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Court Holds That A Common Interest Agreement Bars Disclosure of Material Protected by The Attorney-Client Privilege

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  • Posted on: Aug 15 2018

Recently, the First Department issued a terse decision in which it reversed a lower court ruling requiring the production of documents claimed to be protected by the attorney-client privilege under a common interest agreement. In 21st Century Diamond, LLC v. Allfield Trading, LLC, 2018 N.Y. Slip Op. 05732 (here), the Court made clear that “the common interest doctrine applies to protect otherwise privileged communications between these parties from disclosure.”

Given the absence of analysis by the of the First Department and the current newsworthiness of the issue, today’s post will take a deep dive into the attorney-client privilege under a common interest agreement.

The Attorney-Client Privilege

“The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616, 623 (2016). The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum Sys. Intl. Corp. v. Chemical Bank, 78 N.Y.2d 371, 377 (1991)). “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy, 51 N.Y.2d 62, 67-68 (1980).

Although the privilege serves an important function – the open and candid dialogue between attorney and client – there exists an “[o]bvious tension” between the privilege and the policy of New York State that favors liberal discovery. Ambac, 27 N.Y.3d at 624 (citing Spectrum, 78 N.Y.2d at 376-377); see also CPLR § 3101(a)(1) (requiring “full disclosure of all matter material and necessary in the prosecution or defense of an action”). Because the privilege shields from disclosure “material and necessary” information “and therefore ‘constitutes an “obstacle” to the truth-finding process,’” courts narrowly construe its application. Ambac, 27 N.Y.3d at 624 (quoting Matter of Jacqueline F., 47 N.Y.2d 215, 219 (1979)); Spectrum, 78 N.Y.2d at 377. For this reason, “[t]he party asserting the privilege bears the burden of establishing its entitlement to protection by showing that the communication at issue was between an attorney and a client ‘for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship,’ that the communication is predominantly of a legal character, that the communication was confidential and that the privilege was not waived.” Ambac, 27 N.Y.3d at 624. (quoting Rossi v Blue Cross & Blue Shield of Greater N.Y., 73 N.Y.2d 588, 593-594 (1989)).

Where the communications are made in the presence of third parties, whose presence is known to the client, the communications are not privileged from disclosure because they are no longer deemed to be confidential. Ambac, 27 N.Y.3d at 624 (citations omitted). Similarly, communications lose their protection where a communication is made in confidence but subsequently revealed to a third party. Id. As the Court of Appeals has held: “A lack of confidentiality and subsequent disclosure also destroy the privilege as a matter of fairness: ‘when [the privilege holder’s] conduct touches a certain point of disclosure, fairness requires that the privilege shall cease whether he intended that result or not.’” Id.

An Exception to the Attorney-Client Privilege: Common Interest Agreements

“As with any rule, there are exceptions.” Ambac, 27 N.Y.3d at 624. One such exception is the common interest exception. Under this exception, the presence of a third party will not destroy a claim of privilege where two or more clients separately retain counsel to advise them on matters of common legal interest.

The doctrine originated in the context of criminal cases, where the courts “allowed the attorneys of criminal co-defendants to share confidential information about defense strategies without waiving the privilege as against third parties.” In re Teleglobe Communications Corp., 493 F.3d 345, 364 (3d Cir. 2007). The first known case to apply the exception came from Virginia. In Chahoon v. Commonwealth, 62 Va. 822, 839-840 (1871), the court allowed criminal attorneys to coordinate the strategies of their clients, who were under joint indictment for conspiracy to defraud an estate and retain the privileged nature of their communications. The court reasoned that the parties “had the same defen[s]e to make” and therefore “the counsel of each was in effect the counsel of all.” Id. at 841-42.

