"Class actions are going to become a way of life in the Canadian courts and narrow losses on the part of plaintiffs' counsel will not deter their inventive colleagues," says Larry Lowenstein of Osler, Hoskin & Harcourt LLP's Toronto office. Lowenstein, who successfully defended the recent American-style shareholder "strike suit" (a defined term explained later in this article) challenging Titan Acquisition Ltd.'s takeover of International Comfort Products Corporation, has crossed swords with some of the best. And quite apart from their formidable opponents in the emerging plaintiffs' bar, Canada's class action defence lawyers have had to contend with certification rules which are, surprisingly, more liberal than American rules. In the U.S., questions common to the class members must "predominate" questions affecting individual members only. In this country, however, certification will generally be granted where issues common to class members arise, with no requirement that they "predominate" so long as the class action is shown to be the "preferable procedure" for resolution of the common issues.
Further, the willingness of Ontario courts to certify national classes in cases as diverse as Bre-X (securities) and Webb v. K-Mart (wrongful dismissal) has significantly raised the stakes for corporate defendants as plaintiffs' lawyers from all over the country flock to this key jurisdiction to seek de facto national certification.
Yet, the defence bar is cautiously optimistic that the roller-coaster excesses which have characterized US class action litigation will not be repeated in Canada. "The Class Proceedings Act (CPA) is working," says Campion. "We're not off the dial on class actions in Canada, and so far the legislation has not caused heavy economic damages. The judges nominated to be class action judges have achieved a fair and balanced approach, capable of refusing certification in the right case, and the plaintiffs' bar has been very responsible." This is also the view of Thomas Heintzman, Q.C., at McCarthy Tétrault. "Class actions are so far being used in a responsible way by plaintiffs' counsel and the case law is evolving in a fashion intended by the statute," he says. "Judges are not certifying cases unless the economics of the situation justify the claim."
Strosberg, the former Law Society of Upper Canada Treasurer who kicked off the Bre-X proceedings, and Campion, the lawyer who got Canada's brokers off the Bre-X hook, had been fighting certification of the Via Rail action for over a year when Campion, his colleague Beth Beattie, and their clients, came up with an alternative method for resolving the "mass tort" dispute. Supported by co-counsel Charles F. Scott and William W. McNamara of Ogilvy Renault's Toronto office, who represented Canadian National Railway, Campion scored an important victory when the Divisional Court accepted his argument that courts could consider extra-judicial proposals when determining whether certification was the preferable procedure for resolving a multiparty dispute.
VIA proposed to pay $1,000 to each class member without proof of liability or quantum of damages. Plaintiffs unsatisfied with the $1,000 could take their money and attempt to negotiate a larger settlement. If negotiations were unsuccessful, the parties could proceed to binding arbitration. Certification proceedings would be stayed pending the completion of the alternative process. "Our proposal, if accepted by the certification judge, would allow VIA to keep control of the process and, perhaps more importantly, its relationship with its customers," Campion explains. "We planned this as a general strategy to avoid certification in proper cases in favour of a more commercially viable resolution."
The VIA initiative represents a business strategy that can be critical to ongoing business survival in the face of a class action. The Dow Corning meltdown aside, the American experience has shown that class actions are the stuff of public relations nightmares. For that reason, and because of the enormous cost involved in defending a large class action, defendants are much more inclined to pursue settlement following a successful certification. Fighting certification, therefore, has become the name of the game, particularly because defendants cannot appeal certification decisions without leave. In these all-important opening skirmishes, a misstep can become disasterous: witness the senior counsel at one of Toronto's major firms who chose to file a Statement of Defence before certification, inadvertently pleading facts that ultimately formed the basis of the common issue upon which the case was certified. "Looking at it from the perspective of corporate risk management," says Lowenstein, "class actions are turbochargers."
It is not hyperbole to say that the stakes are enormous. The largest proposed certification involves an estimated two million Canadian cigarette smokers in the class action against Imperial Tobacco, which is represented by Lyndon Barnes and Deborah Glendinning of Oslers. McCarthy Tétrault has 38 litigators in its National Class Action Practice Group, whose brochure outlines 21 different categories of class actions in which the firm has been involved-including Heintzman's defence of engineering giant SNC Lavalin in Bre-X and Paul Morrison's representation of pharmaceuticals manufacturer Degussa in vitamin price-fixing litigation and Clarica Life Insurance in premium offset class proceedings.
