United States: New York Appellate Court Broadens Common Interest Privilege

Last Updated: January 14 2015
Article by Brian J. Massengill and Justin A. McCarty

Keywords: common interest privilege, New York law

The New York Supreme Court, Appellate Division, First Department recently issued an opinion that provides important clarification to the scope of the common interest privilege under New York law. In Ambac Assurance Corp., et al. v. Countrywide Home Loans, Inc. et al.,1 the First Department held that the common interest privilege applies in non-adversarial contexts, rejecting prior caselaw that limited the privilege to situations where there is pending or reasonably anticipated litigation. In doing so, the court significantly broadened the scope of the common interest privilege to apply to communications between different entities in any legal matter in which they share a common interest.

The ruling, which expressly disagreed with the Southern District of New York's ruling in Allied Irish Banks, p.l.c. v. Bank of America, et al.2 limiting the common interest privilege to litigation situations, is significant for auditing and other professional services firms that operate as networks of member firms and that coordinate legal advice on matters in which they have a common legal interest.

Ambac, a monoline insurer, brought suit against Countrywide to recover damages it sustained in connection with its insurance of certain residential mortgage-backed securities transactions. Ambac also brought claims against Bank of America, alleging that Bank of America would be liable as successor-in-interest for any judgment against Countrywide as a result of the companies' 2008 merger. Bank of America and Countrywide signed a merger agreement that required the parties to work together on a number of pre-closing issues, all of which were subject to confidentiality provisions and a common interest agreement between the parties. 

At issue in Ambac was the question of whether Bank of America must produce communications between Bank of America and Countrywide and their counsel that took place during the period prior to closing. Bank of America argued that the communications were subject to the common interest privilege because it had a common legal interest with Countrywide during the pre-merger period. In rejecting this argument, the trial court concluded that New York follows a narrow approach that only provides for application of the common interest privilege when there is a common legal interest that involves potential litigation.

On appeal, the First Department disagreed and reversed the trial court's order. The court held that the common interest privilege only requires two elements: (i) a communication that qualifies for protection under the attorney-client privilege and (ii) that the communication be made for the purpose of furthering a legal interest or strategy common to the parties. In declining to require that such communications must also affect litigation, the court examined the overall purpose of the attorney-client privilege to facilitate communication between client and counsel and noted that the attorney-client privilege is not tied to any similar litigation requirement. Instead, the court explained, privileged communications often take place for the express purpose of considering complex legal obligations and risks and to avoid litigation. Thus, the court supported a broadening of the scope of the privilege to other legal contexts so long as the parties involved—even if they are different legal entities—have a common interest. Central to the court's analysis was the fact that in "today's business environment ... business entities often have important legal interests to protect even without the looming specter of litigation."

While acknowledging that New York's highest court has not yet weighed in on the litigation requirement for the common interest privilege, the appellate court was guided by what it regards as "the better approach" under Delaware's statutory law, which extends the privilege to communications with a lawyer "representing another in a matter of common interest" whether or not litigation is pending or anticipated. It also followed federal precedent, including the Second Circuit, noting that "the federal courts that have addressed the issue have overwhelmingly rejected" the litigation requirement as a prerequisite to receiving protection under the common interest privilege.

This decision may have significant implications for many affiliated companies. It is of considerable significance to professional services firms that operate as a network of independent firms, sometimes under an umbrella organization. Indeed, the court's decision in Ambac expressly rejects the result of the federal district court in Allied Irish Banks.

In Allied Irish Banks, the federal district court ruled that under New York law the common interest privilege could not protect documents that were shared between PricewaterhouseCoopers International Limited (PwCIL) and its member firms, which were a network of professional services firms operating under the PricewaterhouseCoopers name, because the court found that PwCIL could not show that it reasonably anticipated litigation in common with the other network firms.

Under the holding in Ambac, however, individual member firms may seek legal advice in tandem with the coordinating entity or other member firms so long as they have common legal interests. After the Ambac decision, firms may look forward to greater protection under New York law for common-interest communications.

1 2014 WL 6803006 (Index No. 651612/2010) (1st Dep't 2014).

2 252 F.R.D. 163 (S.D.N.Y. 2008).

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