In Schmitt v. Emery, 211 Minn. 547, 2 N.W.2d 413 (1942), the court extended the doctrine to civil litigation. There, a privileged document was exchanged among counsel for several co-defendants in a civil action, to prepare objections to the document’s admission into evidence. The court held that “[w]here an attorney furnishes a copy of a document entrusted to him by his client to an attorney who is engaged in maintaining substantially the same cause on behalf of other parties in the same litigation,” the communication is protected from disclosure by the attorney-client privilege because it was “made not for the purpose of allowing unlimited publication and use, but in confidence, for the limited and restricted purpose to assist in asserting their common claims.” Id. at Minn at 554, 2 N.W.2d at 417. The Uniform Rules of Evidence adopted this formulation of the doctrine, protecting attorney-client communications “by the client or a representative of the client or the client’s lawyer or a representative of the lawyer to a lawyer or a representative of a lawyer representing another party in a pending action and concerning a matter of common interest therein.” Uniform Rules Evid. 502(b)(3).

In New York, the Court of Appeals, first recognized the common interest doctrine in People v Osorio, 75 N.Y.2d 80 (1989). In Osorio, the Court considered whether a defendant who communicated with counsel in the presence of a separately represented co-defendant in a pending criminal prosecution could prevent the co-defendant from testifying as to what he heard. The co-defendant was at the time acting as an interpreter between the defendant and his attorney. Although the Court acknowledged that the attorney-client privilege would, ordinarily, protect communications between co-defendants that are shared for the purpose of “mounting a common defense,” the Court ultimately held that it did not apply in that case because the defendant “was not planning a common defense” and, therefore, did not share a common legal interest with him. Id. at 85 (relying on United States v McPartlin, 595 F.2d 1321, 1336 (7th Cir 1979), and Hunydee v. United States, 355 F.2d 183, 185 (9th Cir 1965)).

After Osorio, courts in New York applied the common interest doctrine to both criminal and civil matters, to communications of both co-plaintiffs and co-defendants, but always in the context of pending or reasonably anticipated litigation. See, e.g., Hyatt v. State of Cal. Franchise Tax Bd., 105 A.D.3d 186 (2d Dept. 2013). Although federal courts have extended the exception regardless of whether litigation is pending or threatened (e.g., Teleglobe, 493 F.3d at 364; United States v. BDO Seidman, LLP, 492 F.3d 806, 816 (7th Cir 2007); In re Regents of Univ. of Cal., 101 F.3d 1386, 1390-1391 (Fed. Cir. 1996)), the Court of Appeals has refused to do so. Ambac, 27 N.Y.3d at 628.

In refusing to extend the doctrine, the Court noted that limiting the exception “to situations where the benefit and the necessity of shared communications are at their highest” – i.e., during litigation or when there is the threat of litigation – reduces the risk of misuse. Ambac, 27 N.Y.3d at 628. The Court reasoned that “the common interest doctrine promotes candor that may otherwise have been inhibited” between co-litigants. Id. Otherwise, “the threat of mandatory disclosure may chill the parties’ exchange of privileged information and therefore thwart any desire to coordinate legal strategy.” Id.

The Court rejected the notion that there is a shared common legal interest in a commercial transaction or other common situation “outside the context of litigation” or the threat of litigation. The Court explained:

The difficulty 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 nonlegal or exclusively business interests to protect. Even advocates of a more expansive approach admit that “in a nonlitigation setting the danger is greater that the underlying communication will be for a commercial purpose rather than for securing legal advice” (James M. Fischer, The Attorney-Client Privilege Meets the Common Interest Arrangement: Protecting Confidences While Exchanging Information for Mutual Gain, 16 Rev Litig 631, 642 [1997]). At least one commentator has also observed that “[t]he greatest push to expand the common interest privilege comes from corporate attorneys representing multiple clients often in an antitrust context,” and that it is in precisely this context “that the potential for abuse is greatest” (Edna S. Epstein, The Attorney-Client Privilege and the Work-Product Doctrine 277 [5th ed 2007]).

Ambac, 27 N.Y.3d at 629-30.

The Court also rejected the notion that since the doctrine derives from the attorney-client privilege it is coextensive with the circumstances under which the privilege may exist:

[Bank of America] contends that we should not limit the common interest doctrine to pending or anticipated litigation when the attorney-client privilege from which the doctrine derives is not so limited. While it is true that the attorney-client privilege is not tied to the contemplation of litigation, the common interest doctrine does not need to be coextensive with the privilege because the doctrine itself is not an evidentiary privilege or an independent basis for the attorney-client privilege (see In re Megan-Racine Assoc., Inc., 189 BR 562, 573 n 8 [ND NY 1995] [observing that it is not necessary for the common interest doctrine to conform exactly with the purposes of the attorney-client privilege]). Rather, it limits the circumstances under which attorneys and clients can disseminate their communications to third parties without waiving the privilege, which our courts have reasonably construed to extend no further than communications related to pending or reasonably anticipated litigation. [Footnote omitted.]