The battlefields range from products liability (breast implants, jaw implants, heart pacemakers, Hep-C), to securities and investment-related actions (Bre-X, YBM, Westar, Boledin, ERON Mortgage), to strike suits (Stern v. Imasco, Epstein v. First Marathon), pensions (Hydro-Québec, Singer, Schweyer v. Laidlaw), environmental law (Hollick v. Toronto); employment law (Webb v. K-Mart), consumer protection (Garland v. Consumers Gas), competition law (vitamin and citric acid price-fixing), insurance law (Sun Life and other "vanishing premiums" cases), franchising (Bulk Barn), medical malpractice (Anderson v. Wilson), education-related claims (Devry, McKay v. CDI) and intellectual property cases (Robertson v. Thomson Corp.) Even sports fans are getting in on the act. Early this year, Ontario Superior Court Justice Michel Charbonneau ruled that Ottawa Senators' booster Leonard Potechin could continue his $27.5 million class action lawsuit against holdout Alexei Yashin, the hockey club's captain and star centre. Potechin filed the suit on behalf of season-ticket holders after Yashin refused to report when the Senators would not give in to his demand for a contract extension or trade.
What is equally remarkable is how quickly the litigation landscape has changed. This is a plaintiffs' bar that has seized the opportunities presented like so much low-hanging fruit. The Ontario legislation is only seven years old (January, 1993) while the BC legislation has not even been on the books for five years (August 1, 1995). The Quebec class action legislation dates back to 1979, but most of the significant claims (apart from travel tour suits) have come in the last decade. The amounts involved are staggering by Canada's pre-class action legislation standards, when seven figure awards were just coming into their own and judgments or settlements in excess of $10 million were unusual. Now, as in the Hep-C litigation, "billions" roll off the tongues of plaintiffs' lawyers with ease, and the plaintiffs' fees alone can run into eight figures.
Ironically, in a number of proceedings the provincial governments have been hoist with their own petard while in one interesting case it is Ottawa, which has not enacted class action enabling legislation, that is on the receiving end. An Ontario court recently certified a taxpayers' class action case against the Canadian Customs and Revenue Agency (formerly Revenue Canada) on the basis of a controversial decision regarding transfer of substantial Bronfman Estate assets to the U.S. Soon after the Supreme Court of Canada decision in Re Eurig Estate that probate fees were an invalid direct tax, three law firms in Ontario and British Columbia (Gowling, Strathy & Henderson, Harris & Harris and Branch MacMaster) announced class actions seeking the return of up to $2 billion unlawfully collected by their provincial governments. The provinces responded by quickly passing legislation that purports to retroactively correct their mistake. A number of the plaintiffs have countered with a constitutional attack on the retroactive legislation.
As we would expect, high stakes attract top talent to the plaintiff's side of the table. In Quebec, the highly regarded Lauzon Bélanger firm in Montreal is currently managing 35 class actions in what, according to partner Yves Lauzon, is one of the largest class action practices in Canada. According to Lauzon, the firm represents in excess of one million Canadian class members. The caseload focuses on product liability cases (breast implant), vanishing premium lawsuits (twelve actions against various Canadian life insurers), environmental actions (Saguinay flood) and an excessive interest rate case against Zeller's department stores alleging unlawful exploitation of consumers under Quebec's Civil Code.
Also well known is Unterberg, Labelle, Lebeau & Morgan where François Lebeau and his colleagues have built a highly specialized practice. "In the past decade ... our courts have opened class litigation to all types of situations that meet the statute's conditions," Lebeau says. Consequently, Lebeau's firm now finds itself involved in class proceedings as disparate as shareholder actions, environmental proceedings, product liability cases, employment, insolvency law-related matters and investment-type litigation.
