Evans v. Artek Systems Corp.

• Decision Date: 25 August 1983
• Docket Number: No. 1297,D,1297
• Court: U.S. Court of Appeals — Second Circuit
• Parties: Fed. Sec. L. Rep. P 99,467 David W. EVANS, Plaintiff-Appellant, v. ARTEK SYSTEMS CORPORATION, Dynatech Corporation, J.P. Barger, William W. Welsh, Jr., Charles G. Leonhardt, Webster B. Brockelman, Jr., David K. Felbeck, John N. Fricker, Clarence A. Kemper and Michael K. Bender, Defendants-Appellees. ocket 82-7969.

Page 788

715 F.2d 788

Fed. Sec. L. Rep. P 99,467

David W. EVANS, Plaintiff-Appellant, v. ARTEK SYSTEMS CORPORATION, Dynatech Corporation, J.P Barger, William W. Welsh, Jr., Charles G. Leonhardt, Webster B. Brockelman, Jr., David K. Felbeck, John N. Fricker Clarence A. Kemper and Michael K. Bender, Defendants-Appellees.

No. 1297, Docket 82-7969.

United States Court of Appeals Second Circuit.

Argued May 18, 1983.

Decided Aug. 25, 1983.

I. Stephen Rabin, New York City (Allan R. Peckel, Kenneth A. Elan, Rabin & Silverman, New York City, of counsel), for plaintiff-appellant.

Stephen A. Weiner, New York City (Winthrop, Stimson, Putnam & Roberts, New York City, of counsel), for defendants-appellees Artek Systems Corp., Dynatech Corp., J.P. Barger, William W. Welsh, Jr., Webster B. Brockelman, Jr., David K. Felbeck, John N. Fricker, Clarence A. Kemper and Michael K. Bender.

Before MANSFIELD, MESKILL and KEARSE, Circuit Judges.

MANSFIELD, Circuit Judge:

David Evans appeals from an order of the Eastern District of New York, Mark A. Costantino, Judge, disqualifying the law firm of Rabin & Silverman from representing him in this action. We remand the case for further factual findings.

Evans was a shareholder of Artek Systems Corporation ("Artek"), a manufacturer of scientific measurement devices, prior to Artek's later merger into a wholly-owned subsidiary of Dynatech Corporation, another manufacturer of scientific instruments. For several years, ending in 1976, the firm of Rabin & Silverman ("R & S") served as general counsel to Artek. That relationship was terminated on March 31, 1976, and R & S resigned as Artek's counsel.

In November 1977 Dynatech acquired 60% of Artek's common stock. In July 1980, the then-President of Artek, Charles G. Leonhardt, consulted briefly with R & S about possible legal action that might be taken against Dynatech based on alleged wrongful conduct causing injury to Artek In support of his claim that Dynatech was unlawfully interfering with Artek's arrangement with Fisher for distribution of Artek products Leonhardt also furnished to R & S a copy of a June 27, 1979 opinion letter that had been rendered by the law firm of Crowell & Moring to Dynatech with reference to the question of whether action taken by Dynatech to restrict or terminate Fisher's marketing efforts on behalf of Artek would violate the anti-trust laws. A copy of the opinion letter had been sent to Leonhardt under cover of a July 6, 1979, memorandum by W.W. Welsh, Group Vice President of Dynatech and Chairman of Artek, advising Leonhardt "They have taken care to stamp this as a privileged and confidential attorney-client communication. (Charlie, you are an officer of Dynatech Laboratories, so I'm hoping you fall under the category of client) I am sure it would be best that we show this letter to others only after advice from Ed."

                and its minority public stockholders.   Leonhardt furnished to R & S a confidential memorandum setting forth "from a layman's point of view" facts relied on by him in formulating an "overall plan of action."   The memorandum advised that Dynatech had deliberately engaged in a course of conduct, details of which were furnished, that was intended to and had the effect of driving down the market price of Artek stock so that Dynatech could purchase the stock of the minority shareholders and effectuate a merger at a bargain rate on the basis of the depressed value of Artek stock.   The July 1980 memorandum went on to state that Dynatech had also damaged Artek and its minority stockholders in violation of anti-trust laws by using its 60% control of Artek and its leverage as a customer of Artek to interfere with Artek's profitable relationship with its distributor, Fisher Scientific Co., and to prevent Artek from selling certain equipment in competition with Dynatech
                

Thus the record to date indicates that although Leonhardt was the President of Artek and may have held some office in Dynatech he was seeking legal advice from R & S, apparently without the knowledge of Dynatech's management or Artek's Chairman, in order to protect Artek's minority public stockholders against wrongdoing on the part of Dynatech. There is no evidence that any other Dynatech or Artek officers or personnel were aware of Leonhardt's consultation of R & S, or that Leonhardt was consulting R & S for the purpose of protecting Dynatech by anticipating or preparing to counter action that might be taken by Artek's minority stockholders. R & S received no fee for its consultation with Leonhardt.