Ambac, 27 N.Y.3d at 630.

The Court further rejected the argument that limiting the exception to litigation “will create an anomalous result: clients who retain separate attorneys … cannot protect their shared communications absent pending litigation but the same communications made in the absence of litigation would be privileged if [they] had simply hired a single attorney to represent them” in a non-litigation context. Id. at 630-31. The Court reasoned that “[i]n the joint client or co-client setting … the clients indisputably share a complete alignment of interests in order for the attorney, ethically, to represent both parties. Accordingly, there is no question that the clients share a common identity and all joint communications will be in furtherance of that joint representation.” Id. at 631(citation omitted). But, when clients retain separate attorneys to represent them on a matter of common legal interest, that is not so. “It is less likely that the positions of separately-represented clients will be aligned such that the attorney for one acts as the attorney for all, and the difficulty of determining whether separately-represented clients share a sufficiently common legal interest becomes even more obtuse outside the context of pending or anticipated litigation.” Id. “Consequently,” held the Court, “although a litigation limitation may not be necessary in a co-client setting where the fact of joint representation alone is often enough to establish a congruity of interests, it serves as a valuable safeguard against separately-represented parties who seek to shield exchanged communications from disclosure based on an alleged commonality of legal interests but who have only commercial or business interests to protect.” Id. (citations omitted).

Finally, the Court rejected the argument that it should extend the common interest exception to communications in furtherance of any common legal interest, as done in the Restatement and some federal courts of appeal. Id. at 631-32 (citing Restatement (Third) of Law Governing Lawyers § 76 (1) (1997); Teleglobe, 493 F.3d at 364; BDO Seidman, 492 F.3d at 816; In re Regents of Univ. of Cal., 101 F.3d at 1390-1391). The Court reasoned that such an expansion “has not been uniformly received” and is otherwise subject to endless application (i.e., use in contexts that are limited only by the imaginations of those asserting the exception). Id. at 632 (noting, as one commentator observed, that the doctrine “is spreading like crabgrass to areas the drafters of the Rejected Rule [503(b) (3) of the Federal Rules of Evidence, which was proposed in 1972 but never adopted] could have hardly imagined”) (citation omitted).

Takeaway

The scope of the common interest privilege can differ depending on the jurisdiction. As the Ambac Court noted, “at least 11 states have statutorily restricted the common interest doctrine to communications made in furtherance of ongoing litigation,” and at least five states “have embraced the same limitation through judicial decision.” Ambac, 27 N.Y.3d at nn. 2, 3. Like these jurisdictions, New York limits application of the doctrine to pending litigation or reasonably anticipated litigation.

The existence of a pending litigation or anticipated litigation by itself is often not enough to enjoy the benefits of the doctrine. Many courts will scrutinize the assertion of a common legal interest before extending the protection of the attorney-client privilege to the parties. Thus, to maintain the privilege, the parties must demonstrate the following: 1) the communications were made pursuant to a common legal interest – i.e., the interests of the parties are, in fact, aligned; 2) the communications were made to further the goals of that legal interest; and 3) the parties are not sharing the communications beyond their group – i.e., they are not otherwise waiving the privilege.

Although most jurisdictions do not require a formal written agreement to recognize a common legal interest, parties seeking protection under the doctrine typically document the legal interest at issue, as well as the scope, duration, and parameters of their agreement. In addition, parties often document what happens if one party decides to terminate or withdraw from the agreement. A common interest agreement that simply says that parties are co-litigants (or expect to be co-litigants) and want to share information may not be enough to protect the privilege. See Ambac, 27 N.Y.3d at n.4 (holding that “the exchanged communication must relate to [“ongoing or reasonably anticipated” litigation], in order for the common interest exception to apply”).

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