“Reasonably anticipated litigation” is a necessary element you need to show to benefit from the common interest privilege in your attempt to withhold certain documents already shared with a third-party during a pending suit in New York – but, when does this privilege apply and what does “reasonably anticipated litigation” actually mean?

Recently, Justice Andrew Borrok issued a decision which analyzed the applicability of the “common interest privilege” and the need to prove the element of “reasonably anticipated” litigation when relying on this privilege in New York courts as a basis for withholding certain discovery.

In Starr Russia Investments III B.V. v Deloitte Touche Tohmatsu Ltd., Plaintiff Starr Russia Investments III B.V. (“Starr”) brought a fraud action against Deloitte Touche Tohmatsu Ltd. and various related entities, including ZAO Deloitte & Touche CIS (“D-ZAO”), claiming that Starr was fraudulently induced by Defendants to invest, between 2008 and 2010, approximately $110 million in Investment Trade Bank (“ITB”), a Russian joint stock company controlled by a Russian national, and that Starr lost the full value of its investment when, in 2015, the Central Bank of Russia revealed that ITB had amassed a huge capital deficit and was deemed insolvent.

Starr claimed that it engaged Allen and Overy (“A & O”) to represent it in its investment in the ITB transaction.  Shortly after, Starr approached FPK Capital/J.C. Flowers (“JC Flowers”) about becoming a co-investor.  JC Flowers engaged Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) to represent it in the transaction.  Skadden commissioned the Risk Advisory Group (“RAG”) to produce a report as part of its due diligence (the “RAG Report”).  Skadden, in turn, shared the RAG Report, dated June 9, 2008, with Starr based on the parties’ agreement to share due diligence materials.

D-ZAO moved to compel Starr to produce the RAG Report and its communications discussing the report’s factual findings and responsive documents it shared with third-parties, including JC Flowers from 2007 to 2015.

Starr refused to produce the RAG Report, claiming that it was protected by the attorney-client privilege and the common interest privilege.

With respect to attorney-client privilege, the Court held that because there was neither a written expression of joint representation by Skadden and A & O as to both JC Flowers and Starr nor a written agreement indicating that the documents shared during the course of due diligence were privileged and could not be shared with others, the RAG Report was not protected by the attorney-client privilege.

With respect to Starr’s claim that the Rag Report was protected by the common interest privilege, the Court analyzed whether the report was prepared in anticipation of litigation, a necessary element in New York.

Under New York law, the common interest privilege is applicable to attorney-client communications disclosed to a third-party where

(1) the third-party shares a common legal interest;

(2) the confidential communication is made in furtherance of that common legal interest; and

(3) the confidential communication relates to pending or reasonably anticipated litigation.

These elements were articulated in the seminal case of Ambac Assurance Corporation v Countrywide, in which the New York Court of Appeals recognized the applicability of the common interest privilege to both criminal and civil matters and rejected expanding the privilege to commercial transactions in the antitrust context where communications do not concern pending or reasonably anticipated litigation.

The Court in Ambac recognized that on a public policy level, the common interest privilege promotes the exchange of privileged information and candor that may otherwise be inhibited by the threat of mandatory disclosure, thereby creating an environment which encourages the coordination of legal strategy where “parties are engaged in or reasonably anticipate litigation in which they share a common legal interest.”

The law in New York State, however, differs from the applicability of the common interest privilege in several federal courts.  For example, the Second, Third, Seventh and Federal Court of Appeals Circuits have rejected the “pending or reasonably anticipated litigation” requirement and applied the common interest privilege in purely transaction contexts.

Ultimately, relying on the precedence set in Ambac, the Court found that the common interest privilege was inapplicable where the RAG Report was prepared for transaction structuring purposes.  In fact, the Court noted that Starr began to “reasonably anticipate litigation” in 2011 when they began to hire outside counsel concerning potential contract claims arising from the shareholders’ agreement.  Although Starr attempted to argue that it already anticipated litigation in 2008, around the time that the RAG Report was prepared, based on an email from JC Flowers which described litigation risks associated with the transaction, the Court held that there was no evidence of a demand, or a refusal of a demand or any other indication that Starr would sue or be sued. Simply put, “[t]he fact that one evaluates litigation risk and or uses litigation risk as a negotiating tool does not mean that litigation is reasonably anticipated.”

Takeaway: New York transaction attorneys and litigators should be mindful of New York State’s restrictive applicability of the common interest privilege where they can expect that documents and communications exchanged with third-parties during a commercial transaction are likely discoverable during litigation.