Court authority to amend class
Recognition of US judgment approving settlement: Currie factors
Amendment of certification order: 'preferable procedure' inquiry
In Silver v IMAX(1) the Ontario Superior Court of Justice recognised the conditional settlement of a US class action, which had been approved by a US court, and granted an order to amend the class definition in the parallel Ontario class proceedings by excluding those persons that had been included in the US settlement. This carefully reasoned decision is an example of cross-border judicial deference and will likely have important implications for litigants involved in parallel class actions in multiple jurisdictions.
The parallel Ontario and US class proceedings against IMAX Corporation, commenced in 2006, were based on allegations of misrepresentations in the financial reporting and recognition of revenue for theatre systems. The certified class in the Ontario proceedings was a global class and included all persons that had acquired IMAX securities on the Toronto Stock Exchange and the NASDAQ during the relevant class period, regardless of where they lived.
The lead plaintiff in the US proceedings originally sought to certify a global class, but was precluded due to the US Supreme Court's decision in Morrison v National Australian Bank Ltd,(2) which effectively excluded purchasers of shares on foreign stock exchanges from bringing securities class actions in the United States. As a result, the proposed class in the US proceedings consisted of all persons that had acquired IMAX securities on the NASDAQ during the relevant class period.
The parties reached a settlement agreement to resolve the US proceedings, which was approved by the US District Court for the Southern District of New York, subject to the Ontario court granting an order amending the class definition in the related Canadian proceedings to carve out the class members who were included in the US settlement class.(3)
Accordingly, the defendants brought a motion before the Ontario court to remove the overlapping class members – that is, those persons that had acquired their IMAX shares on the NASDAQ – from the parallel class action in Ontario. The defendants argued that the Ontario court possessed the authority to amend the class definition, and that the judge should respect the jurisdiction of the US court, which had already considered the fairness of the settlement agreement. In stark contrast, the plaintiffs' counsel argued that the settlement was unsatisfactory and threatened to "rip the guts out" of the Ontario proceedings, as the NASDAQ investors constituted approximately 85% of the global class.(4)
The court's general authority to amend an order certifying a proceeding as a class proceeding is provided by Section 8(3) of the Ontario Class Proceedings Act 1992.(5) In particular, where the conditions for certification have changed, Section 10(1) of the act contemplates an amendment to the certification order:
"On the motion of a party or class member, where it appears to the court that the conditions mentioned in subsections 5(1) and (2) are not satisfied with respect to a class proceeding, the court may amend the certification order, may decertify the proceeding or may make any other order it considers appropriate."(6)
In light of the developments in the US proceedings, Justice van Rensburg determined that the motion engaged Section 5(1)(d) – that is, whether a class action remained the preferable procedure for the resolution of the common issues. The judge referred to Mignacca v Merck Frosst Canada Ltd,(7) in which, in the context of parallel proceedings in Ontario and Saskatchewan, the Ontario Divisional Court held that "certification orders are not final judgments, but 'interlocutory procedural orders that may be amended at any time as the cases proceed'".(8)
The judge reviewed the authorities and confirmed that foreign judgments will generally be recognised by Canadian courts in circumstances where the foreign court has properly taken jurisdiction "in the sense that there is a 'real and substantial connection' between the cause of action and the court, and absent a defence to enforcement based on a violation of public policy or natural justice or evidence of fraud".(9)
In class proceedings, the courts are careful to protect the interests of the 'absent plaintiffs', meaning claimants that are absent before the court, but are members of the defined class and are ultimately bound by the result of the proceedings without their actual participation, unless they opt out of the class. According to the judge, the question was "whether the foreign settlement should be enforced against unnamed persons whose interests fall within the jurisdiction of this court, which is the jurisdiction where their claims are sought to be precluded".(10)
In order to recognise the US judgment approving the pending class action settlement, the judge considered the factors established by the Court of Appeal for Ontario in Currie v McDonald's Restaurants of Canada Ltd:(11)
- whether there was a real and substantial connection linking the cause of action to the foreign court;
- whether the rights of the absent class members were adequately represented; and
- whether absent class members were accorded procedural fairness, including adequate notice.(12)
The first part of the Currie analysis was easily established. Clearly, there was a real and substantial connection between the cause of action of the overlapping class members, who had acquired their IMAX securities on the NASDAQ, and the US court.(13)
The next part of the inquiry focused on whether the absent class members had been provided with adequate representation in the process that led to the settlement. As the judge stated, "adequacy of representation refers to both the representation of class members by the representative plaintiff and by class counsel in the foreign proceeding."(14) The judge was satisfied that The Merger Fund, a significant IMAX shareholder that traded on the NASDAQ, was a suitable representative plaintiff. In addition, US class counsel was recognised as being experienced in class actions and other complex litigation.(15)
