Scope of the Common-Interest Privilege in Light of Ambac v. Countrywide

Wednesday, June 3, 2015 - 12:22

Determining whether written communications with outside parties may be protected from disclosure under the common-interest doctrine can be complicated in light of the differing legal standards applied by federal and state courts. For example, New York courts have held, up until recently, that communications with outside entities or persons can only be protected under the common-interest doctrine if litigation was within the parties’ contemplation at the time of the communication. However, in a recent decision by the Appellate Division of the Supreme Court of New York, First Judicial Department, the court held that “pending or reasonably anticipated litigation is not a necessary element of the common-interest privilege.”[1] In so holding, the court departed from years of case law and adopted the approach taken by the federal courts.

The Common-Interest Privilege

The common-interest privilege is a doctrine derived from, and an exception to, the attorney-client privilege that is designed to protect communications made between parties and counsel with shared legal interests. The attorney-client privilege is one of the oldest evidentiary privileges.[2] Under New York law, the attorney-client privilege protects from disclosure a “confidential communication made between the attorney . . . and the client in the course of professional employment.”[3] The communication must be “made for the purpose of facilitating the rendition of legal advice or services . . . and [be] primarily or predominantly of a legal rather than a commercial nature.”[4]

The purpose of the attorney-client privilege is to encourage the free flow of information between attorney and client without creating a concern that certain communications will be disclosed, and hence stifling them altogether. The attorney-client privilege does not require the anticipation of litigation for a communication to be privileged. Indeed, there are many reasons why a client may seek advice of counsel without pending or anticipated litigation, for example, compliance with regulatory or statutory laws or in drafting certain documents such as contracts or wills. 

In most circumstances, the attorney-client privilege is waived if a communication between client and counsel is shared with a third party. However, the common-interest doctrine provides a notable exception to that rule. The common-interest doctrine may protect a communication that is shared with a third party without destroying the privilege. In order for that communication to be protected, the common-interest doctrine requires that “(1) the communication qualify for protection under the attorney-client privilege, and (2) the communication be made for the purpose of furthering a legal interest or strategy common to the parties.”[5] Courts have generally required that the common legal interest between the parties be “identical or (nearly identical), as opposed to merely similar.”[6] Until recently, New York courts also required the communication at issue be related to pending or reasonably anticipated litigation for the common-interest doctrine to apply. A recent decision from a New York appellate court in Ambac Assurance Corporation v. Countrywide Home Loans, Inc., however, found that pending or reasonably anticipated litigation is not required for the common-interest doctrine to apply.

Ambac Assurance Corporation v. Countrywide Home Loans, Inc.

The Ambac case involved a discovery dispute in which plaintiff Ambac Assurance (“Ambac”) sought pre-merger communications between the two defendants, Countrywide Home Loans, Inc. (“Countrywide”) and Bank of America Corp. (“BAC”), which merged in July 2008. The underlying complaint from which the discovery dispute arose alleged that Countrywide fraudulently induced Ambac to enter into agreements to insure a number of mortgage-backed securities. Ambac also asserted claims against BAC for liability as a successor-in-interest to Countrywide. During discovery, Ambac requested all pre-merger communications between Countrywide and BAC. Countrywide and BAC, however, claimed the documents were protected under the common-interest doctrine and refused to produce them. Countrywide and BAC had entered into a common-interest agreement prior to the merger.  

Ambac moved to compel the pre-merger communications and the referee supervising discovery granted Ambac’s motion, concluding that the common-interest rule did not protect BAC and Countrywide’s pre-merger communications because the parties did not share a common legal interest concerning potential litigation.[7] In denying BAC’s motion to vacate, the motion court agreed and found that in order for the common-interest doctrine to apply, New York law requires pending or reasonably anticipated litigation.

On appeal, BAC argued that the parties required shared legal advice to ensure compliance with the law and to advance their shared legal interests as they are two heavily regulated public financial institutions. In opposition, Ambac argued that BAC must produce the pre-merger communications because they relate to Ambac’s successor liability claims arising from the merger and to determine to what extent, if any, BAC may have been aware of unreported fraud at Countrywide prior to the merger. 

The First Department held that regardless of pending or reasonably anticipated litigation, the common-interest privilege applies to communications “[s]o long as the primary or predominant purpose for the communication with counsel is for the parties to obtain legal advice or to further a legal interest common to the parties.”[8]  The court illustrated that it would be contradictory to impose a litigation requirement to the common-interest privilege when the attorney-client privilege, from which it derives, does not have such a requirement. 

The court noted that, unlike most individuals, the modern corporation regularly seeks advice of counsel to assist it in complying with the “vast and complicated array of regulatory legislation.”[9]  Often, this advice is not tied to pending or reasonably anticipated litigation, but instead “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.”[10]

The court traced the lineage of the litigation requirement to a case that was decided in the criminal context where the common-interest privilege has long been applied in “furtherance of a common defense.”[11]  The interpretation that was developed in the criminal context was then applied to the civil context. In diverging from a line of New York cases, the court pointed out that previous case law did not adequately address the common-interest privilege where “two business entities . . . required the shared advice of counsel in order to accurately navigate the complex legal and regulatory process involved in completing” a merger.[12] The court found that the defendants had a common legal interest because they were engaged in merger talks and had a signed merger agreement. Thus, the court held that the facts in “this case illustrate precisely the reason the common-interest privilege should apply – namely, that business entities often have important legal interests to protect even without the looming specter of litigation.”[13]

Finally, the court noted that imposing a litigation requirement would “make poor legal as well as business policy” as it would “discourage[] parties with a shared legal interest . . . from seeking and sharing that advice, and would inevitably result instead in the onset of regulatory or private litigation because of the parties’ lack of sound guidance from counsel.”[14]

Impact of the Decision

The Ambac court’s decision potentially broadens the scope of the common-interest privilege in New York by protecting communication between parties to a transaction that share a common legal interest regardless of pending or anticipated litigation. Although the facts of the case related to a merger, the court’s holding was not so limited, and therefore may be applied broadly.  

