FEDERAL COURT OF AUSTRALIA

Arrow Pharmaceuticals Limited v Merck & Co., Inc. [2004] FCA 1131

EVIDENCE – legal professional privilege – standard form document containing information about invention sent to in-house patent department of United States corporation – law to be applied – ultimate purpose of filing patent application did not detract from immediate purpose of obtaining legal advice and legal services – whether waiver of privilege

Bennett v Chief Executive Officer of the Australian Customs Service [2004] FCAFC 237 cited

DSE (Holdings) Pty Ltd v Intertan Inc (2003) 203 ALR 348 referred to

Esso Australia Resources Ltd v Commissioner of Taxation of the Commonwealth of Australia (1999) 201 CLR 49 followed

Grant v Downs (1976) 135 CLR 674 cited

Kennedy v Wallace [2004] FCA 332 cited

Mann v Carnell (1999) 201 CLR 1 applied

Ritz Hotel Ltd v Charles of the Ritz Ltd (No 4) (1987) 14 NSWLR 100 followed

Sparnon v Apand Pty Ltd (1996) 68 FCR 322 cited

Pratt Holdings Pty Limited v Commissioner of Taxation [2004] FCAFC 122 referred to

Re Spalding Sports Worldwide Inc 203 F.3d 800 (Fed. Cir. 2000) discussed

ARROW PHARMACEUTICALS LIMITED (ACN 088 417 403) v MERCK & CO., INC.

N 1211 OF 2002

GYLES J

1 SEPTEMBER 2004

SYDNEY

REASONS FOR RULING

1                     A question arose during the hearing as to whether three similar copies of a document in the possession of the respondent are protected from production pursuant to a Notice to Produce by virtue of legal professional privilege.  The document is a Confidential Memorandum of Invention (CMI).  It was a standard form internal Merck document.  It is headed ‘Forward to:  Patent Department’.  A pro forma of a CMI is in evidence on this application.  I need not set it out.  Suffice to say that in a structured way it calls for a good deal of information concerning the invention which would be relevant in forming opinions as to whether the invention was capable of being patented, as to the extent of likely grounds of opposition and relevant to drafting an application for a patent including the specification and claims.

2                     The document in question was signed by Arthur C Santoro II as the person submitting the Memorandum.  It was signed by John Yates MD as Supervisor.  Below that there is a heading ‘Merck Research Laboratories Only:’ which provided for the research management’s recommendation and prioritisation.  Priority was accorded and it was signed by Reynold Spector as the Area Head.  The date 17 July 1997 was filled in beside all signatures.  The received stamp on the document reveals initialling by ‘Director’, ‘Patent Counsel’ and ‘Attorney’, together with other notations.  The attorney identified is Anthony D Sabatelli and the relevant date stamp 17 July 1997.  Two of the documents produced bear the name ‘Joseph F Diprima’ with date stamp 18 July 1997.  The other copy produced has a handwritten note ‘returned on 7/17/97’ and initials which are not easy to distinguish but look like ‘MK’.  The patent application was filed on 22 July 1997.

3                     Anthony Sabatelli has a PhD from Yale University in Biochemistry obtained in 1984.  In 1994 he graduated from Salmon P Chase Law School in Cincinnati, Ohio.  He is qualified to be an attorney in the State of Ohio and in all Federal courts.  He is admitted to the Bar.  He is registered to practise before the United States Patent and Trademark Office.  His admission to the Bar means that he is subject to professional discipline as such. 

4                     Evidence as to the system within Merck was given as follows:

‘DR EMMERSON:  Can you tell, his Honour, what happens in Merck when someone considers that he might have an invention? --- Sure.  Well there are two different things that can happen.  The first is they can contact the Patent Department directly and give them the information, in which case the Patent Department will fill-out the CMI and make sure they have all the information.  Return it for signature and it is sent back to them.  That is one method.  The other method is that the researchers could independently fill-out the CMI and submit it to the Patent Department.  The Patent Department then takes the information that is on that CMI and makes an assessment as to whether there is a patent or invention there.

And what happens then? --- If there is a patentable invention they contact the inventor to let them know.  Well, actually, they contact the inventor either way, whether there is a patentable invention or not a patentable invention.  If there is a patentable invention then a patent application is prepared and filed.

And what is the function of the CMI? --- The CMI is the first step of the process.  It lays out certain basic information.  That is necessary to make an assessment as to the patentability of the invention.  Including conception dates, date first disclosed to, the basics of the patent and any prior art that the inventor may or may not be aware of.

…

MR BURLEY:  … Mr Devlin, when somebody fills in a CMI and they send it to the patent department the patent department might proceed to prepare the patent immediately thereafter.  That’s the case isn’t it? --- I guess – can I ask for further clarification, I mean, they can use it as a basis but generally they do contact the inventor because they’ll need more for the specification and things like that.

