The class action arms race

This fall, Ontario Superior Court Justice Edward Belobaba released five decisions certifying proceedings as class actions and, as night follows day, five decisions on costs soon followed.

In an effort to further the access-to-justice objective of class proceedings and rein in the ever-upward spiraling costs awards in these procedural motions, Belobaba substantially reduced the costs sought by the successful plaintiffs in each case. These actions are almost universally brought by plaintiffs on a contingent basis, and there is typically a significant resource disparity between the parties.

Plaintiffs in class proceedings have every incentive to keep costs down to reduce the attendant risk at this early stage of the action. Conversely, the costs of certification are typically driven up by defendants who are seeking to use the certification motion as a test drive for the merits of the litigation. As a result, reducing the costs awarded to plaintiffs in the name of access to justice misses the mark — the risk borne by the plaintiff is thereby increased, fewer actions will be commenced, and access to justice will be denied.

The issue of costs has been identified by the framers of the governing legislation as the driving force of class actions and the single most important issue in their design. The rising costs of prosecuting class actions and the risk of adverse costs awards rises has represented a significant impediment to the commencement of class proceedings and, as noted by Belobaba, access to justice, even in the very area that was specifically designed to achieve this goal, is becoming too expensive.

When class proceedings were first considered in Ontario by the Ontario Law Reform Commission’s “Report on Class Actions”, a “no-costs” regime was recommended whereby the losing party in a class proceeding was not required to pay the costs of the winning party. However, this recommendation was rejected by the legislature, which instead implemented the traditional “costs follow the event” convention.

In the early years, adverse costs awards arising from class actions were relatively small. Since then, adverse costs awards have risen dramatically. These rising costs awards stem from the increasing time and money spent by the parties to bring these actions. Adverse costs awards of this magnitude (and rising) simply could not have been foreseen by the initial framers of the Class Proceedings Act, 1992.

In the costs decisions arising from the certification of the class proceedings styled Sankar v. Bell Mobility, Brown v. Canada (Attorney General), Crisante v. DePuy Orthopaedics, Dugal v. Manulife Financial, and Rosen v. BMO Nesbitt Burns Inc., Belobaba noted, in general, the amount of time spent by legal counsel was too high, the volume of material filed with the court was excessive, oral hearings were too long, and counsel over-litigated most issues.

The judge admonished plaintiffs’ and defendants’ counsel alike, stating in every aspect of these proceedings excess appeared to be the norm.

In addition to the typical checks and balances applied to determine the appropriate quantum of costs to be awarded from the motion for certification (whether there was hourly rate compliance, any obvious excesses, closely comparable costs wards, and whether the award was fair and reasonable), Belobaba devised a new calculation designed to apply a discount to the amount claimed for costs by the successful party: Where the costs claimed were above $500,000, a 31-per-cent discount was applied, and where the costs claimed were below $500,000, a 41-per-cent discount was applied.

Belobaba found applying this discount would provide an important cross-check on costs awards arising from motions for certification.

It is unsurprising the judges who case-manage class actions are beginning to get fed up with the escalating costs associated with these allegedly procedural motions. We have seen these costs awards march steadily upward over the past 10 years. However, the incentives driving plaintiffs and defendants in these motions are drastically different, and this must be considered by the courts deciding costs.

Plaintiffs have every incentive to keep costs low. Plaintiffs’ counsel almost universally work on a contingent basis, shouldering enormous amounts of unpaid time and disbursements throughout the length of these protracted proceedings. They only get paid at the end and they only get paid when they win.

Conversely, defendants often use the certification motion as a test drive for the merits of the litigation, notwithstanding the focus on the certification motion ought to be whether the certification criteria are satisfied and the “some basis in fact” evidentiary standard in this regard is very low. As a result, plaintiffs are typically required to lead evidence concerning the merits of the motion, and costs are driven up dramatically.

The reality is plaintiffs are participating in an arms race against opponents with virtually unlimited resources who have no incentive to be frugal.

Without a doubt, the costs awarded to successful parties on motions for certification are too high. But substantial reductions to the costs actually incurred by plaintiffs is not an appropriate mechanism to achieve access to justice. In fact, over time this may have the opposite effect, as the risk associated with these motions could increase dramatically, since counsel must spend more and will be compensated with less.

The answer lies in penalizing whoever over-lawyers the file, and harshly.

It is no wonder Belobaba found the number of class actions on an annual basis is declining.

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