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May 27, 1983


The opinion of the court was delivered by: Moran, District Judge.


The defendants, Hillel Maeir ("Maeir") and Paine, Webber, Jackson & Curtis, Inc. ("Paine Webber"), have moved this court to disqualify the law firm of Arvey, Hodes, Costello & Burman ("Arvey Hodes") from any further representation of any of the plaintiffs in this action.*fn1 For the reasons stated below, the motion to disqualify is denied.


On January 14, 1981, Maeir, represented by a Paine Webber attorney, testified voluntarily and without subpoena before the Securities Exchange Commission ("SEC") regarding an investigation focusing on the option accounts of five Paine Webber customers (including the Mesirows) who subsequently became the plaintiffs in this case. In his deposition taken in the instant litigation, Maeir claims he answered the SEC's questions candidly, openly and truthfully. Maeir further claims that he left the five-hour interrogation believing that he had concealed nothing.

Up to this point Maeir and Paine Webber had been represented by the same attorneys. During the summer of 1981, however, Maeir became concerned over whether to retain separate counsel for the pending SEC investigation. At the suggestion of a fellow employee, Maeir scheduled an appointment with Allen Barry Witz ("Witz"), an Arvey Hodes partner, to discuss the possibility of separate representation. Although the exact date is uncertain, it appears that in early July of 1981 Maeir met with Witz and an Arvey Hodes associate, Andrew B. David ("David"), in Witz's office. The parties disagree over the length of this meeting; it appears to have lasted between forty-five minutes and an hour. Also disputed is what was discussed at the meeting. Witz and David claim that the "central and exclusive business of the meeting" was a consideration of the benefits versus the additional expense of retaining separate counsel. Maeir asserts that, in addition to this consideration, he "openly and candidly recounted" all the facts and circumstances concerning the accounts under investigation by the SEC. Maeir further claims that he disclosed information at this meeting which was outside the scope of his SEC testimony.*fn4

All the parties agree, however, that no threatened litigation by customers of Paine Webber was discussed. The parties also agree that Maeir was not informed at this meeting that Arvey Hodes represented the Mesirows in connection with the very same matters that Maeir claims to have discussed with Witz and David. Additionally, Maeir claims he assumed that his revelations to the Arvey Hodes attorneys were confidential and subject to the attorney-client privilege, though he ultimately decided not to retain that law firm to represent him.

On September 8, 1981, the Mesirows, along with Whitfield Hughes, Jr., Bernard Resnick and Irwin Weiner, filed a thirty-two count complaint against Paine Webber, Maeir and Furnari for damages caused by the activities under SEC investigation. At this time plaintiffs were represented by the law firm of Winston & Strawn. Six months later Winston & Strawn withdrew from the case and on March 17, 1982, Jeffrey R. Liebman ("Liebman") and Gary L. Starkman ("Starkman") of Arvey Hodes, appeared as substituted counsel for the plaintiffs. As soon as Maeir realized that Arvey Hodes was representing the plaintiffs he informed his attorney, Michael B. Roche ("Roche"), of the meeting with Witz and David. Roche thereupon contacted Liebman, informed him of the situation, and requested him to voluntarily withdraw as counsel. Liebman eventually refused to do so, and the defendants moved to disqualify Arvey Hodes as plaintiffs' counsel.


A. The Lawyers' Ethical Duties

"When an attorney undertakes litigation against a former client, the attorney may be disqualified if the new representation violates an ethical duty to the former client." Cannon v. U.S. Acoustics Corp., 398 F. Supp. 209, 221 (N.D.Ill. 1975), adopted and aff'd in relevant part, 532 F.2d 1118 (7th Cir. 1976). The disqualification remedy serves to "enforce the lawyer's duty of absolute fidelity and to guard against the danger of inadvertent use of confidential information, as well as to continue to achieve a high regard for the legal profession in the public mind. . . ." Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 723 (7th Cir. 1982) (citations omitted). Essentially, disqualification is designed to encourage clients to fully disclose all information necessary for their attorneys to adequately prepare their cases.*fn5 See Cannon, 398 F. Supp. at 221.

