In dismissing an appeal from the decision of the Ontario Court of Appeal in AIC v. Fischer on December 12, 2013, the Supreme Court of Canada revisited the preferable procedure aspect of the certification test for class proceedings. The decision focused on access to justice, and states that courts must consider both the costs and the benefits of a class action as compared to an alternative procedure in deciding which is preferable. This requires the court to consider whether a class action or an alternative process would be best suited to offer (i) a fair process to resolve the plaintiffs' claims, and (ii) access to a just and effective remedy if the claims are successful.
The action was commenced by investors who claimed to have suffered losses as a result of "market timing" activities that allegedly occurred in certain mutual funds. The defendants were the mutual fund managers who were alleged to have allowed market timing to occur.
The Ontario Securities Commission commenced regulatory proceedings against the defendant mutual fund managers ten years ago. The regulatory proceedings were settled and the mutual fund managers paid millions of dollars in restitution to affected investors, including the plaintiffs.
The plaintiffs led evidence at the certification motion that the amounts received pursuant to the regulatory settlements did not fully compensate them for their losses and they argued that they should be entitled to pursue further recovery through the courts. The defendants took the position that the plaintiffs had been adequately compensated through the regulatory process and did not require a class action to obtain access to justice.
Preferable Procedure Analysis
The Supreme Court's analysis focused on section 5(1)(d) of the Ontario Class Proceedings Act, which requires the court to determine whether a class proceeding is the preferable procedure for the resolution of the common issues.
The Court confirmed that the preferable procedure analysis requires the court to compare the class action against other methods of resolving the claim and that this analysis must be considered through the lens of the three principal goals of class actions: behavior modification, judicial economy and access to justice. The Supreme Court noted, however, that the focus should remain on preferability as the plaintiff does not need to prove that the class action will actually achieve all three of the goals of class actions.
Access to justice was held to have two interconnected dimensions: (i) process, which is concerned with whether plaintiffs "have access to a fair process to resolve their claims"; and (ii) substance, which is concerned with whether plaintiffs "will receive a just and effective remedy for their claims if established".
As the Supreme Court noted in Hollick v. Toronto (City) 2001 SCC 68 and reiterated in this case, a class action will serve the goal of access to justice if: "(1) there are access to justice concerns that a class action could address; and (2) these concerns remain even when alternative avenues of redress are considered." A five-question framework for analysis of these issues was created by the Supreme Court:
1. What are the barriers to access to justice?
There are various barriers to access to justice, the most common of which is economic. However, the Supreme Court recognized that there are also psychological and social barriers to access to justice including ignorance of the availability of substantive legal rights, ignorance of the fact that damages have occurred, limited language skills, age, frail emotional or physical state, fear of reprisal by the defendant, or alienation from the legal system as a result of negative experiences with it.
2. What is the potential of the class proceeding to address the barriers?
This part of the analysis considers the relative ability of the class action, as compared to any other alternative mechanism, to address the barriers to access to justice that are present in the case at issue. While a class action will provide access to the courts for plaintiffs, the Supreme Court was careful to note that this only guaranteed a fair process, but not necessarily substantive results, which is an important dimension of access to justice.
3. What are the alternatives to the class proceedings?
Unlike the US class action process, the process in Canada allows the court to consider procedures both within the court system (e.g. individual actions, joinder, test cases, consolidation) and outside the court system.
4. To what extent do the alternatives address the relevant barriers to access to justice?
Once the alternatives to a class action have been identified, they must be assessed to determine the extent to which they address the barriers to access to justice that exist in the case. The Supreme Court noted that while the court process is not necessarily the "gold standard for fair and effective dispute resolution", alternatives must provide suitable procedural rights.
5. How do the proceedings compare?
This is the stage of the analysis where the court must determine whether the class action is the "preferable procedure to address the specific procedural and substantive access to justice concerns" in the case. This should also involve, to the extent possible, a consideration of both the costs and the benefits of the class action as compared to the alternative procedure.
The Supreme Court held that the five questions set out above "must be addressed within the confines of the certification process; the court cannot engage in a detailed assessment of the merits or likely outcome of the class action or any alternatives to it". It also confirmed that the applicable evidentiary standard is "some basis in fact" and that the court will not be required to resolve conflicting facts and evidence as the certification stage.
While the Supreme Court did not define what "some basis in fact" means, it did cite the decision of the Ontario Court of Appeal in McCracken v. Canadian National Railway Co., 2012 ONCA 445 that "the use of the word "some" conveys the meaning that the evidentiary record need not be exhaustive, and certainly not a record upon which the merits will be argued".
The Supreme Court also took the opportunity to emphasize that the evidentiary burden on the plaintiffs should not lead to a "more fulsome assessment of contested facts going to the merits of the case". The Supreme Court cited with approval from Cloud v. Canada (Attorney General) 73 OR (3d) 401 (C.A.) in which the Ontario Court of Appeal held that the some basis in fact standard "does not entail any assessment of the merits at the certification stage".
Burden of Proof
The plaintiff has the burden of proof to demonstrate that a class action satisfies the preferable procedure criterion for certification. The plaintiff must prove that a class action is preferable to all other litigation alternatives. However, the defendant has the evidentiary burden of proof with respect to non-litigation alternatives.
The Supreme Court held that a class action made it economically possible for the plaintiffs to advance very small claims and that there was no realistic litigation alternative. The regulatory proceedings had provided a substantive remedy for the plaintiffs but it could not be concluded within the framework of a certification motion whether investors had been properly compensated by the regulatory settlement. This was due, in part, to the fact that the methodology used to calculate the amounts payable in the regulatory proceedings was confidential and there had been no investor participation in the regulatory settlement process. Consequently, in upholding the decision of the Ontario Court of Appeal the Supreme Court held that access to justice would be best served by a class action.
This decision sets out a very detailed framework for the analysis of access to justice issues within the preferable procedure analysis. It also reinforces the "some basis in fact" evidentiary standard. Most importantly, while this decision does not necessarily preclude successful opposition to certification based on settled regulatory proceedings, given the typically confidential nature of settlement negotiations in regulatory proceedings and the lack of investor participation, it is unlikely that regulatory settlements will stand in the way of certification unless it is clear that the settlement payment in the regulatory proceeding properly compensated investors.
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