Caught In a Trap - Ethical Considerations for the Plaintiff’s Lawyer in Class Proceedings

The Honourable Chief Justice Warren K. Winkler[1] and Sharon D. Matthews [2]

In 2007, the American law firm Milberg Weiss recovered $3.8 billion in class action settlements. Midway through the year, Bill Lerach – a partner in the firm and a pioneer in shareholder class actions – pled guilty to paying illegal kickbacks to representative plaintiffs in lawsuits that earned his firm many millions of dollars. In February, he was sentenced to two years in jail, fined, ordered to repay almost $8 million in fees, and barred from practicing law for the rest of his life. The remaining partners involved in the scheme have now been sentenced, including Melvyn Weiss who was sentenced to 30 months in prison and ordered to repay $10.5 million in forfeitures and fines.

Class actions, and the opportunities they provide for entrepreneurial activity by lawyers, have led to a novel set of ethical problems and considerations for class action lawyers in particular and for the profession in general. The stark reality of this new era of ethical concerns for lawyers is brought home to us in the Milberg Weiss affair, in the true story A Civil Action by Jonathan Haar, and again in the John Grisham novel The King of Torts. These books should be compulsory reading in every law school curriculum. Class action lawyers likely read them while listening to the Waylon Jennings classic “Caught in a Trap”.[3]  Virtually every class action counsel who has acted for plaintiffs has felt the world tighten around them like a noose as they confront the seemingly impossible choices open to them.

The development of class action practice in Canada has been recent and rapid. When the Class Proceedings Act, 1992[4] was proclaimed in force in Ontario in 1992, there was only one other such piece of legislation in Canada ; in Quebec, where class actions were permitted under the Code of Civil Procedure.[5] Since then, a similar statute has been enacted in every province except Prince Edward Island. Even in the absence of such legislation, the Supreme Court of Canada’s decision in Western Canadian Shopping Centres v. Dutton[6] has ensured that class proceedings are available in every jurisdiction under the applicable rules of civil procedure.

Class proceedings legislation creates a tension between procedure and certain established professional ethical considerations. The procedural aspects of class proceedings seek to promote access to justice, judicial economy and behavioural modification. This is to be accomplished by combining claims into classes, and attracting lawyers to take on cases by sanctioning contingent fees and allowing a multiplier to reward counsel for assuming the risk of achieving success. The purpose of this article is to outline and discuss some of these tensions.

Shortly after the CPA came into force in Ontario, corporations became targets for those who saw an opportunity to profit through the procedural device that the legislation provided and the leverage that it afforded a representative plaintiff and his or her counsel. The multiplier effect of a large class coupled with a modest claim, together with the contingent fee as an incentive for lawyers, was seen as a business model for those with a creative bent.

An early attempt at this behaviour was seen in Smith v. Canadian Tire Corporation.[7]  Larry Whaley set up a corporation called the Borrowers Action Society to solicit – through newspaper ads and radio interviews – contributions from credit card holders to pay for class action proceedings. He promised that investors in the Society would collectively share between ten and thirty per cent of any settlements of the class action lawsuit supported by the Society. A different person was put forward as the representative plaintiff to insulate Whaley and the Society from exposure to costs. Whaley was to personally gain by paying himself a salary from the Society.

After obtaining summary judgment dismissing the action, the defendant brought a motion seeking costs personally against Whaley and the Society even though they were not parties to the action. They were held to be the “real plaintiff” and were found to have engaged in improper conduct akin to maintenance and champerty by taking funds and promising a reward that was not available under the CPA. This costs disposition had a chilling effect on bad behavior by those trying to generate a profit centre from litigation.

Almost fifteen years have gone by since that decision was released. However, the tensions have not disappeared. The decision of the Supreme Court of Canada in Strother v. 3464920 Canada Inc.[8] has re-awakened the profession once again to the potential problems arising from entrepreneurial conduct by a practicing lawyer.

Nowhere is this more evident than in a class proceeding. Class proceedings by their very nature involve entrepreneurial conduct on the part of the plaintiff’s counsel. The lawyer, once engaged, assumes the risk for the time and disbursements required to prosecute the action. This is referred to in the industry as “bet-your-firm-litigation”[9] because the amount of such expenses can be enormous. If a defendant in the lawsuit is a well funded and stalwart party, the legal expenses can amount to millions of dollars and may not be recovered for years. Moreover, many of the causes of action pleaded in such proceedings are novel, increasing the risk of losing the case. The stakes are high.

Several complicating factors and questions unique to class actions arise in the context of client representation. Are duties to the class members different before and after certification? Who do you act for and when? What if the class counsel has a relationship with a representative plaintiff other than that of solicitor and client? What happens if the representative plaintiff does not support what class counsel believes is best for the class members as a whole? Where there are co-counsel, what if they disagree? How do you possibly negotiate a settlement without dealing with fees? Is compensation for the representative plaintiff appropriate? When are cy-pres distributions appropriate? What is the role of the court in sorting all of this out?

None of these questions are easy to answer, except perhaps the last one: the court is the backstop – the protector – of the absent class members and can and will sort it all out.

