Early Class Action Settlements

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1 Early Class Action Settlements By Tim Buckley and Barry Glaspell Borden Ladner Gervais LLP Introduction The extraction of a defendant from complex class actions at a very early stage may be difficult because of practical and legal reasons, both procedural and substantive. A defendant with a peripheral exposure can be caught up in a lengthy, contested lawsuit between a plaintiff class and other defendants or in a dispute between parties seeking a final judicial determination after trial on an issue of principle. Class action settlements are further complicated in Canada due to its dual systems of law, namely, civil law in the province of Québec and common law in the 12 other provinces and territories. Canada does not have a national federal court with subject matter jurisdiction over the bulk of class actions and settlements. National class actions are often cobbled together by parallel lawsuits proceeding in one or more common law provinces and a separate proceeding in the province of Québec. This article reports on recent decisions of the Superior Courts of the provinces of Ontario and Québec where the courts exercised broad statutory powers in approving a novel early partial settlement (the BSE Partial Settlement) after negotiation and mediation 1. The settlement has been found to be fair, reasonable and in the best interests of the plaintiff classes as a whole. Judicial acceptance of the settlement vehicle used in the actions is a significant advance for defendants interested in extricating themselves from national class actions at an early stage. Novelty The novel features of the BSE Partial Settlement include early settlement approval hearings in the two approving jurisdictions, prior to the filing of the statements of defense by the defendants, and before the defending parties declared whether they would add third or subsequent parties to the litigation. Additionally, the settlement was novel in the province of Québec in that it was a partial settlement of plaintiff claims against one defendant only, but in a framework where the settling defendant remains in the action, if needed, to proactively defend claims by the non-settling defendant that the settling defendant had any responsibility. Unique to both jurisdictions, the settlement provided that the settlement monies would be paid into a trust to pay plaintiffs counsels discounted legal fees to fund the plaintiff case against the non-settling defendants with any remainder to be paid to veterinary colleges. The finding of the Courts that the settlement was fair was supported by an independent outside mediator and by a process of more than one year of intense negotiations. Barriers to Early Settlements Settlements of class actions are not binding unless approved by the supervising court. The overriding public interest in encouraging pre-trial settlement of civil cases is recognized by Canadian courts as fundamental to the proper administration of civil justice. The promotion of early settlement is especially salutary in complex, costly, multi-party litigation 2. Often complex cases can only be resolved through a series of partial settlements.

2 2009 LEXPERT / AMERICAN LAWYER The generally accepted test for settlement approval in a Canadian class action is whether the proposed settlement is fair, reasonable and in the best interests of the class as a whole. Through a fortunate and convenient intersection of the common law and the civil law in the province of Québec, the courts use a similar list of factors as a guide in deciding the issue of fairness: (a) Likelihood of recovery or likelihood of success (b) Amount and nature of discovery, evidence or investigation (c) Settlement terms and conditions (d) Recommendation and experience of counsel (e) Future expense and likely duration of litigation and risk (f) Recommendation of neutral parties, if any (g) Number of objectors and nature of objections (h) The presence of good faith, arms length bargaining and the absence of collusion (i) The degree and nature of communications by counsel and the representative plaintiff with class members during the litigation (j) Information conveying to the court the dynamics of, and the positions taken by the parties during, the negotiation 3 The difficulty of an early-stage settlement is that the court must assess the respective shares of liability mindful of principles of joint and several liability. The evidentiary record at an early stage is often not supplemented by the production of documents and the examination for discovery process available in common law jurisdictions or the examinations of witnesses in civil law jurisdictions. Early-stage partial settlements can be frustrated and prevented by the inherent deficiencies in either proportionate share settlements or Mary-Carter-style settlements. In the developing practice of Canadian courts enforcing proportionate share settlements, the plaintiff restricts the class claim in the continuing action to the liability share of the remaining non-settling defendants. The remaining defendants do