New York Rejects Federal Trend, Limits Common Interest Doctrine

New York's decision is the most recent development in the slow and muddled evolution of the “common interest doctrine.” The doctrine originated in criminal law as the joint defense doctrine, which permitted criminal co-defendants to share information with each other's lawyers in furtherance of a joint trial strategy without waiving attorney-client privilege. Courts later applied the doctrine to civil litigation and to communications with third parties, and the doctrine generally became known as the common interest doctrine.

The common interest doctrine is not a privilege, but rather, an exception to the waiver rule. Ordinarily, communications between an attorney and a client for the purpose of securing legal advice are privileged from discovery. However, the attorney-client privilege is waived if the attorney or client discloses the privileged communications to a third party. Under the common interest doctrine, a privilege is not waived if: 1) the communication is shared with parties who have a common legal interest; and 2) the communication is made in furtherance of that interest.

The doctrine's application is unsettled, however. One major area of uncertainty is whether the doctrine protects communications made in the absence of pending or anticipated litigation. Most federal courts have held that it applies even without anticipated litigation, but New York's recent decision deviates from the federal trend. The state of New York requires privileged communications to relate to anticipated litigation for the doctrine to apply. Most other states are undecided, and the few that have addressed the anticipated litigation issue are split.

Federal Courts Generally Apply the Common Interest Doctrine Broadly

Within the federal court system, the common interest doctrine is an area of uncertainty because it was never codified in any federal rule of evidence. Originally, proposed Rule of Evidence 503 codified the attorney-client privilege and stated that the privilege applied to communications by the client or his lawyer “to a lawyer representing another in a matter of common interest” so long as the communication was made for the purpose of providing legal services. Pending or anticipated litigation was not a requirement of the common interest doctrine, as codified in the proposed rule.

Congress rejected proposed Rule 503 in 1973, leaving Rule 501 to govern evidentiary privileges. Rule 501 states that “the privilege of a witness ' shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in light of reason and experience.” However, “in civil actions and proceedings, [where] State law supplies the rule of decision, the privilege of a witness ' shall be determined in accordance with State law.” Fed. R. Evid. 501 (1975) (amended 2011). In other words, for federal claims, evidentiary privileges will be governed by federal common law. For state claims, evidentiary privileges will be governed by that state's common law or rules of evidence.

Under federal common law, most federal circuits do not require that litigation be anticipated in order for the common interest doctrine to apply. In the U.S. Court of Appeals for the Second Circuit, for example, information provided by a defendant to a co-defendant's accountant during a government investigation was held protected under the common- interest doctrine in United States v. Schwimmer, 892 F.2d 237, 243-44 (2d Cir. 1989). The court explained that “[t]he need to protect the free flow of information from client to attorney logically exists whenever multiple clients share a common interest about a legal matter ' and it is therefore unnecessary that there be actual litigation in progress for the common interest rule of the attorney-client privilege to apply.”

In the U.S. Court of Appeals for the Seventh Circuit case of United States v. BDO Seidman, LLP, 492 F.3d 806, 816 (7th Cir. 2007), an accounting firm asked outside counsel to write a memo providing legal advice about Internal Revenue Service (IRS) regulations. The accounting firm later shared the memo with a different law firm to help an attorney draft an opinion letter regarding tax shelters. The attorney did not represent the accounting firm, but did plan to share the opinion letter with the accounting firm and two other law firms because they jointly serviced clients on the same or related matters. The Seventh Circuit held that the memo remained privileged because “communications need not be made in anticipation of litigation to fall within the common interest doctrine.”

In the U.S. Court of Appeals for the Ninth Circuit, the court held that privileged communications remained protected under the common interest doctrine even after lawyers shared the information with nonparty employees of a church that was party to the action. United States v. Zolin, 809 F.2d 1411, 1415 (9th Cir. 1987), overruled on other grounds by United States v. Jose, 131 F.3d 1325 (9th Cir. 1997). The court explained that the common interest doctrine applies “[e]ven where the nonparty, who is privy to the attorney-client communications[,] has never been sued on the matter of common interest and faces no immediate liability.”

In the Federal Circuit, communications containing otherwise privileged information between a university applying for a patent and a potentially exclusive licensee's in-house counsel were protected under the common interest doctrine in In re Regents of Univ. of California, 101 F.3d 1386, 1390'91 (Fed. Cir. 1996). According to the court, the two parties shared a common legal interest in obtaining strong and enforceable patents. The court rejected the notion that the communications must be made in anticipation of litigation, finding that “[i]t is well established that the attorney-client privilege is not limited to actions taken and advice obtained in the shadow of litigation.”

