A recent decision of the Ontario Superior Court of Justice suggests that the standard for approval of class action settlements has been elevated. In Waldman v. Thomson Reuters Canada Limited, Justice Paul Perell rejected a proposed class action settlement, concluding that it was not fair, reasonable, and in the best interests of the class members. Under the Class Proceedings Act, class action settlements must be approved by the court, and this is the second such proposed settlement that has been rejected in recent months.

FACTS

The plaintiff alleged that the defendant had infringed the copyright of class members under the CanadianCopyright Act by making available, without permission and for a fee, court documents authored by lawyers who comprised the class. The publishing branch of the defendant company copied court documents from public court files and made them available to subscribers of its Internet database called “Litigator.” Subscribers to Litigator were required to sign a licence agreement which suggested that the defendant claimed copyright over the court documents. The plaintiff claimed damages, statutory damages, injunctive relief, and an accounting of profits. The defendant denied that its service constituted copyright infringement and argued, among other things, that the use of documents in Litigator by lawyers was “fair dealing” under the Copyright Act.

THE PROPOSED SETTLEMENT

After the action was certified as a class action, and following the release of decisions from the Supreme Court of Canada in July 2012 that clarified the fair dealing defence to copyright infringement (see our Blakes Bulletin: Supreme Court of Canada Deals Fair Blows to Copyright Owners), the parties entered into settlement negotiations. A settlement agreement was signed in February 2013 and a court-approved notice program followed.

As part of the settlement agreement, the defendant agreed to establish a C$350,000 cy-près trust fund to support public interest litigation. It also agreed to make changes to its copyright notices and subscriber contract terms to add cautions against copyright infringement. The individual class members, who could opt out of the settlement, would grant the defendant a non-exclusive “worldwide, perpetual, irrevocable and assignable” licence for the use of their court documents on Litigator and would not receive any monetary award. The settlement terms also provided that class members would release the defendant from any copyright infringement claims, and that class counsel would be paid a fee of C$825,000. The proposed settlement was supported by the representative plaintiff, class counsel, the defendant, the Canadian Bar Association, civil liberties organizations, and members of the bar. Seven class members objected.

PROPOSED SETTLEMENT REJECTED

The court confirmed that the test for approving a class action settlement is that the court must find in all of the circumstances that the settlement is fair, reasonable, and in the best interests of the class members. But, in a departure from previous case law, Justice Perell concluded that to be approved a settlement “must be substantively, procedurally, circumstantially, and institutionally fair” to class members. In prior Canadian decisions, courts have tended to focus on the procedural and substantive components of a proposed settlement in deciding whether it should be approved. Procedural fairness is concerned with whether claimants have access to a fair process to resolve their claims. Substantive fairness is concerned with whether claimants receive a just and effective remedy for their claims, if established. However, in Waldman, Justice Perell stressed the roles of two additional categories of fairness which must be taken into account: circumstantial fairness, which he described as the fairness of the settlement “to the parties and class members in their particular circumstances;” and institutional fairness, which “protects the integrity of class actions within the administration of justice.” Justice Perell emphasized that the courts will not act as a “rubber stamp” and noted that a focus on institutional fairness, in particular, “will elevate the standard for approval” of class action settlements.

Justice Perell concluded that the best that could be said about the proposed settlement in Waldman was that it was procedurally fair. He rejected it because, among other things:

  • the settlement was more beneficial to class counsel than to the class members, notably because class counsel would receive an C$825,000 fee in comparison to the notional benefit of a C$350,000 cy-près trust fund that would not result in payments to class members;
  • the settlement would effectively expropriate class members’ property rights (through the granting of non-exclusive copyright licences) in exchange for a charitable donation from the defendant – something that the defendant could not have achieved even by a successful counterclaim; and
  • the purpose of class actions is not to fund worthy projects but to provide access to justice to class members.

Justice Perell was also influenced by the fact that the proposed settlement, in his view, did not accord with the underlying principle driving the litigation. He noted that the litigation was commenced because lawyers objected to the defendant appropriating their works without consent and not out of a desire for money. In his view, the granting of a licence to the defendant and providing a release from class members was inconsistent with that purpose.

Justice Perell noted two alternatives for settling the litigation that might have met with greater success:

  • seeking court approval for the discontinuance of the action on terms that provided for a cy-près payment, a fair and reasonable counsel fee, and no granting of licences; or
  • bringing a motion to decertify the action and then allowing it to be settled between the representative plaintiff and the defendant.

On the issue of fees, Justice Perell bluntly concluded that it was wrong to make the payment of class counsel’s fee a pre-condition to approval of the settlement. He stated that the court should have been given the option to reduce the counsel fee as it thought appropriate, or to reallocate a portion of class counsel’s fee to enhance the benefits of class members.

IMPLICATIONS

Waldman is the second proposed class action settlement to be rejected by Justice Perell in recent months and suggests there is an increased risk that a hard-fought negotiated class action settlement may not be approved. It is clear from Waldman that courts will not only scrutinize a proposed settlement from the vantage point of the parties and class members, but also with reference to broader notions of institutional fairness and access to justice. The decision also suggests that cy-près resolutions that do not result in payments to class members may face increased scrutiny.