By Wendy Berman, Kate Byers, Carly Cohen, Peter Henein, Stefanie Holland, Jason M. Holowachuk, Christopher Horkins, Marlon Hylton, Lara Jackson, Stephanie Kerzner, Robert Kligman, Jessica L. Lewis, Laurie Livingstone, Jeremy Martin, Eric Mayzel, Alexandra Murphy, W. Michael G. Osborne, John M. Picone, Tim Pinos, Brigeeta C. Richdale, Derek Ronde, Geoffrey B. Shaw, Kristin Taylor, Stephanie Voudouris
In This Issue
Pre-Leave Discovery Prohibited: Quebec Court of Appeal Brings Quebec Law in Line With Other Provinces for Securities Class Actions
The Quebec Court of Appeal has prohibited pre-leave discovery in securities class actions, following in the footsteps of other Canadian provinces.
Summary and Background
On January 29, 2018, the Quebec Court of Appeal in Amaya inc. c. Derome1 overruled a decision of the court below which held that parties seeking leave to institute an action for secondary market misrepresentations under section 225.4 of the Securities Act2 are entitled to compel a public issuer defendant to disclose documents and information for the purpose of the leave proceedings.
As is the case throughout Canada, Quebec plaintiffs must secure leave of the court in order to bring an action for secondary market liability under the Act. While the terms of the Act are broadly similar to those of Canada’s other provinces (and, in particular, Ontario), there are points of distinction. One notable difference pertains to the rules of evidence governing what may be adduced leading up to an application for leave. Ontario courts have been resolute in their prohibition of hopeful plaintiffs seeking evidence from a defendant issuer (by way of discovery) as a means of satisfying the requirements for leave. The courts have cautioned against allowing “mini-trials” that might result at this early stage of proceedings in potential class actions, and have held that discovery is incompatible with the legislative policy for the leave requirement which, they say, is to prevent frivolous or bad faith actions (which are sometimes referred to as “strike suits”) against issuers.3
The Appellate Decision: Harmonization of Approach
In order to advance to trial, a Quebec plaintiff must obtain from the superior court both leave under section 225.4 of the Act as well as authorization to bring a class action under article 575 of the province’s Code of Civil Procedure.4 Both statutes - to the extent that each pertain to class actions - require some evidence to suggest that a party has a valid claim before the action will be allowed to proceed to the merits.
It was to this end that the respondents in Amaya brought a preliminary motion to compel documentary disclosure, seeking from the motion judge certain private documents in order to assist them in satisfying the evidentiary burden required by the Act.
In this instance, the motion judge held that document discovery against public issuers and their respective officers and directors is available in Quebec. In coming to this decision, the judge found comfort in differences between the Quebec statutory regime and the rules applicable in Ontario and, in particular, his understanding of the rules favouring cooperation between parties and proportionality that are “guiding principles” in the Code. The judge also added that the capital market system in Canada is built on a foundation of full disclosure of all material facts and so, as a matter of fairness, a party seeking to satisfy the evidentiary burden necessary for leave should have a reasonable opportunity to obtain that evidence from the issuer through discovery.
The Appellate Court firmly disagreed, stating that document disclosure should not be allowed at this early stage of the proceedings because it is incompatible with the legislative policy underscoring section 225.4 of the Act. The Court explained that this procedural departure from other provinces cannot be justified by differences between the Quebec regime and those applicable elsewhere, nor could it be justified under any other rules in the Code.
Following a detailed analysis of the provisions of the Code and relevant jurisprudence, the Court of Appeal concluded that section 225.4 of the Act does not open the door to the disclosure of documents prior to the authorization of the class action. Kasirer, J.A., writing for the Court, clarified that the purpose of this provision is to protect public issuers, innocent shareholders, the markets and the courts, but not plaintiff-shareholders.
A defendant is not bound to assist the plaintiffs in establishing a viable claim. Courts have held, in respect of disputes as to how evidence may be adduced prior to leave, that the defendant issuers are not required to assist plaintiffs in securing evidence because that would risk undermining the protection against strike suits and amplifying the scope of the proceedings to the equivalent of a mini-trial.5 Kasirer, J.A. warned that forcing a defendant to produce evidence would involve time and costs and would potentially prompt “fishing expeditions” undertaken in the hope of finding some document that would justify leave.
