United States: New York Court Of Appeals Rejects More General Application Of Common-Interest Privilege In M&A Settings

Last Updated: June 30 2016
Article by Grant J. Esposito and Jessica Kaufman

New York's highest court has rejected an attempt to expand the state's common-interest doctrine, and reinstated the New York rule that the doctrine only applies in the context of actual or threatened litigation. Citing the "substantial loss of relevant evidence" and the "potential for abuse" it felt would accompany the expansion, on June 9, 2016, the New York Court of Appeals overturned a December 2014 ruling by the Appellate Division, First Department, that brought New York in line with other jurisdictions, such as Delaware and New York federal courts, where reasonably anticipated litigation is not a required element of the common-interest privilege.1

The Appellate Division's Attempt to Expand Common-Interest Protection to M&A Transactions in New York

The common-interest doctrine provides an exception to the general rule that the attorney-client privilege is waived when otherwise protected information is shared with a third party, provided that the communication "is for the purpose of furthering a nearly identical legal interest shared by the client and the third party."2 Many jurisdictions have upheld the common-interest privilege in the context of mergers and acquisitions, finding that companies seeking to execute a lawful transaction satisfied the requirement of sharing a common legal interest. But New York has historically taken a restrictive view of the doctrine, applying the common-interest privilege only to communications concerning legal advice in pending or reasonably anticipated litigation in which the parties had a common interest. While this interpretation should protect the exchange of information during diligence concerning, for example, pending litigation, other communications between buyer and seller would not be exempt from disclosure. And the trial court so held in Ambac Assurance Corp. v. Countrywide Securities Corp., 980 N.Y.S.2d 274, 274 (N.Y. Sup. Ct. 2013), in which a financial institution's invocation of common-interest protection for documents exchanged with an acquired entity prior to a takeover transaction was rejected according to long-standing New York precedent.3

The Appellate Division had aligned itself with Delaware (as well as with the federal courts in New York and elsewhere) to hold that the common-interest privilege will apply beyond instances where there is pending or reasonably anticipated litigation to additional situations where different parties have a common interest that is "so parallel and non-adverse that, at least with respect to the transaction involved, they may be regarded as acting as joint venturers."4 Specifically, it ruled that communications would remained privileged "so long as the primary or predominant purpose for the communication with counsel is for the parties to obtain legal advice or to further a legal interest common to the parties, and not to obtain advice of a predominately business nature."5

Divided Court of Appeals Reinstates "Reasonably Anticipated Litigation" Requirement

The Court of Appeals, with Judge Pigott writing for the majority and joined by judges Abdus-Salaam, Stein, and Fahey, disagreed with the Appellate Division's view that an expansion of the common-interest privilege was warranted by the unique common interests of parties to a merger. Unwilling to extend the privilege to "any common legal interest," the Court of Appeals reversed, reinstating the requirement that litigation be reasonably anticipated to invoke the protections of the common-interest doctrine.6

The Court of Appeals cited the lack of evidence showing that privileged communication-sharing in situations outside of litigation is necessary for highly regulated financial institutions, which, the party seeking to invoke the privilege argued, constantly face a threat of litigation. According to the majority, the expansion was out of line with New York's historical approach to the privilege, and would make it more difficult for courts to distinguish between common legal interests and strictly business interests, creating what the Court of Appeals thought would be a potential for abuse and overuse of the privilege beyond its intended purpose. "The difficulty," the court wrote, is that of "defining 'common legal interests' outside the context of litigation 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."7

Although the court recognized that requiring disclosure of legal advice exchanged during joint defense of litigation could dissuade parties from freely seeking legal advice, it reasoned that parties to M&A deals are already sufficiently motivated to seek legal advice by their common interest in closing a complex transaction.8 As support for this observation, the court pointed to the lack of evidence that mergers, licensing agreements, or other complex commercial transactions had not occurred in New York over the last 20 years because of the state's limited view of common-interest protection, citing the fact that the parties involved in Ambac itself had moved ahead with their merger, "even when New York state courts had made clear that their joint communications would not remain privileged unless they were engaged in or anticipated litigation."9

In refusing to expand the common-interest privilege, the Court of Appeals seemed particularly concerned that the expansion would be abused, citing commentary observing that the common-interest doctrine was "spreading like crabgrass" in jurisdictions where it had been expanded to never-imagined areas.10 The Court of Appeals cited no specific instances of abuse. but nonetheless cited the potential for abuse as a ground for its decision — an observation the dissent challenged as "purely speculative."11

Judge Rivera, joined by Judge Garcia, dissented from the ruling, writing that the common-interest doctrine should be applied more liberally in New York when it comes to mergers and acquisitions, a holding that would be "fully in line with the goals of our common law and the needs of our complex system of commercial regulation" where the parties agree to treat the information exchanged as confidential. The dissent noted that the "better rule is grounded not in the rote application of a litigation requirement, but in the legal dynamics of a modern corporate transactional practice."12

Parties to complex commercial transactions in New York or parties selecting New York law should not overlook other transaction-friendly aspects of New York law, such as N.Y. G.O.L. §5-1401, which provides that the parties to a contract involving more than $250,000 may agree that New York law governs their rights and duties under the contract — whether or not such contract bears a reasonable relation to New York. But they should take note of the Court of Appeals' Ambac decision in considering what law should apply to their transactions if the parties have shared legal advice in advance of the deal that they wish to keep from future prying eyes.


1 Ambac Assurance Corp. et al. v. Countrywide Home Loans Inc. et al., 2016 NY Slip Op 04439 (N.Y. June 9, 2016) (hereinafter "Ambac (N.Y.").

2 Ambac (N.Y.), 2014 N.Y. Slip. Op. 08510, at *1.

3 For a full analysis of the trial court and Appellate Division decisions, see our December 9, 2014 client alert at http://www.mofo.com/~/media/Files/ClientAlert/2014/12/141208CommonInterestPrivilege.pdf.

4 Id. (quoting 3Com Corp. v. Diamond II Holdings, Inc., 2010 WL 2280734, at *7 (Del. Ch. 2010)).

5 Id. at *4. 

6 Ambac (N.Y.) at 14.

7 Id. at 17.

8 Id. at 16.

9 Id.

10 Id. at 21 (citing Wright & Graham § 5493 [2015 Supp]).

11 Ambac (N.Y.) dissent at 11.

12 Id. at 7.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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