The defendants claim that Arvey Hodes has violated Canons 4,*fn6 5,*fn7 and 9*fn8 of the American Bar Association Code of Professional Responsibility (the "Code"), which "[t]his District Court has adopted . . . as an appropriate guideline for the conduct of attorneys admitted to practice before it (General Rules 6(a)(i)), and [which] our Court of Appeals has regularly relied upon . . . in the disqualification area." Kadish v. Commodity Futures Trading Commission, 548 F. Supp. 1030, 1032 (N.D.Ill. 1982). See also Resnick v. American Dental Association, 95 F.R.D. 372, 378 (N.D.Ill. 1982) (noting that "[c]ourts consistently employ provisions of the Code as sources of procedural and substantive law"). The major thrust of defendants' claim is that Arvey Hodes' representation of plaintiffs violates confidences established between Maeir and the Arvey Hodes attorneys at their meeting in early July of 1981. If such representation does violate confidences it would seem to violate Canon 4. If it does not, however, Arvey Hodes' representation of plaintiffs could still violate Canon 9 if it even "appeared" to be professionally improper.*fn9

By requiring attorneys to preserve the confidences of their clients the Canons seek to achieve two goals. Canon 4's prohibition against an attorney's use of confidences obtained in his prior representation of his current client's opponent seeks to ensure fundamental fairness and prevent an unfair informational advantage. More importantly, by ensuring confidentiality the Canons foster an atmosphere of trust and encourage clients to fully disclose information to their attorneys. If this confidentiality were not ensured clients might withhold critical information that their attorneys need to represent them effectively. The Seventh Circuit has recognized that Canon 4's central purpose is to "encourage the free transfer of confidential information from client to attorney. . . ." Novo Terapeutisk Laboratorium A/S v. Baxter Travenol Laboratories, Inc., 607 F.2d 186, 191 (7th Cir. 1979). The importance of full disclosure by the client was also emphasized in Cannon. Quoting from an ethical consideration accompanying Canon 4, the district court in Cannon noted:

  Both the fiduciary relationship existing between
  lawyer and client and the proper functioning of the
  legal system require the preservation by the lawyer
  of confidences and secrets of one who has employed or
  sought to employ him. A client must feel free to
  discuss whatever he wishes with his lawyer and a
  lawyer must be equally free to obtain information
  beyond that volunteered by his client. A lawyer
  should be fully informed of all the facts of the
  matter he is handling in order for his client to
  obtain the full advantage of our legal system. It is
  for the lawyer in the exercise of his independent
  professional judgment to separate the relevant and
  important from the irrelevant and unimportant. The
  observance of the ethical obligation of a lawyer to
  hold inviolate the confidences and secrets of his
  client not only facilitates the full development of
  facts essential to proper representation of the
  client but also encourages laymen to seek early legal

398 F. Supp. at 222.

In addition to protecting the attorney-client relationship and encouraging full disclosure, the Code's conflict of interest provisions preserve the integrity and favorable public image of both the legal profession and the judicial system, by prohibiting even "the appearance of professional impropriety." ABA Code of Professional Responsibility Canon 9 (1980). This second goal of the Code, however, does not come without certain costs. For example, in cases where a lawyer has received no client confidences the appearance of impropriety standard is clearly over-inclusive; disqualification in such situations accomplishes nothing toward preserving confidentiality. Additionally, this standard may often cause a significant hardship on a client by depriving him of an attorney chosen for his specialized knowledge and already familiar with the client's case. Finally, such a standard may adversely affect attorneys because "[u]nnecessary disqualification may blemish the attorney's professional reputation with an `undeserved and unfair stigma.'" Developments in the Law — Conflicts of Interest in the Legal Profession, 94 Harv.L.Rev. 1244, 1320 (1981) (citing Government of India v. Cook Industries, 569 F.2d 737, 741 (2d Cir. 1978) (Mansfield, J., concurring)). Nevertheless, in promulgating the Code, the American Bar Association has determined that these costs are sufficiently outweighed by the interest in preserving the public's trust in attorneys.

B. The Attorney-Client Relationship

Before an attorney becomes subject to the obligations of the Code, an attorney-client relationship must be found to exist. See e.g., In re Yarn Processing Patent Validity Litigation, 530 F.2d 83, 90 (5th Cir. 1976). In Westinghouse Electric Corp. v. Kerr-McGee Corp., 580 F.2d 1311 (7th Cir. 1978), the Seventh Circuit adopted a subjective approach to determining the existence of attorney-client relationships.*fn10 It held that such relationships depend neither upon the payment of fees nor upon the execution of a formal contract. Id. at 1317. More importantly, Kerr-McGee established that "[t]he fiduciary relationship existing between lawyer and client extends to preliminary consultation with a view to retention of the lawyer, although actual employment does not result." Id. at 1319 (footnote omitted). The Seventh Circuit also concluded that the attorney-client relationship ...

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