Does a law firm's earlier insurance-coverage opinion for a company create a conflict that bars the firm from later bringing a shareholder derivative or class action on that company's behalf?

Plain-English summary

A firm's lawyer had, in 1999, given Lewis and Clark Mutual Insurance Company a written opinion on its directors-and-officers coverage. Years later, a policyholder asked the requesting attorney (in the same firm) to bring a derivative or class action arising from royalty payments between Lewis and Clark and its affiliated cotton-growers association. Lewis and Clark's counsel asserted that the 1999 coverage letter created a conflict. The committee analyzed Rules 1.9, 1.13, 1.6, 1.10, and 1.11 as they stood in 2003.

The committee first addressed screening. Citing Heringer v. Haskel, it concluded that a "Chinese wall" could not cure an ordinary former-client conflict, because under North Dakota law a partner's access to confidential information is imputed to every lawyer in the firm under Rule 1.10. It then turned to the identity of the client. Under the entity rule of Rule 1.13 and SBAND Opinion 99-04, a lawyer who represents a corporation does not also represent its shareholders, directors, or officers. Because a derivative action is brought "in the right of" the corporation (citing N.D.C.C. 10-19.1-86, Schumacher v. Schumacher, and Ross v. Bernhard), the committee found that the requesting attorney represents Lewis and Clark in the present action just as the firm did in the 1999 coverage matter. The client being the same in both matters, no conflict of interest exists under Rule 1.9.

The committee added two points in the alternative. Assuming the firm had instead represented the Board of Directors in 1999, the present matter is not the "same matter" under Rule 1.9(a), and whether it is "substantially related" under Rule 1.9(b) is a fact question; under Continental Resources, Inc. v. Schmalenberger, that turns on whether the firm acquired confidential information usable against the former client, with doubts resolved in favor of disqualification. Separately, the firm's hiring of a former North Dakota Insurance Department attorney who had worked on the Commissioner's takeover of the entity did not preclude the representation, so long as that lawyer was screened under Rule 1.11, received no apportioned part of the fee, and the firm gave written notice to the Insurance Department.

In practice

Under this opinion, a North Dakota firm that earlier advised a corporation is not necessarily conflicted out of later bringing a derivative or class action on that corporation's behalf, because the committee treated the corporation as the client in both matters. The opinion applies Rule 1.10 and Heringer v. Haskel to hold that, for an ordinary firm conflict, screening cannot cure imputed disqualification once a partner holds the former client's confidences. A separately hired former government lawyer is handled differently: Rule 1.11 permits screening that lawyer, with no share of the matter's fee and written notice to the affected agency.

Common questions

Q: If a firm once advised a company, can it later bring a derivative suit on that company's behalf?

A: On these facts, yes. The committee explained that a derivative action is brought "in the right of" the corporation (citing N.D.C.C. 10-19.1-86 and Schumacher), so the firm represented the same client, the corporation, in both matters, and no Rule 1.9 conflict arose.

Q: Does representing a corporation mean representing its directors and officers?

A: No. Applying the entity rule (Rule 1.13) and SBAND Opinion 99-04, the committee said a lawyer for an organization does not automatically represent its shareholders, directors, or officers; dual representation is permissible only if Rule 1.7 allows it.

Q: Can a "Chinese wall" screen cure a former-client conflict in a North Dakota firm?

A: Not for an ordinary firm conflict. Citing Heringer v. Haskel, the committee said a partner's access to confidential information is imputed to the whole firm, so screening one lawyer does not avoid imputed disqualification under Rule 1.10.

Q: How is "substantially related" decided if the firm had represented an adverse party?

A: As a fact question. Under Continental Resources, Inc. v. Schmalenberger, the test is whether the firm acquired confidential information usable against the former client, with doubts resolved in favor of disqualification; the committee left that determination to the requesting attorney.

Background and rules framework

The opinion interprets the North Dakota Rules of Professional Conduct as they stood in 2003: Rule 1.9 (Model Rule 1.9, former clients); Rule 1.13 (Model Rule 1.13, the entity rule for organizational clients); Rule 1.6 (Model Rule 1.6, confidentiality); Rule 1.10 (Model Rule 1.10, imputed disqualification); and Rule 1.11 (Model Rule 1.11, successive government and private employment). North Dakota later revised its Rules of Professional Conduct, so the rule text quoted in the opinion reflects the pre-revision version.

