Among the reasons frequently cited for the higher incidence of litigation in the United States compared to the rest of the world is the acceptability of contingent fees for plaintiffs’ counsel and general rules that each party to a lawsuit in the U.S. bears its own costs. Many other countries have a “loser pays” model and also have restrictions or prohibitions on contingency fees, both of which may have the effect of discouraging the filing of claims.
One development that has been emerging in some jurisdictions recently and that may overcome these claims obstacles is the rise of litigation funding arrangements. A March 21, 2011 opinion (here) by Ontario Superior Court Justice George R. Strathy examined the litigation funding agreement that the plaintiffs had entered in connection with their putative securities class action claims against Manulife Financial Corporation. Justice Strathy’s tentative approval of the arrangement, subject to two specific concerns, may provide encouragement for other prospective plaintiffs and litigation funders, which in turn potentially could lead to increased litigation in Ontario and perhaps elsewhere in Canada.
Plaintiffs had filed a putative class action in Ontario Superior Court against Manulife and certain of its directors and officers seeking damages under the Ontario securities laws for alleged misrepresentations in the company’s public disclosures. The plaintiffs claim that Manulife represented that it “had in place enterprise-wide risk management systems, policies and practices that were effective, rigorous, disciplined, and prudent”. They claim that, contrary to these representations, Manulife failed to have appropriate risk-management systems for its segregated funds and variable annuities. When the equities markets collapsed in the fourth quarter of 2008, Manulife increased its reserves by almost $5 billion to cover its contingent liabilities under these financial products, triggering a sharp decline in the price of its securities.
Justice Strathy’s March 21 ruling relates to the plaintiffs’ motion for court approval of a litigation funding agreement the plaintiffs had entered with Claims Funding International, an Irish Corporation, pursuant to which CFI will pay any adverse costs award made against the plaintiffs in return for a commission of 7% on any settlement or judgment. The arrangement also provides for a cap on the commission of $5 million if the case if resolved at pre-trial stage and $10 million if resolved thereafter. The agreement specifies that counsel’s duties are to the plaintiffs not to CFI. The agreement is subject to court approval, but if approved it is binding on the parties and the class.
Justice Strathy first considered whether or not had jurisdiction to consider the agreement event though no class had yet been certified in the case. In considering this question, Justice Strathy noted that the plaintiffs had notified 25 institutional investors of the arrangement as well as 68 other potential class members of the arrangement, and that none of these prospective class members were opposed to the funding agreement. Justice Strathy concluded that “a part of the court’s responsibility in class actions is to protect the rights of prospective class members” and “to postpone the decision to post-certification, when the views of class members can be sought, could very well spell the end of this proceeding, because the plaintiffs cannot withstand an adverse costs award on certification.” Justice Strathy determined that he was entitled to “ask whether the agreement is fair and reasonable.”
The defendants opposed the plaintiffs’ motion for approval on the ground that it violated the Ontario statute barring “champertous” agreements. (The Ontario statute is a model of brevity, specifying that “All champertous agreements are forbidden and invalid.”) The prohibitions on Champerty are “designed to protect the administration of justice from abuse by the exploitation of vulnerable litigants.” Justice Strathy cited authority that a funding agreement will be champertous “if it is spurred by some improper motive,” such as “exacting an unfair price” which would result in “unfairness to the litigant.”
Justice Strathy then surveyed the case authority on litigation funding agreements. He found that courts in Alberta and Nova Scotia had approved litigation funding agreements, albeit without explanation. He also cited cases from England and Australia where agreements had also been approved.
Justice Strathy then considered some “practical concerns” with the “loser pays” model in the class action context, as a result of which the costs of losing could be “astronomical” and “well beyond the reach of all but the powerful and very wealthy” who are “not exactly the group the legislature had in mind” when the relevant statutes were enacted. He noted that:
The grim reality is that no person in their right mind would accept the role of representative plaintiff if he or she were at risk of losing everything they own. No one, no matter how altruistic, would risk such a loss over a modest claim. Indeed, no rational person would risk an adverse costs award of several million dollars to recover several thousand dollars or even several tens of thousands of dollars.
Justice Strathy noted that while counsel may provide certain indemnities, those types of agreements “impose onerous financial burdens on counsel and risk compromising the independence of counsel.” He also noted that disbursements available from the Class Proceedings Fund established under statute by the Law Foundation of Ontario may or may not be available and may or may not be adequate.
