The New York Court of Appeals issued a decision on June 9, 2016 in Ambac Assurance Corp. v. Countrywide Home Loans (Ambac). This opinion has important implications for communications between attorneys and clients, particularly in commercial contexts. The Court held that the common interest doctrine, which protects communications between parties that share a common legal interest, applies only to communications that relate to litigation, either pending or anticipated, and not in the context of business transactions. This ruling, which puts New York at odds with many federal courts (including the Second Circuit), removes privilege protections that many New York transactional lawyers had taken for granted (justifiably or not). Moreover, in its zeal to create a bright-line rule, the Court missed an opportunity to take a more nuanced, realistic approach.
What Is ‘Common Interest’ Exception and How Does It Relate to Attorney-Client Privilege?
The attorney-client privilege is an evidentiary shield, which protects communications between an attorney and a client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship. See CPLR 4503(a)(1) (prohibiting disclosure of any “confidential communication made between the attorney or his or her employee and the client in the course of professional employment”). The party has to show that the communication at issue was between the attorney and the client, was for the purpose of obtaining legal advice, was predominantly of a legal character, was given in a confidential setting, and was not the subject of a privilege waiver. See Rossi v. Blue Cross & Blue Shield of Greater New York, 73 N.Y.2d 588, 593–94 (N.Y. 1989) (setting forth elements of attorney-client privilege).
Nevertheless, if such communications are voluntarily disclosed to third parties, this will generally destroy the attorney-client privilege. See, e.g., People v. Harris, 57 N.Y.2d 335, 343 (N.Y. 1982). But “generally” does not mean “always.” Under the “common interest” exception, parties who have a common legal interest may share privileged communications that are made in furtherance of that common legal interest, without sacrificing the privilege. See People v. Osorio, 75 N.Y.2d 80, 85 (N.Y. 1989) (citing U.S. v. McPartlin, 595 F.2d 1321, 1336 (7th Cir. 1979)) (applying privilege to communications “made in confidence to an attorney for a co-defendant for a common purpose related to both defendants”). The common interest exception does not create a new, independent basis for asserting privilege; it merely extends the protections of an existing privilege to third parties who share a common legal interest. See, e.g., Unif. R. Evid. 502(b)(3) (common interest exception protects attorney-client communications “by the client or a representative of the client or the client’s lawyer or a representative of the lawyer to a lawyer or a representative of a lawyer representing another party in a pending action and concerning a matter of common interest therein.”) In other words, for the common interest doctrine to apply, the communication must already be protected by an existing privilege. See Id. Thus, the common interest exception usually requires a lawyer to be involved on at least one side of the communication at issue. See Id.
The issue in Ambac was whether this exception applies in a transactional setting, as opposed to the context of a common defense in a civil or criminal litigation.
Court’s Decision Restricting Common Interest Exception to the Litigation Context
In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., the plaintiff Ambac Assurance Corp. (Ambac) sued Countrywide Home Loans (Countrywide) in connection with Ambac’s decision to insure certain residential mortgage-backed securitizations offered by Countrywide prior to its merger with Bank of America Corp. (Bank of America). 2016 NY Slip Op 04439 (N.Y. June 9, 2016). Ambac also sued Bank of America on the ground that it was liable for Countrywide’s damages as a successor-in-interest. Ambac sought to compel disclosure of approximately 400 documents withheld by Bank of America, which reflected communications between and among the defendants and their counsel during the period of time between the signing of the merger agreement and the closing of the merger. Id. at 2.
Bank of America opposed Ambac’s disclosure demands, arguing the common interest doctrine applied to the parties’ communications during that period and, therefore, the documents were protected by attorney-client privilege. Specifically, Bank of America argued that the communications pertained to a number of legal issues the two companies needed to resolve jointly in anticipation of the merger closing, such as “filing disclosures, securing regulatory approvals, reviewing contractual obligations to third parties, maintaining employee benefit plans and obtaining legal advice on state and federal tax consequences.” Id. These were issues where the two merger participants had common interests adverse to government regulators and other third parties.
The Court nevertheless held that these communications were not protected by the common interest privilege. Id. at 9. The Court distinguished clients who share a common legal interest “in a commercial transaction or other common problem but do not reasonably anticipate litigation,” like Bank of American and Countrywide here, from clients that do anticipate litigation or are co-litigants in pending litigation. Id. at 6, 7. Citing a number of lower court cases and treatises, the Court emphasized that the common interest doctrine in New York protects communications only between codefendants, co-plaintiffs, or persons who reasonably anticipate that they will become co-litigants, as those disclosures are necessary to mount a common claim or defense. Id. at 6 (citing, inter alia, Hyatt v. State of Ca. Franchise Tax. Bd, 105 A.D.3d 186 (2d Dept. 2013)) (also citing Hudson Val. Mar., Inc. v. Town of Cortlandt, 30 A.D.3d 377, 378 (2d Dept. 2006)).
