Cannon v. US Acoustics Corporation

OPINION

Charles B. Cannon, Richard L. Davis, John G. Marsh, and Jeffrey Ross brought this derivative shareholder’s action, as well as personal claims, against the defendants, U.S. Acoustics Corporation (hereinafter “Acoustics”), a Florida corporation, and National Perlite Products, S.A., (hereinafter “Perlite”), a Panamanian Corporation. 1 The six-count complaint alleges violations of the Securities Exchange Act of 1934, 15 U. S.C. § 78a et seq., and the common and statutory laws of Florida and Illinois. Jurisdiction of the federal claims exists under 28 U.S.C. § 1331 (1970), and 15 U.S.C. § 78aa (1970). The state claims which arise from the same transactional nucleus as the federal claims are here under the doctrine of pendent jurisdic *213 tion. United Mine Workers of America v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966); Brunswick v. Regent, 463 F.2d 1205, 1206-1207 (5th Cir. 1972). Jurisdiction of Count 4 of the complaint is based on diversity of citizenship, 28 U.S.C; § 1332(a)(1) (1970).

There are pending for decision cross-motions to disqualify counsel and a motion to disqualify Cannon as a party plaintiff. Shortly after Robert J. Gareis, Peter J. Mone and the firm of Baker & McKenzie filed their appearances on behalf of the corporate and individual defendants, plaintiffs moved to disqualify them from representing the corporate defendants and requested that the court appoint independent counsel. 2 Plaintiffs base their motion on the theory that dual representation in a shareholder derivative suit creates a conflict of interest that the court can order terminated.

Concomitant with filing their answer to the plaintiffs’ motion, defendants moved to strike Cannon as a party plaintiff and to strike the appearances of N. A. Giambalvo and Boodell, Sears, Sug-rue, Giambalvo & Crowley as counsel for the plaintiff.

Defendants argue that by virtue of Canon 4 of the American Bar Association’s Code of Professional Responsibility (hereinafter “CPR”), Cannon (who is a lawyer), and the lawyers and law firm which represent him, cannot maintain the pending suit because each previously represented the corporate defendants in legal matters that are substantially related to the present litigation.

1. Plaintiffs’ motion to strike the appearance of the attorneys on behalf of the corporate defendants

Plaintiffs’. motion to disqualify the lawyers from the firm of Baker & McKenzie from representing the corporate defendants raises fundamental questions of legal ethics and the extent to which a court should interfere with the right of any litigant to be represented by counsel of his own choosing. Furthermore, a motion to disqualify calls to question not only the probity of the individual lawyer, but the legal profession as a whole. See Hull v. Celanese Corp., 513 F.2d 568 (2d Cir. 1975). Mindful of these problems and considerations we have reached the conclusion that independent counsel must be selected for the defendant corporations.

In substance, the plaintiffs’ complaint is a shareholder’s derivative suit. While no treatise exposition on the nature of these suits is necessary here, a few pertinent observations will be helpful in analyzing the ultimate issue presented by the motion: whether the same counsel can represent both the individual and corporate defendants in a derivative shareholders suit consistent with the ethical standards promulgated by the American Bar Association and adopted by this court. A derivative suit is, in legal effect, a suit brought by the corporation, but conducted by the shareholders. The corporation, although formally aligned as a defendant for historical reasons, 3 is in actuality a plaintiff. Ross v. Bernhard, 396 U.S. 531, 538, 90 S.Ct. 733, 24 L.Ed.2d 729 (1969); Swanson v. Traer, 230 F.2d 228 (7th Cir. 1956); 13 W. Fletcher, Encyclopedia of the Law of Private Corporations, § 5939, at 324 (1970) (hereinafter “Fletcher”); see Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 548-49, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949). The stockholder is only a nominal plaintiff. 13 Fletcher, supra, § *214 5941.1, at 328, succinctly states the theoretical basis of the derivative suit:

[T]he stockholder’s suit [has] . a double aspect. The stockholders have a right in equity to compel the assertion of a corporate right of action against the directors or other wrongdoers when the corporation wrongfully refuses to sue. The suit is thus an action for specific enforcement of an obligation owed by the corporation to the stockholders to assert its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to take suitable measures for its protection.

