A big win for the class; not so much for class counsel

On April 4, the Federal Court of Canada approved the massive settlement of a class action in Manuge v. Canada, brought on behalf of disabled veterans of the Canadian Armed Forces. Since June 1976, the Federal Government had been deducting Pension Act disability payments from the amounts payable to veterans under their Service Income Security Insurance Plan LTD benefit plan. The loss of this income had a devastating effect on some class members of limited means and resulted in a substantial hardship to others.

Although the practice had been ongoing since 1976, it was not until 2007 that any proceeding was brought to challenge the way the federal government interpreted its obligations under the SISIP LTD plan. This is a strong testament to the beneficial effect class action legislation has in providing access to justice for the disadvantaged who, on their own, do not have the resources or fortitude to take on the colossal challenge and financial risk of asserting a claim against the government.

The plaintiff was successful in having the action certified as a class proceeding, despite a many-pronged defence to the certification motion. Typical of most hotly contested certification motions, particularly those where a substiantial amount is at stake and the issues are far-reaching, the certification decision was appealed. On appeal the decision of the motions judge was reversed. This could have been a bitter end to the claim of more than 4,500 disabled veterans but class counsel persevered, appealing to the Supreme Court of Canada, where the plaintiff ultimately prevailed.

In a strategically intelligent move, the parties proceeded with a motion to have the fundamental issue of how the terms of the SISIP LTD plan should be interpreted determined as a question of law. Federal Court Justice Robert Barnes concluded that the Crown was wrong to deduct pension benefits from the disabled veterans’ SISIP benefits:

Giving effect to the SISIP offset of Pension Act disability benefits wholly deprives disabled veterans of an important financial award intended to compensate for disabling injuries suffered in the service of Canadians. The SISIP offset effectively defeats the Parliamentary intent that is inherent in the Pension Act which is to provide modest financial solace to disabled CF members for their non-financial losses. . . . The practical consequence of the claimed offset is to substantially reduce or to extinguish the LTD coverage promised to members of the Class by the SISIP Policy with particularly harsh effect on the most seriously disabled CF members who have been released from active service. That is an outcome that could not reasonably have been intended and I reject it unreserved.

Once the legal issue of interpretation of the pension contract had been resolved, it was obvious to the parties the plaintiff would prevail at the common issues trial, and negotiations to settle ensued. Here again, class counsel demonstrated their mettle. The settlement they achieved provides benefits not just to the original class of about 4,500 veterans,; but to an expanded class of approximately 7,500 vets and their affected family members. It includes full compensation for the improper deductions back to 1976, despite a strong limitations period argument in favour of the Crown for most of the extended class period.

The total present value of the settlement is estimated at more than $887 million, likely the fourth highest settlement in Canadian class actions. Furthermore, the Crown has agreed to stop the practice of taking similar offsets from other federal financial support programs. Hence, this case demonstrates in spades the positive effect class action litigation can achieve.

Here, some of Canada’s most vulnerable and deserving citizens gained access to the courts to challenge a long-standing and unlawful practice carried out by the Crown that was causing very real loss to the class. The claims were resolved in favour of not just the original class, but a much expanded class, all of whom had been treated in the same way. And the Crown has modified its practices, voluntarily stopping taking similar deductions in comparable circumstances. Judicial economy, access to justice, and behaviour modification have all been successfully achieved.

Class counsel deserve to be well compensated for this outcome. The success achieved as a result of the efforts of class counsel should be the primary factor against which the fees are measured, with due regard being had as well to all the other well-known factors enumerated in Parsons v. Canadian Red Cross Society, including the terms of the retainer agreement with the representative plaintiff, the risks assumed, the time spent, the complexity of the case, and the character and importance of the litigation.

In Manuge, Barnes was highly laudatory of class counsel and the results achieved. He recognized:

•    the skillful and tenacious advocacy of class counsel;
•    the high quality of the legal work performed by class counsel led to the favourable liability outcome;
•    the terms of the settlement are equally impressive;
•    the solutions adopted by the parties to resolve the class’ entitlement to general damages, and the inclusion of surviving spouses and dependent children were novel and creative;
•    class counsel spent more than 8,500 hours, worth over $3.2 million, and will spend a great deal more time in completing the settlement given the large and highly engaged class; and,
•    the litigation was extremely important to the class.