The Court reasoned that allowing the common interest privilege only in threatened or pending litigation limits it to “situations where the benefit and the necessity of shared communications are at their highest, and the potential for misuse is minimal.” Id. “The threat of mandatory disclosure,” the Court went on, “may chill the parties’ exchange of privileged information and therefore thwart any desire to coordinate legal strategy.” Id. Indeed, the Court went so far as to say that in this situation, when clients are facing discovery requests and attempting to mount a common defense, “’the counsel of each is in effect the counsel of all.’” Id. (citation omitted).
This reasoning is shaky enough — we will explain why in a moment — but it gets worse. The Court argues that the need to promote candor is not as great in situations, such as a merger, where the parties have a common interest but do not face litigation: complex corporate transactions have been consummated in New York for many years without the common interest privilege, and the parties would comply with the law anyway, so “‘it is more likely that [the parties] would have shared information even absent the privilege.’” Id. at 7 (citing M. Leslie, The Costs of Confidentiality and the Purpose of Privilege, 2000 Wisc. L. Rev. 31, 68 (2000)). Assuming that all corporate lawyers in New York understand that in state court proceedings the common interest privilege does not apply, the Court concludes that the parties’ “shared interest in the transaction’s completion is already an adequate incentive for exchanging information necessary to achieve that end,” and that the Court’s decision would not change that, or create “a corporate crisis” because of parties’ inability to comply with the law. Id.
Moreover, “extending” the common interest privilege to the corporate setting would, according to the Court, lead to the “substantial loss of relevant evidence, as well as the potential for abuse.” Id. Given that “common legal interests” outside the litigation context are supposedly difficult to define, expanding the privilege “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.” Id.
Court’s Purported Distinction Between Common Interest and Joint Representation
The Court also addressed the argument that its ruling arguably creates an anomalous situation, where parties to a transaction who are jointly represented by the same law firm can shield their communications from disclosure under the attorney-client privilege (applicable to joint clients), whereas parties represented by separate counsel cannot. Id. at 5. The Court attempted to address that apparent contradiction, reasoning that, in the joint representation context, the clients share a complete alignment of interest and, thus, those communications will be protected. Id. The Court noted that attorneys are bound by their professional ethical obligations and may only ethically represent clients jointly when “clients share a common identity and all join communications will be in furtherance of that joint representation.” Id. at 8. In contrast, the Court stated, “[i]t is less likely that the positions of separately-represented clients will be aligned such that the attorney for one acts as the attorney for all.” Id.
Difference Between New York State and Federal Standards for Common Interest Exception
The Court conceded that federal courts analyzing the common interest exception “have overwhelmingly rejected a litigation requirement.” Id. at 5. For example, in Schaeffler v. United States, the Second Circuit held that the common interest doctrine applies when a party is engaged in a “common legal enterprise” with the holder of the privilege, even when the parties are not in litigation. 806 F.3d 34, 40–41 (2d Cir. 2015). In Schaeffler, the court protected disclosures concerning the tax treatment of a refinancing and restructuring that “would likely involve a legal encounter with the IRS.” Id. Nevertheless, New York’s highest court decided to go in a different direction.
New York, however, is not the only state that has taken a narrower approach to the common interest doctrine than federal courts. The Court of Appeals of North Carolina decided Friday Investments, LLC v. Bally Total Fitness of the Mid-Atlantic, Inc., et al., just two days before Ambac. See, No. COA15-822, 2016 WL 3172370, at *1 (N.C. Ct. App. June 7, 2016).
In Friday Investments, the court found that the alleged common interest relationship was not formed primarily for the purpose of indemnification or coordination in anticipation, and thus the parties did not share a common legal interest and the communications were not protected. Id.
Concerns Related to Court’s Reasoning
The disconnect between New York federal and state courts is reason enough to be concerned about the Ambac holding. Given that participants in a transaction usually do not know whether an eventual litigation related to the transaction will wind up in state or federal court, there will be uncertainty as to whether the common interest privilege will apply, leading cautious parties, perhaps unnecessarily, to adopt a less forthcoming approach in light of Ambac. There will also be unfairness, as the application of the common interest privilege will depend on the “fortuity” of where a third party ultimately chooses to litigate. As the U.S. Supreme Court said in Upjohn v. U.S., “[a]n uncertain privilege, or one which purports to be certain but results in varying application by the courts, is little better than no privilege at all.” 449 U.S. 383, 393 (1981).
But this is not our biggest concern with the Court’s ruling. We are troubled by a basic doctrinal problem, noted by Judge Rivera in her dissent: a litigation requirement for the common interest exception “does not derive from the common law roots of the attorney-client privilege, which lacks any [such] requirement.” Ambac, at 12 (Rivera, J. dissenting). If we do not require litigation to invoke the privilege for communications between a client and her attorney, there is no logical reason to do so in the multi-party setting — the need for informed, accurate and complete legal advice is the same.
Judge Rivera’s biting dissent highlights, as do we, that the distinction that the majority has drawn between the litigation and transactional contexts is arbitrary. One of the Court’s central premises is that “the privilege is necessary to entice parties to share confidential information they would otherwise refuse to divulge.” Id. at 13 (Rivera, J. dissenting). Judge Rivera points out, however, that this is true in any context, litigation or transactional, and is precisely why we have the privilege in the first place. Id. If the goal of the corporate attorney-client privilege is to facilitate communications so that parties will comply with the law or their legal obligations to third parties, as the Upjohn decision made clear, then there is no reason not to apply the same rationale to the common-interest exception, particularly where both parties are looking to avoid liability to the government or third parties. See 449 U.S. at 393.
