The New York Court of Appeals, New York's highest state court, ruled in a 4-2 majority decision that under New York law, the attorney-client privilege extends to communications exchanged between parties by operation of the common-interest doctrine only when the communications relate to pending or anticipated litigation (Ambac Assur. Corp. v. Countrywide Homes Loans, Inc., (N.Y. Jun. 9, 2016)). The decision reverses the previous ruling of a New York appellate court and marks a departure for New York law from that of Delaware and many federal courts on the application of the common-interest doctrine.

The attorney-client privilege protects confidential communications between an attorney and a client that are made for the purpose of obtaining or providing legal advice. The privilege is generally considered waived if the communications are made in the presence of, or later shared with, a third party. However, there are exceptions to the waiver, one of which is the common-interest doctrine. The common-interest doctrine allows separately represented parties who have a common legal interest to share information with each other and their respective attorneys without destroying the attorney-client privilege.

The present case addresses the question of what constitutes a common legal interest under New York law. The plaintiff, monoline insurer Ambac Assurance Corporation, filed suit against Countrywide Home Loans, Inc., alleging that Countrywide fraudulently induced Ambac to insure payments on certain residential mortgage-backed securities. Ambac also named Bank of America Corp. (BAC), which acquired Countrywide in 2008, as a defendant, under the theory that BAC should be liable for any judgment against Countrywide as its successor-in-interest and alter ego.

BAC's acquisition of Countrywide was structured as a merger between a wholly owned BAC subsidiary and a Countrywide entity, Countrywide Financial Corp. (CFC). Before signing the merger agreement, CFC and BAC entered into confidentiality and common-interest agreements governing all information and material exchanged between them. The merger agreement also required the parties to work together on several pre-closing issues and prepare and file a joint proxy and registration statement.

In its lawsuit against BAC, Ambac sought pre-closing communications made among BAC, CFC, and their counsel on the grounds that they were significant to Ambac's successor liability claims. Ambac argued that the sharing of confidential material between parties who were unaffiliated before the closing waived any attorney-client privilege that they otherwise would have been entitled to. BAC sought to assert attorney-client privilege over the communications, arguing that the merger agreement evidenced the parties' common legal interest in the merger's closing as well as their commitment to confidentiality, and therefore shielded the communications from discovery.

The special referee assigned to handle privilege disputes granted Ambac's motion, holding that New York law does not protect communications under the common-interest doctrine if that common interest does not concern a potential litigation. BAC appealed, but the trial court declined to overturn the referee's order, affirming that the common-interest doctrine only applies if there is pending or reasonably anticipated litigation. BAC appealed again and was successful in appellate court (124 A.D.3d 129 (1st Dep't 2014)). That court held that New York law does not require pending or anticipated litigation to extend the common-interest exception to communications made between parties who are pursuing a common interest. For a full summary of the appellate court's decision, see Legal Update, New York Appellate Court Extends Privilege under Common Interest Doctrine to Pre-Closing Merger Discussions. The appellate court granted Ambac leave to appeal to the Court of Appeals and certified the question of whether its decision was properly made.

The Court of Appeals, by a 4-2 majority decision, reversed the decision of the appellate court. The Court of Appeals held that under New York law, a communication shared between parties must relate to litigation either pending or anticipated for the common-interest exception to apply.

In reaching its decision, the court examined the history of the common-interest doctrine under New York law and concluded that it had always been premised on the need to preserve privilege when the benefit and necessity of sharing information are at their highest. This is the case only when the parties sharing information face current or anticipated litigation and need to be able to share information candidly, without fear of mandatory disclosure. When the parties do not face litigation, by contrast, and only share a common legal interest in a commercial transaction, they do not harbor the same necessity to protect their communications. In the court's view, parties working together toward closing a complex transaction do not need the attorney-client privilege; their shared interest in the closing is all the incentive they need to communicate with each other.

The court acknowledged that several federal courts of appeals have taken the view that the common-interest doctrine does not require the condition that litigation be pending or anticipated, and that the Restatement (Third) of the Law Governing Lawyers § 76 (2000) has also eliminated that requirement. Unmoved, the court noted that the view is not universal and that at least 11 states have statutorily restricted the common-interest doctrine to communications made in furtherance of ongoing litigation.

The dissenting opinion held that it would have expanded the doctrine. Given that the attorney-client privilege has no pending-litigation requirement and is understood to protect communications made for the purpose of complying with regulation and avoiding litigation, the dissent argued that the privilege should continue to apply to private attorney-client communications exchanged during the course of a "transformative business enterprise" when the parties are similarly conferring with counsel for the purpose of compliance with regulations and avoiding litigation.

The Court of Appeal's majority decision distinguishes New York law from several other jurisdictions—Delaware, most notably—on the application of the common-interest doctrine to pre-closing communications between contractual counterparties. Under Delaware law, parties to a merger agreement can communicate freely about the closing without fear of losing privilege. This is no longer true under New York law. Consequently, if choice-of-law principles in a given case mandate application of New York law, the common-interest doctrine may end up inapplicable even in a court located in a state that would otherwise have applied the doctrine (see Choice of Law in Tort and Contract Actions Chart). Therefore, to the extent that there is a real possibility of a federal court applying New York law, contractual parties should assume that New York's more restrictive view will apply.

Counterparties cannot contract around this issue; they cannot create the anticipation of litigation by mutual agreement. They also will not succeed with an argument that M&A deals are so frequently followed by lawsuits as to render litigation reasonably anticipated. In Ambac, BAC argued that by its nature as a highly regulated financial institution, it constantly faces the threat of litigation and therefore needed the benefit of the common-interest doctrine. Yet the Court of Appeals rejected this argument, asserting that parties have always pursued complex commercial transactions without the need for the court to extend the attorney-client privilege that far.

To the extent that the parties believe they do face the threat of pending or anticipated litigation, they should make a contemporaneous record of that assessment and their reasons for believing they are entitled to privilege over their shared communications. Contemporaneous evidence always stands a better chance of acceptance by the court than arguments conjured for the first time once litigation has already commenced.