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Product Liability e-COMMUNIQUÉ - February 2019

Published: 02/05/2019

By Peter Henein, Chris Hersh, Suhuyini Abudulai, Stefanie Holland, Jason M. Holowachuk, Christopher Horkins, Tim Pinos, Derek Ronde, Jeremy Martin, Stephanie Kerzner, Jessica L. Kuredjian

In This Issue

  1. New Ontario Regulations Give Autonomous Vehicles the Green Light
  2. Houle Look Out for the Absent Plaintiffs? Divisional Court Upholds Judge-Initiated Amendments to Third Party Class Action Funding Agreement
  3. Damage Control: Two Recent Decisions Show the Benefits and Pitfalls of Proactive Risk Management in Products Claims
  4. What We’re Up To

New Ontario Regulations Give Autonomous Vehicles the Green Light

By Stefanie Holland, Jessica L. Kuredjian

On January 1, 2019, the regulatory framework of Ontario’s Automated Vehicles Pilot Program (AVPM) was expanded to include the testing and sale of autonomous vehicles (AVs).1 Our product liability team previously reported on the status of AVs and has been keeping a close watch on the progression of this industry.2 The following provides a summary of the recent expansion to the regulations regarding AVs in Ontario.

Purchase and Sale of Society of Automotive Engineers Level 3 Vehicles

Members of the public will now be able to purchase and drive vehicles originally manufactured as Society of Automotive Engineers (SAE) Level 3 vehicles. SAE Level 3 vehicles are classified as being able to manage most safety-critical driving functions while requiring the driver to be ready to take control of the vehicle at anytime. They fall under the statutory category of  “conditional automation.”3 When the AVPM was introduced in 2016, SLE Level 3 vehicle use was restricted to testing by pilot program participants.4

Testing of Driverless AVs

The testing of driverless AVs on Ontario roads by approved pilot participants will now be permitted.5 Participants eligible to become pilot participants include auto manufacturers, technology companies, academic and research institutions and manufacturers of parts, systems, equipment or components for automated driving systems. Driverless AVs on public roadways will require full human oversight by someone capable of intervening in the operation of the vehicle if necessary.

Notably, pilot participants will be legally required to:

 a)

accept liability where there is an at-fault collision caused by the technology;

 b)

insure participating vehicles under a contract of automobile insurance with $5 million liability coverage for vehicles with capacities of less than 8 and $8 million for vehicles with capacities of greater than 8;

 c)

alert local authorities of the time and location where testing will occur; and

 d)

obtain prior approval from the Ministry of Transportation before conducting testing on provincial highways.

Additionally, the Highway Traffic Act rules of the road and penalties will apply to the operation of all AVs, as well as the responsibilities of the driver vehicle/owner, unless specifically exempted in the pilot regulation.

Key Takeaway Principles

AV technology is steadily advancing and on the road to becoming a transportation reality in Ontario. The expansion of these regulations shows that Ontario is not only committed to the advancement of this technology but the safety of its citizens. These advancements will no doubt change the landscape of personal injury and product liability actions arising from motor vehicle accidents involving AVs. Specifically, what have traditionally been actions between individual drivers for negligence will now inevitably involve complex product liability issues for AV manufacturers.

As the Highway Traffic Act currently stands, only a driver can be held liable for the loss or damage sustained by a person through negligence.6 This means that absent any legislative changes, defendants will need to issue third party claims against manufacturers where there the facts give rise to a product malfunction. Single vehicle accidents caused by technology malfunctions, will also give rise to product liability claims against manufacturers. Our product liability team will continue to provide regular updates regarding advancements regarding AVs.

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1 See the new proposed regulations here: http://www.mto.gov.on.ca/english/vehicles/automated-vehicles.shtml
2 See our previous update here and here.
3 Pilot Project - Automated Vehicles, O Reg 306/15 at s. 1(2)
4 Pilot Project – Automated Vehicles, O Reg 306/15 (past version) at s. 2(2)
5 Pilot Project - Automated Vehicles, O Reg 306/15 at s. 13.1(1).
6 Highway Traffic Act, RSO 1990, c H.8 at s. 192.

