ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 08-CV-351183 CP
DATE: December 3, 2012

BETWEEN:

MICHAEL IAN MCCRACKEN
Plaintiff

– and –

CANADIAN NATIONAL RAILWAY COMPANY
Defendant

Louis Sokolov and Sean Grayson for the Plaintiff
Aaron Dantowitz and Benjamin Kates for the Law Foundation of Ontario

Sylvie Rodrique and Rahool P. Agarwal for the Defendant

Proceeding under the Class Proceedings Act, 1992

HEARD: November 19, 2012

PERELL, J.

REASONS FOR DECISION - COSTS

A. INTRODUCTION

1In the case at bar, the successful defendant, Canadian National Railway Company (“CN”), seeks partial indemnity costs of over $1 million dollars, all inclusive from the Plaintiff, Michael McCracken, for a certification motion under the Class Proceedings Act, 1992 , S.O. 1992, c. C.6.

2For the reasons that follow, I award CN $475,000, all inclusive.

3As the discussion below will reveal, the $475,000 award is based on an issue estoppel. I feel bound by the Court of Appeal’s determination that the case at bar was animated by public interest concerns and that the case involved novel points of law and therefore costs should be fixed at a significantly lower amount than claimed by CN.

4The discussion below, however, will also reveal that apart from the issue estoppel, the appropriate award of costs is $475,000 all inclusive.

B. BACKGROUND

5In 2008, Mr. McCracken commenced a proposed class action on behalf of approximately 1,550 current and former first-line supervisors employed by CN. The action was based on CN’s alleged misclassification of all first-line supervisors as “management” and the assertion that the misclassification deprived them of overtime and holiday pay to which they would otherwise be entitled pursuant to the minimum standards set out in the Canada Labour Code , R.S. 1985, c. L-2. The claim was for $250 million plus punitive damages of $50 million.

6The Class Proceedings Committee of the Law Foundation approved the proposed class action for funding support from its Class Proceedings Fund. As will be explained further below, this means that the Law Foundation, and not Mr. McCracken, is liable to pay CN’s costs. The Law Foundation is entitled to make submissions about the exercise of the court’s discretion to award CN costs. See Rules of Civil Procedure, rule 12.04.

7At the time of its launch, the McCracken action was one of three actions involving overtime pay claims against federally regulated employers. All the actions had the same Class Counsel. The other actions were: (a) Fresco v. Canadian Imperial Bank of Commerce , 2010 ONCA 443 , reversing 2010 ONSC 4724 (Div. Ct.), which had affirmed 2009 31177 (ON SC) , [2009] O.J. No. 2531 (S.C.J.); and Fulawka v. Bank of Nova Scotia , 2010 ONSC 1148 () , [2010] O.J. No. 716 (S.C.J.), leave to appeal to the Div. Ct. granted, 2010 ONSC 2645 (Div. Ct.), affd., 2011 ONSC 530 (Div. Ct.), affd., 2012 ONCA 443 .

8In Fresco , a class action on behalf of bank employees for damages for breach of contract and unjust enrichment with respect to unpaid overtime work was certified as a class action. In Fulawka , a class action on behalf of bank employees for damages for breach of contract and unjust enrichment with respect to unpaid overtime work was certified as a class action. Of the three actions about overtime pay, McCracken was the only misclassification case . Fulawka and Fresco are “off-the-clock” overtime cases, where the allegation is that employees entitled to overtime were deprived of it. In a misclassification case, the issue is whether a group of employees are entitled to overtime pay.

9In McCracken , in July 2008, CN requested permission to bring a Rule 21 motion about the court’s subject-matter jurisdiction over Mr. McCracken’s and the class members’ claims. CN asked that its Rule 21 motion be heard before the certification motion. I directed, however, that its Rule 21 motion be heard contemporaneous with the already-scheduled certification motion.

10It took several years to ready the motions, which were heard in July 2010. On the certification and Rule 21 motions, there were five days of hearings, eight factums totalling over 700 pages, nine gowned lawyers (and others in the courtroom), twenty-five proposed common issues for certification, twenty-six volumes of motion records or compendiums, forty-three affiants, who provided the factual background, and over 400 cases and statutes referred to in the factums and bound in the case books to provide the legal background.

11CN had some modest success on the Rule 21 motion, but it was unsuccessful on the critical point of whether this court did not have subject-matter jurisdiction. In the result, I granted Mr. McCracken’s certification motion. My reasons are reported McCracken v. Canadian National Railway Co ., 2010 ONSC 4520 .