In Ontario, in addition to Harvey Strosberg, Q.C., at Sutts, Strosberg, Michael L. McGowan and Kirk M. Baert of McGowan & Associates, and Scott Ritchie, Q.C., Michael A. Eizenga, Michael J. Peerless and Charles M. Wright of London, Ontario's Siskind, Cromarty, Ivey & Dowler LLP lead the plaintiffs' bar. In Vancouver, J.J. Camp, Q.C., and David P. Church of Camp Church & Associates; David Klein of Klein, Lyons; and Darrell Roberts, Q.C., of Roberts & Baker, lead the pack. Rounding out the class action bar are practitioners who act for both plaintiffs and defendants, like Donald H. Jack of McDonald & Hayden, Bonnie Tough of Hodgson Tough Shields Desbrisay O'Donnell, and Malcolm Ruby of Gowlings, all of Toronto, as well as Vancouver-based Ward Branch of Branch MacMaster.
Interestingly, plaintiffs' counsel are now banding together to share substantive expertise as well as the financial risk of prosecuting class proceedings. McGowan & Associates, a three-lawyer class action specialist firm, has become involved in various high-profile cases by partnering its expertise with the substantive specialities of other boutiques. Most recently, Michael McGowan and Kirk Baert joined forces with David Sterns of Sotos, Associates, a Toronto franchising boutique, and convinced Ontario Superior Court Justice William Jenkins to certify the first franchisee class action in Canada, a decision now under appeal. London's Siskind Cromarty, whose class action experience includes the breast implant lawsuit, the Sun Life "vanishing premium" litigation and the Dalkon shield claims together with a host of employment-related cases, is also regularly involved with class action co-counsel. "We finance class actions entirely on our own," says Siskind's Michael Eizenga, "but on occasion we work with co-counsel-Quebec co-counsel in particular-when there is an inter-jurisdictional aspect to the litigation. Then, when appropriate, we work out shared financing arrangements with the out-of-province firms." Siskinds also seeks out "special relationships" with Ontario colleagues, relationships whose focus is not the sharing of costs. "It's a case of two firms having a special synergy allowing them to bring their unique internal strengths and expertise to bear on cases," Eizenga explains. "That's important because the sheer size of class action litigation frequently invokes areas of the law in which a mid-sized firm like ours does not have expertise. We don't look at other law firms as banks, but as people who can get involved in the work we do." Still, Eizenga concedes that sharing costs and resources can be an "important by-product" of a co-counsel arrangement, particularly when the defendants "have extraordinarily deep pockets."
The risks and the rewards for plaintiffs' counsel are enormous. In the U.S., the emphasis has been on the rewards, and so has the furor. Recent examples of US fee arrangements (all in US dollars) that have left commentator's slack-jawed are as follows:
. a US District Judge has approved $2.3 billion in fees for Texas lawyers whose services in tobacco litigation produced a $15.3 billion settlement for the state. Experts estimate the lawyers will have earned $92,000 hourly. The state is contesting the fees despite having signed a 15 percent contingency retainer;
. sixty-nine firms who expended $36.19 million in base fees for their services in an anti-trust class action against NASDAQ traders were awarded $143 million, a multiplier of five that amounted to 14 percent of the $1 billion settlement;
. attorneys representing the State of Minnesota and an insurer in a suit against the tobacco industry have settled their fees at $466 million, or 7.1 percent of a $6.6 billion settlement; and
. attorneys representing 36 states in a $206 billion tobacco industry settlement are expected to collect at least $10 billion in fees even though their clients are contesting contingency arrangements of up to 25 percent; and
. attorneys at the San Diego office of Milberg Weiss Bershad Hynes & Lerach LLP have made the $150 million class action settlement in Rubin v. Allstate Insurance conditional on judicial approval of their $7 million fee. In other words, if the presiding judge does not approve the legal fees, the settlement agreement becomes void. Milberg Weiss's fee in the four-year old case is based on 8,000 docketed hours averaging $336 hourly and a 2.6 multiplier bringing the hourly rate to $866.
No one disputes that the draughtsmen of Canada's class action legislation intended that "entrepreneurial plaintiffs' lawyers" motivated by court-supervised contingency fees would drive the proceedings. And, as a recent study by the U.S.-based Rand Institute for Civil Justice entitled Class Action Dilemmas: Pursuing Public Goals for Private Gain points out, even American class counsel's fees tend to be a "modest share of the negotiated settlements." Somewhat sarcastically, Vancouver's J.J. Camp, Q.C., one of the lawyers seeking a portion of the $52 million in fees claimed in the Hep-C litigation and a former President of the Canadian Bar Association, notes that "If the judges in this province determine class action fees on an hourly basis even with a premium, I, along with the vast majority of class action counsel, will retire from the business. None of us are interested in working by the hour because that approach does not compensate us for the risks we take." Camp should know. Court-approved contingency fees have long been in place in B.C., and the province's lawyers are well-versed in the frequently zero-sum financial realities of the contingency regime.
