Delaware Chancery Court Blocks Business-Strategy Immunity in Discovery

Delaware Business Court Insider, By Jeff MordockContact
October 26, 2012

The Delaware Court of Chancery has affirmed that the business-strategy immunity privilege, a doctrine the court can invoke to protect confidential corporate information during discovery, cannot be invoked if the transaction has already been completed or disclosed through public securities filings. In issuing the decision, the court denied a plaintiff's attempt to invoke the doctrine to withhold information regarding the sale of her interest in an exercise equipment corporation from the defendant, who owns the remaining shares of the company.

Vice Chancellor Sam Glasscock III issued the decision in Glassman v. CrossFit.

CrossFit Inc. is a Delaware corporation headquartered in Washington, D.C., that licenses its names and products to affiliated gyms across the country. The corporation is controlled by an entity owned by the martial community created by Greg and Lauren Glassman, a married couple who are currently undergoing divorce proceedings in Arizona, according to court documents. As a result of the pending divorce, the entity that controls CrossFit is currently being disassembled by the Yavapai County Superior Court in Arizona, under the court's divorce jurisdiction.

The Glassmans' martial community remains CrossFit's sole stockholder and the Glassmans are the only members of the corporation's board of directors.

In June, Lauren Glassman agreed to sell a 50 percent stake in CrossFit to Anthos Capital LP, a Menlo Park, Calif., private equity group. However, the sale is conditioned on an Arizona court determining the size of her CrossFit ownership in the divorce proceedings or if Greg Glassman consented to the transaction.

Lauren Glassman filed a lawsuit in the Chancery Court in July, asking the court to enjoin her husband's purchase of a private airplane on behalf of the corporation. She claimed that the decision required board approval and she did not consent to the purchase because it would be harmful to CrossFit, according to court documents. In response, Greg Glassman argued that her lawsuit was a "sham designed to frustrate the business of CrossFit," so he would consent to the sale of her shares, which he wanted to purchase for himself.

Greg Glassman filed a countersuit alleging that his wife breached her fiduciary duties by providing Anthos with due diligence documents without his consent. He seeks damages on behalf of the corporation and to enjoin the sale of Lauren Glassman's share of CrossFit, if her ownership share is ever determined by the Arizona court.

While the main lawsuit is pending, Greg Glassman has filed a motion to compel demanding the court order his wife to release certain documents regarding the Anthos sale. Lauren Glassman provided some of the documents, but withheld communications between her and Anthos regarding plans to close the sale, CrossFit's valuation, how she evaluated Anthos' proposal, and Anthos' plans for the company.

Lauren Glassman argued that these documents should be withheld under the business-strategy immunity privilege and the common-interest doctrine.

Glasscock denied Lauren Glassman's efforts to invoke the business-strategy immunity privilege, a doctrine the court can invoke through its inherent power under Chancery Court Rule 26(c) to protect disclosed information that "may not be used for proper legal purposes, but rather for practical business advantages." The court most commonly invokes the privilege in corporate takeover disputes, but Glasscock said the court is "reluctant to allow parties to withhold relevant evidence by invoking the business-strategy privilege, even if the disclosure might benefit one of the parties outside of litigation."

In rejecting Lauren Glassman's claim, the vice chancellor noted that he could not invoke the privilege in this case because, under the Chancery Court's 1987 decision in Atlantic Research v. Clabir, the doctrine does not apply to transactions that have already been publicly disclosed through securities filings.

"Here, Ms. Glassman does not bear undue risk of prejudice from the disclosure of confidential strategic or pricing information because the information in this case concerns a transaction that has already been publicly announced," Glasscock wrote.

"Indeed, many important details of the deal between Ms. Glassman and Anthos Capital are widely known."

"As this court has held in Pfizer [v. Warner-Lambert] and Atlantic Research, the application of the business-strategy immunity is less compelling when a party seeks information about a deal which has already been publicly disclosed than when a party seeks to uncover an adversary's confidential future plans," the vice chancellor continued.

Glasscock said the information Lauren Glassman sought to protect could prove that Crossfit would be irreparably harmed by the transaction, making the documents relevant to the case. He added that a confidentiality order to prevent public disclosure of the documents would also mitigate the risk-sensitive materials being publicly disclosed.

Lauren Glassman also attempted to claim the communications are protected under the common-interest doctrine. Under the common-interest doctrine, when communications made for the purpose of providing legal services are shared with a third party, attorney-client privilege is putatively waived. However, a party can invoke the common-interest doctrine to preserve attorney-client privilege and withhold communications from discovery.

In rejecting the plaintiff's efforts to invoke the common-interest doctrine, Glasscock said the documents are related to information regarding the transaction itself, but not fully related to her legal strategy. And, even if the documents do concern a legal strategy, it does not necessarily mean it is related to a common legal strategy between Lauren Glassman and Anthos.

"Ms. Glassman has failed to present evidence that these documents were provided for the purpose of facilitating a joint legal strategy with Anthos," Glasscock said. "Other documents noted in the privilege log which ostensibly concern legal advice regarding litigation bear ambiguous descriptions, and may or may not concern a common legal interest between Anthos and Ms. Glassman. Again, Ms. Glassman has failed to show that the contents of these documents were created in furtherance of developing a joint defense or legal strategy."

Although Glasscock ordered Lauren Glassman to provide defense counsel with the requested documents, he did issue a warning to Greg Glassman over the possibility that the documents could be used to gain an advantage in frustrating the Anthos transaction or selling his own shares.

"Let me add, however, that if I were to discover that the defendants are using this information to gain a business advantage outside this litigation, I would not hesitate to redress that situation."

Philip Trainer Jr. and Toni-Ann Platia of Ashby & Geddes represent Lauren Glassman, and Raymond J. DiCamillo and Kevin Gallagher of Richards, Layton & Finger represent Greg Glassman.

Trainer declined to comment citing the fact that the case was still pending.

DiCamillo did not return calls seeking comment.