Can a lawyer who once did legal work for a company later sue that company's parent corporation, or the company itself, on behalf of the company's former owners?

Plain-English summary

A lawyer (Attorney A) had earlier done legal work for Company One, a corporation later sold to and operated as a wholly owned subsidiary of Parent Company Two. After Parent Company Two fired Company One's former owners (the Ones), they retained Attorney A to pursue a wrongful-termination claim against Parent Company Two and, if needed, a back-rent claim against Company One on a lease. Parent Company Two's assistant general counsel accused Attorney A of a conflict. The committee analyzed Rules 1.9 (former-client conflicts), 1.13 (organization as client), and 1.6 (confidentiality) as they stood in 2002.

On the parent company, the committee held that corporate affiliation alone does not create an attorney-client relationship with an affiliate. Following ABA Formal Opinion 95-390, whether the parent is a client for conflict purposes depends on factors such as whether corporate formalities are observed, whether the entities have distinct managements and boards, and whether one is the alter ego of the other. The committee said it lacked facts to decide that question and left it to the requesting attorney. If Parent Company Two was not a former client, Rule 1.9 did not apply; if it was, the committee still found no bar, because the termination matter was neither the "same matter" (Rule 1.9(a)) nor "substantially related" (Rule 1.9(b)) to the prior corporate work, and the lawyer reported no confidential information usable against the parent.

On the lease claim against Company One (an undisputed former client), the committee ran the same analysis and reached the same result: not the same matter, not substantially related, and no relevant confidences, so Rules 1.9 and 1.6 did not prohibit the representation.

In practice

Under this opinion, a North Dakota lawyer who previously represented a corporate subsidiary is not automatically conflicted out of a matter adverse to that subsidiary's parent. Applying Rule 1.9 as it stood in 2002, the committee treated the parent's status as a former client as a fact question governed by alter-ego and unity-of-interest factors, and it treated the conflict as turning on whether the new matter is substantially related to the prior work and whether the lawyer holds confidences usable against the former client. Where, as here, the prior representation was unrelated and produced no usable confidences, the opinion concluded the representation was permissible.

Common questions

Q: Does representing a subsidiary make its parent company your client for conflict purposes?

A: Not automatically. The opinion, following ABA Formal Opinion 95-390, says corporate affiliation alone does not create an attorney-client relationship with an affiliate; whether the parent is a client turns on factors like observance of corporate formalities, separate management and boards, and whether one entity is the alter ego of the other.

Q: When does prior work for a former client bar a new matter against it?

A: Under Rule 1.9 as the committee applied it, only when the new matter is the same as, or substantially related to, the prior representation and the interests are materially adverse (and, for substantially related matters, the former client does not consent). The committee found neither the termination claim nor the lease claim substantially related to the lawyer's prior corporate work.

Q: Can confidentiality bar the representation even without a substantial relationship?

A: The opinion notes that Rule 1.6's duty not to use or reveal a former client's confidences is broader than Rule 1.9(c) and continues after the representation ends, but it concluded Rule 1.6 was not violated here because the lawyer stated he held no confidential information useful to the new clients or harmful to the former client.

Q: Who decides whether the parent was actually a former client?

A: The committee declined to resolve that fact question, explaining that it does not act as a factfinder. It set out the alter-ego analysis and left the determination to the requesting attorney based on the actual facts.

Background and rules framework

The opinion interprets the North Dakota Rules of Professional Conduct as they stood in 2002: Rule 1.9 (Model Rule 1.9), governing duties to former clients; Rule 1.13 (Model Rule 1.13), the entity rule that a lawyer for an organization represents the organization acting through its constituents; and Rule 1.6 (Model Rule 1.6), confidentiality. North Dakota later revised its Rules of Professional Conduct, so the rule text quoted in the opinion reflects the pre-revision version.

The committee also notes the safe-harbor provision of North Dakota Rule for Lawyer Discipline 1.2(B), under which a lawyer who relies in good faith on a written ethics-committee opinion is not subject to sanction for the conduct addressed.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.9 / N.D.R. Prof. Conduct 1.9 (duties to former clients)
• Model Rule 1.13 / N.D.R. Prof. Conduct 1.13 (organization as client)
• Model Rule 1.6 / N.D.R. Prof. Conduct 1.6 (confidentiality of information)
• N.D.R. Lawyer Discipline 1.2(B) (safe harbor for reliance on a committee opinion)

Cases:

• Brooklyn Navy Yard Cogeneration Partners, L.P. v. Superior Court, 60 Cal. App. 4th 248, 70 Cal. Rptr. 2d 419 (Cal. Ct. App. 1997), representation adverse to a wholly owned subsidiary

Other opinions cited:

• ABA Formal Op. 95-390: conflicts of interest in the corporate family context
• Illinois State Bar Ass'n Advisory Op. 95-15: conflict of interest, corporate affiliations
• California State Bar Formal Op. 1989-113: representation adverse to a wholly owned subsidiary

See also

• ND Ethics Op. 03-01: Former-Client Conflict in a Derivative Action
• ABA Formal Op. 95-390: Corporate Family Conflicts
• ABA Formal Op. 514: Advising Orgs on Constituent Risk

Source

• Landing page: https://www.sband.org/page/ethics_opinions
• Original PDF: https://cdn.ymaws.com/www.sband.org/resource/resmgr/docs/for_lawyers/opinion_02-04.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

STATE BAR ASSOCIATION OF NORTH DAKOTA
ETHICS COMMITTEE
OPINION NUMBER 02-04

‘DECEMBER 16, 2002

The Ethics Committee received a request dated September 17, 2002, for an opinion

regarding a potential conflict of interest.
‘FACTS

‘Jn 1997, Attorney A began doing legal work for Company One, Inc. At the time, Fred
and Wilma One owned, operated, and managed Company One, Inc. In 1999, Fred and Wilma
One sold Company One, Inc., to Parent Company Two, Inc. Attorney A provided no services to
any of the parties regarding this transaction, and did not do any “corporate work” for Company
One, Inc., at any time. The Committee understands that by “corporate work,” Attorney A means
work related to the organizational structure, bylaws and meetings, etc., of Company One, Inc. It
is Attorney A’s belief that Parent Company Two, Inc., purchased the stock, assets, and accounts
receivable from Fred and Wilma One. Attorney A is not aware of how either Company One,
Inc., or Parent Company Two, Inc., is presently managed. Attomey A is aware, however, that
Parent Company Two, Inc., continues to operate Company One, Inc., as a wholly-owned
subsidiary. Further, Parent Company Two, Inc., continued to employ Fred and Wilma One as’
“partners” after this transaction.

‘In June 2002, Parent Company Two, Inc., terminated Fred and Wilma One’s employment
allegedly “for cause.” This termination resulted in the negation of a one-year severance package
for Fred and Wilma One. The new manager of Company One, Inc., continued to employ

Attorney A’s services in one case which had begun prior to June 2002. Attorney A’s services

were terminated in this matter in August of 2002. At no time has Attorney A provided any

services directly to Parent Company Two, Inc.

Fred and Wilma One have retained Attorney A in regard to their termination of

employment, and a possible claim against Parent Company Two, Inc. The assistant general

counsel for Parent Company Two, Inc., has accused Attorney A of having a conflict of interest in

this representation.

Finally, Fred and Wilma One lease property to Company One, Inc. Fred and Wilma One

have requested that Attorney A provide services to sue for back rent on this lease, should the

same become necessary. Attorney A states that he was not involved in the preparation of the

lease, did not do any general corporate work for Company One, Inc., and gained no knowledge

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from his prior representation of Company One, Inc., that would impact either the termination
action or any lease issues.
Attorney A inquires as to whether he has a conflict of interest and is, therefore, precluded

from representing Fred and Wilma One. Specifically, Attorney A asks:

Is Attorney A prohibited from representing Fred and Wilma One against Parent Company
Two, Inc., in regard to Fred and Wilma One’s termination of employment, because of Attorney
A’s prior representation of Company One, Inc.?

Is Attorney A prohibited from representing Fred and Wilma One in regard to any
breaches of the lease with Company One, Inc., because of Attorney A’s prior representation of
Company One, Inc.?

“APPLICABLE RULES OF PROFESSIONAL CONDUCT

Rule 1.6 -- Confidentiality of Information.
Rule 1.9 -- Conflict of Interest -- Former Client.

‘Rule 1.13 -- Organization as Client.

DISCUSSION

Rule 1.9 of the North Dakota Rules of Professional Conduct provides:

A lawyer who has formerly represented a client in a matter shall not
thereafter:

(a) Represent another person in the same matter in which that person's
interests are materially adverse to the interests of the former client; or
(b) Represent another person in a substantially related matter in which that
person's interests are materially adverse to the interests of the former client unless
the former client consents after consultation; or
(c) Use information relating to the representation to the disadvantage of
the former client in the same or a substantially related matter except as Rule 1.6
would require or permit with respect to a client.
N.D.R. Prof. Conduct 1.9. In this case, the first step is to determine the identity of the former
client. Rule 1.13 of the North Dakota Rules of Professional Conduct provides, in part: “A
lawyer employed or retained by an organization represents the organization acting through its
duly authorized constituents.” Id. at 1.13(a). The comment to this rule makes it clear that
shareholders are constituents of the organizational client. Id. at comment. Absent some other
circumstances, however, the fact of corporate affiliation alone will generally not create an
attorney-client relationship for purposes of conflict of interest. ABA FORMAL OP. 95-390
(January 25, 1995) (entitled: “Conflicts of Interest in the Corporate Family Context’’); ILLINOIS
STATE BAR ASs’N ADVISORY OP. 95-15 (May 17, 1996) (entitled: “Conflict of Interest;
Corporate Affiliations”); CALIFORNIA STATE BAR STANDING COMM. ON PROFESSIONAL
RESPONSIBILITY AND CONDUCT FORMAL OP. 1989-113 (1989) (entitled: “Is It Ethically
Permissible for an Attorney to Undertake a Representation Adverse to a Wholly-Owned

Subsidiary of an Existing Corporate Client?”). Thus, the mere fact that an attorney represents a

wholly-owned subsidiary will not automatically result in a conflict of interest which prohibits the

attorney from representing a claimant against the parent company. See Brooklyn Navy Yard

Cogeneration Partners, L.P. v. Superior Court, 60 Cal. App. 4th 248, 70 Cal. Rptr. 2d 419 (Cal.

Ct. App. 1997).

‘Tn this instance, Attorney A has indicated Fred and Wilma One wish to retain his services
to pursue a claim against Parent Company Two, Inc., the parent corporation of Company One,
Inc., in regard to the termination of employment of Fred and Wilma One. Neither this
Committee, nor the North Dakota Supreme Court, has previously provided any guidance on the
scope of the client, for purposes of conflict of interest, in the corporate family situation. The
American Bar Association has opined that where one corporation is the alter ego of the other,
both may be considered clients. In the ABA Formal Opinion 95-390, it states:

In determining whether there is a sufficient unity of interests to require an
attorney to disregard separate corporate entities for conflict purposes, the attorney
should evaluate whether corporate formalities are observed, the extent to which
each entity has distinct and independent managements and boards of directors,
and whether, for legal purposes, one entity could be considered the alter ego of
the other....

The fact that the corporate client wholly owns, or is wholly owned by, its
affiliate does not in itself make them alter egos. However, whole ownership may
well entail not merely a shared legal department but a management so intertwined
that all members of the corporate family effectively operate as a single entity; and
in those circumstances representing one member of the family may effectively
mean representing others as well. Conversely, where two corporations are related
only through stock ownership, the ownership is less than a controlling interest and
the lawyer has had no dealing whatever with the affiliate, there will rarely be any
reason to conclude that the affiliate is the lawyer’s client.

ABA FoRMAL OP. 95-390 (citations omitted). The Committee has not been presented with facts
to determine if Parent Company Two, Inc., may be considered a prior client of Attorney A’s, for

purposes of conflict of interest.

If the facts are such that Parent Company Two, Inc., was not a former client of Attorney
A, then Rule 1.9 does not prohibit the representation. If, however, the facts are ultimately such
that Parent Company Two, Inc., may be considered a prior client of Attorney A, then the
provisions of Rule 1.9 of the North Dakota Rules of Professional Conduct come into play. See
N.D.R. Prof. Conduct 1.9. Subsection (a) of Rule 1.9 prevents representation in the “same
matter” if the interests of the prior client and the prospective client are materially adverse. Id. at
1.9(a). The present situation does not involve representation in the “same matter,” however.
Therefore, subsection (a) would not prohibit the representation.

Subsection (b) of Rule 1.9 allows representation in a “substantially related matter” when
the interests of the former client and the prospective client are materially adverse only if the
client consents after consultation. Id. at 1.9(b). Because the assistant general counsel for Parent
Company Two, Inc., has accused Attorney A of having a conflict of interest, it is safe to assume
that Parent Company Two, Inc., has withheld, and will continue to withhold, its consent to
Attorney A’s representation of Fred and Wilma One. It appears to the Committee, however, that
upon the facts as presented, Attorney A’s prior representation of Company One, Inc., and the
employment termination matter are not substantially related. Attorney A did not provide any of
the legal services which resulted in the employment agreement or relationship with Fred and
Wilma One. Therefore, it appears that Attorney A’s representation of Fred and Wilma One in
regard to the employment termination dispute is not prohibited by subsection (b) of Rule 1.9.

Attorney A must also comply with the provisions of Rule 1.9(c). Id. at 1.9(c).
Subsection (c) of Rule 1.9 prohibits an attorney from using information related to the
representation of a former client in the same or a substantially related matter, except as permitted

by Rule 1.6 of the North Dakota Rules of Professional Conduct. Id. Because it does not appear

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that ip employment termination dispute is the same or a substantially related matter, it does not
appear that Attorney A is prohibited by Rule 1.9(c) of the North Dakota Rules of Professional

3 Conduct from representing Fred and Wilma One in regard to their employment termination
dispute with Parent Company Two, Inc.

