Managing risk today to prevent tomorrow’s class action

MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 1 Managing Risk Today to Prevent Tomorrow’s Class Action MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 2 Osler, Hoskin & Harcourt llp The Modern Class Action Environment For a company, being named as a defendant in a class action is a significant disruption – and risk – to business. The associated costs may extend far beyond a possible damages award and legal fees. A class action has the potential to pit a business against its clients, customers and stakeholders. It diverts attention and resources away from the day-to-day operation of the company. And the resulting impact to an organization’s brand and reputation can be difficult to overcome, regardless of the litigation’s outcome. Class proceedings are a permanent fixture of the Canadian litigation landscape. Since the passing of Ontario’s Class Proceedings Act, 1992, over 700 class actions have been launched in that province alone. Aggressive, well-funded and creative plaintiffs’ counsel are constantly on the lookout for new areas that may be ripe for class proceedings (digital security breaches and consumer product labelling being just two recent examples). Fortunately, there are a number of things a company can do to help control and minimize the threats associated with a class action. A properly designed and implemented risk management system can identify and mitigate the risk of litigation before it even starts. Deployment of a well-developed crisis response plan upon the imminent threat or commencement of a class action can contain initial fallout and put the company in the best position to defend. And a carefully articulated and executed litigation strategy will help drive a result that has the least financial and reputational impact on the company. 1 MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 3 Osler, Hoskin & Harcourt llp This paper addresses three key topics for companies walking the tightrope in today’s high stakes class action environments: 1. Risk Management, Prevention and Preparedness: reducing the risk of a class action – or avoiding it entirely – through diligence, risk analysis and proactive management; 2.Initial Response and Management: responding quickly and proactively to the threat or commencement of a class action at the outset to manage and contain risk; and 3. Defending the Action: designing a focused and clear strategy for the defence of the action, including identifying the desired endgame and opportunities for potential early success. MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 4 Osler, Hoskin & Harcourt llp Risk Management, Prevention and Preparedness Class actions are just one of many risks to which companies are exposed simply by virtue of carrying on business. The reality is that regular dealings with multiple constituents (consumers, suppliers, investors and members of the public generally) may expose a company to a myriad of threats that can end up being beyond its power to entirely control. Against the backdrop of that uncertain environment, carefully developed risk management procedures and a meaningful crisis response plan are essential tools in helping to identify and mitigate threats, including the threat of a class action, as early as possible. A. ESTABLISH A RISK MANAGEMENT SYSTEM It is important for an organization to design policies and procedures that will accurately identify and diagnose areas of potential exposure before they reach the crisis stage (e.g., litigation). Elements of a proper risk management system include: • Creating a risk assessment team: Companies should create a formal risk assessment team comprised of key players from all aspects of the business, including senior executives and managers from all business divisions, legal, finance, public relations, human resources and information services. That team should meet regularly to review and assess risk, with each member reporting on potential areas of exposure through the lens of his or her individual unit. Risk reviews should not only look forward to potential new areas of risk, but should also look back at areas of risk previously identified to re-evaluate the measures taken to address them going forward. Cogent risk analysis from across the organization is invaluable to internal counsel in assessing potential exposure to litigation. 2 MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 5 Osler, Hoskin & Harcourt llp • Identifying and monitoring critical relationships: Regular monitoring of relationships with customers, suppliers, investors and other key stakeholders can provide advance warning of dissatisfaction and the early genesis of a class. Examples include franchisees who have created their own association or dissatisfied customers who form a group on Facebook. Vulnerabilities exist within all types of stakeholder relationships. Companies need to identify their most crucial relationships and monitor them. • Establishing risk “tripwires”: A critical part of risk prevention is the establishment of benchmarks to help identify when a situation is in danger of becoming a crisis, and to defuse the situation promptly, transparently and completely. These tripwires will vary by organization, but could include anything that triggers an alert when a threshold has been crossed, such as: • formulas in business software that identify when too much money has been spent or too many hours have been logged by an individual; • IT applications that detect unusual behaviour in a network or unusual patterns in data; and • a system that records and logs customer complaints in a manner that will reliably detect sudden surges or longer-term patterns. Establishing tripwires is a cross-functional undertaking that requires input and expertise from a diverse group of risk assessment team members. For example, human resources may have as much to do with data breach security as IT does – a great many security breach and data loss class actions find their origin in sloppy management of passwords and confidential material by employees who lack proper training, discipline or time. Shared knowledge in setting alarms can properly identify