not remain jointly liable for the liability share of the settling defendant. The settling defendant generally exits from the action, protected by bar orders against claims by the remaining defendants and successive parties. The settling defendant may still be subject to orders for documentary production and examinations for discovery in Canadian common law jurisdictions. The deficiency in proportionate share settlements, perceived by plaintiffs counsel, is the departure of the settling defendant from the litigation permitting the remaining non settled defendants to make allegations about the fault or liability share of the departing settling defendant. These allegations are made against the empty chair in the courtroom, as the settling defendant is not present as a party to defend the allegations. The economic interest in defending the allegations against the settling defendant falls on the plaintiff who wants to maximize the liability share of the non-settling defendant to maximize recovery from the non-settling defendant. Depending on the circumstances of the case and the behavior or action under scrutiny by the court, the best defender of the alleged misconduct of the settling defendant may well be the settling defendant and its counsel. Mary-Carter-style agreements also have deficiencies perceived by the settling defendant. Many Mary Carter agreements require the continuing participation of the settling defendant who may continue in the lawsuit for different tactical or financial reasons. As noted above, that may include the advancement of defenses to crossclaims; however, continued litigation may be costly and may continue to distract a settling defendant s management during the ongoing case, particularly where the settlement is made at an early stage well before trial. The Case The BSE Partial Settlement arose in four intended class actions brought on behalf of Canadian cattle farmers in the courts of three common law jurisdictions in Canada 4, as well as the civil law jurisdiction of the province of Québec. The alleged claims for damages of C$5 billion, asserted against a feed manufacturer and the Canadian Federal Government, arose from the closure of international borders to imports of Canadian beef and cattle following the discovery on May 20, 2003, of a cow (the Index cow) in Canada with Bovine Spongiform Encephalopathy (BSE), the so-called mad cow disease. The plaintiffs made an allegation, later largely discredited, that the feed manufacturer was the sole source of the infective agent to the Index cow and was thereby negligent, despite the fact that use of the impugned raw material was specifically permitted under regulations enacted by the Federal Government. The plaintiffs alleged that the Federal Government negligently promulgated regulations permitting the use of the impugned raw material in cattle feed and negligently allowed the remains of imported and infected cattle to be introduced into the animal food chain. The plaintiff case, which sought to impose liability for pure economic losses on a manufacturer for damages suffered by farmers who were neither purchasers nor users of the product, represented a significant attempt to extend Canadian product liability law. The plaintiff case was complicated by the fact that the substantive law of common law provinces of Canada and the civil law jurisdiction of Québec was different in material respects, most notably in the restriction of recovery of pure economic losses in the common law jurisdictions, but not in Québec. (The

3 consideration and restriction of such claims in Québec is accomplished under theories of remoteness of loss). BSE Partial Settlement An outside observer examining a settlement document will always identify ways that a settlement could be improved to advance the interests of one side or the other. Such an examination is a luxury unconstrained, as the analysis is, by what may actually have been available in the negotiation. A settlement must reflect, protect and advance the interest of parties, but also reflect the inherent contradiction that it is a compromise of the very same interests. The art of successful completion of the settlement requires the parties to probe the real interests of the opposing party and identify ways to advance a party s own interests in a manner that does not impose unacceptable costs, whether monetary or non-monetary, on the opposing party. Under the BSE Partial Settlement submitted to the courts for approval, the settling manufacturer paid C$6 million into a settlement fund. In return, its liability was capped at the settlement amount, effected through an indemnity and hold harmless provision given by the plaintiffs and a covenant by the plaintiffs not to collect any judgment to the extent that it would place the settling defendant at risk of paying more than the capped amount. The plaintiffs also covenanted to reimburse the settling defendant for any amount collected by a non-settling defendant or any new party from the settling defendant on a claim for contribution and indemnity. The plaintiffs formally agreed not to seek to apportion liability against the