The court's concern with adequate representation recognised that class settlements are susceptible to manipulation. In other words, "the interests of class members may be sacrificed for the benefit of class counsel, whose interest in their fee is in conflict with the interest of maximizing the value of the settlement".(16) Adequate judicial supervision works to protect the integrity of the settlement process and the interests of the class members. In the present case the parties reached a settlement after six years of litigation and fulsome discovery, coupled with several rounds of negotiation, which included the participation of the plaintiffs' Ontario counsel.(17)
Finally, the judge considered whether the absent class members had been accorded procedural fairness, including adequate notice of the settlement. The US notice made reference to the Ontario proceedings and provided a clear enumeration of the options available to the overlapping class members.(18) Indeed, the overlapping class members had been given a choice and had decided to accept the US settlement, rather than continued involvement in the Ontario proceedings.(19)
In determining whether the settlement of a class action is fair and reasonable, the Canadian courts may consider the following criteria:
- the likelihood of recovery or likelihood of success;
- the amount and nature of discovery, evidence or investigation;
- the settlement terms and conditions;
- the recommendation and experience of counsel;
- the future expense and likely duration of litigation and risk;
- the recommendation of neutral parties, if any;
- the number of objectors and the nature of objections;
- 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 negotiation.(20)
The judge indicated that the same factors had been considered by the US district judge in her determination of the settlement as being fair, reasonable and adequate.(21)
Having considered the Currie factors, the judge determined that the US judgment approving the settlement should be recognised in Ontario. The remaining question was whether the Ontario court should amend the certification order.
The judge referred to the Supreme Court of Canada's decision in Hollick v Toronto (City)(22) for the following statement of law:
"The 'preferable procedure' inquiry includes a consideration of whether the class action is preferable to other 'reasonably available means of resolving the class members' claims'… and must be conducted through the lens of the three principal objectives of class proceedings, which are judicial economy, access to justice and behaviour modification."(23)
The judge was satisfied that the Ontario court's recognition of the US settlement and the amendment of the class to exclude the NASDAQ purchasers' claims would serve the objectives of judicial economy and behaviour modification. The focus was:
"whether amendment of the class would further 'access to justice,' for the overlapping class members and for the members of the class who would remain if the NASDAQ purchasers are 'carved out,' and whether the order sought would respect the integrity of our class actions regime".(24)
With respect to the overlapping class members, the evidence did not establish that the US settlement was improvident when compared to the options available through litigation in Ontario.(25) There was also no indication that the US settlement worked to undermine the feasibility of the Toronto Stock Exchange purchasers' claims. In fact, the Toronto Stock Exchange purchasers had the chance to participate in a proportionally equivalent recovery.(26)
The judge stated that:
"It is not the function of this court to seek to jealously guard its own jurisdiction over a class proceeding that has been certified here. Such an approach is inconsistent with the principles of comity. It is also not the function of the court to favour or protect the interests of class counsel within this jurisdiction, knowing that they have invested time and resources into the litigation, and that their compensation will depend on the size of the judgment or settlement they are able to achieve."(27)
The certification order was amended to remove from the defined class all NASDAQ purchasers during the relevant period that had failed to submit an opt-out notice in the US proceedings. The judge was careful to note that the defendant's motion would have been dismissed had the US settlement been "the product of a reverse auction" or "an attempt to circumvent an order of this court made on the merits, or substantially affecting the proceedings in this jurisdiction, or was in some other way in disregard of this court's jurisdiction".(28)
The Ontario court's decision in IMAX is significant because it demonstrates that class members in Ontario class proceedings can be bound by the settlement of parallel US class proceedings. A globally certified class action does not necessarily have to be resolved on a global basis. The Canadian courts are willing to grant deference to the decisions of their US counterparts "in circumstances where we would expect our judgments to be recognized".(29) IMAX suggests that issuers which are faced with parallel class actions in multiple jurisdictions can avoid a war on two fronts by amending the class definition in one jurisdiction to exclude from the certified class all persons that settled their claims in the other.
For further information on this topic please contact Norm Emblem or Ara Basmadjian at Dentons Canada LLP by telephone (+1 416 863 4511), fax (+1 416 863 4592) or email (firstname.lastname@example.org or email@example.com).