and remove possible dangers. A critical part of risk prevention is the establishment of benchmarks to help identify when a situation is in danger of becoming a crisis, and to defuse the situation promptly, transparently and completely. MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 6 Osler, Hoskin & Harcourt llp • Proper data management: It is increasingly critical for senior executives and managers to understand how the company’s data is stored and protected. Record retention, including storage, archiving and mapping information, is essential not only to litigation preparedness, but also avoidance. Certain documentation may hold the answer to a potential issue or crisis (e.g., a ledger of certain activities, board meeting minutes). Quick access and proper storage and maintenance of this information could help mitigate or eliminate a problem early on. Knowing who is responsible for key documents and having ready access to those documents can also accelerate preparation of a litigation defence plan in the event a claim is threatened or commenced. Document destruction policies should also be clearly defined and regularly enforced to ensure that old and unnecessary documentation does not bog down the discovery process, while at the same time preserving documents that may be essential to respond to litigation if claims materialize many years later. • Ensuring compliance with established risk prevention policies: Many companies have excellent risk management policies on paper, but they are often not followed because of incomplete training, high staff turnover, work overload or miscommunication. Management must devise methods and enact plans to audit and track compliance with critical policies. Examples of such policies include: • Social media policies: Companies in certain lines of business face significant pressure to participate on platforms such as Twitter or Facebook to engage customers and generate awareness of their business or brand. However, an incomplete or inadequately policed social media policy may lead to “rogue tweets” from individuals not authorized to speak on behalf of the company. • Email and related communications policies: Employees – including senior executives and managers – often say things over company email servers that they would never say if they appreciated their exchanges might one day be viewed by opposing litigation counsel or a judge. Many employees never consider that their emails may be produced in litigation and are unaware of how much inappropriate email exchanges can colour a judge’s or the public’s view of a case. Employees need to recognize that emails and instant messages live forever, even when deleted, and that many comments shared by email may be construed differently than intended. • Employee overtime policies: A number of recent class actions have involved companies alleged to have not been compliant with their own overtime policy. • Data breach cases: Significant litigation risk can be created by employees acting outside of software security protocols, especially with regard to lax password or logon/logoff procedures, the use of non-secure devices (such as personal smartphones or tablets), travel with laptop computers, or inadequate cloud-based storage or transfer sites. Many companies have excellent risk management policies on paper, but they are often not followed because of incomplete training, high staff turnover, work overload or miscommunication. MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 7 Osler, Hoskin & Harcourt llp Read our Risk Management and Crisis Response blog Osler offers a dedicated blogsite containing news, advice and case studies focusing entirely on Risk Management and Crisis Response. Visit riskandcrisismanagement.com • Engagement of outside risk management counsel: Companies should consider investing in an objective review by experienced outside counsel to assess and prioritize risk areas that need to be addressed or controlled. A thorough external review of business practices, insurance policies, and workplace policies and procedures may help identify potential threats not obvious to those involved in the daily operation of the business. B. ESTABLISH A CRISIS RESPONSE PLAN Any proper risk management system requires the creation of a formal crisis response plan, which should be in place and ready to be launched well before any actual crisis occurs (e.g., the threat or initiation of a recall or class action). In crisis management generally, the first rule of effective crisis response is safe containment. The second rule is control of appropriate information flow. The third rule is effective restoration. These rules inform the design of the crisis response plan. Properly designed and implemented, a crisis response plan will provide immediate answers to the crucial question “what do we know?” before or at the same time as answering the question “what should we do?” A crisis response plan should set out specific procedures to be followed in the event of a crisis so that the appropriate persons can be immediately notified and engaged. To that end, the plan must include important contact information such as: • key individuals within the company and their roles, both generally and in the event of a crisis; • external legal counsel; • public relations and strategy firms; and • media contacts. In addition, the plan should set out clear communications policies and procedures, including identifying qualified individuals designated to communicate both internally (to management and employees) and externally (to customers, shareholders, insurers, media and the public) on behalf of the company. A company should also establish a cross-functional crisis response team responsible for implementing and overseeing the plan’s deployment in the event of a crisis. This team would very likely overlap with, and draw significant guidance and input from, the company’s risk assessment team (described above). In designing a crisis response plan tailored to its business and industry, a company should seek guidance from qualified crisis management consultants. MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 8 Osler, Hoskin & Harcourt llp Initial