In a recent decision reversing the Appellate Division of the Supreme Court of New York, First Judicial Department, the New York Court of Appeals definitively held that the common-interest privilege may be used in New York only in circumstances where the communication at issue relates to either pending or reasonably anticipated litigation. In a 4-2 decision in Ambac Assurance Corp. v. Countrywide Home Loans, Inc.,1 the Court adhered “to the litigation requirement that has historically existed in New York” because any “benefits that may attend such an expansion of the [common-interest] doctrine are outweighed by the substantial loss of evidence, as well as the potential for abuse.”2

The Court’s decision breaks from precedent followed by the Second, Third, Seventh and Federal Circuits, as well as Delaware courts, which do not have a “litigation requirement” for the common-interest doctrine to apply, as discussed in a previous client alert.3 Both litigators and transactional counsel should be aware of the strict requirements in New York their clients must satisfy to enjoy the protection of the privilege.

Procedural History and the Supreme Court’s Decision

Generally, communications between an attorney and client either made in the presence of or subsequently disclosed to third parties are not protected by the attorney-client privilege.4 But under the common-interest doctrine, an attorney-client communication remains privileged if the third party shares a common legal interest with the client and the communication is made in furtherance of the common legal interest.5 The Court of Appeals confirmed there is a third element to the doctrine in New York – the communication must relate to pending or reasonably anticipated litigation.

The underlying lawsuit in Ambac involved a claim by Ambac Assurance Corporation (Ambac), a financial guaranty insurer, against Countrywide Home Loans, Inc. and related entities (Countrywide), relating to insurance contracts that guaranteed payments on certain residential mortgage-backed securities issued by Countrywide. During the financial crisis, some of the Ambac-insured, Countrywide-issued mortgage-backed securities failed. After one of the Countrywide related entities merged with a Bank of America Corp. (BOA) subsidiary, Ambac filed a lawsuit against Countrywide and Bank of America alleging that Countrywide “breached contractual representations, fraudulently misrepresented the quality of the loans and fraudulently induced Ambac to guaranty them”, and asserted claims against BOA as Countrywide’s successor-in-interest and alter ego.6

During the course of discovery, BOA withheld approximately 400 communications that took place between BOA, Countrywide and their respective counsel after the two entities signed a merger plan, but before the merger closed months later. BOA listed these communications on a privilege log, claiming the documents were protected by the common-interest doctrine. Ambac challenged the withholding.

BOA argued the documents at issue pertained to legal issues the two companies needed to resolve for the merger to close, and that the merger agreement “directed [the parties] to share privileged information related to these pre-closing legal issues” and contained confidentiality provisions to prohibit the disclosure of privileged information to any outside parties.7 In response, Ambac argued that BOA and Countrywide were not affiliated entities at the time of the disclosure and did not share a common legal interest in pending or reasonably anticipated litigation, thereby waiving any applicable privilege.

A Special Referee appointed to handle the privilege dispute ordered BOA to produce the documents, concluding that the common-interest doctrine could apply only if the parties shared a “common legal (as opposed to business or commercial) interest in pending or reasonably anticipated litigation.”8 BOA moved to vacate the Referee’s decision, but the Supreme Court denied the motion, holding that under New York law there must “be a reasonable anticipation of litigation” for the common-interest doctrine to apply.9

Appeal to the Appellate Division, First Department

BOA appealed and the Appellate Division, First Department, reversed, granted BOA’s motion to vacate the Referee’s decision and remanded to the Supreme Court for further proceedings. The First Department held unanimously that even though, historically, “New York courts have taken a narrow view of the common-interest [doctrine] . . . in today’s business environment, pending or reasonably anticipated litigation is not a necessary element of the common-interest privilege.”10

The First Department’s detailed discussion of the attorney-client privilege informed its holding, as the court found that the litigation requirement was at odds with the underlying purpose of the privilege: the “attorney-client privilege is not tied to the contemplation of litigation because advice is often sought, and rendered, precisely to avoid litigation, or facilitate compliance with the law, or simply to guide a client’s course of conduct.”11 To emphasize the need to apply the common-interest doctrine without a litigation requirement, the court relied on the Supreme Court’s decision in Upjohn Co. v. United States, 449 U.S. 383, 389 (1981), and noted that due to “the vast and complicated array of regulatory legislation
confronting the modern corporation, corporations, unlike most individuals, constantly go to lawyers to find out how to obey the law. . . .”12

