Anyone who has ever had to litigate a dispute knows how important the attorney-client privilege is. The privilege is a powerful evidentiary shield - protecting communications between an attorney and a client made for the purpose of obtaining legal advice in the course of a professional relationship. If these communications are voluntarily disclosed to third parties, however, the privilege may be lost - except in cases where the parties are said to have a "common interest." But a recent New York Court of Appeals decision substantially limits the "common interest" exception, exposing many more communications to possible disclosure to opposing parties. Here's a summary of what you need to know.

What is the "Common Interest" Exception?

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. 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. In other words, for the "common interest" exception to apply, the communication must already be protected by an existing privilege.

The Court's Decision Restricts the Common Interest Exception to the Litigation Context

In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., Ambac sued Countrywide in connection with Ambac's insurance for certain residential mortgage-backed securitizations offered by Countrywide prior to its merger with Bank of America Corp. Ambac also sued Bank of America, arguing that it was liable for Countrywide's damages as a so-called "successor-in-interest" following the merger. Ambac asked the court to force Bank of America to disclose approximately 400 documents 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.

Bank of America opposed Ambac's disclosure demands. The bank argued that the "common interest" exception 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 legal issues the two companies needed to resolve jointly in anticipation of closing the merger, 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."

The Court held that these communications relating to the merger were not protected by the "common interest" exception to the attorney-client privilege rules. 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 America and Countrywide here, from clients that do anticipate litigation or are co-litigants in pending litigation. The Court emphasized that the "common interest" exception protects communications between co-defendants, co-plaintiffs, or persons who reasonably anticipate that they will become co-litigants, because such disclosures are necessary to mount a common claim or defense.

What This Means

The Ambac Assurance case should serve as a reminder to all business people to exercise caution in how they communicate sensitive or confidential information to third parties, even when working together with a deal partner to address regulatory concerns. Be aware that the rules governing disclosure are complicated and different rules may apply. For example, unlike Ambac Assurance (a New York State case), federal courts applying the "common interest" exception do not require that the communications be made in anticipation of litigation. The calculus can also change when parties to a transaction are jointly represented by the same law firm.

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