Can class counsel enter into “fee sharing agreements” in order to avoid carriage motions and stay late arriving rival class actions? In the recently decided case of Bancroft-Snell v. Visa Canada Corporation, the Ontario Court of Appeal upheld a decision by Justice Perell (that we discussed in an earlier post) that prohibited class counsel from making any payments from settlement funds to a rival class action firm. In its decision, the Court of Appeal held that courts have the authority to review fee sharing agreements under the Ontario Class Proceedings Act, and found that the agreement in question was not in the best interests of class members.

Events leading to the fee sharing agreement and settlement of the action

The Court’s ruling arose from a class action that had been brought on behalf of merchants who challenged the competitiveness of the Visa and MasterCard credit card networks in Canada. A consortium of three law firms acted together as class counsel in the separate provincial proceedings in British Columbia, Quebec and Ontario (“Class Counsel”). Class Counsel advanced the case primarily in B.C. and had initiated the certification process. However, in July 2012, a significant settlement was announced in the parallel U.S. proceedings. Shortly following that settlement, a rival firm, the Merchant Law Group, filed its own class actions in Alberta and Saskatchewan. Class Counsel then filed their own class proceedings in Alberta and Saskatchewan, and the parties initiated steps to resolve their carriage dispute before the courts.

At the suggestion of the presiding judge in Alberta, the parties held a mediation that resulted in a Fee Sharing Agreement that resolved their dispute. In essence, the Fee Sharing Agreement provided that the Merchant Law Group would agree to stay its rival class actions in exchange for receiving up to $800,000 (plus disbursements) out of the fees awarded to Class Counsel in future settlements. As a result, the consortium of Class Counsel obtained carriage of the class actions on a national basis.

In 2014 and 2015, Class Counsel entered into settlement agreements with certain defendants. Class Counsel proceeded to move for approval of the settlements and for approval of their fees and disbursements in all provinces. These settlements were approved in British Columbia, Quebec, Alberta and Saskatchewan, and the settlements required further approval in Ontario.

Justice Perell holds the fee sharing agreement is unenforceable

On November 19, 2015, the Ontario court heard the motion to approve the partial settlement, and as part of the motion, Class Counsel sought approval of a fee award. Justice Perell approved the settlement but refused to endorse the fee-sharing portion of the agreement as it would have force class members in Ontario to “pay a ransom fee in order to stay late-arriving rival class action in Alberta and Saskatchewan.” Justice Perell held that the fee agreement could not serve the best interests of the class members at large. He declared that the agreement was unenforceable and reduced the fees requested by Class Counsel by 10% to reflect his refusal to approve the Fee Sharing Agreement.

The Court of Appeal upholds the decision with one modification

On appeal, the Ontario Court of Appeal largely upheld the decision of Justice Perell. Justice Blair, on behalf of a unanimous court, held that the court had the authority to review the Fee Sharing Agreement under the Class Proceedings Act as part of their broad supervisory role over the conduct of class proceedings, including the approval of settlements and the approval of fees and disbursements paid to class counsel.

The Court found that Justice Perell’s decision not to approve the Fee Sharing Agreement and to reduce Class Counsel’s fees was reasonable. Although fee sharing agreements between competing law firms to avoid carriage litigation are becoming more common in the industry, the Court held that it was open to Justice Perell to reduce the fees by an amount that he considers judicious to reflect his disapproval of an agreement that in his view amounted to a “ransom fee.” The Court agreed that counsel who did not make any contribution to the settlement and whose work was redundant and useless to the class members should not share in the fees generated by the settlements.

However, the Court of Appeal varied the wording of the paragraphs of Justice Perell’s order dealing with the unenforceability of the Fee Sharing Agreement. The Court noted that it should not prohibit Class Counsel from paying Merchant from any source whatsoever, thereby altogether depriving Merchant of any personal rights that it may have had vis-a-vis Class Counsel. Instead, the Court held that Class Counsel cannot pay the amount owing to Merchant from the settlement proceeds, legal fees or disbursements. As a result, Class Counsel may still have to pay Merchant the amount negotiated in the Fee Sharing Agreement, although this amount cannot come from the settlement funds.

Looking ahead

In its decision, the Court of Appeal did not find that fee sharing agreements” were per se unlawful – rather, the Court of Appeal held that such agreements were not in the best interests of class members and would not be approved to the extent that fees were paid from settlement funds that were held for class members. As a result, the Court of Appeal left open the possibility that class counsel could enter into a fee sharing agreement with a rival firm using class counsel’s own resources that were not drawn from settlement funds.

As a result going forward, the Court of Appeal’s decision may mean that class counsel will face a choice whether to spend money from their own pocket to stay rival class actions or to continue to deal with costly carriage motions. Although this decision focuses on the choices of class counsel, defendants may have their own self-interest in staying rival class actions in other jurisdictions and getting settlements approved.

This decision also serves as a reminder to both plaintiffs and defendants that settlement approval is not simply a rubber stamp process. Courts will consider the interests of the entire class in approving settlements and have continued to flag their reluctance to approve settlements which trigger concerns of fairness or lack of transparency.