settling defendant. The plaintiffs agreed to prosecute the actions and to state that it is the plaintiffs position that the non-settling defendant, the Federal Government, was responsible for the plaintiffs losses and damages and there is no liability on the part of the settling defendant. Unlike a proportionate share settlement, the settling defendant will remain in the class action if the Federal Government or any party added to the action advances a claim for contribution or indemnity with respect to the plaintiffs losses or damages or seeks to apportion any fault or liability against the settling defendant. In such a circumstance, the settling defendant will defend the claim on the basis that the Federal Government was wholly responsible. If such claims are not advanced then, unlike a Mary Carter agreement, the settling defendant will leave the action. Settlement monies shall be paid into a trust used to fund disbursements and plaintiffs counsel fees at significantly reduced rates in order to prosecute the plaintiffs action against the Federal Government. The Ontario court noted that an independent mediator recommended the plaintiffs accept the settling defendant s financial offer, however, it took more than a year of negotiations after the mediation to finalize the other terms of the agreement. The settling defendant wanted to be let out of the action completely through a proportionate share agreement, but the plaintiffs were unwilling to settle in a structure that permitted the Federal Government to attempt to reduce its liability share by arguing against an absent settling defendant that the settling defendant caused or contributed to the damage. Judicial Flexibility Settlement approval was accomplished because of the flexibility the courts exhibited in their consideration of the manageability of the settlement in the context of the ongoing action 5. Mary Carter settlements are controversial in some jurisdictions in the United States, but are less so in Canadian common law jurisdictions, subject to disclosure obligations. They are relatively unknown in the province of Québec. Mary Carter agreements have been described, for the purpose of Canadian practice, as agreements containing the following features: 1. The contracting defendant guarantees the plaintiff a certain monetary recovery and the exposure of that defendant is capped at that amount. 2. The contracting defendant remains in the lawsuit. 3. The contracting defendant s liability is decreased in direct proportion to the increase in the non-contracting defendant s liability. 4. The agreement is kept secret. The Ontario Superior Court of Justice has decided that such agreements must be disclosed to the other parties and to the court as soon as the agreement is made because the agreement may well have an impact on the strategy to be pursued by non-contracting defendants. Most importantly, the Court must be informed immediately so that it can properly fulfill its role in controlling its process in the interest of fairness and justice to all parties 6. The principle of disclosure is often buttressed by obligations of disclosure of such agreements contained in rules of professional practice or ethics. The BSE Partial Settlement did not provide for the recovery of the paid settlement amount by the settling defendant, common in Mary Carter agreements. In fact, the intent of the settlement was that the settling defendant would exit from the action if no attempt was made to apportion liability to the settling defendant. The Ontario Superior Court of Justice noted that settlements of this kind are not per se objectionable 7. The Québec Superior Court was of the opinion that it was

4 2009 LEXPERT / AMERICAN LAWYER premature, at the settlement hearing, to evaluate the consequences of the settlement in regard to the role that the settling defendant may be called to play once the settlement is approved and in regard to the allegations that may or may not be made by the Federal Government against the settling defendant. The liability cap and the possible continued participation by the settling party in the action did not impose a barrier, in principle or in practice, for the Québec court. Each court was required to assess the chances of ultimate success by the plaintiffs against the settling defendant. Each court concluded that the plaintiffs had serious risk of not being able to succeed. The courts were able to reach these conclusions at the early stage as a result of the early cross-examination by the settling defendant of a key witness. That witness was the farmer who is alleged to have bred and initially raised the Index cow that was diagnosed with BSE. The plaintiff claim against the manufacturer was based on a conclusion, supported by initial reports of the federal government agency, that the manufacturer was the identified single source of infection to the Index cow. However, the product identified by the witness by trade name as the product manufactured by the settling defendant feed company was, in fact, a product manufactured by a different company, not a party to the litigation. On an early cross-examination, the