Class Counsel and Clients

Representation of the Representative Plaintiff

Generally, a client will not approach a lawyer suggesting a class action; he or she will come with an individual loss to be redressed. It is the lawyers who will likely recognize the case as a potential class action. Other times, the class action finds the lawyer first, who then seeks to find a representative plaintiff. Either way, the lawyer has a relationship with both the representative plaintiff and the class.

Class actions are often referred to colloquially as the plaintiff-less lawsuit because class counsel sometimes have the sense that they have no effective client from the standpoint of taking instructions or reporting. However, like any other proceeding, a class proceeding begins with a client and a lawyer. Some aspects unique to a class proceeding and which add a layer of complexity to the solicitor-client relationship include: the relationship between counsel and the class; the certification as a statutory condition precedent to entitlement to represent the class; the fact that law firms often band together to spread the risk; and the requirement of court approval at various stages of the proceeding. These unique factors, among others, give rise to a plethora of novel issues relating to representation.

Subsection 5(1)(e) of Ontario’s CPA contains typical requirements for the representative plaintiff:

… a representative plaintiff or defendant who,

(i)        would fairly and adequately represent the interests of the class,

(ii)       has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding, and

(iii)     does not have, on the common issues for the class, an interest in conflict with the interests of other class members.

 A Straw Man?

As noted above, representative plaintiffs rarely seek out class actions – in fact, it is usually the other way around. In some cases, a law firm retained to act for an individual client will identify the client’s problem as a potential class action. In other cases, a law firm will identify a potential class action without having been approached by any particular client. In such instances, there is a live question as to whether the representative plaintiff selects and retains counsel or vice versa.

In addition, since the representative plaintiff may have a relatively small claim as an individual, he or she may not be capable of giving meaningful instructions and counsel may be tempted to self-instruct. This is sometimes rationalized on the basis that it is counsel who is bearing all of the expense inherent in financing the lawsuit and who is assuming all of the risk that the case may ultimately be unsuccessful. While this may be practically true, counsel must continually be mindful that despite the added complications that a class proceeding entails, there is a solicitor-client relationship in place with all of its concomitant duties and obligations. Class counsel should not and cannot overlook the client. Class counsel is certainly not their own client even though they may be financing the case and bearing the risk.

The role of the representative plaintiff was a central issue in Fantl v. Transamerica Life Canada,[10] a case in which the law firm retained by the representative plaintiff split in two. The representative plaintiff chose one of the two new firms to continue representing him, although it was not the firm to which the lead counsel on the file chose to go. The lead counsel objected, and sought to have his firm appointed solicitor of record and a new representative plaintiff appointed. Perell J. dismissed the motion, holding that a representative plaintiff has the right to choose counsel and to replace a solicitor of record. However, in exercising that right, the representative plaintiff must act in accordance with his or her duty to the putative class. Perell J. described that duty as requiring the representative plaintiff to choose competent counsel able to adequately represent the proposed class action if the action is certified. In this regard, he noted that the test is whether the representative plaintiff has chosen adequate, rather than superior, counsel. Similarly, Perell J. concluded that although the court has the jurisdiction to replace counsel, that jurisdiction should only be exercised if it is demonstrated that the counsel chosen are inadequate. The Divisional Court agreed with Perell J.’s analysis.

A representative plaintiff may not understand his or her relationship with and duty to both putative and certified class members. This is an issue that may be complicated by the fact that often the class members are not identified or identifiable.

In Chartrand v. General Motors Corporation,[11] the failure of the plaintiff to demonstrate more than a basic understanding of the issues and a willingness to act was fatal to certification. Martinson J. held that the proposed representative plaintiff had not been actively participating in decisions relating to the litigation to date. In her reasons, Martinson J. distinguished the retainer agreement in Fantl, noting that the retainer agreement in Chartrand did not provide “the right to make all critical decisions regarding the conduct of the matter”. [12]Further, plaintiff’s counsel was found to have paid for the repair to the allegedly defective part in the representative plaintiff’s motor vehicle.[13] The court thus found that the representative plaintiff had no real stake in the litigation. In so concluding, Martinson J. noted that while there was no legislative provision or legal principle prohibiting recruitment, this is a factor to be considered when deciding whether a representative plaintiff can fairly and adequately represent the class.

The court in Chartrand also noted that the representative plaintiff did not understand the role of the U.S. co-counsel in the case, and that this role had not been explained to the court. Martinson J. held that it was incumbent upon the representative plaintiff to satisfy the court that she had a lawyer capable of independently discharging his or her duties to the representative plaintiff, the class and the court. Inferentially, the court seemed to express the opinion that a relationship with U.S. co-counsel could compromise the ability of counsel to discharge his or her duties.

Nonetheless, arrangements between Canadian and U.S. co-counsel are common. Although the court must be made aware of fee sharing arrangements at the time of fee approval, there is no authority for the proposition that a co-counsel arrangement interferes with the ability of a Canadian counsel to discharge his or her duties to the client, the class, or to the court. The obligation to lead evidence on that point should only arise in rare cases where there is some basis upon which to question the independence or lack of objectivity of counsel.

While some of Martinson J.’s comments in Chartrand might raise some eyebrows (particularly among the bar who typically represent plaintiffs in class actions), these comments can all be traced back to a concern that has been extant among the judiciary for some time and which found a voice in Chartrand:  class actions are not to be reduced to purely money-making ventures for class counsel and/or lawyers from outside Canada. There must be a real lis and a real class.