This is why another central premise of the Court’s decision — that there is no need for the privilege to encourage inter-party communications in the transactional context because “parties to a business deal already have an incentive to share information that will close the transaction” — is misguided. Ambac, at 14 (Rivera, J. dissenting). Judge Rivera notes, correctly, that “the majority fails to identify any distinction [in this regard] between co-parties or persons who reasonably anticipate litigation, and parties committed to the completion of a merger. Both are incentivized to cooperate in order to secure a mutually beneficial outcome. … No rational basis exists to recognize the expectations for maintaining confidences in the former but not the latter.” Id.
The majority opinion fears “the substantial loss of relevant evidence” — always the case with the attorney-client privilege — and the “potential for abuse,” apparently because of the difficulty of defining “common interest” in the corporate context compared to the litigation context. Id. at 7. This is a red-herring. Sometimes defining a “common interest” in a corporate context is easy — as just two examples, making sure the Hart-Scott-Rondino filings are accepted, or that the tax treatment is correct. And sometimes defining a “common interest” in a litigation context is difficult. For example, does the truck driver who had a traffic accident because of lack of sleep have a common interest with her co-defendant supervisor, who may or may not have known of her exhaustion? Does the driver have a common interest with other drivers who may have witnessed her interactions with the supervisor? This is why the majority’s statement that in the litigation context “a lawyer for one is the lawyer for all” is so off-base. See Id. at 8. Also, if the “common interest” exception applies to those “anticipating litigation,” when exactly does the privilege kick in? When a threat of litigation is made? Before? After? Courts determine what is privileged and what is not every day, and assertions of the common interest exception should be handled in the same manner. As Judge Rivera notes: “the majority fails to explain why a party’s attempted abuse of the privilege cannot be addressed through our legal systems existing methods for preventing and sanctioning obstruction of proper discovery.” Id. at 14 (Rivera, J. dissenting).
Finally, contrary to the majority opinion, there is something anomalous about not protecting parties with a common transactional interest who retain different attorneys but allowing the privilege for joint clients of the same attorney. The majority permits this distinction because the joint clients “indisputably share a complete alignment of interests in order for the attorney, ethically, to represent both parties.” Id. at 8. That is just not so. Under Comments 29 to 31 to New York Rule of Professional Conduct 1.7, a lawyer may represent joint clients in a transaction — indeed, may assist the clients in “accommodating” their relationship — even if they have adverse interests, as long as (a) the interests are not so adverse that “contentious litigation or negotiations between them are imminent or contemplated,” the parties are unable to work out material deal terms on their own, or “it is unlikely” that the lawyer can maintain “impartiality” between the two clients; (b) a proper waiver is obtained; and (c) the joint clients are properly instructed on the limits to confidentiality in that situation. Joint clients, in other words, do not have to be in lock-step for a lawyer to represent them; their interests must only be sufficiently consistent that any conflict between them is waivable. See RPC 1.7(b)(1) (allowing waiver where “the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client”). With its central premise gone, the majority’s distinction between joint clients and separately represented clients falls apart.
In our view, the dissent got it right: the common interest exception should apply in the transactional context, and the rules in New York state and federal courts should be consistent. But even if the Court was not prepared to go that far, at the very least it should have taken a more nuanced approach, holding that the common interest exception applies to transactional parties with respect to matters in which they have a common interest vis-à-vis third parties, whether it be government regulators or private businesses whose claims against one or another of the parties may impact the transaction. In this context, the transactional parties have as much need to muster a joint position as two co-defendants facing a litigation adversary.
Nevertheless, like it or not, we are stuck with the Ambac decision, at least until the Court revisits the issue. Here are some practical steps for New York transactional lawyers in determining whether to share information with an opposing party in a deal:
(a) Recognize that the common interest exception likely will not apply if the discovery issue arises in state court in New York.
(b) Consult with a litigator, and try to determine whether, if this deal results in litigation, that litigation is likely to take place in federal court (where the common interest exception is still recognized);
(c) If not, or if the answer is unclear, be extremely cautious about exchanging information with the opposing party; and
(d) If one party must have communications with the other, keep those communications narrowly focused and have them take place orally between the lawyers so as to limit their discoverability.
Meanwhile, we must continue to hope that Ambac will have a limited impact, and does not signal a retreat by the Court of Appeals from its long history of supporting a broad, protective attorney-client privilege in New York.
Ronald C. Minkoff is a Shareholder and Director of Frankfurt Kurnit Klein & Selz, P.C. and is the Chair of the firm’s Professional Responsibility Group. Nicole I. Hyland is a partner in the Legal Ethics & Professional Responsibility Group at Frankfurt Kurnit Klein & Selz, PC. LiJia Gong is an associate in the Litigation & Legal Ethics and Professional Responsibility Groups at Frankfurt Kurnit.
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