SimpleAir, Inc. v. Microsoft Corporation et al

Filing 445

OPINION AND ORDER -. Signed by Judge Rodney Gilstrap on 8/26/2013. (ch, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
MARSHALL DIVISION
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§ CIVIL ACTION NO. 2:11-cv-416-JRG
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SIMPLEAIR, INC.,
Plaintiff,
v.
MICROSOFT CORP., et al.,
Defendants.

OPINION AND ORDER
Before the Court is Google Inc.’s (“Google”) Motion to Compel Production of Documents
Withheld as Privileged (Dkt. No. 334). Google seeks to compel SimpleAir, Inc. (“SimpleAir”) to
produce four documents listed as entries 205, 206, 207, and 208 (“Withheld Documents”) in
SimpleAir’s privilege log. 1 Each of the Withheld Documents is correspondence involving
AirMedia, Inc. (“AirMedia”), the predecessor-in-interest to SimpleAir, dated between 1998 and
1999.
I.

ATTORNEY-CLIENT PRIVILEGE
“The oldest of the privileges for confidential communications, the attorney-client privilege

protects communications made in confidence by a client to his lawyer for the purpose of obtaining
legal advice.” Hodges, Grant & Kaufmann, v. U.S. Gov’t, Dept. of the Treasury, I.R.S., 766 F.2d
719, 720 (5th Cir. 1985). “The purpose of the privilege is to encourage clients to make full
disclosure to their attorneys.” Fisher v. U.S., 425 U.S. 391, 403 (1976). “The burden of
1

Google withdrew its request as to the fifth document, Entry 252, during oral argument on August 21, 2013.

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demonstrating the applicability of the privilege rests on the party who invokes it.” Hodges, 677
F.2d at 721. The application of the attorney-client privilege is a question of fact, to be determined
in light of the purpose of the privilege and guided by judicial precedents. Id. The clearly erroneous
standard applies to appellate review of a district court’s factual findings regarding the application
of the attorney-client privilege. In re Avantel, S.A., 343 F.3d 311,318 (5th Cir. 2003).
The Court heard arguments from counsel during a hearing held on this motion on August
21, 2013, 2 at which time counsel for SimpleAir submitted the Withheld Documents to the Court
for in camera inspection. After the hearing, the Court conducted an in camera review of the
Withheld Documents. Based on the briefing, argument, and its own in camera review, the Court
finds that SimpleAir’s assertion of attorney-client privilege over the Withheld Documents, at the
time they were created, is meritorious. The Court further specifically finds the privilege was
created by the inherent nature of these written communications at the time they were generated.
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.
II.

FACTUAL BACKGROUND
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 as part of its
AirMedia Live information service until shortly before it filed bankruptcy in 1999. During the
bankruptcy proceedings, Wireless Internet, Inc. (“WI”) acquired all of AirMedia’s assets as part of
2

The Court notes that during the August 21, 2013 hearing, Google did not seriously dispute the original existence and
attachment of privilege to the four documents at issue in this motion, instead choosing to focus on arguing that the
privilege did not survive to be succeeded to by SimpleAir.

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the bankruptcy Trustee’s liquidation process. WI was formed by several former shareholders and
directors of AirMedia for the specific purpose of purchasing AirMedia’s assets from the
bankruptcy trustee. WI financed the purchase of AirMedia’s intellectual property through a
secured loan made by Verus International Group, Limited (“Verus”). WI did not practice the
Asserted Patents and it too later filed bankruptcy in 2001. In 2002, Verus obtained relief from the
automatic stay in WI’s bankruptcy and proceeded to foreclose its security interest in the collateral
securing its loan. Verus “bid in” such assets by (taking a credit against its debt) and as a result,
purchased all of the assets related to the original AirMedia Live services, including the Asserted
Patents.
Two years later in 2004, SimpleAir was formed by John Payne and Tim von Kaenel, who
are two of the named inventors of the Asserted Patents. SimpleAir 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 one pending patent application and a set of trademarks and domain names, was purchased
by David S. Rose, who was the former CEO of AirMedia. SimpleAir is presently engaged in the
patent enforcement business. It does not practice the Asserted Patents in the same way as
AirMedia did prior to its bankruptcy in 1999.
III.