The opinion is issued under North Dakota Rule for Lawyer Discipline 1.2(B), the safe-harbor provision protecting good-faith reliance on a written ethics-committee opinion.

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; entity rule)
• Model Rule 1.10 / N.D.R. Prof. Conduct 1.10 (imputed disqualification)
• Model Rule 1.11 / N.D.R. Prof. Conduct 1.11 (former government lawyer; screening)
• Model Rule 1.6 / N.D.R. Prof. Conduct 1.6 (confidentiality)
• N.D.R. Lawyer Discipline 1.2(B) (safe harbor for reliance on a committee opinion)

Statutes:

• N.D.C.C. 10-19.1-86 (shareholder derivative actions under the Business Corporation Act)
• N.D.C.C. 26.1-12-29 and 26.1-12-30 (mutual insurance company dividends)

Cases:

• Heringer v. Haskel, 536 N.W.2d 362 (N.D. 1995), imputed disqualification and screening
• Continental Resources, Inc. v. Schmalenberger, 2003 ND 26, 656 N.W.2d 730, "substantially related" test
• Schumacher v. Schumacher, 469 N.W.2d 793 (N.D. 1991), derivative actions on behalf of the corporation
• Ross v. Bernhard, 396 U.S. 531 (1970), a derivative cause of action belongs to the corporation
• Jess v. Danforth, 169 Wis. 2d 229, 485 N.W.2d 63 (1992), the entity rule

Other opinions cited:

• SBAND Ethics Op. 99-04: the entity rule; a corporation's lawyer does not represent its constituents
• SBAND Ethics Op. 00-01: reviewing substantive law in assessing conflicts

See also

• ND Ethics Op. 02-04: Corporate-Family Conflict
• ABA Formal Op. 95-390: Corporate Family Conflicts
• ABA Formal Op. 510: Prospective-Client Conflicts

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_03-01.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 NO. 03-01
July 1, 2003

The Ethics Committee has been asked to issue an opinion on whether the requesting
attorney has a conflict of interest in bringing a derivative/class action lawsuit against an
organization when the requesting attorney’s law firm had previously performed some legal work

for an affiliate of the organization.

ASSUMED FACTS

A. Present Legal Matter.

This opinion will use the hypothetical corporate names contained in the written request
for an Ethics Committee opinion.

North Dakota Cotton Growers’ Association (“CGA”) is a North Dakota corporation.
CGA's promotes the cotton industry. Its membership is made up of two classes of stockholders:
voting stockholders and non-voting stockholders. To be a voting stockholder one must actually
grow cotton. CGA is operated by a Board of Directors composed of 12 members who have to be
voting members. In other words, all of the Board of Directors are cotton growers.

A number of years ago CGA created Lewis and Clark Mutual Insurance Company
(“Lewis and Clark”), a mutual insurance company. Over the years, the same Board of Directors
of CGA served as the Board of Directors of Lewis and Clark. The By-Laws of Lewis and Clark
provided as follows: “[T]he Board of Directors shall consist of 11 persons who shall be a CGA
Board member and a current policyholder in good-standing.” Thus, CGA and Lewis and Clark
had identical Board of Directors with the exception of one.

In recent years, CGA has received a “royalty fee” from Lewis and Clark. Those royalty

fee payments have apparently been quite substantial.

Corporate officers and managers of Lewis and Clark protested the royalty payments,
without success. Certain corporate officers and managers of Lewis and Clark urged the North
Dakota Insurance Commissioner to take over the affairs of Lewis and Clark, based in part on the
royalty payments, as well as alleged certain retaliatory actions taken against Lewis and Clark
officers and managers who protested such payments. Ultimately, the Insurance Commissioner
took administrative control of Lewis and Clark.

