Most lawyers are familiar with the general rule that a client waives the attorney-client privilege by disclosing the privileged information to third parties. The common interest doctrine,[i] however, provides an exception to this rule: The attorney-client privilege may be preserved with respect to communications between multiple parties sharing a “common legal interest” under certain circumstances.
The North Carolina Court of Appeals recently considered the scope of this exception in Friday Investments, LLC v. Bally Total Fitness of the Mid-Atlantic, Inc., et al., No. COA15-680 (N.C. Ct. App. June 7, 2016). Apparently for the first time, the Court distinguished between parties sharing a common business interest versus a common legal interest.
Only the latter can benefit from the common interest doctrine. Understanding the difference can save your client’s case.
The Facts of the Case.
Friday Investments involved the lease of commercial space for a health club in Charlotte. The space was owned by Plaintiff’s predecessor, which leased it to Defendant’s predecessor. Years later, Defendant sold certain health clubs, including the one occupying the leased space in Charlotte, to a company called Blast. As part of the asset purchase agreement, Blast agreed to defend and indemnify Defendant for any obligations arising under the transferred lease.
Years later, Plaintiff brought suit against Defendant for back rent and other charges under the lease. Blast agreed to provide a defense pursuant to the asset purchase agreement; although it provided a defense to Defendant, Blast was not a party to the lawsuit.
Defendant and Blast then began exchanging correspondence and documents regarding the litigation and defense strategy. When Plaintiff requested copies of those communications and documents that related to the lawsuit, Defendant objected on the grounds of attorney-client privilege and moved for a protective order.[ii] The trial court, after first reviewing the documents in camera, ordered the production. Defendant appealed the order.
After finding the interlocutory order affected a substantial right, the Court of Appeals set out to determine the borders of the common interest doctrine. It was not an easy task.
The Analysis and Outcome.
Noting the “dearth of controlling appellate precedent explaining the precise nature of these arrangements”, the court found it appropriate to review law generally applicable to the doctrine. Id. at *11.
First, the court set some basic guidelines: “To extend the attorney-client privilege between or among them, parties must (1) share a common [legal] interest; (2) agree to exchange information for the purpose of facilitating legal representation of the parties; and (3) the information must otherwise be confidential.” Id. at *13.
The court then identified the central issue: whether Defendant and Blast by virtue of their defense and indemnification agreement shared a common legal interest.
Defendant argued the situation was akin to the tripartite relationship among an insurer, an insured, and insurance defense counsel, as in Nationwide Mut. Fire Ins.Co. v. Bourlon, 172 N.C. App. 595, 617 S.E.2d 40 (2005). The Bourlon Court found the doctrine prevented third-party adversaries from obtaining communications among an insurer, insured, and insurance counsel, but that it did not apply to disputes inter sese.
Judge Inman for the panel rejected the analogy to Bourlon, explaining that the “primary purpose of an insurance contract is defense and indemnification[,]” whereas “an indemnification provision in an asset purchase agreement is generally ancillary to the sale of the business[.]” Friday Investments, at *16. Further, unlike the non-party insurer in Bourlon, Blast lacked the authority to settle or otherwise affect the outcome of the lawsuit.
The court next discussed the holdings of two decisions from the business court: SCR-Tech LLC v. Evonik Energy Serv. LLC, 2013 NCBC 42, 2013 WL 4134602 (N.C. Bus. Ct. Aug. 13, 2013), and Morris v. Scenera Research, LLC,2011 NCBC 33, 2011 WL 3808544 (N.C. Bus. Ct. Aug. 26, 2011). Those cases emphasized the need to demonstrate that specific communications at issue were intended to further a common legal interest, as opposed to a joint business strategy that happens to involve litigation concerns. Timing is a key factor in this regard, as agreements arising in the face of imminent litigation are, for obvious reasons, more likely to be driven by a common legal interest. On the other hand, agreements entered into years earlier that merely recognize the possibility of future disputes are more likely driven by business interests.
Against this backdrop, the court ultimately determined an indemnification provision in an asset purchase agreement was not enough to move the needle from a common business to a common legal interest. As such, Defendant waived its privilege by communicating with Blast.
So where does this leave us? Well, we now know “an indemnification provision in an asset purchase agreement, standing alone, is insufficient to create a common legal interest . . . .” Beyond that, the inquiry and result remain fact-dependent. However, there are some concepts that can help avoid an unintended waiver of privilege:
- Prioritize this issue, because timing is critical. If you find yourself representing one client but receiving input from multiple players, pump the breaks and consider the risk of waiver.
- Memorialize the common interest in writing and before sharing information. Consider a written joint-defense agreement that identifies pending or anticipated litigation arising from a looming dispute.
- Mark all privileged communications even emails with an appropriate label,such as “PRIVILEGED JOINT-LITIGATION MATERIAL”.
- Exchange privileged information between the lawyers, not between the clients. It’s only natural for business associates to communicate about litigation that may affect them both. However, the lawyer must be the conduit for any exchange of privileged information.
- Interpret discovery requests broadly, but object specifically. While this process is time-consuming, it could save you and your client headaches down the road.
While this article offers a cursory look at the common interest doctrine, I hope it provides some guidance for managing litigation relationships outside the familiar tripartite relationship.
[i] The doctrine and its variations are also loosely referred to as the “common interest privilege”, “common defense rule”, “joint litigation doctrine”, “joint litigation privilege”, and “allied litigant doctrine”. The degree of overlap and variation among these doctrines and their application is beyond the scope of this article.
[ii] An interesting sub-issue was that Plaintiff moved to dismiss Defendant’s appeal for failure to assert any privilege with respect to an earlier request for communications between Defendant and Blast. While beyond the scope of this article, the court’s discussion is well worth the read. In short, the court decided that an objection based on privilege was unnecessary, because the initial discovery requests sought “[a]ll non-privileged correspondence” between Defendant and Blast. Therefore, the court held it would be “unreasonable for the purpose of determining waiver to require Defendants to have first acknowledged the existence of correspondence they considered privileged and to have objected to production in response to a request for non-privileged’ information.” The court went on, though, to explain the “best practice for counsel” is to “give each request the broadest possible interpretation” and to assert “a particularized objection” to those requests believed to be beyond the scope of permissible discovery.