Yes, and so there may be an interaction between the inventor and the patent department for the purpose of completing the patent application.  Is that right? --- There’d be communications between the patent attorney and the client for purposes of filling out certain parts of the specification.

Yes.  Thank you? --- For sure.

The decision as to whether to file a patent is something which isn’t made by the inventor themselves is it? --- It’s made by the client.

And the client is - - -? --- Merck & Co.

Merck Management? --- Merck & Co.

Yes? --- Yes.’

5                     Yates gave affidavit evidence that the CMI had been prepared in May 1997.  He said that in May 1997 he instructed Anastasia Daifotis, one of the inventors, to complete the CMI.  He described Sabatelli’s responsibilities at Merck as follows (T554):

‘Dr Sabatelli reported to Dr Winokur in the patent department and his responsibilities were on the procurement side of patents.  Meaning to say, he would assist scientists such as myself in helping to procure patents on a world-wide basis, where that was appropriate.’

6                     In cross-examination, Yates said that he did not recall precisely but that he may have sent the CMI to the Patent Attorney within a day or so after 20 May 1997.  After the page of the CMI with the signatures upon it was produced and shown to Yates, the following evidence was given:

‘Doctor, is this right?  This looks as if the CMI was lodged with Dr Sabatelli on 17 July ’97? --- That looks right.

Does that mean that your evidence yesterday that this was done in May ’97 was incorrect? --- That’s correct.

Could you explain how the error occurred please? --- It was my recollection that I would have – that I had filed this CMI and signed it in May but clearly my recollection was not perfect.

…

THE WITNESS:  Could I make one other point, your Honour, on this page which is that the final signature at the bottom of the page is Reynold Spector who I mentioned yesterday was the Senior Vice President of Merck Research Labs and that was a prerequisite for submission of a CMI that it had management approval before submission and I think explains why an early submission was not possible because it was necessary to get approval based upon agreement that this was a worthwhile and patentable invention.’

7                     It appears from contemporaneous emails that Yates had made a decision to commence work on ‘putting a patent together’ by 21 May 1997.

8                     Evidence was given by Rodney Caldwell who is an attorney and patent attorney practising in Houston, Texas.  He had taken into account the affidavit of Yates, the CMI itself and a decision of the United States Court of Appeals for the Federal Circuit In Re Spalding Sports Worldwide Inc 203 F.3d 800 (Fed. Cir. 2000), a copy of which he annexed.  The evidence he gave included the following (to which much objection was taken):

‘I have concluded that the CMI is protected by the attorney-client privilege in the United States.  The CMI reflects a communication between the client (in this case, the Merck inventors) and Dr. Anthony Sabatelli, who according to the Yates declaration was an attorney in Merck’s Patent Department.  This communication reveals on its face that it was made for the purpose of obtaining legal advice concerning the preparation of a patent application.

The Spalding case is a decision from the United States Court of Appeals for the Federal Circuit, the appellate court with exclusive appellate jurisdiction over all decisions of the United States District Courts in civil actions arising under the United States patent laws.  The United States Court of Appeals for the Federal Circuit determined that the invention record involved in the Spalding case was protected by the attorney-client privilege because it contained communication from inventors to a corporate legal department for the purpose of obtaining legal advice regarding the preparation of a patent application.  Under Spalding, the CMI referred to in the Yates declaration is protected by the attorney-client privilege in the United States.

Forced disclosure of the confidential attorney-client privileged communication made by the CMI could destroy the protections of the attorney-client privilege in the United States.  If Merck were forced to disclose the confidential and privileged communication represented by the CMI, the United States District Courts might determine that the Merck has waived the protections of the attorney-client privilege not only for the CMI but also for other attorney-client privileged communications related to the CMI.’

9                     The evidence given by Yates when cross-examined upon part of the CMI caused me to reconsider an initial ruling that the document was privileged.  I then heard further submissions both as to the effect of that evidence and generally as to the authorities.  As the ruling I had earlier announced without reasons was interlocutory and made on the run during the hearing, I reconsidered the issue afresh, but decided that the ruling should stand.  I indicated that reasons would be given later.  These are those reasons.

10                  The initial submission for Arrow was that the respondent’s claim for privilege is governed by Pt 3.10 of the Evidence Act 1995 (Cth) in combination with Federal Court Rules O 33 r 11(5).  This would depend upon production of a document pursuant to notice to produce being regarded as the adducing of evidence.  That is a difficult argument in view of the decision of the High Court in Esso Australia Resources Ltd v Commissioner of Taxation of the Commonwealth of Australia (1999) 201 CLR 49.  The applicant now accepts that, at least for present purposes, I would be bound to reject that submission.  The question is thus governed by the common law.  In my opinion, O 33 cannot alter the substantive rights involved.