The requesting attorney was approached by a policyholder of Lewis and Clark regarding
the activity of CGA and the combined Boards of CGA and Lewis and Clark. The policyholder
sought advice on possible remedies available to the policyholders of Lewis and Clark.
Thereafter, the requesting attorney wrote a letter to Lewis and Clark requesting the present Board
Members of Lewis and Clark to bring an action against the following: current and/or former
Board Members of Lewis and Clark who authorized the royalty payments; CGA; and, all other
parties or entities involved in the royalty payments. Such notice is required under North Dakota

law. Phillip-Van Heusen Corp. v. Shark Bros., Inc., 289 N.W.2d 16 (N.D. 1980) (providing

demand must be made on corporation for action before suit is instigated).

An attorney representing Lewis and Clark responded to that letter indicating that he
believes the requesting attorney and the requesting attorney’s firm have a conflict of interest
because of a 1999 opinion letter on insurance issues provided by the requesting attorney’s law
firm to Lewis and Clark. The requesting attorney seeks an opinion from this Committee as to
whether a conflict of interest exists.

B. Former Legal Matter.

The requesting attorney’s law firm (“Law Firm”) has not routinely represented CGA,

CGA’s subsidiary, or Lewis and Clark. However, in 1999, the Secretary and General Counsel

for Lewis and Clark sought an opinion from one of the members of the Law Firm primarily
regarding Lewis and Clark’s officers and directors (“O&D”) liability insurance policy. An
attorney with the Law Firm reviewed the O&D liability insurance policy and North Dakota law
answered the specific questions raised. The attorney first answered the specific questions by way
of a letter dated November 2, 1999. (hereinafter “Coverage Letter”). That attorney also orally
presented the opinions set forth in the letter at a meeting of the Board of Directors of Lewis and
Clark.

The requesting attorney advises that the Law Firm's attorney who provided the Coverage
Letter and attended the Board of Directors meeting has no specific recall of anything being
discussed other than the opinions and information set forth in the letter. The Law Firm no longer
has a copy of the insurance policy in its file. The requesting attorney assumes that the policy
was sent to the Law Firm and then returned. The Law Firm has no notes or memoranda
regarding the file and no member of the Law Firm can recall receiving any background facts.
The requesting attorney is confident, however, that no conversations took place regarding the
royalty payments being made between Lewis and Clark and CGA and that no conversations or
facts were provided to the Law Firm about any actual breach of a fiduciary duty.

The issues for which the Law Firm advised Lewis and Clark in 1999 were the following:

1. Whether Lewis and Clark’s O&D liability insurance policy covered intentional
   acts?

2. Whether defamation is an intentional act under North Dakota law?

3. Whether the current O&D liability insurance policy covered criminal acts?

4, Whether breach of a fiduciary obligation under North Dakota law is a criminal act

or civil act exposing a director to personal liability? And

5. Whether breach of a fiduciary obligation or criminal acts by an individual Board
   member is sufficient basis for removal of that Board member?

The Coverage Letter contains no facts or set of hypothetical facts, but rather discusses the
pertinent insurance policy provisions and/or North Dakota law that govern the specific questions.
The Law Firm’s opinion letter, however, does provide that:

It is opinion that a breach of a fiduciary obligation, in and of itself, does not
constitute a criminal act under North Dakota law. .. . With respect to the officers
and director of (Lewis and Clark}, we believe that breach of their fiduciary duties
to the company would only expose an officer or director to personal civil liability.
Based o the above stated definition of “wrongful acts,” your current O&D liability
policy does generally provide coverage for claims based on a breach of a
director’s fiduciary duty. However, this general coverage is subject o several
specific exclusions, including, but not limited to, claims based on a director
“gaining any profit or advantage to which they were not legally entitled,” See
Section IV(B), and claims based on “fraudulent dishonest” acts, See Section
IV(D). A claim for breach of a director’s fiduciary duty may be based on one or
more of these “excluded” acts, and therefore, the policy would not provide
coverage.

It should also be noted that Section IV(K) of the policy specifically excludes
coverage for claims brought ‘by or at the behest of the Company,” and Section IV
(L) specifically excludes claim ‘by any security holder of the Company’ whether
directly or derivatively, unless such claim is brought completely independently
and without any assistance from the Company or its directors or officers. Thus, a
claim by Lewis and Clark or a derivative action brought by a policyholder against
a director for breach of his/her fiduciary duty would not be covered under the
policy. Since these are the likely parties to initiate a claim against a director for
breach of his/her fiduciary duty, in many situations, your O&D liability policy
will not provide coverage to a director against a claim for breach of his/her
fiduciary duty.