Response and Management A robust risk management system can significantly minimize the risk of a class action or, at the very least, identify the potential for one before it is commenced. If a company learns that a class proceeding is being investigated or may be started, it should begin implementing its crisis response plan. How a company responds and manages a potential class action from the outset can have a significant impact on containing and mitigating associated risk. A. COMMENCE THE INTERNAL INVESTIGATION Immediately upon discovering the threat of a class action, a company’s crisis response team should begin identifying the key personnel and subject matter experts within the company who can assess the genesis and merits of the issues. This process should also involve team members from information services and IT, who can begin to collect any documents and electronic data that will assist in information gathering. Being able to understand and assess the merits of the allegations as soon as possible is critical to setting a defence strategy, identifying the potential for a proactive resolution strategy and devising an appropriate and accurate public relations message. B. SELECT AND RETAIN CLASS ACTION COUNSEL A company should not wait to get sued before it retains class action counsel. An experienced class action firm brings tremendous value and efficiency to the process well before litigation is formally commenced. If engaged early, counsel can assist in carrying out a thorough internal investigation, providing expert risk assessment and helping design a proactive resolution procedure where appropriate. 3 MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 9 Osler, Hoskin & Harcourt llp In addition to legal expertise, sophisticated firms can provide specialized technical services that greatly reduce legal costs. For instance, document management specialists offer expertise in the efficient collection, culling and review of internal documents for the internal investigation and ultimate production in the litigation (often the most time-consuming and expensive part of a class action). When considering and choosing external class action counsel, a company should look for expertise in class actions generally, as well as in the company’s particular industry. In a regulated industry, the firm’s experience dealing with any relevant regulators will also be important. In a potentially multi-jurisdictional class action (i.e., where a company carries on business throughout Canada and therefore may face proceedings in a number of provinces), class action counsel should also have a national presence. This will generate significant efficiencies and ensure consistency in representation. Most national firms have relationships with the local bar in all major Canadian cities, which can prove invaluable in dealing with plaintiffs’ counsel and local judges. C. DEVISE A PUBLIC RELATIONS STRATEGY Class actions can attract significant public attention. Plaintiffs’ counsel will often undertake campaigns announcing an investigation and seeking to identify potential class members. Further, the mere existence of a distinct class of individuals suing a large organization will attract at least some media interest. Timely and consistent messaging by a company in the face of an investigation or proceeding can help establish a public position and mitigate any immediate fallout caused by the mere announcement of a potential proceeding. MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 10 Osler, Hoskin & Harcourt llp A company’s public communications in the face of a threatened class action are important not only with respect to the litigation, but also to protecting the company’s reputation and shaping public perception of the case. These communications should be prepared by the company’s internal or external public relations group, in close conjunction with legal counsel. Both the tone and accuracy of communications are crucial. There is an understandable tendency to wish to unequivocally deny or dispute the allegations at the outset, but any early statements that turn out to be untrue may end up being used in evidence against the company (or, even worse, may cause further harm to consumers or others who rely on them). D. IMPLEMENT OR ACTIVATE A PROACTIVE RESOLUTION PROGRAM Careful risk assessment, a system of tripwires and a crisis management plan should all be in place to facilitate early identification and mitigation of litigation risk. If a company can identify the prospect of a class action before it starts, it can take any number of approaches to stop it or mitigate damage before the litigation is launched. Depending on the nature of the business, these steps can include: • for consumer products issues: • proactive recall and voluntary refund programs; • customer service departments empowered to meaningfully address customer complaints in real time; • mandatory, pre-litigation dispute resolution mechanisms built into consumer agreements to the extent permitted by law; and • carefully designed internal claims procedures that may provide customers with a simpler and more efficient mechanism for resolution of their issue as opposed to a court proceeding. • for complaints relating to privacy concerns, designated privacy officers to which employees can have recourse. • for administrative issues such as salary, benefits and pensions inquiries, an ombudsman program that quickly and efficiently addresses employee concerns. In any event, it is integral to have a carefully crafted public relations campaign (be it internally or externally focused) to get ahead of an issue, and to identify and compensate potential class members, before an action is started. Read our Class Actions Defence blog Osler has emerged as an expert in the project management approach to class action litigation. You can find a listing of the relevant blogs at our Canadian Class Action Defence website. Visit canadianclassactiondefence.com/category/project-management MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 11 Osler, Hoskin & Harcourt llp Defending a Class Action While active risk management and a proactive response can often reduce or eliminate the