These federal circuit court decisions to eliminate the anticipated-litigation requirement under the common interest doctrine are consistent with ' 76(1) of the Restatement (Third) of the Law Governing Lawyers. The Restatement only requires that the persons communicating privileged information have common interests; there is no requirement that the communications be made with respect to pending or reasonably anticipated litigation.

In Some Circuits, Tighter Requirements

Other federal courts have held that pending litigation is not a requirement of the common interest doctrine, but have been less clear about whether anticipated litigation is required. The U.S. Court of Appeals for the Fourth Circuit relied on the Second Circuit's decision in Schwimmer to explain that parties must share a common interest about a legal matter, but “it is unnecessary that there be actual litigation in progress for this privilege to apply.” United States v. Aramony, 88 F.3d 1369, 1392 (4th Cir. 1996). However, the Fourth Circuit has not yet decided whether an adverse party is a prerequisite to invoking the doctrine. Hunton & Williams v. U.S. Dep't of Justice, 590 F.3d 272, 283 (4th Cir. 2010). If the common -nterest doctrine requires an adverse party, then at least some contemplation of litigation is likely required.

The U.S. Court of Appeals for the First Circuit has recognized that the common interest doctrine “may apply outside the context of actual litigation.” In re Grand Jury Subpoena , 274 F.3d 563, 572 (1st Cir. 2001). But the court has also recognized that “outside the context of actual or prospective litigation, there is more vice than virtue in [joint defense agreements].” Id . at 575. Thus, it is unclear whether the First Circuit would apply the common interest doctrine absent any contemplation of litigation.

By contrast, the U.S. Court of Appeals for the Fifth Circuit requires anticipated litigation for the common- interest doctrine to apply. In re Santa Fe Int'l Corp., 272 F.3d 705, 711 (5th Cir. 2001). In In re Santa Fe, in-house counsel had drafted a memorandum about exposure to antitrust liability and then shared that memorandum with the company's offshore drilling competitors. The disclosure of the memorandum was not for the purpose of preparing a joint defense to lawsuits, so the common interest doctrine did not apply. The Fifth Circuit held that “there must be a palpable threat of litigation at the time of the communication, rather than a mere awareness that one's questionable conduct might some day result in litigation.” Id.

Generally, however, there is a trend toward eliminating the anticipated-litigation requirement from the common interest doctrine in federal courts. Modern-day corporations are constantly assessing legal risks in complex transactions. An expanded common interest-doctrine that protects all privileged communications ' not just communications in defense of pending or anticipated litigation ' preserves the free flow of information necessary for effective legal counsel. Federal courts have recognized the need to protect attorney-client privilege in the face of increasingly complex corporate transactions and contractual relations.

Ambac Assurance Corp. v. Countrywide Home Loans, Inc.

The New York Court of Appeals' recent decision in Ambac did not follow the federal trend. Instead, the court held that under New York law, the common interest doctrine requires the communication with a third party to relate to a shared legal interest in pending or reasonably anticipated litigation. If the communication does not relate to pending or reasonably anticipated litigation, it is no longer privileged information.

The plaintiff in the case, Ambac Assurance Corp., guaranteed payments on residential mortgage-backed securities issued by Countrywide Home Loans. During the financial crisis, the mortgage-backed securities insured by Ambac failed. In response, Ambac sued Countrywide for misrepresenting the quality of the loans. Because Countrywide was merging with Bank of America at the time, Ambac also named Bank of America as a defendant.

In discovery, Bank of America withheld communications between itself and Countrywide that took place while negotiating the merger. Bank of America claimed that the communications containing attorney-client privileged material were protected from disclosure under the common interest doctrine. Bank of America argued that it had a shared interest with Countrywide to resolve potential legal issues and successfully complete the merger. Ambac, however, argued that Bank of America and Countrywide waived the privilege because they did not share a common legal interest in ongoing or anticipated litigation at the time of disclosure.

The New York Supreme Court, New York's trial-level court of general jurisdiction, held that the common interest doctrine requires reasonable anticipation of litigation. But in December 2014, the Appellate Division reversed. Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 998 N.Y.S. 2d 329, 334 (N.Y. App. Div. 2014). The Appellate Division explained that the purpose of the attorney-client privilege is to facilitate the free flow of information between client and attorney to ensure effective representation. The privilege applies whether or not the client is contemplating litigation because effective legal counsel is important whether a client is being sued or is just trying to comply with the law. Given that the common interest doctrine exists to protect the attorney-client privilege, the court saw no reason why it should be limited to communications in anticipation of litigation.

