Court File and Parties

COURT FILE NO.: CV-12-459926

DATE: 2014/07/16

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

HER MAJESTY THE QUEEN IN RIGHT OF THE PROVINCE OF ONTARIO

Plaintiff

– and –

CHARTIS INSURANCE COMPANY OF CANADA, AMERICAN HOME ASSURANCE COMPANY, ROYAL & SUN ALLIANCE INSURANCE COMPANY OF CANADA, THE ROYAL INSURANCE COMPANY OF CANADA, ROYAL INSURANCE COMPANY LIMITED, AVIVA CANADA INC., AVIVA INSURANCE COMPANY OF CANADA, GENERAL ACCIDENT ASSURANCE COMPANY OF CANADA, TRAVELERS INSURANCE COMPANY OF CANADA, and ST. PAUL FIRE AND MARINE INSURANCE COMPANY

Defendants

Counsel:

Bill Manuel and Jonathan Sydor, for the Plaintiff

Gavin MacKenzie and Brendan Clancy, for the Defendants, Chartis Insurance Company of Canada, and American Home Assurance Company

HEARD: June 30, 2014

Reasons for Judgment

A.J. O’MARRA J.:

[1] The defendants, collectively known as AIG Insurance Company (AIG), move for a declaration that an ethical screen put in place by its lawyers of record Lloyd, Burns, McInnis LLP (LBM) is sufficient to prevent disclosure of the plaintiff’s confidential information and that it is in the interest of justice that LBM continue to act for AIG in the present action. Ontario has brought a cross-motion seeking an order from the court to disqualify LBM from continuing to act for AIG due to an inherent conflict of interest caused by a lawyer, Michael Foulds, formerly of the law firm Theall Group LLP (TG), Ontario’s counsel for the present action, having joined LBM to work with lawyer, Douglas H. McInnis.

Factual Circumstances

[2] Ontario was the defendant in three class action lawsuits brought by former residents of institutions for persons with developmental disabilities and one class action brought on behalf of former students at a school for the blind. Ontario was insured by a number of different insurance policies over the period of time of concern in the class actions, 1940s to 2009, including policies issued by AIG.

[3] A dispute arose with respect to the coverage for class actions with the various insurers including AIG. One aspect of the dispute related to the insurer’s obligation to pay defence costs for the class actions. TG, acting on behalf of Ontario instituted proceedings to compel coverage from the various insurers. Settlements were reached in three of the four class actions. In August 2013 Ontario reached a final settlement with three of the insurers, other than AIG, with respect to their indemnity obligations under their respective policies of insurance.

[4] Mr. Michael Foulds was an associate at TG and involved from November 2010 onwards as counsel for Ontario working with lead counsel, Lawrence Theall. During the time he was with TG, Mr. Foulds, as part of the litigation group docketed over 160 hours to the coverage proceedings. He has, as a result, extensive knowledge of privileged and confidential information with respect to the action between Ontario and AIG in the coverage proceedings.

[5] Mr. Douglas McInnis, most recently a partner of LBM from June 2013, has been retained as counsel exclusively by AIG on all issues involving its liability insurance program with the Province of Ontario, referred to as the Ontario Insurance Program. As early as 1986 Mr. McInnis acted as coverage advisor and counsel to AIG. Since the early 1990s AIG has retained Mr. McInnis to represent it on more than 50 separate coverage files relating to the Ontario Insurance Program. As Mr. McInnis moved firms over the years AIG has directed that its coverage files accompany him to the firms he joined.

[6] Mr. McInnis was retained by AIG to act for them in the present matter as early as June 2009. He has been actively and directly involved in assessing liability and damages in the class actions, negotiating issues with Mr. Theall, participating in mediations regarding such issues, and discussing coverage issues with the other insurers. He has docketed over 400 hours with respect to the coverage action.

[7] Mr. McInnis had been a partner at McCague LLP from 1994 to 2013 when he joined LBM. Between 2004 and 2010 Mr. McInnis worked with Mr. Foulds at McCague on a number of AIG matters. In 2010, Mr. Foulds joined TG. During the summer of 2013, Mr. McInnis approached Mr. Foulds to join LBM, a 14 member boutique litigation firm, as a partner to work with him on AIG files, excluding the coverage action and any Ontario-AIG matters, and other clients. In late November 2013, Mr. Foulds informed Mr. Theall that he intended to continue with LBM. On January 6, 2014 Mr. Foulds commenced work with the law firm LBM.