See Ross v. Bernhard, supra, 396 at 334, 90 S.Ct. 733. Finally, a derivative action is appropriate to enforce a cause of action under the Securities Act of 1933, and the Securities Exchange Act of 1934. Fletcher, supra, § 5925, at 312; see Comment, “Shareholder’s Derivative Suit to Enforce a Corporate Right of Action Against Directors under SEC Rule 10b-5,” 114 U.Penn.L.Rev. 578 (1966).

The preceding paragraph delineates the anomalous position of the corporation ; it is both a defendant and a plaintiff. An examination of plaintiffs’ complaint amply reveals this position. Count 1 alleges that beginning in 1968 and continuing to the present, the individual defendants committed numerous violations of Rule 10b-5: 4 illegal stock options were allegedly granted, stock was issued and purchased upon false representations that the stock was for services, rent, and other expenses, stock was issued for little or no consideration, corporate opportunities were usurped, illegal profits were retained by certain officers and directors, and illegal and excessive compensation was paid to Stedman. 5

The remaining derivative counts allege the same misconduct but seek recovery under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (1970), and the common law of Florida and Illinois.

Even a cursory examination of the foregoing allegations demonstrates that should they be established at trial, Acoustics and Perlite will benefit substantially. For this reason plaintiffs argue that Mone, Gareis, and the firm of Baker & McKenzie cannot represent the alleged wrongdoers and the ultimate beneficiaries of any judgment that might be obtained.

Defendants’ position is that although there is a theoretical conflict of interest, no real conflict exists. They argue that the corporations are really inactive participants in the lawsuit, 6 and that should any conflict arise they will withdraw their representation of the individual defendants and continue their representation of the corporations. 7 Defendants further argue that their present position is that all the transactions complained of are legal and should be upheld.

The conduct of attorneys practicing before the court is governed by the American Bar Association's CPR. General Rules of the District Court for the Northern District of Illinois, Rule 8(a) & (d). 8 Jurisdiction to enforce the *215 CPR exists by reason of the court’s regulatory power over the members of its Bar. Cord v. Smith, 338 F.2d 516, 524 (9th Cir. 1964); Richardson v. Hamilton International Corp., 333 F.Supp. 1049, 1052 (E.D.Pa.1971), aff’d, 469 F.2d 1382 (1972), cert. denied, 411 U.S. 986, 93 S.Ct. 2271, 36 L.Ed.2d 964 (1973); see United States v. Ott, 489 F.2d 872, 874 (7th Cir. 1973); Handelman v. Weiss, 368 F.Supp. 258, 263 (S.D.N.Y.1972).

When a single lawyer or law firm undertakes to represent both the individual and corporate defendants in a derivative action, at least two potential ethical problems arise. First, there exists, as previously discussed, a potential conflict of interest between the individual and corporate defendants, and second, there is the threat that confidences and secrets obtained from each client may be jeopardized because of the dual nature of the representation. The CPR addresses each of these problems in varying degrees of particularity. No code of ethics could establish unalterable rules governing all possible eventualities. Ultimately, therefore, the resolution of these problems rests in the reasoned discretion of the court.

Canon 5 of the CPR addresses the ethics of representing conflicting interests. 9 It provides that a lawyer “Should Exercise Independent Professional Judgment on Behalf of a Client.” Ethical consideration (hereinafter EC) 5-1 sets the Canon’s overall objective:

The professional judgment of a lawyer should be exercised solely for the benefit of his client and free from corn-promising influences and loyalties. [T]he interest of other clients . . . should [not] be permitted to dilute his loyalty to his client.

In the instant case Gareis, Mone and their firm represent two clients with, at a minimum, potentially conflicting interests. The pleadings charge the individual defendants with serious corporate misconduct, and although counsel has in good faith represented there is no present conflict between the two sets of defendants, the subtle influences emanating from the representation of the individual defendants that might lead counsel to reach this position on behalf of the corporations are troubling.

Fortunately there are several other ethical considerations that deal more specifically with multiple clients. EC5-18 provides:

A lawyer employed or retained by a corporation or similar entity owes his allegiance to the entity and not to a stockholder, director, officer, employee, representative, or other person connected with the entity. In advising the entity, a lawyer should keep paramount its interests and his professional judgment should not be influenced by the personal desires of any person or organization. Occasionally a lawyer for an entity is requested by a stockholder, director, officer, employee, representative, or other person connected with the entity to represent him in an individual capacity; in such case the lawyer may serve the individual only if the lawyer is con *216 vinced that differing interests are not present.

