Class actions on the upswing

Another class action launched in October is against Edmonton-based payday-loan company, Cash Store Financial Services Inc. The company is alleged to have violated provincial rules in Ontario, Saskatchewan, Alberta and British Columbia designed to prevent prohibitive levels of interest. The firm has said it will mount a vigorous defence.

The new era of class actions, especially against companies with deep pockets, is apparently in full swing. “The launch of class actions in Canada is relatively new,” says Douglas Worndl, a partner in law firm Siskinds LLP‘s class actions group in Toronto. “And there has been an emerging jurisprudence over the past six years.”

As plaintiffs and defence counsellors increase their focus on how courts will interpret the rules in these actions, Worndl expects that more of these cases will be brought.

The size and numbers of these gargantuan actions are likely to have a growing impact on the operations of major Canadian corporations, ranging from banks and accounting firms to consumer staples and mining interests.

Those effects could include massive damage awards, heavy costs (even for defendants that manage to fend off these behemoth claims), court orders for changes in operating procedures and even insolvency.

In Worndl’s view, there are also positive effects: “I think that it is for the benefit of investors, and it’s also for the benefit of the economy as a whole. Private enforcement of securities and other financial laws is vitally important to the maintenance of the integrity of our capital and financial markets. As much as we would like it to be the case, the regulators can’t be everywhere all the time.”

The Zungui case has been particularly unsettling for many investors and their financial advisors because of the apparent ease with which the company managed to raise tens of millions of dollars from Canadian investors – even in a carefully regulated, post-financial crisis marketplace – without adhering to basic disclosure and governance requirements. Zungui’s former auditor, Ernst & Young LLP (which initially brought irregularities to light), and the IPO’s underwriters, CIBC World Markets Inc., Canaccord Genuity Corp., GMP Securities LP, and Mackie Research Capital Corp., are also being sued by the investor-plaintiffs.

In permanently banning two of the executives of Zungui, brothers Fengy Cai and Yanda Cai, from participating in Ontario’s capital markets under a “protective order” last August, the Ontario Securities Commission used strong language, stating that the pair showed “total disregard” for shareholders.

While some class actions may not be overly surprising – absconding corporate executives often attract lawsuits – a host of reputable companies are finding themselves the targets of class actions by newly empowered investors.

And even when defendants win, they rarely seem to escape unscathed. Last year, Inco Ltd. won a hard-fought, $36-million class action against 7,000 residents of Port Colborne, Ont., who had claimed that emissions from a nearby Inco plant had reduced their property values.

Although the mining giant won (after an appeal that overturned the trial decision), Inco failed to recover its costs of $5.3 million. In ruling that Inco could recover only $1.8 million, most of which were its disbursements, the court noted that full recovery would have meant depleting the public fund that helps plaintiffs bring these costly actions.

And in a key decision on the rules that govern class actions in Ontario, Sharma v. Timminco, the Ontario Court of Appeal ruled earlier this year that plaintiffs in secondary-market securities class actions must seek leave to proceed with a class action within three years of the alleged misrepresentations.

That ruling sent a sigh of relief through the ranks of large, publicly traded companies. However, this past August, the Ontario Superior Court of Justice again seemed to cut plaintiffs a break: in Silver v. Imax, the court ruled that the three-year limitation period will be extended if the plaintiffs have run afoul of hurdles they cannot control. In Silver v. Imax, the plaintiffs had moved quickly after learning of the alleged misrepresentations, but, due to no fault of either party, the leave-to-proceed hearing was not held until just after the three-year period had expired. In granting an extension, Justice Katherine van Rensburg stated: “No public interest would be served by permitting a cause of action to be defeated by delays inherent in the litigation process.”

However, a few other recent cases seem to indicate that the courts have not yet declared open season on defendants. Last summer, the Ontario Court of Appeal certified two massive class actions against large banks for overtime pay allegedly owed to non-management employees; however, the court also ruled that if damages are ultimately awarded, they must be calculated individually for each member of the class.

This ruling somewhat reduces the spectre of aggregate damages, which do not require the testimony of individuals who may choose not testify for a variety of reasons.

And last summer, Canadian Imperial Bank of Commerce (CIBC) defeated a claim by investors who alleged that the bank had misrepresented its exposure to the troubled U.S. residential market in 2007 (Green v. CIBC).

But that victory was a mixed one: while the Ontario Superior Court of Justice found that the plaintiff investors had missed the crucial, three-year limitation period, the decision makes it abundantly clear that the court found the claim to have significant merit and that it might well have been certified but for missing the three-year limit.

So, what’s the outlook for public firms and their investors?

Although big corporations and their investors do need to be concerned about the potential threat of the certification of a class, says Lawrence Thacker, partner with litigation law firm Lenczner Slaght LLP:“It’s important for defendants to realize that the claim does not become any stronger against them on the merits by virtue of it being a class rather than an individual proceeding.”

“That means that courts will continue, as the Inco decision shows, to eventually deal with the merits of the claim,” Thacker adds. “While it can seem like an unquantifiable risk to bear during the long process of certification and trial on the merits, parties that have the willingness to mount a strong defence will be rewarded.”

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