What does class counsel do with a proposed or actual plaintiff who does not have an interest in or ability to provide meaningful instructions? One solution is to advise such a client to participate solely as a member of the class and to seek out a representative plaintiff who can and will instruct counsel. It is also essential that counsel regularly communicate with and seek input on all major decision points with the representative plaintiff and to report regularly to all class members. The problems that can arise by failure to do so are demonstrated in the Chartrand decision and are discussed below under the topics of conflicts between class members and removal of class counsel.

Indemnification for Costs

The key task of the representative plaintiff is to provide a litigation plan for prosecuting the common issues trial. In Ontario, commensurate with this is the responsibility for paying costs if unsuccessful. The recent decision of the Supreme Court of Canada in Kerr v. Danier Leather[14] makes clear that a representative plaintiff will be treated no differently than any other litigant in civil litigation, particularly where the plaintiff is a sophisticated party standing to gain significantly from the litigation.[15] Any decision not to award costs on the normal basis must meet the CPA’s test of being a test case, raising a novel point of law or involving a matter of public interest.[16] In Ontario, where normal costs rules apply, plaintiff’s counsel may offer to indemnify the representative plaintiff for his or her costs exposure. This can increase the lawyer’s exposure significantly if certification fails or if the case fails on its merits. But the practical reality is that a representative plaintiff, who often has only a small monetary claim in the case, will not or should not agree to expose him or herself to a costs order that may be many, many times what he or she has at stake in the litigation.

There has been much debate over the ethical implications of indemnities.  On the one hand, is providing a representative plaintiff with such an indemnity ethical?  On the other hand, is it ethical to allow a representative plaintiff to proceed without an indemnity in the absence of competent legal advice as to the availability of such indemnities and the possibility of going to a no-costs jurisdiction if jurisdictional issues permit?

The ethical issues around indemnities remain unresolved, but the consequences of failing to provide one have now been addressed in Poulin v. Ford Motor Company of Canada.[17] In that case involving allegedly faulty Ford door latches, plaintiff’s counsel had a co-counsel arrangement with a U.S. firm which had acted on similar litigation in the U.S. Mackenzie J. held that the representative plaintiff was not suitable, in part because his counsel had not provided an indemnity for costs and there was no evidence he could satisfy costs. The court also held that the representative plaintiff did not understand the relationship between counsel or the affidavit of U.S. counsel pertaining to the underlying allegations in the case.

At the subsequent costs hearing, Mackenzie J. held the representative plaintiff, his U.S. lawyer and his Ontario lawyers liable for costs of the certification hearing.[18] Again, the failure to agree to indemnify the representative plaintiff for costs was cited as having been a “significant matter in the context of the plaintiff’s capacity to be a representative plaintiff”[19]. The provision of an indemnity subsequent to that decision did not dissuade the court from ordering costs against the law firms directly.

The rationale for this award was that the plaintiff was not sufficiently informed to give his solicitors proper instructions. This factual basis was married up with the dicta in Smith v. Canadian Tire Acceptance and the non class action jurisprudence on holding solicitors directly liable for costs. In addition, Mackenzie J. held that the plaintiff’s lawyers assumed the upside of large fees if the case was successful, and should also have to assume the downside of an adverse costs award. This is an added refinement to the usual risk/benefit assessment which weighs the risk of non-payment of fees for time and disbursements incurred against the benefit of a substantial fee if the case is successful.

Does Poulin render the ethics debate moot by making the provision of an indemnity a prerequisite for certification?  Or, conversely, does it render it moot because in the absence of an indemnity, the court may well simply levy the costs directly against the lawyer? We suspect we have not heard the last on this issue.

Putative Class Members

Strictly speaking, prior to certification, a case commenced under class proceedings legislation but not yet certified is not a class proceeding.[20] Therefore, there is no solicitor-client relationship between putative class counsel and the putative class members. This limbo state has been characterized both as an ordinary action “with ambition”[21] and as an intended class proceeding, with the applicable legislation and safeguards for absent class members in place until it is certified, dismissed, or converted to an individual action.[22] Accordingly, neither plaintiff’s counsel nor the court can ignore the interests of the putative class members.

Indeed, in Fantl, Perell J. held that because there is a potential solicitor-client relationship with the class members, the relationship is sui generis and the court has the jurisdiction to protect the potential class members.[23] This is in part derived from the court’s inherent jurisdiction to control its process throughout the proceeding. The Divisional Court agreed, upholding Perell J.’s conclusion that the court’s jurisdiction includes the authority to supervise the relationship between counsel and the representative plaintiff and proposed class members, as well as the authority to replace the solicitor of record.

The nature of this potential solicitor-client relationship boils down to avoiding prejudice to the putative class members - nothing may be done in the pre-certified claim which prejudices their claims.

For example, in Coleman v. Bayer,[24] a certification and settlement approval was put before the court which, by restricting compensation to those who developed the condition Rhabdomyolis, excluded some putative class members who were included in the original class definition. Cullity J. held that the test was not whether the settlement of a not-yet-certified class was in the best interest of the whole class (as it is in certified proceedings), but whether the proposed certification and settlement would prejudice the interests of excluded putative class members. The underlying thesis is that persons excluded by a not-yet-certified class settlement are not bound by the result, and they are free to start their own lawsuits. However, the exclusionary settlement must not prejudice their ability to do so.

