The Supreme Court of Canada (SCC) has issued a decision making it more challenging for defendants to oppose proposed class actions at the certification stage. In AIC Limited v. Fischer, the Court also changed the landscape for securities regulators seeking to encourage settlements with companies accused of violating securities laws.
In 2003, the Ontario Securities Commission (OSC) investigated five mutual fund managers for alleged failure to prevent the practice of market timing. Market timing involves "in-and-out" trading of mutual funds by short-term investors. The technique capitalizes on the fact that the value of a mutual fund is calculated only once per day, at 4:00 p.m. EST. Some short-term investors will trade units of mutual funds that hold foreign equities when they believe that the price of the units in the fund on a given day does not reflect anticipated price movements on foreign markets the following day, thereby capturing an arbitrage profit that can adversely affect the long-term investors in the mutual fund. The OSC alleged that the mutual fund managers had failed in their duty to protect the long-term investors against these effects.
In 2004 and 2005, the five mutual fund managers settled with the OSC. Without admitting liability, they acknowledged that they had allowed certain investors to engage in market timing in a way that harmed long-term investors. They agreed to pay $205.6 million in compensation, which was distributed to the funds’ unit holders. In 2009, proposed class actions on behalf of the unit holders were launched against the fund managers. The plaintiffs argued that their losses from market timing could be as high as $800 million – significantly more than was paid under the OSC settlement agreements.
The Supreme Court Decision
The issue before the SCC was whether the actions against two of the mutual fund managers should be certified as class actions and, specifically, whether the actions met the "preferable procedure" requirement for certification under the Ontario Class Proceedings Act, 1992. The Court considered whether the class action process was, as a means of achieving access to justice for the unit holders, preferable compared to both the already-completed OSC settlements, and traditional litigation. Access to justice is one of the three key policy objectives of class proceedings legislation.
The Court held that the proposed class actions were preferable to the completed OSC proceedings, despite the fact that the OSC settlements had already resulted in payment of substantial compensation to the unit holders, including more than $108 million to the proposed class members in the two actions.
The Court explained that access to justice, in the class action context, has both procedural and substantive dimensions. The procedural dimension is concerned with whether class members have access to a fair process, outside the class action regime, to resolve their claim. The substantive dimension is concerned with whether class members will receive a just and effective remedy in that other process – what the Court described as a "real opportunity to recover compensation for all of the losses suffered."
The Court held that the OSC proceedings did not provide procedural access to justice for three reasons. First, the focus of the OSC procedure was regulatory rather than remedial, designed to protect and prevent future harm, rather than compensate for past harm. Second, there were limited participation rights for investors (i.e., the proposed class members) in the OSC proceedings. Third, there was no information available on the certification motion about how the OSC staff quantified investor compensation for the settlement agreements.
The Court held that the OSC proceedings did not provide substantive access to justice because the unit holders in the mutual funds may not have been fully compensated by the OSC settlements. The Court stated that it was not appropriate to assess, at the time of the certification motion, the likelihood of success of the plaintiffs’ claims for additional compensation. It was sufficient that they had demonstrated to the court on the certification motion "some basis in fact" for the submission that full compensation may not have been effected.
The Court also concluded that a class action was preferable to traditional litigation, holding that the ordinary litigation process was unable to achieve either the substantive or the procedural dimensions of access to justice. Substantively, there is no access to justice under the traditional litigation regime for the claims of the putative class members, the Court stated, because of the "small claims" nature of those claims: access to justice requires a process that can produce fair compensation in an economically feasible manner. The Court also held, without elaborating, that "as a result of the nature of the claim, there is potentially no access to a fair process, geared towards protecting the rights of class members" using traditional litigation. This last statement is confusing, since it appears to cast doubt on the procedural fairness of the existing court system for individual claims.
The Supreme Court’s decision in AIC Limited v. Fischer appears to signal a preference for class actions over other dispute resolution processes, especially in the area of small claims. The Court’s analysis suggests that, absent a distinguishing factor in a particular case, the class action process is likelier to be deemed "preferable" to the extent that the alternative process does not: (i) involve reasonable rights of participation for class members; (ii) secure full compensation for class members as part of a remedial regime; (iii) secure that compensation in an economically viable basis for class members; and (iv) provide procedural fairness.
Another consequence of the Supreme Court’s decision may be to constrain the ability of securities regulators to secure settlements with companies alleged to have violated securities laws. The settlement model used by the OSC for the market timing cases was unusual in that the payments made by the fund companies were distributed to investors rather than retained by the regulator. Like other Canadian securities commissions, the OSC has no express jurisdiction in the Securities Act to require that payments be made to investors; as such, the market timing settlement model is only available in the context of a voluntary settlement. However, if a final resolution of a securities law issue cannot be achieved through an OSC settlement, companies will be less willing to respond to regulatory proceedings on a basis that includes payments to investors, and they may be less willing to settle in any event before the completion of any related civil litigation.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2020 by Torys LLP.
All rights reserved.