NEW YORK COUNTY LAWYERS’ ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 684
TOPIC: CONFLICT OF INTEREST; ADVERSE CONCURRENT REPRESENTATION
DIGEST: AN ATTORNEY MAY, UNDER CERTAIN CIRCUMSTANCES, ACCEPT EMPLOYMENT IN A MATTER ADVERSE TO A SUBSIDIARY OF A CORPORATE CLIENT IF THE ADVERSE ACTION WOULD NOT MATERIALLY AFFECT THE CORPORATE CLIENT’S INTERESTS
CODE: DR 5-105(A); DR 5-X05(C); EC 5-18; EC 5-19; CANONS 4, 5, 9
May a lawyer who represents a corporate client also represent a party with interests adverse to those of a subsidiary of the corporation in an unrelated matter?
The Code of Professional Responsibility prohibits concurrent representation of parties with “differing interests” unless it is obvious that the lawyer can adequately represent the interests of both clients and each client consents to the representation. See DR 5-105. The term “differing interests” includes “every interest that will adversely affect either the judgment or the loyalty of a lawyer to a client, whether it be a conflicting, inconsistent, diverse, or other interest.” Definition 1.
The rule against adverse concurrent representations is designed to protect “the reasonable expectations of clients with regard to the loyalty of the client’s lawyer and confidentiality of the work of a present or former lawyer”, C, Wolfram; Modern Legal Ethics §7.1.7 (1986). In addition, “[a] lawyer should not be permitted to put himself in a position where, even unconsciously he will be tempted to ‘soft pedal’ his zeal in furthering the interests of one client in order to avoid an obvious clash with those of another”. Estates Theatres, Inc. v. Columbia Pictures Indus., 345 F. Supp. 93, 99 (S.D.N.Y. 1972). DR 5-105 has been invoked to prohibit adverse concurrent representations in a wide variety of settings. See, e.g., ABA Inf. 1441 (1979) (representation of both manufacturer and dealer in defending products liability action); N.Y. State 516 (1980) (estate planning for prospective customers by lawyers for an insurance company); N.Y. County 651 (1976) (representation of both driver and passenger involved in automobile accident).
The question raised here is whether representation of a parent company should automatically be deemed to include representation of a subsidiary such that taking a position adverse to the subsidiary would be precluded under DR 5-105. We believe that DR 5-105 normally would prohibit the proposed representation in the circumstances described if (1) either the parent or the subsidiary reasonably believes that an attorney-client relationship exists between the subsidiary and counsel to the parent, (2) counsel to the parent is privy to confidential information regarding the subsidiary which, if used in the proposed representation, would be detrimental to the subsidiary’s interests, or (3) the parent corporation’s interests would be materially adversely affected by the action against its subsidiary.
Absent an agreement to the contrary, a subsidiary corporation is not a client of the lawyer for the parent corporation. Under New York law, a subsidiary corporation is considered to be legally distinct from its parent even if it is wholly-owned, or if the two corporations share stockholders, officers or directors, or use the same offices. 13 N.Y. Jur. 2d Business Relationships §30 (1981) (and references therein). See also N.Y. State 580 (1986) (attorney for Industrial Development Agency may represent parties with interests adverse to parent municipality since the Agency is a distinct corporate legal entity; client may properly be viewed as the Agency and not the municipality); N.Y. State 447 (1976) (attorney for county’s Department of Social Services permitted to represent clients in claims against the county; such department, and not the parent governmental unit, should be treated as the client for purposes of the rule which forbids the concurrent representation of one client against another); EC 5-18 (“[a] lawyer employed or retained by a corporation . . . owes allegiance to the entity and not to a stockholder, director, officer, employee, representative, or other person connected with” the entity”).
Although not dispositive of the ethical issues raised, decisional law and a recent ethics opinion from another jurisdiction support the proposition that the on-going representation of a parent corporation does not automatically preclude a law firm from representing a party adverse to a subsidiary of the parent. See Whiting Corp. v. White Machinery Corp., 567 F.2d 713 (7th Cir. 1977) (per curiam) (affirming district court’s order refusing to disqualify plaintiff’s counsel where counsel simultaneously represented corporation owning over 20% of the outstanding shares of defendant corporation); California Opinion 1989-113 (1990) (permitting representation of parent and party adverse to wholly owned subsidiary except where subsidiary is alter ego of parent or where subsidiary revealed confidences to lawyer).
While representation of a parent does not automatically constitute representation of its subsidiary, there are certain circumstances in which the lawyer will be presumed to represent the subsidiary as well as the parent. A reasonable belief on the part of a subsidiary or its parent that an attorney-client relationship exists between the subsidiary and counsel to its parent will preclude representation adverse to the subsidiary. The existence of an attorney-client relationship will depend on such factors as the nature of the relationship between the subsidiary and its parent and the extent to which counsel for the parent is privy to confidential information of the subsidiary. See Hartford Accident & Indemnity Co. v. RJR Nabisco, Inc., 721 F. Supp. 534, 540 (S.D.N.Y, 1989) (attorney-client relationship existed between subsidiary’s lawyer and parent where parent’s general counsel supervised actions of subsidiary’s lawyer). Such a situation might arise if a close relationship exists between the parent and its subsidiary. For example, if a parent and its subsidiary shared the same legal department, the lawyer for the parent could be precluded from representing a client with interests adverse to the subsidiary. See Pennwalt Corp. v. Plough, Inc., 85 F.R.D. 264, 272 (D. Del. 1980) (upcoming consolidation of legal departments of sister corporations would have led to disqualification if counsel had continued to represent one corporation and party adverse to the other).