Coleman also established that exclusion is not prejudicial per se. However, the commencement of the action tolls the limitation period and so exclusion from the ultimate certification starts it running again. For this reason, in Smith v. Crown Life Insurance,[25] Cumming J. held that the discontinuance of a not-yet-certified class action, in exchange for compensation for the representative plaintiff and the only known members of the class, had to be on notice to the putative class members so they could take steps to commence their own actions within the revived limitation period if they saw fit. The defendant was not agreeable to this term of the “settlement”, and the motion for discontinuance was dismissed. Cumming J. further clarified that the burden was on the putative representative plaintiff to establish that the putative class members’ interests were not prejudiced by a proposed settlement. The motion to dismiss was subsequently revived and approved on the basis of a notice appearing in the Globe and Mail and on class counsel’s website.[26]

Certified Class Members

Upon certification, class counsel is in a solicitor-client relationship with all members of the class. From the time of certification until the expiry of the opt-out period, plaintiff’s counsel has the right and duty to communicate with all class members about the merits of the case, including whether they should opt out, and such communications are subject to solicitor-client privilege:  Ward-Price v. Mariners Haven Inc.[27] In Ward-Price, Nordheimer J. held that the solicitor-client privilege belongs to the class as a whole and cannot be waived by the voluntary disclosure of privileged communications by one member of a class. This represents an interesting development of the law of solicitor-client privilege particular to class proceedings.

Additionally, although this article focuses on ethical traps for plaintiff’s counsel, here lies one for defense counsel:  if a class member discloses privileged information to defense counsel or a defendant, that counsel has the obligation to treat it in accordance with the rules of suspected inadvertent disclosure. The privileged material must be returned to plaintiff’s counsel or a ruling of the court sought.[28]

However, this seeming extension of solicitor-client privilege, or rather restriction on the principle of waiver of privilege, has an equally powerful governor. The court is entitled to review such communications, even if privileged, to ensure that they do not constitute improper communications with class members.[29] Such improper communications include those containing misinformation, threats, intimidation or coercion, or which generally undermine the process and the court’s role in protecting absent class members.[30]  Communications are also considered improper if they undermine the statutory notice requirements.[31]

This principle applies both pre-certification and post-certification. After certification, class counsel may firmly and fairly express views on the merits and whether class members should opt out. Indeed, it is their duty to do so. However, it must be made clear that these opinions are not part of the court sanctioned notice process and should be made separately from any court approved notice so that the two are not confused.[32]

The solicitor-client relationship also brings with it duties other than communication and solicitor-client privilege. In Richard v. British Columbia,[33] a division arose between one of the representative plaintiffs, plaintiff’s counsel, and some members of the class as to the best interests of the class. Butler J. reviewed the Canadian and U.S. law on the duties owed by class counsel and summarized them as follows at para. 42:

From the above authorities and the provisions of the Act, I extract the following principles:

Fulfilling all of these duties can be difficult where certain issues or conflicts arise. Richard is an example, and illustrates the point that classing these duties into a hierarchy can lead plaintiff’s counsel to a point of no return, addressed only by the capital punishment of class actions – removal of class counsel. This issue will be discussed further below.

It is often the case that counsel from different firms and different jurisdictions band together to prosecute a case in order to share the work and the risk. Where that occurs, the duties of plaintiff’s counsel include the obligation to cooperate, to speak with one voice to the representative plaintiffs and class members, and to act in concert: see Lau v. Bayview Landmark.[34]  This case will also be discussed in the “capital punishment” portion of this article.

Ethical Issues on Settlement

Settlements of class actions raise a multitude of issues. Concerns arise because the adversarial process is lost in a settlement where all parties want the court to do the same thing:  approve the settlement. The court must ensure that the interests of the absent class members, putative or otherwise, are properly addressed. As noted above, putative class members must not be prejudiced by the settlement.

In the case of certified class actions, the settlement must be fair and reasonable and in the best interests of all class members in the circumstances of the case. In Dabbs v. Sun Life Assurance Co. of Canada ,[35] Sharpe J. set out a list of factors to consider when determining whether a settlement is fair and reasonable, including: (1) the presence of good faith and absence of collusion; (2) the settlement terms and conditions; (3) the recommendations of counsel and any neutral third parties; and (4) that relevant information pertaining to, inter alia, the risks of litigation and assessment of the value of the case are before the court. In Parsons v. Canadian Red Cross Society, the court added two factors to the list which are germane to the issues addressed in this article: the degree and nature of communications by class counsel and the representative plaintiff to class members during the litigation; and information pertaining to the dynamics of, and positions of the parties, during the negotiations. [36]

