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Rethinking class action settlements
By John Chapman and Adam Stephens

May 13 2011 issue

[Illustration by Jeremy Bruneel for The Lawyers Weekly]
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Few areas of our civil law raise as many public policy issues as class proceedings. Supporters say class proceedings are the only feasible way to access justice in a wide variety of cases and prevent large corporations from profiting from their misbehaviour. Critics decry that the real beneficiaries in many cases are the lawyers — and not class members — and that class certification leads to pressures that result in cases of little or no merit being settled on a cost avoidance basis. Critics doubt, at least in some types of cases, whether the benefits of such expensive litigation justify the costs.

At the appellate level, the courts have tended to philosophically favour the values of access to justice and deterrence. The track record of court-approved settlements and class counsel fees is also arguably pro-plaintiff, with few cases rejecting settlements or fee requests. However, as the courts  have become more experienced with how class proceedings actually work once certified, they are now becoming more sensitive to the unusual dynamics of class proceedings. This is a welcome development and hopefully the courts will further extend their scrutiny to include enhanced procedures to assist in determining when the goals of the class proceedings legislation are being met.

In a recent payday loan case, Smith Estate v. National Money Mart Co. [2011] O.J. No. 1321 (C.A.), the payday lender was alleged to be violating the Criminal Code’s provisions (since repealed) relating to criminal rates of interest. The Smith Estate matter settled at trial on the basis that the defendants would pay the plaintiffs $27.5 million cash, drop a counter-claim of $56 million for moneys allegedly owing by class members and provide “coupons” with a face value of $30 million to class members. The coupons could be used by certain class members in the future to decrease payday loans transaction fees and interest charges.

There was no doubt that class counsel were entitled to a very handsome fee for all their services over the years on what was an extremely complex matter. Their time valued at normal rates was $10 million. However, on appeal the Ontario Court of Appeal upheld Justice Perell’s rejection of a claim by class counsel for $27.5 million in fees and agreed with him that a fee of $14.5 million was fair and reasonable.

As is typical, in Smith Estate the request for approval of the settlement and class counsel’s fees was made in an unopposed motion. The Court of Appeal noted that the unopposed nature of these motions places the court in a difficult position. The motions judge is deprived of “the dynamics of the adversary system where opposing views are heard” and is required to perform the role of adversary and adjudicator at the same time. Class counsel, too, finds itself in a conflicted position. It has a duty to represent the class, which wants to maximize the settlement funds available to it. At the same time, class counsel is claiming legal fees which will reduce the amount available for the class.

As a result of these conflicting roles, the Court of Appeal encouraged motions judges to appoint an amicus or monitor in appropriate cases to present counter-arguments about the proposed settlement and fees. It also encouraged class counsel to consider retaining independent counsel to advise the class members about the fairness and reasonableness of the fees being claimed.

Aside from these comments on procedures on fee approval motions, both the decision of first instance and the appeal are notable for their scrutiny of the overall merits of the settlement. Class counsel claimed the total settlement value was $120 million. However, Justice Perell disagreed that the settlement was worth this much and held that the settlement was a disappointment to class members. Neither the debt forgiveness nor the coupons could be valued at anything approaching their face value (as class counsel had recommended). Justice Perell noted, perhaps somewhat playfully, that class counsel would not want to be paid in coupons for their fees.

Had the total fee request been approved, there would be little or no benefit to class members. Further, as the law had changed the defendants were not required by the lawsuit to change their behaviour or business practices. There was thus a real question as to what, if anything, the class action had achieved. The Court of Appeal, although not being as pointed as Justice Perell in its statements, seems to have generally shared the same concerns.

Smith Estate highlights the real difficulties associated with settlements that provide little or no benefit to class members and have no net deterrence effect. In such cases, arguably the goal of class proceeding legislation has not been achieved.

Too many results like this may lead some to question whether we should learn from this experience in future certification decisions. After all, if over time experience tells us that a subset of cases in a particular area do not achieve results consistent with the class proceeding legislation, perhaps those cases should not be certified in the first place.

John Chapman is a commercial litigation partner with Miller Thomson LLP in Toronto. Adam Stephens is a partner at the same firm whose practice encompasses a wide range of commercial litigation, with a focus on shareholders’ rights and real property law.

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