Canada: Theratechnologies Inc. v. 121851 Canada Inc.: The Supreme Court Gives The Leave Test Teeth

Last Updated: April 29 2015
Article by Alan P. Gardner, Jonathan G. Bell and Justin R. Lambert

For the first time, the Supreme Court of Canada has weighed in on the threshold for granting leave for plaintiffs to commence statutory causes of action for secondary market misrepresentation cases. In contrast to recent decisions from several courts of appeal that had set a remarkably low standard, the Supreme Court has clearly stated that the statutory requirement to seek leave before commencing such actions reflects a legislative objective of creating a "robust deterrent screening mechanism" that should be "more than a speed bump". The Court explained that claimants must have both a plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim before being granted leave to proceed.

Historically, in the common law jurisdictions, investors had to generally rely on the tort of negligent misrepresentation when they wished to bring such an action which requires, among other things, that investors prove they had relied on the misrepresentation to their detriment. In Quebec, a similarly heavy burden was placed on investors under the Civil Code.

Amendments to the Securities Act (Quebec), as well as other provinces including Ontario and Alberta, provided a cause of action for misrepresentations in the secondary market in which investors were relieved of the burden to prove reliance. In return for relieving plaintiffs of the burden of demonstrating reliance on the alleged misrepresentation for these statutory causes of action, the Acts provide that investors must first obtain leave, in order to discourage "strike suits" and other non-meritorious claims often brought to obtain a quick settlement.

The test for obtaining leave is substantially the same under all of the provincial statutory causes of action and contains two requirements: (1) the action must be brought in good faith, and (2) there must be a reasonable possibility that the action will be resolved in favour of the claimant. The good faith requirement is generally easily satisfied and is not the subject of much judicial consideration or observer comment. By contrast, the reasonable possibility of success requirement has been considered numerous times by courts in a number of jurisdictions, and has been the focus of much discussion.

The majority of the cases on this issue from both Quebec and the common law provinces have set a very low standard for obtaining leave, creating a plaintiff-friendly regime. For example, the leading case in Ontario is CIBC v. Green, in which the Ontario Court of Appeal found that the test for obtaining leave is equivalent to the threshold applied during certification when determining whether the pleadings disclose a cause of action: the purpose is to weed out hopeless claims and only allow those to go forward that have "some chance of success".

In Theratechnologies Inc., the Supreme Court considered the case law that has attempted to articulate the appropriate standard, often somewhat conflicting in nature, and articulated a threshold that appears significantly higher than many courts had previously articulated, including the Ontario Court of Appeal in CIBC v. Green.

In endorsing a more rigorous threshold, the Court noted that the purpose of the leave test was to create an appropriate balance and a meaningful screening mechanism so that costly strike suits and unmeritorious claims would be prevented. The Supreme Court found that this important gatekeeping role requires courts "to conduct a preliminary examination of the impugned action or inaction to assess whether it could be said to have a reasonable chance of success."

The Court found that the threshold should be more than a mere "speed bump" and courts must undertake a reasoned consideration of the evidence to ensure that the action has some merit. In order to properly give effect to the gatekeeping function, there must be a reasonable or realistic chance that the action will succeed. The Supreme Court found that this requires the claimant (1) to offer a plausible analysis of the applicable legislative provisions, and (2) provide some credible evidence in support of the claim. While a full analysis of the evidence is unnecessary as it is not a "mini-trial" and should not have the same demands of a trial, there still must be sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the claimant's favour.

On the facts before it the Supreme Court found that the plaintiff had not pointed to any evidence that supported its theory of the case. Without such evidence, the action could not have a reasonable possibility of success. As such, the threshold for leave under the Securities Act was not met and the appeal was allowed.

The guidance provided by the Supreme Court on this gatekeeper test, which has been the subject of much judicial consideration in many jurisdictions, and in particular Ontario, is much welcomed and should provide more certainty for cases under the relevant Securities Acts in all provinces going forward. Many had argued that the courts had created a plaintiff-friendly regime that had effectively moved away from the legislative intent in creating the meaningful requirement to obtain leave before proceeding with an action. However, the Supreme Court appears to have given more effect to the intention of the legislatures and to a certain extent reinstated the proper gatekeeper role of the courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Alan P. Gardner
Justin R. Lambert
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