Appearance-of-Impropriety Test Replaced with Objective Analysis Standard

Shareholder Action Results in Counsel's Disqualification

This case arose from a former corporate employee's claims against the corporation's parent company and its former officers, directors, and shareholders following a merger. The employee claimed the merger agreement was a "collusive scheme" that had deprived him and other shareholders of millions of dollars. Specifically, he alleged that the merger agreement's provisions obligating the parent company to pay future proceeds to its subsidiary's shareholders were a sham because the defendants knew at the time of the agreement that the triggering events required to generate the proceeds would never occur.

The plaintiff employee moved to disqualify the parent company's counsel on the basis that he had disclosed confidential information to that counsel in connection with previous litigation between the corporation and another company. In support of his motion, the employee filed a declaration outlining his communications with the parent company's counsel. The defendants argued that those communications were not confidential. They noted the plaintiff had signed an engagement letter limiting the scope of the representation and authorizing the counsel to disclose information to the corporation and related entities.

In ruling on the motion, the trial court relied on the plaintiff's declaration. It gave weight to the plaintiff's perception that prior disclosures could be used to his disadvantage, and to his impressions of the content of the privileged communications. Ultimately, the trial court concluded that under Rule 1.9(a), the "overlap between the issues" in the disputed counsel's representation of the plaintiff and his former employer's parent company strongly suggested the two matters were substantially related. The trial court further determined that even when a substantial relationship could not be found, the defendant's counsel "should be disqualified to avoid the appearance of impropriety."

Application of Rule 1.9(a) Requires Objective Consideration

On review, the North Carolina Supreme Court held that the trial court erred in disqualifying counsel. Rule 1.9(a), it stated, "balances the prevented use of confidential information against a former client with a current client's right to choose counsel freely," and a movant seeking to disqualify former counsel must meet a particularly high burden of proof. The court determined that the trial court's assessment of the representation using the appearance-of-impropriety test, and its attempt to determine the content of the privileged communications between the disqualified counsel and his former client, did not meet this burden.

The court found that the Rules of Professional Conduct no longer recognize the appearance-of-impropriety standard, noting that the standard's tendency to "lean toward a subjective, rather than objective analysis, rendered it no longer helpful." It further held that the trial court erroneously relied on the former client's subjective perception of the past representation and on his "conclusory" belief that he had shared confidential information. The trial court should have instead, it reasoned, objectively compared the "facts and circumstances of both representations" to determine whether a former client would normally have shared confidential information relevant to the current matter. 

Finally, the supreme court noted that when assessing whether two matters are substantially related under Rule 1.9(a), the trial court should consider a number of factors, including the initial engagement letter, the scope of representation and any limitations on confidentiality, the factual background leading to the past representation, and the amount of time spent with the attorney. The court remanded the case to the trial court for an objective assessment of these factors. 

Balancing Ethical Duties to Clients

ABA Section of Litigation leaders agree that while client conflict issues may be complex, the standard of inquiry under Rule 1.9 is an objective one. "If Rule 1.9(a) applies objectively, the lawyer is disqualified," says Phillip A. Cole, Minneapolis, MN, member of the  Section of Litigation's Professional Liability Litigation Committee. "The rule does not in any context call upon the court to investigate the actual content of communications in the former representation," he states.

However, Section leaders are uncertain about what this decision may mean for litigators, and how the trial court will treat the case on remand. "This case may make it harder for North Carolina lawyers to predict how a former client conflict will be analyzed, because it bases its conclusion not on what the lawyer and client actually said to each other, but on what a court would later determine is ordinarily communicated in that type of case," says Ronald Minkoff, New York, NY, member of the Section's Professional Liability Litigation Committee.

In the end, the ultimate takeaways for attorneys may be straightforward. "Make sure a former client has given informed consent to your representation of a new client," says Scott E. Reiser, Roseland, NJ, cochair of the Section's Ethics & Professionalism Committee. "Know what the rules are for being a conflicted attorney in your jurisdiction and follow them," advises Reiser.

Amy Mattson is a contributing editor for Litigation News.

Hashtags: #EthicalLawyers, #ABAModelRules, #LawyerClient, #ConflictsofInterest

Related Resources

• Michael Downey, "Scruples: Adversity to a Colleague's Former Client," Litigation Journal, Vol. 42 No. 1 (2015).
• Peter Geraghty, "Ethics Tip—Conflicts of Interest: Former Clients," ABA Cntr. for Professional Responsibility (2017).
• William Freivogel, Freivogel on Conflicts.

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