought documents related to certain communications between one of the non-name brand manufacturer defendants, Barr Pharmaceuticals, Inc. and Chemagis, one of Barr's suppliers. The documents were generated in the weeks just prior to the settlement between Cephalon and Barr, and generally related to how the terms of the settlement may financially affect Chemagis. Although Chemagis was not named as a defendant in the suit, Barr and Chemagis had allegedly entered into a joint defense agreement around the time the suit was filed.
In response to Barr's refusal to produce certain documents based upon its assertion that the documents were protected by the community-of-interest privilege, the plaintiffs filed a motion to compel production. Barr argued that it shared a substantially similar legal interest with Chemagis because both were at risk of being sued for patent infringement by Cephalon, notwithstanding the fact that Chemagis was not actually named as a party. The plaintiffs countered by arguing that (1) Barr and Chemagis shared a purely "financial" interest, as opposed to the requisite "legal" interest required for the community-of-interest privilege to apply; (2) the alleged joint defense strategy never materialized because Chemagis was never sued by Cephalon; and (3) many of the communications at issue did not involve attorneys from both Barr and Chemagis.
The court's analysis was guided by the following principles articulated by the U.S. Court of Appeals for the 3rd Circuit in In re Teleglobe Commc'ns Corp., 493 F.3d 345 (3d Cir. 2007): the community-of-interest privilege allows attorneys representing clients with "substantially similar" legal interests (interests that are not "solely commercial") to share information without having to disclose the information to third-parties due to the "disclosure rule." The King Drug court explained that although some jurisdictions require the parties to share "identical" legal interests as opposed to "substantially similar" legal interests, the 3rd Circuit does not require this heightened showing.
The plaintiffs argued that because the interests of Barr and Chemagis were primarily financial as opposed to legal, the privilege should not apply. In support, plaintiffs pointed out that Chemagis had not been named as a party to the suit, and thus any interest it had in the litigation was purely financial as opposed to legal. The court disagreed, and held that the mere fact that Chemagis had not been named in the suit was not dispositive as to whether the community-of-interest privilege potentially could apply. Ultimately, however, the court found it unnecessary to formally categorize the parties' interests as legal versus financial because, even if the interests were sufficiently legal, the court held that the parties never actually implemented the required "joint, coordinated and ongoing defense strategy" at the heart of the community-of-interest privilege.
The crux of the court's analysis centered on the fact that, although the parties produced some evidence in support of their intention to enter into a joint defense agreement, the plan never actually came to fruition. Relying on the 3rd Circuit case, Haines v. Liggett Grp., Inc., 975 F.2d 81 (3d Cir. 1992), the court explained that for the community-of-interest privilege to apply, the party asserting the privilege must meet its burden of demonstrating that (1) the communications were made in the course of a joint defense effort, (2) the communications were intended to further that common defense effort, and (3) the privilege had not otherwise been waived. The timing of the communications at issue – made in the weeks leading up to settlement – was revealing for the court.
Barr and Chemagis entered into a supply agreement in 2001. Just prior to Cephalon filing suit in March of 2003, Barr and Chemagis supposedly entered into a formal "joint defense agreement." The court explained that Barr failed to show that "any actual concrete, tangible steps were taken to effectuate or implement that joint defense." Barr primarily relied on two emails from early April 2003, in which Barr and Chemagis discussed in general terms how they would communicate regarding the status of the litigation. While the parties discussed how they would communicate, Barr failed to produce any meaningful evidence that the parties actually did communicate regarding the litigation.
Perhaps most relevant of all, several communications made by Chemagis to the FTC during the course of the FTC's investigation revealed that Chemagis represented to the FTC that the patent litigation was completely controlled by Barr, as was any decision to settle. (Chemagis was entitled to half of any settlement entered into by Barr pursuant to the terms of its supply agreement with Barr.) Chemagis also represented to the FTC that Barr kept Chemagis "minimally informed" about the litigation, and that pursuant to its supply agreement with Barr, Barr would exclusively direct and control the litigation. Thus, the record supported the fact that Chemagis "clearly and affirmatively disavowed having any input into Barr's litigation strategy."
Barr attempted to persuade the court that Chemagis' statements to the FTC were merely a part of Chemagis' attempt to distance itself from the litigation and constituted "self-interested, post hoc statements made in an effort to avoid an FTC lawsuit." The court disagreed, explaining that Barr failed to produce any evidence to support its theory. Moreover, the fact that Chemagis shared in Barr's legal costs did not convince the court that there was, in fact, an ongoing and coordinated legal defense in which both parties communicated in that context. Rather, the court viewed the parties' sharing of defense costs, without more, as indicative of the fact that Chemagis' interest was more "financial" than "legal." At the end of the day, Barr simply failed to convince the court that the purpose of the communications between Barr and Chemagis during the course of the litigation was to further a joint defense strategy.
Because the community-of-interest privilege did not apply, the court found it unnecessary to address whether the privilege applied to communications involving nonlawyer representatives. (Although, under the In re Teleglobe principles, it seems unlikely that communications not involving at least one of the community-of-interest attorneys could ever satisfy the requirements of the privilege.) Finally, the court rejected further arguments from the plaintiffs that Barr had waived the attorneyclient privilege as to certain other documents by sharing these with Chemagis. The court did not view the majority of these communications as attorney-client communications. To the extent that one of the communications may have contained "legal-type information," the court held that interests of fairness did not demand a waiver as to other attorney-client communications not already disclosed.
The court's opinion indicates that the relevant concern for determining whether communications are protected by the community-of-interest privilege is not whether the parties can point to a formal written document. This is not meant to imply that entering into and memorializing an agreement in a signed writing is not beneficial under the right circumstances. Whether the privilege applies, however, will be determined by whether the parties actually took concrete, tangible steps to effectuate and implement a coordinated and common defense, and whether communications were made in furtherance of that effort. Granting complete control of the litigation to one member of the "community" (as in King Drug) runs directly contra to the policies underlying the community-of-interest privilege.
Often, insurers initially share a common interest in litigation, even if those interests become adverse down the road. Accordingly, it is especially important for insurers to understand not only the benefits of a community-of-interest arrangement, but also the pitfalls highlighted by the court in King Drug. The parties must actually work together in furtherance of a shared and coordinated defense effort for the privilege to apply. Finally, bearing in mind that interests can diverge as litigation develops, it is crucial that insurers are mindful that only communications made in furtherance of a coordinated defense effort will be protected by the privilege.
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