The Role of the Court and the Record

McCarthy v. Canadian Red Cross Society[37] addresses the role of the court in assessing a settlement, the nature of the record necessary for the court to discharge its role, and how its role differs from the role of the court in a proceeding under the Companies Creditors Arrangements Act.[38] In McCarthy, a proposed class action involving persons infected with Hepatitis C through the blood supply before 1986 and after 1990, the defendant Canadian Red Cross Society (“CRCS”) had sought protection under the CCAA. The CRCS, and other participants to the reorganization plan, put together a partial settlement of the claims made in the case, with CRCS putting forward about $63 million and the plan participants putting forward just under $9 million. On review of the partial settlement in the class action, the court noted that its concern in CCAA proceedings is to balance the interests of claimants and creditors while maintaining the viability of the corporate entity. However, in a class action the court is only concerned with the interests of the class members and whether the settlement is fair and reasonable in the circumstances. In that case, the court found that the material before it did not permit it to fully assess the fairness and the reasonableness of the settlement vis à vis the plan participants. The material before the court simply disclosed that there had been hard bargaining between the parties, resulting in agreement on a certain sum of money. There was no evidence about the potential litigation exposure of these participants or why the sum of money proposed was appropriate in exchange for the class members releasing claims against the CRCS. In the result, the application was dismissed with a right for the plaintiffs to file more information and have the court revisit the settlement.

The proposed settlement in McCarthy would have also extinguished the rights of some putative class members with derivative claims under the Family Law Act.[39] The court held that instead of requiring them to opt out to avoid having their rights extinguished, the class definition should be amended to exclude them. This is consistent with the principle of doing no prejudice to putative class members who are excluded from a settlement. It should be noted that the “do no prejudice” rule only applies pre-certification and so, in terms of settlement, only applies to putative class members being excluded from a settlement. Where the settlement is merging with certification, and the putative class members become members of a certified class with the terms of the settlement binding on them, then the test in Dabbs applies:  the settlement must be in the best interests of the class members.

The plaintiff in McCarthy did come back to court with a revised proposal and more information. The derivative claims were included in the settlement. More information was provided which permitted the court to analyze the contributions of the plan participants to the settlement against the test of fairness and reasonableness.[40]

More recently, on a motion for certification and settlement approval in Burnett v. St. Jude Medical, Inc.,[41] the BC Supreme Court ordered that a group of objectors to a proposed settlement be given access to documents. The documents ordered to be produced were held to be necessary for the objectors to understand why certain compromises had been made in the course of the settlement, and to allow them to make submissions on whether the settlement was fair and reasonable. However, the court stopped short of ordering whole scale production to the objectors of all documents produced in the litigation. In doing so it held that a settlement approval is not review of the merits of the case, and the volume of documents sought was such that it would not be consistent with a fair and expeditious determination of the proceeding. In this case, the representative plaintiff and the defendants banded together in opposition to the objectors, demonstrating how the traditional adversarial approach can be eroded on a certification motion.

On the approval itself,[42] the court in Burnett found that the representative plaintiff had not demonstrated that the settlement was in the best interest of the class as a whole, because class counsel had not investigated the possibility of a psychological damage claim to a large portion of the class which had not suffered a physical injury. Sigurdson J. noted that where class counsel has done adequate investigation of the merits of the claims, the recommendation of class counsel would not be lightly second guessed. However, without ruling on the merits on the psychological damage claims, he found that they had been inadequately investigated by the representative plaintiff’s counsel.[43] With the objectors asserting that their claims were compensable beyond a nominal level, Sigurdson J. rejected the settlement with permission for counsel to bring it back before him if the concerns he expressed were addressed.   

Compensation of the Representative Plaintiff

In some situations the representative plaintiff is the driving force in identifying the claim, choosing counsel, advancing the claim and in bringing the proceeding to fruition. This can involve a great deal of effort and commitment on the part of that person. From the perspective of the representative plaintiff, the class members get a free ride: they have no risk as to costs and they put up no money, time or commitment toward moving the claim forward. Accordingly, some representative plaintiffs are of the view that they should be fairly compensated for their time and expenses.

The courts have been circumspect in authorizing such claims, since they raise the potential for a conflict of interest between the representative plaintiff and the class members. It is also contrary to the policy of the class proceedings legislation to turn class proceedings into profit centres.

In Sutherland v. Boots Pharmaceutical PLC,[44] it was held that compensation to representative plaintiffs must be for “necessary” functions that result in monetary success for the class. Any amount awarded should not exceed what would compensate the plaintiff on a quantum meruit basis. This may be particularly problematic where the settlement calls not for payments to class members but for a cy-pres distribution, as the representative plaintiff becomes the only class member to derive any financial benefit.

However, in Garland v. Consumers Gas,[45] the plaintiff was paid for his participation even though the settlement came in the form of a cy-pres distribution. Although Cullity J awarded the plaintiff only $25,000 of the $95,000 requested, an order was entered on consent on appeal that he would be paid the full $95,000 out of the funds reserved for fees and disbursements.

In McCarthy v. Canadian Red Cross Society,[46] the court held that compensation should generally not be paid for actions of a representative plaintiff to pursue the case because this is the role he or she has agreed to perform.

In Hislop v. Canada,[47] representative plaintiffs from across the country in a national class action were allowed compensation in circumstances where the case went to trial on the merits and the compensation sought was calculated at below the value of time and energy they had put into the case. The court directed that the compensation be treated as a disbursement.

Negotiations of Class Counsel Fees – Is There An Elephant In The Room?