Still, one member of the defence bar, who did not wish to be named, maintains tongue-in-cheek that the fees in the Hep-C cases should go to Ontario Superior Court Justice Horace Krever, who spearheaded the inquiry into the Red Cross tainted Hep-C. "The plaintiffs' lawyers overall risk in the Hep-C case was not substantial," says the lawyer, who was not involved in the case, "and the outrageous sums they are demanding will simply be an unjustifiable windfall for people who happened to be in the right place at the right time." Comments one academic expert on class actions, who again spoke to Lexpert on condition of anonymity: "It is not a very healthy society where lawyers are making $10 million a year bringing class actions." Sour grapes?
But in Ontario, where contingency fees are available only in class actions, courts have already decided that lawyers may charge a percentage of settlements in calculating their contingency fees. In Gagné v. Silcorp, the Ontario Court of Appeal also approved "multipliers" as high as four times the hourly value of lawyers' work in assessing appropriate fees in class actions. The reasoning is simple, based on a risk vs. reward model business people can easily understand. Plaintiffs' counsel will simply not take on the risks and cash drain of unfunded cases without some assurance of a considerable premium in the event of success. It is the same reasoning that dictates higher interest rates on junk bonds than on government-backed financial instruments.
What troubles the defence bar most is not the notion of contingency fees in itself, but the idea that the possibility of "windfalls" will lead plaintiffs' lawyers to meritless litigation with eyes only on the huge fees attainable through "nuisance" lawsuits with little regard for the concerns of class members. "Class members typically play a small part in class action litigation. Their virtual absence may lead lawyers to questionable practices," the Rand study states. But Michael McGowan of McGowan & Associates says that percentage fees are an "inoculation" for meritless actions. "The percentage fee is becoming more acceptable to avoid situations where class members get a toaster and their lawyer gets $1 million," McGowan says. "A 25 per cent contingency fee would give lawyers one-quarter of the toasters, and have the advantage of tying the financial welfare of the lawyers to that of the class."
Certain members of the defence bar also criticize "creative third-party arrangements" by which lawyers finance class actions. But Strosberg, whose creativity in financing litigation is legend, is unapologetic. By way of explaining how his relatively small law firm managed to finance Nantais v. Telectronics, the heart pacemaker class action suit Strosberg settled for $24 million-and $6 million in legal fees and disbursements, Strosberg, while still the LSUC's Treasurer, says, "You can bet on a horse or you can bet on a lawyer." But the case was in the system for three years, during which time the firm carried over $1 million in disbursements alone. Strosberg convinced private investors to advance $350,000 to the representative plaintiff in Nantais, as he says, "substantially relieving the pressure on our firm." In return for a 20 per cent interest rate recoverable only as a first charge against the proceeds of a successful settlement or trial, the investors agreed to forego recourse against the representative plaintiff, class members or the law firm. Strosberg was careful to point out that the CPA mandates court approval of financing arrangements and that Ontario Court, General Division (now Superior Court) Justice John Brockenshire readily approved the financing arrangements.
Nevertheless, even judicial approval does not impress McCarthy Tétrault's Paul Morrison, who believes the third-party arrangements are "champertous and just dead wrong from the perspective of traditional legal principles." Strosberg's point is that traditional legal principles are evolving rapidly, and the procurement of third party loans to finance class actions removes a serious impediment regarding access to justice, allowing the participation of law firms who could not otherwise afford such litigation. And, he adds, borrowed money facilitates settlement. "Defendants' lawyers are being paid as they go, so unless you have staying power, they'll freeze you out and spend you into the ground in what amounts to a war of attrition." Lexpert's anonymous academic source sides with the plaintiffs on this point. "My personal view is that the defence bar in this country has not made out a case for plaintiffs' lawyers as charlatans, notwithstanding the recent rash of strike suits," the scholar says. Michael Cochrane, a Toronto lawyer who helped formulate the CPA, says that the legislation's draughtsman anticipated shared-cost arrangements, based on the American experience. "We just didn't think it would happen so fast," Cochrane adds.