Attorney A should also be aware that Rule 1.6 of the North Dakota Rules of Professional
Conduct’s requirement of confidentiality may also come into play. Rule 1.6 of the North Dakota
Rules of Professional Conduct prohibits a lawyer from using or revealing, to the disadvantage of
the client, information relating to the representation of the client. Id. at 1.6. The prohibition of
using or revealing client confidences in Rule 1.6 is not limited to situations involving the same or
a substantially related matter, as is the prohibition found in Rule 1.9(c). Further, the duty of
confidentiality continues after the client-lawyer relationship has terminated. Id. Thus, if Parent
Company Two, Inc., was a “client” of Attorney A’s, then the full prohibition regarding the use of
confidential information, as found in Rule 1.6, applies. However, Attorney A specifically states
that he has “no knowledge from my representation of [Company One, Inc.] that would in any
way be beneficial to [Fred and Wilma One] or harmful to [Parent Company Two, Inc.], in
representing them in their termination action.” Accordingly, Attorney A’s representation of Fred
and Wilma One would not violate Rule 1.6. On the facts as presented, therefore, the Committee
is of the opinion that Attorney A is not prohibited from representing Fred and Wilma One in
pursuing a claim against Parent Company Two, Inc., relating to the termination of their
employment.

In regard to the representation of Fred and Wilma One against Company One, Inc., on
any breaches of the lease, the analysis is much the same, only somewhat simpler. From the facts

presented by Attorney A, there is no dispute that Company One, Inc., was a former client of

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Attorney A’s. The provisions of Rule 1.9 and 1.6 of the North Dakota Rules of Professional
Conduct squarely apply. There is no need for analysis of the identity of the client in the
corporate family setting on this issue.

‘Under subsection (a) of Rule 1.9, Attorney A would be prohibited from representing Fred
and Wilma One if he had previously represented Company One, Inc., in the same matter.
Attorney A states, “I had no involvement in the preparation of these leases.” Subsection (a) of
Rule 1.9 of the North Dakota Rules of Professional Conduct would not, therefore, prohibit this
representation.

Similarly, under subsection (b) of Rule 1.9 of the North Dakota Rules of Professional
Conduct, it does not appear Attorney A’s representation of Fred and Wilma One against
Company One, Inc., on the lease dispute would be substantially related to his prior
representation. Therefore; it does not appear that Attorney A’s representation of Fred and Wilma
One concerning any lease disputes would be prohibited by Rule 1.9(b) of the North Dakota Rules
of Professional Conduct.

Finally, it does not appear that Rule 1.9(c) of the North Dakota Rules of Professional
Conduct would prohibit the representation either. Because the representation does not relate to
either the same or a substantially related matter, Rule 1.9(c) of the North Dakota Rules of
Professional Conduct does not come into play.

‘In regard to the lease dispute, Attorney A is also governed by Rule 1.6 of the North
Dakota Rules of Professional Conduct. Again, the analysis is similar to the analysis of the
employment termination dispute. There is no question that Company One, Inc., was the client of
Attorney A. Thus, Rule 1.6’s confidentiality requirements come into play. Attorney A states,

however: “Until [Fred and Wilma One] mentioned the possibility of a lawsuit on the lease, I had

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no knowledge of the lease or information that would be either helpful to [Fred and Wilma One]
or harmful to [Company One, Inc.] regarding these lease issues.” Under the facts as presented,
Attorney A’s representation of Fred and Wilma One on the lease disputes would not violate Rule
1.6 of the North Dakota Rules of Professional Conduct.

‘CONCLUSION

The Committee concludes as follows:

1. : On the facts as presented, Attorney A is not prohibited from representing Fred and Wilma
   One in pursing a claim against Parent Company Two, in regard to Fred and Wilma One’s
   termination of employment; and

2. : On the facts as presented, Attorney A is not prohibited from representing Fred and Wilma
   One in pursuing a claim against Company One, Inc., regarding breaches of the lease between
   Fred and Wilma One and Company One, Inc.

This opinion is provided pursuant to Rule 1.2(B) of the North Dakota Rules for Lawyer

Discipline. NDR. Lawyer Discipline 1.2(B). This rule provides:

_A lawyer who acts with good faith and reasonable reliance on a written opinion or
advisory letter of the ethics committee of the association is not subject to sanction

for violation of the North Dakota Rules of Professional Conduct as to the conduct
that is the subject of the opinion or advisory letter.

This opinion was drafted by Steven E. McCullough and was unanimously approved by

the Ethics Committee on December 16, 2002.

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