In light of these considerations, Justice Strathy approved the agreement, ruling that it promotes the statutory goals by “providing access to justice.” This goal would be “illusory” if “access to justice were deterred by the prospect of a crushing costs award.” The presence of these kinds of agreements may actually be “beneficial to the proper administration of justice” because they “can avoid the unfortunate result that individuals with potentially meritorious claims cannot bring them because they are unable to withstand the risk of loss.”
Justice Strathy found that this specific agreement was appropriate because it left control of litigation in the hands of the representative plaintiff and because the commissions and caps are “reasonable” and “represent a fair reflection of the potential downside risk.”
He did note that he would not finally approve the agreement unless and until the defendants are “provided adequate security” that any costs award can and will be funded, and unless and until appropriate arrangements are made for “reasonable controls on the provision of information to the funder. “ Justice Strathy’s said that his approval of the finding agreement is subject to “satisfactory amendments to address” these concerns.
As reflected in Justice Strathy’s opinion, there have been prior occasions on which Canadian courts have approved litigation funding agreements. However, his opinion may represent the most detailed explanation of the basis on which such agreements may be approved. His reference to the advantages these types of arrangements may have in the class action context could prove persuasive to other judges, and his analysis could encourage other prospective plaintiffs and litigation funders to enter similar agreements.
To be sure, any parties contemplating entering into litigation funding arrangements will have to heed the concerns noted in Justice Strathy’s opinion. He was clear that he was approving this agreement only because the commissions were reasonable and because the controls were appropriately kept with the named plaintiffs and are not with the litigation funder. Moreover, his final approval ultimately will depend on the plaintiffs adopting appropriate amendments to address the court’s security and information concerns.
But while any future litigation funding agreements will undoubtedly be subject to similar scrutiny, the fact is that the door seems to be opened to the use of this type of litigation funding mechanism in Ontario at least if not elsewhere in Canada, at least when appropriately structured. The ability to address the impediments of the “loser pays” model could encourage other litigants to come forward, or at least remove disincentives that might otherwise discourage prospective future litigants from coming forward.
The prospect that the availability of litigation funding might lead to increased litigation is not just conjecture. As NERA Economic Consulting noted in its 2010 study of Australian securities class action litigation (about which refer here) , among the most significant explanations for the reported increase in the number of securities class action lawsuits in Australia is the “emergence of commercial litigation funding” which removed financial barriers to pursuing litigation.
Of course, it remains to be seen whether or not other Canadian courts will follow Justice Strathy and approve similar litigation funding arrangements, and whether the availability of this type of arrangements leads to increased litigation levels. There are of course many possibilities, including the possibility that litigation funding does not catch on or become an important factor. On the other hand, it is possible that Canada might see the emergence a litigation funding industry that has developed in Australia, where there are even publicly traded litigation financing companies.
The development of these types of arrangements to overcome the limitations of the “loser pays” model is particularly interesting now, when as a result of the U.S. Supreme Court’s ruling in the Morrison v. National Australia Bank case, investors in non-U.S. companies may find themselves unable to resort to U.S. court to pursue damages claims. These investors may increasingly be turning to their home courts for relief. In the past, limitations such as the “loser pays” model have served as a litigation deterrent in many countries. But if these limitations can be overcome, for example through the use of a litigation funding mechanism, investors may be increasingly motivated to pursue claims in their own home jurisdictions. Just as in Australia, the availability of litigation funding could lead to increased securities litigation activity.
It probably should be noted in closing that litigation is not only catching on outside the U.S, but it also gaining traction in side the U.S. as well, at least according to June 4, 2010 New York Law Journal article (here). An October 2009 U.S. Chamber Institute of Legal Reform publication entitled “Selling Lawsuits, Buying Trouble” (here) proposes that third-party litigation finding in the United States be prohibited. The Institute for Legal Reform publication provides a comprehensive overview of recent developments in litigation funding.
Special thanks to loyal reader Greg Shields, who is a contributor at the Mitchell Sandham blog (here), for sending me a link to Justice Strathy’s ruling.
A Story You Might Have Missed: According to sources (here), The Economist magazine is temporarily suspending publication to allow its readers a chance to catch up. (They must have seen my coffee table.) The same source reports that ESPN The Magazine is suspending publication indefinitely to allow its readers a chance to learn how to read.
Apologies: My apologies to readers who may have tried to access this blog between 3:30 6:00 pm EDT yesterday. My hosting service was having server issues that interrupted accessibility. I am assured the problems will not recur. Technology is great when it works. But otherwise, not so much.