ABA Section of Business Law

By STEVEN F. ROSENHEK

C anada now has a little experience with class actions, a familiar American litigation tool. But they aren’t handled quite the same as they are in the United States.

Class action legislation is a relatively recent addition to the Canadian legal landscape (Ontario did not have legislation until 1992 and in British Columbia, a similar statute was enacted in 1995, while Quebec has had class action legislation since 1978). Given the growing number of lawsuits being brought and settled under its auspices, however, Canadian corporations can no longer afford to ignore its significance.

Indeed, based on the latest spate of high-profile cases and their staggering financial consequences, some would say that class actions have exploded onto the scene. With their strong media appeal and huge pay outs, cases dealing with breast implants, contaminated water, tainted blood, vanishing insurance premiums and securities fraud confirm that the class action lawsuit is here to stay.

This article will focus on the Ontario Class Proceedings Act (the Act), as it differs the most from American legislation and has been considered more frequently by the courts than its British Columbia counterpart. The Act was created after consideration of the American experience. It is generally accepted that the purpose of Ontario’s legislation was threefold:

• to improve access to the courts for plaintiffs who could not otherwise afford to sue;

• to resolve disputes in the most efficient manner possible; and

• to discourage misconduct.

This paper will focus on three areas of the law in Canada that vary significantly from that of the United States: how classes are certified, whether courts will award costs against a losing party, how lawyers’ fees are calculated.

One of the most significant differences between the American and the Ontario experiences relates to the certification of classes. This area of the law is rather complex, but the bottom line is that it is much easier to be certified as a class in Ontario than in the United States. That is crucial, since most actions that achieve certification have ultimately been settled. This fact, as much as any discussed below, explains the number of class actions being filed in Ontario.

In the United States, Rules 23(a) and (b) of the Federal Rules of Civil Procedure set out a number of prerequisites that must be established for a class to be certified as a class action. For a money-judgment action, one requirement is that "the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." (U.S. Rule 23(b)(3)).

That sets two very high hurdles. The first is that the common issues must predominate over the individual issues. Second, a class action must be superior to other options. As such, this criterion is often viewed as restrictive.

In Ontario, on the other hand, "it was not the intention of the legislature to incorporate a ‘predominate’ issue test into . . . the Act." (Abdool v. Anahiem Management Ltd . (1995), 31 C.P.C. (3d) 197 (Ont. Gen. Div.) at 218). The courts have repeatedly held that the fact that there are numerous individual issues to be settled is not determinative of a refusal to certify a class.

It is one of the factors to be considered, however, in determining whether a class action is the "preferable procedure for the resolution of common issues," one of the other requirements for certification in Ontario. Numerous individual issues may mean that a class action proceeding is not the most efficient or just manner in which to address the claims, since so much time, money and effort will be used to determine each individual issue. As such, the class may not be certified.

However, unlike the American requirement, a class action in Ontario need not be a superior option, merely preferable. That is recognized by the courts as a lower threshold. Ontario therefore has a relatively pro-plaintiff approach taken by judges in certifying classes, erring on the side of certification by reference to the three purposes of class actions, particularly the goal of permitting access to the courts.

This pro-plaintiff approach is also present in the determination of classes and sub-classes. Ontario courts will find an identifiable class where they can identify individuals with a potential claim against the defendant, define and identify those who would be bound by the result, and describe who is entitled to be notified of the action. Further, Ontario courts take a more "fluid" approach to certification than their U.S. counterparts, and even allow subclasses to be determined "as the need arises." (Bendall v. McGhan Medical Corp. (1993), 16 C.P.C. (3d) 156 (Ont. Gen. Div.) at 171.)

Finally, the issue of a certification of national classes is common in the United States, yet remains an issue in Canada. The legislation in Ontario and British Columbia offers two quite different approaches to the certification of national classes. In Ontario, class members must "opt-out" if they do not want to be bound by the class action. As such, national classes have been certified in Ontario on a number of occasions with little consideration of how a decision could bind individual members of the class from another province.

