Wednesday, March 03, 2010

Ontario Judge Rules for Associates in Messy Law Firm Breakup

In law firms, as in life, breaking up is hard to do.

The ground rules governing the fallout, however, have now been made abundantly more clear.

A strongly-worded ruling by Mr. Justice Edward Belobaba of the Ontario Superior Court of Justice unequivocally articulates the very significant limits on the fiduciary duties that are owed by Ontario's associate lawyers when they leave the law firms that employ them.

In Loreto v. Little et al, a decision released February 21, 2010, Mr. Justice Belobaba dismissed a suit by a senior Toronto practitioner against four former employee-associates of his personal injury law firm.

In the suit, the employer alleged that the departing associates breached their fiduciary duties to the firm after they opened a competing law firm and utilized their former firm's client lists to solicit the clients for whom they acted before their departure.

Justice Belobaba resoundingly disagreed with the employer.

The lawsuit ultimately boils down to a dispute over fees and ownership of client files in the context of a law firm that dissolved over partnership negotiations gone very sour.

While Justice Belobaba's ruling is not lacking in the predictably animated details of the firm's messy breakup, it more importantly addresses key issues of concern to lawyers and clients alike in these regrettably common circumstances.

Constructive Dismissal

Interestingly, the Court held that the sheer velocity of the firm principal's highly vocal obection to the terms of a partnership agreement proposed by the four associates in and of itself created so poisoned an environment that continuation of two associates' employment was rendered untenable.

Thus, they were constructively dismissed.

Mr. Justice Belobaba noted:

[25] This is not a case where the employer was being critical of the four lawyers’ unsatisfactory performance – indeed Frank had been so pleased with their work and the financial contribution they were making to the firm that he had just offered them a partnership and had asked Ian to prepare a draft of the agreement. This is a case where the employer became irrationally defensive and paranoid and uncontrollably angry. This is a case where the employer decided to throw a temper tantrum for no apparent reason.

[26] But even so, not every workplace blow-up automatically results in a poisoning of the working environment or in the constructive dismissal of the targeted employees. Cooler heads prevail, apologies are made and accepted and the workplace returns to normal. Here, however, in my view, Ian and Dianna had good reason to conclude that Frank had crossed a line and they could not reasonably return to work with him at the LLM law firm. If they did, the office environment would be intolerable

Mr. Justice Belobaba ruled that the employment of the two remaining Defendant associates had actually been terminated in the verbal flare-up that followed presentation of the proposed agreement.

Fiduciary Duty of Law Firm Associates

The Court underlined that the interests of clients are paramount when a law firm dissolves.

Clients have an absolute right to choose who will subsequently represent them.

Thus the duties of lawyers and other professionals who leave employment are quite different from those of employees who leave positions in most other fields and industries:

[28] Departing employees, as a general rule, have certain obligations when they leave their employer. At the very least, in the absence of any restrictive contractual provisions, the departing employee has an implied duty of fidelity. She can set up shop in competition with her former employer; she can even contact customers or clients using a public telephone directory, but she cannot take and use customer lists to make these calls.[6]
[29] Where the departing employee is a fiduciary, the rules became more restrictive. He cannot compete with his former employer or solicit clients for at least a reasonable period of time. And he certainly cannot use customer lists belonging to the employer to contact clients and solicit business.In cases involving lawyers or doctors or other professionals, however, these general rules do not apply. A different approach is taken primarily because of the personal nature of professional services and the client’s right to choose.


Similarly, the Court held that the ordinary restrictions on use by former employees of client lists to solicit the former employer's customers do not apply to lawyers, doctors and other professionals who work on a close, personal basis with their clients:

[38] Nor was there any breach of any duty of confidentiality. The plaintiff argues that the defendants’ use of the firm’s client list was a breach of their duty of confidentiality. It is true that in many situations, taking and using a firm’s client list, even if the list is limited to “one’s own” clients can amount to a breach of confidentiality.

[39] The law takes a different approach, however, in the case of professionals such as doctors, lawyers or dentists. A departing lawyer or other professional is permitted to take, even to download, a list of the clients he has personally worked with in order to contact them and offer them the three choices [regarding representation] discussed above.

The Retainer Agreement Prevails

In the inevitable dispute over division of legal fees arising in connection with the disputed client files, most of which were governed by contingency fee agreements, the court ruled that the firm's retainer agreement prevailed.

These agreements provided that if the firm's retainer was terminated prior to completion of a matter, the firm's fees would be wholly based on the hourly rates applicable for the time spent by the lawyers engaged in the matter, prior to the termination of the retainer. Thus, the court ruled:

[41] A brief comment about Frank’s right to be compensated for the 200 plus files that his former clients have transferred to LMVS. This is a matter that is governed by the terms of the retainer agreement. The disbursements have now been paid in full. All that remains is to estimate the time that was spent on each file before it was transferred and submit the appropriate account. One of the problems for Frank, a problem of his own creation, is that the personal injury lawyers were not required to docket their time and keep track of their hours – they were only to focus on getting a recovery and then billing the contingency fee.

It should be noted that no employment agreement governed the parties in Loretto; this may well have been a significant factor in the outcome.

Read the complete ruling: Loreto v. Little et al, 2010 ONSC 755 (CanLII)

- Garry J. Wise, Toronto

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