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Houle Look Out for the Absent Plaintiffs? Divisional Court Upholds Judge-Initiated Amendments to Third Party Class Action Funding Agreement

By Jeremy Martin

Once considered unlawful “champerty”, third party litigation funding has been on the rise in Canada following more recent case law holding that third party funders should be permitted to fund private litigation.1 A recent product liability class actions decision demonstrates the unique issues posed by third party funding in the class actions context. A class action funding agreement is not just a civil contract; it is an arrangement subject to intense scrutiny in the public interest. In Houle v. St Jude Medical, a highly anticipated judgment controlling the ‘business model’ of class actions in Ontario, the Divisional Court has upheld the decision of a leading class actions judge to intercede in the arrangement between class representatives and the private third party lender engaged to fund the litigation.2

A Unique Arrangement: The Proposed Third Party Funding Agreement

The agreement at issue in this case, a proposed class action involving allegedly defective defibrillators, was a unique one to Canadian courts. Subject to minor restrictions, the lender agreed to pay:

 a)

50% of class counsel’s legal fees throughout the action, up to a certain cap;

 b)

100% of class counsel’s disbursements; and

 c)

Any adverse costs awards or order for security for costs.

In turn, class counsel would provide the lion’s share of any contingency fee arising from success or settlement to the lender. The split between class counsel and the lender ranged from 10/20% if the matter resolved within 18 months, all the way up to 13/25% if it resolved after three years. For context, to date, Canadian courts have only approved arrangements where the funder takes on a lesser burden and seeks up to 10% of recovery.3

At the outset of the proposed class proceeding, the plaintiffs sought an order approving the litigation funding agreement with the lender, which was opposed by the defendants.

Approved, With Comments: The Motion Judge’s Decision

Despite the fact that the representative plaintiffs were given access to quality independent legal advice before signing the third party funding agreement, the motion judge had serious concerns  about the third party funding arrangement. The motion judge noted among other things that the contingency fee after three years of litigation (38%) exceeded the standard 33%.4 The motion judge was also concerned that there were several clauses that seemed to imply that the representative plaintiffs were responsible to the lender for the conduct of the action, and that the lender had the benefit of ‘ripcord clauses’ that would allow it to resile from the funding agreement if it disagreed with the trajectory of the class action.

The motion judge ordered that the agreement be modified to permit 10% recovery for the lender, along the lines of the standard return allocated to Ontario’s public class actions funder, the Class Proceedings Fund – and then, in light of the significant additional risk and costs taken on by the lender in excess of what that the fund would cover, the motion judge ordered that the remainder of the allocation be determined at the conclusion of the proceeding, in the same way class counsel fees must be approved at the time of settlement or judgment. This decision was subsequently appealed by class counsel.

Judicial Rewrites Upheld: The Divisional Court Decision

The Divisional Court – the first level of appeal for interlocutory decisions between the motion court and the Ontario Court of Appeal5 – upheld that decision.

In seeking to overturn the motion judge’s unilateral amendment of the funding agreement, the plaintiffs effectively argued that the matter should be viewed through the lens of contract, while the defendants (and, to date, the courts) seemed to approach it through the lens of class actions procedure and “champerty”: the ancient common law and statutory offence forbidding intermeddling in a stranger’s lawsuit. The plaintiffs noted that the parties were independently advised, that class actions are recognized by the courts as a social good,6 and that the plaintiffs’ counsel would not provide a backstop against adverse costs awards. That, the plaintiffs argued, should have been the end of the inquiry into privileged affairs. Representative plaintiffs enter into contracts that bind the class all the time, after all, including expert retainers, counsel retainers and e-discovery services agreements.

In upholding the motion judge’s direction that the third party funding agreement must be amended to receive court approval, the Divisional Court pointed to the risk of abuse of absent, non-participating class members and the courts’ responsibility to those parties under the Class Proceedings Act. The court found the motion judge’s proposed amendments were appropriate to avoid the risks of overcompensating the lender or giving the lender undue control over the plaintiffs’ conduct of the litigation. The Court declined to treat the arrangement as a pure contract between arm’s-length parties. These funding arrangements have only recently been ruled to be something short of illegal, and as a result the courts continue to justify their maintain control over potentially champertous arrangements that could overcompensate a lender for its actual risk, at the expense of a highly vulnerable population.

Key Takeaway Principles

While the Divisional Court’s decision in Houle makes clear that third party funding is here to stay, it also makes clear that the courts will take an active role in scrutinizing these arrangements in the public interest:

As the industry grows and new forms of transactions emerge, they will be considered on their merits with due input from the affected parties. The law will continue to be concerned to protect vulnerable parties whose recovery is the subject of the proposed bargain. It will continue to be concerned with the potential for harm to the administration of justice that could accrue if the court is seen to allow third parties who are not parties to the litigation to profit unduly from or unreasonably control that litigation.7

The friction between the law of contract and the law of champerty, unsettled as it now is, looks to be a recipe for uncertainty: particularly since the courts are assessing the legality of these agreements on a case-by-case basis. Watch this space, as the plaintiffs are likely still within time to appeal the decision further. In the meantime, expect to see third party funding arrangements continue in Ontario, though with a bit of a chill. Any funder would be hesitant to enter an agreement that might be rejected by the court, but worse still for business is any agreement that could be modified by the court at will.

