Québec Court of Appeal Renders its First Decision on the Secondary Market Liability Regime

The Québec Court of Appeal rendered its decision in Theratechnologies Inc. v. 121851 Canada Inc. on July 17, 2013.¹ This is the Court of Appeal’s first ruling on Québec's secondary market liability regime since the adoption of those provisions in the Quebec Securities Act² ("s. 225.4 of the QSA") in 2007.

The Court of Appeal upheld the Superior Court judgment³ authorizing the plaintiff to institute a class action against Theratechnologies Inc. ("Thera") pursuant to s. 225.4 of the QSA, addressing procedural elements of the secondary market liability regime. The Court of Appeal confirmed that: (a) an appeal from a decision of the Superior Court to authorize a secondary market case is available with leave of the Court of Appeal; and (b) the threshold for authorization to pursue such a claim is a low one.

Background

In the course of considering an application for approval of Thera’s new drug, tesamoralin, the U.S. Food and Drug Administration raised questions concerning risks of side effects. Bloomberg, Dow Jones and Thomson Reuters published information concerning the FDA’s questions, but Thera itself did not make any disclosure about the FDA’s questions. The same day the reports were published, and on the basis of this information, the plaintiff sold its shares of Thera for a loss. Thera’s share price also fell that day by 58%. Two days later, a public hearing was held by the FDA advisory committee at which the committee unanimously voted to approve tesamoralin. Thera issued a press release announcing this development, and its share price recovered.

The plaintiff filed a motion seeking the authorization of an action pursuant to s. 225.4 of the QSA, and authorization of a class action. The plaintiff alleges that, in breach of Québec securities law, Thera failed to disclose a material change, namely the questions raised by the FDA before it approved tesamoralin. The judge in first instance granted leave to the plaintiff to bring an action pursuant to s. 225.4 of the QSA and authorized the class action. Thera sought leave to appeal the authorization of the judgment pursuant to s. 225.4 QSA.

Right to Seek Leave to Appeal

The Court of Appeal found that there are no provisions in the QSA that specifically provide a right to appeal a judgment authorizing an action pursuant to s. 225.4, but that there were also no provisions prohibiting appeal proceedings.   The Court held that the mechanism for authorizing an action pursuant to the secondary market liability regime of the QSA was distinct from the mechanism for authorizing a class action generally, where there are no appeal rights for defendants, and that nothing prohibits these two regimes from co-existing. In line with the Ontario case law, the Court concluded that leave to appeal decisions rendered pursuant to s. 225.4 of the QSA can be sought under the general rules applicable to appeals from interlocutory orders. However, leave to appeal must be evaluated on a case-by-case basis. In this case, the Court of Appeal granted leave to appeal, and its decision addresses both the appeal procedure and the merits of the appeal.

The Test for Authorization

For authorization to be granted pursuant to s. 224.5 of the QSA, the plaintiff must show it is acting in good faith and that the action has a reasonable possibility of success.   In regard to the plaintiff's burden on the second part of the test, the Court of Appeal concluded that demonstrating a reasonable possibility of success is a higher burden than the burden for the authorization of a class action, but is a lower burden than proof on a balance of probabilities. The Court of Appeal also held that the evidence required to establish a reasonable possibility of success will vary according to the circumstances of each case.

The merits aspect of the test for authorization articulated by the Court of Appeal is similar to the "low threshold" or "speedbump" test that has been applied by many Ontario motions judges in analogous cases under the Securities Act (Ontario), an issue that is the subject of an appeal currently under reserve at the Court of Appeal for Ontario.

Also, during the authorization stage of class actions in Québec, parties can only file evidence with leave of the judge.  However, to meet the two-part test for authorization of a secondary market case under s. 225.4 of the QSA, the plaintiff is required to adduce evidence sufficient to satisfy the test and this burden is not lowered because of the general class action rule precluding evidence.

The Court of Appeal agreed with the first instance judge that the plaintiff is acting in good faith and that it had demonstrated a reasonable possibility of success.

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¹ 2013 QCCA 1256.

² RSQ, c V-1.1.

³ 2012 QCCS 699.