## Facts

- Shareholders brought a lawsuit asserting (1) derivative claims on behalf of a corporation and (2) individual claims, alleging federal securities violations and related state-law claims.
- The corporation and another corporate entity were named as defendants, along with individuals associated with the corporate defendants.
- Plaintiffs moved to disqualify defense counsel from representing the corporate defendants and sought appointment of independent corporate counsel.
- Defendants cross-moved to disqualify one shareholder-plaintiff (an attorney who had previously represented the corporate defendants) and to disqualify plaintiffs’ counsel and their firm.
- The district court addressed only the disqualification motions under the ABA Code of Professional Responsibility, not the merits of the underlying securities and state-law claims.
- The court of appeals later affirmed based on the district court’s reasoning, subject to a limited exception concerning a separate count not resolved by the disqualification opinion.

## Issues

1. Whether defense counsel may represent both the corporation and individual defendants in a shareholder derivative action, given the risk of conflicts between the corporation’s interests and the individuals’ interests.
2. Whether a shareholder-plaintiff who previously represented the corporate defendants must be disqualified as a party under duties to preserve former-client confidences and secrets.
3. Whether plaintiffs’ counsel must be disqualified based on allegations that the former corporate lawyer conveyed corporate confidences to current counsel.

## Decision

- The court disqualified defense counsel from representing the corporate defendants due to a conflict created by dual representation in the derivative setting.
- The court denied the motion to disqualify the former corporate lawyer as a plaintiff, finding no sufficient showing that he was using or disclosing protected confidences or secrets.
- The court denied the motion to disqualify plaintiffs’ counsel and their firm, finding the record did not show that counsel received or used specific confidential information.
- The court of appeals affirmed the district court’s disqualification rulings for the reasons stated in the district court’s opinion, with an unrelated partial modification regarding a separate count.

## Legal Principles

- In a shareholder derivative action, joint representation of the corporation and alleged wrongdoer insiders presents at least a potential conflict that can impair independent professional judgment and risk the misuse of client confidences, warranting disqualification of counsel for the corporation.
- Prior representation alone does not automatically bar a lawyer from later taking an adverse position to a former client; disqualification under duties of confidentiality requires a showing that specific former-client confidences or secrets are being used or disclosed in the later dispute.
- Disqualification is an extraordinary, protective remedy aimed at safeguarding the attorney-client relationship and public confidence in the judicial process; it should not be imposed on speculative or conclusory allegations without a concrete factual basis.
- Motions to disqualify opposing counsel based on alleged transmission of confidences require evidence of the content and protected character of the information and a demonstrated risk of its use against the former client.

## Conclusion

The court required separate counsel for the corporate defendants in a derivative action because dual representation with individual defendants posed a conflict and confidentiality risk, but it refused to disqualify a former corporate lawyer as a plaintiff or to disqualify plaintiffs’ counsel absent a specific, supported showing that protected corporate confidences were being used or disclosed.


Cannon v. U.S. Acoustics Corp., 398 F. Supp. 209 (N.D. Ill. 1975), aff’d in part, 532 F.2d 1118 (7th Cir. 1976)