GM suit reignites conflict argument

The alleged conflict, outlined in the lawsuit's statement of claim, is this: Cassels was retained, and paid millions of dollars in fees, to advise the GM dealers as they faced the possibility of shutdowns during the company's restructuring. But, unbeknownst to the car dealers, the law firm was also working for the federal government, which was pressuring GM to cut costs by shutting down those same dealers, the claim alleges.

The Globe and Mail
April 6, 2010

GM suit reignites conflict argument
Cassels in crosshairs for representing GM dealers while at same time advising federal government on bailout
Jeff Gray

GeneralMotors.jpg

For many car dealers across the country, it was a tense Victoria Day weekend last year. In the midst of high-stakes government bailout talks, General Motors of Canada Ltd. told hundreds of its dealerships they had to agree to shut down or the company could face bankruptcy.

Many agreed. But now, some of those dealers have filed a $750-million class-action lawsuit, alleging GM used “shock and awe” tactics to pressure them into signing away their rights in “wind-down agreements,” giving them as little as two business days to make up their minds.

That's not why many lawyers are keeping a close eye on this case, however. The reason the legal profession is keenly interested is simple: The lawsuit doesn't target only GM. It is also aimed at venerable Bay Street law firm Cassels Brock & Blackwell LLP, and accuses its lawyers of having a conflict-of-interest in the case.

The alleged conflict, outlined in the lawsuit's statement of claim, is this: Cassels was retained, and paid millions of dollars in fees, to advise the GM dealers as they faced the possibility of shutdowns during the company's restructuring. But, unbeknownst to the car dealers, the law firm was also working for the federal government, which was pressuring GM to cut costs by shutting down those same dealers, the claim alleges.

The lawsuit's allegations, which have not been proven in court, come as Canada's legal profession wrestles over the rules that govern conflicts-of-interest, an area where it is safe to say the lines are decidedly blurry.

“This is a huge case,” said Richard Devlin, a professor at the Schulich School of Law at Dalhousie University in Halifax. “But it's part of a larger of pattern.”

It's a pattern established by a handful of recent Supreme Court of Canada rulings that have caught the legal profession's attention by appearing to broaden the definition of conflict of interest.

The issue has also grown in importance as the concentration of Canada's legal industry has increased over the last few decades. As big law firms get bigger, potential conflicts within law firms become more common.

While the issue is again on the front-burner, it has been an active debate ever since a 1990 Supreme Court ruling, MacDonald Estate v. Martin, in which a law firm was forced to quit acting for a plaintiff because one of its lawyers, years earlier, had acted for the defendant in the same case.

Law firms have tried to avoid potential conflicts and appease the courts by erecting internal “screens” between lawyers working with potentially conflicted clients. They are forbidden from talking shop and can even have their computer access limited, in order to prevent any leaks of confidential information.

But a more recent Supreme Court ruling forced the legal profession to re-examine its rules on conflicts of interest. In 2002, the Supreme Court ruled in Regina v. Neil – a tangled case involving an Edmonton paralegal accused of fraud and faking a divorce document – that lawyers owe their clients a broadly defined “duty of loyalty.”

Mr. Justice Ian Binnie wrote in the decision that lawyers should not represent a client “whose interests are directly adverse the immediate interests of another current client” even if the matters are unrelated, unless clients are told about the situation and agree to it.

Gavin MacKenzie, former treasurer of the Law Society of Upper Canada, said the judgment, and its broad definition of conflict of interest, caused “consternation” in the country's law offices as firms took a hard look at their own client lists.

And it sparked a rash of conflict-of-interest allegations in courtrooms across the country, as some lawyers tried to use the ruling as a weapon to get opponents thrown off cases.

Strict conflict-of-interest rules also created what lawyers call “beauty contests,” in which a client consults all the top law firms in one specialty – sharing confidential information about a case – before choosing one, in a deliberate attempt to make it impossible for an opponent to hire one those same firms under conflict-of-interest rules.

Such tactics prompted the Canadian Bar Association, which represents the interests of the country's lawyers, to assemble a task force on the issue in 2008. It was led by Scott Jolliffe, the chairman and chief executive officer of Gowlings Lafleur Henderson LLP in Toronto.

The Neil case judgment “gave rise to a whole bunch of new litigation for tactical purposes to try to disqualify counsel and create a disadvantage for your opponent,” Mr. Jolliffe said. “So we went through four or five years of that when all of a sudden, lawyers, in-house outside counsel and judges said ‘Hey, this is crazy. We've got to rethink this.'”

Among its recommendations, Mr. Jolliffe's task force concluded that the allowing of unrelated matters to cause conflicts of interest was “unnecessarily restrictive” and “poses practical problems.”

But the bar association doesn't make the rules for lawyers. The country's law societies do. The Federation of Law Societies of Canada, the umbrella group made up of the country's 13 law societies that regulate the profession, is now in the midst of drafting its own new “model code” on conflicts of interest, which its members could then choose to adopt.

This conflict about conflicts makes for an interesting backdrop for the case against GM and Cassels Brock, which is scheduled for a hearing in the Ontario Superior Court of Justice in December, where a judge will decide whether it can proceed as a class action.

Neither Cassels nor GM would comment on the lawsuit.

The lawyer spearheading the case against Cassels and GM, David Sterns at Sotos LLP in Toronto, said his case will force Canada's major law firms to look again at their approach to conflicts of interest.

“The prevailing views of some of the big firms have gotten a bit lax,” Mr. Sterns said in an interview. “And this case is going to serve as a useful reminder as to why conflicts of interest are really an inviolate rule of the profession. They are not to be trifled with.”

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