Barnes acknowledged, “These are results that would not have been reasonably contemplated by anyone at the outset of this litigation.”

The risks class counsel undertook were enormous. This was not a case of “low hanging fruit.” The outcome was far from certain. What was certain is the litigation would be hotly contested and ongoing for many years. If the motion for determination of a legal issue had not been successful, the case would have been lost. If there had been no such motion, then the litigation would have been very complex and involve massive document production and pretrial maneuvering.

Barnes noted: “Given the Defendant’s adversarial approach to the motion to certify, counsel would have assumed that they were exposing themselves to a financial risk measured in the potential loss of professional time and disbursements of probably tens of millions of dollars.”

However, at this point, after properly enumerating the factors to take into consideration, the court misdirected itself regarding the assessment of what a reasonable fee should be in these circumstances.

Barnes’ decision was driven by his conclusion the effect of deducting legal fees from the settlement fund would negatively impact the recovery to the class. This is, of course, self-evident. Every litigant is deprived of some amount of their recovery in order to pay counsel for prosecuting the action on their behalf, unless the lawyer has agreed to do it pro bono.

In Manuge, counsel entered into a contingency fee agreement, agreeing to assume the risks of the litigation and all ongoing expenses, and they prosecuted the claim to an exceptional result. They expected and deserved to be richly rewarded for their efforts when the claim was successfully resolved.

In the ordinary course, a contingency fee in the range of 20 to 33 per cent is not unusual. The fee is not driven by a simple hours-times-fee multiple, and it is intended to have the possible result of a substantial premium. The contingency premium is an important element to the class action regime. Absent the potential for a substantial fee, there would be little incentive for counsel to take on difficult cases. The risk of losing would be too great.

Class actions are sometimes lost. Unless counsel can look to the possibility of making up the loss through the premiums gained in a winning case, they simply would not assume the risk, certainly not where the cases are highly complex, aggressively defended, and drawn out. Why work without payment for years, while expending tens of thousands of dollars, or more, on the costs of the litigation, unless the return justifies the efforts?

Barnes failed to give proper weight to the contingency agreement for the wrong reason. He said at the time it was made, the parties had no idea how the litigation would unfold. Which is true, and is exactly the point. The contingency agreement should never be looked at through the lens of the end result, but from what the parties’ realistic expectations were at the outset. A contingency agreement should reward counsel who are able to innovatively bring a case to swift and effective conclusion — which is better for both the class and the administration of justice.

In this case, counsel recognized the percentage fee called for in their contingency agreement would have been unacceptably high, given the size of the settlement and the amount of work they expended to achieve it. They fairly sought a fee at a much reduced percentage: only 7.5 per cent of the gross value of the settlement. Without applying the percentage to the settlement amount, but only looking at a contingency fee of 7.5 per cent, one would be hard-pressed to say it was unreasonable under any circumstances.

The judge, however, disagreed. He said: “Cases that generate a recovery of a few million dollars may well justify a 25 per cent to 30 per cent costs award. It is more difficult to support such an approach where the award is in the hundreds of millions of dollars.”

He concluded a fee of approximately four per cent of gross recovery was appropriate. With the greatest of respect, in my view this decision was misdirected, internally inconsistent, and wrong. If it is appropriate for class counsel to be paid 25 to 30 per cent in a case where the risks are similar, the time expended is similar, and the results are much smaller, there is no justification for a substantially reduced percentage fee when the recovery is greater.  Each class member’s recovery is still reduced by the same percentage, and all other factors are static as well.

The parties agreed on a reasonable percentage at the outset and at the end. In fact, at the settlement approval hearing, many class members confirmed that they agreed the fee sought was reasonable.

It would appear the judge simply found that the fee sought was too big to chew. In my view, that is not an appropriate consideration. If, on review of the factors in Parsons, the percentage sought appears reasonable, then there is no reason not to apply it to the result, no matter how large or small the total may be.

In Manuge, the risks assumed were substantial and the results exceptional. Class counsel should have been rewarded accordingly. If fees are reduced arbitrarily simply because they are large, this could have a deleterious effect on future class actions. The incentive to take difficult cases advocating for the systemically disadvantaged would be negatively impacted. There are few enough counsel prepared to undertake the risks of these cases, let’s not discount the reward incentives that sustain the system just because in the exceptional case the fee seems large. The exceptional case deserves an exceptional reward.

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