COURT FILE NO.: CV-14-512624-00CP DATE: 20160829

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

STEVEN LOZANSKI Plaintiff – and – THE HOME DEPOT, INC. and HOME DEPOT OF CANADA, INC. Defendants

Counsel: Bryan C. McPhadden and C. Simoes for the Plaintiff Dana Peebles, Katherine Booth, and Kirsten Thompson for the Defendants

HEARD: August 22, 2016

PERELL, J.

REASONS FOR DECISION

A. INTRODUCTION

[1] On June 6, 2016, pursuant to the Class Proceedings Act, 1992, S.O. 1992, c. 6, this action was certified in Ontario as a national class action for settlement purposes.

[2] The Plaintiff, Steven Lozanski, brings a motion for, among other things: (a) approval of the settlement; (b) approval of the notice of the settlement and of its distribution plan; (c) payment of administration costs; (d) payment of several honoraria; and (e) payment of Class Counsel’s fee of $406,800, all inclusive.

[3] Class Counsel, a settlement-consortium of the Merchant Law Group and McPhadden Samac Tuovi LLP, submitted that the settlement was worth over $1 million in benefits to the Class Members and ought to be approved by the court. They also submitted that their counsel fee, which will be paid by the Defendants as part of the settlement, should be approved by the court.

[4] For the reasons that follow, I shall approve the settlement and the associated or ancillary requests. I do not approve any honoraria. I would very generously value the settlement as having a value of $400,000, and I approve a counsel fee of $120,000, all inclusive of disbursements and HST.

B. FACTUAL AND PROCEDURAL BACKGROUND

1. The Data Breach at Home Depot and its Response

[5] The defendants are Home Depot, Inc. and Home Depot of Canada, Inc. Home Depot Inc. is the indirect parent of Home Depot of Canada (collectively “Home Depot”). Home Depot is a well known retailer of home improvement and construction products and services in Canada and in the United States.

[6] Between April 11, 2014 and September 13, 2014, there was a data breach at Home Depot. Its payment card system was hacked by criminal intruders using custom-built malware to clandestinely breach Home Depot’s computer system. The six-month period between April and September 2014 would define the Class Period for the class actions, discussed below.

[7] On September 9, 2014, Home Depot provided notice to the Office of the Privacy Commissioner of Canada, the Office of the Information and Privacy Commissioner of Alberta, the Office of the Information and Privacy Commissioner of British Columbia, and the Commission d'accès à l'information du Québec that there had been a data breach. Subsequently, after an ongoing dialogue with Home Depot, none of the Privacy Commissioners found that Home Depot had violated Canada’s privacy laws and each Office closed their files.

[8] After discovering the data breach, on September 8 and 18, 2014, Home Depot issued a press release, and on September 16, 2014, Home Depot published notices of the data breach in The Globe and Mail (in English) and in La Presse (in French). On September 21, 2014, Home Depot sent over 500,000 emails directly to Canadian customers, in English and in French, to notify them that some customers’ payment card information might have been compromised.

[9] On November 6, 2014, Home Depot sent 58,605 emails directly to Canadian customers to advise that their email addresses may have been stolen in the Data Breach and issued a further press release regarding emails stolen in the Data Breach. Here, it may be noted that the theft of email addresses by itself does not by itself lead to identity theft financial harm.

[10] In its press releases, Home Depot apologized to its customers, confirmed that it had eliminated the malware, and reassured the customers that they would not be responsible for fraudulent charges on their accounts. As further assurances, Home Depot offered its customers free credit monitoring and identify theft insurance. Its newspaper notices of September 16, 2014 stated, in part:

To assist our customers who may have been affected by the breach, we are offering free identity protection service, including credit repair services, credit monitoring, and an identity theft insurance policy to any customer who used a payment card at a Home Depot store in 2014, from April on. Affected customers may receive 12 months of identity protection services beginning on September 8, 2014, at no cost to the customer. You may obtain information by calling 1-800-668-2266 or visiting www.HomeDepot.ca.

[11] More precisely, under the offer made by Home Depot, Canadian customers were provided, at no charge, with: (1) Equifax credit monitoring; (2) Equifax identity theft insurance through an AIG policy (the identity theft insurance was not limited to the data breach); and (3) credit repair services – from AllClear ID, Inc. These latter services, called AllClear Secure, provided access to investigators who would determine if the customers had suffered fraud or identity theft and would assist them in recovering financial losses and restoring their identities to proper conditions.

[12] To be more precise, pursuant to the offer made by Home Depot, any Canadian who said he or she had used a payment card at a Home Depot store in Canada between April and September 2014 received the Equifax Complete Premier Plan, at no charge. This plan included: (a) Lost Wallet Assist: One-stop assistance in cancelling and reissuing credit or debit cards, driver's licences, SIN cards, insurance cards, passports, and traveler's cheques; (b) WebDetect™ (Internet Scanning) to detect that personal information (e.g. SIN or credit card number) is being used on the Internet; (c) 24/7 credit monitoring with email notifications of key changes to credit profiles; (d) unlimited Equifax Credit Score™ and Report; and (e) up to $50,000 of identity theft insurance.

[13] Between September 8, 2014 and September 19, 2015, Home Depot provided a total of 43,458 Canadian customers with one year of coverage under that Equifax Plan, beginning on the date of activation. I was advised that depending on bulk purchasing, the premium for identity theft insurance is between $50 and $100, and thus Home Depot spent several millions of dollars to address the privacy concerns of its customers. Subsequently, there were approximately 10 insurance claims made under the Equifax policies, none of them associated with the data breach at Home Depot.

