Conflicts for in-house counsel are unavoidable and complex

In-house lawyers have a deeper knowledge of their client than external lawyers. So when they move among competitors, conflicts are unavoidable and complex

The release of the Supreme Court of Canada's decision in Canadian National Railway Co. v. McKercher LLP in mid-2013 rounded out the SCC's “conflicts trilogy” that spanned over a decade and included R. v. Neil and Strother v. 3464920 Canada Inc. While they clarified the law, all three cases involved fact situations that revolved around the private Bar [see “Clarity brought to conflicts of interest but grey areas remain,” Lexpert, May 2014]. None even mentioned the conflicts rules in the context of their application to in-house counsel. The thrust of the ensuing discussions and commentary, then, also focused on the private Bar.

Yet the pillars of the conflicts rules, which is to say both the duty of confidentiality and the duty of loyalty, apply, at least in principle, to in-house counsel as much as they do to the private Bar. But as the Manitoba Court of Appeal noted in its 1998 decision in Canadian Pacific Railway Company v. Aikins, MacAulay & Thorvaldson, the application of conflicts to in-house counsel could be quite different in practice than it applies to external lawyers.

When conflicts issues have arisen for the private Bar, they have done so mostly in the context of conflicts between clients, existing or former. Not so for in-house counsel, where the conflicts that have drawn the bulk of the attention are those between the duty to the client, which is to say the corporation or other employer, and the administration of justice. The advent of the corporate whistleblowing phenomenon accentuated this focus.

The upshot is that issues surrounding conflicts engaging in-house counsel's duties to clients and former clients has scarcely arisen in Canada, or if it has, remained largely below the radar. But that could change, particularly with the pervasive mobility that is now a common characteristic of the profession.

These issues, however, have been rife in the US. for some time. Indeed, the case of former Coca-Cola North America general counsel Thomas Haynes may be a harbinger of what's coming to Canada.

In 2001, following a corporate reorganization, Haynes lost his job after spending 16 years as an in-house lawyer with Coca-Cola. With the company's blessing, he took a job as chief executive officer for the Coca-Cola Bottlers Association.

Haynes obtained written assurances from Coca-Cola that conflicts were not an issue, apart from several matters from which Haynes agreed to abstain. Coca-Cola even issued a news release saying that it was “pleased” that Haynes would “continue his leadership in the Coca-Cola family.”

Five years later, Coca-Cola changed its mind when it became embroiled in a lawsuit with its bottlers. It offered to pay Haynes to leave his job. When he refused, the company alleged he had violated his professional and legal obligations. In response, Haynes argued that many of the matters he worked on during his employ at Coca-Cola engaged business, not legal, advice and therefore were not covered by attorney-client privilege.

Coca-Cola eventually settled with the bottlers, leaving the issues regarding Haynes unresolved.

Where Canadian courts have dealt with in-house conflicts regarding former clients, it is the duty of confidentiality that has absorbed courts' attention.

“When we see disqualification motions relating to in-house counsel, they tend to be based on breach of confidentiality grounds,” says Gavin MacKenzie of Davis LLP's Toronto office, one of Canada's leading experts on professional ethics.

Most recently, the confidentiality issue reared its head in the in-house context early in 2014 in the Federal Court of Appeal's decision Valeant Canada LP v. Canada (Health), a patent dispute between two pharmaceutical companies.

After discovering that a member of Cobalt Pharmaceuticals Company's law department had spent two years working for a law firm that had represented Valeant's predecessor on litigation involving the same patent now in issue between the two companies, Valeant moved to have the lawyer disqualified from working on the case. The motions judge so ordered.

The FCA upheld the disqualification, but reasoned that the motions judge had done so on an improper basis. Relying on the inference that lawyers share confidences among themselves and that no precautionary measures had been taken, the motions judge attributed the law firm's knowledge of confidential information to the lawyer. But the FCA reasoned that because the evidence showed that the lawyer had in fact received confidential information himself, the inference was not necessary.

When discussing in-house conflicts issues, it's useful to separate current client [administration of justice] and former client issues. The former client issues are out there, but they just haven't shown their head yet.

“In this case,” the FCA wrote, “Mr. Migus had confidential information and so his disqualification is automatic.”

What's interesting about Valeant is that the disqualified lawyer's status as an in-house counsel was not a fact around which the decision turned: there's little doubt that the result would have been the same had he been employed by a law firm that was adverse in interest to Valeant.

Valeant certainly espouses the principle that there is no reason why the conflicts rules set out in the leading cases wouldn't apply equally to in-house legal departments,” says Terry O'Sullivan of Toronto's Lax O'Sullivan Scott Lisus LLP.

