MacDonald Estate v. Martin

MacDonald Estate v. Martin
Collection
Supreme Court Judgments
Date
1990-12-20
Report
[1990] 3 SCR 1235
Case number
21469
Judges
Dickson, Robert George Brian; Wilson, Bertha; La Forest, Gérard V.; L'Heureux-Dubé, Claire; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret
On appeal from
Manitoba
Subjects
Professional law
Notes
SCC Case Information: 21469
Decision Content
MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235
William Steward Arnold Martin Appellant
v.
William Hamilton Gray, administrator
with will annexed of the estate of
John Edwin MacDonald Respondent
indexed as: macdonald estate v. martin
File No.: 21469.
1990: May 4; 1990: May 10*.
Present: Dickson C.J.** and Wilson, La Forest, L'Heureux‑Dubé, Sopinka, Gonthier and Cory JJ.
on appeal from the court of appeal for manitoba
Barristers and solicitors ‑‑ Conflict of interest ‑‑ Former junior solicitor for appellant joining law firm acting for respondent ‑‑ Whether law firm may continue to act as solicitors of record for respondent ‑‑ Test to be applied in determining whether disqualifying conflict of interest exists.
Respondent brought an action against appellant for an accounting. Appellant's solicitor was assisted by a junior member of his firm who was actively engaged in the case and was privy to many confidences disclosed by appellant to his solicitor. The junior member later joined the law firm which represents respondent in this action. Appellant applied to the provincial superior court for a declaration that the law firm was ineligible to continue to act as solicitors of record for respondent. The court granted the application and ordered the firm removed as solicitors of record. The Court of Appeal reversed that decision. This appeal is to determine the appropriate standard to be applied in deciding whether a law firm should be disqualified from continuing to act in the litigation by reason of a conflict of interest.
Held: The appeal should be allowed.
Per Dickson C.J. and La Forest, Sopinka and Gonthier JJ.: In determining whether a disqualifying conflict of interest exists, the Court is concerned with three competing values: (1) the concern to maintain the high standards of the legal profession and the integrity of our system of justice; (2) the countervailing value that a litigant should not be deprived of his or her choice of counsel without good cause; and (3) the desirability of permitting reasonable mobility in the legal profession. The "probability of mischief" standard, which is the traditional English test, is not sufficiently high to satisfy the public requirement that there be an appearance of justice. The use of confidential information is a matter usually not susceptible of proof, and the test must therefore be such that the public represented by the reasonably informed person would be satisfied that no use of confidential information would occur. Two questions must be answered: (1) Did the lawyer receive confidential information attributable to a solicitor and client relationship relevant to the matter at hand? (2) Is there a risk that it will be used to the prejudice of the client? In answering the first question American courts have adopted the "substantial relationship" test: once it is established that there is a "substantial relationship" between the matter out of which the confidential information is said to arise and the matter at hand, there is an irrebuttable presumption that confidential information was imparted to the lawyer. This test is too rigid, however. Rather, once it is shown by the client that there existed a previous relationship which is sufficiently related to the retainer from which it is sought to remove the solicitor, the court should infer that confidential information was imparted unless the solicitor satisfies the court that no information was imparted which could be relevant. The degree of satisfaction must withstand the scrutiny of the reasonably informed member of the public. This will be a difficult burden to discharge.
In answering the second question, whether the confidential information will be misused, a lawyer who has relevant confidential information is automatically disqualified from acting against a client or former client. With respect to the partners or associates in the firm, the concept of imputed knowledge is unrealistic in the era of the mega‑firm. The court should therefore draw the inference that lawyers who work together share confidences, unless satisfied on the basis of clear and convincing evidence, that all reasonable measures have been taken to ensure that no disclosure will occur by the "tainted" lawyer to the member or members of the firm who are engaged against the former client. Such reasonable measures would include institutional mechanisms such as Chinese Walls and cones of silence. Until the governing bodies of the legal profession have approved of these and adopted rules with respect to their operation, it is unlikely that a court would accept them as evidence of effective screening. Undertakings and conclusory statements in affidavits are not sufficient, since affidavits of lawyers are difficult to verify objectively and the public is not likely to be satisfied without some additional guarantees that confidential information will under no circumstances be used.