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1 See, inter alia, Fehr v Sun Life Assurance Company of Canada, 2012 ONSC 2715; compare with Metzler Investment GmbH v Gildan Activewear Inc. (2009), 81 CPC (6th) 384 (Ont SC).
2 Houle v St. Jude Medical Inc., 2018 ONSC 6352, <http://canlii.ca/t/hvq7d> [“Houle”].
3 See, inter alia, Dugal v Manulife Financial Corp., 2011 ONSC 1785; Musicians’ Pension Fund of Canada (Trustee of) v Kinross Gold Corp., 2013 ONSC 3974; compare with the rejection of 30% or more in Schenk v Valeant Pharmaceuticals International Inc., 2015 ONSC 3215.
4 Houle v St Jude Medical, 2017 ONSC 5129 <http://canlii.ca/t/h5nnm>.
5 The Court of Appeal had previously refused to hear the appeal, referring it back down to the Divisional Court as it found the decision below to be an interim, rather than final, disposition despite the practical effect the decision might have on the proceeding: Houle v St Jude Medical, 2018 ONCA 66.
6 Dutton v Western Canadian Shopping Centres, 2001 SCC 46.
7 Houle, supra at para. 51.

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Damage Control: Two Recent Decisions Show the Benefits and Pitfalls of Proactive Risk Management in Products Claims

By Christopher Horkins, Stephanie Kerzner

Two recent Ontario decisions shed light on the conflicting consequences of a manufacturer’s attempts to rectify product defects. Where a defendant has taken proactive and successful steps to mitigate losses caused by its product, litigation may be avoided before it is even commenced. On the flipside, if those efforts are not successful, the defendant may be extending the relevant limitation period and thereby exposing themselves and others to additional risk.

Richardson v Samsung: Mitigating Risk Before The Class Action Hits

The Ontario Superior Court’s decision in Richardson v Samsung, which denied certification of a proposed class action regarding Samsung’s Galaxy S7 smartphone, provides a good example of what product manufacturers can do to protect themselves against class actions through proactive risk mitigation.9

The smartphones at issue contained batteries were prone to overheating, creating a risk of fire or explosion. The phones were released and distributed in Canada beginning August 19, 2016. About one week after their release, the issue was identified and sales were halted. Shortly thereafter, a recall was initiated. In October 2016, Samsung offered a compensation package to Galaxy S7 purchasers that provided either a replacement phone or a full refund along with some compensation for out of pocket costs. The proposed class action essentially alleged that the compensation package was inadequate because it did not properly reimburse consumers for their losses.

The Ontario Superior Court refused to certify the class action on the grounds that the claim failed to meet some of the “preferable procedure” criterion for certification under Ontario’s Class Proceedings Act for two reasons. First, Samsung’s compensation program was found to be preferable to a class action. Second, the voluntary compensation scheme was found to sufficiently address access to justice and behaviour modification concerns, two of the stated policy goals underlying the Class Proceedings Act. The fact that Samsung responded promptly and in concert with Health Canada in initiating its recall and compensation program demonstrated the response of a “responsible corporate citizen” and “behaviour that should be encouraged rather than discouraged” in the Court’s view. Further, access to justice was not an issue since the class had already received compensation. While some proposed class members remained out of pocket, the Court noted that perfect compensation was not required. Accordingly, certification of the proposed class proceeding was denied.

Presley v Van Dusen: For Whom The Limitation Period Is Tolled

Conversely, the Ontario Court of Appeal’s recent decision in Presley v Van Dusen shows how a defendant’s unsuccessful attempts to rectify product defects can be harmful to its position in the ensuing litigation.10 In that case, the Ontario Court of Appeal considered whether the appellant plaintiffs’ claims for negligent design, installation, approval and inspection of a septic system at their property were statute-barred under the Limitations Act or whether the defendant’s ameliorative efforts in attempting to remedy those issues delayed the start date for the commencement of the limitation period.

The appellant homeowners had retained the respondent Van Dusen to install a septic system in 2010. From 2011 to 2012, the homeowners experienced various issues, which Van Dusen tried to address unsuccessfully. In the spring of 2013, the homeowners further notified Van Dusen that the problems persisted and were worsening. Van Dusen continually assured the homeowners that he would fix these problems up until the winter of 2014. Ultimately, on June 1, 2015, the local Health Unit condemned the system and issued an Order to Comply requiring the plaintiffs to replace it. At trial, the Court initially found that the plaintiffs were statute-barred for having failed to commence their claim within two years of first noticing the issues. At the Court of Appeal, however, the Court found that the limitation period did not actually start to run until after it became clear that Van Dusen’s attempts to remedy the issues had failed, since the plaintiffs would not have discovered that a legal proceeding was an appropriate means of addressing the issues until then.