The Court of Appeals’ Decision

On June 9, 2016, a divided 4-2 Court of Appeals reversed the First Department, holding that “as the courts in New York have held for over two decades, [] any such communication must [] relate to litigation, either pending or anticipated,” for the common-interest doctrine to apply.13 Writing for the majority, Judge Pigott began by providing a brief background of the attorney-client privilege, explaining that despite “the social utility of the privilege, it is in obvious tension with the policy of this State favoring liberal discovery.”14 Moving on to the common-interest doctrine, which has its roots in criminal law, Judge Pigott discussed it as a distinct “exception to the general rule that the presence of a third party destroys any claim of privilege.”15 As the doctrine was originally conceived, it allowed criminal co-defendants to share confidential information about their defense strategy without the co-defendants waiving the attorney-client privilege.16 New York courts eventually replaced the so-called joint-defense doctrine with the common-interest doctrine, which extended to both criminal and civil cases.17 But until the First Department’s decision in this case, “New York courts uniformly rejected efforts to expand the common interest doctrine to communications that do not concern pending or reasonably anticipated litigation.”18

The Court reasoned that when two or more parties reasonably anticipate or are engaged in litigation, “the threat of mandatory disclosure may chill the parties’ exchange of privileged information and thwart any desire to coordinate legal strategy.”19 In that context, the common-interest doctrine “promotes candor that may otherwise have been inhibited.”20 In contrast, when two or more parties share a common legal interest in a commercial transaction but do not reasonably anticipate litigation, “their shared interest in the transaction’s completion is already an adequate incentive for exchanging information necessary to achieve that end.”21 The Court was not persuaded by the fact that while it was limiting the common-interest doctrine to pending or threatened litigation, the attorney-client privilege from which it derives is not so limited. Nor was the Court moved by the “anomalous result” that clients who retain separate attorneys cannot protect their shared communications absent pending or anticipated litigation, but if clients jointly retain a single attorney the same communication would be privileged in the absence of litigation.

At its core, the Court’s decision is based on a policy rationale: “any benefits that may attend [] an expansion of the doctrine are outweighed by the substantial loss of evidence, as well as the potential for abuse,” such as shielding from discovery purely commercial communications rather than legal advice.22 The Court noted that there has not been a “corporate crisis” in New York while the litigation requirement existed and doubted that such a crisis would occur as a result of the decision.23

In dissent, Judge Rivera would have expanded the common-interest doctrine to coexist more in line with the attorney-client privilege, writing that an extension of the doctrine to confidential communications made “for the purposes of seeking legal and regulatory advice to complete the merger . . . is fully in line with the goals of our common law and the needs of our complex system of commercial regulations.”24 Judge Rivera also thought it “worthy of note that the majority of federal courts that have addressed the issue,” along with a number of state jurisdictions, do not have a litigation requirement as part of the common-interest doctrine.25

Lessons of Ambac

With the Court of Appeals’ decision, the elements of New York’s common-interest doctrine have now been articulated. A disclosed attorney-client communication remains privileged if: (i) the party to whom disclosure is made shares a common legal interest with the client; (ii) the communication is made in furtherance of that common legal interest; and (iii) the communication relates to either pending or anticipated litigation.26

Now that Ambac has delineated the elements of New York’s common-interest doctrine, pre-closing transacting parties in New York should be aware that exchanging attorney-client privileged communications that do not relate to pending or anticipated litigation will likely waive the attorney-client privilege and open the communications to discovery by third parties. As a result, counsel and clients should consider jointly retaining a single law firm to serve as special counsel to address sensitive common legal issues. And regardless of the now-narrowed version of the common-interest doctrine, parties and counsel should still:

  • Separate legal interests from business interests. Under Ambac, two transacting parties may be able to claim the common-interest doctrine if they can show that their communication relates to anticipated litigation, but only if the communication is “predominately of a legal character” as opposed to communication that assists the client in furthering a business interest.27 Counsel should articulate and document the specific legal interests being served when making communications.
  • Maintain confidentiality of communications. Even if the communication relates to pending or anticipated litigation, as Ambac requires, the communication must still retain the hallmarks of the attorney-client privilege and be maintained as confidential between client and counsel, or the privilege can be deemed waived. New York courts will require that the attorney-client privilege and common-interest doctrine are “strictly confined within the narrowest possible limits consistent with the logic” of their principles, so parties and counsel must maintain vigorous controls over access to and subsequent dissemination of potentially privileged information.28