Canada’s Reformed Class Action Law Wins Few Friends

A Canadian law designed to make it easier to bring class action suits against companies that mislead investors has all sides frustrated as it faces its first real-world tests.

Changes to the Ontario Securities Act that came into effect in late 2005 eliminated an arduous requirement that shareholders prove they relied on faulty disclosures when they invested on the secondary market.

But the reform added the requirement that a judge must rule that each class action has a reasonable chance of success before it moves on to trial. This is known as a leave requirement and is unique in Canadian law.

“Corporate Canada demanded a leave requirement in order to protect itself from frivolous litigation,” said Dimitri Lascaris of Siskinds LLP. “What they got was something that not only imposes significant burden on plaintiffs, but also imposes a significant burden on them. It’s costly to both sides.”

Lascaris is lead counsel for the plaintiffs in both of the first two cases approved for trial since the reform was enacted. Time is running out for the second case as the company under fire, Arctic Glacier Income Fund, said last week that it may default on its credit agreements.

Defense lawyers worry that judges set too low a bar in approving the first suits considered. But the case of Arctic Glacier shows the time spent arguing for leave to go to trial may be a significant problem for shareholders seeking compensation from struggling firms.

Arctic Glacier has struggled since 2008, when it said its U.S. operating subsidiary, Arctic Glacier International Inc, was being investigated by the U.S. Department of Justice.

In 2009 the ice supplier pleaded guilty to conspiring with competitors to divide up the market in part of Michigan, and agreed to pay a $9 million fine. It has since agreed to multimillion-dollar settlements with purchasers in both the United States and Canada.

Siskinds filed the class action suit against Arctic Glacier in September 2008, alleging that the company had misrepresented itself as a “good corporate citizen”.

A judge gave the class action leave to continue to trial this March, but the defense will ask in September for permission to appeal that decision. It will almost certainly be years before the case comes to trial.

The first case, against Imax Corp, has moved at a similarly sluggish pace since Siskinds filed in September 2006. The class action, alleging that the company overstated its 2005 revenues, was granted leave in December 2009, but Imax’s request for an appeal was not turned down until February 2011. The case may be another two years coming to trial.

More than 20 similar class actions have been filed under the new law, according to a January report from NERA Economic Consulting. Nine have been settled, but the majority were still awaiting leave to go to trial, NERA said.

The leave requirement was meant to keep shareholder class actions, previously rare in Canada, from rising to U.S. heights.

But Lascaris said plaintiffs already risk having to pay opponents’ legal costs, something that is almost unheard of in the U.S. context, and the leave requirement simply slows a process that is already time-consuming.

Cristie Ford, a law professor and securities regulation expert at the University of British Columbia, disagreed. “I think the leave requirement is a great thing, and I think the cap on damages is a great thing too,” she said, noting that U.S. companies often settle frivolous class actions to avoid legal costs.

Eric Hoaken, part of the defense team for the Arctic Glacier case, said only a fraction of defendants’ costs are covered, but cases decided so far show the leave requirement isn’t working as a deterrent either.

“If what the framers of the legislation had in mind was that the leave test was going to be a meaningful obstacle that would screen out cases, there’s no indication in the two cases that have decided leave so far that that’s going to happen,” he said.

The two cases with leave to continue to trial are Silver v. Imax Corp (2011 ONSC 1035) and Dobbie v. Arctic Glacier Income Fund (2011 ONSC 25).

(Editing by Janet Guttsman and Peter Galloway)