The Ethical Screen

[8] Prior to Mr. Foulds joining LBM, Mr. McInnis recognizing the potential conflict of interest notified Mr. Theall initially by telephone in early December 2013 to discuss establishing an ethical screen at LBM in order to safeguard Ontario’s confidential information possessed by Mr. Foulds.

[9] In an email dated January 2, 2014 Mr. McInnis set out the nature of the safeguards to be put in place:

a) Mr. Foulds would have no involvement in LBM’s representation of AIG in the coverage action;

b) Mr. Foulds would not discuss Ontario coverage matters involving AIG with anyone at LBM or AIG;

c) No one from LBM would discuss Ontario-AIG matters with Mr. Foulds;

d) Immediately upon arriving on his start date Mr. Foulds would sign a written undertaking confirming that he understood, and would adhere to, all elements of the ethical screen;

e) LBM members involved in the Ontario-AIG matters would sign a similar undertaking;

f) LBM would inform all personnel in writing of the ethical screen, of the requirement to adhere to it, and of the possible sanctions for failing to abide by the terms of the ethical screen, which could include dismissal;

g) Mr. Foulds’ office would be located several offices away from those LBM personnel working on Ontario-AIG matters; and

h) The ethical screen would be monitored and enforced by a senior partner of LBM with no personal involvement in Ontario-AIG matters.

[10] Mr. McInnis provided the proposed form of undertaking to Mr. Theall to review as well. No additional proposals were made by TG.

[11] In advance of Mr. Foulds’ arrival at LBM, Vincent Burns, senior partner with experience in dealing with matters relating to ethical screens and professional obligations, was appointed to implement, monitor and enforce the ethical screen. On January 6, 2014 he advised all members of the firm and members working for Ontario-AIG matters by email of the measures to be taken to prevent disclosure of confidential information, and sanctions for failing to abide by those measures, including dismissal.

[12] On arrival at LBM, Mr. Foulds entered an undertaking, as did Mr. McInnis, and his assistant, that they would not discuss anything related to the Ontario-AIG matters. Later, when an associate and articling student joined the firm and became involved in the Ontario-AIG matter they too signed the undertaking.

[13] LBM set up various measures to isolate Ontario-AIG coverage proceedings files from Mr. Foulds. He was not allowed access to the physical or electronic files related to the matter.

[14] On February 7, 2014 Mr. Theall wrote to Mr. McInnis and informed him that Ontario objected to LBM continuing to act for AIG due to the conflict created by Mr. Foulds’ move to LBM. In his letter he stated:

In light of all the facts, Ontario has concluded that it would not be appropriate for your firm to continue to act. Ontario believes the conflict of interest cannot be sufficiently remedied with any ethical walls you propose may be constructed around him given that this is not a case of a mega firm, where lawyers coming to the firm have no real contact with the lawyers who might continue to act for the adverse party behind an ethical wall. This is a case where a lawyer who worked for the client (Ontario) on the specific case has now joined the firm which is representing the adverse party (Chartis), and is working closely with the specific lawyer who would continue to represent Chartis.

We regret this unfortunate result, as it has always been a pleasure working with you in this matter. We would request that you confirm Chartis will be retaining new counsel.

[15] AIG continues to retain LBM. The ethical screen as outlined has been instituted. Mr. Foulds swore in his affidavit presented on the motion that he took with him no work product, notes or other documents relevant to the coverage action or that contained Ontario’s confidential information. Further, as indicated in the undertakings, Mr. Foulds declared he has not discussed any matters concerning the Ontario-AIG action with Mr. McInnis or anyone at LBM. Since his start date he has not been involved in any AIG files that relate to the class actions, the coverage action or the Ontario Insurance Program, or any Ontario-AIG matters. However, he does work closely with Mr. McInnis on other matters, including AIG files not involving Ontario. In his examination, Mr. Foulds testified that between 50 to 60 percent of his work was with Mr. McInnis, and approximately half of his time is spent doing work for AIG.

