SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)
BETWEEN:
NOBUL TECHNOLOGIES INC. Plaintiff/Moving Party
- and -
SCOTT REED, ADAM JACOBS, MARTHA SIMMONS aka MARTHA COHEN, SUSAN MCGEE, MICHAEL CAPPUCCITTI, MITCHELL STEVEN COHEN, K2 & ASSOCIATES INVESTMENT MANAGEMENT INC., K2 PRINCIPAL FUND L.P., K2 PRINCIPAL TRUST, and SHAWN KIMEL, Defendants/Responding Parties
BEFORE: Penny J.
COUNSEL: Nathan J. Shaheen and Shaan P. Tolani for the moving party
J. Thomas Curry, Jaan Lilles and Bhreagh Ross i for the responding K2 defendants
Justin Nasseri for Regan McGee, Lisa Coulman and Rebecca Levy, defendants to the counterclaim
HEARD: July 31, 2023
ENDORSEMENT
Overview
1The plaintiff moves for an order disqualifying Norton Rose Fulbright LLP (“NRF”) as lawyers of record for the defendants K2 & Associates Investment Management Inc., K2 Principal Fund L.P., K2 Principal Trust and Shawn Kimel (the “K2 defendants”). It does so on the basis that the plaintiff is a current client of NRF.
2For the reasons that follow, the motion is granted.
Background
3Nobul is a start-up phase Canadian technology company. Its business, it says, is the provision of a digital real estate marketplace that utilizes Nobul’s core proprietary technology to connect home buyers and sellers to suitable real estate agents.
4Nobul retained NRF in January 2022. NRF was retained to handle Nobul’s patent applications being prosecuted in Canada and the United States. These patent applications are in connection with Nobul’s core proprietary technology.
5Since its retainer, NRF has actively prosecuted both the Canadian and United States patent applications for Nobul’s core proprietary technology that underpins Nobul’s digital real estate marketplace. In the course of this retainer, NRF has received significant proprietary, confidential and privileged information on Nobul’s technology, including through documents and detailed discussions between NRF lawyers and senior management of Nobul, including Nobul’s Chief Executive Officer, Mr. McGee, and Nobul’s Chief Financial Officer, Ms. Coulman. NRF was aware that the subject matter of its legal advice was the technology underpinning Nobul’s digital real estate marketplace.
6The K2 defendants operate a multi-strategy hedge fund that invests primarily in North American equities and debt markets. K2 invested in Nobul and became a shareholder in 2021. Over the course of the next two years, the K2 defendants became unhappy with the progress of the Nobul start-up business, the quality of the information they were receiving and the manner in which the company was being managed. The parties’ relationship became fractious. Threats were made and litigation counsel were retained. In January 2023, Nobul initiated litigation against the K2 defendants (and others).
7In this action, Nobul is represented by Bennett Jones. Nobul’s claim alleges that it was the target of a malicious campaign relating to matters of corporate finance and corporate governance undertaken by recently departed directors in coordination with the K2 defendants. Nobul alleges that the K2 defendants are liable for, among other things, breach of contract, unlawful means conspiracy and predominant purpose conspiracy in connection with alleged misconduct relating to matters of Nobul’s corporate finance and corporate governance. In its statement of claim, Nobul does not advance any allegations relating to its core proprietary technology that is the subject of NRF’s mandate.
8The K2 defendants were longstanding clients of NRF’s commercial litigation group. They retained NRF to respond to Nobul’s action. Nobul was given a courtesy “head’s up” warning that NRF was proposing to act in the K2 defendants’ defence. On March 15, 2023, the K2 defendants delivered their statement of defence and a counterclaim to Nobul’s action. The statement of defence and counterclaim were prepared and delivered by NRF on the K2 defendants’ behalf.
9The allegations advanced in the K2 defendants’ statement of defence and counterclaim include claims that Nobul, through its senior management, Mr. McGee and Ms. Coulman “solicit[ed] investment on the false premise that Nobul owns revenue-generating technology” “overstated the capabilities of Nobul’s technology” and that “Nobul did not own, operate or derive revenue from any technology”.
10The allegations advanced by the K2 defendants also include claims of financial misfeasance and fraudulent misrepresentations by Mr. McGee and Ms. Coulman in operating Nobul, including that they “were siphoning company funds through exorbitant compensation and non-arm’s length transactions, and constantly required new investment to sustain their scheme”. Thus, the K2 defendants’ defence and counterclaim alleges that that the very Nobul senior management who instruct NRF in the patent applications to protect Nobul’s proprietary technology were engaged in the perpetration of ponzi scheme which relied, among other things, on Nobul senior management’s false claims that Nobul had any propriety technology at all.