farmer also disclosed that in addition to the alleged infected product, he also purchased another feed product at the relevant time period and fed it to cattle on his property. This resulted in the federal government agency advising that it could no longer definitively identify which source of exposure (if any) infected the Index cow. The Québec Superior Court concluded at the settlement approval hearing that there existed a serious risk that the plaintiff would never be in a position to establish that the source of contamination originated from a product manufactured or distributed by the settling defendant. The Ontario Court determined that the claim against the settling defendant had been placed in jeopardy by the withdrawal of the federal government agency report, the misidentification of the settling defendant as the manufacturer of the product under the trade name and the identification of the settling defendant as the sole manufacturer of feed containing the infected agent. The Ontario Court also acknowledged that the settling defendant would raise significant duty, foreseeability, identification, causation and remoteness issues. Moreover, in the common law jurisdictions, the claim by the plaintiffs against the manufacturer raised a novel question of whether Canadian negligence law contemplated a claim against a product manufacturer in respect of pure economic losses suffered by persons who neither purchased nor used the product. The settling defendant s motion to strike the plaintiff claim as disclosing no cause of action failed, but the early motions were decided on the basis of allegations made in the plaintiffs statement of claim. Countervailing evidence was not admissible. The court recognized that such defenses could be raised on a full evidentiary record. The plaintiffs conceded that the Canadian courts had not yet recognized the duty of care alleged and the Court, which refused the summary motion to strike the claims as disclosing no cause of action, acknowledged that the claim raised policy considerations that had manifest implications for the law of tort 8. The Ontario court stated that the BSE Partial Settlement converted the settling defendant from an opponent of the plaintiffs to an ally and concluded that the settlement significantly streamlined the litigation into an action that would save years in time and legal fees and was likely to achieve a more timely resolution for class members. The Québec Court described what appeared to be a selfevident truth, namely that continuation of the action against the settling defendant would require considerable material and testimonial evidence and the settlement would facilitate the administration of justice, shorten delays and reduce the budget necessary to obtain a judgment on the merits. Settlement as Art The art of class action settlement is measured by practicality. Does it satisfactorily achieve the goals of the parties, present and future, and can the approving courts be satisfied that the settlement is fair and reasonable? Every class action settlement requires careful craftsmanship based on the particular facts and pleas raised by the parties. The BSE Partial Settlement is the first partial settlement of a class action of its kind approved in Canada. It is also the first Canadian class action settlement pursuant to which the plaintiff legal counsel fees are to be funded on an ongoing basis by the settlement fund as against the non-settling defendant. The BSE Partial Settlement provides an important precedent in the Canadian environment of increasing cross-border partial class action settlements 1. Sauer v. Canada (Attorney General), [2008] O.J. No Bernèche c. Canada (Procureur général) (PGC), 2008 QCCS 2248, EYB , 2008 CarswellQue M.( J.) v. B. (W.) (2004), 71 O.R. (3d) 171 (C.A.) at para Sauer v. Canada (Attorney General), [2008] O.J. No at para 77 Berneche c. Canada (Procureur général) (PGC), 2008 QCCS 2248, EYB , 2008 CarswellQue The intended class action in Saskatchewan is stayed; the intended class action in Alberta is postponed. 5. Sauer v. Canada (Attorney General), [2008] O.J. No at para Pettey v. Avis Car Inc., [1993] O.J. No (Gen. Div.) at paras 17 and Sauer v. Canada (Attorney General), [2008] O.J. No at para Sauer v. Canada (Attorney General), [2008] O.J. No at para 83; Sauer v. Canada (Attorney General), [2005] O.J. No. 26 at para 47

5 Tim Buckley, Borden Ladner Gervais LLP Tel: (416) Fax: (416) Tim is a litigation partner in the Toronto office and is the chair of the BLG National Class action practice. Tim practices commercial litigation, including class actions and product liability law. Tim regularly speaks to industry groups on issues related to class actions, product liability and E-discovery. Barry Glaspell, Borden Ladner Gervais LLP Tel: (416) Fax: (416) bglaspell@blgcanada.com Barry is a litigation partner in the Toronto office and is the leader of the Class Action Focus Group in Toronto. Barry s area of specialization includes class actions. He has acted for defendants on a wide variety of class actions and has written and presented a number of papers on class action issues.