In deciding when the claim was discovered, or ought to have been discovered, the Court of Appeal considered s. 5(1)(a)(iv) of Ontario’s Limitations Act, 2002, which provides that if a legal proceeding is inappropriate means of remedying the loss or injury suffered by the plaintiff, the start date for the commencement of the limitation period may be postponed. The Court stressed that commencing a legal proceeding may be inappropriate in cases where a plaintiff relies on the superior knowledge and expertise of a defendant who engages in efforts to right the wrong they caused.

Since Van Dusen had attempted to fix the problem and continued to assure the plaintiffs that he would fix the problem, which the plaintiffs relied upon, the plaintiffs held a reasonable belief that the problem could and would be remedied without the need to bring an action. Accordingly, the Court found that the action was commenced within the two-year limitation period. Notably, the Court even found that this principle applied to the limitation period for the plaintiffs’ claim against the local Health Unit, which played no role in Van Dusen’s unsuccessful attempts to mitigate the issue. Manufacturers should thus be aware that the unsuccessful mitigation attempts of others, such as dealers or service providers, may expose them to additional litigation risk as well.

Key Takeaway Principles

In assessing what these decisions and their differing outcomes mean for manufacturers seeking to mitigate risk proactively, an important distinguishing factor should be noted. In Samsung, the proposed class of consumers were found to have been adequately compensated for their losses. In Van Dusen, the plaintiff homeowners were not compensated for their loss despite Van Dusen’s attempts to address their septic system issues. Samsung shows how a well-executed risk mitigation strategy may limit product liability litigation risk before proceedings are even commenced, whereas Van Dusen shows the risks inherent in an unsuccessful risk mitigation strategy, which may extend relevant limitation periods and leave manufacturers exposed. Before offering assurances or compensation in relation to product defects, manufacturers should carefully weigh options and consider consulting with counsel as soon as the issue arises to determine what steps they can take to protect against potential liability.

__________________________

9 Richardson v Samsung, 2018 ONSC 6130 <http://canlii.ca/t/hvks1> [“Samsung”].
10 Presley v Van Dusen, 2019 ONCA 66, <http://canlii.ca/t/hx8n5> [“Van Dusen”].

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What We’re Up To

  1. We are proud to announce that Chris Horkins has joined the partnership of Cassels Brock, effective January 1, 2019! Chris is a key member of Cassels’ Product Liability litigation team and has considerable experience defending product liability claims in the automotive industry.
  2. We are pleased to introduce Jessica Kuredjian as the newest member of the Cassels Brock Product Liability litigation team. Jessica joined Cassels as an associate in January 2019 after practicing at a major national defence litigation firm.
  3. Peter Henein, Chris Horkins and Stephanie Kerzner will be attending the Defence Research Institute (DRI) Product Liability Conference in Austin, Texas from February 6-8, 2019. Cassels Brock is a proud sponsor of this year’s conference. Peter will be chairing the Recreational Products Specialized Litigation Group session on February 6 and Chris is the Marketing Chair for the Manufacturers’ Risk Specialized Litigation Group session on February 8. Peter, Chris and Stephanie look forward to connecting with all those attending the conference, so please reach out to them!
  4. Chris Horkins was recently interviewed by Anna Tombs for the December 2018 edition of DRI’s Raising The Bar newsletter. In the article, Chris discusses his favourite part about being a lawyer, his Cassels Brock mentors and his favourite spots in Toronto. Read the full interview here.
  5. Stefanie Holland recently spoke about her experiences as a young professional in the Italian-Canadian community as part of Ciao Amici's 2nd Annual Italian Youth Night, held in Vaughan, Ontario on November 22, 2018.
  6. Jeremy Martin recently spoke on a panel titled "Cross Country Update — What is Happening Elsewhere?" at the Western Canada Class Actions Conference in Vancouver, British Columbia presented by The Continuing Legal Education Society of British Columbia on October 11, 2018. There will be a rebroadcast of this seminar on March 5, 2019. For details on how to view the rebroadcast, click here.
  7. Cassels Brock was once again recognized as a leading Canadian Product Liability firm in the 2019 edition of Chambers Canada, which noted the firm has: "A robust product liability practice held in high esteem."
  8. Peter Henein and Tim Pinos were once again recognized in the 2019 Edition of Best Lawyers Canada. Peter was recognized as a leading Product Liability lawyer and Tim was recognized for his expertise in Class Actions.

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