Class Actions: New Decisions Send a Strong Warning to Class Counsel on Fee Premiums

Feb 15, 2013

In two significant rulings in Ontario, the Courts have sent a strong signal to plaintiff class action firms that they will not be entitled to claim a fee premium following a successful settlement unless they can demonstrate that they achieved real results for class members.  

In Lavier v. MyTravel Canada Holidays Inc. the Ontario Court of Appeal soundly rejected a plaintiff’s request for an additional fee premium in light of the relatively low take-up by class members following a settlement. In Eidoo v. Infineon Technologies AG, the Ontario Superior Court also significantly reduced a request for a fee award on a substantial class settlement, on the grounds that the plaintiffs had not yet presented any plan for distributing the balance of the funds to class members.  

These separate rulings represent a welcome deterrent to future strategic claims, and they serve as an important reminder that class proceeding statutes were adopted to benefit class members and not only enterprising lawyers. In light of these rulings, class counsel should be reluctant to ask the Court for a fee premium unless and until they have secured a significant settlement and have developed a distribution plan that will benefit actual class members.   

In Lavier, the class consisted of about 4000 travellers who were allegedly exposed to a contagious disease while on vacation at resorts booked through MyTravel. The defendant, MyTravel, agreed to pay up to $2.25 million into a settlement fund and an additional $600,000 to class counsel for fees. Class members had to submit claims to the settlement fund to receive any payment. To the extent that not all of the $2.25 million fund was claimed or used for expenses, MyTravel agreed that class counsel could apply to court to claim additional fees from that surplus, though it reserved the right to oppose any such claim. Whatever residue remained in the fund would revert to MyTravel.  

Ultimately, the “take-up rate” by class members was just under 9%, resulting in only $333,000 from the $2.25 million settlement fund being paid to class members. Class counsel then sought approval of an additional $395,000 fee, which Justice Perell approved. MyTravel appealed. 

On February 14, 2013, the Court of Appeal held that the additional fee was “grossly disproportionate” to the results achieved for the class and the risks undertaken by class counsel. According to the Court of Appeal, the key consideration in the circumstances of the case to determining the proportionality of class counsel fees was the settlement fund take-up rate – which, in the Court’s view,  indicated the actual value delivered to the class members from the settlement – as opposed to the full value of the $2.25 million fund made available to class members. If class counsel were to have been awarded the addition $395,000, the total class counsel fee would have represented nearly three times the value of the settlement to the class members. The Court objected to what it characterized as a “manifestly disproportionate” result and emphasized that if the goal of class proceedings is to compensate class members who have been injured, then “courts should ensure it is they and not class counsel who are benefitting.”   

In the context of this case, the take-up rate was a crucial factor in determining the premium.  The Court held that the original $600,000 fee to class counsel (which was two times the recovery of the class) was fair and reasonable. 

At the same time, the Court of Appeal did emphasize that determining premiums is an “art and not a science” and that a number of factors can be considered in any case: no one factor will be determinative.  

Slightly different considerations were engaged in the Eidoo v. InfineonTechnologies AG decision. In that case, class counsel sought approval of significant fees without having proposed a scheme for the distribution of the settlement funds.  

Eidoo was one of several related antitrust class proceedings commenced in jurisdictions across Canada against foreign manufacturers of DRAM, a type of semiconductor memory found in many commonly-used electronic devices. After hard-fought certification hearings in Ontario and Quebec, the plaintiffs reached a settlement with one defendant in the amount of $5.75 million. Courts in Ontario, British Columbia and Quebec approved the settlement and awarded a 30% fee to Class Counsel, totalling $2,256,183. 

More recently, the plaintiffs reached a number of additional settlements with other defendants totalling roughly $23 million. Given that there still remained a number of non-settling defendants, class counsel determined that it was premature to implement a distribution plan at this time. However, class counsel nonetheless sought a substantial fee award in the amount of roughly $7 million, which represented 30% of the amount of the settlements. In a decision dated February 6, 2013, Justice Perell approved the settlements, but balked at class counsel’s fee request. Justice Perell ultimately awarded Class Counsel a fee of roughly $4.2 million, which was closer to 20%. 

While the 30% fee was not excessive in the circumstances per se, Justice Perell ruled that he could not find that such an amount was fair and reasonable because Class Counsel had not yet developed a plan for the distribution of the remaining funds to the class members. Instead, as they had done in respect of the first settlement, Class Counsel proposed to transfer the remaining settlement funds to a trust account for the benefit of the class. While Class Counsel advised the Court that they were keen to begin work on a distribution plan, Justice Perell held that this “trust us” approach to creating a plan was unsatisfactory, particularly given what were expected to be “enormous challenges to developing a fair distribution scheme” in light of the significant difficulty in identifying class members.  

While Justice Perell left open the possibility that, following further settlements or judgments in the proceedings, Class Counsel may ultimately be awarded 30% of the total amount recovered, his ruling stands as a clear warning to class counsel that they should be wary about seeking a fee premium in the absence of a concrete scheme to deliver value to class members.