Court File and Parties
COURT FILE NO.: CV-24-00714669-0000 DATE: 2024/07/03
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Joel Donen Plaintiff/Responding Party AND CleanDesign Income Corp., CleanDesign Power Systems Inc., Precision Drilling Corporation, Mark Lerohl and Shuja Goraya Defendants
Counsel: David Levangie and Teodora Obradovic, Counsel for the Plaintiff/Responding Party Jeremy Devereux and Tiffany O’Hearn Davies, Counsel for the Defendants/Moving Parties, CleanDesign Income Corp., CleanDesign Power Systems Inc., and Mark Lerohl
HEARD: June 26, 2024
LEIPER J.
Endorsement
Introduction
[1] Three of the named Defendants in this action, CleanDesign Power Systems Inc. (“Clean Power”), CleanDesign Income Corp., (“Clean Income”) and Mark Lerohl (collectively “The Defendants”) brought a motion to remove Fogler Rubinoff, counsel to the Plaintiff, Joel Donen, from the record based on a conflict of interest linked to the firm’s former representation of Clean Power and Clean Income.
[2] Mr. Donen asks that the Defendants’ motion be dismissed. He submits that his lawyers, did not act for Clean Power in connection with the issues involved in the litigation, nor do they have any confidential information that would give him an advantage over the Defendants. Mr. Donen argues that he has had a longstanding relationship with the firm, and his choice of counsel should not be denied. He submits that this is a tactical motion, which was not pursued at the earliest opportunity and that the motion should therefore be dismissed.
[3] I find that the Defendants have established that Fogler Rubinoff should be disqualified from acting for the Plaintiff based on the duty of loyalty they owed to their former client, Clean Power. These are the reasons for that decision.
Background
Nature of the Litigation
[4] Mr. Donen founded Clean Power and served as its President from 2017 until November 10, 2023 when his employment was terminated. Clean Power manufactures energy storage and automation for diesel and natural gas-powered generators, which are contracted to oil and gas companies and drilling rig contractors.
[5] On February 13, 2024, Fogler Rubinoff on behalf of Mr. Donen issued a claim for wrongful dismissal against the Defendants. The claim seeks a variety of relief, including damages, oppression remedies, declarations as to shareholder interest and relief from restrictive covenants which Mr. Donen signed while still employed by Clean Power and in the context of a share purchase transaction between Clean Power and Clean Income.
[6] In relation to the restrictive covenants, the claim includes the following request for relief:
1(f) A Declaration that the restrictive covenants in the following agreements are, as applicable, void, unenforceable, ambiguous or lack consideration:
(i) Employee Grant Agreement dated February 9, 2023;
(ii) Share Purchase Agreement dated February 9, 2023; and
(iii) Employment Agreement dated February 9, 2023.
[7] On February 27, 2024, counsel to the Defendants wrote to Fogler Rubinoff to ask that it recuse itself from acting for Mr. Donen for reasons of conflict of interest, breach of its duty of loyalty and duty of commitment to Clean Power. Fogler Rubinoff denied having a conflict. The firm declined to withdraw.
[8] On April 4, 2024, the Defendants issued a statement of defence and a counterclaim, seeking damages arising from Mr. Donen’s alleged breaches of contract and fiduciary duty, defamation, and unjust enrichment. The statement of defence pleaded that the restrictive covenants were valid and enforceable.
The Prior Role of Fogler Rubinoff as Counsel to the Parties
[9] In the cross-examination on his affidavit, Mr. Donen testified that he has had a close relationship with a partner at Fogler Rubinoff since 2008. In 2013, Fogler Rubinoff acted for him personally on a sale of property. Fogler Rubinoff first acted for the predecessor firm to Clean Power in rolling over certain intellectual property assets to Clean Power, at the behest of Mr. Donen.
[10] On March 8, 2021, Clean Power and Clean Income signed a Letter of Intent for Clean Income to purchase the assets of Clean Power. On April 30, 2021, the companies signed a System Purchase Agreement. Fogler Rubinoff became involved as counsel to Clean Power at the time of the System Purchase Agreement which ultimately became the share purchase agreement (“SPA”).
