The Ontario Superior Court of Justice in Serhan v. Johnson & Johnson approved the settlement of the first class action in Canada to certify waiver of tort as a common issue. In approving the settlement, Justice Horkins assessed the likelihood of recovery or success pursuant to waiver of tort, which, since the certification decision in Serhan, has become an all too common pleading in class action claims.

The action

The action was commenced in 2001. The plaintiffs alleged negligence, negligent misrepresentation, breach of the Competition Act and conspiracy relating to the manufacture, sale and distribution by the defendants of certain home blood glucose monitoring products (the SureStep Meters and Strips). The plaintiffs also claimed that the defendants held all the revenue generated from the sale of the SureStep products in a constructive trust for the benefit of the class members. The blood glucose monitors had two design errors, which resulted in the device displaying incorrect blood glucose levels. There was evidence that one of the errors occurred between 0.5% and 1.5% of the time and the other occurred approximately 0.13% of the time. The defendants corrected the design errors and undertook a voluntary recall of the affected products. There was no evidence of any injury in Canada arising from either of the design issues.

Companion actions were brought in British Columbia and Quebec, which were subsequently, to the extent possible, held in abeyance pending the resolution of the Ontario action.

The certification decision

In July 2004, Justice Cullity certified the action as a class action; but certified only "waiver of tort" as a common issue, holding that the plaintiffs could pursue constructive trust and restitutionary claims for an accounting of the defendants' proceeds of sales, which would not require the plaintiffs to establish any individual loss (as would be required for the other causes of action advanced by the plaintiffs). The defendants appealed on the basis that waiver of tort was not an independent cause of action. The certification decision was upheld on appeal on the basis that the nature and scope of waiver of tort should be resolved on a full factual record. As Justice Horkins summarized:

There is a serious question of whether "waiver of tort" is an independent cause of action, or merely a remedy available only after a plaintiff has established another cause of action. All Justice Cullity found in certifying this action was that it was not plain and obvious that waiver of tort was not a cause of action. And all that the Divisional Court found on appeal was that "whether waiver of tort is an independent cause of action should be resolved in the context of a factual background of a more fully developed record.

The settlement approval decision

In reasons released earlier this year, Justice Horkins approved the settlement which totaled $4 million, with cash value of $2.75 million (of which $1.5 million was for counsel fees) and product value of $1.25 million. The settlement funds were allocated to educational and public awareness programs that would be established by the Canadian Diabetes Association (CDA). With respect to products, the defendants would provide 5000 home glucose monitoring systems to be distributed by the CDA. The settlement agreement was subject to approval in Ontario, Quebec and British Columbia. No class member objected to the settlement.

The Court approved cy près distribution of the settlement as it found that direct compensation was not practical in the circumstances of this case. The following facts supported a cy près distribution: (i) the class members were able to use their SureStep Meters and Strips for the intended purposes, except in only a small number of occasions; (ii) there was no evidence of actual harm; (iii) many class members received replacement product; and (iv) a direct distribution to class members would be uneconomic considering the modest damages.

It is well established that when considering the approval of negotiated settlements, the court may consider a variety of factors, including: likelihood of recovery or likelihood of success, amount and nature of discovery, evidence or investigation, settlement terms and conditions, recommendation and experience of counsel, future expense and likely duration of litigation and risk, number of objectors, the presence of good faith, arm's length bargaining and the absence of collusion, the degree and nature of communications by counsel and the representative plaintiffs with class members during the litigation and information conveying to the court the dynamics of and the positions taken by the parties during the negotiations.

In considering these factors, Justice Horkins noted that in this case the likelihood of recovery or success, was "critical" to the court's approval of the settlement: "while class counsel believes it has a good case on liability against the defendants, the amounts recoverable as a result of waiver of tort were considerably less than originally anticipated."

According to Justice Horkins, the fact that the action was certified with waiver of tort being the cause of action created "significant risks and challenges for the class". The problem with waiver of tort, her Honour noted, lies in defining the applicable parameters, thus leaving class counsel and the courts in "uncharted territory":

Even if the Class was successful in establishing waiver of tort as a cause of action, for policy reasons it might not be found applicable in product liability cases. Thus, it was possible that a court might find that the cause of action existed but was inapplicable in these circumstances.

Justice Horkins also found the calculation of the amount to be "disgorged" was another area of uncertainty, which affected the likelihood of recovery or success by the plaintiffs. In particular, her Honour noted, if the defendants were found liable, it is not clear whether the plaintiffs would be entitled to gross revenue, net revenue after deducting costs of sale, or net profit after deducting costs of sales and overhead or a portion thereof. Furthermore, the defendants had provided free replacement products after the product recall, which the court may or may not deduct from the amount to be disgorged. Indeed the defendants asserted that given these deductions and the cost of the recall they would claim a loss at the common issues trial such that there would be nothing to disgorge.

Given the uncertainty in how these factors may be determined by the common issues trial judge, class counsel had submitted three alternative calculations of the amount to be disgorged in this case. The Court, however, noted that there was a "real risk" that the plaintiffs' calculations would not succeed because of two compelling points raised by the defendants: (i) the plaintiffs were able to use the products for their intended purpose, except possibly for a small number of occasions; and (ii) there was no evidence of actual harm. In these circumstances, Justice Horkins stated, "a court might conclude that it is unjust to allow the Class to receive any disgorgement of profits, which would in essence be a windfall without any juristic basis." In addition, Justice Horkins expressed some doubt as to whether the court would order punitive damages in addition to disgorgement, which may itself be seen as punitive.

While not a decision that considers whether waiver of tort is, in fact, an independent cause of action, the Court's commentary is nevertheless interesting as it relates to the application of the waiver in that case. Given the settlement, however, it still remains to be seen whether waiver of tort can survive a full merits review at a trial.