The vast majority of class actions result in settlement rather than trial. It is not uncommon for the fee to be negotiated as part of the settlement process, and all settlements and fee agreements must be approved by the court. When the settlement is put before the court for approval, the common practice is for approval of the fee to be dealt with only after the settlement of the claim of the class members. Nonetheless, observers point out that the total will be regarded as a package by the settling defendant. The question is whether this places the plaintiff’s counsel in a conflict. The answer is that it does not, at least where the fee is negotiated at arm’s length, is not paid from the same fund as the settlement money, and would not diminish the recovery of individual class members:  see Dabbs v. Sun Life.[48]

Because class counsel do not wish to have the settlement approved and their fees not approved, on a few  occasions counsel have made the settlement approval contingent on fee approval. This practice was soundly rejected by the court in Garland v. Consumers Gas[49]and in Quatell v. Canada (Attorney General),[50] where Brenner C.J.S.C. “de-linked” the settlement approval from the fee approval and considered them separately.

Depending on the terms of the settlement, the defendant may not have standing on the fee approval and in such cases there will be no effective adversary to assist the court on either settlement or fee approvals. Class counsel may find themselves in a conflict in supporting settlement approvals. As noted above, McCarthy establishes that class counsel have a duty to provide the court with a complete record so that the judge is able to fully consider the interests of absent class members.[51] It may be appropriate to appoint amicus curiae to assist courts in understanding the merits of the settlement generally and as it relates to fees in particular.

In Killough v. Canadian Red Cross Society,[52] Pitfield J. held that the court in a class proceeding is only concerned with fee agreements between the representative plaintiff and class counsel. Thus, where the fee is being paid by the defendant to the plaintiff and does not diminish the settlement fund, the court is without jurisdiction to approve or reject the fee agreement. However, this ruling was not an endorsement of structuring fees to avoid court approval of fees. To the contrary, Pitfield J. said that the fee should be structured as being claimed pursuant to the fee agreement between the representative plaintiff and class counsel, thereby engaging the full jurisdiction of the court to review it, and should include a clause that the defendant will contribute to the fee up to the negotiated amount as part of the settlement. In the end, Pitfield J. approved the fee to the B.C. counsel, although he stated that had the aggregate fee (the fee for all class counsel across the country) been sought in the context of an agreement between class counsel and the representative plaintiff, he would have only approved a fee of about half the quantum of that agreed to between the defendant and the national group of class counsel.

The primary finding of Pitfield J., that a fee being paid by a defendant is not subject to review by the court, is not easily squared with existing jurisprudence. In the Ontario approval of the same case, the court held that such a circumstance did not eliminate the need for court review of the fee sought.[53] In addition, in another Hepatitis C case in British Columbia, Endean v. Canadian Red Cross Society,[54] Smith J. (as he then was) held that the public perception of the administration of justice must be taken into account when approving fees in class actions. In Northwest v. Canada (Attorney General),[55] McMahon J. held that the public interest demanded court review in part because the fees were being paid by a governmental defendant out of the public treasury (as was the case in Killough and Endean). However, he left the issue open for a case where the paying defendant is a private litigant. In Quatell,[56] as noted above, Brenner C.J.S.C. came to the same conclusion after de-linking the fee and settlement approvals – the fees must be reviewed by the court despite being paid by the defendant.

Cy-Pres Distributions

A cy-pres distribution occurs when a settlement cannot practically be distributed to the actual class members, in whole or in one part. The reasons giving rise to this situation vary. For instance, the size of the claims and the number of class members could mean that it is impractical and uneconomical to compensate individual class members.[57] It may be that the class size includes virtually every Canadian who has bought a consumer product subject to widespread price fixing, and it is impossible to ascertain how much of the overcharge was passed through to the end use consumer as opposed to being absorbed by the direct and/or indirect purchasers.[58]  It could be because the settlement fund is based on a take-up rate above that which will actually be realized and the surplus is better going to some worthy cause related to the underlying case rather than back to the defendants.[59]

Class proceedings legislation contemplates and permits cy-pres distribution.[60]  However, cy-pres distributions, by their very nature, raise a number of serious potential ethical problems. In the first place, because the corpus of the settlement is not going to class members, there is always the overriding concern as to the adequacy of the settlement. In other words, a beneficiary is not going to look a gift horse in the mouth. The class members will not be affected and the defendant is anxious to minimize the settlement. Courts on approval motions will be very circumspect for these reasons and counsel must ensure that the motion materials address this point squarely. Secondly, there is a question as to how the particular beneficiary has been chosen. Is there any connection with class counsel or the defendant? The basis for the selection and the process employed to determine the beneficiary should be dealt with in detail in the motion materials. Finally, there is a growing concern about lobbying of counsel, and even courts, by hopeful beneficiaries of cy-pres settlements as this source of funds becomes better known. This must be forbidden.

These concerns have been brought to the fore in the United States , mainly because of issues relating to selection of the beneficiary, and to a lesser extent, the concern that perhaps there is not as great an emphasis on the adequacy of the settlement when it is going cy-pres. We must be vigilant in Canada for the same reasons expressed south of the border.