In this case the lawyer actively worked on the very case in respect of which her new firm is acting against her former client, and she is therefore in possession of relevant confidential information. With respect to misuse of the information, there is nothing in the affidavits filed to indicate that any independently verifiable steps were taken by the firm to implement any kind of screening, and the firm may therefore not continue to act.
Per Wilson, L'Heureux‑Dubé and Cory JJ.: Where a lawyer who has had a substantial involvement with a client in an ongoing contentious matter joins another law firm which is acting for an opposing party, there is an irrebuttable presumption that the knowledge of such lawyer, including confidential information disclosed to him or her by the former client, has become the knowledge of the new firm. Such an irrebuttable presumption is essential to preserve public confidence in the administration of justice.
Neither the merger of law firms nor the mobility of lawyers can be permitted to affect adversely the public's confidence in the judicial system. At this time, when the work of the courts is having a very significant impact upon the lives and affairs of all Canadians, it is fundamentally important that justice not only be done, but appear to be done in the eyes of the public. While the necessity of selecting new counsel will certainly be inconvenient and worrisome to clients, and reasonable mobility may well be important to lawyers, the integrity of the judicial system is of such fundamental importance that it must be the predominant consideration. Our judicial system cannot function properly if doubt or suspicion exists in the mind of the public that the confidential information disclosed by a client to a lawyer might be revealed. No matter what form of restrictions were sought to be imposed on individual lawyers and law firms involved, the public would, quite properly, remain skeptical of their efficacy since lawyers in the same firm meet frequently and have numerous opportunities for the private exchange of confidential information.
Cases Cited
By Sopinka J.
Not followed: Rakusen v. Ellis, Munday & Clarke, [1912] 1 Ch. 831; referred to: Morton v. Asper (1987), 49 Man. R. (2d) 167, aff'd (1987), 51 Man. R. (2d) 207; Law Society of Manitoba v. Giesbrecht (1983), 24 Man. R. (2d) 228; Re a Solicitor, unreported, Chancery Division, March 31, 1987, summarized at 131 Sol. J. 1063; T.C. Theatre Corp. v. Warner Bros. Pictures, Inc., 113 F. Supp. 265 (1953); Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562 (1973); E. F. Hutton & Co. Inc. v. Brown, 305 F. Supp. 371 (1969); Nemours Foundation v. Gilbane, Aetna, Federal Ins. Co., 632 F. Supp. 418 (1986); U.S.A. for the Use and Benefit of Lord Electric Co. v. Titan Pacific Construction Corp., 637 F. Supp. 1556 (1986); In re Asbestos Case, 514 F. Supp. 914 (1981); Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263 (1983); Novo Terapeutisk Laboratorium A/S v. Baxter Travenol Laboratories, Inc., 607 F.2d 186 (1955); Akerly v. Red Barn System, Inc., 551 F.2d 539 (1977); Gas‑A‑Tron of Arizona v. Union Oil Co. of California, 534 F.2d 1322, certiorari denied, 429 U.S. 861 (1976); Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 518 F.2d 751 (1975); Laskey Bros. of W. Va., Inc. v. Warner Bros. Pictures, 224 F.2d 824 (1955), certiorari denied, 350 U.S. 932 (1956); City of Cleveland v. Cleveland Electric Illuminating Co., 440 F. Supp. 193 (1977), aff'd mem., 573 F.2d 1310, certiorari denied, 435 U.S. 996 (1977); Fleischer v. A.A.P., Inc., 163 F. Supp. 548 (1958); D & J Constructions Pty. Ltd. v. Head (1987), 9 N.S.W.L.R. 118; National Mutual Holdings Pty. Ltd. v. Sentry Corp. (1989), 87 A.L.R. 539; In the Marriage of Thevanaz (1986), 11 Fam. L.R. 95; Re the Marriage of R.P. and A.A. Gagliano (1989), 12 Fam. L.R. 843; Steed & Evans Ltd. v. MacTavish (1976), 12 O.R. (2d) 236; Canada Southern Railway Co. v. Kingsmill, Jennings (1978), 8 C.P.C. 117; Falls v. Falls (1979), 12 C.P.C. 