[16] Similarly, Mr. McInnis, executed an undertaking, and swore in his affidavit on the motion, he has not received or discussed any confidential information relating to Ontario-AIG matters with Mr. Foulds. He has not received any information from Mr. Foulds regarding his work for Ontario in respect of the Class Actions, the Coverage Action, the underlying coverage issues giving rise to the Coverage action, or Ontario-AIG matters.

The Test

[17] The seminal case in determining whether a disqualifying conflict of interest exists is MacDonald Estate v. Martin, [1990] 3 SCR 1235 wherein the Supreme Court indicated that in such matters there are three competing values to consider: 1) the concern to maintain the high standards of the legal profession and the integrity of the justice system; 2) the counter-value that a litigant should not be deprived of his or her choice of counsel without good cause; and 3) the desirability of permitting reasonable mobility in the legal profession.

[18] Further, Sopinka J. set out the following test to apply in determining whether a disqualifying conflict exists:

The test must be such that the public represented by the reasonably informed person would be satisfied that no use of confidential information would occur. That, in my opinion, is the overriding policy that applies and must inform the court in answering the question: Is there a disqualifying conflict of interest? In this regard, it must be stressed that this conclusion is predicated on the fact that the client does not consent to but is objecting to the retainer which gives rise to the alleged conflict.

Typically, these cases require two questions to be answered: 1) Did the lawyer receive confidential information attributable to a solicitor-and-client relationship relevant to the matter at hand? 2) Is there a risk that it would be used to the prejudice of the client?

[19] In answer to the first part of the two part test there is no issue that Mr. Foulds received relevant confidential information attributable to a solicitor-and-client relationship with the client, Ontario. He was part of the litigation team, having assisted in drafting the statement of claim, he attended client and settlement meetings, he was on the record as counsel for Ontario and privy to settlement agreements with other parties to the coverage proceedings.

[20] The issue for determination is the second part of the test, which is whether there is a risk the confidential information will be used to the prejudice of Ontario.

[21] Sopinka J. held in MacDonald Estates v. Martin that in assessing the risk of prejudice, the court should infer that the migrating lawyer, (in this instance Mr. Foulds), has imparted confidential information of the former clients to members of his or her new firm. However, the inference is rebuttable if the measures instituted by the tainted firm (LBM) would satisfy a reasonably informed person that the use of confidential information had not occurred or was likely to occur.

Guidelines for Ethical Screens

[22] Sopinka J. recommended in MacDonald Estate v. Martin that lawyers’ professional regulatory bodies consider what sort of institutional measures would be necessary to satisfy a reasonable member of the public that no unauthorized disclosure would occur or would likely occur. Since then the legal profession and its regulatory bodies have established guidelines to assist lawyers and firms in structuring timely and effective institutional measures/ethical screens to protect confidential information where conflicts of interest arise. The Law Society of Upper Canada in sub-rule 2.05(4) sets out the Law Society’s approach to what constitutes adequate “institutional measures”:

Where the transferring lawyer actually possesses relevant information respecting the former client that is confidential and that, if disclosed to a member of the new law firm, may prejudice the former client, the new law firm shall cease its representation of its client in that matter unless

a) The former client consents to the new law firm’s continued representation of its client, or

b) The new law firm establishes that it is in the interests of justice that it act in the matter, having regard to all the relevant considerations, including,

i) The adequacy and timing of the measures taken to ensure that no disclosure to any member of the new law firm of the former client’s confidential information will occur,

ii) The extent of the prejudice to any party,

iii) The good faith of the parties,

iv) The availability of suitable alternative counsel, and

v) Issues affecting the public interest.

[23] In addition, 12 guidelines for protecting client’s confidential information are set out in the commentary to Rule 2.05:

1. The screened lawyer should have no involvement in the new law firm’s representation of its client.

2. The screened lawyer should not discuss the current matter or any information relating to the representation of the former client (the two may be identical) with anyone else in the new firm.

3. No member of the new firm should discuss the current matter or the previous representation with the screened lawyer.

4. The current matter should be discussed only within the limited group that is working on the matter.

5. The files of the current client, including computer files, should be physically segregated from the new law firm’s regular filing system, specifically identified, and accessible only to those lawyers and support staff in the new law firm who are working on the matter or who require access for other specifically identified and approved reasons.