12After the certification motion, Mr. McCracken sought costs of $740,650.55 on a partial indemnity scale, of which the counsel fee was $550,000.00, disbursements were $150,369.90, and taxes were $40,280.65. After the certification motion, CN sought costs of $400,000 all inclusive of counsel fee, disbursements, and taxes.

13In justifying Mr. McCracken’s claim for costs, Class Counsel submitted that based on its dockets, its claim for fees on a partial indemnity basis exceeded $1,090,000.00 and exceeded $1,600,000.00 in chargeable fees. Thus, Mr. McCracken’s claim for a counsel fee represented a substantial discounting of what notionally Class Counsel could have charged Mr. McCracken but for a contingency fee arrangement.

14Although CN was the unsuccessful party on both the certification motion and also only modestly successful on the imbedded Rule 21 motion, as noted above, it sought costs on a partial indemnity scale of $400,000, all inclusive. The theory of CN’s request for costs was that McCracken’s claims in negligence, for breach of a duty of good faith, and for holiday pay were not certified and Mr. McCracken and Class Counsel should not receive credit for success because of those dismissed claims and because the common issues that the court certified were not the ones that Class Counsel had proposed but rather were questions fashioned by the court.

15In their costs submissions, the parties were in accord that, practically speaking, there was one motion with many issues, some of them interconnected. Both parties claimed to be the winner and both parties claimed the winner's prize of costs.

16I dismissed CN's claim for costs, and I granted Mr. McCracken's claim for costs, which I treated as a claim by the class counsel consortium of Roy Elliott O'Connor LLP and Sack Goldblatt Mitchell LLP as its reward for assuming the risk of losing the certification motion.

17I concluded that Mr. McCracken and Class Counsel had achieved a level of success that justified an award of costs for what, practically speaking, was a single complex motion with a multitude of issues, some of them interconnected and some of them mutually exclusive. It was my opinion that the success achieved by CN did not rise to the level that should deprive Class Counsel of an award of costs or justify an offsetting award to CN.

18In the result, I awarded Mr. McCracken costs of $740,650 for the certification and Rule 21 motions. My reasons about costs are reported as McCracken v. Canadian National Railway Co ., 2010 ONSC 6026 .

19Both sides appealed. Initially, CN sought leave to appeal to the Divisional Court, but all the appeals were eventually heard by the Court of Appeal. In its factum in support of its motion for leave to appeal to the Divisional Court, CN argued that the appeal raised matters of such importance that leave was desirable and that the case transcended the interests of the parties.

20I note here that it is arguable that CN was more or less compelled to make this submission because of the requirements for granting leave set out in rule 62.02(4) of the Rules of Civil Procedure , R.R.O. 1990, Reg. 194.

21On its leave to appeal motion, CN submitted that the outcome of the action would develop the law on misclassification cases and have far-ranging consequences for Canadian employers and that the action presented serious and novel legal issues about whether misclassification cases can be heard collectively, if at all.

22In any event, the Divisional Court did not hear the appeals, and they were heard by the Court of Appeal in February, 2012. In the result, the Court allowed CN’s appeal, and it reversed the certification Order. The Court dismissed the parties' appeals from the Order under Rule 21. The Court set aside the original costs Order favouring Mr. McCracken, and it ordered that CN shall have its costs of the certification motion, to be fixed by the motion judge. The Court of Appeal’s reasons are reported: McCracken v. Canadian National Railway Co ., 2012 ONCA 445 .

23Because it raises an issue estoppel, it needs to be noted that for the costs of the appeal itself, CN claimed partial indemnity costs of $300,000, all inclusive. CN's counsel indicated that this amount represents approximately one-third of the actual costs incurred of $931,464. The Court of Appeal awarded CN $60,000, all inclusive. See McCracken v. Canadian National Railway Co ., 2012 ONCA 797 .

24For present purposes, the pertinent part of the Court of Appeal’s judgment is found in paragraphs 6 to 12.

25The matter of fixing CN’s costs for the certification now returns to me.

26CN says that its actual legal costs for the certification motion were $ 2,288,736.02 , which amount does not include what it paid its former counsel , Osler, Hoskin & Harcourt LLP .

27The breakdown of CN’s claim for costs is $625,000 for counsel fees and $376,882.42 for disbursements, both amounts inclusive of taxes.

C. POSITION OF THE PARTIES

1. CN’S Position

28CN’s argument is that it was entirely successful on the certification motion and the normal loser-pays rule should be applied.

