The Supreme Court of Canada is normally the end of the road for contentious legal issues, regardless of which area of the law is being argued. In its long-awaited decision last December in a trilogy of secondary markets class action appeals, however, lawyers who acted on the plaintiff side and those on the defendant side of these actions were left wanting when it came to the big picture in this area.
The court issued three judgments in the appeals, which were all heard together, involving alleged misrepresentations several years earlier by CIBC, IMAX, and Celestica. The decisions focused primarily on interpretations of conflicting provisions of the Class Proceedings Act and Securities Act in Ontario related to the limitations period — which are effectively no longer in dispute because of amendments enacted in 2014 by the provincial government.
As well, the number of judgments issued in the appeal highlighted a split on the broad policy goals behind the statutes that govern securities-based class actions. While there was unanimity on the legal test to be granted leave to proceed with a secondary markets class action, the size of this hurdle was not precisely defined.
As a result, it is going to be up to the trial courts across the country to provide more guidance as to what “reasonable possibility” of success means when plaintiffs are asking for leave or authorization to go ahead with a securities-based class action against a publicly traded company.
“The larger issue is what happens with the leave test,” says Margaret Waddell, a partner at Paliare Roland Rosenberg Rothstein LLP in Toronto. “Is it a much more robust test than we previously thought?” asks Waddell, who represented an investors’ rights group last year as an intervener at the Supreme Court in the CIBC/IMAX/Celestica appeals.
The leave hearings “are going to be more intense and more complicated,” says Jasminka Kalajdzic, a law professor at the University of Windsor and a co-author of the text book The Law of Class Actions in Canada. “Judges are going to want plaintiffs’ counsel to have done their due diligence” at the leave stage, she suggests.
The hearings are also likely to result in judges performing “very fact-specific inquiries” before deciding whether to grant leave, says Linda Fuerst, a senior partner at Norton Rose Fulbright LLP in Toronto.
These types of hearings and the extent of the so-called “gatekeeper role” for judges presiding over the motions stems from provincial securities legislation enacted across the country over the past decade. The statutes, which all have very similar language, were designed to provide an opportunity for investors to sue issuers, directors, and officers of public companies who made misrepresentations or failed disclosure obligations. The potential class actions were another form of market regulation. At the same time, the statutes include a screening mechanism to try to prevent American-style “strike suits” where the goal is to have defendants settle quickly to avoid the cost of litigation.
The mechanism kicks in at a leave or authorization hearing, before a Superior Court level judge in Canada. In Ontario, for example, the Securities Act states that the court must be satisfied that “there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff,” as one of the conditions for granting leave.
In the proposed CIBC action, Justice George Strathy (who has since been appointed chief justice of Ontario) ruled in 2012 after an eight-day leave hearing that given the complexity of this litigation it would be unfair to engage in a “fairly calibrated weighing process” at this stage. Having considered all the evidence, Strathy said a judge should simply ask if the plaintiffs’ case is so weak or so successfully rebutted it has no reasonable possibility of success.
(Strathy did not grant CIBC leave as a result of the limitations period provision — a decision that was ultimately overturned by the Supreme Court of Canada. Since that time, the Ontario government changed the Securities Act to state that a notice of motion is all that must be filed within three years under the statute, rather than being granted leave within that period, for an action to be permitted to continue.)
The Ontario Court of Appeal agreed with Strathy’s interpretation of the test, but in April 2015, the Supreme Court ruled on the issue in Theratechnologies Inc. v. 121851 Canada Inc. The proposed class action involved a publicly traded pharmaceutical company that had its share price drop significantly after a public release by the U.S. Food and Drug Administration.
The Supreme Court overturned the decision of the Quebec Court of Appeal and found that the plaintiff did not meet the test to be granted authorization to proceed with the class action.
Justice Rosalie Abella, in writing for the court, stated that a reasonable possibility of success is a higher standard than for a normal class action to be certified. The threshold is “more than a speed bump,” stated Abella, in reference to a prior Ontario Superior Court decision on the issue. “The courts must undertake a reasoned consideration of the evidence to ensure that the action has some merit,” she said, to ensure that the “robust deterrent screening mechanism” prevents litigation without merit from being certified.