In addition to considering whether representation of adverse interests would implicate any ethical duties owed to the subsidiary, the lawyer must consider also the impact of such representation on the parent corporation. A corporation’s interests extend beyond the corporation itself: a parent corporation will be affected not only by an action against it, but also, to varying degrees, by an action against a subsidiary. The interests of two corporations may thus be indistinguishable even if the corporations are legally distinct.
The extent to which the interests of the parent will be adversely affected by a representation adverse to a subsidiary will vary with the degree of ownership and importance of the subsidiary to the parent, the nature and magnitude of the action that constitutes the adverse representation, and perhaps other factors as well. For example, an action against a substantial, 100%-owned first-tier subsidiary is more likely to have an adverse impact on the parent corporation than one against a partially- owned, lower-tier subsidiary. Likewise, an action for extraordinary damages will be more significant than a trivial suit. Indeed, situations may exist where the unity of economic interest between parent and subsidiary is such that, although legally distinct, the two entities must be considered a single unit for purposes of applying the relevant ethical principles. See California Opinion 1989-113 (1990).
A lawyer’s ethical responsibilities with regard to the parent corporation should be a function of the materiality of the adverse action. Where an adverse action would materially affect the parent, the lawyer’s ethical duty is the same as it would be were the parent itself the subject of the action- Under such circumstances, the lawyer should only represent the adverse client if it is obvious that the lawyer can adequately represent both clients and if each consents. See DR 5-105(C). On the other hand, where an action against a subsidiary would not have a material adverse effect on the parent, the lawyer should be free to represent the adverse party. As a matter of good practice, the lawyer should consider whether disclosure to the parent company of the proposed representation against its subsidiary (assuming that no confidences or secrets of the new client would be revealed thereby) is necessary or would be the most effective means to ascertain the materiality of the new representation to the parent corporation.
In addition to considering whether representation of differing interests would implicate any ethical duties owed to the parent or the subsidiary, a lawyer must consider also whether the proposed representations would adversely affect his or her judgment on behalf of, or dilute his or her loyalty to, the party with interests opposed to those of the subsidiary. See Canon 5; DR 5-105(A); EC 5-14. The underlying purpose of Canon 5 is to insure the absolute and unfettered loyalty of a lawyer to a particular client. The very threat of divided loyalty is a basis for disqualification. If the ongoing representation of a parent corporation reasonably might impair the lawyer’s independent professional judgment on behalf of the adversary of a subsidiary, the lawyer must decline representation of the adverse party absent disclosure to, and consent of, both the parent and the adverse party. See EC 5-19.
Finally, the lawyer must consider Canon 9. Canon 9 states that “[a] lawyer should avoid even the appearance of professional impropriety.” Two tests concerning disqualification by reason of a Canon 9 violation have been articulated:
“[A]n attorney should be disqualified under Canon 9 only when ‘there is a reasonable possibility of improper professional conduct’ and ‘the likelihood of public suspicion or obloquy outweighs the social interests which will be served by a lawyer’s continued participation in a particular case.’” Pennwalt, 85 F.R.D. at 272 (quoting Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1321 (17th Cir), cert. denied, 439 U.S. 955 (1978).
“[U]nder this canon there must be a showing of a reasonable possibility that some specifically identifiable impropriety in fact occurred and that the likelihood of public suspicion must be weighed against the interest in retaining counsel of one’s choice,” Pennwalt. 85 F.R.D, at 273 (quoting Brennan’s Inc. v. Brennan’s Restaurants, Inc., 590 F.2d 168, 172 (5th Cir. l979)).
While the appearance of impropriety is difficult to define, as a general rule, the closer the relationship between the law firm and the subsidiary and the more material an adverse action to the parent, the greater the chances that the dual representation proposed will appear improper. Where an action would materially affect the parent, Canon 9 considerations are likely to be implicated if the proposed representation would require the lawyer to take action hostile to persons connected with the parent, such as discovery of officers or directors of the parent corporation.
A lawyer representing a corporation may represent a party in a matter adverse to a subsidiary of that corporation if the representation will not compromise an attorney-client relationship that the subsidiary or its parent reasonably believes to exist, if counsel to the parent is not privy to confidential information of the subsidiary which, if used in the proposed representation, would be detrimental to the subsidiary corporation’s interests, and if the adverse action will not materially affect the parent corporation’s interests. If the action would compromise an attorney-client relationship with a subsidiary or would have a material adverse affect on the parent corporation, then DR 5-105(A) would operate to prohibit the representation absent client consent.
July 8, 1991