When the client expresses concerns that discovery in litigation of highly confidential corporate strategies will cause competitive harm to the company, the business strategy immunity may afford protection. This doctrine is an application in specific factual circumstances of the balancing test for the terms of a protective order under Federal Rule of Civil Procedure 26(c) or under the comparable state rule. The business strategy immunity originally arose in the context of hostile takeovers in the 1980s and was then known as the “white knight” privilege. The courts limited hostile offerors from taking discovery of the target company’s strategies in defending and considering alternatives to the hostile offer. Over the years, the business strategy immunity has been applied more broadly to any circumstance where the premature discovery of a confidential corporate strategy may cause severe harm. It has been applied to limit and postpone discovery in a wide variety of types of litigation: shareholder derivative lawsuits, proxy contests, trust administrations, competitive bidding contests, labor union actions, patent infringement litigation, and bankruptcy or insolvency proceedings.

An early application of business strategy immunity was BNS, Inc. v. Koppers Co., Inc. In that case, the board of directors of the target company had rejected two hostile offers of $45 and $56 per share and was actively considering the adequacy of a $60 offer. The offeror sought discovery of board information and defensive measures actively being considering. The court weighed the harm to the target from producing the information against the offeror’s need for the information and found that balance in favor of the target. The bidder had no need for the information until the board took a position with respect to the $60 offer and the target’s “ability to act in the best interests of shareholders” would be severely impaired by premature disclosure of the board’s view of the pending offer and the defensive measures it was actively considering in response.

Business strategy cases typically turn on several factual issues:

First, while many cases refer to this doctrine as a “privilege,” that is a misnomer. Unlike the attorney-client privilege, the business strategy immunity from discovery is temporary. The business strategy doctrine is more akin to a qualified immunity from discovery like the work product doctrine. The immunity only postpones production and must be reevaluated during the litigation to confirm that this treatment remains warranted. The immunity lasts only so long as the strategy is under active consideration. Once the strategy is adopted or rejected, the adversary may demand discovery of it.

Second, a finding of business strategy immunity is highly dependent upon the relevance of the information sought in discovery to the issues in the litigation. Where the information is highly relevant to issues in the proceeding, the court may well deny immunity and order discovery. On the other hand, when the information sought has less relevance to the litigation, or is only relevant to issues that do not need to be litigated immediately, the court more likely will find immunity and postpone discovery. This finding is especially likely in cases where there is evidence that the adversary has a motive of advancing its business interests outside of the litigation through the discovery of highly confidential strategies. Either way, the court may tailor specific discovery to the issues in the litigation.

Third, the degree of the harm to the producing party also affects the business strategy decision. The primary question is whether disclosure of the information will cause severe harm to a non-litigation interest, such as the party’s position in negotiations with the adversary. For example, if a hostile bidder has access to the target’s internal valuation information before the target has rejected the offer, arms-length bargaining is impaired.

Fourth, the courts frequently deny the business strategy immunity when the party has already partially disclosed the strategy. To do otherwise would allow a party to choose to disclose the facets of the strategy that favor it in public forums while at the same time cloaking facets of the strategy that some stakeholders may consider disfavorable. This sort of cherry picking is disfavored.

The business strategy immunity recognizes that a confidentiality agreement is insufficient to protect highly confidential business strategies. As the Delaware Chancery Court emphasized in an early case:

“I do not regard confidentiality orders as providing absolute protection. If they did, there would be no need to attempt to evaluate competing claims in this setting, for the words written on a page would afford the protection of a guarded vault. We must operate, however, in a world more closely aligned with reality in which mistakes occur and in which trust is sometimes abused for advantage.”

Even an order limiting discovery to attorneys may not eliminate the risk of misuse. Some information is so critical to a matter that no attorney can put it out of mind in making decisions. Only by postponing discovery can the court protect the business interests of the party.