The Supreme Court of Canada's recent decision in Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18, marks the first time this Court has opined on the threshold a plaintiff is required to meet to obtain leave to commence a secondary market liability class action under provincial securities laws.
Raising the bar for leave set by the Ontario Court of Appeal in Green v. CIBC, 2014 ONCA 90, the SCC has confirmed that the leave requirement is not merely a procedural formality and that in order to demonstrate that a case has a reasonable possibility of success a plaintiff must offer some credible evidence in support of the claim.
The decision gives weight to the legislative objectives underlying the secondary market liability regime in Canada, confirming that the leave requirement is more than a "speed bump." In a further departure from Green v. CIBC, the SCC has confirmed that the leave threshold is higher than the threshold for certification of a class action.
While decided based on provisions of the Quebec Securities Act (the Quebec Act), the decision applies across Canada given the widespread adoption of comparable secondary market liability regimes, including Part XXIII.1 of the Ontario Securities Act.
On balance, this decision is a positive one for public companies, and their directors and officers, as plaintiffs (and class counsel) must now meet a higher evidentiary burden to pursue a costly secondary market liability claim.
The plaintiff in this case sought leave to commence a secondary market liability class action under the Quebec Act against Theratechnologies Inc. (Thera), a TSX-listed pharmaceutical research and development company, alleging that it failed to disclose developments related to the U.S. Food and Drug Administration approvals process for a new Thera drug.
In particular, the plaintiff alleged that a publicly released FDA Background Introductory Memorandum containing questions about the drug's possible side effects amounted to an undisclosed material change in Thera's business, operations or capital.
At first instance, the motions judge found that the plaintiff met the evidentiary threshold required by the screening mechanism under the Quebec Act and found that such threshold was higher than the certification threshold for a class action under the Quebec Code of Civil Procedure. On appeal, the Quebec Court of Appeal agreed with the lower court that authorization/leave to proceed requires more than a mere possibility of success and dismissed Thera's appeal.
As there was no dispute on the "good faith" requirement to obtain leave, the Court focused its analysis on the interpretation of a "reasonable possibility" that the action will be resolved in the plaintiff's favour.
In reviewing the legislative history and policy rationale underlying the secondary market liability regime, the Court noted that timely disclosure obligations are designed to increase fairness in the secondary market, ensuring a "level playing field." Secondary market liability under the Quebec Act, and elsewhere in Canada, emerged out of a national effort to develop "a more meaningful and accessible form of recourse for investors." To do so required eliminating the requirement that plaintiffs demonstrate reliance on misinformation or omission of information or, in Quebec, a "causal link." This was balanced with the need to discourage the kind of "strike suits" common in the United States and the Canadian Securities Administrators recommended that in addition to removing the burden of proof on investors, "the new liability regime should include a 'screening mechanism' to ensure that only claims with a reasonable chance of success would be brought."
In upholding the decisions of the Quebec lower courts on the threshold question, the SCC adopted Justice Belobaba's suggestion in Ironworkers Ontario Pension Fund (Trustee of) v. Manulife Financial Corp., that the threshold should be more than a "speed bump" and that "the courts must undertake a reasoned consideration of the evidence to ensure that the action has some merit."
According to the SCC, to demonstrate that a case has reasonable possibility of success and to give effect to the legislative intent of a screening mechanism, a plaintiff must "offer both a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim." The Court noted, however, that the leave or authorization stage should not be treated as a "mini-trial" and that "a full analysis of the evidence is unnecessary."
Also of note, is the SCC's agreement with the lower court that the "reasonable possibility of success" threshold is higher than the general threshold for the authorization (or certification) of a class action. This likely has broad implications given the decision in Green v. CIBC, in which the Ontario Court of Appeal equated the "reasonable possibly of success" test with the test for determining whether a claim "has a reasonable prospect of success" for the purpose of certification.
While the SCC agreed with the lower courts on the threshold issue, it ultimately concluded that the threshold was not met in that case. The Court found that the FDA's memorandum contained no new information about the side effects of the drug that required disclosure on the day that it was released. The questions about the drug's side effects were part of the normal FDA process and not necessarily an indication of whether the drug would be approved. Accordingly, the Court allowed the appeal since the evidence did not credibly point to a material change and there was no reasonable possibility that the action could succeed.
Conclusion and Implications
This case represents a significant development in securities class actions, as plaintiffs, and class counsel, must now meet a higher evidentiary burden to obtain leave to proceed with a secondary market liability claim. While it remains to be seen whether this new standard will deter would-be plaintiffs or result in more denials of leave motions, it is likely that plaintiffs will spend more time and resources to prepare a more thorough evidentiary record.
The result in this case is a positive one for public companies, and their directors and officers as it raises the bar for would-be plaintiffs and signals that a vigorous response at the leave stage may be warranted in more cases.
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