A recent Ontario Superior Court decision forces defendants in a class-action lawsuit to file a full defence and disclose their strategy before it has been determined the case is even eligible to proceed.
If the landmark ruling is widely adopted, it will draw back the veil on the normally private workings of officers and directors and expose their actions to public scrutiny even in cases that wind up being dismissed.
“This ruling tosses out the playbook used to fight class actions in Canada for the last 15 years,” said Won Kim of Kim Orr Barristers PC, which is acting for shareholders of Timminco Ltd. bringing suit against the company. “It changes everything.”
Class actions start with a statement of claim in which shareholders or consumers lay out their allegations. A judge then has to certify that the case can go ahead as a class proceeding.
To meet the test, plaintiffs have to satisfy five criteria: They have to show a claim in law; an identifiable class; common issues; a lead plaintiff with a litigation plan; and that a class action is the most efficient way for the case to proceed.
Defendants don’t have to address the allegations and explain their side in a statement of defence unless the case is actually certified, so defence lawyers rigorously challenge every part of the statement of claim and the certification test in an effort to get the lawsuit thrown out or whittled down. Motions to dismiss and requests for more specifics can drag things out for years.
The results of Pennyfeather v. Timminco changes that.
If adopted by other courts, it will compel anyone named in a class action to lay out exactly what they did or did not do, and why, before the judge decides on certification, forcing defence lawyers to make critical strategic decisions far earlier in the proceeding.
“You’re being asked to fight the battle before you even know whether you’ll have to go to war,” said Mary Jane Stitt, a corporate litigator at Blake Cassels & Graydon LLP. “It’s not just putting the cart before the horse, it’s putting the cart before the horse and then running the horse over.”
Ms. Stitt said the ruling will make many class actions more expensive, requiring defendants to carry out a full investigation of the allegations before the case gets the green light.
And she cautions that news media won’t be the only ones looking at the results. She expects that in cases involving companies that do business on both sides of the border, U.S. plaintiffs’ lawyers will be combing the Canadian case files as well.
The decision that is sending ripples through the class-action bar came out of a routine procedural matter in a case that is far from being decided.
Shareholders in Timminco are alleging the Toronto-based company and its officers and directors falsely claimed the company had a proprietary low-cost process to produce solar-grade silicon (used to produce solar panels) on a commercial scale. Defence lawyers filed a motion precertification asking for more details about the allegations, saying they needed them to understand the case they were being asked to defend.
Mr. Justice Paul Perell granted the request, but then did something that was anything but routine. He ordered defence lawyers to file their statement of defence before certification as a quid pro quo, saying that requiring both sides to lay their cards on the table at the earliest possible stage would speed up class actions and avoid “the enormous costs” of a certification motion.
“In my opinion, it would be advantageous for the immediate case and for other cases if the convention ended and defendants were required in the normal course to deliver a statement of claim before the certification motion,” Judge Perell ruled.
That would “call out the defendant to makes its challenges … if that challenge is upheld, the class action would be dismissed or stayed and the enormous costs of a certification motion avoided.”
Plaintiffs’ lawyers welcomed the ruling as a triumph of common sense.
“What this means is the defence is going to have to commit to a position 60 days into a case instead of four years into it,” said Kirk Baert, a plaintiffs’ litigator at Koskie Minsky LLP. “Right now, if you’re a big company you can just say: ‘Let’s fight certification and see how it goes. If we lose, the worst that happens is we have to put in a defence.’ Class actions drag on for years. This decision takes away a major stonewalling tactic.”
Mr. Kim, acting for Timminco shareholders, said the ruling means firms like his won’t have to bear the enormous cost of carrying cases to certification, the point at which companies without a strong defence usually become serious about settling.
“Until now, defendants have played for free. Because they haven’t had to deliver a statement of defence, they spend the first year or two or three just playing off the plaintiffs’ materials: They attack the statement of claim, they attack the certification, all without showing their hand,” Mr. Kim said. “Justice Perell says they can do all that but they have to show their cards right away.
“He’s making the defendants put up or shut up, which evens out the playing field and gets the game going as soon as possible. He’s saying, ‘Enough with the procedural niceties, let’s get to the substance,’ ” Mr. Kim said.
Alan D’Silva of Stikeman Elliott, acting for Timminco, disagrees and played down the decision calling it a “a complete non-issue, a minor procedural event.” He said the ruling is very specific and will not spill over to other kinds of class actions.
But Paul Morrison, a defence litigator at McCarthy Tétrault, said there is no reason why the ruling would not apply to every kind of class action, up to and including U.S.-style shareholder suits.
Mr. Morrison said the big question now is whether the Timminco decision becomes the law of the land. “Right now, this is the decision of one judge – albeit a pretty good judge and a judge who has a lot of experience in the class-action field. It’s an open question whether other courts and courts in other provinces will apply it.”
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