6. No member of the new law firm should show the screened lawyer any documents relating to the current representation.

7. The measures taken by the new law firm to screen the transferring lawyer should be stated in a written policy explained to all lawyers and support staff within the firm, supported by an admonition that violation of the policy will result in sanctions, up to and including dismissal.

8. Undertakings should be provided by the appropriate law firm members setting out that they have adhered to and will continue to adhere to all elements of the screen.

9. The former client, or if the former client is represented in that matter by a lawyer, that lawyer, should be advised (a) that the screened lawyer is now with the new law firm, which represents the current client, and (b) of the measures adopted by the new law firm to ensure that there will be no disclosure of confidential information.

10. The screened lawyer’s office or workstation and that of the lawyer’s support staff should be located away from the offices or workstations of lawyers and support staff working on the matter.

11. The screened lawyer should use associates and support staff different from those working on the current matter.

12. In the case of law firms with multiple offices, consideration should be given to referring conduct of the matter to counsel in another office.

[24] As counsel for LBM has pointed out, in all but one of the cases decided since MacDonald Estate v. Martin, and the institution of regulatory guidelines, Canadian courts have held that the ethical screens provided sufficient protection for the migrating lawyers’ former clients. (See Dwyer v. Man, 2011 ONSC 2163, [2011] O.J. No. 1551 (SCJ); Robertson v. Slater Vekio, [2008] BCJ No. 1353 (CA); Bank of Montreal v. Dresler, 2002 NBCA 69, [2002] NBJ No. 324 (CA); Rich v. Canada, [2001] NJ No. 365 (CA); Davenport (Litigation Guardian of) v. Hotel-Dieu of St. Joseph, [2013] NBJ No. 13 (QB); FP Genetics Inc. v. Lizee, 2012 SKQB 453, [2012] SJ No. 708 (QB); Allied Signal Inc. v. Dome Petroleum Ltd., 1997 ABCA 71, [1997] AJ No. 193 (CA), leave to appeal to SCC refused [1997] SCCA No. 162; Davidova-Perez v. Lombard General Insurance Co. of Canada, O.J. No. 2456 (SCJ); Gardner v. Gardner, [2007] AG No. 1534 (QB); Bramalea Inc. (Trustee for) v. KPMG, [1998] O.J. No. 3019 (SCJ); AK Film Ltd. Partnership v. Gallery Pictures Inc., [1996] O.J. No. 1741 (SCJ); Berg v. Bruton, [2005] SJ No. 801 (QB).)

[25] These cases underscore the hallmarks of an objectively effective ethical screen:

a) The conflict was detected prior to the migrating lawyer’s start date at the new firm;

b) The previous firm was notified of the conflict prior to the migrating lawyer’s start date;

c) The previous firm was notified, prior to the migrating lawyer’s start date, of the terms of the ethical screen to be implemented by the new firm;

d) The migrating lawyer would have no involvement in the matter in question at his or her new firm, nor would he or she discuss the matter with other members of the new firm;

e) The migrating lawyer and those working on the matter at the new firm executed undertakings in which they, a) agreed not to discuss the matter with the other, and b) declared that there had been no disclosure of confidential information;

f) All members of the new firm were informed of the terms of the ethical screen, and of the consequences of breaching those terms, which consequences could include dismissal;

g) The file pertaining to the matter was physically and electronically segregated such that the migrating lawyer would have no access;

h) The migrating lawyer’s office would not be located near those lawyers working on the matter;

i) The migrating lawyer did not work with support staff involved in the matter.

[26] The one exception in which the firm was disqualified, relied on by Ontario, is Marinangeli v. Marinangeli, [2004] 4041 (ONSC) a family law matter in which the wife sought to disqualify her husband’s lawyer because her former lawyer, who had acted for her earlier in the dispute had joined the firm of her husband’s lawyer.

[27] The migrating lawyer had acted for the wife on the separation with her spouse, which concluded with a negotiated settlement agreement in 1996. In 1999, he joined the firm that was retained subsequently by the spouse in 2003 to achieve a variation in child support. He swore an affidavit he had not spoken with her husband’s lawyer or anyone else in the firm about working for her, or having any specific recollection of the matter other than having represented her.