270; Goldberg v. Goldberg (1982), 141 D.L.R. (3d) 133; Lukic v. Urquhart (1984), 11 D.L.R. (4th) 638, aff'd in part (1985), 15 D.L.R. (4th) 639; O'Dea v. O'Dea (1987), 68 Nfld. & P.E.I.R. 67; Fisher v. Fisher (1986), 76 N.S.R. (2d) 326; Thomson v. Smith Mechanical Inc., [1985] C.S. 782; Canada v. Consortium Designers Inc. (1988), 72 Nfld. & P.E.I.R. 255, aff'd (1989), 80 Nfld. & P.E.I.R. 12; Farmers Mutual Petroleums Ltd. v. United States Smelting, Refining & Mining Co. (1961), 28 D.L.R. (2d) 618; R. v. Burkinshaw (1967), 60 D.L.R. (2d) 748; Devco Properties v. Sunderland, [1977] 2 W.W.R. 664; Mercator Enterprises Ltd. v. Mainland Investments Ltd. (1978), 29 N.S.R. (2d) 703; Christo v. Bevan (1982), 36 O.R. (2d) 797; Schmeichel v. Saskatchewan Mining Development Corp., [1983] 5 W.W.R. 151; International Electronics Corp. v. Woodside Developments Ltd., unreported, British Columbia Supreme Court, June 26, 1985; Davey v. Woolley, Hames, Dale & Dingwall (1982), 35 O.R. (2d) 599; United States Surgical Corp. v. Downs Surgical Canada Ltd. (1982), 141 D.L.R. (3d) 157.
By Cory J.
Followed: Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263 (1983).
Authors Cited
Canadian Bar Association. Code of Professional Conduct. Adopted August 25, 1974.
Dean, Miriam R. and Christopher F. Finlayson. "Conflicts of interest: When may a lawyer act against a former client?", [1990] N.Z.L.J. 43.
"Developments in the Law ‑‑ Conflicts of Interest in the Legal Profession" (1981), 94 Harv. L. Rev. 1247.
Kryworuk, Peter William. "Acting Against Former Clients ‑‑ A Matter of Dollars and Common Sense" (1985), 45 C.P.C. 1.
Steele, Graham. "Imputing Knowledge From One Member of a Firm to Another: `Lead Us Not Into Temptation'"(1990), 12 Adv. Q. 46.
APPEAL from a judgment of the Manitoba Court of Appeal (1989), 57 Man. R. (2d) 161, 58 D.L.R. (4th) 67, [1989] 3 W.W.R. 653, reversing the judgment of the Court of Queen's Bench granting a declaration that a firm of lawyers was ineligible to continue to act as solicitors of record for the respondent and removing the firm as solicitors of record. Appeal allowed.
R. A. Dewar and R. A. Watchman, for the appellant.
A. D. MacInnes, Q.C., for the respondent.
//Sopinka J.//
The judgment of Dickson C.J. and La Forest, Sopinka and Gonthier JJ. was delivered by
SOPINKA J. -- This appeal is concerned with the standard to be applied in the legal profession in determining what constitutes a disqualifying conflict of interest. The issue arose in the context of a lawsuit in which a former junior solicitor for the appellant transferred her employment to the law firm acting for the respondent.
Facts
The respondent, Gray, is the plaintiff in an action for an accounting against the appellant and Rossmere Holdings. In 1983, the appellant retained the services of A. Kerr Twaddle, Q.C., who served in the capacity of solicitor and counsel until his appointment to the bench in 1985. While acting for the appellant, Twaddle was assisted by Kristin Dangerfield, a graduate articled student and later a junior member of his firm. She was actively engaged in the case and was privy to many confidences disclosed by the appellant to Twaddle. Dangerfield was in attendance at numerous meetings between Mr. Twaddle and the appellant Martin, assisted in the preparation of many documents, prepared and attended examinations for discovery, was present when a settlement was discussed by the parties and during discussions of a settlement with representatives of the law firm of Thompson, Dorfman, Sweatman, and participated in the taking of de bene esse evidence. Upon Twaddle's appointment to the bench in 1985, Dangerfield joined the firm of Scarth, Dooley. Eight out of eleven members of that firm, including Dangerfield, joined the Thompson firm in 1987. The Thompson firm represents the respondent in this action.
Both Dangerfield and senior members of Thompson, Dorfman, Sweatman have sworn affidavits that the case has not been discussed since Dangerfield joined the firm and will not be discussed.