[11] Clean Power, Clean Income and the shareholders of Clean Power negotiated and signed the SPA on February 9, 2023. Several lawyers from Fogler Rubinoff acted for Clean Power on the negotiations, including preparing and commenting on closing documents and the SPA. Section 12.2(c) of the SPA stipulated that any notice required to be given to Clean Power under its terms, was also to be copied to named counsel at Fogler Rubinoff.
[12] Part of the share purchase transaction included an employment agreement and an employee grant agreement regarding Mr. Donen’s status with Clean Power and Clean Income post-closing. Norton Rose acted for the purchasing company, Clean Income in drafting the employment agreement. Blakes drafted the employee grant agreement.
[13] Mr. Donen received independent legal advice on the employment agreement and the employee grant agreement from another law firm. Mr. Donen sent an email to counsel at Fogler Rubinoff on February 2, 2023, that he was not seeking [another Fogler’s lawyer’s] review of “my employment contract.”
[14] The SPA, employment agreement and employee grant agreement all contained restrictive covenants which bound Mr. Donen in his role as shareholder and as an employee.
[15] An email between two lawyers at Fogler’s confirms the position of the firm on this motion, that the firm only acted for Clean Power, and they would be conflicted if they were to act for or advise the shareholders (including Mr. Donen) on the share purchase transaction.
[16] Fogler’s partner, Mr. Miakichev confirms in his affidavit that he does not believe he received any confidential information from Clean Power after the transaction closed on February 9, 2023. His sources of confidential information during the negotiations and transaction were Mr. Donen, and General Counsel at Clear Power. Mr. Miakichev stated that he understood that once the transaction was completed, that aside from some minor administrative matters, Norton Rose would provide future legal services to Clean Power and Clean Income.
[17] Fogler Rubinoff issued several invoices to Clean Power in August and October of 2023 for services related to corporate filings and providing closing documentation, however there is no evidence that any significant or substantive services were provided by Fogler Rubinoff to Clean Power after the closing of the SPA in February of 2023.
The Role of Fogler Rubinoff with Clean Income and Joel Donen October – November 2023
[18] In October of 2023, Mr. Donen spoke with Jennifer Campbell, a partner with Fogler Rubinoff about retaining the firm on his behalf in his role as a shareholder of Clean Income USA, the parent company to Clean Power and Clean Income. Mr. Donen wanted to pursue a management takeover bid of Clean Income USA.
[19] On October 26, 2023, Ms. Campbell opened a file to advise Mr. Donen on his proposed management takeover. She also agreed to assist Mr. Donen with a draft purchase and sale escrow agreement between Clean Income and Hillspoint Electric, Inc. According to Ms. Campbell, Mr. Donen’s thinking was that if he were to obtain a purchase and sale agreement with Hillspoint, this would demonstrate his value to Clean Income USA and support the takeover bid.
[20] On November 10, 2023, Clean Power terminated Mr. Donen from his position.
[21] The management takeover bid failed. The wrongful dismissal litigation remains, with Fogler Rubinoff as counsel of record to Mr. Donen on his claim.
Analysis of the Issue: Should Fogler Rubinoff be Removed as Counsel of Record to the Plaintiff?
[23] The Defendants’ primary argument is that Fogler Rubinoff should be removed as counsel of record because the action is related to its former retainer on behalf of Clean Power in negotiating and providing advice on the SPA. Fogler Rubinoff’s retainer on behalf of Mr. Donen includes seeking a declaration in respect of the restrictive covenants in the SPA that the Defendants submit were included by Fogler Rubinoff for the benefit of its former client, Clean Power.
[24] Mr. Donen submits that he has rebutted the presumption that Fogler Rubinoff has confidential information in its possession to the detriment of the Defendants. This flows from his role as the source of instructions to Fogler Rubinoff on the SPA as former President and CEO. He submits that the test for disqualification that applies requires a finding that a former client’s confidential information is at risk.