11                  The respondent has produced a memorandum of 29 December 1997 which refers to the CMI.  The relevant paragraph is as follows:

‘J. Yates provided a cursory update on issues of patent exclusivity for the 35mg/70mg weekly dosing programs.  There are some weaknesses in our patent application, namely the existence of a reference to intermittent dosing in a Lunar News publication circulated in 4/97.  Our internal Confidential Memorandum of Invention (CMI) is dated 6/97.  Team members were encouraged to forage through their files in search of any supporting documentation that pre-dates the Lunar News publication.  Any information should be forwarded to Dr. A. Santora and A. Sabatelli in the Patent department.’

12                  It is submitted for the applicant that production of that document, including that paragraph, waives privilege in relation to the CMI.  In my opinion there has been no waiver when the principles explained in Mann v Carnell (1999) 201 CLR 1 are applied.  The document was internal to Merck and has only been produced in the ordinary course of production of documents.  That is not inconsistent with the maintenance of confidentiality (cf Bennett v Chief Executive Officer of the Australian Customs Service [2004] FCAFC 237).

13                  All the relevant facts occurred in the United States.  That immediately gives rise to a question as to which body of law governs the issue.  That question was discussed inconclusively in Kennedy v Wallace [2004] FCA 332 at [51]–[52].  The submissions in this case have not carried the matter any further.  Counsel have been content to argue the question on the basis that the law which governs the issue is the same here as in the United States.  Consideration of the Spalding case indicates that the principle being applied is the same, which is not surprising in the light of the common ancestry of the common law being applied in each place.  That is not to say that there may not be differences in application of the principle at various times and in various places.  A glance at the numerous cases in Australia and the United Kingdom which have concerned legal professional privilege in the last 20 years or so indicates twists and turns in the application of the general principle within single jurisdictions.  In circumstances such as the present, it seems to me that, when dealing with international patents, it is appropriate to pay special regard to the situation in the place where the events have occurred, at least in circumstances where the principle applied there is the same as the principle applied here.

14                  The next point to be considered is that there was no involvement of any independent lawyer acting in a professional capacity; it was all in-house.  It is apparent from the Spalding decision that that is not a problem in the United States.  That is consistent with the decision of McLelland J in Ritz Hotel Ltd v Charles of the Ritz Ltd (No 4) (1987) 14 NSWLR 100 at 102.  In this case, as in that case, the particular lawyer to whom the document was referred is a member of the Bar and subject to professional discipline.  I would not deny privilege because the lawyer was in-house, although the nature of that system can properly be taken into account.  It may be that the issue warrants further consideration because of the potential for abuse which exists, but I do not think that I should undertake that task as a single judge.

15                  Was the CMI produced or brought into existence with the dominant purpose of using it in order to obtain legal advice?  It seems clear enough that the answer of the United States Court of Appeals for the Federal Circuit would be ‘yes’.  In Spalding the Court said:

‘In determining whether the attorney-client privilege applies, we first note that Spalding’s invention record constitutes a communication to an attorney.  As confirmed by the district court’s own review, the invention record was submitted by the inventors of the ‘178 patent to Spalding’s corporate legal department.  See Spalding, slip op. at 3.  Furthermore, the communication was made for the purpose of obtaining legal advice.  According to the declaration of Spalding’s current house patent counsel, “it was, and is, the policy at Spalding for [**14] Spalding’s patent counsel, and/or outside patent counsel to whom the invention is delegated for evaluation, to refer to the INVENTION RECORD for the purpose of making patentability determinations.”  Covello Decl. P 7.  We therefore hold that an invention record constitutes a privileged communication, as long as it is provided to an attorney “for the purpose of securing primarily legal opinion, or legal services, or assistance in a legal proceeding.”  Knogo Corp. v. United States, 1980 U.S. Ct. Cl. LEXIS 1262, 213 U.S.P.Q. (BNA) 936, 940 (Ct. Cl. Trial Div. 1980)  (rejecting the characterization of patent attorneys as mere “conduits” to the PTO); see also Sperry v. [*806] Florida, 373 U.S. 379, 383, 10L. Ed. 2d 428, 83 S. Ct. 1322 (1963) (“The preparation and prosecution of patent applications for others constitutes the practice of law.”).  Spalding’s invention record meets that test.

