Larry Lowenstein, Laura Fric, Kevin O’Brien, Robert Carson
Dec 12, 2013
In a decision that will affect class proceedings throughout Canada, the Supreme Court of Canada today set out a new approach for the certification of class actions. Specifically, the Supreme Court changed the analysis used to determine whether a class proceeding will be the preferable procedure to provide access to justice to class members – for the first time engaging in an explicit cost-benefit analysis of class proceedings versus other avenues for recovery.
The issue of preferability in class proceedings has been a thorny one. That is particularly evident in the unique circumstances of this case, AIC Limited v. Fischer,1 and reflected in the fact that all four courts that considered this matter took quite different approaches to the preferability analysis.
About ten years ago, the Ontario Securities Commission (OSC) commenced regulatory proceedings against five mutual fund managers. The OSC alleged that they had failed to act in the public interest because they had not taken steps to curb an investment practice known as “market timing”.2 As part of the settlement of the regulatory proceedings, the fund managers agreed to pay $205.6 million to their investors.
After the OSC approved the settlement, investors commenced and sought certification of a proposed class proceeding against the same mutual fund managers, in respect of the same conduct, for additional compensation.
The pivotal issue for deciding whether to certify the case was whether a class proceeding was the preferable procedure, given that the OSC had already obtained compensation for the proposed class of investors. Ontario’s Class Proceedings Act requires that a class proceeding be the “preferable procedure” to resolve the dispute in order for the case to be certified and proceed as a class action. Whether a class action is “preferable” must be gauged in part by asking whether the goal of access to justice would be met by certifying the case.
In this case, the motions judge and lower appellate courts addressed this issue as follows:
An experienced class action judge, Justice Perell, denied certification on the basis that the OSC proceeding was the preferable procedure for resolving the class members’ claims because, among other reasons, it accomplished access to justice, behaviour modification and judicial economy. Investors received compensation quickly and did not have to pay legal fees or prove the defendants’ liability.
The first level of appellate court, the Ontario Divisional Court, allowed the appeal and certified the action, concluding that a class proceeding was preferable because it was the only viable method for investors to obtain full or substantially full recovery.
The Ontario Court of Appeal upheld certification but rejected the Divisional Court’s reasoning. The Court of Appeal held that the OSC proceeding did not provide procedural access to justice, particularly because: (a) the OSC pursued a regulatory objective, rather than a remedial function, and (b) the investors did not have the opportunity to participate in the OSC proceeding.
The Supreme Court’s Modification of the Preferable Procedure Analysis
The Supreme Court agreed with the other appellate courts that the case should be certified, but for different reasons. Notably, the Supreme Court engaged in an explicit cost-benefit analysis of a class proceeding versus other alternatives.
The Supreme Court held that the correct approach in analyzing whether a class proceeding is preferable and satisfies the access to justice goal requires the court to analyze both the procedural and substantive aspects of the competing proceedings.
The Court held that a class proceeding will serve the goals of access to justice if: (i) there are access to justice concerns that a class action could address; and (ii) these concerns remain even when alternative avenues of redress are considered. The Court stated that this inquiry may be informed by the following questions:
What are the barriers to access to justice?
What is the potential of a class proceeding to address the barriers?
What are the alternative proceeding(s) to a class proceeding?
To what extent can the alternative proceeding(s) address the barriers?
(The Court explained: “The question is whether the alternative [proceeding] has the potential to provide effective redress for the substance of the plaintiffs’ claims and to do so in a manner that affords suitable procedural rights.”)
How do the proceedings compare?
The Court also confirmed that, when a defendant identifies the existence of an alternative procedure, the burden remains on the plaintiff to establish that a class proceeding would be preferable to the alternative procedure.
On the facts of this case, the Court found that significant procedural access to justice concerns remained after the OSC proceeding because: (i) the OSC pursued a regulatory function; (ii) the OSC proceeding provided limited investor participation rights; and (iii) there was an absence of information about how the OSC assessed investor compensation.
The Court also found that, on the limited evidentiary record of a certification motion, the plaintiffs met the burden of establishing that substantive access to justice concerns remained because there was some basis in fact to support their claim that they had not been fully compensated by the OSC settlement. The Court relied on expert evidence adduced by the plaintiff in support of this point and found that there was no reason to believe that this additional recovery, if achieved, would be consumed by the costs of a class proceeding.
Preferable procedure has always been a contentious aspect of certification motions, and this decision will not change that. The new approach confirms that there may be a wide variety of procedural and substantive issues in dispute in analyzing preferability. Unlike the Court of Appeal’s approach, the Supreme Court’s approach opens the door to competing expert evidence relating to potential recoveries and the costs of class proceedings, and the potential costs of pursuing a class action as opposed to other forms of recovery. One could expect that costs to defendants and to the judicial system could be part of the future analysis in some cases, particularly where other less costly roads to recovery, including regulatory avenues, are available. It will be interesting to see how the new approach will be applied in future motions for certification.
1 2013 SCC 69.
2 The market timing in this case refers to a short-term investment technique in which investors try to exploit movements in the prices of the securities held by a mutual fund. Movements in the prices of these securities – for example, on foreign markets – may not be reflected in the unit price of the mutual fund until the unit price is re-calculated.
Authored by Larry Lowenstein, Laura Fric, Kevin O’Brien and Robert Carson