[25] Mr. Donen also submits that leaving the issue of confidential information aside, the current action is not sufficiently related to the prior retainer with Clear Power, given his affidavit which limits what he intends to argue under the restrictive covenant section of relief in his statement of claim.
[26] Finally, Mr. Donen submits that this is a tactical motion, brought to deprive him of his counsel of choice, which the Defendants did not pursue with diligence.
[27] I consider each of the issues raised on the motion in turn, beginning with the nature of the duty of loyalty owed to former clients.
The Nature of the Duty of Loyalty and its Relationship to Duties of Confidentiality
[28] I begin with the application of the duty of loyalty to former clients. The parties disagree on the elements of the test for disqualification where counsel for a former client acts subsequently against that client, and whether a finding that there is no risk to a former client’s confidential information ends the analysis.
[29] The Defendants submit that where the retainer involves acting on the same or a related matter, a client’s former lawyers are disqualified from acting against the client, whether or not the former client’s confidential information is at risk.
[30] Mr. Donen submits that this is not enough. He submits that not only must the two matters be sufficiently related, there must also be a risk to the former client’s confidential information. He submits that there is no risk to Clean Power’s confidential information given his former role in providing instructions to Fogler Rubinoff during the SPA. Thus, the motion for disqualification must be dismissed.
[31] I disagree. The appellate authority and relevant ethical principles are to the contrary. There is a broader duty of loyalty connected to the integrity of the administration of justice which does not depend on confidential information being put at risk. I decline to follow the cases to the contrary relied on by Mr. Donen and explain below why that is the case.
[32] Mr. Donen relies on two cases as authority for the test on disqualification. The first of these cases is TransCanada Pipelines Inc. v. Nova Scotia (Attorney General), 180 N.S.R. (2d) 355 (SC), in which the court considered a decision of the Saskatchewan Court of Queen’s Bench in Agri Resource Mgt. 2001 Ltd. v. Saskatchewan Crop Insurance Corp. (1993), 22 C.P.C. (3d) 59. Agri Resource concerned a motion by the defendant insurance company for an order disqualifying counsel for the plaintiff from acting in the litigation. The Court declined to remove the firm, considering the firm’s specialized area of practice in crop insurance. Although the firm had formerly advised the government on the Crop Insurance Act and regulations at issue, the law firm had no confidential information from the prior retainer with the provincial government.
[33] The court in TransCanada observed that the court in Agri Resource found that the prior advice fell short of the standard of confidential information because the Act and regulations were public law. It wrote at para. 46, “In effect, this is a conclusion that the two retainers were not ‘sufficiently related.’”
[34] Mr. Donen relies on this portion of TransCanada Pipelines in support of his submission that to be “sufficiently related” there must be a risk of a former client’s confidential information being communicated during the second retainer.
[35] Subsequent appellate authority in Nova Scotia holds to the contrary. In Brookville Carriers Flatbed GP v. Blackjack Transport Ltd., 2008 NSCA 22, 52 C.P.C. (6th) 67, the Nova Scotia Court of Appeal considered the duty of loyalty owed by firms to former clients. The Court reviewed a line of cases from across Canada, legal texts and the Legal Ethics and Professional Conduct: A Handbook for Lawyers in Nova Scotia, (Halifax: Nova Scotia Barristers’ Society, 1990).
[36] Cromwell J. A. concluded at para. 17: “lawyers have a duty not to act against a former client in a related matter whether or not confidential information is at risk.” Given this more recent appellate authority, I do not accept the submission that TransCanada is persuasive on the question of the duty of loyalty and its relationship to confidential information.
[37] Mr. Donen also relies on Cavan Construction Ltd. v. Lewis, 2024 ONSC 3115. Cavan Construction involved a motion to disqualify counsel after confidential information obtained during a client’s prior retainer was put to the client during cross-examination in a subsequent proceeding by counsel from the client’s firm. Cavan Construction applied the test in MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235 and considered whether there was a conflict of interest arising from the lawyer’s duty of confidentiality.