The appellant brought an application in the Court of Queen's Bench in which he sought a declaration that the Thompson firm was ineligible to continue to act as solicitors of record for the respondent and an order removing that firm as solicitors of record. Hanssen J. allowed the application.
The respondent's appeal from the decision of the motions judge was allowed by the Court of Appeal of Manitoba, Monnin C.J.M. dissenting: (1989), 57 Man. R. (2d) 161.
Judgments
Court of Queen's Bench
Hanssen J., the motions judge, observed that the respondent's right to retain counsel of his choice is not an absolute right but, rather, it is subject to reasonable limits. In his view, the court has a duty not only to the parties to the litigation but also to the public "to ensure that lawyers observe the highest standards of professional conduct with respect to cases before the court". Where those high standards are not observed, the Court has jurisdiction to intervene and remove a lawyer from the record. In granting the order requested, the motions judge applied the principles enunciated by Jewers J. in Morton v. Asper (1987), 49 Man. R. (2d) 167 (Q.B.), aff'd (1987), 51 Man. R. (2d) 207 (C.A.).
Hanssen J. stated that, while he was satisfied that Dangerfield had not passed on confidential information to other members of the Thompson firm and that the likelihood of her so doing, either intentionally or unintentionally, was remote, the appearance of conflict or possible impropriety had to be avoided. In his opinion, there was an obvious conflict of interest and the continued participation of the Thompson firm as solicitors of record would constitute a "threat to the integrity of the trial and create the appearance of impropriety".
Court of Appeal
Monnin C.J.M. (dissenting)
The Chief Justice agreed with the conclusion of the trial judge that there was, in the circumstances, a conflict of interest. He found no reason to distinguish between the confidences obtained by either a senior or a junior counsel as both are members of the profession and bound by the rules of secrecy. In his view, the Morton decision was applicable in the circumstances of the case at bar. While the test propounded in that case may be a rigid one, it is a test which is clear and easily applied.
Huband J.A.
Huband J.A. was of the view that there is no absolute rule to the effect that, where there is an appearance of impropriety, the solicitor involved in the apparent conflict must be declared ineligible. He observed that the only absolute rule is that information given by a client to a solicitor must remain confidential. Beyond that absolute rule, however, each case must be considered on its facts: Rakusen v. Ellis, Munday & Clarke, [1912] 1 Ch. 831.
In arriving at his conclusion, Huband J.A. distinguished on its facts the decision in Morton. He stated that, while there could be cases where appearances alone might be determinative, a case such as Morton constitutes an exception to the general rule and does not establish a principle of law giving rise to a new rule, general or absolute. In the circumstances of the case at bar, "where there is no real danger of prejudice or impropriety, where the nature of the litigation is complex, and where a sense of confidence has developed between the client and his solicitors as a consequence of a six year relationship, this factor deserves additional consideration" (p. 171).
Philp J.A. (concurring with Huband J.A.)
Philp J.A. agreed with the conclusion arrived at by Huband J.A. and substantially with his reasons. He added, however, that he had been a member of the Court of Appeal which upheld the decision of Jewers J. in Morton. In his view, Jewers J. did not pronounce or apply a test or rule to be automatically and rigidly applied regardless of the circumstances in which impropriety or unfairness is alleged to exist. Jewers J. had considered the nature of the litigation, the extent to which it had progressed and the inconvenience and the expense to be suffered by the party required to retain and instruct new counsel. In his opinion, Jewers J. had come to the correct conclusion on the facts before him. He found, in the circumstances, that Hanssen J. erred in holding that "the appearance of fairness is the overriding consideration".
The Issue
The sole issue in this appeal is the appropriate standard to be applied in determining whether Thompson, Dorfman, Sweatman are disqualified from continuing to act in this litigation by reason of a conflict of interest.
Legal Ethics -- Policy Considerations
In resolving this issue, the Court is concerned with at least three competing values. There is first of all the concern to maintain the high standards of the legal profession and the integrity of our system of justice. Furthermore, there is the countervailing value that a litigant should not be deprived of his or her choice of counsel without good cause. Finally, there is the desirability of permitting reasonable mobility in the legal profession. The review of the cases which follows will show that different standards have been adopted from time to time to resolve the issue. This reflects the different emphasis placed at different times and by different judges on the basic values outlined above.