Later developments also indicate that Leonhardt may have consulted R & S not on behalf of Dynatech or Artek but in his individual capacity, seeking to protect the interests of Artek's minority public stockholders in opposition to the Dynatech group which then controlled a majority of Artek's stock. In particular, although Leonhardt is nominally a defendant in the present suit, his answer to Evans' complaint admits nearly all of the allegations of wrongdoing by Dynatech. In addition, unlike the remaining defendants, Leonhardt does not appear to object to the representation by R & S of the plaintiff here.

In August 1982 Dynatech merged with Artek, and Artek became a wholly-owned subsidiary of Dynatech. The shareholders of Artek were given one share of Dynatech stock for each eight shares of Artek stock, or about $1.75 in market value of Dynatech stock for each share of Artek stock. According to Leonhardt's July 1980 memorandum to R & S, the stock had sold as high as $7 per share before Dynatech took steps to depress its value.

On August 4, 1982, Evans, represented by R & S, filed suit on behalf of a class of minority shareholders of Artek against Dynatech, Artek, and the individual directors of Artek. Count I of the complaint alleged that Dynatech had violated § 10(b) of the Securities Exchange Act and Rule 10b-5, 17 C.F.R. § 240.10b-5, by taking various actions, including the cancellation of the Fisher contract, to cause the value of Artek stock to decline. Count II alleged that Artek The defendants, except for Leonhardt, moved to disqualify R & S as counsel to the plaintiff, primarily on the ground of the July 1980 consultation by Leonhardt with R & S, and secondarily on the basis of R & S's service as general counsel to Artek until March 1976. However, there is no indication that as general counsel prior to 1976 R & S could have become involved in subject matter related in any way to this lawsuit, which deals with conduct that did not occur until 1979. The district court granted the motion in open court without stating the facts upon which it based its decision other than to refer generally to R & S's representation of Artek in 1976.

                had sent a false and misleading proxy statement to shareholders in violation of §§ 10(b) and 14(a) of the Securities Exchange Act.   Finally, Count III, brought as a derivative action on behalf of Artek, alleged that Dynatech committed waste upon Artek's corporate assets in order to benefit Dynatech.   Although Artek is named as a defendant, plaintiff apparently intended it to be a nominal party since the thrust of the complaint is that Artek was deliberately harmed by Dynatech, its controlling competitor, which took various unlawful steps to lower the market value of Artek shares and thus injure its minority public stockholders to the ultimate profit of Dynatech as majority 60% stockholder.   Moreover, Count III seeks damages derivatively on behalf of Artek
                

DISCUSSION

Ordinarily an attorney may not knowingly reveal a confidence of his client or use a confidence of his client to the disadvantage of the client. ¹ See Fund of Funds, Ltd. v. Arthur Andersen & Co., 567 F.2d 225, 227 n. 2 (2d Cir.1977); ABA Com. on Ethics and Professional Responsibility, Code of Professional Responsibility, Canon 4-101(B). To ensure faithful adherence to this principle, an attorney may be disqualified from representing a client in a particular case if

(1) the moving party is a former client of the adverse party's counsel;

(2) there is a substantial relationship between the subject matter of the counsel's prior representation of the moving party and the issues in the present lawsuit; and

(3) the attorney whose disqualification is sought had access to, or was likely to have had access to, relevant privileged information in the course of his prior representation of the client.

Cheng v. GAF Corp., 631 F.2d 1052, 1055-56 (2d Cir.1980), judgment vacated on other grounds, 450 U.S. 903, 101 S.Ct. 1338, 67 L.Ed.2d 327 (1981); Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562, 570-71 (2d Cir.1973); T.C. Theatre Corp. v. Warner Bros. Pictures, Inc., 113 F.Supp. 265, 268 (S.D.N.Y.1953).

The objective of the disqualification rule is to "preserve the integrity of the adversary process," Board of Education of the City of New York v. Nyquist, 590 F.2d 1241, 1246 (2d Cir.1979). However, while we have not hesitated to disqualify counsel when the circumstances warranted it, we have also noted that "there is a particularly trenchant reason for requiring a high standard of proof on the part of one who seeks to disqualify his former counsel, for in disqualification matters we must be solicitous of a client's right freely to choose his counsel--a right which of course must be balanced against the need to maintain the highest standards of the profession." Government of India v. Cook Industries, Inc., 569 F.2d 737, 739 (2d Cir.1978). We have also noted that disqualification motions "are often interposed for tactical reasons," and that "even when made in the best of faith, such motions inevitably cause delay." Board of Education v. Nyquist, supra, 590 F.2d at 1246 (2d Cir.1979); see Allegaert v. Perot, 565 F.2d 246, 251 (2d Cir.1977).

Applying the foregoing criteria to the present case, the question of whether R & S should be disqualified as plaintiff's counsel turns on whether R & S were acting as attorneys for Artek or...