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Common Interest Protection In Commercial Transactions

Law360, New York (February 2, 2016, 9:51 AM ET) -The Second Circuits decision in Schaeffler v. U.S., 806 F.3d 34 (2d Cir. 2015),
underscores that the common interest privilege will safeguard from discovery
privileged materials shared between parties before a significant commercial
transaction. The decision falls in line with an emerging consensus of jurisdictions
flexibly applying the common interest doctrine to commercial and corporate
transactions.
The common interest privilege, sometimes called the community of interest
privilege, arose from necessity in joint defense situations to protect from
Stephen Ram
discovery attorney-client communications shared between defendants jointly
represented by the same counsel. Now, as businesses navigate the increasingly
complex webs of laws and regulations, they often share their privileged materials before significant
commercial and M&A transactions where they recognize a threat of litigation by third-party plaintiffs or
government bodies to challenge a transaction. The Schaeffler decision demonstrates the protection
afforded the exchange of privileged information, which is often an integral component of modern dealmaking.
In that case, the Schaeffler Group, an automobile and industrial parts manufacturer and distributor,
entered into an 11 billion loan agreement with a consortium of banks to finance a tender offer for
Continental AGs stock. The Schaeffler Group expected to acquire a minority interest in Continental, but
by the time the tender closed, nearly 90 percent of Continental shareholders gladly had accepted the
offer amid a reeling price for Continental stock in the tumultuous economic events of 2008. To avoid
insolvency from the oversubscribed tender offer, the Schaeffler Group faced a need to restructure its
debt.
The Schaeffler Group engaged counsel and an accounting firm to assess the potential tax consequences
and prepare for a likely IRS challenge to the tax treatment. To facilitate the debt restructuring, the
Schaeffler Group shared its attorney-client privileged and work product materials with the bank
consortium under a confidentiality agreement. In response to the eventual IRS subpoena, the Schaeffler
Group withheld those privileged documents on the basis of the common interest privilege and work
product doctrine.
The trial court overruled the objections. The trial court found that the Schaeffler Group and the bank
consortiums motivations for sharing the privileged information were financial or commercial: the
Schaeffler Group sought to avoid insolvency and the banks sought to avoid a default on the loans. The

court remarked that this joint business strategy encompassed a mere concern for possible litigation.
Following an in-camera inspection, the trial court also overruled work product protection for an
accountants memorandum. The trial court found that the accountant would have provided the same
advice whether there was anticipated litigation or not.
The Second Circuit disagreed. The Second Circuit observed the Schaeffler Group and bank consortium
shared a strong common interest in the outcome of [the likely] legal encounter with the IRS. 806 F.3d
at 41. The Second Circuit acknowledged that this was a legal problem albeit with commercial
consequences, but that commercial dimension did not foreclose the application of the doctrine. Id. The
court explained: A financial interest of a party, no matter how large, does not preclude a court from
finding a legal interest shared with another party where the legal aspects materially affect the financial
interests. Id. at 42.
The Second Circuit also held that the accountants memorandum was entitled to work product
protection. The court readily recognized that the memorandum expressly contemplated litigation by the
IRS and the guidance in the memorandum was unique to the situation posed by the debt restructuring.
806 F.2d at 44. In particular, the court noted that the district courts holding appears to imply that tax
analyses and opinions created to assist in large, complex transactions with uncertain tax consequences
can never have work-product protection from IRS subpoenas. Id. at 44-45. The Second Circuit rejected
that notion as contrary to circuit law. Id.
Schaeffler provides long-needed clarity because the Second Circuit had not previously addressed the
application of common interest doctrine for commercial transactions. See, e.g., In re W.R. Grace & Co.Conn., 984 F.2d 576 (2d Cir. 1993) (declining mandamus review of common interest assertions between
insurance carrier and its insured); U.S. v. Schwimmer, 892 F.2d 237 (2d Cir. 1989) (applying common
interest protection for expert materials shared by co-defendants in a criminal case). Indeed, just over
one year ago District Judge Lewis Kaplan described the scope of the common interest doctrine as a
spectrum, where outer limits of the common interest doctrine ... are not clear. U.S. v. Bank of N.Y.
Mellon, 11-cv-6969 (LAK), 2014 U.S. Dist. LEXIS 159069, at *8 (S.D.N.Y. Nov. 10, 2014) (denying motion
to compel privileged memorandum shared by bank with third-party investment managers, finding that
banks claim for common interest protection fell along the spectrum, even though no litigation was
imminent).
The Schaeffler decision also squarely places the Second Circuit in line with other jurisdictions in flexibly
applying the doctrine. For example, the Seventh Circuit explained the purpose for common interest
doctrine in the following manner:
Applying the common interest doctrine to the full range of communications otherwise protected by the
attorney-client privilege encourages parties with a shared legal interest to seek legal assistance in order
to meet legal requirements and to plan their conduct accordingly. This planning serves the public
interest by advancing compliance with the law, facilitating the administration of justice and averting
litigation. Reason and experience demonstrate that joint venturers, no less than individuals, benefit
from planning their activities based on sound legal advice predicated upon open communication.
U.S. v. BDO Seidman LLP, 492 F.3d 806, 815-16 (7th Cir. 2007) (internal citations omitted); see also In re
Regents of the Univ. of Cal., 101 F.3d 1386, 1389-91 (Fed. Cir. 1996) (upholding common interest for
legal analysis of intellectual property rights before optionee exercised an option to acquire the
intellectual property).