The legal profession has changed with the changes in society. One of the changes that is most evident in large urban centers is the virtual disappearance of the sole practitioner and the tendency to larger and larger firms. This is a product of a number of factors including a response to the demands of large corporate clients whose multi-faceted activities require an all-purpose firm with sufficient numbers in every area of expertise to serve their needs. With increase in size come increasing demands for management of a law firm in accordance with the corporate model. These changes in the composition and management practices of law firms are reflected in changes to ethical practices of the profession. Some of the old practices have been swept aside as anachronistic, perhaps with justification. Advertising to inform the public in a tasteful way of the services provided by a firm and of its fee schedule is but one example.
Merger, partial merger and the movement of lawyers from one firm to another are familiar features of the modern practice of law. They bring with them the thorny problem of conflicts of interest. When one of these events is planned, consideration must be given to the consequences which will flow from loss of clients through conflicts of interest. To facilitate this process some would urge a slackening of the standard with respect to what constitutes a conflict of interest. In my view, to do so at the present time would serve the interest of neither the public nor the profession. The legal profession has historically struggled to maintain the respect of the public. This has been so notwithstanding the high standards that, generally, have been maintained. When the management, size of law firms and many of the practices of the legal profession are indistinguishable from those of business, it is important that the fundamental professional standards be maintained and indeed improved. This is essential if the confidence of the public that the law is a profession is to be preserved and hopefully strengthened. Nothing is more important to the preservation of this relationship than the confidentiality of information passing between a solicitor and his or her client. The legal profession has distinguished itself from other professions by the sanctity with which these communications are treated. The law, too, perhaps unduly, has protected solicitor and client exchanges while denying the same protection to others. This tradition assumes particular importance when a client bares his or her soul in civil or criminal litigation. Clients do this in the justifiable belief that nothing they say will be used against them and to the advantage of the adversary. Loss of this confidence would deliver a serious blow to the integrity of the profession and to the public's confidence in the administration of justice.
An important statement of public policy with respect to the conduct of barrister and solicitor is contained in the professional ethics codes of the governing bodies of the profession. The legal profession is self-governing. In each province there is a governing body usually elected by the lawyers practising in the province. The governing body enacts rules of professional conduct on behalf of those it represents. These rules must be taken as expressing the collective views of the profession as to the appropriate standards to which the profession should adhere.
While there exists no national law society, the Canadian Bar Association, a national society representing lawyers across the country, adopted a Code of Professional Conduct in 1974. The Code has been adopted by the Law Society of Manitoba and by the Law Societies of other provinces. Chapter V, entitled "Impartiality and Conflict of Interest", commences with the following rule:
The lawyer must not advise or represent both sides of a dispute and, save after adequate disclosure to and with the consent of the client or prospective client concerned, he should not act or continue to act in a matter when there is or there is likely to be a conflicting interest. A conflicting interest is one which would be likely to affect adversely the judgment of the lawyer on behalf of or his loyalty to a client or prospective client or which the lawyer might be prompted to prefer to the interests of a client or prospective client.
The rule is followed by thirteen commentaries. The most relevant of these are Commentaries 11 and 12, which state:
11. A lawyer who has acted for a client in a matter should not thereafter act against him (or against persons who were involved in or associated with him in that matter) in the same or any related matter, or place himself in a position where he might be tempted or appear to be tempted to breach the Rule relating to Confidential Information. It is not, however, improper for the lawyer to act against a former client in a fresh and independent matter wholly unrelated to any work he has previously done for that person.
12. For the sake of clarity the foregoing paragraphs are expressed in terms of the individual lawyer and his client. However it will be appreciated that the term "client" includes a client of the law firm of which the lawyer is a partner or associate whether or not he handles the client's work.
A code of professional conduct is designed to serve as a guide to lawyers and typically it is enforced in disciplinary proceedings. See, for example, Law Society of Manitoba v. Giesbrecht (1983), 24 Man. R. (2d) 228 (C.A.). The courts, which have inherent jurisdiction to remove from the record solicitors who have a conflict of interest, are not bound to apply a code of ethics. Their jurisdiction stems from the fact that lawyers are officers of the court and their conduct in legal proceedings which may affect the administration of justice is subject to this supervisory jurisdiction. Nonetheless, an expression of a professional standard in a code of ethics relating to a matter before the court should be considered an important statement of public policy. The statement in Chapter V should therefore be accepted as the expression by the profession in Canada that it wishes to impose a very high standard on a lawyer who finds himself or herself in a position where confidential information may be used against a former client. The statement reflects the principle that has been accepted by the profession that even an appearance of impropriety should be avoided.