[28] The tainted law firm did not file an affidavit from the husband’s lawyer. The court concluded that in its absence the burden had not been meet notwithstanding the confidentiality screen. Further, the court observed the relationship between family law lawyers and their clients go well beyond technical, financial and impersonal information. Clients go to family lawyers and bare their souls. There is an emotional vulnerability that is not often found in other areas of law. Clients must have faith that matters of substance discussed with his or her lawyer will be held in the strictest of confidence.

[29] Ferrier J. determined that the tainted firm had not discharged the heavy burden of showing that the public represented by a reasonably informed person, would be satisfied that no use of confidential information had occurred or would occur.

[30] In this instance, Ontario’s concern is that as a result of the continuing working relationship between Mr. Foulds and Mr. McInnis, the lead counsel with respect to the Ontario-AIG matters that the risk is high of an inadvertent disclosure of confidential information, which would be highly prejudicial to its interests. Mr. Foulds works 50 to 60 percent of his time with Mr. McInnis. Ontario does not challenge the integrity of counsel or suggest any impropriety; just that such a direct working relationship creates a substantial risk of inadvertent disclosure to the prejudice of Ontario.

[31] Ontario contends there is no independent or objective means of verifying that such disclosure had not occurred, or was unlikely to occur, as would be the case if Mr. Foulds did not have a continuing working relationship with Mr. McInnis. There are no measures which could prevent inadvertent disclosure.

[32] Ontario relies on a comment by Robertson J.A. in Bank of Montreal v. Dresler, 2002 NBCA 69, [2002] NBJ No. 324, a case in which the size of the firm and the effectiveness of an ethical screen was at issue, at para. 81:

On the issue of firm size, the court must be satisfied that the transferring lawyer can be effectively screened from those working on the tainted file. In an ideal legal world, the screened lawyer would not have daily contact with those working on the tainted file. Thus, lawyers in the same firm, but who work in different cities, do not pose the same risk as those who practice within the same office space. In effect, the screened lawyer must be able to practice law independently of those representing the current client. If the screened lawyer continues to work on other files with those working on the conflict file does it make any sense to perpetuate the belief that compliance with the Law Society’s rules and guidelines has the effect of sustaining public confidence in the integrity of the legal profession and the administration of justice? I think not.

[33] In response, counsel for LBM argued that the comment in Bank of Montreal v. Dresler is obiter to the decision, which involved in part an assessment of the B.C. Law Society equivalent of guideline Number 11 under Rule 2.05, i.e., the screened lawyer should use associates and support staff different from those working on the current matter. The court observed that there is no authority for the proposition that a tainted law firm must comply with all 12 guidelines, only numbers 1 to 4 should be considered “mandatory”.

[34] Some of guidelines, such as Number 11 create a particular challenge for small firms that function with limited number of professionals and staff. The intent of the guideline is to limit professional interactions to prevent disclosure of confidential information, not to prohibit all contact. Disqualification is not automatic because of failure to comply with all of the Law Society’s guidelines. Otherwise, the guidelines would be a comprehensive code of conduct, which would be too impractical, because it is an area of law that requires flexibility.

[35] In Robertson v. Slater Vecchio, [2008] B.C.J. No. 1353, the B.C. Court of Appeal considered as well whether the guidelines must be followed in all respects whether the firm is large or small. In the case of a nine member firm, based on a comment by the chambers judge that the evidence was unclear as to whether the migrating lawyer was sufficiently removed from other lawyers and staff and avoided working with those on the client’s lawsuit, the Court of Appeal for the purpose of the appeal assumed that the migrating lawyer’s work area was not segregated and that he was likely to have worked with lawyers and staff working on the client’s lawsuit.

[36] In that case there were delays in the imposing of some of the guideline measures and others, such as the physical and professional quarantine of the migrating lawyer, were not followed. The chambers judge concluded the deficiencies were not fatal and from the commencement of the lawyer’s employment with the tainted firm there was “compliance in spirit and substantial compliance” with the guidelines. The Court of Appeal dismissed the appeal and observed that the question was not whether each of the guidelines had been followed to the letter, but whether the lawyer and his firm had taken measures to meet the difficult burden of satisfying a reasonable member of the public that no use of confidential information would occur or would likely occur.