Even defence counsel who acknowledge the responsibility displayed by the plaintiffs' bar are wary of abuses. Malcolm Ruby at Gowlings, who acts on both sides of the class action street, is concerned that bringing in outside investors "smacks of champerty and maintenance." "I can see why spreading risk is a good idea for a law firm," he says, "but I think the way to do it is to join with other law firms who have expertise you need. With outside investors, the litigation starts to look like a theatrical production." Ontario Superior Court Justice Ian Nordheimer, who defended the Nantais litigation while practising at Fraser Milner (then Fraser & Beatty), spoke to the issue before he was appointed to the Bench. At the time, he distinguished between investors who finance class actions on a "normal commercial basis the cost of which is then presented as part of the damage claim," and investors who are effectively sharing in the damages or legal fees. And professional participation, Nordheimer felt, should be confined to law firms actively engaged in the prosecution of the class action. "I would be concerned, for example, if law firms who merely deliver class members were financing the litigation," he says. The ultimate solution, Strosberg suggests, is for law societies to allow capital partners in law firms. Such partners would lend money directly to the firm's clients.
Self-serving litigation. Ultimately, the debate about class action excesses boils down to this issue. The fear, plainly put, is that entrepreneurial lawyers are the real plaintiffs in many American-style class actions, bringing actions solely for their settlement rewards and garnering rewards hugely disproportionate to the returns enjoyed by class members. But J.J. Camp says the fears are misplaced: "There would be some merit to this whining if we were seeing a lot of frivolous and vexatious class actions, but that's not happening." Besides, plaintiffs' lawyers disastrous first ventures into American-style "strike suits" suggest it's not likely to happen soon.
Vancouver's David Klein, with the assistance of Milberg Weiss in the United States, brought a class action attacking the National Bank of Canada's merger with First Marathon, one of Canada's last independent securities houses. At about the same time, Vancouver's Ward Branch and partner James MacMaster, working with American law firm Beattie & Osborn LLP, mounted an almost identical assault on the BAT p.l.c. purchase of Imasco Limited. Similarly, in what was basically a derivative claim on the class action strike suit model, Klein, again with assistance from Milberg Weiss, complained that the price achieved by the International Comfort Products Corporation (ICP) Board of Directors on the receiving of a takeover by Titan Acquisitions Ltd. (Titan) was inadequate. All three actions failed miserably.
In ICP, Oslers' Larry Lowenstein, Laura Fric and Allan Coleman, representing ICP, and Stikeman Elliott's David Byers and Adrian Lang, representing Titan, achieved a settlement dismissing the action without costs. In Stern v. Imasco, Oslers' Lyndon Barnes, Mark Gelowitz and Coleman, acting for Imasco and its management directors joined forces with Byers, Lang and Katherine Kay at Stikemans, representing BAT, and Joseph Groia, then of Heenan Blaikie and now with Groia & Company of Toronto, who represented Imasco's independent directors. The defendants' lawyers convinced Ontario Superior Court Justice Peter Cumming that the claim against BAT and the Directors of Imasco disclosed no cause of action. While allowing the plaintiff to proceed with a class action against Imasco, Justice Cumming dismissed the claims for injunctive relief and accelerated disclosure. Soon after the judgment's release, the case settled for payment of the plaintiff's disbursements.
At that point, it appears, Justice Cumming had seen quite enough of strike suits. When Klein subsequently asked Cumming to approve a settlement in Epstein v. First Marathon that would have paid $190,000 to his law firm and nothing to the class, Cumming refused, notwithstanding that all parties had consented to the resolution, including Dale Denis and Joel Farber of Toronto's Fogler, Rubinoff LLP, counsel to First Marathon. Justice Cumming then dismissed the class action on the basis that there was "to be no payment of any monies to Klein, Lyons, under the Settlement Agreement or otherwise, as a consequence of the dismissal of the action."