In British Columbia, non-B.C. residents must opt in to any class action proceeding in British Columbia, and they must form a sub-class within the class action proceeding. Theoretically, if class actions are began in B.C., Ontario and Quebec, a plaintiff could be a member of the class in all three provinces.

Clearly, double recovery should not be permitted. There does not appear, however, to be a mechanism for determining where a matter would proceed if two national classes are certified in two provinces, or to ensure that an individual plaintiff does not recover twice. That may need to be addressed in the near future to ensure that unsuccessful defendants do not reach into their wallets twice for individuals who are part of national class actions.

Costs are awarded to reimburse litigants for the expense of prosecuting or defending actions. Generally, costs include lawyers’ fees and expenses incurred by the parties, such as those for conducting examinations for discovery (depositions), making court appearances, submitting written materials and hiring expert witnesses.

In the United States, certain costs, as opposed to lawyers’ fees, can be recovered by the prevailing party under Rule 54 of the Federal Rules of Civil Procedure. Under that rule, it is within the trial court’s discretion to award costs, and creates a presumption for their recovery. However, the "American rule" on fees, unlike in Canada, generally does not entitle the prevailing party to compensation unless it is expressly authorized by statute. Nevertheless, a lawyer in a class action creating a common fund is entitled to fees from the fund created for the class, but the amount is subject to court approval.

In Ontario, however, the rule on costs is a discretionary one, in both regular lawsuits and class actions. Generally, the losing party is ordered to pay the winning party’s costs. This presents a dilemma for a representative plaintiff in a class action suit. If the plaintiff loses his or her class action, he or she may be ordered to pay the defendant’s costs. This is a major disincentive to act as a representative plaintiff since an individual’s potential loss could be large, while the individual pay out in the event of success may be quite small.

That has led to a number of interesting developments in Ontario. The first was the creation of the Class Proceedings Fund. This fund was set up by the Law Foundation of Ontario to address the concern that a representative plaintiff might not come forward unless there were some way to insulate him or her from a potentially large costs award. The fund does not cover lawyers’ fees but it does cover reasonable disbursements.

Most important, "the granting of funding to a plaintiff insulates the plaintiff from an adverse costs award." (Garland v. Consumers’ Gas Co. (1995), (Ont. Gen. Div.) 22 O.R. (3d) 767 at 770.) Applications for funding are made to the Ontario Class Proceedings Committee that considers factors such as the merits of the case, the proposed use of the funds and the fund-raising efforts made by the class representative. The fund is responsible for any adverse costs award if it has agreed to fund the plaintiff, even if that funding is nominal.

Another interesting development is that class action suits are beginning to be viewed as investments or money-making schemes. In a case involving defective pacemaker leads (Nantais v. Teletronics Proprietary (Canada) Ltd . (1996), 28 O.R. (3d) 523 (Ont. Gen. Div.) leave refused (1996), 28 O.R. (3d) 523n (Ont. C.A.)), the class counsel solicited investments from third parties to fund the proceeding, promising a 20 percent return if the suit were successful. The suit, like most class actions in Canada thus far, was settled after the class was certified. The investors received their 20 percent return.

Many view this practice as problematic at best, and disturbing at worst. In Smith v. Canadian Tire Acceptance Ltd . ((1995), 36 C.P.C. (3d) 175 (Ont. Gen. Div.) aff’d (1995) 40 C.P.C. (3d) 129 (Ont. C.A.)), using class actions as a money-making tool was characterized as a "scheme" by the judge, who ordered the "masterminds" of the investment to pay the defendant’s costs.

In Epstein v. First Marathon Inc. ([2000] O.J. No. 452 (Ont. Sup. Ct.)), the court spoke to the emergence of "strike suits" (class action lawsuits started without regard to the merits in an attempt to obtain a sizable settlement) in the United States, and refused to approve a settlement in an action that he felt was akin to "legalized blackmail" perpetrated by plaintiffs’ counsel.