Accordingly, the Law Firm’s Coverage Letter did discuss whether the O&D liability policy
provides coverage for lawsuits, including derivative actions, arising from a board member’s

breach of fiduciary duty.

DISCUSSION

Rule 1.9 of the North Dakota Rules of Professional Conduct primarily covers questions
on whether an attorney has a conflict of interest in representing a client involved in litigation

which also involves a former client. Rule 1.9 provides as follows:

A lawyer who has formally 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 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 substantially related matter, except as Rule 1.6
would require or permit with respect to a client.

N.D.R.Prof. Conduct 1.9 (2003). Before applying that rule to the presumed facts, the Committee
will briefly address whether a “Chinese wall” can be constructed around the attorney who

provided the insurance coverage information so as to prevent any conflict of interest from

arising.

A. Imputed Disqualification under Rule 1.10.

Attorneys may consider screening another attorney in a law firm from a matter so as to
avoid a conflict of interest from arising as a result of the screened attorney’s involvement in a
prior matter. Such a screening is often called a “Chinese wall.”

Rule 1.10 of the North Dakota Rules of Professional Responsibility provides, in relevant
part, as follows:

Lawyers associated in a firm may not knowingly represent a client when any one

of them practicing alone would be prohibited from doing so by these rules, except

as provided by Rule 1.11 (which addresses successive government and private

employment) or Rule 1.12 (which addresses former judge, arbitrator, adjudicative

officer and law clerks).

As explained in the official comment to Rule 1.10:

The rule of imputed disqualification stated in §(a) gives affect to the principle of
loyalty to the client as it applies to lawyers who practice in the law firm. Such

situations can be considered from the premise that a firm of lawyers is essentially
one lawyer for purposes of the rules governing loyalty to the client, or from the
premise that each lawyer is vicariously bound by the obligations of loyalty owed
by each lawyer with whom the lawyer is associated.

In Heringer v. Haskel, 536 N.W.2d 362 (N.D. 1995) the North Dakota Supreme Court addressed

imputed disqualification under Rule 1.10 and whether a “Chinese wall” can be constructed to
preclude a disqualified attorney from working on a matter such that his or her partners may still
be involved. The Supreme Court explained that a law partner’s access to confidential information
justifies disqualification of the partner because the partner is imputed with all knowledge in the
firm’s files, and such access to confidential information is imputed to other attorneys in the firm.
Id. at 366. In other words, if the requesting attorney had access to his partner’s file containing
the insurance coverage opinion given to Lewis and Clark the requesting attorney is imputed with
all knowledge in that file even if the attorney did not actually view it. Accordingly, if the
requesting attorney’s partner is disqualified because of information learned and contained in the
file so too is the requesting attorney. The requesting attorney has not suggested that members of
his Law Firm do not have access to each other’s files. If that assumption is correct, then a
“Chinese wall” cannot be constructed around the attorney who provided the Coverage Letter and
coverage advise so as to allow the requesting attorney to avoid any conflict of interest arising
from the prior representation of Lewis and Clark by the Law Firm.

B. Whether the Requesting Attorney is Representing the Same Client in the
Present Matter as in the Previous Matter.

In order for a conflict of interest to exist, the present derivative/class action claim must be
against a former client. Paragraphs (a) and (b) of Rule 1.9 describe the prohibition against an
attorney representing “another person” in the same or substantially related matter against a

former client. Thus, a threshold issue is whether the requesting attorney is representing the same

"person" in the present derivative/class action as was represented by the attorney’s Law Firm in
the previous insurance coverage matter.
1. The requesting attorney is representing Lewis and Clark and one or
more of its policyholders in the present matter.