Ford v. Hoffman-LaRoche contains an excellent summary of the types of issues which justify cy-pres distribution, as well as the nature of the evidence that will be required to support such a finding. It is incumbent upon the parties to satisfy the court that the selection of the recipients was based on objective criteria and that the funds will be used for legitimate purposes related to the underlying cause of action. In addition, it must be clear on the evidence that the recipients have not received any favourable treatment from class counsel. Each recipient must be a credible organization willing to attorn to the jurisdiction of the court and prepared to report to the court on a periodic basis as to the use of the funds. Where the case is a national class, it is desirable that the recipients should have a national perspective as well.

The End of the Road on the Merits – Concluding the Marginal Case

As is always stressed by plaintiff’s counsel during certification, and has been confirmed by the Supreme Court of Canada,[61] the merits of the underlying action are not considered on certification. Sometimes class counsel, who fought tooth and nail to certify the case, might wish they were. It would have been better to know back then that the case would crater on the merits or that the number of class members with claims are so few, or so disinterested, that the case is uneconomical even though certified. There can be legitimate reasons for class counsel to wish to end a proceeding where, in their opinion, the case is of questionable merit and they are on the hook for time, disbursements and possibly even costs. Putting aside the economic consequences for class counsel, the objectives of the class actions -  judicial economy, access to justice and behaviour modification -  are moot where the case has no merit or the costs of trying it outstrip the overall value of the case. This is a valid reason why counsel must act advisedly before commencing a class action. An action cannot be dismissed or discontinued without court approval.

Where the case has been settled for cents on the dollar, the court will be concerned that class counsel may be happy to exit the proceeding as long as their fees are paid.

In K. Field Resources v. Bell Canada International,[62] a settlement was approved that provided for a dismissal of the class action without costs but with a $3 million payment to class counsel. Class counsel argued that they had pursued the matter diligently, but it was only by reason of the discovery process afforded in the litigation that they were able to evaluate the case more accurately. The settlement was held to be reasonable and in the best interests of the class.

A different result was seen in Epstein v. First Marathon Inc.,[63] where a settlement agreement dismissing the action was not approved by the court. Warning against the danger of “strike suits” – cases of little merit brought under the impetus of counsel with the hope of pressuring the defendant into a settlement – the court refused to approve of any agreement that provided any funds to class counsel. Cumming J. wrote that “approving a settlement tainted by bad faith or unethical behaviour would constitute an abuse of judicial discretion.”[64]

In this regard, Epstein also definitively addressed the issue of settling a class action prior to certification – even though it is not yet a class proceeding, the court’s role in protecting absent putative class members cannot be ignored and court approval of the discontinuance could not be sidestepped as had been attempted in that case.

Markedly different circumstances were noted in Smith v. Crown Life Insurance, where counsel for the plaintiff sought to discontinue the action prior to certification because of recent decisions dismissing certification applications in similar vanishing premium cases.[65] The discontinuance had been negotiated with the defendant on the basis that the representative plaintiff and the only other known putative class member would be paid, and that plaintiff’s counsel would receive a fee. All of this was put before the court. The court acknowledged this disclosure and the reasonableness of the steps proposed, including payment to plaintiff’s counsel for the time invested, but dismissed the application because of the notice issue discussed earlier in this paper.

The factors a court will consider when determining a request to discontinue a class action include the prospects for success, the actions of counsel, the costs exposure of the representative plaintiff, the effect on the rights of all parties, prejudice to putative class members, the overall reasonableness of the settlement, and the motivation in bringing the action.[66]

Captial Punishment – Removal of Class Counsel

Fortunately, removal of class counsel has been rare to date in Canadian class actions. The most common instances of losing the right to represent the class occur at the initial stages, where a so-called beauty contest is held by the clients with counsel or on a carriage motion before the court which results in one set of counsel being permitted to proceed in favour of another.

It does happen that plaintiff’s counsel get themselves into fixes, which usually could have been avoided and which result in the court ordering removal of counsel. For instance, in Lau v. Bayview Landmark,[67] one representative plaintiff brought a motion to remove the two current lawyers as solicitors of record, while the other representative plaintiff sought to retain them. Cullity J. held that different representative plaintiffs could not be represented by different lawyers, and that the loss of confidence by one plaintiff (and the strong evidence of incompetence on the part of the named lawyers, as well as extensive evidence of the inability of co-counsel to work together) was sufficient to justify removal. The court was clear, however, that it did have the jurisdiction to refuse the request to change solicitors.

In British Columbia, the Richard case has a long and involved history in this regard.[68]  The case involves the alleged physical and sexual abuse of students at the Woodlands school for mentally challenged persons run by the province of British Columbia. The first skirmish involving plaintiff’s counsel was indeed whether Richard’s counsel and the case itself would proceed, or whether a rival case supported by the Public Guardian and Trustee of British Columbia, who stood in a relationship of litigation guardian with many of the class members, would proceed. Richard’s case and counsel received the court’s blessing, and that decision was affirmed on appeal.[69]

The class members in Richard were living persons who attended the Woodlands School between 1878 and 1996. As the case progressed, the British Columbia Court of Appeal ruled in an unrelated case, Arishenkoff v. British Columbia,[70]  that the Crown could not be held liable for acts committed prior to the enactment of the Crown Proceedings Act[71] in 1974. This, of course, affected the claims of the class members who attended the school prior to 1974. Subsequent to this decision, settlement negotiations ensued. The terms agreed upon in the proposed settlement excluded persons whose abuse had occurred prior to 1974. At this juncture, an application was brought to create a sub-class of those persons allegedly abused prior to 1974 and to name the already appointed representative plaintiff as the representative for this pre-1974 sub-class.[72] The application also sought to appoint a new representative plaintiff to represent the post-1974 sub-class. In addition, the Public Guardian and Trustee applied to intervene in the proceedings.