11When Nobul became a client of NRF in January 2022, it signed an engagement letter. The engagement letter specifies the scope of NRF’s work for Nobul: NRF was “engaged to handle certain intellectual property matters and such other activities as we may agree in the future. Please do not assume we will be undertaking such further tasks unless they are set out in subsequent correspondence between us.”
12The engagement letter also contains an advance waiver, which is at the heart of this motion. The advance waiver provides:
Acting adverse to you while you are a client: Under professional/ethical rules, while you are a client, we may not be permitted to act for another client in an engagement that is directly adverse to your immediate interests unless you have agreed to a waiver.
You agree that we may represent current or future clients (including any parties adverse to you in this matter) in any matters that are not substantially related to this matter, even if the interests of such clients in the other matters are directly adverse to you. We agree however that your consent does not permit us to represent another client in a matter if we have obtained non-public proprietary or other confidential information from you that could be used by the other client to your material disadvantage in that matter, unless appropriate measures are taken to protect the confidentiality of such information.
13The evidence is that, upon taking on the K2 defendants’ retainer, NRF established an ethical wall between the patent lawyers acting for Nobul and the commercial litigation lawyers acting for the K2 defendants.
Issue
14The issue for determination is whether NRF has a disqualifying conflict such that it should be barred from acting for the K2 defendants in this litigation.
15Mr. Shaheen advanced two arguments in support of his position on behalf of Nobul:
(1) that NRF is purporting to act concurrently for two clients whose interests are in direct conflict (such that the “bright line” rule applies); and
(2) that the advance waiver is not a consent to the situation at hand because:
(a) the two engagements are “substantially related” due to the nature of the allegations made by the K2 defendants in their statement of defence and counterclaim about the validity, and even existence, of Nobul’s proprietary technology; and
(b) the nature of the allegations, include fraud, fraudulent misrepresentation and the perpetration of a ponzi scheme committed by the senior management who are also responsible for and instruct NRF’s lawyers on patent retainer. This goes beyond any reasonable expectation of what might have been contemplated when the engagement letter was entered into in January 2022 and offends fundamental duties of loyalty which are engaged when a lawyer accepts a retainer for a client.
16Mr. Curry accepts that the “bright line” rule is engaged but argues, on behalf of K2, that:
(a) the patent prosecution retainer has nothing to do with the allegations being made by the K2 defendants in this action about the commercial and revenue producing capability of Nobul’s proprietary technology. The matters are not substantially related such that the engagement letter contains Nobul’s valid consent; and
(b) Mr. McGee and Ms. Coulman are not clients of NRF. In any event, it was Nobul’s claim against the K2 defendants which initiated a ‘bare knuckle brawl’ of personal allegations against K2’s CEO, Mr. Kimel, such that there can have been no reasonable expectation that responding allegations in kind would not follow from the K2 defendants in due course.
Analysis
17The parties agree that the governing law is laid down by the Supreme Court of Canada in Canadian National Railway Co v McKercher LLP, 2013 SCC 39.
18A lawyer, and by extension a law firm, “owes a duty of loyalty to clients.” The duty of loyalty has three dimensions: (1) a duty to avoid conflicting interests; (2) a duty of commitment to the client’s cause; and (3) a duty of candour.
19The fundamental duty of loyalty and the related duty to avoid conflicting interests are “intertwined with the fiduciary nature of the lawyer-client relationship” and are central to protecting and maintaining confidence in the administration of justice. Unless a litigant is assured of the undivided loyalty of the lawyer, neither the public nor the litigant will have confidence that the legal system is a reliable and trustworthy means of resolving their disputes and controversies. Accordingly, the lawyer must refrain “from being in a position where it will be systemically unclear whether he performed his fiduciary duty to act in what he perceived to be the best interests’ of his client”.
20In McKercher, the Supreme Court concluded that the duty of loyalty and related duty to avoid conflicting interests require that a law firm engaged in the “concurrent representation of clients directly adverse in interest attracts a clear prohibition: the bright line rule.” The bright line rule requires that “a lawyer may not represent a client in one matter while representing that client’s adversary in another matter, unless both clients provide their informed consent.” Notably, the Court held that the “rule applies to both related and unrelated matters”, which, it explained, is justified by the fact that “the client’s faith in the lawyer’s loyalty to the client’s interests will be severely tried whenever the lawyer must be loyal to another client whose interests are materially adverse.”