The Ethics Committee has, in deciding whether a requesting attorney has a conflict of
interest, reviewed and considered the substantive and procedural law in which the issue arises.
See SBAND Op. 00-01 at p. 2. The requesting attorney provided the author of this opinion a
copy of a draft complaint. The named plaintiffs in the draft complaint are two policyholders
"individually and an behalf of Lewis and Clark and all other policy holders similarly situated."
The named Defendants are CGA, another company affiliated with CGA [identified in the draft
complaint as a wholly owned subsidiary of CGA), and the board of directors of Lewis and Clark
"for relevant time periods in their official capacities as Directors." The draft complaint alleges a
derivative action, or in the alternative a class action, for the following claims for relief:

l. Breach of Standard of Conduct (against Individual Board Defendants)

2. Conflict of Interest (against Individual Board Defendants)

Unauthorized dividends — violation of NDCC 26.1-12-29 and 30 (against all
defendants)

Conversion (Against CGA)

Unjust Enrichment (against CGA)

Unfair Insurance Practices (against Individual Board Members)

Consumer Fraud (against Individual Board Members)

Exemplary Damages (reserving right to plead punitive damages as allowed under
North Dakota law).

Ww

SO NAWS

Lewis and Clark is not a defendant. Rather, the claims are brought “on behalf of Lewis
and Clark” as well as the individual policyholders. It appears from the complaint that Lewis and
Clark will be the entity that will recover any money that may be awarded as damages in the

derivative/class action. This is confirmed by substantive law on derivative actions.

Section 10-19.1-86 of the North Dakota Century Code discusses derivative actions under
the Business Corporation Act and explains that the action is "in the right of" the corporation. In

Schumacher v. Schumacher, 469 N.W.2d 793, 798 (N.D. 1991), the North Dakota Supreme

Court recognized that shareholders alleging an injury to the corporation may bring an action on
behalf of the corporation within the context of a derivative action. The court explained that “as a
matter of general corporate law, shareholders alleging injury to the corporation must bring an
action on behalf of the corporation within the context of a derivative action.” Id. at 798; see also.

Ross v. Bernhard, 396 U.S. 531, 535 (1976) (the cause of action in a derivative action belongs to

the corporation, not to the individual shareholders).

Similarly, the requesting attorney has advised the Committee, and the draft complaint
shows, that in the class action Lewis and Clark will not be the defendant. Rather, the defendant
in the class action will be CGA and/or the individual Board of Directors. See N.D.R. Civ.P. 23(a)
(2003)

The question then arises as to whether the requesting attorney, in representing Lewis and
Clark, will also be representing its Board of Directors. Pursuant to the “entity rule” an attorney
who represents an organization, such as a corporation, does not also represent the organization’s

shareholders or officers. See, e.g., Jess v. Danforth, 169 Wis.2d 229, 485 N.W.2d 63 (1992). For

example, N.D.R.Prof. Conduct 1.13 provides that: “[a] lawyer who is employed or retained by an
organization represents the organization acting through its duly authorized constituents.” In
SBAND Ethics Op. 99-04 this Committee recognized the “entity rule” when it explained that an
attorney representing a corporation does not also automatically represent the corporation’s
shareholders or officers and that such dual representation is permissible only if allowed under

Rule 1.7 [the general conflict of interest rule].

Therefore, under the facts presented, the requesting attorney will not be representing the
Board of Directors of Lewis and Clark in the present derivative/class action. Rather, the
requesting attorney is representing the mutual insurance company, Lewis and Clark, itself and
one or more of its policy holders.

2. The requesting attorney’s law firm was representing Lewis and Clark
   in the previous matter.

A critical question is whether the requesting attorney’s Law Firm was providing legal
advice to Lewis and Clark or to its Board of Directors with respect to the prior insurance
coverage mater. If the advise was being provided only to Lewis and Clark and not its Board
members then the present derivative/class action is not against a former client, Le., it is not
against the board members.

The requesting attorney has advised this Committee that “there are no facts, or evidence
in our possession that Lewis and Clark intended anything else but to hire this firm on behalf of
the organization.” The SBAND Ethics Committee does not act as a factfinder, but rather renders
opinions based on the facts presented by the requesting attorney. Therefore, it is assumed that
the requesting attorney’s rendition of the facts are correct and that the Law Firm was providing
advice regarding O&D coverage to Lewis and Clark. Because, as explained above, an attorney
who represents an organization does not also represent the organization’s shareholders, directors
or officers, the Committee concludes that the requesting attorney’s Law Firm was only
representing Lewis and Clark in the previous insurance coverage matter and not the Board of
Directors of Lewis and Clark.