By allowing discovery, a plaintiff would have the opportunity to mine for documents that might support a suit or simply coerce the issuer into a protracted dispute, prompting a possible settlement that the ordinary rule militating against strike suits would not allow.
In its ruling, the Court stated that the Quebec rules were designed to be harmonized with the provincial securities legislation elsewhere as a matter of substantive law. Discovery prior to an application for leave brought under similar provisions to section 225.4 has been prohibited elsewhere in Canada. Motion judges are mindful that, in a summary setting, the merits of the dispute will not be fully aired and that the shareholder did not have the benefit of evidence that would come from discovery.
This decision unifies the approach across Canada with respect to discovery at the leave stage of a securities class action. This unification removes any potential strategic advantage in this regard that plaintiff-shareholders may have otherwise received in electing Quebec as the jurisdiction to hear a secondary market misrepresentation class action.
The Quebec Court of Appeal’s decision in Amaya inc. c. Derome is available here.
Ontario Court Denies Plaintiffs’ Motion to Add New Defendants to Proposed Class Action Outside Limitation Period
Cassels Brock successfully resists a motion to add its clients as defendants to a proposed billion-dollar class action arising from allegations of an international price-fixing conspiracy.
Summary and Background
The proposed class action arises from the highly publicized “Libor scandal” in the international foreign currency exchange market. The Statement of Claim alleges that between January 1, 2004 and December 31, 2013, the defendant financial institutions conspired with one another through the use of online chat rooms to coordinate the fixing of spot prices for currency pairs, the control and manipulation of benchmark rates and the exchange for confidential customer information to trigger stop loss orders and limit orders.
The proposed class action was commenced in 2015, naming 48 financial institutions as defendants. It has yet to be certified, other than with respect to limited certification orders issued for settlement purposes. Beginning in May 2016, the plaintiffs entered into a series of settlement agreements with various defendant financial institutions compromising the majority of the original 48 defendants. In July 2016, more than two years after the end of the alleged conspiracy, the plaintiffs sought to add Bank of Montreal and certain affiliates (BMO), represented by Cassels Brock, and Toronto Dominion Bank and certain of its affiliates (TD).
In seeking to add BMO and TD as defendants, the plaintiffs claimed that they did not and could not have discovered the alleged involvement of BMO and TD prior to receiving a confidential proffer of information pursuant to the first settlement agreement reached in May 2016. The plaintiffs sought to rely on this assertion in arguing that the discoverability principle applied to extend the limitation period applicable to their claims against BMO and TD and permit the addition of these new defendants more than two years after the end of the class period.
In refusing to allow BMO or TD to be added, Justice Perell found that the plaintiffs had failed to meet their low evidentiary burden of showing that they acted with reasonable diligence in discovering the proposed claim to justify abrogating the otherwise presumptive two year limitation. While accepting that the plaintiffs had no subjective knowledge of their potential claims against BMO and TD prior to May 2016, Justice Perell was not persuaded that the plaintiffs could not have discovered these potential claims with reasonable due diligence.
The plaintiffs’ evidence of having conducted a review of public documents was found to be insufficient, particularly in light of the plaintiffs’ knowledge from the outset that other major banks may be involved in the alleged conspiracy and that BMO and TD were “persons of interest” in the case, worthy of investigation by nature of their involvement in the foreign exchange market. In these circumstances, Justice Perell suggested that the plaintiffs had a duty to do more to investigate the identities of other potential defendants beyond simply reviewing public documents and waiting for a settling defendant to provide information. As a result, Justice Perell found there was no genuine issue requiring a trial that the claims against BMO and TD were statute-barred and denied the amendment.
In light of the implications for defendants being added to large class proceedings after the expiry of a presumptive limitation period, this decision is a reminder that the court plays an important gatekeeper role in respect of attempts to bring forward late claims. While the threshold for adding defendants outside of the presumptive limitation period is low, Justice Perell’s decision underscores that there is still a threshold for class counsel to meet in bringing such a motion and that raising a discoverability argument is not, in and of itself, enough. Class counsel will be expected to take an active role in investigating the identity of potential defendants and will not simply be permitted to rely on the clandestine nature of a civil conspiracy claim to extend the applicable limitation period.
BMO was represented at the motion by Cassels Brock litigators Lara Jackson and Chris Horkins, with a defence team including Wendy Berman and Stephanie Kerzner. The plaintiffs have commenced an appeal which is currently pending.
