The class action migration

The class action migration
Illustration: Tara Hardy
Once the long-time general counsel of Barrick Gold Corp., Patrick Garver left the role of in-house a number of years ago but still keeps a keen eye on what’s happening in the class action universe. The now-senior adviser to a U.K.-based consulting firm says he has watched with interest as what happens south of the border increasingly influences the fate of companies in Canada. “I think if you’re a general counsel of a Canadian-based company your biggest risk from class action litigation still probably remains suits that originate in the United States as opposed to in Canada,” says Garver, who retired from Barrick in 2010 and is now with the Good Governance Group.

He acknowledges there has also been a significant upturn in Canadian class action litigation, but says, “it’s still a bigger threat coming out of the United States because so many Canadian firms subject themselves to jurisdiction of the U.S. courts either by having a U.S. listing or debt traded in the U.S. or putting products into the U.S.”

In general, Canadian courts are seeing more securities law cases, more competition law cases, product liability cases and more cases brought on the heels of U.S. litigation, and regulatory investigations. “Look around and if you’re in a category that looks like it will be the subject of other cases, make sure your house is in order to the maximum extent that you can,” says Garver.

He points to SNC Lavalin as an example of another trend emerging in the area of class actions. SNC investors filed a $1.5-billion class action against the firm in May alleging former CEO Pierre Duhaime authorized $56 million in improper payments to foreign agents. A second class action for $250 million alleges “unlawful” SNC activities in Libya. In late November Duhaime was arrested in Montreal on unrelated charges of fraud. “The plaintiffs saw a significant drop in share price, which people attributed to the investigation and costs associated with it and any lost business that might flow from it. If you’re the general counsel of another company in the same industry you might reasonably say, ‘Are there similar problems like that we should be concerned about?’ You’re not going to get sued if all of your compliance programs are in place and they’re working — that’s the best defence against class action litigation,” says Garver.

The speed at which lawsuits influenced by activities in the U.S. are moving to Canada can perhaps best be illustrated by a scenario lawyer Christopher Naudie saw in 2008: A client in Canada issued a press release that disclosed the company was subject to investigation by a regulator. “Within 24 hours, there was a class action in Quebec, and within the ensuing days and weeks, we had over a dozen class actions filed across nine provinces,” recalls Naudie, co-chairman of the national class actions specialty group at Osler Hoskin & Harcourt LLP in Toronto. During the same period, there were dozens of class actions and related claims filed in federal and state courts in the U.S. “By our last count, there were over a hundred pending claims filed in the U.S. In short, class plaintiffs scrutinize the press wires and they are prepared to file at a moment’s notice. It’s a race that belongs to the swift.”

Experts say the threshold for certification in Canada has become softer in contrast to trends being observed in the United States. “I think what we’re finding in Ontario is that in most cases the leave requirement is not presenting a significant hurdle for plaintiffs,” says Andrea Laing, a partner with Blake Cassels and Graydon LLP. “I think what we’re likely to find is that cases in Ontario and other Canadian provinces are likely to get to the certification stage and beyond, proportionately and relative to the United States, but the reality is the damages exposure is likely to be much lower in Ontario or other provinces.”

With the increase in class actions coming forward, the defence bar here has expressed concern the floodgates have been opening in Canada for
strategic class action litigation — that which is not necessarily driven by merits, but more by entrepreneurial plaintiff lawyers seeking to leverage settlement from risk-averse Canadian businesses that don’t want to go to trial in high stakes litigation, even when the defence remains convinced there is no harm in Canada and no violation in Canadian law. “We have argued in a number of forums, including before the Supreme Court, that the falling of the threshold in Canada is just not faithful to the Supreme Court’s prior jurisprudence,” says Naudie.

In 2001, the Supreme Court of Canada said to obtain class certification a plaintiff in Canada has to show some basis in fact for each of the requirements for class certification, the biggest one being commonality. “We always understood that to mean a real onus — that the plaintiff has to come up with a rigorous methodology supported by an expert to show you could really try these cases in one forum with one judgment that would bind all class members,” says Naudie.