21However, the “bright line” rule is not absolute. The bright line rule has certain limits on its scope. The immediate legal interests of the clients must be directly adverse. The rule “cannot be raised tactically. And, it does not apply in circumstances where it is “unreasonable for a client to expect that a law firm will not act against it in unrelated matters” (emphasis added).
22It is common ground that these are the applicable principles. Where the parties differ is over their application to the facts of this case.
Are The Mandates Substantially Related
23The K2 defendants argue that the immediate legal interests of Nobul and the K2 defendants are not directly adverse. The K2 defendants also argue, relying on the expert testimony of an independent patent lawyer, that the issue of whether a digital technology is patentable is legal distinct from the issue of whether it will be commercially successful. They argue that the K2 defendants’ claims in this litigation involve whether Nobul’s alleged technology is being, or can be, exploited profitably, not whether it is patentable. The patent witness also suggests that Nobul’s patent application appears to be “dormant”. The K2 defendants seek to infer from this that NRF’s involvement is minimal or quiescent.
24I can not agree with this argument. Nobul has an immediate legal interest in the validity of its core technology, including its ability to qualify for a patent. This interest has become directly adverse to the K2 defendants by virtue of their claim that Nobul has no core technology (patentable or otherwise) because it does not exist.
25The problem with the K2 defendants’ argument is two-fold. First, while it is true that commercial success is not required for a patent, it is also true that, for a patent to be valid, it must be useful; that is, it must do what it is claimed to be able to do. The K2 defendants’ defence and counterclaim alleges not only that Nobul’s digital technology is not profitable or commercially valuable but that Nobul has no digital technology; in other words, that Nobul’s claimed core technology does not even exist. In my view, this claim is fundamentally and irrevocably inconsistent with NRF’s duty to advance Nobul’s interests in the protection of its core technology and the patent applications. Given the K2 defendants’ allegations in the defence and counterclaim, the two matters are “substantially related”. Thus, the language of the advance waiver does not assist in the K2 defendants’ argument. NRF agreed, in accordance with the dictates of the Supreme Court of Canada, that it would under no circumstances act both for and against Nobul in any “substantially related” matter. In the language of the Supreme Court in McKercher, it was reasonable for Nobul to expect that NRF would not act against it in a claim that attacks the fundamental existence of it core technology.
26The second problem is illustrated by how the K2 defendants’ argument has been advanced on this motion. The K2 defendants, of course, could not and did not ask NRF’s patent lawyers to give an opinion on the status of Nobul’s patent application or the scope of their duties in relation to the patent application for purposes of this motion. But in both substance, and form, Nobul might well have benefited from their patent lawyers’ advice in view of the “expert” patent evidence lead by the K2 defendants on this motion. The suggestion that the patent application is “dormant” was vociferously rejected by Nobul’s chief technology officer, who gave evidence to the contrary. But the best evidence, presumably, would have come from Nobul’s lawyers prosecuting the patents. That would have involved NRF’s patent lawyers testifying on an issue contrary to the K2 defendants’ interest in this litigation. This problem remains a real issue for the case going forward as well. The same problem applies to the more substantive aspects of the patent process alluded to by the “expert”. If Nobul’s core technology is a fraud and non-existent and is being used in a ponzi scheme, that, it seems to me, could have implications for the viability of the patent application, at the very least on the question of the technology’s usefulness. Nobul might well require evidence from its patent lawyers at NRF for this point as well. The fact that this could not happen highlights the very nature of the NRF conflict.
27The K2 defendants argue that the plaintiff’s motion is tactical in nature and that there was, in any event, implied consent when Nobul failed to object after it was told that NRF would be acting for the K2 defendants’ in their defence of this action. I am unable to accept this argument. The plaintiffs did not initially object to NRF’s retainer by the K2 defendants; that was at a time when the only issues in dispute appeared to involve corporate finance and corporate governance. There was no apprehension that the two matters would be “substantially related” until the K2 defendants put the validity and existence of Nobul’s core technology in issue when it delivered its defence and counterclaim several months later, in March 2023. The plaintiffs raised the conflict issue promptly following delivery of the defence and counterclaim.
