Court of Appeals confirms common interest doctrine in New York viewed narrowly, requiring pending or anticipated litigation to attach to pre-merger communications

June 21, 2016

Commercial Litigation Law Alert

Author(s): Carolyn G. Nussbaum, Danielle M. McLaughlin

Recently, New York’s highest court issued a decision of enormous significance to corporate attorneys and parties considering, or engaged in, an acquisition or merger. The New York Court of Appeals limited the application of the common interest doctrine to attorney-client communications shared with third parties (such as those shared during pre-transaction communications) only under circumstances where litigation is ongoing or reasonably anticipated.

The New York State Court of Appeals recently issued a very important decision with significant implications for parties sharing information during the course of business transactions. In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2016 NY Slip Op. 044339 (June 9, 2016) the Court of Appeals held that the common interest doctrine, an exception to the rule that attorney-client privilege is waived by disclosure to a third party does not apply unless litigation is “ongoing or reasonably anticipated.” In a split decision, issued on June 9, 2016, addressing the contours of the common interest doctrine for the first time in a civil context in the absence of litigation,[1] the Court ruled that the doctrine will not apply where otherwise privileged communications are shared with a third party, including during transactional due diligence, unless litigation is not already pending or reasonably anticipated. The Court’s holding, which reversed the Appellate Division, places the law of New York at odds with the law of a number of other states, including Delaware, and multiple federal courts. Those courts have held, as the Appellate Division did, that the common interests of parties in completing a merger is sufficient to extend the doctrine to protect privileged communications shared during that process.

The journey to the New York Court of Appeals

Ambac Assurance Corp. (“Ambac”) commenced suit against Countrywide Home Loans, Inc. (“Countrywide”) and Bank of America (the “Bank”) over the failure of certain mortgage-backed securities insured by Ambac. During discovery, Ambac sought certain communications that were shared between Countrywide and the Bank during their merger negotiations. The Bank asserted that the common interest doctrine protected the communications from disclosure because they related to legal issues that the parties needed to resolve jointly in anticipation of the transaction’s closing. As evidence of their shared legal interest, the Bank also pointed to the parties’ merger agreement, where they agreed that such communications would be maintained in confidence.

Ambac moved to compel disclosure of the communications—and a Special Referee construed the common interest doctrine narrowly—to apply only to communications relating to a shared legal interest in pending or reasonably anticipated litigation. The Bank moved to vacate the Referee’s decision, and the Supreme Court denied the motion siding with the Special Referee and holding that the existing New York law adopted a narrow definition of the doctrine requiring that there be a reasonable anticipation of litigation. On appeal, the Appellate Division reversed and remanded, holding that although New York courts had traditionally taken a narrow view of the common interest doctrine, the requirement of “pending or reasonably anticipated litigation” was no longer a necessary element of the exception. Citing cases from the Second, Third, Seventh and Federal Circuit Courts of Appeals, the Appellate Division stated that federal courts had “overwhelmingly rejected [a litigation] requirement.” The Appellate Division then granted leave to take an appeal to the New York State Court of Appeals.

The Court of Appeals’ decision

At the Court of Appeals, the majority ruled that a broad interpretation of the common interest doctrine “could result in the loss of evidence of a wide range of communications between parties who assert common legal interests but who really have only non-legal or exclusively business interests to protect.” Opinion at 7. It added that there was no evidence “that mergers, licensing agreements and other complex commercial transactions have not occurred in New York because of our [s]tate’s litigation limitation on the common interest doctrine; nor is there evidence that corporate clients will cease complying with the law.” Id.

The dissent argued that “given that the attorney-client privilege has no litigation requirement and the reality that clients often seek legal advice specifically to comply with legal and regulatory mandates and avoid litigation or liability, the privilege should apply to private client-attorney communications exchanged during the course of a transformative business enterprise, in which the parties commit to collaboration and exchange of client information to obtain legal advice aimed at compliance with transaction-related statutory and regulatory mandates.” Opinion at 9.

Implications and considerations for transactional lawyers

This decision presents significant implications for transactional lawyers, although what is meant by “reasonably anticipated” litigation remains to be decided.

Buyers will continue to seek to explore legal matters during due diligence that may be unrelated to pending or anticipated litigation, such as legal advice provided to the seller about the strength of intellectual property, the merits of tax positions or the risks of business decisions. Both parties will want to prevent a waiver of the privilege if otherwise privileged prior communications are shared, and will want the privilege to extend to the communications between their own counsel. To achieve these objectives, transactional lawyers should consider: (1) that a court is more likely to find that the parties share a common interest after the merger or acquisition agreement is executed, rather than during the initial pre-signing negotiations; (2) whether it may be appropriate to agree on the governing law of a state other than New York that does apply a broader interpretation of the common interest doctrine; (3) whether it would be appropriate to also sign a common interest agreement setting forth their shared interests and, to the extent possible, expressly identifying litigation that may be “reasonably anticipated” in relation to the transaction; (4) whether the information the buyer seeks can be provided without sharing privileged communications, or limiting such disclosures; (5) marking all materials exchanged in pursuit of the shared legal interest as “common interest materials” and setting forth in the transmittal of those documents the purpose of the disclosure; and (6) considering joint retention of special counsel for the limited purpose of handling sensitive matters of shared interest.

  1. The New York Court of Appeals addressed the common interest doctrine in the context of a criminal case in 1989, holding that doctrine can extend the attorney-client privilege when multiple parties represented by different lawyers are mounting a joint defense or engaged in a common legal enterprise. See New York v. Osorio, 75 N.Y.2d 80. 549 N.E.2d 1183, 550 N.Y.S.2d 612 (1989).
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