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Court restricts unprecedented deal to fund heart implant case

Class action decision provides roadmap for third-party funding agreements
|Written By Anita Balakrishnan
Court restricts unprecedented deal to fund heart implant case
Margaret Waddell says the court provides a sober second look at third-party class.

A panel of judges at the Ontario Superior Court of Justice Divisional Court upheld the lower court’s set of conditions on a third-party funding class action agreement by Bentham IMF Capital Ltd., saying the agreement as it was currently written connoted that the representative plaintiffs “are working on behalf of Bentham.”

The decision bears on the funds available to alleged victims of 8,000 negligently designed cardiac defibrillator devices, since the “costs of mounting a products liability case such as this one area well beyond the ability to pay of most Canadians,” according to the decision, Houle v. St. Jude Medical Inc., 2018 ONSC 6352, released Oct. 25 by Justice Frederick Myers with Justices Anne Mullins and Harriet Sachs concurring.

The decision provides a “roadmap” for creating this kind of third-party funding agreement, and comes as “third-party litigation funding is a relatively recent and growing phenomenon in Canada,” wrote Myers.

Margaret Waddell, partner at Waddell Phillips Professional Corporation and one of the lawyers that represented the plaintiffs, says the decision clarified the way the court views the well-being of the class when it comes to third-party agreements.

“[Judges] are taking a tempered and conservative ... approach to looking at these agreements because they are still so new and they are just not comfortable with them as part of the norm of litigation at this stage,” says Waddell. “They weren’t prepared to, in broad strokes say, ‘Litigation agreements are always good for access to justice,’ which I had invited them to do — in a class action context, obviously. I think they made some important points about the essential role the court plays in being the sober second look at the agreement from the perspective of what’s in the interest of the class.”

Shirley Houle was implanted with a Fortify Assura ICD device manufactured by St. Jude in 2014, and later learned from the University Health Network, the Peterborough Regional Cardiac Device Clinic, and the Canadian Heart Rhythm Society that “the defibrillator might experience unexpected early battery depletion and ... might stop functioning within a few hours or days.” The Houles, according to the original 2017 decision that was being appealed, would have been “financially ruined” by the case.

The funding agreement for this proposed class action case arose when representative plaintiffs Shirley and Roland Houle were unable to fund the costs, disbursements, or adverse costs of the case, according to the decision. The Houles’ lawyer would only be paid if the plaintiffs won the case or settled — but were not able to cover adverse costs if the Houles lost the case, according to Myers.

The lower court said “this was a case in which third-party funding was necessary to provide access to justice.”

But at the core of the dispute was a funding agreement that “offers features that have never been seen before in any reported Canadian case.”

Under the proposal, Bentham would pay up to 50 per cent of the reasonable docketed time of the plaintiffs’ counsel, disbursements court-ordered costs assessed against the Houles, and any security for costs. If the Houles were successful, the agreement says Bentham gets 20 per cent if it is resolved within 18 months; 22.5 per cent of the proceeds if the matter is resolved between 18 months and 36 months, and 25 per cent of the proceeds if the matter takes longer than 36 months.

The lawyers would be paid 50 per cent of their fees “in real time,” with contingency fees of 10 per cent of the proceeds if the was resolved in 18 months, fees of 11.5 per cent if the case took 18 months to 36 months, and fees of 13 per cent after that.

The agreement requires the Houles to promise to follow reasonable legal advice, conduct the case efficiently, and to “to notify to Bentham of any event or circumstance that could reasonably be expected to give rise to a termination right.” Bentham could terminate the agreement if it determines the case would not be commercially viable, said the decision.

“The one nuance to the decision that was new and had not been articulated so clearly in the lower court, but I thought Justice Myers made very clear [was] that from the court’s perspective, the cost of the litigation funding is part and parcel of the fees they are paying in order to prosecute the case. Although it’s not a legal fee, it is a form of fee they have to pay in order to have the case go forward. So, the court is going to maintain a tight supervisory control over that to make sure that it’s not excessive. The message I took for it is that the court is going to apply the same kind of criteria as they do to class counsel fees even though its two separate and distinct issues,” says Waddell.

McCarthy Tétrault LLP lawyers Eric Block and Richard Lizius, who represented St. Jude Medical Inc., declined to comment. Patrick Flaherty of Chernos Flaherty Svonkin LLP, who represented the intervenor, was not able to provide comment before deadline.

David Sterns, who practises at Sotos LLP in Toronto, says the decision emphases that, even as the business models around class actions evolve, lawyers have to remain firmly in the driver’s seat of any litigation.

“In this particular case the judge found [Bentham] were kind of backseat drivers and that rubbed the judge the wrong way,” says Sterns. “He wanted some protections put in there for the class that would make it more of a traditional relationship between a lawyer and a client. I’ve never seen a ménage a trois in litigation and that’s kind of what the Bentham agreement was, so they have got to go back to the drawing board.”

The proposed agreement contrasts with the Class Proceedings Fund, which has been traditionally used to fund class actions since its establishment and covers adverse costs in return for 10 per cent of the proceeds, but does not pay any legal fees to the class counsel, the decision said.

When the agreement was before Ontario Superior Court Justice Paul Perell, he opted to only pre-approve 10 per cent recovery, leaving the rest of the recovery to the end of the case to treat Bentham in the same fashion as it would treat the Class Proceedings Fund.

Myers deferred to Perell, writing that the clauses “interfere with the lawyer and client relationship and with the Houles’ autonomy as the genuine plaintiff of the proposed class action,” and the covenants “would have an effective weapon to enforce its view about the conduct of the litigation regardless of whether its view is shared by the representative plaintiffs or their lawyers.”

“[Bentham] were asking for an unprecedented percentage of the recovery,” says Sterns. “There were a lot of provisions in there that give them a say, directly or indirectly…and that is the kind of thing that will raise a lot of red flags with judges.”

Sterns says as more cases are brought before the Class Proceedings Fund, the fund must be conservative in how it approves cases, which can be cumbersome, and sometimes lead to runaway windfalls since the 10 per cent share for the fund is fixed.

“Lawyers acting the best interest of their class have said, ‘Hmm, that’s not a great deal for our class, there are third parties that are willing to do it. They are not only willing to do it for less but they are willing to set a cap’,” says Sterns. “Both Justice Perrell and the divisional court were very mindful of the fact that these agreements can be beneficial to class members and lawyers bringing them…possibly it changes the business model that Bentham had at the beginning, but Bentham is just starting with Canada and I hope they will stick around and provide funding for years to come.”

Ranjan Agarwal, a partner at Bennett Jones LLP, who was not involved in the case, noted that an intervenor in the case, Nomos Capital Corp., asked the court to expressly limit the applicability of this decision to class actions, which indicates that at least one other funder out there is concerned that these rules are going to applicable elsewhere.

But, Agarwal says, the decision “shouldn’t stop creative funders and creative plaintiffs from coming up with other options, keeping in mind the directions given in the reasons.”

“I think Justice Myers, on behalf of the divisional court, took it upon himself to write, I think, comprehensive reasons in an effort to educate the bar and the bench on these type of agreements and where the law is.”