Accordingly, based on the assumed facts, as well as the nature of a derivative action and

class action, the Committee concludes that the requesting attorney is representing the same client

in the present derivative/class action as his Law Firm was representing in the prior matter, L.e.,
Lewis Clark was the client in both of those matters. Therefore, no conflict of interest exists

under Rule 1.9.

C. Assuming That the Requesting Attorney was Representing the Board of
Directors in the Former Matter Does a Conflict of Interest Arise?

The requesting attorney inquires as to whether he has a conflict of interest in representing
the clients in the present derivative/class action assuming that his Law Firm represented the
Board of Directors in the prior, insurance coverage matter. Under such a hypothetical the
requesting attomey has a potential conflict of interest because he will be representing a current
client, Lewis and Clark and one or more of its policyholders, in a matter adverse to a former
client, a derivative/class action against Lewis and Clark’s Board of Directors. Whether an
impermissible conflict of interest exists in such scenario generally is a question of fact that
ultimately has to be answered by the requesting attorney. The committee, however, will provide
the requesting attorney some guidance in how to answer that question.

Paragraph (a) of Rule 1.9 prohibits an attorney from representing another person in the
same matter in which that person’s interests are materially adverse to the interests of a former
client. Based upon the assumed facts, the present derivative/class action and the prior insurance
coverage matter are not “the same matter.” There is no indication in the information received
from the requesting attorney or in the Coverage Letter itself that the prior legal work by the
requesting attorney’s Law Firm dealt with or addressed the alleged improper conduct by the
Board of Directors that will be the subject matter of the present derivative/class action.
Therefore, Paragraph (a) of Rule 1.9 does not disqualify the requesting attorney.

Paragraph (b) of Rule 1.9 applies to situations in which the attorney is representing a

claim in a “substantially related” matter in which the present client’s interests are materially

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adverse to the interests of a former client. Under such a situation the attorney can represent the
current client only if the former client consents.

Neither Rule 1.9 nor its comments provide a definition or detail discussion of what is
meant by a “substantially related” matter. (See SBAND Ethics OP. 00-01, at P3). The analysis
is usually determined on a case-by-case basis.

In Continental Resources, Inc. v. Schmalenberger, 203 N.D. 26, 656 N.W.2d 730, the

North Dakota Supreme Court addressed whether an attorney must be disqualified due to a
conflict of interest arising from the attorney’s representing a current client in a dispute against a
former client. The Supreme Court explained that a potential conflict of interest between current
and former clients involves the “delicate and sometimes difficult task of balancing competing
interests: the individual right to be represented by counsel of one’s choice, each party’s right to
be free from the risk of inadvertent disclosure of confidential information, and the public’s

interest in the scrupulous administration of justice.” Id. at { 11 (citing Brown v. Eighth Judicial

District Court 14 P. 3°? 1266, 1269-70 (NEV. 2000)). The Supreme Court also explained that
any “doubt” with regard to whether there is a conflict of interest in representing a present client
in an action against a former client “must be resolved in favor of disqualification.” Id. at § 14.

The Supreme Court's opinion in Schmalenberger helps to define what constitutes a

"substantially related matter" under Rule 1.9(b). The Supreme Court explained that a critical
question is the extent to which the attorney acquired confidential information in the course of the
representation of the former client. If the attorney acquired confidential information that may be
used in advocating the current client’s claim against the former client then the current claim and
the former matter are “substantially related” under Rule 1.9(b). DI. At § 20. The Supreme Court

in Schmalenberger also confirmed the obvious - that the interest of a current and former client

1]

are “materially adverse” if they are on opposites of litigation. Id. Thus, the question is whether
the requesting attorney’s acquiring information regarding possible insurance coverage under a
D&O liability policy for derivative claims arising out of a director’s breach of a fiduciary duty is
“confidential information and may be useful in advocating” the present derivative/class action
claims.