[37] The guidelines and the suggested hallmarks of objectively effective ethical screens referenced above do not require that the tainted lawyer should have no contact or involvement with lawyers working on the client’s file. It would be a particular challenge for small firms, as here, if it was otherwise.

[38] Here, all of the suggested measures under the guidelines were implemented in a timely manner by LBM. There was notification to counsel for the client, opportunity for consultation as to proposed safeguards, undertakings executed by the migrating lawyer and the other lawyers of the firm working on the client’s file not to discuss it, notification to all lawyers and staff of the requirements of the ethical screen with sanctions if violated, including dismissal, separation and isolation of the physical and electronic litigation file from the migrating lawyer, and an office located away from the litigation group.

[39] In addition to the 12 guideline measures, LBM has appointed an independent senior partner, with no involvement with the client’s file, to supervise and monitor adherence to the requirements of the ethical screen, and the migrating lawyer (Foulds) has been excluded from involvement in any Ontario-AIG matters.

[40] Although there may be continuing professional contact between Mr. Foulds and Mr. McInnis, it involves non Ontario-AIG matters. Even with the ethical screen in place, the absolute prevention of inadvertent disclosure can never be assured. Inadvertent disclosure could occur in even the most structured of professional environments. The issue is whether reasonable precautions have been taken to minimize the risk.

[41] As asked rhetorically by Cavarzan J. in Dwyer v. Mann, 2011 ONSC 2163, [2011] O.J. No. 1551 (SCJ), a similar case to this one, what more could be done to protect the confidentiality of the plaintiff’s information.

[42] Even if a doubt remains that there is the possibility of inadvertent disclosure, I consider in the balance, the impact of a disqualification order on the opposing parties’ right to counsel of choice. Mr. McInnis has not just been retained. He has been involved significantly as coverage counsel in AIG matters for many years. He has been their outside counsel on such matters since 1986. Since the early 1990s, AIG has retained Mr. McInnis exclusively for Ontario-AIG matters. He has been dealing with matters giving rise to the present coverage action for more than five years. He has docketed over 400 hours in the matter, which has been described as a complex action involving the interpretation of his client’s insurance policy and class actions involving a class period from the 1940s to 2009. The areas of dispute and policy interpretation, as outlined by counsel, and stated by Mr. McInnis on examination, entail:

a) Ontario taking the position in the past that the wording of AIG’s policy did not reflect the coverage to which it was entitled;

b) The Coverage Action, as it relates to AIG, will fall to be decided or settled, as the case may be, on the basis of the 2005 settlement agreement negotiated on AIG’s behalf by Mr. McInnis;

c) AIG’s position in respect of the Coverage Action is that Ontario either does not recognize or understand that certain layers in the Ontario Insurance Plan’s tower of coverage have, in fact, already been exhausted.

[43] This is not a family law dispute with vulnerable clients as in Marinangeli. The parties are large sophisticated institutional interests. Although there are a number of experienced lawyers competent to undertake litigation of such complexity as in this case, as acknowledged by Mr. McInnis on examination, none have the depth of knowledge, experience and understanding of AIG and the Ontario Insurance Program as Mr. McInnis. AIG should not be denied its counsel of choice.

[44] LBM has been pro-active in minimizing the risk of disclosure of confidential information. In considering the timely and comprehensive compliance by LBM with the institutional measures set out in the guidelines, in addition to appointment of a supervising senior partner, and isolating Mr. Foulds from any Ontario-AIG matters, I find that a reasonably informed person would be satisfied that the use of confidential information had not occurred or would likely occur, and it is in the interests of justice to allow Mr. McInnis to remain as AIG’s counsel of choice.

[45] Accordingly, LBM’s motion is granted and Ontario’s cross-motion to remove LBM as AIG’s lawyers of record is dismissed.

[46] If the parties are unable to agree as to costs between themselves, written submissions together with costs outline may be made within 15 days of the release of this decision and responding submissions within 15 days thereafter.

A.J. O’Marra J.

Released: July 16, 2014