Numerous state jurisdictions have similarly applied the doctrine, including those states whose laws are
routinely implicated in transactions. With so many companies organized in Delaware, the first states
law often comes into play in strategic and commercial transactions. Delaware courts, for example, have
protected the common interest. See, e.g., Rembrandt Techs. LP v. Harris Corp., C.A. No. 07C-09-059-JRS,
2009 Del. Super. LEXIS 46, at *24-26 (Feb. 12, 2009) (rejecting the contention that the parties can claim
no common legal interest as they were merely involved in and communicating about a proposed
business arrangement). In 2014, New York followed a similar approach for diligence materials
exchanged before an M&A transaction. Ambac Assurance Corp. v. Countrywide Home Loans Inc., 2014
N.Y. App. Div. LEXIS 8439 (Dec. 4, 2014) (protecting premerger documents that required the shared
advice of counsel in order to accurately navigate the complex legal and regulatory process involved in
completing the transaction.).
While not all jurisdictions have endorsed this expansive view, and even in those such as the Second
Circuit that have embraced a broader view, counsel and clients should be mindful of developing a
sufficient evidentiary record considering the following touchstones.
Tread Lightly
Maintain confidentiality with an agreement that specifically addresses the handling of the privileged
materials. The agreement should provide special designations and limitations on who may receive
privileged materials, beyond standard confidentiality provisions for sensitive business materials, trade
secrets and proprietary information. The agreement also should include provisions for return or
destruction of privileged materials. Because litigation or other proceedings are anticipated, the
agreement may require immediate written notice of any subpoena or other legal process seeking to
compel disclosure of the privileged materials to give the counterparty sufficient time to intervene.
Parties may consider reimbursement provisions for reasonable attorneys fees or costs in seeking to
preserve the confidentiality of the counterpartys privileged information, or intervention and control of
defense rights similar to many indemnity agreements.
Articulate the Legal Interest
Articulate the shared legal interest in litigation through a percipient witness who is familiar with the
privileged materials exchanged, the confidentiality treatments followed by the parties, and the purpose
for sharing the privileged information, including an understanding of prospective litigation or regulatory
scrutiny. Underlying documents that describe the purpose for sharing the privileged materials are
immeasurably helpful, particularly in the event of in-camera review.
Only Share What is Necessary
Disclose only the privileged communications or work product that is directly related to the shared legal
interest. It is always better to err on the side of caution due to the risk of waiver. In the event a legal
memorandum contains information beyond the shared legal interest, a party should redact the
additional information.
Only Counsel Should Exchange
Allow only counsel to exchange the privileged information with counsel for counterparty because that is
indicative of the legal interests being considered and pursued jointly. While a partys in-house counsel
may exchange privileged materials with a counterpartys executive or in-house counsel, sharing

between executives of each party can blur the purposes for sharing the privileged information and
create unintended waivers.
By Stephen Ram, Stradling Yocca Carlson & Rauth PC
Stephen Ram is a shareholder in the Newport Beach, California, office of Stradling Yocca Carlson &
Rauth.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.
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