Confidential information under Rule 1.6 is "information relating to the representation of
the client." NDR. Prof. Conduct 1.6(2003). A lawyer shall not reveal such information unless
required or permitted to so by Rule 1.6. Id. The Committee does not believe that the insurance
policy or its contents constitutes "confidential information." Liability insurance is readily
discoverable in litigation. N.D.R.Civ.P. 26 (2003). Thus, the liability policy can be disclosed to
comply with the law or court order. N.D.R. Prof. Conduct 1.6(g) (2003). Moreover, based on the
information received form the requesting attorney, the Committee assumes that no facts
regarding improper conduct by any Board of Director was received by the requesting attorney’s
Law Firm as part of the prior insurance coverage matter. Rather, the requesting attorney’s Law
Firm only answered some rather generic questions regarding coverage. Therefore, the only
“possible confidential information” the law firm could have obtained during the insurance
coverage matter is the portions of the policy and/or North Dakota law that apply to a
derivative/class action alleging breach of fiduciary duty by a board of director. That is the
"information relating to the representation of the former client” obtained by the Law Firm in the
prior insurance coverage matter.

As explained in Schmalenberger if the requesting attorney’s knowledge regarding the

D&O policy may be used to help fashion claims against the directors of Lewis and Clark such

that there was insurance coverage, then the present derivative/class action and the prior insurance

12

coverage issue are “substantially related” under Rule 1.9(b) and the requesting attorney has an
impermissible conflict of interest unless the Board of Directors consent to his representing the
present clients. If, however, knowledge of the D&O liability coverage obtained by the requesting
attorney as a result of the prior insurance coverage dispute is not useful in advocating the
pending derivative/class action claim, for example because the D&O policy reviewed by the
requesting attorneys law firm is outdated and/or no longer in affect, then the pending and prior

matters are not “substantially related” and no conflict of interest exists under Rule 1.9(b).

The Supreme Court’s discussion of Rule 1.9 in Schmalenberger did not end with
application of the rule itself. Rather, the Supreme Court explained that:

Although the North Dakota Rules of Professional Conduct do not use the
language, the “appearance of impropriety” standard has not been wholly
abandoned in spirit. Concern “about the public’s perception of the legal
profession, particularly as it relates to confidentiality of client information,
is a relevant consideration when we examine and interpret the rules."

We view a possible appearance of impropriety from the perspective of a
lay person: because judges have a privileged understanding of the legal
system, they may fail to find that an appearance of impropriety were one
would be found by a lay person. The existence of impropriety should
therefore should be determined from the perspective of a reasonable lay
person.

We believe a lay person “would view a law firm switching sides in a
middle of a dispute to by highly objectionable.” In fact, “[t]he idea of a
lawyer changing sides is at the heart of the coalition” in Rule 1.9. Thus, to
“preserve public confidence in the legal profession, and to insure the
confidentiality and integrity of client information,” lawyers and law firms
“must not be allowed to “switch sides” when they have access to the
former client’s file.”

Schmalenberger, 2003 ND at { 22, 23 and 24 (Citing Heringer at 367).

The "appearance of impropriety test", to the extent it is a "new test" in addition to the
specific dictates of Rule 1.9(b), is also a factual question. As with the "substantially related"

question under Rule 1.9 (b), the "appearance of impropriety" analysis in the question before the

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Committee hinges on whether the requesting attorney's Law Firm obtained confidential
information in the insurance coverage dispute that may be used against the Board of Directors in
the present derivative/class action. If so, a lay person likely would view the requesting attorney's
representation of Lewis and Clark and one or more of its policy holders in the pending matter as
"switching sides."

Finally, even if no conflict of interest exists, Rule 1.6(c) precludes the requesting attorney
from disclosing any “confidential information” that may have been obtained during the insurance
coverage matter except as allowed under Rule 1.6. Therefore, even if a conflict of interest
involving a former client does not arise under Rule 1.9, Rule 1.6 continues to protect the former
clients right to have his or her confidential information kept confidential.

D. Is The Requesting Attorney Disqualified By Virtue Of His Law Firm’s

Hiring A Former Lawyer With The North Dakota Department Of
Insurance?

The requesting attorney advises the Committee that his law firm recently hired an
associate attorney who was employed by the North Dakota Department of Insurance prior to
joining the requesting attorney’s Law Firm. While so employed the associate attorney was
involved in the Insurance Department’s administrative control of Lewis and Clark. The
Committee assumes that within that role the associate attorney would have obtained confidential
information regarding CGL, Lewis and Clark and the conduct of their directors. Even so, the
Committee concludes that the associate attorney’s knowledge of such confidential information
does not disqualify the requesting attorney from representing Lewis and Clark and individual

policyholders in the present derivative/class action assuming the associate attorney is properly

screened from the present matter.