[38] The two-part test in MacDonald Estate requires that the person seeking to disqualify counsel show that a sufficient relationship exists between the two retainers to raise a rebuttable presumption that confidential information relevant to the current matter has been passed to the lawyer pursuant to the first retainer. That is precisely what Somji, J. did Cavan Construction. However, nothing in the decision reflects a contrary interpretation of the duty of loyalty considered in Brookville Carriers or in the subsequent jurisprudence.
[39] In Consulate Ventures Inc. v. Aimco Contracting and Engineering (1992) Inc., 2010 ONCA 78 at para. 22, Doherty, J. described the duty of loyalty to former clients as a matter of public interest and public confidence in the administration of justice:
Counsel submits that lawyers owe a duty of loyalty to their former clients. That duty is not premised on or confined to confidentiality obligations, but flows from a broader concept of fidelity that is essential to the proper functioning of the client/solicitor relationship. Clients must be able to speak frankly and without fear of exposure to their lawyers about their legal problems. To do so, clients must be confident that their lawyers will not become their adversaries’ lawyers at some subsequent point in the course of the same dispute. The prospect of one’s lawyer switching sides must undermine the confidence essential to the operation of the client/solicitor relationship. There is also concern that if lawyers act against former clients in the same manner, the public confidence in the integrity of the legal profession will suffer. That confidence is crucial to the effective and just administration of justice. [Emphasis added].
[40] This statement of the law as to the duty of loyalty owed to former clients is consistent with the ethical obligations required of lawyers in Ontario. The Rules of Professional Conduct of the Law Society of Ontario address conflicts of interest that may arise in acting for a client. The commentary to the relevant rule discusses conflicts with former clients as follows:
3.4-1 A lawyer shall not act or continue to act for a client where there is a conflict of interest, except as permitted under the rules in this Section.
Commentary
Former Client Conflicts
[10] Duties owed to a former client, as reflected in Rule 3.4-10, can impair client representation and loyalty. As the duty of confidentiality continues after the retainer is completed, the duty of confidentiality owed to a former client may conflict with the duty of candour owed to a current client if information from the former matter would be relevant to the current matter. Lawyers also have a duty not to act against a former client in the same or a related matter even where the former client’s confidential information is not at risk. In order to determine the existence of a conflict of interest, a lawyer should consider whether the representation of the current client in a matter includes acting against a former client (emphasis added).
3.4-10 Unless the former client consents, a lawyer shall not act against a former client in
(a) the same matter,
(b) any related matter, or
(c) save as provided by rule 3.4-11, any other matter if the lawyer has relevant confidential information arising from the representation of the former client that may prejudice the client.
Commentary
[1] Unlike rules 3.4-1 through 3.4-9, which deal with current client conflicts, rules 3.4.10 and 3.4-11 address conflicts where the lawyer acts against a former client. Rule 3.4-10 guards against the misuse of confidential information from a previous retainer and ensures that a lawyer does not attack the legal work done during a previous retainer, or undermine the client's position on a matter that was central to a previous retainer. It is not improper for a lawyer to act against a former client in a fresh and independent matter wholly unrelated to any work the lawyer has previously done for that client if previously obtained confidential information is irrelevant to that matter (emphasis added).
[41] While codes of ethics are not binding on the courts, they are important expressions of public policy which reflect the collective views of the profession as to the appropriate standards to which lawyers should adhere: See MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235, at para. 19 and Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39, [2013] 2 S.C.R. 649, at para 16.
[42] Rules 3.4-1 and 3.4-10 consider the duties owed to former clients. They identify two separate and distinct harms. The first is the misuse of confidential information by counsel who acts in a matter where the client’s confidential information is at risk. The second, independent of risk to confidential information, is duty of a lawyer not to act against their former client in the “same or related matter” or to undermine their former client’s position on a matter central to the previous retainer. This understanding of the latter duty is consistent with Consulate Ventures Inc. and Brookville Carriers. It has been applied by this Court in Woroch v. Northfield, 2023 ONSC 218, at para. 32.
