As in-house counsel responding to a new proposed class action, once you have alerted and educated the various interested stakeholders about the new proceeding, and you have the appropriate in-house team and outside counsel assembled and active, you must next turn your mind to the major strategic question: to settle or to fight?

In order to determine the appropriate strategy to protect the company, you must understand the series of steps that the lawsuit will follow, and then assess the strength of the company’s position at each stage. Procedurally, there are important differences between a traditional lawsuit and a proposed class action. In an "ordinary" lawsuit, your company will file a Statement of Defence, and then exchange documentary productions with the plaintiff and proceed through oral examinations as to the allegations and defences of the opposing sides. In a proposed class action, however, before (in most cases) any defence is filed or documents produced, counsel for the plaintiffs will initiate a motion to the Court to request a judge to "certify" the lawsuit as a class action. Each province has legislated criteria which a judge will consider in deciding whether to join the allegedly common issues of a group of individuals to be decided in one

"common issue trial." The defendant company may oppose certification on any number of grounds and, if the action is nonetheless recognized by the Court as a class action, it may continue to defend the action through the common issue trial. As in a traditional action, the parties may also seek to settle the action at any stage: after service of the claim but before the certification motion; after the certification motion and before the common issue trial (if the lawsuit is ordered to proceed as a class action); or before the trial of the issues of the individual plaintiffs only (if certification is denied).

As in a traditional lawsuit, there are also numerous considerations both in favour of and against settling a proposed class action, in general and at any particular point in the lawsuit. However, because the scale of costs and exposure in most proposed class actions is larger than in traditional lawsuits, and because of the different procedural steps involved, early and regular consideration of settlement is appropriate.

It is therefore important to obtain as complete an understanding as possible, as early as possible, of:

1. the merits of the lawsuit;

2. the expenses and exposure involved in the lawsuit; and

3. the publicity the lawsuit may garner.

1. The merits

There are two important, but very separate aspects, to the merits: the merits of the underlying substantive claim, and the merits of the lawsuit for certification as a class action.

As to the action itself, the company must assess the likelihood that the allegations contained in the lawsuit can be proven by the plaintiff at trial on his/her/its own behalf. It will be important to obtain expert advice from outside counsel on the legal allegations, to interview all of the involved individuals, and to review all of the critical documents relevant to the factual allegations and defences (Your investigation, and your assessment of the likelihood of success, will of course continue throughout the duration of the lawsuit.)

While the plaintiff may have a strong or weak case on the merits of the underlying action, that evaluation is largely unrelated to your assessment of the likelihood that the plaintiff can succeed in convincing a court that the lawsuit, as pleaded and as supported by affidavit evidence on a certification motion, should be allowed to go forward as a class proceeding.

It is important to recognize that the certification motion is very significant in many class actions, as a successful defence by the company to the motion will limit the company’s immediate exposure to the claims of the named plaintiffs only. Even though the substantive issues in the lawsuit remain outstanding, the plaintiffs’ loss of leverage and momentum can severely curtail their own willingness and ability (and that of their counsel) to pursue their individual claims. Conversely, even if the plaintiffs have a relatively weak case on the merits of the action as a whole, if their lawsuit is certified as a class action on behalf of a large number of persons, the cost of losing the lawsuit becomes exponentially greater to the company. Such a development can dramatically alter the risk assessment of proceeding to trial.

2. The expenses

As noted, the expense and exposure of defending a class action may be radically different than the risks associated with even a number of individual actions advancing the same allegations of wrongdoing. The liabilities the company must consider are fivefold:

  • its own legal fees;
  • the proposed damages award to the plaintiffs and all class members;
  • the potential requirement to pay the legal costs of the plaintiffs;
  • the manpower cost to the company as its employees and management devote time and energy to defending the lawsuit instead of conducting business; and
  • the potential reputational cost of a loss at trial or a well-publicized settlement.

Generally speaking, if the company fully defends and wins the class action lawsuit, it still faces a significant cost in terms of its own legal fees and manpower commitment. If the company fully defends and loses the class action, then it faces all of the above exposure and expense. If the company elects to settle, it may limit its exposure in many respects, but must consider the price that it may pay in company morale and reputation if the settlement is widely publicized. Further, it is important for the company to realize that even in a settlement, it may be required to fund or staff a very involved administrative effort to locate, verify and pay out on the claims of class members.

All of these facets of expense and exposure should be weighed by the company, taking into account its legal advice, at each stage of the lawsuit.

3. Publicity

Any significant legal action may bring with it unwanted and extensive publicity. Proposed class actions, however, have the potential to stimulate extraordinary public scrutiny, due to the potential number of individuals involved, and the cumulative value of their individual claims. Companies must be sensitive to this reality, and must evaluate whether factors such as the nature of the allegations, the identity of class counsel, the scope and composition of the proposed class, the quantum of the combined damages claims, and the related interest of the media and the public weigh for or against the opposing strategies of fighting or settling the new proposed class action.