The concern is that recent case law hasn’t followed what the court originally directed. That’s why one of the issues front and centre before the Supreme Court last October in a trilogy of class actions involving anti-competitive behaviours was whether or not the latest jurisprudence is really faithful to what the SCC said in 2001. At issue is what the plaintiffs have to prove for the price of admission to a class proceeding in Canada. Do they have to show some plausible way of dealing with this issue or a proven workable methodology for showing there is class-wide harm? “We’ve got an ironic situation here where the standard in Canada has fallen much lower than the standard in the U.S. We actually have some cases where the court in the U.S. would not certify but the courts in Canada do in respect to the same misconduct and same alleged wrongs, and sometimes the same expert evidence, which from our perspective just doesn’t make sense,” says Naudie.

Perfect storm brings cases to the SCC
He points to what he calls a “perfect storm” of issues relating to access to justice, class proceedings, and cross border litigation being explored in the three cases currently before the Supreme Court of Canada. “I think we will get further guidance once the Supreme Court gives its decisions in Microsoft, Sun-Rype, and Infineon in telling us what the actual standard for certification is,” says Naudie. “This is really asking what is the test for class certification. Every business in Canada has an interest in what that test is going to be.”

On Oct. 17, the Supreme Court of Canada heard three appeals — Pro-Sys Consultants Ltd. v. Microsoft Corp., Sun-Rype Products Ltd. v. Archer Daniels Midland Co., and Option Consommateurs c. Infineon Technologies. All three involve allegations of anti-competitive conduct that arose from class actions predicated on the fact there were parallel actions in the U.S. that resulted in tens of millions of dollars in settlements. The issue is whether similar conduct violated the law in Canada and whether there are similar remedies in law for that conduct in Canada.

In the Sun-Rype proceedings in British Columbia, the plaintiffs alleged the existence of a horizontal conspiracy to fix the price of high-fructose corn syrup and sought to certify a class of direct and indirect purchasers. In Microsoft, the plaintiffs alleged the existence of a vertical conspiracy to fix the price of branded software products and sought to certify a class of indirect purchasers only.

At first instance, the B.C. Supreme Court certified both cases. However, on appeal, the B.C. Court of Appeal reversed on the basis there was no cause of action for indirect purchasers. It set aside the certification order and remitted the certification application to the B.C. Supreme Court for further consideration in Sun-Rype and rejected certification entirely in Microsoft. These decisions created an immediate appellate conflict, since the B.C. Court of Appeal had previously certified a direct and indirect case a number of months earlier. In addition, the decisions created an appellate conflict within other provinces, since Ontario courts had certified direct and indirect classes in other cases.

Infinion is a case seeking to authorize a proposed price-fixing class action on behalf of Quebec class members against foreign manufacturers of dynamic random access memory chips, a type of semiconductor memory chip found in electronic devices.

The long-term impact of the decisions in these cases will depend on whether the SCC grants leave to appeal and, ultimately, affirms or overturns them. If upheld the effect of the decisions might be to limit the number and scope of competition class actions in Canada. The SCC is expected to deliver its decisions in early 2013 and will hopefully address the question as to what a plaintiff has to prove to bring these sorts of claims.

Naudie says the appeals coincide with a “perfect storm” of issues related to class certification, cross border litigation, and access to justice for consumers. “The real issue in these cases is whether in this type of conduct the consumer has a remedy in Canada and whether our law in Canada should be similar to the law in the United States.”

What general counsel need to know
Legal observers will no doubt be watching the SCC decisions closely, but the cases also represent a keen lesson for Canadian in-house counsel. “You have to keep your eye out for strategic litigation,” says Naudie. “Anytime there is a restatement of financial results, a product recall, or investigation by a regulator you have to be mindful that there are enterprising plaintiffs thinking about whether your company should be a target for a class proceeding.”

That means general counsel must be responsive where issues come up and determine whether it’s worth fighting, or whether there is an opportunity for early settlement. “We’re hoping to get some guidance from the Supreme Court, but until that happens you have to be very proactive. In the past you only had to deal with the regulator now you have to deal with class action plaintiffs at the same time,” says Naudie.

In part he says all of this has happened because of a misreading of the Supreme Court’s guidance in 2001 in Hollick v. Toronto, in that some courts have read it the wrong way. “I believe if they read it they would see the standard requires more due diligence in assessing whether a class proceeding would actually work,” he says.

The securities actions cometh
Canada is also being looked at as an “overflow” country for secondary market securities class action litigation U.S. courts won’t entertain as they are being more rigorous on limitation periods and because of the demands these kind of class proceedings impose on the judicial system.