2. The Commencement of Class Proceedings against Home Depot

[14] Hard upon the announcement of the data breach at Home Depot, proposed class actions against it were commenced in the United States. These actions were eventually consolidated as The Home Depot, Inc. Customer Data Security Breach Litigation : Case No. 14-md-02583-TWT in Atlanta, Georgia before Judge Thrash. A counsel group of nine law firms was appointed to prosecute the class actions in the United States.

[15] In Canada, after the announcement of the data breach, Merchant Law Group created a webpage soliciting sign-ups for claimants. Martin Knuth, a resident of Regina, Saskatchewan, signed up, and he was recruited by the firm to be a representative plaintiff in a class action launched there.

[16] On September 17, 2016, Merchant Law Group commenced a class action in Saskatchewan on behalf of Mr. Knuth. Mr. Knuth had used his credit card in several transactions at a Home Depot store between April 11 and September 13, 2014.

[17] The proposed class definition in Mr. Knuth’s action was:

All individuals in Canada, who suffered harm, inconveniences, economic losses, mental distress or other losses as a result of a privacy breach, who are and were at all material times owners of or otherwise beneficially entitled to deal with certain information of a confidential character, both personal and financial.

[18] As it turned out, Mr. Knuth’s class definition was over-inclusive, because not all credit or debit card purchasers were affected by the data breach at Home Depot. In actuality, the only affected purchasers were those that used their payment card by swiping its magnetic chip through the card reader at self-checkout terminals (a “SCO” terminal) that had been infected by the malware. Thus, later, the proposed class definition in Saskatchewan became:

All persons in Canada, who, between April 11, 2014 and September 13, 2014, made a purchase at a Home Depot store using a credit card or debit card at a self-checkout terminal.

[19] Purchasers with “chip” technology that “dipped” their cards at the reader and entered a PIN were not affected. It was later determined that Mr. Knuth and William Gilchrist, a deponent for Mr. Knuth’s certification motion, had not been affected by the data breach because the manner in which they made payments was not vulnerable to the data breach. There were no SCOs in Québec Home Depot stores during the Class Period.

[20] Home Depot estimated that 500,000 Canadian customers could have been affected by the data breach. Thus, Mr. Knuth’s original class was over-inclusive by around two million Canadians.

[21] Notwithstanding that it had commenced a national class action in Saskatchewan, on September 19, 2014, Merchant Law Group commenced a class action in Ontario. Andrew Sandrasangra was the proposed Representative Plaintiff.

[22] Merchant Law Group also commenced proposed class actions in British Columbia; Rachel Mendel was the proposed Representative Plaintiff and in Newfoundland; Randy Clarke was the proposed Representative Plaintiff.

[23] I foreshadow here to note that honoraria are sought for Mr. Sandrasangra, Ms. Mendel, and Mr. Clarke.

[24] Merchant Law Group also commenced a proposed class action in Québec. Yves Theriault was the proposed Representative Plaintiff. This action was subsequently discontinued. No steps were ever taken in Merchant Law Group’s British Columbia, Ontario, and Newfoundland proposed class actions.

[25] Merchant Law Group was not the only Canadian law firm that responded to the situation at Home Depot. On September 22, 2014, McPhadden Samac Tuovi LLP issued a proposed class action on behalf of Mr. Lozanski.

[26] Mr. Lozanski is a resident of Richmond, Ontario. He used his credit card in three transactions at a Home Depot store between April 11 and September 13, 2014. The proposed class definition in Mr. Lozanski’s action was:

All persons resident or situated in Canada (including their estates, executors, or personal representatives), who have communicated personal information and/or financial data and/or usage data to the defendants, which information was stolen or released to or obtained by unauthorized third parties in April or May 2014.

[27] Like Mr. Knuth’s proposed definition, Mr. Lozanski’s class definition is over-inclusive. It was also later determined that like Mr. Knuth and Mr. Gilchrist, Mr. Lozanski was not personally affected by the data breach.

[28] In their respective actions, Mr. Lozanski and Mr. Knuth alleged that the criminal breach of Home Depot’s payment card system resulted in a compromise of Class Members’ payment card information and caused financial and other losses to Class Members. It was further alleged that the breach of their payment card information represented a breach of Class Members’ privacy rights and their contracts with Home Depot.

3. The Progress of the Class Actions

[29] Thus, as of the fall of 2014, there were numerous class actions against Home Depot in the United States and six class actions in Canada. Of the five started by Merchant Law Group, it seems that a decision was made to move forward only with Mr. Knuth’s action in Saskatchewan.

[30] In Ontario, neither Merchant Law Group nor McPhadden Samac Tuovi LLP brought a carriage motion. From the fall of 2014, until relatively recently, there was very little activity in Ontario. McPhadden Samac Tuovi LLP and Merchant Law Group did not form a consortium in 2014, and it seems that McPhadden Samac Tuovi LLP was content to simply monitor the developments elsewhere and not push forward in Ontario.

[31] Meanwhile in the Saskatchewan action, in the fall of 2015, Mr. Knuth delivered a certification motion record. The Record was comprised of: (a) his affidavit; (b) an affidavit from Brandon Ralfe, an Information Technology manager with Merchant Law Group; (c) an affidavit from Mr. Gilchrist; and (d) an affidavit from Professor Norman Archer, who was Mr. Knuth’s expert witness.

