Risks of certifying a global class action

A recent Ontario Superior Court decision amended the class definition of a certified Canadian class proceeding to carve out the settled claims of a parallel U.S. class action. This was done in the face of vehement arguments from Canadian class counsel that the U.S. settlement was inadequate and improvident. This decision provides a powerful demonstration of the risks associated with litigating a class action on behalf of a global class where there are parallel proceedings in a foreign jurisdiction. As a result of the amendment to the class definition, the Canadian class was reduced by 85 per cent.

In 2006, eight lawsuits were filed in the United States against IMAX, alleging misrepresentations and omissions regarding revenue recognition. These proceedings were consolidated into a single action. The U.S. plaintiffs had originally sought to certify a global class on behalf of all purchasers of IMAX shares, regardless of where the shares were purchased, but the release of the U.S. Supreme Court’s decision in Morrison v. National Australian Bank Ltd. precluded them from certifying on behalf of purchasers on foreign exchanges. As a result, the U.S. class was limited to purchasers on the NASDAQ, an American stock exchange.

One lawsuit was commenced in Ontario, based on facts that were substantially identical to the U.S. actions. In contrast to the U.S. claim, the Ontario action, Silver v. Imax, was certified on behalf of a global class of purchasers who acquired IMAX securities on both the Toronto Stock Exchange and the NASDAQ. As a result, there was significant overlap between the Ontario and the U.S. class definition.

The Ontario class action proceeded much more rapidly than the U.S. proceeding. However, unbeknownst to Ontario class counsel, a round of negotiations between U.S. counsel and the defendants took place without inviting the participation of Ontario class counsel, and without their knowledge.

As a result of this negotiation, the parties to the U.S. proceeding entered into a settlement agreement for the benefit of only the U.S. class. The settlement agreement was valued at US$12 million. On June 14, 2012, a final approval hearing of the U.S. settlement was held and it was approved on condition the class definition in the Ontario proceeding was amended to exclude NASDAQ purchasers. This amendment, opposed by Ontario class counsel, would exclude approximately 85 per cent of the Ontario class.

In order to determine whether to amend the Ontario class, Justice Katherine van Rensburg undertook a two-step process. First, she undertook to determine whether the U.S. settlement ought to be recognized by the Ontario court. Second, she undertook to determine whether the Ontario action remained the preferable procedure to determine the claims of NASDAQ purchasers.

In determining the issue of recognition, van Rensburg applied the factors set out in Currie v. McDonald’s Restaurants of Canada Ltd., which established the test for recognition of a foreign judgment approving a class action settlement. The Currie factors are:
(a) whether there was a real and substantial connection linking the cause of action to the foreign court;
(b) whether the rights of the absent class members were adequately represented; and
(c) whether absent class members were accorded procedural fairness, including adequate notice.

Van Rensburg found the Currie factors were satisfied in this case and the U.S. fairness decision should be recognized in Canada. There was a real and substantial connection between the cause of action of the overlapping class members and the U.S. court, U.S. counsel fairly represented the rights of the NASDAQ purchasers, notice in the U.S. proceeding was found to be sufficient to accord the NASDAQ purchasers with adequate procedural fairness, and the U.S. settlement was held to be fair, reasonable, and adequate by the U.S. court.

The next step was to determine whether the certification order should be amended to remove the NASDAQ purchasers from the Ontario class definition. The Ontario judge found the court had jurisdiction to amend a class definition in order to respond to changing circumstances where the criteria of s. 5(1) of the Class Proceedings Act, 1992, were no longer satisfied. In this case, the Ontario action was found to no longer be the preferable procedure for the determination of the claims of NASDAQ purchasers.

As a result, van Rensburg amended the Ontario certification order to exclude NASDAQ purchasers.

In high stakes litigation where plaintiffs’ counsel fees are typically paid only on a contingency basis, the dangers of pursuing overlapping parallel proceedings are amplified. Because the costs associated with prosecuting a securities class action, including expert fees, are fixed, unilateral reduction in class size can change the economic viability of pursuing these claims.

Since Ontario courts will not look at the substance of the foreign settlement, but only the process that was followed in protecting the interests of absent class members, this invites the danger of a “reverse auction.” A reverse auction may occur where the defendant in a parallel class action “picks the most ineffectual class lawyers to negotiate with, in the hope that the applicable court will approve a weak settlement that will preclude other claims against the defendant”

Finally, there is also a concern for a “race-to-the-bottom,” where the foreign representative plaintiff’s interest may conflict with those of the Ontario class, and foreign class counsel may accept a sharply discounted recovery rate for non-resident plaintiffs. These concerns recognize that class action settlements in cross-border litigation may be susceptible to manipulation.

Although there was no evidence of manipulation in Silver v. Imax, Ontario class counsel raised the concern that granting the relief sought without examining the U.S. settlement on a fairness basis would encourage this kind of behaviour by competing class counsel in other cases. If nothing more, this decision will weigh on the future calculus in seeking to certify class action on behalf of a global class.

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