Class actions targeting law firms

During a luncheon with colleagues recently, Eric Hoaken gave an informal presentation that turned out to be quite unappetizing as it raised the spectre of broader duties of care accompanied by prohibitive financial exposure and skyrocketing insurance costs for practitioners and law firms alike.

In what appears to be the emergence of an unsettling development that has begun to attract the attention of the legal community, a series of class action suits armed with significant claims has waded its way through the Ontario courts, all of whom have named major law firms as defendants. In two of the three cases, the claims were brought by parties other than the clients of the law firm.

“It’s an area that has to be watched,” noted Eric Hoaken, a partner with Bennett Jones LLP in Toronto who regularly represents defendants in proceedings commenced pursuant to the Ontario Class Proceedings Act (Act). “A relatively generous approach is being taken to common issues in preferable procedure, and that is permitting claims that perhaps at one time would not passed the certification stage.”

A string of rulings —  Cloud v. Canada (Attorney General), Cassano v. The Toronto-Dominion Bank, and Markson v. MBNA Canada Bank — issued by the Ontario Court of Appeal set the stage by emphasizing the need for a positive and generous interpretation of the Act, asserts Hoaken. In their “own unique ways,” each of the cases managed to circumvent obstacles that existed – or were perceived to have existed — in the past at the certification stage

It may also have paved the road for the challenges now facing law firms. The staggering $750-million class action launched by Trillium Motor World Ltd. which names Cassels Brock & Blackwell LLP and two of its partners as defendants, alleging conflict of interest, is the latest suit that has rocked the legal world.

But it’s not the only one. In a case that highlights the perils of lawyers taking on directorships, draws attention to potential conflicts of interests and indirectly raises questions over privilege, Ontario Superior Court of Justice George Strathy certified late last year a securities class action that names as co-defendants WeirFoulds LLP and  Wayne Egan, one of its lawyers. The suit in Allen v. Aspen Group Resources Corporation attacks Egan’s work on a takeover circular. A partner in WeirFoulds, Egan acted as legal counsel for Aspen from February 1995, was a member of Aspen’s Board of Directors since 1996 and has served on the Board’s compensation committee.

“It seems to me that it is arguable that a lawyer who, through his or her law firm, acts as external corporate counsel to a corporation and who also sits on the corporation’s board, may well be acting in the ordinary course of the law firm’s business when he or she takes a seat at the boardroom table,” said Judge Strathy in a passage that has drawn considerable interest from law firms across the country.

Another class action case, Robinson v. Rochester et al. , 2010 ONSC 463, has left Hoaken literally beweildered. The case involves a claim by investors in a leveraged charitable deduction scheme that was disallowed by the Canada Revenue Agency. Named as co-defendants, Fraser Milner Casgrain LLP (FMC) allegedly issued an opinion, which contained express qualifications on the opinion and authorized reliance by a very limited category of individuals, on tax issues. Though it was admitted by plaintiffs that they did not actually read the opinion, Ontario Superior Court of Justice J. Lax certified the class action this past January.

“It is certainly arguable that FMC ought reasonably to have foreseen that its tax opinion would be used to market the gift program and that the participants would be “disappointed” and suffer damages if FMC was negligent in giving that opinion,” said Justice Lax in a 30-page ruling. “In my view, FMC placed itself in a relationship of sufficient proximity to owe a prima facie duty of care to the plaintiffs and proposed class members and I would leave to trial the question of whether policy considerations ought to negative that duty.”

Though a motion seeking leave to appeal from the decision will be heard shortly, Hoaken is troubled by the generous interpretation given to duty of care hinted at by the Lax decision, particularly since he believes that the law firm in the Robinson case did everything it could to limits its exposure.

“After reading the Robinson case, it is pretty hard to understand how a lawyer can limit their liability,” remarked Hoaken. “The courts seem to be more accepting of the fact that lawyers in some circumstances owe broader duties or duties to broader categories of people.”

William Vanveen, a former assistant law professor at the University of Windsor’s faculty of law, too is concerned about the outbreak of class actions targeting law firms. While the legal exposure or the rules of related to liability for lawyers and law firms does not change with class actions, Vanveen points out that the fact that the thresholds for class action certifications have become “exceeding low” means that law firms can now be more “easily dragged” into a class action – a costly, time-consuming battle with great potential for financial exposure.  And that’s not even taking into account the distraction, effort and impact a class action can potentially have on a law firm facing a class action.

“A class action is just not the pot that you want to be caught in the middle of,” said Vanveen, a partner in Gowling Lafleur Henderson LLP’s Ottawa office, who believes that creative lawyering is also to blame for the recent surge. “Lawyers facing it are going to have to put in time and effort responding to it which detracts from their normal work. It can also have an impact on one’s reputation so there are other issues besides money at stake.”

But not everyone is convinced that class actions against lawyers and law firms will be exploding into a new area. Deborah Glendinning, co-chair of Osler, Hoskin & Harcourt LLP’s national class actions specialty group, contends that the nature of the client-solicitor relationship is “not really amenable” to law firms becoming immersed in situations where they owe duties – or are alleged to owe duties – with large groups of people, a prerequisite of class action lawsuits.

“We all know who practice in this business that plaintiff lawyers are very innovative and creative,” said Glendinning, who was appointed co-chair of the International Subcommittee on class actions of the American Bar Association. “In these difficult times, with insolvencies on the rise, they are looking for new parties that they may add to add more deep pockets to their law suits.”

Still, Hoaken believes that a growing number of law firms will begin to conduct risk assessments to filter out mandates that exposes them to liability “way out of proportion” to the size of the retainer. Vanveen concurs, though he admits it will be easier said than done. “It’s a difficult calculus to make but it is one that should be kept in mind, certainly in areas like securities or any advice that could affect many people that may give rise to a potential class action.”

This story was originally published in The Lawyers Weekly.

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