The leave hearings should not be “a mini-trial,” explained Abella.
When the decision in the CIBC and the companion cases was issued several months later, the rulings of Justice Suzanne Côté and Justice Andromache Karakatsanis both agreed that Theratechnologies explained the threshold for what plaintiffs must show — a plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim.
The first appellate court to apply the test since the SCC ruling in CIBC was the Ontario Court of Appeal earlier this year, in dismissing a leave application in Goldsmith v. National Bank of Canada [see sidebar: National Bank]. Even still, there are a number of different interpretations about the exact meaning of the test and what kind of evidence is going to be necessary to grant leave.
Laura Cooper, a partner at Fasken Martineau DuMoulin LLP in Toronto, describes the recent SCC decisions as “promising” for the defence side of securities-based class actions. “It is very important that the market is not overwhelmed by cases that should not go forward,” she says. “I think it is often going to be difficult to defeat leave, but I believe we will see it [the test] refined through subsequent decisions,” says Cooper, who is co-chairwoman of the firm’s Class Actions Practice Group.
The evidentiary threshold is still relatively low, says Kalajdzic. “It is not as high a standard as defendants would like to have seen,” she says.
For her part, Waddell believes the test will be applied more strictly and is less plaintiff-friendly. Plaintiffs are going to have to show it is “more likely than not” there was an alleged misrepresentation. She also notes that since defendants are not required to provide an evidentiary record at this stage, a plaintiff may not have more than the information disclosed in a company’s public filings and the hope of finding a whistleblower to put forward its case.
Where there is agreement by lawyers on all sides is that the leave motions will be very fact specific and of the importance of a thorough investigation early on in the litigation. “There is a lot of work to be done upfront. You have to do a very early merits-based investigation,” says Cooper, who expects plaintiffs to be making the same efforts before a leave hearing.
Despite the caution by the SCC in Theratechnologies, many of these leave hearings may end up appearing a lot more like a “mini-trial” depending on the extent of the defence’s evidentiary record.
Vincent de l’Étoile, a partner in the litigation group at Langlois LLP in Montreal, says he believes it is usually a good idea for a defendant to put forward a record at the time of the certification motion. “It is always a tough call. From the client’s perspective, though, they have a shot at having a claim dismissed at a very early stage,” says de l’Étoile. “Nearly everyone wants to take that shot.”
For a publicly traded company to succeed at the leave motion stage, it will in most cases be necessary to file a defence, says Fuerst, whose litigation practice has a focus on securities and class action matters.
However, this could also disclose the nature of the defence, early in the litigation, she notes. “If you file an affidavit, you are exposing yourself to cross-examination. That is a risk,” she says.
The size of the company may also impact the decision on how vigorously to challenge the lawsuit at the leave stage, says de l’Étoile. More established corporations may have the resources to fight a costly legal battle at every stage, in comparison to startups and other smaller publicly traded entities, he says. The impact on a company’s reputation is another consideration as well as the cost of defending an action.
“With the Internet and social media, people are much more aware” of a public company’s alleged wrongdoings, says de l’Étoile.
In the original CIBC leaving hearing before Strathy, there were a total of seven expert witnesses representing the plaintiffs and the bank, including senior members of the financial services industry and a former chair of the Ontario Securities Commission. That litigation involves allegations that the bank failed to disclose more than $10 billion in exposure to the U.S. subprime market in 2007, so it is a higher stakes case than most. Expert evidence, though, is likely to be part of most class action litigation, even at the leave stage.
While judges are unlikely to make the decision based on a “battle of the experts” in securities cases, it is expected that plaintiffs will continue to file expert evidence and the defence will respond with its own, says Cooper.
An effective critique of the findings of the plaintiffs’ expert evidence at the leave stage may be sufficient on its own to have a claim dismissed, points out Fuerst. She refers to another decision in 2012 by Strathy in Western Coal, where he was very critical of the expert put forward by the plaintiff and did not certify the class action.
Fuerst stresses again that the extent of the evidentiary record by the defence depends each time on the specific fact scenario. “If it is a close call [on leave], you may lose and expose yourself at the early stages of the litigation,” she says.
