Declining to follow the lead of numerous U.S. federal courts and other states, including Delaware, the New York Court of Appeals has held that privileged attorney-client communications shared between or among separate parties with a common legal interest remain privileged only when such communications relate to pending or reasonably anticipated litigation.1 The decision, by a 4-2 majority, reverses the ruling of the lower appeals court for cases originating in Manhattan, which had reasoned that businesses often have important, common legal interests to protect in the absence of litigation.
What You Need To Know
- New York's highest court has declined to expand the common-interest doctrine beyond the litigation context, such as to M&A transactions.
- Companies that share privileged communications in connection with due diligence or pre-closing integration, for example, do so at their peril under New York law.
Facts of the Case
A detailed summary of the facts can be found in our January 5, 2015 bulletin; in short, the plaintiff AMBAC Assurance Corporation sought to compel the production of attorney-client privileged documents from defendant Bank of America Corporation, which its predecessor, Countrywide Home Loans, Inc., had shared with Bank of America after they had executed a merger agreement but before the transaction had closed. AMBAC contended that the pre-closing disclosure waived the privilege, while Bank of America argued that the documents remain protected under the common-interest doctrine.
Analysis and Impact
Underlying the majority's decision is its observation that the "social utility" of the attorney-client privilege is in "obvious tension" with New York's policy favouring liberal discovery and, therefore, the privilege is "strictly confined within the narrowest possible limits consistent with the logic of its principle." The Court further noted that New York courts, until this case, have always applied the common-interest doctrine in the context of pending or reasonably anticipated litigation.
Bank of America argued that highly regulated financial institutions constantly face a threat of litigation and the protection of shared communications in connection with a common transactional or regulatory interest facilitates better legal representation, ensures compliance with the law and avoids litigation. The Court of Appeals rejected that rationale, stating, "[t]here is no evidence, for example, that mergers, licensing agreements and other complex commercial transactions have not occurred in New York because of our State's litigation limitation on the common interest doctrine."
Employing "if it ain't broke, don't fix it" logic, the majority opined that no evidence suggests that a "corporate crisis existed in New York over the last twenty years when our courts restricted the common interest doctrine to pending or anticipated litigation, and we doubt that one will occur as a result of our decision today." Accordingly, the Court concluded, "we do not perceive a need to extend the common interest doctrine to communications made in the absence of pending or anticipated litigation, and any benefits that may attend such expansion of the doctrine are outweighed by the substantial loss of relevant evidence, as well as the potential for abuse."
The dissent, reflecting a pragmatic approach more consistent with commercial reality, stated that the common-interest doctrine "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." In the dissent's view, "[t]he better rule is grounded not in the rote application of a litigation requirement, but in the legal dynamics of a modern corporate transactional practice."
Indeed, this decision places New York law squarely at odds with Delaware, another commercial center, and the federal courts in many U.S. states.
In our January 5, 2015 bulletin, we said that the lower court's decision, "creates greater certainty for parties involved in M&A transactions governed by New York law and particularly those in which potential disputes will be heard in a Manhattan court. In such a transaction, shared legal communications between and among the parties and their counsel will be protected by the attorney-client privilege." The Court of Appeals' adherence to a litigation requirement underlying the common-interest doctrine is likely to surprise transactional practitioners who believed that New York would evolve its jurisprudence in a manner consistent with many other jurisdictions, particularly Delaware. It has not done so, however, and corporate lawyers are now on notice that privileged communications and materials cannot be shared between or among parties to New York M&A transactions without risking a waiver of the privilege.
1. AMBAC Assurance Co. v. Countrywide Home Loans, Inc., No. 80, slip op. at 2 (N.Y. June 9, 2016).
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