In the securities realm, Laing points out that if your company is a cross-listed entity that gets sued in the U.S., there is a high probability a parallel case will be commenced in Canada. “You could also be sued here even if your shares aren’t traded here. In Canadian Solar (Abdula v. Canadian Solar Inc.) the company had business activities in Ontario but traded exclusively on the NASDAQ but it met the definition of an issuer and could be pursued in Canada.”

In December 2009, the Ontario Superior Court in Silver v. Imax Corp. certified a global class of shareholders that alleged statutory and common law misrepresentation claims in connection with a secondary market distribution of the defendant’s shares. In early 2011, the Superior Court denied leave to appeal to the Divisional Court its earlier decision certifying the class. Imax is the first court ruling to address the statutory provisions for secondary market liability under Ontario’s Securities Act. It has been heralded as a game-changing decision and one that could make Ontario the new destination for secondary market class actions. “It’s certainly conceivable that cases that are dismissed in the U.S. after Morrison [v. National Australia Bank] might find a home in Canada. It’s something GCs need to be concerned about especially if they are multi-nationals that are operating in both countries,” says Laing.

Morrison is a 2010 decision of the Supreme Court of the United States that decided it did not have jurisdiction to decide claims brought by foreign
claimants who purchased on foreign exchanges of a foreign issuer. “I think we’re setting ourselves up to be the ‘hotel’ jurisdiction for plaintiffs who are just visiting and using Ontario for a forum from which to launch a global transaction,” says Michael Rosenberg, an associate at McCarthy Tétrault LLP and adjunct professor of class actions at the University of Toronto Faculty of Law. “It’s easier to do it here because our laws permit global classes in many circumstances and the formerly ideal jurisdictions in the United States have closed their doors to this kind of international business. It’s become impractical to litigate for a global class in a securities context in the United States.”

Rosenberg says there are conflictive law issues that arise when part of a class is subject to a different regulatory regime. “The courts have yet to really take one of these class actions through from snout to tail to play out how these complications are to be resolved. In Silver v. Imax the approach the court has taken has been very much ‘We’ll deal with that as it comes up.’ So this is really cutting edge in that sense.”

Canadian courts have to look at cases involving investors who purchased on foreign exchanges with a high degree of skepticism, says Laing. “I think we should be taking an approach closer to that adopted in the United States. But it’s really early days and it’s not clear how strictly our courts are going to interpret the responsible issuer definition. It is possible people will look to Ontario as an overflow jurisdiction for cases thrown out in the United States over jurisdictional reasons.

“If a class action comes to a company in the U.S., general counsel for that company in Canada should look very quickly to see if they should appoint Canadian shadow counsel,” says Laing, to strategize around potential Canadian proceedings and start to co-ordinate early with the U.S. lawyers. “Just because you haven’t been sued in Canada yet, if you’re cross listed there’s a very good prospect it’s going to happen and you have to be proactive and engage Canadian defence counsel early.”

She adds: “The strategy that works in the States won’t always be optimal in Canada so it’s very important the two sets of counsel on either side of the border co-ordinate very closely. I think the big message is if you trade in the U.S. and Canada and you’re facing litigation in the States, as quickly as possible appoint Canadian defence counsel and make sure they work closely with your U.S. lawyers.”

Growing areas of class action
In 2011, Garver says there were 188 new class action cases filed in the U.S. federal courts — there wasn’t a huge spike but what was interesting was the changes in the composition of the cases. In 2011, 33 of the 188 cases were related to Chinese reverse mergers like Sino-Forest. “That’s a huge increase,” he says.

Paul Martin, a partner with Fasken Martineau DuMoulin LLP, points to employment law as another area seeing an increase in class action cases that once were predominantly seen only in the U.S. “Overtime is a good example and employment cases in general are the No. 1 class action filing by numbers in the United States and a large number of those are the wage-and-hour cases,” he says. “There’s been a very well-developed approach to those cases in the United States that we hadn’t seen in Canada and now we’re seeing some of them spin their way out. So much does happen in the U.S. first — it will typically happen here six months later.

“Having a good handle on what’s going on in the U.S. is essential for corporations that have a global business or export their products into the U.S., and might be vulnerable there.”

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