Admittedly the focus of this consideration is on the problem of corporate counsel representing corporate officials when the corporation is not also a party litigant. But its import is clear. The interest of the corporate client is paramount and should not be influenced by any interest of the individual corporate officials.

Although EC5-18 is persuasive authority for plaintiffs’ position, EC5-15 is even more so:

If a lawyer is requested to undertake or to continue representation of multiple clients having potentially differing interests, he must weigh carefully the possibility that his judgment may be impaired or his loyalty divided if he accepts or continues the employment. He should resolve all doubts against the propriety of the representation. A lawyer should never represent in litigation multiple clients with differing interests; and there are few situations in which he would be justified in representing in litigation multiple clients with potentially differing interests. If a lawyer accepted such employment and the interests did become actually differing, he would have to withdraw from employment with likelihood of resulting hardship to the client; and for this reason it is preferable that he refuse the employment initially.

Taken together, these two ethical considerations convincingly establish that in a derivative suit the better course is for the corporation to be represented by independent counsel from the outset, even though counsel believes in good faith that no conflict of interest exists. 10

The exact question presented by the plaintiffs’ motion was considered by the influential Association of the Bar of New York Committee on Professional Ethics, in Opinion 842. 11 The Committee is in full agreement that if the corporation takes an active role in the litigation, independent counsel must be obtained. If the corporation’s role is passive, a majority of the committee was still of the opinion that,

a conflict of interests is inherent in any [derivative] action wherever relief is sought on behalf of the corporation against the individual director-officer defendants, and in such cases Canon 6 [presently Canon 5, EC5-14 n. 6 & 18] precludes one firm from representing both the corporation and the individual director-officer defendants except in unusual circumstances stemming from particular facts in a given case. 12

In addition to the conflict of interest problem there is also the proscription of Canon 4 that a “Lawyer Should Preserve the Confidences and Secrets of a Client.” The question is whether a law firm might jeopardize the confidences or secrets of one defendant while representing the other. In the case of individuals this is a serious problem. In a derivative suit, however, the question is likely to be of less moment since the se *217 crets and confidences of the corporate client are probably accessible to the director-officer clients. And while this conflict is less troubling than the conflict of interest difficulties, see Comment, “Independent Representation for Corporate Defendants in Derivative Suits,” 74 Yale L.J. 524, 526-27 (1965); but see Marco v. Dulles, 169 F.Supp. 622, 628-30 (S.D.N.Y.), appeal dismissed, 268 F.2d 192 (2d Cir. 1959), nevertheless, it is one more reason to examine dual representation with caution.

The Canons and Ethical Considerations are aspirational ; 13 consequently, they provide only guidance. 14 Thus, while the CPR supports plaintiffs’ position, a study of the relevant case law is necessary. 15

Although there is not a wealth of eases dealing with the problem of dual representation in derivative shareholder’s suits, the position of the federal courts has developed along two lines. The older cases have refused to disqualify counsel, while the more recent trend is to require the corporation to obtain independent counsel. This trend has also manifested itself in a number of cases under the Labor-Management Reporting and Disclosure Act, 29 U.S.C. § 501 et seq., (1970).

Defendants’ position, which has previously been outlined, is supported by three principal cases. The first of these, Otis & Company v. Pennsylvania R. Co., 57 F.Supp. 680 (E.D.Pa.1944), affd 155 F.2d 522 (3d Cir. 1946) (per curiam), was a derivative suit alleging that the defendant officers breached their fiduciary duty to the corporation because they failed to “shop around for the best price on a new bond issue.” The court concluded that since no fraud was alleged and the bond issue was floated under customary procedure, the corporation could file an answer and ae-tively defend. The court also refused to remove counsel for the defendant corporation stating:

[T]here is no reason to require removal of counsel as petitioned. The corporation, as an interested party having a right to appear and defend, may select counsel as it chooses. Moreover, there is no allegation of any breach of confidence or trust of which either the corporations or the individual defendants complain. . Moreover, there are many stockholders’ suits on record in which the same counsel represented both the individual and corporate defendants. 57 F.Supp. at 684.

Otis is still the law of the Third Circuit, Universal Athletic Sales Co. v. American Gym R. & A. E. Corp., Inc., 357 F.Supp. 905, 908-909 (W.D.Pa.1973).

