Pet Valu doesn’t signal open season to eviscerate class actions

I’m sure there is nothing that warms the bottom of the heart of class action defendants more than seeing a mass exodus of potential class members from the proceeding following certification. Fewer class members mean reduced exposure to the payment of damages. And if enough people opt out, it could effectively render the class proceeding economically unviable from the perspective of class counsel. That, in turn, could lead to an early and lower settlement, or in an extreme case, a discontinuance of the proceeding or successful motion to decertify.

In 1250264 Ontario Inc. v. Pet Valu Canada Inc., a franchise class action, death of the action from a million cuts is exactly what a group of franchisees hoped to achieve. The “dissident” franchisees did not want to participate in the class action. They were anxious to prove their loyalty to the franchisor, upon whom they are dependent for their livelihood.

But these franchisees did much more than simply exercising their own right to opt out of the class action. In the last 10 days of the opt-out period, the dissidents organized a “systematic and highly effective campaign . . . to deal a death blow to the class action by persuading other franchisees to opt out,” according to the decision. Patently the dissidents’ intent was to do serious harm to the viability of the class action. Pressing other franchisees to opt out of the proceeding was entirely irrelevant to the dissident’s direct business relationship with the franchisor; but as the motions judge fairly concluded, they did so to ingratiate themselves with management.

In my view, once the dissidents had opted out of the class action, they were no longer parties to the proceeding and their conduct, which was highly coercive, was tantamount to officious intermeddling in a proceeding to which they were no longer party. This is particularly troubling in this case, which had been highly contentious between the parties from the outset.

Because of the heated atmosphere, the issue of communications with the class during the opt-out period had been expressly addressed by the certification judge, who ruled that no communications from the parties were to be made to the class without court approval (exclusive of day-to-day operational communications between franchisor and franchisees). Justice George Strathy explained:

“The provision limiting communications before the end of the opt-out period to those approved by the court reflected the concern that the integrity of the opt-out process would be impaired if class members were subjected to unfair, misleading or oppressive communications by either party. That concern exists in all class proceedings, but it exists in particular in cases such as this one, where the class members have an ongoing relationship with the defendant. It also reflected the fact that the atmosphere had been heated and there was some risk that the fairness of the opt-out process would be undermined if the court did not exercise careful control.”

Not surprisingly, the plaintiff took exception to the dissident’s conduct, particularly in the face of the court’s direction that had been aimed at silencing coercive communications during the opt-out period. The plaintiff brought a motion to set aside the opt outs delivered after the dissidents began their targeted campaign.

The motions judge found the opt-out campaign had spread misinformation and was coercive, contrary to the fundamental principle that class members “ought to be free to exercise their right to participate in or abstain from the class action on an informed, voluntary basis, free from undue influence,” as noted in 2002’s 1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada Ltd.

The motions judge recognized the facts before him were exceptional and he thoughtfully crafted a remedy to the case. The opt outs delivered after the campaign began were declared void, and those putative opt outs would be given the opportunity to reconsider their choice after a pending summary judgment motion was decided.

The defendant appealed. It was, not surprisingly, pleased with the results of the dissidents’ campaign, which had resulted in well over half of the current franchisees excluding themselves from the action. Chief Justice Warren Winkler allowed the appeal, finding the facts did not support the conclusions reached by the motions judge.

While the appeal was allowed based upon the Court of Appeal’s starkly different interpretation of the evidence before the court (it found the conduct was not coercive), the message from that court was consistent with the message of the trial judge. Particularly, the courts will be highly vigilant to protect the integrity of the class proceeding, including the opt-out process. Winkler reiterated the following key points:

•    class members have the right to make a fully informed and voluntary decision about whether to remain as a member of the class or to opt out;
•    class members should be free to exercise that decision on an informed, voluntary basis, free from undue influence;
•    where class members engage in conduct that amounts to misinformation, threats, intimidation, coercion, or that reveals some other improper purpose in an attempt to undermine the opt-out process, the court may intervene to restrain and remediate the effect of such conduct;
•    where the parties become aware that class members or former class members are engaging in tactics that may demand judicial scrutiny during the opt-out period, the representative plaintiff should promptly seek the intervention of the supervising judge, and if the defendant does nothing, it does so at its own risk.

While Winkler did not agree with the motion judge’s findings on the facts he did deliver a stern warning against the type of conduct that occurred in this case:

“I think it is important to emphasize that the [Class Proceedings Act] does not contemplate the politicization of the opt-out process. . . . Within the statutory framework of the CPA, there is no legitimate purpose that can be achieved by politicizing the opt-out process. As explained in A&P, at para. 32, certification motions are not determined through a referendum of the class members. Nor is the viability of the class action dependent on majority support. Just as the percentage of support amongst class members is not an element of certification, opting out cannot stop a class action. The number of opt-outs does not in itself provide a basis for decertifying a class action.”

The mere fact the Pet Valu appeal was allowed should not be taken as a signal to defendants or their supporters among putative class members or opt outs that they will now have a freer reign in encouraging class members to exclude themselves from a certified proceeding. The Court of Appeal has confirmed their conduct will continue to be subjected to careful scrutiny and, in appropriate circumstances, the court will not hesitate to take action to maintain the integrity of its process.

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