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As stated above, the North Dakota Supreme Court in Haskel held that an attorney cannot
avoid disqualification due to a conflict of interest by “screening” (placing a "Chinese wall"
around) the lawyer’s partner who has knowledge of the confidential information unless it is
shown that the attorney did not have access to his partner’s files. The difficulty in applying the
“Chinese wall doctrine” does not, however, apply to instances where the partner’s confidential
information was obtained during previous government employment. Under that situation, Rule
1.11, rather then Rule 1.0 controls.

Rule 1.11 provides, in relevant part, as follows:

(a) Except as law may otherwise expressly permit, a lawyer shall not represent a

private client in connection with a matter in which the lawyer participated

personally and substantially as a public officer or employee, unless the
appropriate government agency consents after consultation. No Lawyer in a firm

with which the lawyer is associated may knowingly undertake or continue

representation in such a matter unless:

(1) The disqualified lawyer is screened from any participation in the

matter and is apportioned no part of the fee therefrom; and

(2) Written notice is promptly given to the appropriate government
agency.

(b) Except as law may otherwise expressly permit, a lawyer having information
that the lawyer knows is confidential government information about a person
acquired when the lawyer was a public officer or employee may not represent a
private client whose interests are adverse to that person in a matter in which the
information could be used to the material disadvantage of that person. A firm with
which that lawyer is associated may undertake or continue representation in the
matter only if the disqualified lawyer is screened from any participation in the
matter and is apportioned no part o the fee therefrom.

N.D.R. Prof. Conduct 1.11 (2003). It appears that the Law Firm's associate attorney: (a)
participated personally and substantially as a public employee in connection with the royalty
payments from Lewis and Clark to CGA; and, (b) obtained confidential government information

regarding that matter. Paragraphs (a) and (b) therefore likely apply. Under both paragraphs (a)

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and (b) the requesting attorney can still represent Lewis and Clark and one or more of the policy
holders if the associate attorney is screened and the associate is apportioned no part of the fee
from that representation. The prohibition against an apportionment of the fee does not prohibit
the associate from receiving a salary or bonus established by prior independent agreement. See
Comment to Rule 1.11 Rule 1.11 prohibits directly relating the attorney's compensation to the
fee in the matter in which the lawyer is disqualified. Id.

Finally, because paragraph (a) may apply the Law Firm should give written notice to the
North Dakota Insurance Department of the requesting attorney's involvement in the present
derivative/class action ad that the associate attorney will be screened in compliance with Rule
1.11. The requesting attorney has provided the author of this opinion a copy of a February 25,
2003 letter so advising the North Dakota Insurance Commissioner. This Committee was not
asked to provide an opinion on whether that letter complies with Rule 1.11 and therefore does

not do so in this Formal Opinion.

CONCLUSION

Based upon the assumed facts, the requesting attorney is representing the same client in
the present derivative/class action as his law firm represented in the former insurance coverage
matter. Therefore, no conflict of interest exists.

If, however, an “adverse party” in the present derivative/class action is a former client of
the Law Firm's then the requesting attorney must make a determination as to whether the Law
Firm acquired “confidential information” in the prior matter that may be useful in advocating the
claims of the present clients against the former client. If so, the attorney has a conflict of interest

under Rule 1.9(b) and must withdraw from representing the current clients unless the former

client consents.

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Finally, the requesting attorney’s Law Firm’s hiring of a former attorney of the North
Dakota Insurance Department who worked on the Insurance Commissioner’s administrative
control of the entity in question does not preclude the requesting attorney from representing the
current clients in the derivative/class action so long as the former Insurance Department attorney
is properly screened from the case as required under Rule 1.11.

This Opinion is provided pursuant to a 1.2(B) of the North Dakota Rules for Lawyer
Discipline. This rule states that:

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 a subject of the opinion or advisory

letter.
This Opinion was drafted by Mark Hanson and was approved by a vote of by
the committee on July , 2003.

Mark R. Hanson, Chair

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