Defendants also rely on Marco v. Dulles, 169 F.Supp. 622 (S.D.N.Y.), appeal dismissed, 268 F.2d 192 (2d Cir. 1959). Marco was a derivative action filed against officers and directors alleging diversion of assets. The original corporate defendant was succeeded in the lawsuit by its successor in interest. The individual defendants were represented in the litigation by the same law firm that had advised the corporation on the transactions that were alleged to be illegal. At no point, however, did the same law firm represent both the individual and corporate defendants in the derivative suit, 169 F.Supp. at 626, 628. Thus the court concluded there was no conflict of interest present.

Although no conflict was found under former Canon 6 (CPR, Canon 5), a more difficult question was presented by the last paragraph of Canon 6, and Canon 37 requiring a lawyer to preserve the confidences of his client even after employment has terminated. Plaintiffs alleged that the continued representation *218 of the individual defendants would violate these canons since the firm would be undertaking to represent the directors in matters adversely affecting the present position of the corporation which was that the transaction was illegal. In this context the court indicated, absent the special circumstances of the ease, a motion to disqualify could be granted. 16 Furthermore, in dictum, the court added, there might be circumstances in which a former general counsel could represent the directors in a minority suit if the corporate management took the position that the transactions were valid and proper. The court did not, however, say that the corporation and individual defendants could properly be represented by the same firm in a derivative suit. 169 F.Süpp. at 630. Consequently, Marco only inferentially supports defendants’ position. 17

The last principal case relied on by defendants is Selama-Dindings Plantations, Ltd. v. Durham, 216 F.Supp. 104 (S.D.Ohio 1963), aff’d, 337 F.2d 949 (6th Cir. 1964) (per curiam), in which the court held without discussion, that it was not improper in a derivative suit for a law firm to represent both the corporate defendant and the individual directors when there was no conflict of interest and no breach of trust. 216 F. Supp. at 115. 18 Although this case supports defendants’ position, the court of appeals did not discuss the dual representation issue in its affirmance, and the district court’s opinion has never been cited for the proposition suggested by defendants.

The ease law referred to by defendants does not represent the present trend in judicial, thinking on the ethical propriety of dual representation which has .developed in recent derivative shareholder’s suits and cases brought under the Labor-Management Reporting and Disclosure Act. 29 U.S.C. § 501 (1970) . 19

The leading lower court decision requiring selection of independent counsel is Lewis v. Shaffer Stores Co., 218 F.Supp. 238 (S.D.N.Y.1963). There, plaintiff stockholder filed a derivative action alleging many of the same transgressions as are pleaded in the present action. One firm entered an appearance and filed an answer on behalf of the directors and the corporate defendant. Plaintiffs filed a timely motion to disqualify the firm from representing the corporation, asking that it be represented by truly independent counsel who would answer the complaint to the end that plaintiffs be invited to prove their case for the benefit of the corporation. The court held:

The interests of the officer, director, and majority stockholder defendants in this action are clearly ■ adverse, on the face of the complaint, to the interests of the stockholders . . . other than the defendants. I have no doubt that . . . [the law firm] believe [s] in good faith that there is no merit' to this action. Plaintiff, of course, vigorously contends to the contrary. The court cannot and should not attempt to pass upon the merits at this stage. Under all the circumstances, including the nature of the charges, and the vigor with which they are apparently being pressed and defended, I believe that it would be wise for the corporation to retain in *219 dependent counsel, who have no previous connection with the corporation, to advise it as to the position it should take in this controversy. See Garlen v. Green Mansions, Inc., 9 A.D.2d 760, 193 N.Y.S.2d 116 (1st Dept.1959), Marco v. Dulles, supra. 218 F.Supp. at 239-40.

The Lewis approach is the most advisable. On the face of plaintiffs’ complaint there is a conflict of interest. 20 It is unwise to assess the merits of the case now. See Smith v. Sperling, 354 U.S. 91, 95, 77 S.Ct. 1112, 1 L.Ed.2d 1205 (1957); Comment, “Independent Representation for Corporate Defendants in Derivative Suits,” 74 Yale L.J., 524, 525 (1965). 21 The merits of the case and the appropriate role for the corporate defendants to take in the litigation should be decided after independent counsel has investigated the facts and circumstances surrounding the allegations of the complaint. 218 F.Supp. at 240.