Equality in principle and equality in practice, however, are not always equal.

“Unlike external counsel, in-house lawyers will know their client in a deeper, richer and broader way,” says Mercer. “So when you start to get them moving among competitors, you could end up with a very different sort of conflicts playbook than we're used to.”

There's a distinction to be made, however, between the duty of confidentiality and the duty of loyalty. In the case of the duty of confidentiality, the prohibition is absolute: without consent or overriding ethical considerations, a lawyer may simply not disclose confidential information. Indeed, the prohibition applies whether or not the person to whom the disclosure is made is adverse in interest or not and regardless of the nature of the confidential information. It is only when adverse interests are in play, as Valeant demonstrates, that the prohibition morphs into a disqualification.

But for the most part, as Chief Justice Beverley McLachlin noted in McKercher, disqualification issues arise in the context of litigation.

“What the court didn't clarify was whether disqualification could be appropriate in transactional matters,” MacKenzie says. “That remains an open question.”

It is also a question that could assume increasing importance: as in-house lawyers continue to take on greater corporate responsibilities and their work becomes more intertwined with the business workings of a corporation, they are bound to align themselves ever more closely with their company's strategic business goals. As Professor Geoffrey Hazard of the University of Pennsylvania Law School and the University of California's Hastings College of the Law has observed, “more and more law gets practiced at higher levels” in-house.

“And so the problem of sensitivity correspondingly increases,” he told the Wall Street Journal's Law Blog.

To deal with the problem, judges may come to regard in-house conflicts in the context of the duty of loyalty, which is broader than the duty of confidentiality and which does not require disqualification as an automatic consequence.

Here, it is instructive to review the Supreme Court of Canada's formulation of the duty of loyalty in McKercher. As the court saw it, the duty is comprised of three elements: a duty to avoid conflicting interests; a duty of commitment to the client's cause; and a duty of candour. The general rule was a bright-line rule: lawyers and their law firms could not represent clients adverse in interest without first obtaining their consent. This rule applied where a situation engendered an inescapable conflict of interest, applied to concurrent representation in both related and unrelated matters, and could not be rebutted.

But the bright-line rule was limited in scope: it applied only where the immediate interests of clients were directly adverse to the matters on which the lawyer was acting. It also applied only to legal interests, not to commercial or strategic interests. It could not be raised tactically and did not apply where it was unreasonable for a client to expect that a law firm would refrain from acting against it in unrelated matters.

Where the bright-line rule was inapplicable, the SCC stated, the issue became whether the concurrent representation created a substantial risk that the lawyer's representation of the client would be materially and adversely affected by the lawyer's own interests or by the lawyer's duties to another current client, a former client, or a third person.

From this formulation, it is apparent that the duty of loyalty is a more complex and discretionary beast than the duty of confidentiality. Indeed, the formulation of the test where the bright-line rule does not apply gives courts the leeway to extend the duty of loyalty to commercial and strategic interests, and then determine the remedy, including disqualification, by weighing the risk involved.

Arguably, the duty of confidentiality does not – or at least so far has not – allow for that kind of analysis. In McKercher, for example, the court gave little heed to Canadian Pacific's argument that the law firm's knowledge of its litigation strategies was prejudicial to the company.

“But that argument could get a very different reception in the future if we were talking about the strategic knowledge of in-house counsel,” Mercer says.

Or it could not, if the 1998 decision of the Manitoba Court of Appeal in Canadian Pacific Railway Company v. Aikins, MacAulay & Thorvaldson, suggesting that conflicts rules will be applied less strictly where in-house counsel are concerned, is any indication.

The case involved an appeal by Aikins MacAulay & Thorvaldson, one of Manitoba's largest law firms, from an order enjoining it from representing the Canadian Wheat Board in an action against both CPR and CNR before the Canadian Transport Agency. The railways based their application on the grounds that a member of the firm, Winston Smith, was at one time the regional counsel for CPR in Winnipeg, a position that made him the senior legal officer for most legal matters arising in the Prairie region consisting of Manitoba, Saskatchewan and Northern Ontario.

In his position, Winston Smith controlled and maintained all CPR legal files in Winnipeg. Smith did not provide legal services relating to grain transportation matters and the lawyers in Smith's office handling grain-related files reported directly to other senior legal officers in either Montreal or Calgary. Indeed, CPR had a department that dealt exclusively with grain transportation, of which Smith was not a part. Smith did, however, participate in conference calls and annual conferences along with other senior legal officers, in which there was an exchange of information regarding legal, strategic and operating issues concerning CPR.

In 1995, CPR closed the Winnipeg regional office and Smith joined Aikins' transportation practice.

