In Fischer v IG Investment Management Ltd,1 the Ontario Court of Appeal provides important guidance to class action defendants and their counsel on the impact of an existing alternate dispute resolution procedure when deciding whether to certify a proposed class action. This decision will be of particular interest to persons involved in regulated industries with their own dispute resolution procedures, such as investors in regulated capital markets.
Fischer was a proposed class proceeding brought by investors against certain mutual fund managers. The plaintiffs alleged that the defendant fund managers permitted certain market conduct – "market timing" – to occur in certain mutual funds. Unlike other traded securities, mutual funds are valued only one time per day. This comparatively infrequent valuation means that, for short periods of time, the posted value of a fund may be artificially low. "Market timers" take advantage of this circumstance by buying undervalued funds and then quickly selling once the funds' value increases.
The plaintiffs in Fischer claimed that the fund managers breached their duties to investors by failing to take appropriate steps to stop market timing in affected funds. Although market timing is not illegal, the plaintiffs alleged that by failing to address this conduct the fund managers did not act in the best interest of the fund or in the best interests of investors, caused an annual loss to the value of the funds and increased certain transaction costs.
Prior to the certification motion, the Ontario Securities Commission ("OSC") had investigated the same market timing activity that formed the basis of the Fischer claim and subsequently initiated enforcement proceedings. The OSC reached settlements with the defendant fund managers and held hearings pursuant to section 127 of the Ontario Securities Act2 to determine if the settlements were in the public interest. The OSC provided notice of the hearings to the public, but did not directly notify individual investors. Although the hearings were initially open to the public, they were ultimately held in camera at the request of the fund managers. At the conclusion of the hearings, the settlements were approved.
Following the OSC settlement approvals, the plaintiffs brought a motion to certify their action as a class proceeding. To certify an action as a class proceeding the court must find the following: the claim discloses a cause of action, there is an identifiable class, there are issues common to the class, a class action would be the preferable procedure for the resolution of the common issues and there is a representative plaintiff who would fairly represent the interests of the class.
The only contested issue at certification was whether a class proceeding under the CPA was the "preferable procedure" for the resolution of the issues common to the class. In conducting the preferable procedure inquiry it is well established that a court should consider:
- whether a class proceeding is a fair, efficient and manageable method for advancing the plaintiffs' claims; and,
- whether a class proceeding is preferable to any other reasonably available means of resolving the class members' claims.
The preferable procedure inquiry must be conducted with the three goals of the Class Proceedings Act in mind: judicial economy, access to justice and behavior modification.
At the certification hearing, the plaintiffs argued that a class proceeding was the most appropriate procedure to resolve the common issues. As support for their position, the plaintiffs led expert evidence that the OSC settlements did not fully compensate investors for their losses (the settlements represented only 1/7 of the actual loss to CI investors and 1/3 of the total harm to AIC investors). In opposition, the defendants argued the concluded OSC proceedings were the most appropriate procedure to resolve the claims of the class.
The motions judge declined to certify the class proceeding on the basis that the preferable procedure requirement was not met. He found that the OSC proceedings, and the settlements reached in those proceedings, fulfilled the objectives of the CPA so as to make the OSC proceedings "preferable" to a class proceeding under the CPA. In coming to this finding, the motions judge considered the criteria the court applies when determining whether to approve a settlement in a class proceeding, and applied those criteria to the OSC awards. The Court found that as long as the purpose of the alternative proceedings was to obtain compensation for harm, the court should not delve into an inquiry of whether the plaintiffs have been fully compensated or not.
The plaintiffs appealed.
On appeal, the Divisional Court overruled the motions judge and certified the action as a class proceeding. In coming to this decision, the Divisional Court focused primarily on the amount of the recovery obtained through the OSC proceedings. The Court found that the OSC proceedings could not be the "preferable procedure" because the investors' action was for significant monetary damages beyond the amount recovered in the OSC proceedings.
The defendant fund managers appealed.
The Ontario Court of Appeal found that the Divisional Court came to the right result but for the wrong reasons and that both courts below erred in their consideration of the substantive outcome of the OSC enforcement proceedings.
According to the Court of Appeal, the correct approach to a preferable procedure inquiry is to analyze the nature of the alternative procedural mechanism at issue and then compare it to the procedure offered under the CPA. The purpose is to determine which procedure is the preferable procedure for resolving the common issues. The substantive result obtained by another procedure is not relevant. In conducting a preferable procedure inquiry, the judge may consider the following characteristics of the alterative proceeding: the impartiality and independence of the forum; the scope and nature of the alternative forum's jurisdiction and remedial powers; the procedural safeguards that apply in the alternative proceeding; and the accessibility of the alterative proceeding.
In comparing the OSC proceedings with the procedure available under the CPA, the Court of Appeal found the OSC proceedings did not adequately address the CPA goal of providing access to justice with respect to the claims of investors because:
- the jurisdiction of the OSC under section 127 of the Securities Act is regulatory and not meant to serve as a compensatory or remedial provision with respect to harm done to individual investors; as such, the OSC lacks appropriate powers to fully address class members' claims; and,
- the investors' participatory and informational access to the OSC proceedings was insufficient.
In so finding, the Court determined that a class proceeding would be the preferable procedure for resolving the investors' claims and dismissed the defendants' appeal.
The Court of Appeal's decision is consistent with the law in this area. It is very well established that certification is procedural only and does not involve a consideration of the substantive merits of the case. It is therefore not appropriate to consider such matters as the substantive result of concluded, alternate proceedings. Instead, the proper focus of the inquiry is on the nature of the alternate process and whether that process furthers the goals of the CPA.
1 2012 ONCA 47.
2 RSO 1990, c S.5.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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