Judicial approval, Justice Cumming reasoned, was the only available tool for dealing with the potential for abuse in specific class proceedings. He defined "strike suit" as the "commencement and pursuit of a class proceeding where the merits of the claim are not apparent but the nature of the claim and targeted transaction is such that a sizeable settlement can be achieved with some degree of probability." In other words, the term suggested "a class proceeding that is properly regarded as an abuse of process." The American experience had shown that most settlements in such actions were not based on the merits. As such, they were disconcerting because they "severely and unacceptably interfere with standard corporate governance practices, creating unnecessary inefficiencies and bypassing existing regulatory devices." And, added Justice Cumming, "When fashioned into a sword by profit-motivated lawyers and shareholder-plaintiffs posing as class representatives, the class proceeding becomes a means of harassing corporate defendants. Such harassment constitutes an abuse of process and a violation of the very goals that the class-action mechanism is expected to further." The very vitality of the CPA, Cumming concluded, depended on the court's ability to deal appropriately with strike suits.
Not surprisingly, the defence bar is ecstatic over the decision. What is surprising is the lack of outcry against the decision from the plaintiffs' side, lending considerable credibility to John Campion's earlier noted assessment of the plaintiffs' bar as "responsible". Indeed, J.J. Camp applauds Justice Cummings' ruling in Epstein v. First Marathon: "If a plaintiff's lawyer behaves as did the lawyer in Epstein, he deserves to be treated in exactly the same way that Epstein's lawyer was treated, and that will be an enormous deterrent to other lawyers inclined to behave in the same way." In any event, Justice Cumming's decision would have delighted the authors of the Rand study, who wrote, "When judges fully exercise their oversight responsibilities, the quality of class action settlements and the social benefits of the litigation are improved." That judicial attitude is firmly in place in Canada, says Camp's partner David Church, and he warns lawyers "who think they can get in and out of class action cases quickly to be very, very careful."
Klein, a respected member of the BC and Ontario bars, says the Epstein decision took him by surprise as "Justice Cumming gave no prior indication that he had the types of concerns he expressed in his reasons." Klein maintains that his reputation for "seeing cases through regardless of what the personal costs may be" militates against Cumming's portrayal of the lawyer as motivated by self-interest. "I never take a case with the anticipation it will settle before trial," Klein says. "As any lawyer knows, sometimes a case just doesn't work out, and this was one that did not." In any event, Klein maintains, the ruling sends the wrong message to the investment community. "The signal that Cumming has sent to small shareholders is that Ontario, which comprises most of Canada's securities market, is not receptive to the enforcement of shareholder's remedies," Klein contends. "And that sends a chill over the markets, because it means if you're a small investor, you have few rights, and whatever rights you have, you cannot enforce."
Klein vigorously defends his conduct of the case, pointing out that he had obtained an expert assessment regarding the value of the shares involved in the transactions before he filed his suit. "The problem in Ontario is that there's little experience with contingency fees and a distaste for entrepreneurial lawyers," Klein says. "On the other hand, some of Bay Street's biggest corner offices house entrepreneurial lawyers who market, hire public relations firms, and have whole departments that prepare proposals. Somehow, the same entrepreneurial mentality isn't OK for smaller firms. The attitude is very different in British Columbia where many members of the bench worked in the contingency fee environment when they were practising."
Klein's attitude evokes sympathy from some quarters of the plaintiffs' bar. At least one prominent plaintiffs' counsel, speaking on condition of anonymity, has expressed the view that defence counsel welcome the enormous cash flow class actions, meritorious or not, have delivered to large firm coffers. "A few defence counsel have said they should be throwing me a party in recognition of what I've done for them by creating a huge new source of income from the hordes of lawyers they have working on these cases, lawyers billing at their highest hourly rates for every hour." Our counsel goes on to add: "How do I know they mean it? Easy. In most class actions, you just don't see the same rancor as in all the other cases. In fact, we plaintiff specialists have created the class action defence bar entirely on our own. And the defence counsel have become specialists because every time we sue, we can sue ten or twenty of their clients." Indeed, our not-for-attribution law professor calls class action litigation "a windfall for Bay Street." In other words, while the courts may make short shift of strike suits, class proceedings in general are here to stay. Which raises the question: in what direction are they heading?
The results of the Ontario strike suits combined with the general trend against large-scale negligent misrepresentation cases, as evidenced by the decision not to certify the brokers in Bre-X, suggest that securities class action proceedings will not develop along US lines. But, so far, the Supreme Court of Canada has not decided the issue. Yet, even if the Supreme Court does uphold the Ontario decisions, recent pr