Despite these rare instances of judicial disdain for some aspects of class action litigation, one of the avowed goals of class action legislation remains providing enhanced access to justice for those claimants who could otherwise not afford it. To that end, a court may order that costs be paid by the losing party of a motion for certification, without having to wait for the ultimate conclusion of the action. As one judge put it, "If the goal of enhanced access to justice is to be met, some account must be taken . . . of the financial burden of carrying on litigation against a wealthy and determined opponent." (Robertson v. The Thomson Corp. et al. (1999), 43 O.R. (3d) 389 (Ont. Gen. Div.)).

Finally, even if a plaintiff is unsuccessful, it is possible that the court will not award costs against him or her by virtue of a specific provision in the Act. As mentioned above, the Ontario Rules of Civil Procedure give discretion to a judge in determining whether to award costs in any case. The Ontario legislation specifically allows a judge to "consider whether the class proceeding was a test case, raised a novel point of law or involved a matter of public interest." (s. 31(1) of the Act). This provision could theoretically allow an award of costs to an unsuccessful plaintiff, and indeed, such attempts have been made, but in most cases of novelty or public interest, the court would likely make no award as to costs. Essentially the exercise of a judge’s discretion could have the effect of mirroring the American rule.

All of this is troubling news for businesses defending class action suits. While the general rule on costs favors the successful party, the discretion given to judges means that a successful lawsuit may not result in a costs award, and could even result in a costs award against a business that is sued unsuccessfully. Given the length and complexity of class action proceedings, and the resultant costs, it is not surprising that few class action suits have proceeded to trial in Ontario. It may be uneconomic to defend a lawsuit that, even if won, will result in no recovery of defense costs.

Closely related to costs is the issue of lawyers’ fees. These fees can, depending on the case, represent staggering amounts and an incentive to plaintiffs’ counsel. For example, the court in the tainted-blood case of Parsons v. Canadian Red Cross Society, [2000] O.J. No. 2374 (Ont. Sup. Ct.) awarded class counsel fees of $15 million and $5 million for the two groups of plaintiffs.

In the United States, it is very common for lawyers to take on lawsuits contingent on a successful outcome or settlement. In Ontario, however, contingency fees are forbidden by the Solicitors Act (R.S.O. 1990, c. S.15, s. 28). There was a recognition on the part of legislators that this might create problems, as plaintiffs might not be able to afford lawyers’ fees or the disbursements required for a class action proceeding.

As such, the Act creates an exception, and allows payment contingent on success in a variety of ways. Although percentage fees are still not generally permitted in Ontario, a contingency fee based on a percentage of a settlement is permitted under the Act. The Act also allows for lawyers’ fees to be increased by a multiplier. With a successful outcome, the court may allow the lawyer’s fees to be multiplied, as a recognition of the risk he or she took as well as the success achieved.

For instance, if the lawyer’s fees were $250,000 on a judgment of $10 million, the judge could allow a multiplier (say, 2.5) that would increase the lawyer’s fees from $250,000 to $625,000. The multipliers have ranged from 1 to 3. Finally, under the Act, a court may assess a lump sum amount for lawyers’ fees as it did in Parsons, supra. In that case, the lump sum of $15 million was the equivalent of a fair base fee with a multiplier of 3.3.

What is important to note is that if costs have been awarded to the winning plaintiff, only the base lawyers’ fees form part of the costs judgment. The increase to the fees based on percentage, multipliers or lump sum calculations should be paid from the award or settlement.

A decidedly pro-plaintiff approach has been taken thus far in respect of costs and certification issues in Ontario. Very few class actions have proceeded to trial. Defendants have a great deal to lose, and little to gain, since even if successful, they might not recover costs. It remains to be seen how the law will evolve in terms of substantive and procedural issues. It is clear, however, that class action legislation has created new opportunities for plaintiffs. Canadian corporations should brace themselves for larger and more numerous class actions in the future.

Rosenhek is chair of the class actions group at Macleod Dixon, Barristers and Solicitors, in Toronto. The author acknowledges the invaluable contribution of Erica J. Baron and Aleks Mladenovic, articling students at McCarthy Tétrault, Barristers and Solicitors, Toronto, the writer’s former firm. The author’s e-mail is: steven.rosenhek@tor.macleoddixon.com.

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