A result similar to Lewis was reached in Murphy v. Washington American League Base Ball Club, Inc., 116 U.S.App.D.C. 362, 324 F.2d 394 (1963). Plaintiff brought a shareholder’s derivative suit to challenge certain salary increases voted by the board of directors substantially for their own benefit. The corporation, a nominal defendant in the suit, was represented by the same firm that represented the individual officer-director defendants. The court held that dual representation was not proper because if the charges had substance, counsel chosen to represent both the wrongdoer and beneficiary of any judgment would not be able to guide the litigation in the best interest of the corporation. See Essential Enterprises Corporation v. Dorsey Corporation, 40 Del.Ch. 343, 182 A.2d 647 (1967); Garlen v. Green Mansions, Inc., 9 A.D.2d 760, 193 N.Y.S.2d 116 (1959) (per curiam). See generally United States v. Spencer, 473 F.2d 1009 (2d Cir. 1973).

The emerging judicial condemnation of dual representation in shareholder derivative suits is also evident in suits under Section 501 of the Labor-Management Reporting and Disclosure Act, 29 U.S.C. § 501 (1960). 22 Under this section a hybrid derivative action is allowed. Union members may sue the union and its officers for breach of fiduciary duty (§ 501(a)) and any recovery belongs to the union. See Yablonski v. United Mine Workers, 145 U.S.App.D.C. 252, 448 F.2d 1175, 1181 (1971); International Brotherhood of Teamsters v. Hoffa, 242 F.Supp. 246 (D.D.C.1965). These cases require that independent counsel be appointed when there is a potential conflict between the interests of the union and accused officers. Weaver v. United Mine Workers, 160 U.S.App. D.C. 314, 492 F.2d 580, 583 (1973); Yablonski v. United Mine Workers, 145 U.S.App.D.C. 252, 448 F.2d 1175 (1971), petition for enforcement granted, Yablonski v. United Mine Workers, 147 U.S.App.D.C. 193, 454 F.2d 1036 (1971), cert. denied, 406 U.S. 906, 92 S.Ct. 1609, 31 L.Ed.2d 816 (1972); Tucker v. Shaw, 378 F.2d 304, 307 (2d Cir. 1967); Milone v. English, 113 U.S.App.D.C. 207, 306 F.2d 814 (1962). 23

*220 In summary, this is a derivative shareholder action against four officer-directors and two corporations. The complaint alleges that certain directors misappropriated monies of the corporation and violated federal and state securities laws. These are serious charges. If they are proved, the corporations stand to gain substantially. The CPR unquestionably prohibits one lawyer from representing multiple clients when their interests are in conflict. The code goes so far as to say that if the clients’ interests are potentially differing, the preferable course is for the lawyer to refuse the employment initially. In addition, at least one influential bar association has issued an opinion stating that dual representation is subject to conflicts of interest even when the corporation takes a passive role in the litigation. The case law on the question is not consistent; older cases hold dual representation is not improper, while more recent decisions hold that it is, both in derivative shareholder suits and in suits under 29 U.S.C. § 501 (1970).

As previously discussed the court is bound to apply the CPR to lawyers practicing before it. The code is clear that multiple representation is improper when the client’s interests are adverse. Nevertheless, defendants’ counsel argue there is no present conflict and should one arise they will withdraw their representation of the individual defendants and represent only the corporations. There are a number of problems with this solution. First, the complaint on its face establishes a conflict that cannot be ignored despite counsel’s good faith representations. Second, counsel overlooks the hardship on the court and the parties if in the middle of this litigation new counsel must be obtained because a conflict arises. Lastly, although counsel offers to withdraw its representation of the individual defendants and remain counsel for the corporations if a conflict should arise, the appropriate course, as suggested by Lewis and Murphy, is for the corporation to retain independent counsel. Under this procedure, once counsel has examined the evidence, a decision can be made regarding the role the corporation will play in the litigation. This decision will be made without the possibility of any influence emanating from the representation of the individual defendants, and will also eliminate the potential problem of confidences and secrets reposed by the individual defendants being used adverse to their interests by former counsel should new counsel have had to have been selected under the approach suggested by defense counsel. This solution, concededly, is not without its disabilities. .The corporations’ rights to counsel of their choice are infringed and in a closely held corporation, as here, the financial burden is increased. Nevertheless, on balance, the corporations must obtain independent counsel. 13 Fletcher, supra, § 6025, at 528; Osborn, “Developments in Corporate Law,” 14 Bus.Law. 577, 578 (1964); Comment, “Independent Representation for Corporate Defendants in Derivative Suits,” 74 Yale L.J., 524 (1965).

