The year 2014 brought further development and maturity to Canadian securities class action regimes but the case law continues to reveal discordant themes.
Preliminary issues relating to jurisdiction, the leave test and certification remained a primary focus, while the Supreme Court of Canada's granting of leave in four securities class actions will open the door to a new level of appellate guidance that will hopefully resolve some of the most significant controversies arising from the early cases interpreting Part XXIII.1 of the Ontario Securities Act (OSA) and its provincial counterparts. These controversies include the interpretation of the statutory limitation provision, the leave standard, and the appropriateness of certifying "common-law claims" advanced in tandem with statutory secondary market misrepresentation claims.
As the case law continues to develop, active securities class actions are piling up. Eleven new securities class actions were filed in Canada in 2014, including eight in Ontario. According to trends data compiled in a recent report by NERA Economic Consulting,1 these figures match the number of actions filed in 2013 and bring the total number of pending actions in Canada to 60, more than double the number five years ago. These active securities class actions represent more than C$35-billion in total claims. Additionally, six securities class actions were settled or tentatively settled in 2014, collectively worth C$38.4-million. The average of these settlements was C$6.4-million, and the median was C$6.4-million.
The Trilogy: Limitation Period Rulings and Implications
In February 2014, the Ontario Court of Appeal overturned one of its own recent precedents regarding the interpretation of the limitation period for commencing a secondary market class action under Part XXIII.1 in a trilogy of cases: Green v. CIBC, IMAX v. Silver and Celestica v. Millwright Regional Council of Ontario Pension Trust Fund (altogether referred to as the Trilogy). The Supreme Court, which heard the Trilogy appeal on February 9, 2015 and now has the decision under reserve, will now have the final say on how the statutory limitation period should be applied.
In 2012, the Ontario Court of Appeal confirmed, in Sharma v. Timminco, that plaintiffs must obtain leave to pursue a claim under Part XXIII.1 within three years of the alleged misrepresentation in accordance with section 138.14 of the OSA. However, the Court of Appeal panel that heard the Trilogy appeal reversed Timminco, holding that the section 138.14 limitation period is suspended as long as plaintiffs issue a statement of claim asserting common-law misrepresentation claims and plead an intention to seek leave to plead the statutory cause of action within the requisite three-year period. The Court of Appeal concluded that members of the proposed class are protected from the expiry of the limitation period from the point in time when the representative plaintiff "asserts" the statutory cause of action under Part XXIII.1. It held that an action is "asserted" when a statement of claim expressing the intention to pursue such a claim is issued.
In July, the Ontario legislature amended the OSA. It now provides that the limitation period governing a Part XXIII.1 claim is suspended on the date the application for leave is filed with the court and resumes running on disposition of the motion. While the amendment arguably addresses the controversy over how the statutory limitation period is to be applied going forward, several other issues that the Supreme Court will consider remain central to the future of securities class action litigation in Canada.
For example, the Supreme Court may consider whether the Court of Appeal appropriately considered section 138.14 within Part XXIII.1 as a whole, keeping in mind that the underlying purpose and policy objectives of the secondary market liability regime and that its various provisions are intended to operate harmoniously. Commentary from the Supreme Court about the interpretative approach taken by the Court of Appeal will likely influence the approach taken by lower courts interpreting other provisions of Part XXIII.1.
The Leave Standard
As the appeal in the Green case stemmed from the denial of leave and certification at the motions level, the Supreme Court will also consider the appropriate application of the leave test under the OSA. The OSA provides that leave for a proposed secondary market class action should only be granted if the claim is brought in good faith and the plaintiff has a "reasonable possibility of success at trial."
The Court of Appeal agreed with the motions judge in Green that the leave requirement constitutes "a preliminary low-level merits based leave test" but went on to observe that further judicial guidance as to the application of the test is unnecessary because it was the same as the test applied to determining the adequacy of a pleading. In other words, the Court of Appeal arguably lowered the threshold for granting leave below the standard that earlier motions judges have articulated.
In December 2014, the Ontario Court of Appeal released its decision in Bayens v. Kinross Gold Corporation, a further decision considering the leave standard. The decision clarifies the standard for obtaining leave to advance statutory claims for secondary market misrepresentation. The Court of Appeal upheld the trial court's decision denying leave, confirming that the "reasonable possibility of success" standard for leave is the correct standard and that it is a "relatively low threshold, merits-based test." The Court of Appeal in Bayens clarified the comments of the Trilogy panel about the test for leave and its relationship to a motion to strike. It stated that the leave standard is the same standard applied when deciding certification motions or whether to strike a pleading, but that the evidentiary basis in each scenario is different. In the latter instance, no evidence is filed and the facts pleaded are assumed to be true. On the leave motion, however, evidence must be adduced and scrutinized.
The Certification of Common-Law Claims
The motions judge in Green confirmed that both the "fraud on the market doctrine" and the "efficient market theory," which are recognized and affirmed by U.S. courts as supporting theories of class-wide reliance and have enabled the certification of secondary market misrepresentation cases, are not applicable in Canada. Accordingly, absent legislation allowing otherwise, each member of the class must prove individual reliance on an impugned misrepresentation in order to pursue a common-law misrepresentation claim.
The motions judge in Green determined that a class proceeding would not be the preferable procedure for resolving reliance-based claims because it would "give rise to individual issues of causation and reliance that would be unmanageable." Part XXIII.1 was enacted, in part, to overcome the difficulty of proving reliance on a class-wide basis. Significantly, if common-law misrepresentation claims were pursued in the form of securities class actions, various protections that Part XXIII.1 offers to defendants, including liability limits that in some cases would significantly reduce a defendants' liability exposure will not apply.
On appeal, the Trilogy panel concluded that inferred reliance may provide a basis for the certification of common-law misrepresentation claims in certain limited circumstances. However, it agreed with the motions judge that it would not be appropriate to certify the reliance-based common issues in the particular circumstances of Green. The panel disagreed with the motions judge's determination that other proposed common issues that related to the common-law claims but that did not raise individual issues should not be certified. The appeal panel certified these common issues and observed that individual trials could be ordered to determine the individual issues of reliance and damages raised by the common-law claims.
The Court of Appeal in its subsequent decision in Bayens further clarified that a denial of leave for statutory misrepresentation claims does not automatically mean that a class action will not be the preferable procedure for pursuing common-law claims. Nonetheless, it noted that standalone common-law negligent misrepresentation claims in securities cases are generally unsuitable for certification given the difficulty of managing individual issues of causation and reliance. For this reason, the Court of Appeal, in Bayens, concluded that a class action was not the preferable procedure for resolving the common-law claims, meaning that neither the statutory nor the common-law misrepresentation claims would proceed as class-wide claims.
Without definitively ruling out the possibility of securities class actions premised entirely on common-law claims, the Bayens decision suggests that such claims will have a low prospect of certification. The seemingly discordant approaches taken by the motions judge in Green and the Court of Appeal in Bayens on one hand, and the Court of Appeal in Green on the other, is characteristic of many seemingly incongruous positions that have emerged from the early Part XXIII.1 cases and highlights the need for the Supreme Court to bring greater consistency to the interpretation of the secondary market liability provisions.
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Footnote
1. NERA Economic Consulting's complete report, Trends in Canadian Securities Class Actions, is available at: http://www.nera.com/publications/archive/2015/trends-in-canadian-securities-class-actions--2014-update--the-do.html.
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