Morrison J., who was the case management judge and was to be the trial judge, declined to create the sub-class on the basis that it was premature and that an argument might be made that Arishenkoff No. 2 did not apply to exclude a cause of action based on breach of fiduciary duty (as opposed to tort). However, she did permit the addition of a new representative plaintiff who had been a victim of abuse after 1974. Morrison J. was not apprised of the terms of the proposed settlement, but encouraged the parties to seek the assistance of the court (through a different judge) if the proposed settlement was the cause of the problems which brought them before her. It may have been that had she been aware that the proposed settlement sought to differentiate between such persons, she would have created the sub-class, as the interests of the classes were clearly diverging. Arishenkoff No. 2 created a legal divergence and sub-classing would presumably have resulted in separate counsel being appointed for the sub-class.

The parties then appeared before a different judge, Butler J., on an application by the original representative plaintiff to have his counsel removed.[73] The original representative plaintiff was an alleged victim of abuse prior to 1974, and had instructed class counsel to reject any settlement excluding him and other like victims. Class counsel nonetheless proposed the settlement which excluded pre-1974 abuse victims. Plaintiff’s counsel cross applied to have him removed as representative plaintiff.

At the hearing before Butler J., it was revealed that plaintiff’s counsel had agreed to keep the settlement negotiations confidential, including from the representative plaintiff. When the representative plaintiff became aware of the terms of the settlement, he retained independent counsel and gave instructions to plaintiff’s counsel to reject the settlement. Plaintiff’s counsel rejected the instructions and instead moved before Morrison J. for the creation of subclasses and for the appointment of an additional representative plaintiff.

Before Butler J., the original representative plaintiff stated that he opposed the settlement, and an affiant who was the co-ordinator of a survivors group of class members deposed that there was no support for the settlement within that community. Class counsel stated that the new representative plaintiff, appointed by Morrison J. as a post-1974 class member, was supportive of the settlement, although there was no affidavit material from him. Class counsel acknowledged that while his actions would have breached the duty owed to his client in an individual action, it was his duty in a class proceeding to act in the best interests of the class as a whole. In his view, the proposed settlement met that test. The underlying implication of his submission was that class counsel should prefer the interests of the class as a whole if they conflicted with those of a representative plaintiff, or if the representative plaintiff formed a contrary view of what was in the best interests of the class.

The court set out the duties of the representative plaintiff and of class counsel.[74] Butler J. held that class counsel had breached the duty of loyalty and candour owed to the representative plaintiff. Class counsel made this misstep because of his conclusion that the representative plaintiff was putting his own interests before that of the class. However, instead of seeking direction from the court, class counsel had acted to limit or eliminate the representative plaintiff’s involvement. The outcome was an order removing plaintiff’s counsel. Leave to appeal was granted but the appeal was subsequently abandoned.

The next development in the case was perhaps what should have happened when Arishenkoff No. 2 was released: the defendant applied for summary judgment to dismiss the claims of the pre-1974 class members on the basis that no cause of action existed, and to amend the class definition to include only those persons who attended the school after 1974. This issue was heard by a third judge, Satanove J., who granted the application.[75] She held that while the question posed by the court in Arishenkoff No. 2 concerned claims founded in tort, the answer was broad enough to cover equitable claims, and there was no cause of action for acts committed before 1974. This order was appealed and is under reserve.

Conclusion

The purpose of this article is not to set out an exhaustive list of ethical problems that may present themselves in any given class proceeding. Indeed, it would be unrealistic to attempt to do so. Moreover, the suggestion that there is any one correct approach that should be adopted in a certain situation would also be highly problematic. Ethical issues will arise that are unanticipated, beyond our comprehension based on experience to date, and for which idiosyncratic solutions will have to be devised by both counsel and the courts.

However, we do know that the ethical issues discussed here arise in large measure because of the sometimes unusual features of the class action model and the manner in which it intersects with the traditional legal principles governing the duties and responsibilities as between solicitor and client, not to mention with the court. Class action legislation is sui generis, and only time and experience will afford the opportunity for traditional legal principles and those emanating from this legislation to fully meld together in a homogeneous fashion. Some of the factors that underpin these tensions include: that the lawyer acting for a putative class owes a duty to that class as a whole, which may be at odds with the undivided loyalty that the lawyer owes to a single client; the financial stake and risk assumed by class counsel, dwarfing in most cases that of any class member; the ever-present concern for the silent class members; and the role of the court in protecting those interests. And the list goes on!

What then is the best advice for counsel confronting what must appear at times to be a hopeless and answerless list of dilemmas? What should counsel do when faced with that feeling that the world is closing in on them, that they are “caught in a trap”? There is no “pat answer”, but do not pick sides, do not prepare a construct or hierarchy of duties and loyalties and above all do not procrastinate in the false hope that things will sort themselves out. Finally, be candid and fulsomely frank with the representative plaintiff and with the court.