Last Thursday, the New York Court of Appeals issued a stark reminder to transactional lawyers: no matter how much “common interest” two parties may have with respect to a transaction, the common interest doctrine may not protect their communications.
In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., New York’s highest court held, in a 4-2 decision, that a party waives its attorney-client privilege if it shares privileged information with another party unless (i) those two parties share a common legal interest, (ii) the communication between the parties was made in furtherance of that legal interest, and (iii) the communication relates to pending or anticipated litigation. Plaintiff Ambac insured residential mortgage-backed securities issued by defendant Countrywide. When those securities failed during the financial crisis, Ambac sued Countrywide under various breach of contract and fraud theories. Ambac also sued Bank of America, which acquired the assets of Countrywide in a merger in 2008. At issue in the decision were approximately 400 documents Bank of America withheld from production during discovery. The documents comprised attorney-client privileged communications that the bank and Countrywide shared with each other during the period between entering into the merger agreement and the closing of the merger six months later. The bank argued the documents pertained to a number of legal issues the two companies needed to resolve jointly in anticipation of the merger closing, such as filing disclosures, securing regulatory approvals, and reviewing contractual obligations to third parties, and thus, were protected from disclosure under the common interest doctrine. As is common in such transactions, the bank and Countrywide agreed to share such information and that their communications were confidential and subject to a common interest privilege, ostensibly preserving the attorney-client privilege in the documents.
The Appellate Division, First Department, overturned a lower court decision that had ordered the production of the documents. It ruled that New York’s common-interest doctrine, which has always applied only to shield communications concerning pending or reasonably anticipated litigation, was too narrow. Instead, the appellate court decided to follow several federal circuit courts that have held that a common interest in a transaction is enough to create a common interest privilege and there is no need for the communications between the parties to relate to litigation.
The Court of Appeals reversed the Appellate Division, declining to expand New York’s common interest doctrine. In doing so, the Court attempted to balance the competing public policies at issue – i.e., the policy of keeping attorney-client communications privileged so as to foster full and effective legal representation vs. the policy favoring liberal discovery in lawsuits – and determined that the common interest doctrine should only apply “to situations where the benefit and the necessity of shared communications are at their highest, and the potential for misuse is minimal.” The Court then reasoned that the presence of litigation creates the appropriate situation because when parties are co-litigants, “in order to mount a common claim or defense, their legal interests are sufficiently aligned that ‘the counsel of each [i]s in effect the counsel of all.” And, the Court found, that if there were a threat that the parties’ privileged communications would be discoverable, it would chill the parties’ exchange of information and thwart their ability to coordinate their legal strategy.
The bank argued that the same policy reasons should apply even when there is no litigation in sight because two merging parties need to share privileged information to comply with the law and regulations and to facilitate better legal representation. The Court of Appeals rejected this argument, finding that there was no evidence in the record that parties to complex commercial transactions, such as mergers and licensing agreements, need to share privileged information in order to achieve those goals or that without a privilege covering their communications, they would not share the necessary information. The Court reasoned that if this were the case, there would be evidence that such transactions did not take place in New York due to the state’s limitation on the common interest doctrine. Rather, the Court found that “when businesses share a common interest in the closing a complex transaction, their shared interest in the transaction’s completion is already an adequate incentive for exchanging information necessary to achieve that end.”[1]
The Court of Appeals, recognizing that numerous other states and federal circuits have expanded the common interest doctrine, invited the Legislature to consider whether to expand the doctrine statutorily. Until then, however, parties and counsel involved in commercial transactions in (or that may be the subject of a lawsuit in) New York, such as mergers, must give careful consideration before sharing privileged information with their counterparty because those communications will be discoverable in the future unless they concern actual or anticipated litigation.[2]
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[1] The Court also reasoned that if it were to expand the common interest doctrine to situations where there was no litigation present, the potential for abuse would be too great because it would be too difficult to determine where to draw the line between what is a communication for the purposes of seeking legal advice and what is a communication concerning a commercial purpose. As the dissent pointed out, however, courts in New York already deal with that issue routinely in discovery disputes.
[2] It is worth noting, as the Court of Appeals did, that several other states have a similarly limited version of the common interest doctrine, including Arkansas, Florida, Hawaii, Kentucky, Maine, Maryland, Mississippi, New Hampshire, New Jersey, North Dakota, Oklahoma, South Dakota, Tennessee, Texas, Vermont, and Virginia.