[32] Professor Archer’s credentials are that he has a B.Sc. in Engineering Physics from the University of Alberta, a M.S. in Operations Research from New York University, and a PhD in Physics from McMaster University. He was a professor Emeritus at McMaster in the Information Systems Area of the DeGroote School of Business. He is the owner of the consulting firm EC Innovations, located in Hamilton, Ontario. Professor Archer has engaged in research, publication, and testimony relating to identify theft and fraud for 12 years.

[33] In December 2015, in the Saskatchewan action, Home Depot delivered an affidavit from René Hamel, who is the Director of Telus’ Security Solutions Department, which manages a team of digital forensic investigators. He trained with the RCMP and the FBI, and has worked in the forensic technology departments of the RCMP, KPMG, TD Bank, and other Canadian institutions.

[34] A certification motion was scheduled for May 2016 and the parties proceeded to cross-examinations in the run up to the motion.

[35] Although a certification motion is not a determination of the merits, the cross-examinations exposed considerable weaknesses in the merits of Mr. Knuth’s proposed class action. In his affidavit for Mr. Knuth in the Saskatchewan action, Professor Archer deposed that the data breach was preventable, but during cross-examination, he admitted that he was just speculating and that data breaches are not unpreventable. For his part, Mr. Hamel, Home Depot’s expert, testified that despite utmost diligence and efforts to prevent data breaches, companies remain vulnerable because hackers continually develop new malicious code “and the game of cat and mouse continues.” He deposed that the occurrence of a data breach is not proof of a lack of care and of not having taken appropriate preventative measures. Home Depot was building a very strong case that it had done nothing wrong and there was mounting evidence that no Class Member had in fact been injured.

[36] Following the completion of the cross-examinations, the parties to the Saskatchewan action filed several interlocutory motions that needed to be resolved before the certification motion could proceed. These motions were scheduled for April 28, 2016 and the May certification motion was accordingly adjourned.

4. Settlement Negotiations and Settlement Agreements

[37] Meanwhile in the United States, the class actions were moving toward a settlement. In September 2015, the U.S. parties conducted a two-day mediation with an experienced mediator, Jonathan B. Marks of MarksADR, LLC. The mediation failed; however, the U.S. parties continued to negotiate in the following months with the ongoing assistance of Mr. Marks.

[38] Eventually, in the United States, on March 7, 2016, a formal Settlement Agreement was signed and filed with the U.S. Court, and on March 8, 2016, Judge Thrash issued a Preliminary Approval Order.

[39] On March 25, 2016, in the wake of the U.S. settlement, Home Depot offered to negotiate a resolution of all outstanding consumer class actions in Canada arising out of the data breach. Using the U.S. settlement as a template, Home Depot sent offers to settle to both Merchant Law Group and to McPhadden Samac Tuovi LLP. Home Depot wished a national settlement, subject to court approval in Ontario, using the settlement terms in the U.S. Agreement as a framework.

[40] Home Depot wished to settle both class actions, and it stipulated that it would only address the matter of legal fees after the terms of settlement for the Class Members had been negotiated to an agreement.

[41] It would appear that it was at this juncture that Merchant Law Group and McPhadden Samac Tuovi LLP agreed to form a consortium to settle the various class proceedings in Canada.

[42] On April 25, 2016, the parties attended a mediation in Toronto with Ron Slaght acting as mediator. The mediation was successful, and Mr. Lozanski in the Ontario action and Mr. Knuth in the Saskatchewan action signed a Settlement Agreement with Home Depot.

[43] Class Counsel recommends the settlement be approved by the court. Mr. Lozanski and Mr. Knuth consent to the settlement and to Class Counsel’s fee request, discussed below.

[44] After the settlement was reached, the court in Saskatchewan was advised that the settlement approval motions would proceed in the Ontario action. Practically speaking, the Saskatchewan action has been stayed for a national class action in Ontario. As noted above, in June 2016, I certified the action for settlement purposes.

5. The Terms of the Settlement Agreement

[45] The major terms of the settlement between Home Depot and Messrs. Lozanski and Knuth are as follows:

• Home Depot denies any wrongdoing.
• The Class Members will release their claims against Home Depot.
• Home Depot agrees to create a non-reversionary Settlement Fund of $250,000 for the documented claims of Canadians whose payment card information and/or email address was compromised as a result of the data breach during the data breach period (Settlement Class Members).
  • If the claims approved by the Administrator exceed the Settlement Fund, then the payments are to be distributed to Settlement Class Members on a pro rata basis.
• A Settlement Class Member with documented losses, which may include time spent remedying issues relating to the data breach, may apply for reimbursement up to $5,000.
  • The time remedying issues claim is: (a) for up to five hours at $15 per hour; or (b) for a Settlement Class Member with reasonable documentation of substantiated losses for out-of-pocket losses or unreimbursed charges who cannot separately document their time remedying those losses or charges may self-certify for up to two hours at $15 per hour.
• The Settlement Administrator will evaluate claims submitted to determine whether: (a) the claimant is a Settlement Class Member; (b) the claim form is complete, accurate, and timely; (c) the claimant provided all information needed to evaluate the claim form; (d) the Settlement Class Member signed any applicable attestation as required; and (e) for documented claims, the information and documentation submitted, if true, could lead a reasonable person to believe that, more likely than not, the claimant has suffered a substantiated loss.
• The Settlement Administrator, in its discretion to be reasonably exercised, will determine the amount of substantiated losses for documented claims and/or self-certified time claims, up to a maximum of $5,000 per Settlement Class Member.
• Home Depot agrees to pay for free credit monitoring for Settlement Class Members to a cap of $250,000.
  • If the cost to provide credit monitoring exceeds the capped fund of $250,000, then the service will be provided to claimants in the order in which their approved claim forms were received by the Administrator, until the funding is exhausted.
  • Depending on whether bulk purchase prices are available, the per capita cost for credit monitoring is between $50 and $100. This means that on a first come first served basis, there will be free credit monitoring for between 2,500 to 5,000 Settlement Class Members.
• To receive benefits, a Settlement Class Member must file a claim form with the Administrator or before October 29, 2016, unless this Court orders otherwise.
• Home Depot agrees to pay a $4,000 honorarium to each of Mr. Lozanski and Mr. Knuth from the Settlement Fund.
• Home Depot agrees to pay a $1,000 honorarium to each of Mr. Sandrasangra, Ms. Mendel, and Mr. Clarke from the Settlement Fund.
• Home Depot agrees to pay for the notice of the fairness hearing and for the notice of the settlement to a value of $100,000.
  • It is now anticipated that the costs of giving notice will be approximately $50,000.
• Home Depot agrees to pay for the costs of administration to a value of $100,000.
  • Depending on the extent of the take up of the settlement, the costs of administration are anticipated to range between $25,000 to the cap of $100,000.
• If there is a surplus in the $250,000 Settlement Fund, it is to be applied to reimburse Home Depot for the costs of the notices and for the costs of administration.
• Home Depot will pay Mr. Lozanski and Mr. Knuth for their legal fees, costs, and disbursements up to the cumulative amount of $360,000 plus HST to be determined by the Ontario court after the determination of the settlement approval motion.
  • The cumulative claim for legal fees, disbursements, and HST is $406,800.

6. The Value of the Settlement to Class Members

[46] Professor Archer outlined three heads of damage to consumers from a payment card breach: (1) the risk of a fraudulent charge on one’s credit card; (2) the risk of identity theft; and (3) the inconvenience of checking one’s credit card statements. The so-called non-reversionary Settlement Fund of $250,000 is designed to provide compensation for these heads of damages.

[47] Of the three heads of damage, practically speaking, there is little risk of fraudulent charges because of sophisticated safeguards developed by credit card companies. Moreover, when there are frauds, the losses are almost always absorbed by the credit card company or the retailer. The credit card companies are not Class Members.

[48] In the immediate case, there is no evidence that a Class Member absorbed a fraudulent charge. Neither Merchant Law Group nor McPhadden Samac Tuovi LLP have been contacted by a putative Class Member who said that he or she suffered a financial loss attributable to the data breach.

[49] There is also little risk that the data breach, including the disclosure of email addresses, increased the risk of identity theft, because the stolen data would have been inadequate to allow a criminal to fake another’s identity.

[50] Mr. Hamel’s evidence was that for identity theft, the most important information to have is a government-issued identification number such as a driver’s licence number, social insurance number or passport number and preferably all three. In the immediate case, the data stolen from Home Depot did not include this information.

[51] As for inconvenience damages, in the immediate case, there are none, because credit card holders are already obliged to check their statements for fraudulent purchases.

[52] Thus, in the immediate case, it is highly unlikely that the $250,000 fund will be taken up for damage claims and thus the so called non-reversionary Settlement Fund of $250,000 will be available to pay for the notices and to the administrator for its costs of administration. Given that the costs of the notice and administration are capped at $200,000 and probably will be less than that, there may have to be a cy-près or the money should be returned to Home Depot. For present purposes, I would value this component of the settlement at $150,000 comprised of the notice costs of $50,000 and the maximum administrator’s cost of $100,000.

[53] Unfortunately, as demonstrated by Lavier v. MyTravel Canada Holidays Inc. , 2012 ONSC 1673 , rev’d 2013 ONCA 92, discussed below, the take up of benefits of settlements is often disappointing, and in the immediate case, there is a short claim period, so it remains to be determined whether the $250,000 fund for identity theft insurance will be taken up. If it were fully taken up, then at most 5,000 of the 500,000 Class Members would secure a benefit. For present purposes, I, nevertheless, value this component of the settlement at $250,000.

[54] Thus by my generous reckoning, the value of the settlement to Settlement Class Members is approximately $400,000.

7. The Settlement Approval Process

[55] On June 6, 2016, I certified Mr. Lozanski’s action as a class action for settlement purposes. I scheduled August 22, 2016 for the fairness hearing.

[56] There were no opt-outs and no objectors to the proposed settlement.

[57] Somewhat untypically, I received factums and argument from both sides at the settlement approval hearing supporting the settlement. More typical is a defendant tacitly supporting the settlement and leaving it to the plaintiff to justify the settlement.

8. The Claim for Class Counsel Fees

[58] Merchant Law Group requests approval of a counsel fee of $238,669.41 ($223,669.41 + $15,000) plus HST of $31,027.02 ($29,077.02, + $1,950) for a total of $269,696.43.