[43] I find that Fogler Rubinoff acted for Clean Power on the SPA and as such, the firm owed a duty of loyalty to its former client, Clean Power. Fogler Rubinoff was required to decline to act against Clean Power in any matter sufficiently related to its retainer, even where Clean Power’s confidential information was not put at risk. I turn next to the question of whether Mr. Donen’s claim is related to the prior retainer involving the SPA in which Fogler Rubinoff acted for Clean Power.
Have the Moving Parties Demonstrated that the Action is Sufficiently “Related” to the Former Retainer?
[44] In my view, Mr. Donen’s claim is related to the prior retainer of Fogler Rubinoff by the Defendant Clear Power, to act in its interest during the negotiation and finalizing of the SPA and the Employment Agreement which it signed. His claim includes a declaration for relief from the restrictive covenants in the SPA and the employee agreement to which Clean Power was a signatory. Fogler Rubinoff had a duty to act in Clean Power’s interest during the share purchase transaction. The statement of claim issued by Fogler Rubinoff on behalf of Mr. Donen and the statement of defence put the interpretation and enforcement of the restrictive covenants squarely in issue on the litigation.
[45] As Cromwell, J. wrote in Brookville Carriers at para. 17, a matter is “related” where “the new retainer involves the lawyer taking an adversarial position against the former client with respect to the legal work which the lawyer performed for the former client or a matter central to the earlier retainer.”
[46] Counsel on the transaction from Fogler Rubinoff, Artem Miakichev, agreed in his cross-examination on his affidavit that he had an obligation to act in Clean Power’s best interests during the negotiations, and that this meant he had to protect and advance Clean Power’s interests with respect to the form of the share purchase agreement documents. Mr. Miakichev agreed that this included ensuring that the restrictive covenants within the share purchase agreement were “clear and enforceable by [Clean Power].”
[47] The enforceability of the restrictive covenants in the share purchase agreement, and in the employment agreement have both been put in issue by Mr. Donen in his wrongful dismissal claim and defended by Clean Power in its statement of defence and counterclaim. Both were negotiated and finalized while Fogler Rubinoff was counsel to Clean Power and required to protect and advance Clean Power’s interests. The restrictive covenants were included for the benefit of Clean Power.
[48] Mr. Donen submits that his affidavit filed on this motion, clarifies what his intentions are under s. 1(f) of his statement of claim: despite the wording in the claim, Mr. Donen states that he will only seek relief from the restrictive covenants under the Billposting principle which renders restrictive covenants unenforceable where the court finds that the employee has been wrongfully dismissed. [1] Mr. Donen submits that this answers the Defendants’ submission that the matters are related, because his lawyers will no longer be required to attack their prior legal work on behalf of Clean Power.
[49] I do not accept this submission. The statement of claim and statement of defence are the pleadings which matter for the purposes of this motion. They have “joined issue” on the question of the enforceability of the restrictive covenants. The statement of claim does not limit the routes to challenging the restrictive covenants as unenforceable.
[50] Mr. Donen’s current intentions as expressed in his recent affidavit do not have the benefit of discovery, documentary disclosure or cross-examinations. At this early stage of the proceedings, I cannot find that this “clarification” or statement of Mr. Donen’s present intentions as to what he will pursue on his claim alters the issues as defined by the pleadings. Although Fogler Rubinoff was put on notice in the letter from Norton Rose on February 27, 2024 that the restrictive covenants were part of the basis for the conflict, Fogler Rubinoff nevertheless required the Defendants to serve and file their statement of defence based on the statement of claim and not on any other basis.
[51] I conclude that the current action is clearly related to the share purchase transaction by putting Fogler Rubinoff’s work for its former client on the restrictive covenants in issue. I find that disqualification of Fogler Rubinoff should be considered based on its duty of loyalty to Clean Power.
Should the Motion be Dismissed Based on Delay or Tactical Considerations?
[52] On a motion for disqualification, it is appropriate to consider whether the defendants acted in a timely way because delay may be relevant to whether the motion should be granted: Moffat v. Wetstein, 29 O.R. (3d) 371, at paras. 126-128, leave to appeal to the Divisional Court refused, , 144 D.L.R. (4th) 188; Woroch v. Northfield, at para. 34.