The Court of Appeal overturned the disqualification order. In an operative part of the judgment, the court wrote:

“While the onus on the party alleging the conflict is no higher in the case of in-house counsel, the burden of discharging it does require a more precise and definite evidentiary basis. In the world of private practice, it is relatively easy to identify specifically the client by whom a solicitor was retained and what the exact nature of the retainer was. In the case of a monolith, like CPR, the exercise is much more complicated. Were Smith, in the position of his juniors, reporting directly to a senior legal official responsible for grain transportation matters, as opposed to his reporting to a Vice-President of Legal, I could more readily accept CPR's concern and assertion that Smith had the type of knowledge of which they complain and that the possession of such knowledge could have the result it asserts. Such would also be the case if Smith were in the position of the Vice-President of all legal affairs for the company or, in another scenario, if he were the senior legal officer of a small legal unit that provided all of the legal services for a company. That, however, is not the reality in this case. There is a distinction between possessing information that is relevant to the matter at issue and having an understanding of the corporate philosophy of a previous employer. This first scenario can bring about a disqualification because of conflict; the second does not.”

Arguably, the case stands for no more than the proposition that in-house counsel's role must be carefully scrutinized to determine to what, if any, confidential information, he or she became privy. The law in this respect likely hasn't changed.

What has changed, however, is the role of in-house counsel, especially those in senior positions, and the scope of the inquiry, which must now include the Supreme Court of Canada's articulation of the duty of loyalty, which occurred some four years after the Manitoba Court of Appeal decided Canadian Pacific Railway Company v. Aikins, MacAulay & Thorvaldson.

These days, an investigation of senior in-house counsel's role is much more likely to reveal an integral familiarity with sensitive matters, quite apart from knowledge of prejudicial confidential information. Such a finding, under the McKercher rules, must lead to an assessment of the impact of the risk – be it legal, commercial or strategic – posed by the alleged conflict.

What all this suggests is that in-house counsel are today more significantly exposed to conflict allegations than at any time in the past. From a practical perspective, it means that companies should screen new legal department hires for conflicts and that departing in-house counsel should take proper precautions when they enter private practice.

As legal departments grow and specialize, then, they become more and more akin to law firms. For many, it seems certain that the administrative headaches will keep pace with this growth.

IN HOUSE INSIGHT: THE DUTY OF LOYALTY

Is a duty of confidentiality and loyalty held to all members of the corporate family or just the one that pays your salary?

In-house counsel, especially those in large companies, frequently work in a complex corporate structure, a situation that can give rise to issues regarding the reach of their ethical responsibilities. Do in-house counsel owe their duties of confidentiality and loyalty only to the corporate entity that pays them or to other members of the corporate family as well?

These are questions that are not unique to in-house counsel: external counsel can also face similar questions regarding the scope of their duties, but the analysis leading to the answers to the questions can vary considerably.

The most recent guidance on the general issue can be found in the Federal Court's April 2014 decision in MediaTube Corp. and Northvu Inc. v. Bell Canada. Although the case engages the duties of Bereskin & Parr LLP, an intellectual property boutique, it does offer meaningful insights on the role of in-house counsel in a conflicts context.

The defendants, Bell Canada and Bell Aliant sought an order removing B&P as solicitors for MediaTube. The Bell companies alleged that the law firm's previous relationship with the defendants led to a conflict of interest.

Bell Canada was a subsidiary of BCE Inc. Bell Mobility, Bell Media, Bell ExpressVu and Bell Aliant Inc., the parent of Bell Aliant, were subsidiaries of Bell Canada. All these companies had one legal department.

MediaTube retained B&P in 2013 when it sued Bell Canada and Bell Aliant, alleging patent infringement. B&P had previously acted for Bell Canada, but not for Bell Aliant. B&P was acting for Bell Media on unrelated matters at the time, but terminated the retainers over Bell's objections.

The key issue on the motion was whether a law firm that acted for one member of a corporate family could be said to have acted for each company in the corporate family. B&P took the position that it never had a general retainer with the Bell family. “The issue is whether Bell Media's status as B&P's current client can result in a duty of loyalty to the whole Bell family of companies — or at least to the applicants,” Justice Catherine Kane wrote. “There are circumstances where a law firm may owe duties to related corporations, but these circumstances do not exist in this case.” Neither the existence of a single legal department nor the casual interchangeable references to “Bell” in correspondence led to the conclusion in this case that B&P was in a conflict of interest to the BCE companies as a group. “It is not realistic to assume that if a law firm is retained by one entity within a large group of companies, then it is retained by the whole and its parts,” Justice Kane concluded.