[59] McPhadden Samac Tuovi LLP requests approval of a counsel fee of $121,330.59 ($120,437.37 + $893.22) plus HST of $15,772.98 ($15,656.86 + $116.12) for a total of $137,103.57.

[60] The total counsel fee is $406,800. It appears that this sum is being divided with two-thirds to Merchant Law Group and one-third to McPhadden Samac Tuovi LLP.

[61] I was provided with very little information about the nature of the retainer agreement between Mr. Knuth and Merchant Law Group apart from the fact that it was a contingency fee agreement.

[62] Mr. Lozanski signed a “Class Action – Representative Plaintiff Contingency Fee Retainer Agreement” with McPhadden Samac Tuovi LLP. This agreement was disclosed to the court. The agreement defined the scope of the retainer, and provided terms of payment of fees by way of a contingency fee. The terms of payment stated:

7. The Client hereby acknowledges and agrees that this is a contingency fee agreement and that the Lawyer will be paid by way of a percentage of the recovery, subject to the terms and conditions set out below. ….

8. In this matter, legal fees will only be paid to the Lawyer in the event that the services are successful in obtaining a Judgment, Award or Settlement acceptable to the Client. The fees shall be paid by a lump sum payment, or payments out of the proceeds of such Judgment, Award or Settlement, or otherwise as the Lawyer and Client may agree or the Court may direct. The legal fee shall be a percentage of the total value of any Judgment, Award or Settlement, over and above any Award of court costs, or claim for reasonable disbursements by the Lawyer. Any and all costs awarded are to be to the Lawyer. The Client agrees that the above percentage will be calculated either as a contingency fee of 35% of the amounts recovered under any Judgment(s), Awards(s), or Settlement(s), (including damages and interest) or on the basis of a multiplier of 3 times the "Base Fee", whichever is higher. The "Base Fee" means the result of multiplying (i) the total number of hours worked by (ii) the hourly rates of the lawyers working on the file.

In addition to any legal fee, the Lawyer shall be entitled to recover from any Settlement or Judgment all reasonable disbursements incurred along with interest which has accrued on such disbursements, and taxes. The Client acknowledges that it is not possible at this time to calculate what the Lawyer's exact fee will be; however, the Client acknowledges the following examples:

(a) If the claim results in a recovery of $10,000.00 for damages and interest and, $500.00 for disbursements, and $1,500.00 for costs for a total of $12,000.00, and if the lawyer actually incurred disbursements of $500.00, then the Lawyer's fee will be $3,500.00 ($10,000.00 x 35%) and the Lawyer would additionally be entitled to recover the disbursements of $500.00 and the costs of $1,500.00, such that the Lawyer would be paid a total of $5,500.00 ($3,500.00 + $500.00 +$1,500.00 = $5,500.00). The Client would receive $6,500.00 of the $12,000.00; or

[63] As of the first week of August, Merchant Law Group had $353,395 in docketed time and $16,181.02 in disbursements. I was not provided with details of the dockets and I was not provided with the docket entries.

[64] McPhadden Samac Tuovi LLP had docketed time of just over $35,000. I was not provided with details of the dockets, and I was not provided with the docket entries.

[65] Since I was not provided with the dockets of either Merchant Law Group or McPhadden Samac Tuovi LLP, I do not know how much of the dockets of Merchant Law Group were attributable to the firms moribund actions in British Columbia, Ontario, Québec, and Newfoundland.

[66] Since the consortium was only recently formed for the purposes of negotiating a settlement, it would appear that no litigation efficiencies were achieved by the formation of the consortium, which was a consortium just for settlement purposes.

[67] As already noted above, under the settlement agreement, Home Depot agreed subject to court approval, to pay the counsel fee up to $360,000.

[68] In the settlement agreement, there was no prohibition on Home Depot disputing the quantum as part of the fee approval process. At the hearing, although I invited comment, Home Depot’s counsel made no submissions about whether a $406,800 fee should be approved.

C. DISCUSSION AND ANALYSIS

1. Settlement Approval

[69] Section 29 of the Class Proceedings Act, 1992 requires that discontinuances and settlements of class actions require court approval. Section 29 states:

Discontinuance, abandonment and settlement

29. (1) A proceeding commenced under this Act and a proceeding certified as a class proceeding under this Act may be discontinued or abandoned only with the approval of the court, on such terms as the court considers appropriate.

Settlement without court approval not binding

(2) A settlement of a class proceeding is not binding unless approved by the court.

Effect of settlement

(3) A settlement of a class proceeding that is approved by the court binds all class members.

Notice: dismissal, discontinuance, abandonment or settlement

(4) In dismissing a proceeding for delay or in approving a discontinuance, abandonment or settlement, the court shall consider whether notice should be given under section 19 and whether any notice should include,

(a) an account of the conduct of the proceeding;

(b) a statement of the result of the proceeding; and

(c) a description of any plan for distributing settlement funds.

[70] To approve a settlement of a class proceeding the court must find that in all the circumstances the settlement is fair, reasonable, and in the best interests of the class members: Dabbs v. Sun Life Assurance Company of Canada , [1998] O.J. No. 1598 (Gen. Div.) at para. 9; Parsons v. The Canadian Red Cross Society , [1999] O.J. No. 3572 (S.C.J.) at paras. 68-73.

