Ordinarily, when a communication between an attorney and her client is disclosed to a third party, that communication loses its privileged status. The common interest privilege operates as an exception to that rule that allows the privilege to extend to communications with certain third parties. For the common interest doctrine to apply, the communication must be in furtherance of a legal interest that is shared by the client and the third party. Historically, New York courts additionally required that the communication relate to legal advice regarding pending or prospective litigation. On December 4, 2014, in a landmark decision, a New York appellate court did away with this additional requirement.
In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., the First Department held that “in today’s business environment, pending or reasonably anticipated litigation is not a necessary element of the common interest privilege.” The court correctly recognized that business entities often have shared interests outside of litigation for which they need to seek common legal advice that should remain entitled to protection.
The communications at issue in Ambac took place in the context of Bank of America’s merger with Countrywide. Bank of America and Countrywide entered into a merger agreement and separate common interest agreement on January 11, 2008. The merger ultimately closed on July 1, 2008. Between those dates, the parties sought shared legal advice on a number of topics, including regulatory, securities, employee benefit, and tax issues. Several years later, Ambac sued Countrywide and Bank of America, alleging that Countrywide fraudulently induced Ambac to insure several residential mortgage backed securities. Ambac also named Bank of America as a defendant, seeking to hold it liable as Countrywide’s successor-in-interest.
In connection with its successor liability claims, Ambac sought documents related to the Bank of America-Countrywide merger. The defendants withheld communications in which they pursued shared legal advice in connection with the merger under the common interest privilege. Both the special master and the trial court held that the common interest privilege was inapplicable because the communications were not in connection with pending or anticipated litigation and ordered the communications to be produced. On appeal, the First Department reversed.
The court began by discussing the purpose of the attorney-client privilege, which is “to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.” The attorney-client privilege itself is not limited to litigation-related communications, but extends to any number of communications in which a client seeks legal advice from an attorney. Corporations, in particular, face a constant need to consult legal counsel to, among other things, ensure that they are complying with “the vast and complicated array of regulatory legislation confronting the modern corporation.”
The court observed that it would be inconsistent with these principles to require parties with a shared legal interest to be pursuing legal advice in connection with litigation in order for the common interest privilege to apply. Under such a rule, when two parties with a common legal interest seek advice from counsel together, the communication would not be privileged unless litigation is within the parties’ contemplation; on the other hand, when a single party seeks advice from counsel, the communication is privileged regardless of whether litigation is within anyone’s contemplation. The court determined that it could not reconcile this contradiction. So long as the parties share a common legal interest and communicate with an attorney to seek legal advice—for example, when contemplating a merger, as was the case for Countrywide and Bank of America—the common interest doctrine extends the protection of the attorney-client privilege to those communications. The court remanded the case to the trial court to assess, under this new standard, whether the documents fell within the privilege.
The expansion of the common interest privilege to non-litigation communications better protects companies who seek shared legal advice with interested third parties. Companies pursuing mergers, in particular, will find that they may seek shared legal counsel in furtherance of completing their transaction without rendering those communications non-privileged and potentially discoverable in any litigation.