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The case for cy-près distributions

Class Acts
|Written By Kirk Baert
The case for cy-près distributions

“Such a settlement and payments largely serve the important policy objective of general and specific deterrence of wrongful conduct through price-fixing. That is, the private class action litigation bar functions as a regulator in the public interest for public policy objectives.”

So wrote Ontario Superior Court Justice Peter Cumming in the 2002 decision approving the settlement in Alfresh Beverages Canada Corp. v. Hoechst AG. Alfresh was a price-fixing case in which the corporate plaintiff alleged a number of defendants conspired to fix the prices and allocate the market share of sorbates between 1979 and 1996. Damages were sought pursuant to s. 36 of the Competition Act. Under the terms of the settlement, the defendants agreed to pay $3,055,743 plus interest. The settlement funds were distributed, partially through a claims process and partially cy-près.

The decision in Alfresh is noteworthy, not only in that it was one of the earliest settlement approvals where cy-près distributions were proposed. It is also significant in light of Cumming’s express recognition of the role of the private class action bar in performing a “regulatory function,” effectively filling a void left by the absence of an appropriate or effective regulatory structure.

Notwithstanding this early recognition of the appropriateness of cy-près distributions in the context of class proceedings, academic discussion of the propriety and, at times, justifications underlying cy-près distributions in class proceedings are often viewed as suspect. Such discussions are framed with a narrow focus on one of the purposes underlying class proceedings legislation — access to justice — to the exclusion of other considerations, such as behaviour modification.

The goals of deterrence and behaviour modification stand on par with the goal of improving access to justice, and in certain types of cases, provide a full answer to concerns that a class proceeding has failed to compensate class members for their losses. This is particularly so where the remedy sought on behalf of the class is in the nature of a disgorgement remedy rather than compensation for the class.

While the court’s jurisdiction under the CPA to award settlement funds to a party or entity other than a class member has been, by analogy, commonly referred to as cy-près, it is important to note the jurisdiction for such payments flows directly from the language of the CPA and are not properly understood, true cy-près schemes as that term is commonly used by the courts of equity. As such, any analysis of the propriety of such proposed distributions must be analyzed through the lens of the CPA, and its underlying purposes.

The issue of cy-près distributions in the context of class proceedings was considered by the Ontario Law Reform Commission in its “Report on class actions.” Reviewing the experience of courts in the United States, as well as the historical role that the doctrine of cy-près had in equity, the committee recommended a cy-près provision be included, failing which the residue of the settlement would have to go back to the defendant.

After examining the experience in other jurisdictions, the OLRC stated: “For this reason, the commission is of the view that a provision should be adopted expressly authorizing forfeit distributions where an aggregate award cannot be applied for the immediate benefit of class members.”

The recommendations of the OLRC, at least with respect to cy-près distributions, were ultimately accepted, and resulted in the drafting of ss. 24 and 26 of the CPA. Section 24 permits the court to assess aggregate damages as against a defendant, and to award individual shares of such damages to class members on an average or proportional basis. Subsection 24(3) expressly requires the court to consider whether it would be “impractical or inefficient to identify the class members entitled to share in the award or to determine the exact shares that should be allocated to individual class members.”

Section 26(1) grants the court very broad discretion to direct distribution of awards; it is expressly authorized to direct “any means of distribution . . . that it considers appropriate.” Subsection 26(4) of the CPA also expressly grants the court the authority to make “cy-près” distributions.

Given the broad discretion granted to the court under ss. 24 and 26 to effect cy-près distributions, even where class members can be identified, there is nothing fundamentally objectionable about such distribution methods being used. The more appropriate question should be what considerations should govern the exercise of that discretion by the court not whether or not such distributions can be effected.

The OLRC concluded that “the justification for endorsing class actions aggregating individually recoverable and individually non-recoverable claims lies mainly in the ability of these types of class action to achieve either judicial economy or increased access to justice,” while behaviour modification was viewed as “an inevitable, albeit important, by-product of class actions.”

As other commentators have noted, cy-près distributions are generally approved, and can be reasonably justified, in two particular circumstances: (a) in circumstances where class members cannot be easily identified; or (b) where it would be uneconomical to effect a distribution to class members.

It is now common practice for settling parties to include a provision in settlement agreements providing for some form of cy-près distribution. In fact, according to one survey, at least 60 settlements have been approved in Canada involving fixed cy-près awards.

Perhaps the most common, and least controversial use of such awards involves the application of a remaining residue, following a claims process, to a specified charity. This type of cy-près provision was approved in cases such as Bilodeau v. Maple Leaf Foods Inc. The main purpose underlying such gift-over provisions is to prevent a reversion of funds to the defendants — clearly a laudable purpose.

Another, and at times more controversial, application involves a division of portions, some to class members, some to charities. This was the kind of award approved in Alfresh, and in Cassano v. Toronto-Dominion Bank.

Finally, and perhaps most controversially, in some cases, the courts have approved settlements where the entire corpus of a settlement fund has been applied cy-près. Such cases include the settlement in Currie v. McDonald’s Restaurants of Canada Ltd. and Walker v. Union Gas Ltd.

In those cases involving a residual cy-près provision, the rationale underlying the provision is clear and uncontroversial. The purpose is to prevent a reversion of funds to the defendant. Few would argue that such a provision contravenes the spirit and purpose of the CPA.

The greater issues arise where a portion, or all, of the settlement funds are distributed cy-près. The general justification raised by counsel in such cases, and approved by the courts, is that identification and payment to individual class members would be impracticable, overly costly, inefficient, or impossible. These considerations are fully aligned with the CPA, and notwithstanding issues related to the standard required of counsel in establishing such distributions are impossible, fully justifiable.

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