[71] A reasonable and fair settlement is inherently a compromise and a reasonable and fair settlement will not be and need not be perfect from the perspective of the aspirations of the parties. That some class members are disappointed or unsatisfied will not disqualify a settlement because the measure of a reasonable and fair settlement is not unanimity or perfection. See: Baxter v. Canada (Attorney General) , [2006] O.J. No. 4968 (S.C.J.) at para. 21; Dabbs v. Sun Life Assurance Company of Canada , supra.

[72] In determining whether to approve a settlement, the court, without making findings of facts on the merits of the litigation, examines the fairness and reasonableness of the proposed settlement and whether it is in the best interests of the class as a whole having regard to the claims and defences in the litigation and any objections raised to the settlement: Baxter v. Canada (Attorney General) , supra at para. 10.

[73] When considering the approval of negotiated settlements, the court may consider, among other things: (a) likelihood of recovery or likelihood of success; (b) amount and nature of discovery, evidence or investigation; (c) settlement terms and conditions; (d) recommendation and experience of counsel; (e) future expenses and likely duration of litigation and risk; (f) recommendation of neutral parties, (g) number of objectors and nature of objections, if any; (h) the presence of good faith, arm’s length bargaining and the absence of collusion; (i) the degree and nature of communications by counsel and the representative parties with class members during the litigation; and (j) information conveying to the court the dynamics of and the positions taken by the parties during the negotiation: Dabbs v. Sun Life Assurance Company of Canada , supra; Parsons v. The Canadian Red Cross Society , supra at paras. 71-72; Frohlinger v. Nortel Networks Corp. , [2007] O.J. No. 148 (S.C.J.) at para. 8; Kelman v. Goodyear Tire and Rubber Co. , [2005] O.J. No. 175 (S.C.J.) at paras. 12-13; Vitapharm Canada Ltd. v. F. Hoffmann-La Roche Ltd. (2005) , 74 O.R. (3d) 758 (S.C.J.) at para. 117; Sutherland v. Boots Pharmaceutical plc , [2002] O.J. No. 1361 (S.C.J.) at para. 10.

[74] In the immediate case, given that: (a) Home Depot apparently did nothing wrong; (b) it responded in a responsible, prompt, generous, and exemplary fashion to the criminal acts perpetrated on it by the computer hackers; (c) Home Depot needed no behaviour management; (d) the Class Members’ likelihood of success against Home Depot both on liability and on proof of any consequent damages was in the range of negligible to remote; and (e) the risk and expense of failure in the litigation were correspondingly substantial and proximate, I would have approved a discontinuance of Mr. Lozanski’s proposed class action with or without costs and without any benefits achieved by the putative Class Members.

[75] Since in the immediate case, I would have approved a discontinuance that would have provided no benefits to Class Members, it is quite easy to conclude that the proposed settlement agreement, which does confer benefits (albeit for a small portion of the Class), should be approved as being fair, reasonable, and in the best interests of the Class Members.

[76] This conclusion that the settlement should be approved is supported by: (a) the amount and nature of discovery, evidence or investigation of the claims against Home Depot; (b) the recommendation and experience of counsel; (c) the absence of any objections; and (d) the presence of good faith arm’s length bargaining and the absence of collusion.

[77] For these reasons, I approve the settlement.

2. Honoraria

[78] Where a representative plaintiff can show that he or she rendered active and necessary assistance in the preparation or presentation of the case and that such assistance resulted in monetary success for the class, the representative plaintiff may be compensated by an honorarium: Windisman v. Toronto College Park Ltd ., [1996] O.J. No. 2897 (Gen. Div.) at para. 28.

[79] However, the court should only rarely approve this award of compensation to the representative plaintiff: McCarthy v. Canadian Red Cross Society , [2007] O.J. No. 2314 (S.C.J.); Sutherland v. Boots Pharmaceutical plc , supra; Bellaire v. Daya , [2007] O.J. No. 4819 (S.C.J.) at para. 71.

[80] Compensation for a representative plaintiff may only be awarded if he or she has made an exceptional contribution that has resulted in success for the class: Markson v. MBNA Canada Bank , 2012 ONSC 5891 at paras. 55-71; Toronto Community Housing Corp. v. Thyssen Krupp Elevator (Canada) Ltd. , 2012 ONSC 6626.

[81] Compensation to the representative plaintiff should not be routine and should be awarded only in exceptional cases. In determining whether the circumstances are exceptional, the court may consider among other things: (a) active involvement in the initiation of the litigation and retainer of counsel; (b) exposure to a real risk of costs; (c) significant personal hardship or inconvenience in connection with the prosecution of the litigation; (d) time spent and activities undertaken in advancing the litigation; (e) communication and interaction with other class members; and (f) participation at various stages in the litigation, including discovery, settlement negotiations and trial: Robinson v. Rochester Financial Ltd. , 2012 ONSC 911 at paras. 26-44.

[82] In the immediate case, there is no justification for awarding honoraria to Mr. Lozanski, Mr. Knuth, Mr. Sandrasangra, Ms. Mendel, and Mr. Clarke from the settlement fund.

3. Fee Approval

[83] Under the Class Proceedings Act, 1992, the court is charged with the responsibility of approving contingency fee agreements and in approving the counsel fee in any settlement of the class action.

[84] In the immediate case, the court’s fee approval task is complicated because in a roundabout way, the Ontario court is being asked to scrutinize the Counsel Fee for a Saskatchewan class action. In the immediate case, McPhadden Samac Tuovi LLP’s involvement was largely prompted by Home Depot’s insistence that the Ontario action be ramped up for settlement purposes rather than reaching an outcome in the much further advanced action in Saskatchewan.