prospect of a class action, sometimes pre-litigation resolution is not practical or economically feasible, and a class action will be commenced. That does not mean a defendant company must simply cede control of the pace and steps in the litigation to plaintiffs’ counsel. In appropriate circumstances, there are several proactive steps that a defendant can take, before certification, to either obtain favourable early resolution or narrow the issues in dispute considerably. Before determining which of these steps might be appropriate, an organization will first need to determine its endgame in the litigation. A. IDENTIFY THE ENDGAME Every project has a deliverable that must be identified before any meaningful planning can take place. Class actions are no different, with the deliverable being the company’s ultimate objective in the litigation. Understanding that the precise endgame may be fluid as the facts of the litigation unfold, it is important to identify it from the outset: • If the allegations are particularly critical in nature, such that settlement at any stage is simply not an option, a company may wish to fight the litigation aggressively through to trial; • If the allegations are less business-critical in nature, or if business and reputational risks would be raised by a prolonged legal battle, the company may want the litigation to be resolved as quickly and efficiently as possible; or • A variety of points on the spectrum between these two extremes. 4 MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 12 Osler, Hoskin & Harcourt llp It is also important to recognize the distinction between the desired endgame and the associated cost. A common and understandable question that decision makers ask when faced with a class action is, “what is this going to cost us?” If the endgame is to not pay anything by way of settlement and mount a vigorous defence, that strategy will likely involve different costs than a strategy of quick settlement. Further, there are different categories of costs that must be considered in defending a class action: • monetary cost, most notably any settlement payout or potential damages award, and the cost of the legal defence; • management and organizational time spent working with defence counsel in preparing for and defending the litigation that would otherwise be spent on running the company; and • potential damages to the company’s reputation or brand. The potential exposure to – and tolerance for – each category of cost will have a direct impact in determining the optimal endgame. B. COORDINATE WITH INSURERS It is critical to involve the company’s insurance carriers as early as possible in the litigation, as they will likely need to be consulted to approve any litigation or settlement strategy. The company may want to have its external legal counsel participate in initial communications with insurers to answer specific questions about the benefits and risks of differing legal strategies. MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 13 Osler, Hoskin & Harcourt llp C. POTENTIAL FOR EARLY SETTLEMENT THROUGH MEDIATION There may be circumstances where early, pre-certification settlement by way of mediation is an attractive option for both plaintiffs’ counsel and the defendant company. Those circumstances could include actions with relatively few factual and legal issues in dispute (with the only issue being quantum of potential damages), or where plaintiffs’ counsel with limited funding has indicated a preference for early mediation as opposed to protracted, multi-year litigation. In these cases, external legal counsel’s experience with and knowledge of the plaintiffs’ bar, as well as their creativity in identifying options for potential early resolution of a matter, can be of significant value both in achieving a settlement in principle and structuring the settlement to increase the likelihood of court approval. D. GOING ON THE OFFENSIVE, PRE-CERTIFICATION Simply because a class action has been started does not mean a defendant’s options are limited to responding to activity by plaintiffs’ counsel in an inexorable march to a certification motion and common issues trial. In appropriate circumstances, defendants can advance issues early to obtain important victories before certification: • Jurisdiction Motion: For a Canadian court to take jurisdiction over a dispute, the dispute must have a “real and substantial” connection to the province where it is commenced. If the defendant is not resident or does not carry on business in a province, and if the plaintiffs’ claim is not connected to the province (i.e., the tort alleged was not committed there, or the contract in dispute was not made there), then a court in that province will not have jurisdiction over the dispute. Even if the court does have jurisdiction, it may still decline its jurisdiction under the doctrine of forum non conveniens if the defendant can establish that there is another jurisdiction that is a clearly more appropriate forum for the resolution of the plaintiffs’ claims. Early strategic planning is important because this type of motion must be made at the outset of the action, prior to the defendant taking any other formal step in the action, or the defendant may be held to have attorned to the court’s jurisdiction. • Motion to Strike: Sometimes the plaintiffs’ statement of claim may be deficient on its face, failing to plead a recognized cause of action or raising an obvious limitation period issue. In those circumstances, a defendant may wish to bring a motion to strike all or portions of the pleading. The test on such a motion is high – a defendant must show that it is “plain and obvious” that the claim cannot succeed – and the court will generally give plaintiffs’ counsel an opportunity to amend and re-file some or all of a meritorious claim even after striking parts of the pleading. However, success on a motion to strike at an early stage can be a devastating blow to a proposed action. In appropriate circumstances, defendants can advance issues early to obtain important victories before certification. MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 14 Osler, Hoskin & Harcourt llp • Summary