ANALYSIS
Both sides rely heavily on Soverain Software LLC v. Gap, Inc., et al., 340 F. Supp. 2d 760

(E.D. Tex. 2004) to support their opposing positions on whether this transfer of assets preserves
the privilege claim to the Withheld Documents with respect to SimpleAir. The Court finds that
while Soverain is instructive, it provides no bright-line rule for general application. Instead, this

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Court concludes that whether a transfer of assets preserves a claim of privilege is a question of fact
that should be answered based upon the totality of the circumstances and examined on a
case-by-case basis. The Court in Soverain took this very approach. This Court now undertakes the
same approach in the present case.
In its motion, 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.” 340 F. Supp. 2d at 763. 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 communication service
and software development business into something entirely different. In contrast, 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. At the end of the day, the Court is
persuaded that, as in many situations, the truth lies somewhere in between the competing versions
offered by the parties. The Court must now determine whether such facts constitute “a mere
transfer of some assets,” or something more. Clearly, a “mere transfer of some assets” does not
also transfer the privilege.3
The court in Soverain recognized real and practical concerns of applying the “mere
transfer” standard to the myriad of ways in which control of an enterprise can effectively change
hands. There, the court found that better guidance flows from the practical consequences in each
3

Zenith Elecs. Corp. v. WH–TV Broadcasting Corp., 2003 WL 21911066, *1–2 (N.D.Ill.2003); In re Grand Jury
Subpoenas, 734 F.Supp. 1207, 1211 n. 3 (E.D.Va.1990); Telectronics Proprietary Ltd. v. Medtronic, Inc., 836 F.2d
1332, 1336–37 (Fed.Cir.1988) (patent); In re Yarn Processing Patent Validity Litig., 530 F.2d 83, 90 (5th Cir.1976)
(patent).

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case rather than the legal formalities of the particular transaction. 340 F. Supp. 2d at 763 (citing
Tekni–Plex, Inc. v. Meyner and Landis, 89 N.Y.2d 123 (1996) and Ramada Franchise System, Inc.
v. Hotel of Gainesville Associates, Inc., 988 F.Supp. 1460, 1464 (N.D.Ga.1997)). “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.” Id.
Here, AirMedia’s original business of software and communications systems development
was unsuccessful and in 1999, the company went bankrupt. AirMedia’s resulting 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. During oral
argument, counsel for Google represented that David Rose paid $15,000 for his share of the
AirMedia assets in a cash sale. Upon inquiry by the Court, counsel for SimpleAir stated that
instead of a cash sale, Verus agreed to receive a structured percentage of future monies recovered
by SimpleAir through patent enforcement. Counsel for SimpleAir estimated that, to date, Verus
has received several “tens of millions” of dollars from SimpleAir by means of their purchase
agreement. (08/21/2013 Hearing Tr. at 51:3-4.) 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.
Additionally, 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

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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. The Court finds that these realities weigh
against Google’s assertion that SimpleAir’s acquisition is nothing more than “a mere transfer of
some assets.”
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. AirMedia was in the business of software and
communications systems development before it sought bankruptcy relief in 1999. The key assets
of a software business include its employees, sellable products, book of customers, trademark
names, and patent portfolio. However, the goodwill attributed to a company’s trademarks,
products, and the viability of its book of business necessarily diminishes when confronted with the
realities of bankruptcy.
As a result, the 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 be severely hindered if
potential buyers are forced to choose between continuing the failed model of the bankrupt business
or forfeiting claims of vital privileges such as those at issue here. Such a Hobson’s choice, if forced

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upon prospective purchasers of intellectual property (where attorney-client communications are
often significant), might effectively leave future bankruptcy liquidation sales in shambles. See,
Soverain, 340 F. Supp. 2d at 764 (“The Court is reluctant to adopt a principle that unnecessarily
inhibits the effective administration of bankruptcy estates.”). Therefore, despite 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.
In sum, the Court finds that control 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 of the Asserted Patents from Airmedia to WI, from WI to Verus, and from Verus to
SimpleAir, when evaluated in light of the totality of the circumstances, amounted to only a mere
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transfer of some assets through which the privilege failed to survive. Accordingly, this Court
concludes that AirMedia’s attorney-client privilege as relates to the Withheld Documents has
survived the transfers discussed above and is now properly vested in SimpleAir.
IV.

CONCLUSION
For the reasons set forth, Google’s Motion to Compel Production of Documents Withheld

as Privileged (Dkt. No. 334) is hereby DENIED.

SIGNED this 19th day of December, 2011.
So ORDERED and SIGNED this 26th day of August, 2013.

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RODNEY GILSTRAP
UNITED STATES DISTRICT JUDGE