[53] The statement of claim was issued on February 13, 2024. Counsel for the Defendants first raised the issue of conflict in a letter to Fogler Rubinoff dated February 20, 2024, which stated that by virtue of its “involvement in CleanDesign Power Systems Inc. acquisition by CleanDesign Income Corp., the Share Purchase Agreement for which was dated February 9, 2024.” Defendants’ counsel asked that Fogler Rubinoff remove itself from the record.
[54] On February 23, 2024, Fogler Rubinoff responded, and denied it had any conflict of interest or any confidential information.
[55] On February 27, 2024, Defendants’ counsel wrote again to Fogler Rubinoff. That letter provided more detail on the basis for the alleged conflict, including Mr. Donen’s claim for relief from the restrictive covenants on the SPA transaction. Defendants’ counsel referred Fogler Rubinoff to the jurisprudence from the Ontario Court of Appeal in Consular Ventures Inc. Defendants’ counsel again asked that Fogler Rubinoff remove itself from the record because of its conflict of interest.
[56] After Fogler Rubinoff declined to withdraw from acting for Mr. Donen, the Defendants prepared and served a statement of defence and counterclaim on April 4, 2024. The Defendants also sought a motion date to have the conflict issue adjudicated. The lawsuit is still in the pleadings stage, with the defence to the counterclaim outstanding. Two of the defendants are awaiting the result of this motion before filing their statements of defence. No discoveries have taken place and the trial is not imminent.
[57] I find that the Defendants acted reasonably diligently once the claim was issued to raise the issue of the conflict, and to provide appropriate, applicable legal authority supporting their position. There was no inordinate delay, even if the period can be considered to begin in December of 2023 when Fogler Rubinoff sent its first demand letter to the Defendants, prior to issuing the statement of claim.
[58] I also find that the Defendants’ motion to disqualify was not brought for tactical or any oblique motive. As Granger, J. noted in Moffat, at para. 138, there is often a relationship between the fact of delay and a submission that a conflict motion is being used strategically.
[59] The Defendants’ position had merit and was supported by binding appellate caselaw and the content of the pleadings. They articulated their reasoning for the benefit of Fogler Rubinoff within several weeks of service of the statement of claim. Fogler Rubinoff did not provide a detailed response beyond denying the conflict. The firm did not engage with the issues, which left the Defendants with the choice to either acquiesce or bring a motion.
[60] Finally, I am satisfied that there will be little prejudice to the plaintiff in having to retain a new lawyer to prosecute this lawsuit. There are many firms available with the necessary expertise in wrongful dismissal claims. While there will be some expense associated in bringing new counsel on to the file, given the early stage and the uncomplicated factual background a this process should not be complicated.
Other Issues
[61] The parties raised other issues including adverse inferences to be drawn from gaps in the productions on the motion. Those questions relate to alternative arguments by the Defendants. Given my findings in relation to the primary issue raised by the Defendants, it is unnecessary to resolve those questions.
Conclusion
[62] I order that Fogler Rubinoff LLP be removed as solicitors of record for the plaintiff in this action. Within 30 days of the order, the plaintiff shall appoint a new lawyer by serving notice under subrule 15.03(2) or serve a notice of intention to act in person under subrule 15.03(3), in accordance with subrule 15.04(8) of the Ontario Rules of Civil Procedure (R.R.O. 1990, Reg. 194).
[63] The parties are encouraged to agree on the costs of this motion. If no agreement is reached, brief written submissions as to costs not exceeding three pages in length (exclusive of bills of costs and summaries) may be made by July 14, 2024.
Leiper, J.
Date: July 3, 2024
COURT FILE NO.: CV-24-00714669-0000 DATE: 2024/07/03
ONTARIO SUPERIOR COURT OF JUSTICE
Joel Donen AND CleanDesign Income Corp., CleanDesign Power Systems Inc., Precision Drilling Corporation, Mark Lerohl and Shuja Goraya
ENDORSEMENT Leiper J.
Released: July 3, 2024
[1] General Billposting Co. Ltd. v. Atkinson, [1909] AC 118, 25 TLR 178.