…

Accordingly, since Spalding’s invention record was prepared and submitted primarily for the purpose of obtaining legal advice on patentability and legal services in preparing a patent application, we conclude that it is privileged in its entirety.  n3

[n3  We are aware of several district court opinions that have held that technical information communicated to an attorney, and documents relating to the prosecution of patent applications are non-privileged, based on the rationale that the attorney is acting as a mere “conduit” between his client and the Patent and Trademark Office (“PTO”).  See, e.g., Jack Winter, Inc. v. Koratron Co., 50 F.R.D. 225, 228, 166 U.S.P.Q. (BNA) 295, 297-98 (N.D. Cal. 1970); see also, e.g., Howes v. Medical Components, Inc., 1988 U.S. Dist. LEXIS 1317, 7 U.S.P.Q.2D (BNA) 1511, 1512 (E.D. Pa. 1988); Detection Sys., Inc. v. Pittway Corp., 96 F.R.D. 152, 155, 220 U.S.P.Q. (BNA) 716, 717 (W.D.N.Y. 1982); Sneider v. Kimberly-Clark Corp., 91. F.R.D. 1, 5 (N.D. III. 1980); Choat v. Rome Indus., Inc., 462 F. Supp. 728, 732, 203 U.S.P.Q. (BNA) 355, 358 (N.D. Ga. 1978).  However, these cases did not deal specifically with invention records, and moreover, they are not binding on this court.  We conclude that the better rule is the one articulated in this case.]’

16                  There is no other evidence concerning the state of United States law.  It is apparent from the decision itself that there is a difference of opinion between that jurisdiction and other jurisdictions.  The situation in the United States is more complicated than in Australia as there is no federal supervision of State courts.  In the absence of other evidence, it is reasonable to follow the court system which relates to patents. 

17                  In my opinion, the answer would be the same if the facts had occurred in Australia, at least where common law is applied.  The first question is whether the submission of the CMI to the Patent Department was for the dominant purpose of obtaining legal advice.  It is obvious that the ultimate purpose was to file an application for the patent. 

18                  The implied instruction involved in the submission of a CMI can be summarised as follows:

(1)        please advise as to whether an application for a patent has reasonable chances of success.

(2)        if the answer is ‘yes’, draft and lodge the appropriate application.

19                  The first involves a mixed question of fact and law which is appropriately classified as legal advice if directed to a lawyer.  The second also reflects traditional legal services if directed to a lawyer.  In my view, the ultimate purpose of obtaining a patent does not detract from the immediate purpose which was to obtain legal advice and the provision of legal services. 

20                  On the other hand, a CMI, or something very like it, would be necessary if that purpose were to be effected, with or without the intervention of lawyers or patent attorneys.  Branson J expressed the opinion in Sparnon v Apand Pty Ltd (1996) 68 FCR 322 at 328:

‘If the decision to bring the document into existence would have been made irrespective of any intention to obtain professional legal services, I am inclined to doubt that the purpose of obtaining professional legal services could be regarded as the dominant purpose for the making of the document.’

21                  In cases such as this there can be an uncomfortable feeling that a system may have been devised in order to grant secrecy to a document by exploitation of the immunity conferred by legal professional privilege.  That potential has given rise to much debate in cases dealing with routine reports in differing regimes, eg National Employers’ Mutual General Insurance Association Ltd v Waind (1979) 141 CLR 648; Grant v Downs (1976) 135 CLR 674; Waugh v British Railways Board [1980] AC 521; McIlwraith McEacharn Operations Ltd v CE Heath Underwriting & Insurance (Australia) Pty Ltd (No 2) [1995] 1 Qd R 363; Newcastle Wallsend Coal Co Pty Ltd v Court of Coal Mines Regulations (1997) 42 NSWLR 351; and Secretary of State for Trade & Industry v Baker [1998] Ch 356.

22                  If the CMI had not been approved and counter-signed by Santoro, it would not have been submitted to the Patent Department.  In a sense, the document up to that time was only provisional in that respect.  It could be said that the dominant purpose for preparation of it was to obtain Santoro’s approval.  Information about the alleged invention would have been necessary for that purpose.  On that reasoning, it would not be privileged.

23                  However, in my opinion, that reasoning is unsound.  Preparation of a CMI was a well-established procedure which was directed towards submission of it for legal advice.  In Waind, Mason J (who was one of the majority in Grant v Downs) said (at 656):

‘These facts do not sustain the existence of an overriding purpose of the kind which the appellant seeks to set up.  If it had been the practice of the appellant to refer every claim and every case with the relevant reports to its solicitor for advice or information, the appellant might have been in a position to establish the existence of an overriding purpose which would found a claim to legal professional privilege.  But the facts fall far short of this.’

24                  The CMI prior to authorisation by Santoro was by way of being a draft.  It had no independent existence.  In my opinion, such a draft would be entitled to the protection of the privilege.  That conclusion is supported by the reasoning in Pratt Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 122 (see also the reasoning of Allsop J in DSE (Holdings) Pty Ltd v Intertan Inc (2003) 203 ALR 348).

25                  I was satisfied that each document was protected from production by legal professional privilege.

Associate:

Dated:              1 September 2004