Two questions remain. The first is how new counsel should be selected. Plaintiffs urge the court to make the selection because the individual defendants still serve as the board of directors and thus will make the selection unless prevented from doing so. There is no precedent in the reported decisions to support plaintiffs’ suggestion. In Lewis, the court specifically held the problem of selecting counsel was not insurmountable and allowed the board to select new counsel. 218 F. Supp. at 240.

The defendant corporations may select their own counsel. Certainly new counsel will recognize their duty to represent solely the interests of the corporate entities. And should difficulties arise, the parties or counsel may apply to the court for additional relief.

The final question is whether the corporations’ answer should be stricken and new pleadings filed. Al *221 though this relief was not specifically requested, it is implied in the motion to strike the appearance of the corporations’ counsel. See Lewis v. Shaffer Stores Company, 218 F.Supp. 238, 240 (S.D.N.Y.1963); Teamsters v. Hoffa, 242 F.Supp. 246, 257 (D.D.C.1965). The answer filed on behalf of the corporate defendants will be stricken with leave to new counsel to refile within 20 days of this order.

In accord with the foregoing, plaintiffs’ motion to strike the appearance of Gareis, Mone and the firm of Baker & McKenzie as counsel for defendants Acoustics and Perlite, is granted, and the answer of these defendants is stricken with leave to new counsel to answer anew within 20 days.

II. Defendant’s motion to strike the appearance of plaintiffs’ attorneys and to disqualify Charles B. Cannon as a plaintiff.

Shortly after plaintiffs filed their motion to disquality Messrs. Gareis and Mone and Baker & McKenzie, defendants filed their motion to strike the appearance of N. A. Giambalvo and Bood-ell, Sears, Sugrue, Giambalvo & Crowley as attorneys for plaintiffs and to disqualify Charles B. Cannon as a plaintiff. In substance, both motions are similar. Defendants allege that Cannon and Giambalvo represented defendants in prior matters that are substantially related to the issues in the present suit and therefore cannot, consistent with the CPR, prosecute or be a party to this litigation. Cannon and Giambalvo argue that although they have represented defendants in various matters in the past, that representation is not substantially related to the issues raised in the present litigation. Because the motion is grounded on separate instances of representation, the exact nature of Cannon’s and Giambalvo’s legal services must be examined. Before moving to the facts, however, a statement of the applicable principles of law is necessary.

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. The common law fashioned the law of disqualification to assure the public that any information disclosed to an attorney in a professional capacity would never be disclosed or utilized adversely without the consent of the client. The rule was designed to encourage individuals to divulge freely to their attorneys all the information necessary to prepare adequately the client’s case. Note, “Disqualification of Attorneys for Representing Interests Adverse to their Former Clients,” 64 Yale L.J. 917, 918-921 (1955), noting Consolidated Theaters, Inc., v. Warner Bros. Circuit Management Corp., 216 F. 2d 920 (2d Cir. 1954).

The common law principles of disqualification are embodied in the CPR. Canon 4 24 provides: “A Lawyer Should Preserve the Confidences and Secrets of a Client.” The parameters of Canon 4 are set out in the accompanying ethical considerations. EC 4-1 stresses the importance of the Canon in seeing that there is full disclosure by the client.

*222 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 assistance.

The ethical obligation under Canon 4 is broader than the evidentiary privilege. This fact is clearly stated in EC 4-4. 25

The attorney-client privilege is more limited than the ethical obligation of a lawyer to guard the confidences and secrets of his client. This ethical precept, unlike the evidentiary privilege, exists without regard to the nature or source of information or the fact that others share the knowledge.

For the purpose of the present motions, EC 4-5 is extremely important because it bars a lawyer from using information gained in the course of a representation to the disadvantage of the client.

A lawyer should not use information acquired in the course of the representation of a client to the disadvantage of the client and a lawyer should not use, except with the consent of his client after full disclosure, such information for his own pu