29It submits that the litigation was highly complex, and justifiably, CN put up a vigorous and expensive defence.

30CN submits that given its status as a major player in the international transportation industry and one of Canada's longest-standing and most-respected commercial institutions, it was pressed to defeat the certification motion because the reputational damage of certification alone could have been significant.

31CN submits that it would have come as no surprise to Mr. McCracken that CN would deploy significant resources to defend itself.

32CN submits that there should be no discount in the costs award for the unsuccessful aspects of its Rule 21 motion.

33CN submits that awarding it costs would have no significant adverse affect on access to justice because Mr. McCracken will be indemnified by the Law Foundation of Ontario’s Class Proceeding Fund.

2. Mr. McCracken and the Law Foundation’s Position

34Mr. McCracken and the Law Foundation submit that the amount of CN’s claim is unprecedented and cannot be justified as reasonable.

35They submit that CN should not be awarded costs associated with its unsuccessful attack on this Court’s subject-matter jurisdiction.

36They submit that CN was successful on certification but unsuccessful on subject-matter jurisdiction.

37Mr. McCracken and the Law Foundation submit that CN unnecessarily increased the costs.

38They submit that the special factors identified by s. 31 (1) of the Class Proceedings Act, 1992 are operative.

39They submit that the action involved novel points of law.

40They emphasize that the class action involved a matter of public interest.

41They emphasize the influence of the access to justice factor.

42They argue that adverse costs awards would chill access to justice.

43They submit that the case had behaviour modification benefits.

44They submit that the Court should not take into account CN’s argument regarding the Fund.

D. DISCUSSION

1. Preliminary Point

45As a preliminary matter, I note that although the Court of Appeal directed this Court to determine the costs of the certification motion only and the Court of Appeal did not disturb this Court’s determinations on the Rule 21 motion, I view the Rule 21 motion as imbedded within the certification motion.

2. The Role and Significance of the Involvement of the Class Proceedings Fund and Others that Facilitate Access to Justice

46Before addressing the heart of this determination of CN’s entitlement to costs, I shall first deal with the role and significance of the involvement of the Class Proceedings Fund.

47The Legislature established the Class Proceedings Fund in conjunction with the enactment of the Class Proceedings Act, 1992 with the broad purpose of increasing access to justice.

48A plaintiff’s exposure to costs may be assumed by the Law Foundation of Ontario pursuant to the Law Society Amendment Act (Class Proceedings Funding), 1992.

49A plaintiff may apply to the Law Foundation for support.

50The Law Foundation ’s assistance, however, has a price.

51The Fund is designed to be self-funding.

52If the Fund agrees to provide financial support to a plaintiff, it is financially responsible for any costs award against that plaintiff.

53The case law establishes that the issues of entitlement, scale, and quantum of costs must be determined without reference to whether the Law Foundation provided support.

54The case law establishes that where the Law Foundation is liable to pay costs to the defendant, the possible adverse effect on the viability of the fund is not a ground to deny costs.

55The case law thus establishes that the court should ignore CN’s submission that access to justice will not be affected because the costs will be paid by the Law Foundation.

56I add that apart from the established case law, I would have held that CN’s submission was incorrect.

57As noted by the Court of Appeal, if the Law Foundation were required to absorb steep cost awards this would have an undesirable chilling effect on class proceedings.

58Exposure to an adverse costs award in the hundreds of thousands of dollars would deter access to justice.

59Moreover, the costs regime of the Class Proceedings Act, 1992 is based on the assumption that the representative plaintiff is exposed to an adverse costs award.

60I discussed the legal fiction that the representative plaintiff is exposed to costs in my earlier decision.

61In McCracken v. Canadian National Railway Company , 2010 ONSC 6026 at paras. 11-13 , I stated:

11. The jurisprudence about awarding costs should be applied to the reality, not to the pretend of class proceedings.

12. Ending the fictions associated with the awarding of costs in class proceedings will facilitate the court’s ability to do justice.

13. Ending the fictions associated with discussing and explaining the awarding of costs will not change the developed case law.

62For present purposes, the point I wish to emphasize is that ending the fiction changes nothing in the application of the law.

63The fact remains that exposure to adverse costs affects willingness to pursue claims.

64Thus, the role of the Law Foundation in the case at bar is just to make submissions.

3. Costs Awards in Class Actions and The Role of s. 31 of the Class Proceedings Act, 1992

65I turn now to describing the law about costs awards in class actions.