28For all these reasons, I find that the allegations of the K2 defendants in the defence and counterclaim have put NRF in the position of acting for another client adverse in interest to NRF’s representation of Nobul in the defence and preservation of their core, proprietary digital technology. These are, in the circumstances, “substantially related” matters. The bright line rule applies. NRF is barred from acting against Nobul in this action.
The Allegations Challenging the Honour and Integrity of Nobul’s Senior Officers
29The Supreme Court has made it clear that: “a lawyer shall not represent a client in a matter when there is a conflict of interest unless there is consent, which must be fully informed and voluntary after disclosure, from all affected clients…” R v Neil, 2002 SCC 70, at para. 29; R v Baharloo, 2017 ONCA 362, at para. 51.
30In Chiefs of Ontario v Ontario, 2003 CanLII 32351 (ONSC), this Court disqualified and removed Blake, Cassels & Graydon LLP from acting against a former client despite the existence of a general consent from the former client to act in the litigation at issue. The Chiefs argued that circumstances changed when Blakes new client attacked the honour and integrity of its former client. The Court included that, among the list of “things that a law firm simply cannot do”, were making “an attack on the honour of its former client” and relying on an insufficiently detailed waiver in an attempt to justify that attack. The Court concluded that a generically worded waiver does not provide a “blank cheque” for “a direct attack by a law firm on the honour of their former client”, which instead, Campbell J. held, would require “clear and unambiguous consent” by the client.
31The Chiefs case predates McKercher and several other seminal cases which have, as the Supreme Court contemplated in McKercher, begun to develop the contours of the application of the bright line rule in specific circumstances and applications.
32Nobul argues that even if the matters were not substantially related, the attacks on the honour of senior Nobul executives (who have dealt with and instructed NRF lawyers in the patent mandate) contained in the defence and counterclaim would be an independent basis for declaring that NRF’s mandate for the K2 defendants has put NRF in a conflict.
33I have already found that the two NRF mandates are substantially related and that, based on the engagement letter, Nobul had a reasonable expectation that NRF would not accept an adverse mandate for any substantially related matter. In the circumstances, therefore, it is unnecessary to determine whether the very nature of the allegations themselves, being an attack on the honour and integrity of Nobul’s senior management, are sufficient to find a disqualifying conflict. There is certainly force to Mr. Shaheen’s argument but it is better left to a circumstance where it is necessary to resolve this issue; here, given my conclusion on the first issue, it is not.
Residual Discretion
34Finally, the K2 defendants argue that the Court has a residual discretion not to disqualify NRF even if it is otherwise found to be in a conflict.
35In McKercher, the Supreme Court held, at para. 41, that it is only when a situation falls outside the scope of the bright line rule that the test becomes whether there is a substantial risk that the lawyer’s representation of the client would be materially affected. The issue of residual discretion comes up in the context of the analysis of whether, in a circumstance to which the bright line test does not apply, there still remains a substantial risk that the lawyer’s representation of the client will be impaired. Thus, the circumstances which give rise to a role for the exercise of residual discretion do not apply in this case.
36Even if this were not the case, however, I would not have acceded to the K2 defendants’ argument. In my view, the circumstances of this case give rise to a significant risk that NRF’s representation of Nobul will be impaired. I have already alluded to the peculiar circumstance which gives rise to a risk that NRF lawyers might be required to testify “against” the K2 defendants. Further, the facts disclosed for this motion regarding the NRF internal review process (conducted, I should add, at the outset of the K2 defendants’ retainer before the defence and counterclaim were delivered) reveal that the conflict was “cleared” following an internal exchange which contrasted NRF’s mandate for Nobul as “not that big of a relationship”, with the potential mandate for the K2 defendants, already a client of the firm, which NRF concluded “could be a big one”.
37Further, this is not a situation where the K2 defendants will have any difficulty finding new counsel. The action is in its infancy. Pleadings have barely closed. While the choice of counsel is not to be set aside lightly, there is no discernible prejudice to the K2 defendants that cannot be overcome by a brief pause in the forward progress of these proceedings.
38I conclude, for these reasons, that there is no basis upon which to exercise residual discretion not to disqualify NRF from acting for the K2 defendants in this litigation.
Conclusion
39The motion is granted. NRF is in a disqualifying conflict of interest. It may not continue to act for the K2 defendants in this action.
Costs
40Following conclusion of oral argument, I was advised the parties agreed that partial indemnity costs to the successful party should be assessed in the all inclusive amount of $55,000. Costs are awarded to Nobul in this amount.
Penny J.
Date: August 10, 2023