It is not clear, however, whether Ambac will be followed by courts in the Second, Third, or Fourth Judicial Departments,[15] as the New York Court of Appeals has not decided whether a litigation requirement is necessary to apply the common-interest privilege. The Ambac court’s decision, though, is consistent with federal case law,[16] which guided its decision in rejecting the litigation requirement.[17]

It should also be noted that the court in Ambac stressed that the predominant purpose of a protected communication must be to obtain legal advice or to advance a common legal interest, not to obtain advice of a predominantly business nature. Thus, parties reviewing documents for common-interest protections should identify business communications from legal communications.[18]  Moreover, the Ambac court placed great emphasis on the confidentially provisions contained in the parties’ signed merger agreement and a pre-merger common-interest agreement as the court referenced those documents throughout its decision. Accordingly, parties seeking to protect their communications with counsel based on the common-interest privilege would be wise to have a clearly defined common-interest agreement and/or confidentiality agreement in place prior to any communications during a potential merger, joint venture, and the like. Parties should also be mindful that courts have found that a common-interest agreement cannot create a privilege that otherwise does not exist.[19]



[1] Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 124 A.D.3d 129, 130 (1st Dep’t 2014). 

[2] Spectrum Sys. Int’l Corp. v. Chem. Bank, 581 N.E.2d 1055, 1060 (N.Y. 1991) (observing that the attorney-client privilege has long been recognized under common law long prior to its codification in the CPLR and that courts must still look to common law “[f]or a definition of what is encompassed by the privilege”).

[3] See N.Y. CPLR § 4503(a).

[4] U.S. Bank N.A. v APP Int’l Fin. Co., 33 A.D.3d 430, 431 (1st Dep’t 2006) (emphasis included).

[5] Ambac, 124 A.D.3d at 132–33 (citing U.S. Bank N.A. v. APP Int’l Fin. Co., 33 A.D.3d 430, 431 (1st Dep’t 2006)).

[6] Cohen v. Cohen, No. 09-civ-10230-LAP, 2015 WL 745712, at *3 (S.D.N.Y. Jan. 30, 2015).

[7] Ambac, 124 A.D.3d at 132.

[8] Id. at 135.

[9] Id. at 133 (citing Upjohn Co. v. United States, 499 U.S. 383, 392 (1981)).

[10] Id. (quoting Upjohn, 499 U.S. at 380).

[11] Id. at 136 (citing Parisi v. Leppard, 660 N.Y.S.2d 307, 310 (Sup. Ct., Nassau County 1997)).

[12] Id. at 136–37.

[13] Id. at 130–31.

[14] Id. at 137.

[15] See Hyatt v. State Franchise Tax Bd., 105 A.D.3d 186, 205 (2d Dep’t 2013) (noting that the common-interest privilege requires anticipated litigation but finding that the communications at issue would not have been privileged regardless of anticipated litigation).

[16] See United States v. Schwimmer, 892 F.2d 237, 243 (2d Cir. 1989) (concluding that it was “unnecessary that there be actual litigation in progress for the common interest rule of the attorney-client privilege to apply”); In re Teleglobe Commns. Corp., 493 F.3d 345, 364 (3d Cir. 2007) (common-interest privilege applies even in “purely transactional contexts”); Fox News Network, LLC v. U.S. Dep’t of the Treasury, 739 F. Supp. 2d 515, 563 (S.D.N.Y. 2010) (finding that “[a]lthough the [common-interest] doctrine is most frequently applied in the context of litigation, it also has been successfully invoked with respect to joint legal strategies in non-litigation settings”).

[17] The court’s decision also referenced Delaware statutory law and the Restatement (Third) of the Law Governing Lawyers. See Del. Uniform R. of Ev. 502(b); see also 3Com Corp. v. Diamond II Holdings, Inc., 2010 WL 2280734, at *7 (Del. Ch. May 31, 2010).

[18] Hyatt, 105 A.D.3d at 206 (finding that communications regarding the licensing of patents, even with attorneys involved, was commercial in nature and communications regarding the negotiation of the licensing agreement would not be protected as the “parties had divergent interests in making the deal”).

[19] See Brooklyn Navy Yard Cogeneration Partners v. PMNC, 753 N.Y.S.2d 343, 345 (Sup. Ct. Kings County 2002) (“A private agreement by the parties to protect communications cannot create a privilege.”); Schaeffler v. United States, 22 F. Supp. 3d 319, 334 (S.D.N.Y. 2014) (“[T]he mere assertion of a common legal interest in a written agreement cannot create such an interest. What matters is whether there exists in actuality a common legal interest between the contracting parties.”).

 

Brian Astrup is an associate with Leader & Berkon. His practice focuses on commercial, product liability, and toxic tort litigation. He can be reached at bastrup@leaderberkon.com.