The New York Court of Appeals has ruled that the common interest exception applies only when two parties share privileged communications related to a common interest in pending or reasonably anticipated litigation. In doing so, the court in Ambac Assurance Corp. v. Countrywide Home Loans, Inc. rejected the defendants’ argument that the common interest exception should have applied to shield communications between parties to a merger agreement that were necessary to obtain regulatory approval for the transaction and avoid litigation. The Ambac court’s imposition of the pending or anticipated litigation requirement is inconsistent with the law in a number of other state and federal courts, and transactional lawyers should be aware that the common interest doctrine may be applied narrowly by New York courts.
The common interest doctrine goes by many names: “common interest arrangement,” “common legal interest doctrine,” “common interest exception,” “community-of-interest privilege,” “joint defense doctrine,” “joint litigant privilege,” “pooled information privilege,” “allied lawyer doctrine,” and “allied litigant privilege.” In general terms, the doctrine states that a party does not waive attorney-client privilege when that party discloses privileged information to a third party who shares a “common legal interest.” It is the nature of that “common legal interest” that has split the courts.
Ambac Assurance Corp. v. Countrywide Home Loans, Inc.
Ambac, a mortgage insurance company, guaranteed payments on a number of mortgage-backed securities issued by Countrywide. In 2008, Countrywide merged with Bank of America. Ambac filed suit against Countrywide and Bank of America, alleging that Countrywide misrepresented the quality of their mortgages and Bank of America was liable as Countrywide’s successor-in-interest or alter-ego. During discovery, Ambac challenged the defendants’ designation of approximately 400 communications between Countrywide and Bank of America during the period between the signing of the merger plan in January 2008 and the closing in July 2008 as privileged. Bank of America contended that the communications were privileged because they pertained to a number of legal issues the two companies needed to discuss jointly in anticipation of the merger closing, such as securities filings and the tax consequences of the merger.
The Ambac court refused to apply the common interest doctrine to the disputed communications, holding that the parties’ common legal interest must relate to pending or anticipated litigation. The Ambac court rejected Bank of America’s argument that the complex regulatory scheme governing Bank of America exposed it to a constant threat of litigation. For the Ambac court, the mere “threat of litigation” resulting from the transaction did not amount to a “reasonable anticipation” of litigation. In response to Bank of America’s argument that the decision would create an anomalous result in the merger context between mergers where parties are separately represented and those where the parties are represented by a single attorney, the Ambac court opined that parties represented by a single attorney would indisputably share a common interest in order for the attorney to ethically represent both parties.
The “Common Interest” Exception Under Delaware Law
Although a number of courts in other jurisdictions do not require pending or anticipated litigation for the common interest exception to apply, Delaware law is a helpful example of an alternative approach as Delaware law is frequently selected as the applicable law in transactional documents. Rule 502 of the Delaware Rules of Evidence states that a client may refuse to disclose confidential communications made “to a lawyer or a representative of a lawyer representing another in a matter of common interest” when such communication is made for the purpose of facilitating the rendition of legal services to the client. Del. R. Evid. 502.
The rule does not explicitly refer to pending or anticipated litigation, and Delaware courts have applied the rule in the transactional context without specific reference to litigation. Like New York, however, Delaware courts have held that the common interest must be legal, rather than commercial, in nature. At least one Delaware court has held that “[t]he parties’ interests in ensuring that [a] transaction was structured in a way that is legally appropriate is not sufficient to warrant the extension of the common interest privilege.” In addition, Delaware courts have suggested that parties to a merger agreement can share a common interest with respect to some issues, such as obtaining regulatory approval for the transaction, but may at the same time be adverse with respect to other issues, such as allocation of responsibility for a termination fee. Similarly, the common interest exception may not apply at all times during a negotiation. At least one Delaware court has ruled that parties cannot share a common interest before a merger agreement is signed. Thus, while the common interest doctrine may be broader in Delaware, counsel should not assume that they will receive blanket protection for all communications exchanged in the course of negotiating a transaction.
Advice for Reducing Risk that Privilege Will Be Waived During a Transaction
While the protections of even the Delaware common interest exception may be narrower than many lawyers not familiar with this case law might expect, there are several strategies counsel should consider to increase the odds that the exception will apply:
- In both Ambac and many of the Delaware cases addressing the common interest doctrine, the designation of documents as privileged was challenged because they were disclosed on a privilege log. To the extent it is practical, the parties to a merger or acquisition should avoid written, interparty communications relating to privileged matters if they are concerned about waiving the privilege. If a communication is not in writing, it is less likely to be disclosed in litigation.
- The parties to a transaction should enter into a written common interest agreement before exchanging privileged information. While it should not be necessary that an agreement is executed before communications take place, at least one Delaware court has stated that the execution of a common interest agreement after communications were exchanged suggested that the parties did not have a common interest at the time of the communications.
- While still limited in scope, the common interest exception under Delaware law offers more protection to privileged communication shared between parties to a transaction than the exception under New York law. Given the choice between Delaware and New York, the parties may want to consider including Delaware choice of law and forum selection clauses in a merger or acquisition agreement if they are concerned about preserving the privilege. While these clauses might not apply to a dispute brought by a non-party outside Delaware, at least one Delaware court relied on these clauses to rule that Delaware law applied even though most of the communications relating to the transaction were exchanged in Massachusetts.
If New York law will govern the transaction, the parties may want to accept the Ambac court’s invitation to consider retaining a single attorney to represent both parties with respect to any regulatory, tax, or other issues of common interest where such an arrangement may be feasible.