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A Fine Balance: Third Party Funding in Class Actions

Back in 2013, Justice Belobaba recognized, with dismay, that “access to justice, even in the very area that was specifically designed to achieve this goal, is becoming too expensive.” (Rosen v. BMO Nesbitt Burns Inc., 2013 ONSC 6356) He was talking about class actions.

A class action is a lawsuit started by one member of a group to recover damages suffered by the entire group. So basically, the Erin Brockovich movie, except the movie does not get into much of the reality of lawyers funding the class action, nor the years which the cases can take to resolve.

Typically, lawyers agree to take on these cases in exchange for a percentage of the settlement or trial award. This means that they bear the costs of years of litigation until they get paid at the end. If you’ve been following Enlighten by Spark, you probably already know that in Ontario, the loser pays the winner’s legal fees (called “adverse costs”).

The increasing expense of litigation, multiplied in the context of class actions, may prevent lawyers from being able to protect their representative plaintiffs against adverse costs awards. To combat this, the courts in Ontario have become more accepting of third party litigation funding. Third party litigation funding is an arrangement in which someone—usually a fund of some kind—agrees to fund the plaintiff’s lawyers to some extent, historically by paying some disbursements, and provide the plaintiff with some protection against adverse costs awards. All of this is provided in exchange for a portion of the litigation proceeds being paid to the funder. These arrangements require Court approval.

There have only been a handful of third party litigation funding approval decisions in Ontario. The decisions show that the Courts are attempting to maintain a fine balance between providing the class with as much access to justice as possible and protecting the class members from possible adverse costs awards, all while ensuring that it is the representative plaintiffs and not the funders, who are in control of the litigation. In Houle v. St. Jude Medical Inc, 2017 ONSC 5129, the representative plaintiffs, Shirley and Roland Houle, along with their class counsel, Waddell Phillips Professional Corporation and Howie Sacks & Henry LLP, sought an order approving a litigation funding agreement with Bentham IMF Capital Ltd.

Justice Perell identified the litigation funding agreement as novel, a “hybrid retainer that combines partial contingency fee with a fee-for-services retainer.” That is, Bentham would pay a portion of the lawyers’ fees as the case progresses, in return for a fee upon success, and the lawyers would take a partial contingency fee if the case is successful.  If the case is unsuccessful, Bentham would lose its investment and pay any court-ordered costs, and the lawyers would not recover any amount above what they had been paid along the way.  He acknowledged that hybrid agreements were a positive development and would boost access to justice. For a glimpse into the real-time submissions made by class counsel, counsel for Bentham IMF and counsel for the defendants, check out @SparkLLP’s twitter feed.

In his decision, Justice Perell articulated a general test for determining whether to approve such an agreement, and went one step further by setting out six factors for the court to consider in its determination.

Justice Perell found that Bentham’s share of the ultimate award may be unfair and disproportionate, given that it would be approximately two times that of the plaintiffs’ lawyers, no matter when the litigation was resolved. He did, however, suggest an alternative: 10% of Bentham’s fee would be approved upfront, with the remainder subject to court approval. That is, the court approved at the start Bentham’s right to a 10% return (based upon the percentage that the Class Proceedings Fund recovers), but Bentham’s ultimate percentage recovery would depend upon the outcome of the case and be considered at the end.

Justice Perell also held that the wording of the agreement, including the termination provision, interfered with the ability of the Houles and class counsel to control the litigation. Again, his suggested solution was to make any termination of the litigation funding agreement subject to court approval.

So, where does this leave the state of the law regarding the approval of litigation funding agreements? It remains to be seen, especially given Justice Perell’s finding against hybrid litigation funding agreements in the face of his acknowledgement that they are a positive development and would boost access to justice.

Given Justice Perell’s emphasis on the fact-specific nature of each litigation funding agreement, it is unlikely that court approval for third party funders’ return or termination provisions will be required across the board in class actions. However, the decision runs the risk of deterring third party funders from taking on the risk of funding these class actions if there is a chance that their right to terminate is limited and the upfront approval of the return on their investment will be limited to 10% with any additional return being less certain and subject to court approval upon the conclusion of the case.

At least one thing is for sure – Erin Brockovich made this look too easy.

Samantha Schreiber

Samantha was the first employee lawyer to join Spark LLP, joining the firm in early 2017. She assisted with the firm’s litigation matters for two years before deciding to leave and join a mid-sized Bay Street firm.

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