The New York Court of Appeals, the state’s highest court, reaffirmed the parameters of the state’s “common interest” doctrine, which preserves the attorney-client privilege when attorney-client communications are shared with third parties represented by separate counsel who share a common legal interest, but only in the context of pending or reasonably anticipated litigation. In Ambac Assurance Corp. v. Countrywide Home Loans, Inc.,1 the Court declined to follow the lead of certain federal courts and other states that have expanded the doctrine beyond the litigation context into transactional settings.
Ambac, the insurer that guaranteed payment on certain residential mortgage-backed securities issued by Countrywide, sought discovery of certain documents Countrywide had shared with Bank of America when the two entities were in the process of merging. The discovery is being sought in litigation between Ambac and Bank of America in which Ambac alleges that Countrywide misrepresented the quality of guaranteed mortgage loans. Bank of America objected on the ground that those documents were protected by the common interest doctrine because of Bank of America’s shared legal interest with Countrywide in successfully completing the merger. Ambac challenged the assertion of privilege on the ground that the privilege had been waived because Countrywide and Bank of America were not affiliated at the time the documents were shared, the parties were not involved in active litigation and did not anticipate future litigation, and accordingly, the common interest doctrine was inapplicable.
The Court of Appeals agreed, holding that the common interest doctrine only attaches in the context of ongoing or reasonably anticipated litigation. In the four-to-two majority opinion,2 the Court acknowledged that its narrow application of the common interest doctrine is at odds with a significant number of federal courts and other states, but pointed out that its holding is consistent with over two decades of precedent in New York state courts. The Court rejected Bank of America’s argument that highly regulated financial institutions face a constant threat of litigation and that protection of their shared communications is necessary to facilitate better legal representation, ensure compliance with the law and avoid litigation. The Court also stated that it was not concerned that its holding would chill commercial activity because there was no evidence that companies have prioritized the need to be able to share information confidentially over their shared need to effectuate complex corporate transactions such as mergers.
The Ambac decision removes any doubt that, in situations in which New York law is potentially applicable, either pending litigation or identification of a reasonable threat of litigation are the sole circumstances under which the common interest doctrine will prevent waiver of the attorney-client privilege over attorney-client communications shared with another party and its counsel unless the parties are represented jointly by the same counsel.
The Ambac decision also reaffirmed the applicability of the common interest doctrine in the context of litigation, which should provide a degree comfort to companies that often find themselves as co-defendants, such as co-insurers, air carriers, and manufacturers. Nonetheless, given the Court of Appeals’ preference for the narrow application of the attorney-client privilege, parties to joint defense agreements always should carefully and concretely set forth their common legal interest with co-defendants in joint defense agreements, and specifically, how the sharing of privileged communications among defendants will enable their attorneys to better represent each defendant. Additionally, Ambac could create difficulties for companies working together in non-litigation contexts, such as on transactions, and responding to regulatory requests, and companies engaged in these activities must be mindful that in the event of future litigation, shared sensitive documents and communications, even if shared in furtherance of a joint and shared legal goal, could lose attorney-client protection.
1 No. 80, Slip Op. 04439 (N.Y. June 9, 2016).
2 Judge Rivera filed a 17-page dissent, in which Judge Garcia concurred. Chief Judge DiFiore took no part in the decision.