[85] While I think that McPhadden Samac Tuovi LLP has earned a share of the fee, because it participated in the settlement consortium and because the Ontario action has been resolved, nevertheless, having regard to the little it did to advance Mr. Lozanski’s action, the firm’s involvement in the settlement may be viewed as somewhat opportunistic. I will, however, accept this complication to the fee approval by focusing on the role and activities of Merchant Law Group and essentially ignore the redundancies of a late arriving settlement consortium.

[86] The fairness and reasonableness of the fee awarded in respect of class proceedings is to be determined in light of the risk undertaken by the lawyer in conducting the litigation and the degree of success or result achieved: Parsons v. Canadian Red Cross Society (2000) , 49 O.R. (3d) 281 (S.C.J.) at para. 13; Smith v. National Money Mart, 2010 ONSC 1334 at paras. 19-20, varied 2011 ONCA 233; Fischer v. I.G. Investment Management Ltd. , [2010] O.J. No. 5649 (S.C.J.) at para. 25.

[87] Where the fee arrangements are a part of the settlement, the court must decide whether the fee arrangements are fair and reasonable, and this means that counsel are entitled to a fair fee which may include a premium for the risk undertaken and the result achieved, but the fee must not bring about a settlement that is in the interests of the lawyers, but not in the best interests of the class members as a whole: Sparvier v. Canada (Attorney General) , 2006 SKQB 533 , [2006] S.J. No. 752 (Q.B.) at para. 43, aff'd 2007 SKCA 37 , [2007] S.J. No. 145 (C.A.).

[88] Fair and reasonable compensation must be sufficient to provide a real economic incentive to lawyers to take on a class proceeding and to do it well: Gagne v. Silcorp Ltd. (1998) , 41 O.R. (3d) 417 (C.A.); Parsons v. Canadian Red Cross Society , supra; Vitapharm Canada Ltd. v. F. Hoffmann-La Roche Ltd. , [2005] O.J. No. 1117 (S.C.J.) at paras. 59-61.

[89] Factors relevant in assessing the reasonableness of the fees of class counsel include: (a) the factual and legal complexities of the matters dealt with; (b) the risk undertaken, including the risk that the matter might not be certified; (c) the degree of responsibility assumed by class counsel; (d) the monetary value of the matters in issue; (e) the importance of the matter to the class; (f) the degree of skill and competence demonstrated by class counsel; (g) the results achieved; (h) the ability of the class to pay; (i) the expectations of the class as to the amount of the fees; and (j) the opportunity cost to class counsel in the expenditure of time in pursuit of the litigation and settlement: Smith v. National Money Mart , supra , at para. 24; Fischer v. I.G. Investment Management Ltd., supra , at para. 28.

[90] The benefits of the settlement to class members and the benefit of class actions to class counsel are interrelated matters. In Lavier v. MyTravel Canada Holidays Inc. , supra, the Court of Appeal ruled that I erred in awarding class counsel a fee that was disproportionate to the benefit and access to justice obtained by the class, which had only taken up a very small portion of the settlement funds, the balance of which reverted to the defendant.

[91] In the Lavier case, MyTravel funded a settlement fund of $2.25 million for a class of approximately 4,000 members. After the take-up of the settlement, class counsel was entitled to apply for approval of an additional fee, and after class counsel's additional fee, if any, was paid, the residue in the fund was to be refunded to MyTravel. The settlement was administered, and $333,306.79 was paid to the 352 class members who submitted eligible claims. The take-up rate was 8.85% of the class and 16.7% of the settlement fund. Class counsel was paid an initial fee of $600,000 and sought payment of the additional fee bringing its compensation to approximately $1.0 million, which was more than twice the value of the time recorded by class counsel and three times the amount of claims actually paid to class members.

[92] The Court of Appeal held that while it was reasonable to award the initial fee, it was not reasonable to award any additional fee in light of the poor take-up. Justice MacPherson stated that I had correctly identified the factors to be applied on the fee approval, see above; however, my analysis minimized the significance of the actual recovery to the class and led me to award a fee that was grossly disproportionate to the results achieved and the risks undertaken.

[93] In the immediate case, as explained above, being very generous, I would value the settlement in the immediate case to Class Members to be $400,000, and having regard to the various discretionary factors, noted above, in my opinion a fee of $120,000, all inclusive of disbursements and HST, is an appropriate and indeed generous counsel fee. To award Class Counsel more than the value of the settlement would be to repeat the error I made in the Lavier case.

[94] During the course of the oral argument, I suggested to Class Counsel that the optics of approving a counsel fee of $406,000 for a settlement with a value of between $75,000 (if there was a small take-up) to $400,000 (if there was a fulsome take-up) were very bad. Class Counsel’s response was that in September 2014, it was reasonable and commendable for Class Counsel to start a class action given the likelihood that Home Depot had some culpability in not safeguarding its customers’ privacy and confidential information from criminal intruders and given the need to remedy the damage caused by the data breach.

[95] Further, Class Counsel submitted that they diligently pursued the case to a very favourable outcome for the Class and, therefore, Class Counsel should be compensated for taking on the enormous litigation risks associated with class actions, including the risk of a fee contingent on success and the risk of exposure to ruinous adverse costs awards.