This past June, however, the Court of Appeals of New York, the state's highest court, reversed the Appellate Division's decision and held that the common interest doctrine applies only when the disclosure is made with a reasonable anticipation of litigation. The Court of Appeals held that New York should construe the common interest doctrine narrowly because it is in tension with the state's policy of liberal discovery. Judge Eurgene R. Pigott, writing for the majority, relied on a long line of New York state case law requiring pending or anticipated litigation. He recognized, but ultimately dismissed, the federal court decisions that abandon the anticipated-litigation requirement. He claimed “that the policy reasons for keeping a litigation limitation on the common interest doctrine outweigh any purported justification for doing away with it.” Id.

Other State Law Approaches to the Anticipated Litigation Requirement

Other states have adopted varying approaches to the common interest doctrine. Some states have codified the doctrine in their state rules of evidence. Others have relied on state common law and developed the doctrine slowly over time. And still others have yet to confront the doctrine.

For example, siding with many federal courts, Massachusetts, Delaware, and California have rejected the anticipatory litigation requirement. In 2007, the Supreme Court of Massachusetts explicitly adopted the Restatement's approach to the common interest doctrine because “[c]onfidentiality of consultations between parties to business transactions with their respective attorneys is no less essential or less common than in the litigation context.” Hanover Ins. Co. v. Rapo & Jepsen Ins. Servs., 449 Mass. 609, 617 (2007).

Delaware codified the common interest doctrine in 1972. Delaware's application of the doctrine is narrower than the Restatement, but does not require pending or reasonably anticipated litigation. Del. R. Evid. 502(B)(3).

In California, the common interest doctrine is derived from sections 912 and 952 of the California Evidence Code. Section 912(d) states that disclosure of a privileged communication to a third party is not a waiver if disclosure is “reasonably necessary for the accomplishment of the purpose for which the lawyer ' was consulted.” Although California limits the doctrine to “reasonably necessary” communications, there is no requirement that those communications be made in connection with pending or anticipated litigation. STI Outdoor LLC v. Superior Court , 91 Cal. App. 4Th 334, 340'41 (2001).

By contrast, Texas is even more restrictive than New York or the Fifth Circuit, and requires actual litigation for the common interest doctrine to apply. The Rules of Evidence in Texas state that a shared privileged communication is only protected if disclosed to a lawyer representing another party in a “pending action and concerning a matter of common interest therein.” Tex. R. Evid. 503(b)(1)(C).

Protecting Communications with Your Client

Until states and federal courts adopt certain and uniform requirements for the common interest doctrine, lawyers and their clients risk unintentionally breaking attorney-client privilege when they share privileged information with third parties. If there is a need to communicate privileged information with a third party, the following steps may help prevent the waiver of privilege:

1. Reach an agreement with the third party to treat privileged materials as privileged. The common interest doctrine will not protect a company's privileged information if the company shares the information with a third party that doesn't know the information is privileged or has no intention of keeping the information confidential. Both parties should agree that they share a common legal interest and will treat privileged information as privileged and protected under the common interest doctrine.

2. Mark materials that contain privileged information as subject to the common interest doctrine as well as attorney client privilege. Marking materials as subject to the common interest doctrine helps the third party understand what is privileged and what is not. It also proves to a court that a company is not using the common interest doctrine as a post-hoc justification for concealing information. Markings help demonstrate that the parties intended to communicate about a common legal interest and intended to keep the information privileged. Finally, markings will help a company efficiently sort materials in response to a discovery request.

3. Link communications with third parties to existing or anticipated litigation. It is difficult for large corporations to predict where they could be sued and whether they will be sued under state or federal law, so they can't rely on any one interpretation of the doctrine. The safest bet is to comply with the narrowest interpretation of the common interest doctrine. If possible, wait to communicate with the third party until after litigation commences, or is at least threatened.

4. Ensure that communications shared with third parties would otherwise be privileged. As courts adopt more expansive interpretations of the common interest doctrine, it is easy to forget that it is not, in itself, a privilege. Even if communications are made in anticipation of litigation and between parties with identical interests, they still must satisfy the traditional requirements of the attorney-client privilege. For example, pure business advice ' as opposed to legal advice ' would not be protected under the attorney-client privilege and thus would not be protected under the common interest doctrine. If clients are communicating without attorneys in the room, a court might find that the communication was not privileged to begin with.

5. Consider a jurisdiction's interpretation of the common interest doctrine when making forum selection and choice of law agreements. Some states have not developed a common interest doctrine, while others like Massachusetts have a clear and broad application of the doctrine. When possible, choose to litigate in states that reject the anticipated-litigation requirement and broadly apply the common interest doctrine to protect attorney-client privilege.

Kurt Hamrock ([email protected]), a member of this newsletter's Board of Editors, is Of Counsel with Covington & Burling LLP, and focuses on government contracts and related product liability litigation. Ellen Noble is a law student at Georgetown University Law Center; she was a 2016 summer associate at Covington & Burling.