Judgment Motion: In its landmark 2014 decision in Hryniak v. Mauldin, the Supreme Court of Canada effectively lowered the bar for obtaining summary judgment in an action. In its decision the court stressed the need for greater access to justice and the early determination of disputes, without the delays and costs associated with full-blown discovery and trials. Courts will determine entire actions on a summary judgment motion where there is “no genuine issue requiring trial,” meaning that the central issues in the litigation can be determined on a relatively limited record and without the need for extensive testimony from live witnesses. A summary judgment motion may be an attractive alternative where a statement of claim would likely survive a motion to strike, but the issues in the litigation will not involve extensive disputed factual evidence. Each of these types of motions has differing evidentiary requirements, risks and timing considerations. A defendant will have to discuss with legal counsel whether any are appropriate in the circumstances of a particular case. E. CONTESTING CERTIFICATION In cases where certification seems likely, experienced counsel may advise avoiding the need for a certification fight by agreeing to certify some or all of the issues on terms favourable to the defendant. However, if a defendant can defeat a certification motion, that will often effectively put an end to the action. Opportunities to defeat certification can arise if, for example: (i) the issues common to all potential class members in the action are dwarfed in scope and importance by the individual issues, such that a common issues trial would not meaningfully advance the litigation; (ii) there is an alternative procedure that is preferable in the circumstances for the resolution of the claim of the proposed class; or (iii) the statement of claim does not disclose a cause of action (assuming this issue was not already determined on an earlier motion to strike). Even if total defeat is not realistic, it can be critical to fight certification in order to refine and narrow the issues that will move forward to common issues discoveries and trial. This can dramatically affect the ultimate outcome. MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 15 Osler, Hoskin & Harcourt llp F. DEFENDING A CERTIFIED ACTION If a class action is certified, either on consent or after a contested motion, the first thing a company should do is revisit its desired endgame in the litigation (discussed above). In doing so, decision makers should keep two points in mind. First, where historically a loss on certification was seen as a precursor to a settlement, defendants today are finding success on common issues trials. Settlement may not be desirable if the issues involve a key point of principle or are business-critical in nature. Second, plaintiffs’ counsel, who are often working on contingency, greatly prefer the certainty of an early settlement as compared to the risks of trial. Plaintiffs’ counsel may also have little interest in proceeding to the individual claims stage where, even if the plaintiffs are successful, take-up rates can be low and a complex, sometimes contested individual claims distribution process would have to be put in place that could otherwise be streamlined through a structured settlement process. In other words, certification does not equal defeat, nor does it necessarily significantly weaken a defendant’s negotiation position on settlement. Following certification of all or part of a case, internal counsel, external counsel and insurers should perform a careful risk assessment that weighs the endgame of the litigation with the costs of achieving it, and build out its defence strategy from there. If a class action is certified… the first thing a company should do is revisit its desired endgame in the litigation. MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 16 Osler, Hoskin & Harcourt llp Key Takeaways The three most common questions a company will ask its counsel regarding a potential class action are: 1. What can be done to prevent it? 2. If one is commenced, what are the options for making it go away? 3. How much will it cost? All three questions have a common reply: it depends on the level of preparation. Identifying potential exposure to a class action, taking a proactive approach to mitigating or eliminating the risk before it starts and executing a carefully planned defence strategy if and when one arises are the surest ways to keep the risk and costs of an action predictable and under control. Experienced risk management and class action counsel can prove invaluable to ensuring proper preparation at all stages of a possible class action’s life cycle. 5 MANAGING RISK TODAY TO PREVENT TOMORROW’S CLASS ACTION 17 Osler, Hoskin & Harcourt llp Osler’s Class Actions Practice Group has successfully defended clients in many of the leading and complex class action cases in Canada. We have an excellent track record in opposing and defeating class certification and winning early dismissals in every major jurisdiction in Canada. Our class action team has broad and deep experience guiding clients through the most complex businesscritical challenges. For more information about Osler’s Class Actions Group, visit osler.com/classactions About Osler, Hoskin & Harcourt LLP Osler is a leading business law firm uniquely positioned to advise Canadian, U.S. and international clients on domestic and cross-border legal issues, recognized for providing business-critical advice and strategic counsel in key industry sectors, and in transactions and litigation for some of the world’s largest enterprises. Our “one firm” approach is based on collaboration, empowering a cross-organization team of top-ranked legal experts dedicated to providing clients with innovative, solution-oriented advice in a practical and cost-effective manner. Founded in 1862, Osler has over 400 lawyers working together from offices across Canada in Toronto, Montréal, Calgary, Ottawa, Vancouver and an office in New York. For more information, please visit osler.com Osler, Hoskin & Harcourt llp Toronto Montréal Calgary Ottawa Vancouver New York | osler.com