Federal Court of Appeal Clarifies Exception to the No-Costs Rule, Upholds Security for Costs in Proposed Reverse Class Action
The Federal Court of Appeal has upheld an order of the Federal Court that required payment of security for costs in a “reverse” class action, despite the presumptive no-costs regime for class proceedings enshrined in the Federal Courts Rules.
Summary and Background
The appellants, a group of American film distribution, financing, and production companies, initiated a proposed “reverse” class action. A “reverse” class action occurs when the plaintiff attempts to make the same case against a number of defendants. In this case, the plaintiffs’ claim is against a number of individuals who they allege have illegally downloaded their films. One such individual, Robert Salna, is the proposed representative defendant in the class action.
Mr. Salna brought a motion requiring the appellants to pay security for costs for their intended motion for certification on the basis that the appellants are based in the United States and have no assets in Canada.
The Federal Court Decision
In February 2017, the Federal Court considered the presumptive no-costs regime for class action proceedings.1 In particular, the Court considered the general approach to costs in a class proceeding, set out in Rule 334.39 of the Federal Courts Rules, which provides a general rule that costs will not be awarded against any party to a motion for certification, unless “exceptional circumstances make it unjust to deprive the successful party of costs,” per Rule 334.39(1)(c).
However, the Court determined that Rule 334.39 was not engaged since the appellants had not yet served and filed their notice of motion for certification – and therefore that Mr. Salna was not yet a party to a motion for certification when he brought his motion for security for costs.
Having determined that Mr. Salna was not barred from seeking security for costs, the Federal Court considered whether costs should be awarded in the circumstances, where the appellants: (i) had admitted that they were not ordinarily resident in Canada, (ii) did not have any significant assets in the country, and (iii) did not provide any evidence as to their ability to satisfy a costs award or their ability to advance the proposed class proceeding to the certification stage. The Court considered these factors and the discretionary nature of a costs award, and held that an order for security for costs was appropriate, in part, “in view of the novel nature of the proposed class proceeding.”
Federal Court of Appeal Decision
The Federal Court of Appeal disagreed with the Federal Court’s decision, holding that the Federal Court’s proposed approach would allow a defendant to circumvent the intent of Rule 334.39 by bringing a security for costs motion prior to a plaintiff’s motion for certification and “drive a wedge through the presumptive no costs regime.”2
Nevertheless, the Court of Appeal dismissed the appeal and concluded that security for costs was appropriate given the “exceptional circumstances,” that would potentially entitle the proposed representative defendant to costs at a later date. Since those exceptional circumstances could entitle the proposed representative defendant to costs on the motion for certification, the Court of Appeal held that security for those costs was available. The exceptional circumstances emphasized by the Court of Appeal were (i) the nature of the proceeding, being a “reverse” class action, (ii) the fact that the proposed class of defendants could include thousands of Canadians, and (iii) the fact that the proposed class action was brought by foreign corporations with no significant assets in Canada.
The Court of Appeal also considered the policy considerations behind the prima facie no-costs regime. In doing so, it found that there were no access to justice concerns since the American film distribution companies appeared to have considerable resources available and had declined to file evidence regarding their ability to post security for costs. Moreover, since the proposed class would “likely face difficulty in funding representation,” the Court of Appeal found that there was no principled basis not to award security for costs in the circumstances.
The Court of Appeal declined to interfere with the quantum of security set by the Federal Court, and emphasized the discretionary nature of costs awards.
While the Federal Court and the Federal Court of Appeal employed different approaches to the matter, both ultimately allowed security for costs, in part, due to the exceptional circumstances of the proposed “reverse” class action.
These decisions provide useful guidance as to when the Federal Court will find that there are “extraordinary circumstances” that warrant a deviation from the presumptive no-costs regime for class proceedings under the Federal Courts Rules.
The Law Commission of Ontario Sets the Stage for Class Action Reform
On Friday March 9, 2018, the Law Commission of Ontario (LCO) released its consultation paper on class action reform. The Commission is accepting feedback on the questions posed in the report until May 11, 2018.
Cassels Brock will continue to monitor these developments and provide updates.
If you have any questions concerning the LCO’s initiative, or class actions generally, please contact Derek Ronde, John M. Picone, Stephanie Voudouris, or any other member of the Cassels Brock Class Actions Group.