The Law
The law in Canada and in other jurisdictions has adopted one of two basic approaches in determining whether a disqualifying conflict of interest exists: (1) the probability of real mischief, or (2) the possibility of real mischief. The term "mischief" refers to the misuse of confidential information by a lawyer against a former client. The first approach requires proof that the lawyer was actually possessed of confidential information and that there is a probability of its disclosure to the detriment of the client. The second is based on the precept that justice must not only be done but must manifestly be seen to be done. If, therefore, it reasonably appears that disclosure might occur, this test for determining the presence of a disqualifying conflict of interest is satisfied.
England
The "probability of real mischief" test is the traditional English approach based on Rakusen v. Ellis, Munday & Clarke, supra. Rakusen was terminated from his employment. He retained Mr. Munday to discuss his legal position. When several months later Rakusen instituted proceedings with the assistance of new solicitors, the defendant company retained Munday's associate, Clarke. The court accepted the evidence that Clarke knew nothing about what had transpired between Rakusen and Munday. The passages set out below are most often quoted in support of the "probability" test. Cozens-Hardy M.R. stated, at p. 835:
I do not doubt for a moment that the circumstances may be such that a solicitor ought not to be allowed to put himself in such a position that, human nature being what it is, he cannot clear his mind from the information which he has confidentially obtained from his former client; but in my view we must treat each of these cases, not as a matter of form, not as a matter to be decided on the mere proof of a former acting for a client, but as a matter of substance, before we allow the special jurisdiction over solicitors to be invoked, we must be satisfied that real mischief and real prejudice will in all human probability result if the solicitor is allowed to act. [Emphasis added.]
Fletcher Moulton L.J. expressed himself as follows, at p. 841:
As a general rule the Court will not interfere unless there be a case where mischief is rightly anticipated. I do not say that it is necessary to prove that there will be mischief, because that is a thing which you cannot prove, but where there is such a probability of mischief that the Court feels that, in its duty as holding the balance between the high standard of behaviour which it requires of its officers and the practical necessities of life, it ought to interfere and say that a solicitor shall not act. [Emphasis added.]
There have been few cases in England since Rakusen, but the most recent case, Re a Solicitor, unreported, Chancery Division, March 31, 1987, summarized at 131 Sol. J. 1063, reaffirmed "the probability of real mischief test". The court noted that it was not actually suggested that the solicitor had acquired "relevant knowledge concerning a former client" and the latter could not "think of any confidential information which he [had] communicated . . . and which might be relevant in connection with" the case (p. 4).
United States
The courts in the United States have generally adopted the stricter "possibility of real mischief" test. According to this approach, once it is established that there is a "substantial relationship" between the matter out of which the confidential information is said to arise and the matter at hand, there is an irrebuttable presumption that the attorney received relevant information. If the attorney practises in a firm, there is a presumption that lawyers who work together share each other's confidences. Knowledge of confidential matters is therefore imputed to other members of the firm. This latter presumption can, however, in some circumstances, be rebutted. The usual methods used to rebut the presumption are the setting up of a "Chinese Wall" or a "cone of silence" at the time that the possibility of the unauthorized communication of confidential information arises. A "Chinese Wall" involves effective "screening" to prevent communication between the tainted lawyer and other members of the firm. A "cone of silence" is achieved by means of a solemn undertaking not to disclose by the tainted solicitor. Other means which would constitute clear and convincing evidence that no improper disclosure has or can take place are not ruled out. See T.C. Theatre Corp. v. Warner Bros. Pictures, Inc., 113 F. Supp. 265 (S.D.N.Y. 1953), Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562 (2d Cir. 1973); E. F. Hutton & Co. Inc. v. Brown, 305 F. Supp. 371 (S.D. Texas 1969); Nemours Foundation v. Gilbane, Aetna, Federal Ins. Co., 632 F. Supp. 418 (D. Delaware 1986); U.S.A. for the Use and Benefit of Lord Electric Co. v. Titan Pacific Construction Corp., 637 F. Supp. 1556 (W.D. Washington 1986); In re Asbestos Cases, 514 F. Supp. 914 (E.D. Virginia 1981); P. W. Kryworuk, "Acting Against Former Clients -- A Matter of Dollars and Common Sense" (1985), 45 C.P.C. 1; "Developments in the Law -- Conflicts of Interest in the Legal Profession" (1981), 94 Harv. L. Rev. 1247, at pp. 1315-34.
In Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263 (7th Cir. 1983), Posner J., set out the rationale for the "substantial relationship" test which gives rise to an irrebuttable presumption that confidences have been disclosed by the client. He states, at p. 1269:
The "substantial relationship" test has its problems, but conducting a factual inquiry in every case into whether confidences had actually been revealed would not be a satisfactory alternative, particularly in a case such as this where the issue is not just whether they have been revealed but also whether they will be revealed during a pending litigation. Apart from the difficulty of taking evidence on the question without compromising the confidences themselves, the only witnesses would be the very lawyers whose firm was sought to be disqualified (unlike a case where the issue is what confidences a lawyer received while at a former law firm), and their interest not only in retaining a client but in denying a serious breach of professional ethics might outweigh any felt obligation to "come clean." While "appearance of impropriety" as a principle of professional ethics invites and maybe has undergone uncritical expansion because of its vague and open-ended character, in this case it has meaning and weight. For a law firm to represent one client today, and the client's adversary tomorrow in a closely related matter, creates an unsavory appearance of conflict of interest that is difficult to dispel in the eyes of the lay public -- or for that matter the bench and bar -- by the filing of affidavits, difficult to verify objectively, denying that improper communication has taken place or will take place between the lawyers in the firm handling the two sides. [Emphasis added.]
The rigidity and overinclusiveness of the irrebuttable presumption have been criticized and some courts have departed from it in special circumstances. These criticisms are summarized in "Developments in the Law -- Conflicts of Interest in the Legal Profession", op. cit., at pp. 1355-59:
In situations involving large firms, the maintenance of an irrebuttable presumption of sharing among affiliates can become sorely strained. Suppose that a young litigator, now out on his own, was briefly associated with a big firm and that the firm included among its members a specialist in corporate law who once, perhaps many years before, represented a client in some affair. The young lawyer is now asked to represent a second client against the first in a suit involving a substantially related matter. If the firm is large enough, the corporate specialist may never have been more than a name on the letterhead to the young litigator, who was his nominal affiliate. In most instances, the affiliate will not have been familiar with the corporate lawyer's old client or with any of the details of that client's affairs during the affiliate's association with the firm. In this case, forbidding the young litigator's representation of a second client in a suit against the first client is an empty gesture.
As the structure of legal practice changes and such cases become increasingly common, one must ask whether the putative benefits of the strict rule justify its costs. Proscription of successive representation, including representation by a former affiliate, imposes significant losses on would-be clients, including effective deprivation of their first choice of counsel. A further objection to the categorical rule is its effect on the professional mobility of young attorneys, who frequently begin their careers with a stint at a large firm. A rule irrebuttably imputing to every former affiliate of such a firm synoptic knowledge of the matters it has handled is not merely unrealistic, but is potentially a serious impediment to an attorney (like the young litigator in the previous example) who seeks either to establish his own practice or to affiliate himself with a new firm. Especially when the former affiliate has specialized during his tenure with his old colleagues, an irrebuttable presumption may block his attempt to use his training to the advantage of new clients; indeed, it may transform his specialized skills from an asset into a serious liability.
The need for a more flexible approach to imputation of client confidences is widely acknowledged. The liberalized rule allows the traditional presumption to be rebutted in an enforcement proceeding by evidence suggesting a low probability that the lawyer who was materially involved in representing a client actually shared any relevant information with his affiliate.
. . .