66The role of costs has grown from its historic role of indemnification for the cost of litigation.

67The most general rule about costs is that costs follow the event.

68For class actions, the Ontario Legislature imposed the normal rules about costs.

69In rejecting the recommendation that there be no costs for a certification motion, the Legislature decided that there are to be restraints on access to justice through class actions.

70Thus, under the scheme developed in Ontario for class proceedings, the plaintiff remains liable for costs.

71The Class Proceedings Act, 1992 was never intended to insulate representative plaintiffs from costs consequences.

72In Pearson v. Inco Ltd. the court identified principles for fixing costs on a certification motion.

73A critical principle is that the sum awarded reflect the fair and reasonable expectations of the unsuccessful litigant.

74A class proceeding should not become a means to overspend on legal expenses.

75Another important factor is s. 31 of the Class Proceedings Act, 1992.

76Under s. 31 the court should give special weight to whether the proceeding raised a novel point of law or involved a matter of public interest.

77Courts should be alert to these tendencies.

78Public interest litigation is a difficult concept.

79To be a matter of public interest the case must have significance beyond the class.

80A legally significant novel issue must be one where existing case law is inadequate.

81Another important factor is the underlying goals of the Act.

82Defendants are also entitled to access to justice.

83The traditional principles are codified in rule 57.01 (1).

84Very substantial costs awards have been made to successful plaintiffs on certification motions.

85Several examples follow.

86Costs awarded against unsuccessful plaintiffs have typically been more modest.

87However substantial costs awards have also been made to successful defendants.

88Examples include Martin v AstraZeneca Pharmaceuticals PLC and others.

89In some cases defendants have received no costs despite success.

90Nominal awards of costs against unsuccessful plaintiffs have also been made.

4. An Issue Estoppel and the Application of the Principles that Govern Costs Awards in Class Actions

91In this section I apply the above principles.

92The discussion begins with the submission that there should be a nominal costs award.

93Because of the estoppel created by the Court of Appeal’s decision, I must agree that the case was animated by public interest concerns and involved novel points of law and therefore costs should be fixed at a significantly lower amount than claimed by CN. Based on this issue estoppel, I award CN $475,000 all inclusive.

94However, apart from the issue estoppel, I would not have agreed with Mr. McCracken’s and the Law Foundation ’s submission.

95There are several problems with their argument.

96Nothing special was identified to justify exempting the case from the loser‑pays regime.

97But for the issue estoppel, I would not have considered the case a public interest case in the requisite sense.

98But for the issue estoppel, I also would not have concluded that the case was a novel case in the requisite sense.

99Although I would not have come to the same conclusions as the Court of Appeal about the reasons for fixing costs lower, I would have fixed costs significantly lower than $1 million.

100In my opinion, CN’s claim for $1 million in costs was not reasonable nor justified and the appropriate award was $475,000 independent of any issue estoppel.

101CN argued that its claim was reasonable because it was the successful party and it devoted significant resources.

102With respect, I do not understand how anything other than a decision on the merits can remove reputational harm.

103Defeating the certification motion provides only a procedural outcome.

104Sometimes defendants argue they must adopt a “take no prisoners” strategy.

105I do not see the relevance of Mr. McCracken having a comprehensive litigation strategy.

106It is unreasonable to expect one’s opponent to pay $1 million in costs for a mandatory‑procedural‑interlocutory‑non‑dispositive motion.

107I appreciate that I originally awarded Mr. McCracken $740,650.55 but I now think I was too generous.

108In awarding $475,000 I have taken into account CN’s lack of success on certain issues and reduced disbursements.

E. CONCLUSION

109For the above reasons, I award CN partial indemnity costs of $475,000, all inclusive.

110Given the divided success of the parties, I award no costs for this motion to fix CN’s costs.

111I conclude the Reasons with an editorial comment.

112A certification motion is a mandatory‑procedural‑interlocutory motion where the merits are not determined and the successful party should not anticipate an enormous cost award that would diminish the access to justice purposes of the Class Proceedings Act, 1992.

113Based on anecdotal evidence available to me as a class actions judge, the large costs awards awarded in recent years are having adverse consequences.

Perell, J.

Released: December 3, 2012

COURT FILE NO.: 08-CV-351183 CP
DATE: December 3, 2012

ONTARIO
SUPERIOR COURT OF JUSTICE

BETWEEN :

MICHAEL IAN MCCRACKEN
Plaintiff

‑ and ‑