Canada: Court Of Appeal Holds That Intra-Class Debate During Opt-Out Period Is Permissible

In its decision released on May 3, 2013, the Court of Appeal for Ontario confirmed that communications between class members during the opt-out period are acceptable and overturned the decision of Justice George R. Strathy of the Ontario Superior Court of Justice which had invalidated certain opt-out notices received during the period for opting out of the class proceeding.

Background

In January 2011, Strathy J. (as he then was)certified a class action against Pet Valu Canada Inc. which alleged that Pet Valu had breached its contractual duty to class members by failing to share with its franchisees certain volume discounts and rebates that it received from suppliers and manufacturers.

During the 60 day opt-out period, a group of Pet Valu franchisees who opposed the class action and who identified themselves as Concerned Pet Valu Franchisees ("CPVF") waged a campaign to try to persuade class members to opt-out of the class action. As a result of the CPVF's opt-out campaign, more than half of the class submitted opt-out notices. A significant time after the opt-out period expired, the representative plaintiff moved for an order setting aside the opt-out notices received after the commencement of the CPVF's campaign on the basis that the CPVF had mislead and intimidated class members into opting out.

Strathy J. invalidates opt-out notices

Strathy J. held that there was a "reasonable probability" that franchisees had decided to opt-out of the class action as a result of misleading information and unfair pressure amounting to intimidation caused by the CPVF's campaign. Relying on the informed and voluntary test for opting out of a class proceeding established in 176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada Ltd.,¹ Strathy J. invalidated the opt-out notices received after the commencement of the CPVF's campaign on the basis that class members were entitled to opt-out of the class action on an informed, voluntary basis, free from undue influence.

Court of Appeal sets aside order invalidating opt-out notices

The Court of Appeal concluded that because Strathy J. evaluated the fairness of the opt-out process based on the incorrect belief that the viability of the class action was in peril, the CPVF's actions appeared more troubling that they actually were. The Court of Appeal held that the Class Proceedings Act, 1992 does not contemplate the politicization of the opt-out process and as such, the viability of a class action does not depend on majority support. The reduction of the class size during the opt-out period does not preclude the class action from proceeding. Therefore, while the CPVF was attempting to undermine the opt-out process by politicizing it, Strathy J. erred in his depiction of the impact of the opt-out process on the survival of the class proceeding.

Regarding the timing of the motion to invalidate the opt-out notices, the Court of Appeal held that if the representative plaintiff had concerns about the nature of the CPVF's communications during the opt-out period he had a duty to protect the interest of class members by bringing the issue to the attention of the supervising judge on a timely basis. However, due to the representative plaintiff's dilatory conduct in bringing the issue to the attention of the supervising judge, Strathy J. was not afforded an opportunity to develop measures to address the problem of improper communications to the class. 

The Court of Appeal confirmed that while Strathy J. was correct in scrutinizing the CPVF's campaign according to the fully informed and voluntary test, he misapplied the test. His Honour's conclusion that the CPVF's campaign was misleading and intimidating was based on an inference that class members were misled or pressured into opting out of the class action by the CPVF's campaign. However, the evidence did not support an inference that the campaign was coercive. The plaintiffs failed to adduce direct evidence from class members establishing that they had been misled or intimidated into opting out. In addition, there was no evidence that any class member perceived a threat that Pet Valu might take retaliatory action against them for remaining in the class. Further, Strathy J.'s consideration of the power imbalance inherent in the franchisor/franchisee relationship in assessing the effect of the CPVF's communications was improper given his finding that Pet Valu had not been "responsible for, or connected to," the CPVF's campaign.

Significantly, the Court of Appeal commented that Strathy J. incorrectly held the CPVF to a standard of objectivity with regard to its communications with class members. The communications at issue amounted to no more than opinion regarding the undesirability from a business perspective of pursing the lawsuit, rather than an attempt to address the technical merits of the action:

Conclusion

The decision of the Court of Appeal makes it clear that during the opt-out period, class members have the right to engage in debate and express their opinions about whether or not to opt-out of a class proceeding. This type of intra-class debate need not be fair or balanced. However, comments that disparage the technical merits of the class action in an effort to persuade class members to opt-out will likely be subject to greater scrutiny. Moreover, while class members are entitled to express their opinions, communications by plaintiffs and defendants with class members will be held to the higher standard of objectivity.

Footnotes

^{1.(2002), 62 O.R. (3d) 535 (S.C.J.), aff'd (2004), 70 O.R. (3d) 182 (Div. Ct.), leave to appeal ref'd (May 11, 2004), Court File No. M31109 (Ont. C.A.) ("A&P")}

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