Another option, says Cooper, is to concede certification, yet only on certain issues. “There could be a negotiated order to put forward a smaller case, to try to reduce the exposure or the damage. I do not think this is going to be the normal course of action,” Cooper says.
By a narrow margin, the SCC permitted the CIBC class action to go ahead as well as the IMAX action. The claim against Celestica was dismissed. The CIBC case is expected to go to trial in 2017 and a settlement was approved early this year in the IMAX proceeding.
All three rulings focused primarily on the limitations period interpretation, which affected the three class actions before the court and other ones still in the system before the Ontario legislative amendments.
Chief Justice Beverly McLachlin and Justice Marshall Rothstein concurred with Justice Côté. Justice Thomas Cromwell wrote his own decision, concurring with much of what was said by Justice Côté, but he voted in favour of permitting the CIBC action to go ahead, based on a special circumstances doctrine.
Justices Michael Moldaver and Clément Gascon concurred with Justice Karakatsanis.
While the judgments may have mostly been about a technical interpretation of a conflict between statutes, the broader policy comments on class actions, specifically in the securities context, suggested significant differences of opinion.
“It does not appear there is a unanimous policy view,” says Fuerst, which may be why the decision was fairly narrow in scope.
Côté was a Montreal-based commercial litigator before she was appointed directly to the SCC in 2014. In finding that all three actions were time-barred as a result of the limitations period, Côté outlined her interpretation of the Ontario Securities Act and the provisions related to liability and limitations periods.
“The interests of potential plaintiffs and defendants and of affected long-term shareholders have been weighed conscientiously and deliberately in light of a desired precise balance between deterrence and compensation,” wrote Côté. Policy concerns surrounding the reasons for class action proceedings should not override the “plain meaning” of the Ontario legislature, she added.
The judgment by Karakatsanis, a former Ontario Court of Appeal judge and senior civil servant in the province, concluded that none of the actions was statute-barred. As a result, she did not address doctrines related to the jurisdiction of motion judges to permit actions to go ahead even if the limitations period has ended. “However, I should not be taken to agree with either the analysis or conclusions of Côté J. on these issues,” wrote Karkatsanis in the final sentence of her judgment.
As well, she had a very different interpretation of how to balance the class proceeding and securities statutes. The decision by Côté was too restrictive and did not accord with the purpose of either statute, stated Karakatsanis. “My colleague’s interpretation effectively bars Part XXIII.1 from fulfilling either of its goals; it can neither facilitate access to justice for investors nor deter corporate misconduct,” she wrote.
Waddell says that after the decision was released she was struck by the contrasting interpretations. “One of the most interesting things is there are two very different policy analyses. There are completely different views of the purposes of the legislation. There was room for the court to mine a whole raft of issues if they wanted to. Clearly, they could not reach a consensus,” says Waddell.
Click here for timeline Green v. CIBC / Silver v. IMAX / Trustees of the Millwright Regional Council v. Celestica
Goldsmith v. National Bank of Canada
The first appellate level decision to interpret the threshold for a plaintiff to meet to be granted leave in a secondary market class action since the Supreme Court decision in Green was issued by the Ontario Court of Appeal earlier this year.
The plaintiff was appealing a Superior Court decision that declined leave in a proposed action against the National Bank of Canada. The bank was alleged to have been liable for misrepresentations by an energy company in its function as a “promoter” for a public offering by the company. The motion judge concluded that there was no reasonable possibility of success because the plaintiff did not show that the bank’s involvement with the company met the definition of a promoter within the Ontario Securities Act.
In upholding the decision of the motion judge, the Court of Appeal addressed the test for leave, and in citing the Supreme Court, stressed that the bar is higher than the threshold for authorizing a regular class action. “Therefore the threshold applied on a motion seeking leave under [the Securities Act] is more stringent than that generally applied on interlocutory review, consistent with the objective of screening out unmeritorious claims at an early stage,” wrote Justice Gladys Pardu.
Scrutiny by the motion judge of the evidence put forward by the plaintiff in the leave hearing was appropriate, the Court of Appeal said. “Applying that scrutiny is necessary to give effect to the purpose of the screening mechanism,” she wrote, with Justices Karen Weiler and Mary Lou Benotto concurring.
— Shannon Kari