Critics of a rebuttable imputation rule have generally relied on the need to prevent any representation that involves even an "appearance of impropriety." Operating on the view that appearances must be protected at nearly any price, some courts have rejected former affiliates' attempts to rebut the presumption of shared knowledge. Under the "appearance of impropriety" doctrine, the "non-existence of actual conflict is presumed," and the mere appearance of conflict is sufficient to taint the representation. Yet there seems to be a trend, even among those courts that accept the policy behind the doctrine, to allow "any initial inference of impropriety" to be "dispelled" by evidence rebutting the presumption that knowledge was shared among former affiliates. As the role of appearances in determining whether a given representation ought to be proscribed continues to decline, objections to a rebuttable presumption will presumably dissipate. This liberalized approach reduces unnecessary proscription and its associated costs while affording former clients a reasonable degree of security from the threat of fiduciary breach. [Footnotes omitted.]
In support of this position, the author cites considerable authority. See for example: Novo Terapeutisk Laboratorium A/S v. Baxter Travenol Laboratories, Inc., 607 F.2d 186 (7th Cir. 1955) (en banc); Akerly v. Red Barn System, Inc., 551 F.2d 539 (3rd Cir. 1977); Gas-A-Tron of Arizona v. Union Oil Co. of California, 534 F.2d 1322 (9th Cir.), certiorari denied, 429 U.S. 861 (1976); Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 518 F.2d 751 (2d Cir. 1975); Laskey Bros. of W. Va., Inc. v. Warner Bros. Pictures, 224 F.2d 824 (2d Cir. 1955), certiorari denied, 350 U.S. 932 (1956); City of Cleveland v. Cleveland Electric Illuminating Co., 440 F. Supp. 193 (N.D. Ohio 1977), aff'd mem., 573 F.2d 1310 (6th Cir.), certiorari denied, 435 U.S. 996 (1977); Fleischer v. A.A.P., Inc., 163 F. Supp. 548 (S.D.N.Y 1958).
Typical of the statements in these cases is the following made in Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., supra, at pp. 753-54:
It is unquestionably true that in the course of their work at large law firms, associates are entrusted with the confidences of some of their clients. But it would be absurd to conclude that immediately upon their entry on duty they become the recipients of knowledge as to the names of all the firm's clients, the contents of all files relating to such clients, and all confidential disclosures by client officers or employees to any lawyer in the firm. Obviously such legal osmosis does not occur. The mere recital of such a proposition should be self-refuting. . . .
Thus, while this Circuit has recognized that an inference may arise that an attorney formerly associated with a firm himself received confidential information transmitted by a client to the firm, that inference is a rebuttable one. Laskey Bros. of W. Va., Inc. v. Warner Bros. Pictures, 224 F.2d 824, 827 (2d Cir. 1955). . . .
And in Analytica, supra, Coffey J., said, at p. 1277:
Reliance upon antiquated notions of disqualification such as irrebuttable presumptions simply will no longer suffice in today's specialized practice of law.
My concern in this area lies in the effect a disqualification motion has on both a law firm as well as a newly hired individual in a firm. . . .
If prior representation of a particular client will irrebuttably disqualify an entire firm from handling certain cases, the result could easily be whole law firms of "Typhoid Marys." This would have a drastic impact on the careers of attorneys in entire firms, would impede clients' rights to be represented by attorneys of their choice and would discourage attorneys with expertise in a particular field of law from handling cases in their respective specialties.
Australia
In Australia as in Canada courts appear to vacillate as to the proper test. In D & J Constructions Pty. Ltd. v. Head (1987), 9 N.S.W.L.R. 118, Bryson J. approved of the Rakusen test. But in National Mutual Holdings Pty. Ltd. v. Sentry Corp. (1989), 87 A.L.R. 539, Gummow J. expressed the view that the Australian position was perhaps no less stringent than the American position. He also referred to a paper by Dr. Finn, "Conflicts of Interest and Professionals" (published by the New Zealand Legal Research Foundation in the volume Professional Responsibility) in which Dr. Finn refers to the Rakusen test as "untenable". Dr. Finn considers whether it is preferable to adopt the American concept of the irrebuttable presumption or the less rigid approach of a presumption rebuttable by the lawyer. The learned writer opts for the latter.
Several cases in the Family Court of Australia have applied a test stricter than Rakusen. See In the Marriage of Thevanaz (1986), 11 Fam. L.R. 95, and Re the Marriage of R.P. and A.A. Gagliano (1989), 12 Fam. L.R. 843.
New Zealand
There are no reported cases on the point but, in "Conflicts of interest: When may a lawyer act against a former client?",