[96] Class Counsel submitted that the class actions against Home Depot were reasonably commenced and diligently prosecuted and it was only through their role as champion for the Class Members that the goals of the class action regime of access to justice, behaviour modification, and judicial economy could be and were achieved in this case.

[97] In my opinion, while Class Counsel’s response provides the justification for approving the $120,000, all inclusive, counsel fee, it is does not justify paying $406,000 to Class Counsel while Class Members will receive a maximum and largely nominal $400,000 payment.

[98] The truth be told, although Home Depot agreed to pay the Counsel Fee subject to court approval and made no submissions at the hearing to reduce the up to $360,000 it agreed to pay, it had a good case that the fee was too high for the purposes of the Class Proceedings Act, 1992.

[99] Fee approval, like most other operative elements of the Act , is meant to be viewed through the lens of access to justice, behaviour modification, and judicial economy, and in this case, Home Depot had a good argument that it ought not to have been subject to a class proceeding at all.

[100] The case for Home Depot being culpable was speculative at the outset and ultimately the case was proven to be very weak. The real villains in the piece were the computer hackers, who stole the data. After the data breach was discovered, there was no cover up, and Home Depot responded as a good corporate citizen to remedy the data breach. There is no reason to think that it needed or was deserving of behaviour modification. Home Depot’s voluntarily-offered package of benefits to its customers is superior to the package of benefits achieved in the class actions.

[101] Perhaps, it was the attempt to avoid a class action that explains why Home Depot was so generous in offering benefits, but it was sued nevertheless. By the time the actions against Home Depot came to be settled, there were no demonstrated or demonstrable losses by the Class Members and the Representative Plaintiffs were not even members of the settlement class. Unless one wishes to play pretend, Home Depot was the successful party in resisting a pleaded claim of $500 million.

[102] I appreciate that Class Counsel take on a considerable risk when they accept a retainer for a class action, and I appreciate that in the immediate case, there is no premium and indeed there is deficit in a counsel fee of $360,000. But it is not the court’s function to make class actions risk free just because Class Counsel demonstrates that bringing a class action was not frivolous, vexatious, nor a palpable strike suit but rather was a reasonable response to a harm suffered by a group. In Smith v. National Money Mart , supra , at paras. 124-126, I had the following to say about the risk factor:

124. I accept that Class Counsel took on a high risk when they took on this class action, and I accept that taking on risk should be rewarded.

125. Recognizing risk as a factor relevant to determining the fairness and reasonableness of Class Counsel's fee provides an incentive to Class Counsel to encourage them to be a vehicle for access to justice for the class and behavior modification for society. That said, risk is only one factor connected to other factors, and it is a difficult factor from which to extrapolate a monetary award, because all litigation has risk, and every case raises the question of whether litigating would be worth the risk. In addition to being idiosyncratic, the evaluation of risk is also problematic because risk changes as social and legal conditions change. For instance, without speaking about the case at bar, there are many areas of mass wrongs where the risk of a proposed class proceeding not being certified is arguably less than it used to be in the early days of the legislation.

126. The acceptance of risk is not the paramount factor in the assessment of a reasonable fee or multiplier. In this regard, it is interesting to note that the Legislature did not enact a provision in the draft legislation approved by the Attorney General's Advisory Committee on Class Action Reform that provided that in fixing a multiplier, the court should only have regard to the risk incurred and the manner in which the solicitor conducted the proceedings. The acceptance of risk and the solicitor's performance are not privileged factors in the determination of a reasonable fee probably because the risk factor does not differentiate between a bad settlement and good one.

[103] In some cases, and in my opinion, the immediate case is an example, it may have been reasonable to commence the class action but there comes a point when the litigation should be abandoned, discontinued, or settled pursuant to s. 29 of the Class Proceedings Act, 1992, and when the action is discontinued, abandoned, or settled, class counsel should not anticipate that every reasonably commenced class action will be remunerative and a profitable endeavor.

[104] It is informative that the Act speaks of abandonment, even of a certified class action. Abandonment, which is not a normal incident of regular litigation, is at least envisioned for class proceedings, and it appears that the notion of abandonment was introduced as another mechanism to ameliorate the risk of class actions.

[105] What might be champertous legal fees in other circumstances is permitted in a class action, but the court is charged with the responsibility of ensuring that the fees are consistent with the values and purposes of the class action regime, which is designed primarily as a means to access to justice for real clients, even recruited ones. And while class counsel should be compensated for taking on the risk of their client’s case, in approving class counsel’s fees the court should not approve the fee simply because a class counsel was prepared to take on the risk. In approving counsel fees, recognizing that class counsel are in some sense a partner in their client’s litigation, the court walks the high adjudicative tightrope of neither encouraging nor discouraging class actions.

[106] In this role of not discouraging, the courts must balance the risk undertaken by the lawyer in conducting the litigation and the degree of success or result achieved and consider all of the other factors that are relevant to determining a fee, but the ultimate goal of fee approval is to arrive at a fee that is fair and reasonable in the circumstances of the particular case and not to send messages to heat or chill access to justice.

[107] In the immediate case, in my opinion, $120,000, all inclusive, is a fair and reasonable counsel fee.

D. CONCLUSION

[108] For the above reasons, I approve the settlement and the associated or ancillary requests. (I signed the Order at the hearing of the settlement approval motion.) I do not approve any honoraria. I approve a counsel fee of $120,000, all inclusive of disbursements and HST.

Perell, J.

Released: August 29, 2016