Canada: Avoiding Settlement Stumbling Blocks, Part Two: Continuing Concerns Over "Sweetheart" Deals

In an earlier post from February, we wrote about the decision in Leslie v. Agnico-Eagle Mines, where Justice Belobaba's expressed significant concern about the risk of "sweetheart" settlements, where the interests of class members are compromised to those of class counsel, who may be incentivized to settle a case on less than optimal terms where it will nonetheless provide them with substantial contingency fees. Section 29 of the Class Proceedings Act requires court approval of every class action settlement before it can take effect, and judges are required to ensure that a settlement is fair, reasonable and in the best interests of the class. In Justice Belobaba's view, to reach this determination, the court should be provided with specific and detailed information about why the settlement falls within a "zone of reasonableness," not simply generic "boilerplate" about litigation risk, hard-fought negotiations, arm's length parties, and class counsel's sterling credentials. It was only after class counsel filed a supplementary affidavit describing in more detail the realistic range of possible damages recoveries, and why the settlement fell within that range, that the settlement in in Agnico-Eagle was ultimately approved.

In the recent decision of O'Brien v. Bard Canada Inc., Justice Belobaba again expressed the same concerns he outlined in Agnico-Eagle. As was the case in Agnico-Eagle, in the Bard case Justice Belobaba indicated at the settlement approval hearing that he was not prepared to approve the settlement on the evidence provided, which was, in his words, "little more than non-specific 'boilerplate'." As he went on to find:

It's simply not enough for class counsel (whose interests are not aligned with those of the class), to file a factum that says nothing more than 'we know what we are doing ... trust us'. It is my hope that in approving class action settlements in the future, judges will urge class counsel to skip the wind-up (i.e. all the non-specific 'boiler-plate') and just throw the pitch (and explain why the settlement amount is within a zone of reasonableness).

Again, class counsel was asked to file additional affidavit evidence, where they specifically identified the number of affected class members, the expected number of claimants in respect of the settlement fund, the likely recovery per claimant had the matter gone to trial, and how the settlement compared to their expected recovery at trial (discounting for litigation risk). On the basis of this evidence, the settlement was ultimately approved.

In Agnico-Eagle, Justice Belobaba suggested that one possible means of ensuring that a settlement is in the best interests of the class would be to appoint independent counsel, who could review and opine on the fairness of the agreement, and "add a much needed adversarial dimension to the settlement approval hearing."

In the recent decision of the Divisional Court in Waldman v. Thomson Reuters Canada Ltd., the court did precisely that, appointing amicus curiae ("friends of the court") to assist the court by "providing a more balanced perspective on the issues". In this case, both the plaintiff and defendant appealed the order of the class action judge, who had dismissed the settlement on the basis that it was not in class members' best interests. As both the plaintiff and defendant sought approval of the settlement on appeal, the court found that they were "allied" in interest and therefore appointed amicus curiae. (The fees for the amicus were ordered to be paid on a full-indemnity basis out of class counsel's fees).

These recent decisions reinforce the importance of ensuring that the materials on the settlement approval motion are detailed and thoughtful. Although the task of preparing the first draft of the materials in support of the settlement approval motion typically falls on class counsel, defendants should ensure that the court is provided with sufficient information to understand how the settlement was arrived at and why it is fair for class members.

From a broader perspective, the Court's apparent unease with the role of class counsel in settlement approval hearings raises interesting issues. Courts have recognized that class counsel play a critical role in facilitating meaningful access to justice for prospective class members. In "carriage fights", Courts carefully weigh the respective qualifications and litigation plans of competing class counsel in deciding which of two prospective class proceedings should move forward. The skills and experience of class counsel is something that Courts routinely consider in certification motions. Given the weight placed on the acumen of class counsel at the outset of a class proceeding, it is perhaps surprising that at the conclusion of cases Courts have almost placed an onus on class counsel to prove that they have not allowed their self-interest to interfere with their duty to their clients. There is no doubt that the role of class counsel gives rise to complex ethical issues – a point that was noted as early as the 1982 Law Reform Commission's Report on Class Actions. If the statements in recent cases merely reflect the Court's unease with insufficient evidence in support of a proposed settlement, that is one thing. If, however, the Court is saying that class counsel have an inherent conflict of interest while negotiating a settlement, the same conflict would presumably be present in the myriad other strategic and tactical decisions that class counsel are called upon to make throughout a proceeding.

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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