Schenk v. Valeant Pharmaceuticals International Inc., 2015 ONSC 3215

CITATION: Schenk v. Valeant Pharmaceuticals International Inc., 2015 ONSC 3215

COURT FILE NO.: CV-15-10842-00CL

DATE: 20150608

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

REINER SCHENK

Plaintiff

– and –

VALEANT PHARMACEUTICALS INTERNATIONAL INC., VALEANT INTERNATIONAL (BARBADOS) SRL, EUGENE MELNYK, TRIMEL PHARMACEUTICALS CORPORATION, TRIMEL BIOPHARMA INC., TRIMEL BIOPHARMA HOLDINGS INC. and TRIMEL BIOPHARMA SRL

Defendants

EUGENE MELNYK, TRIMEL PHARMACEUTICALS CORPORATION, TRIMEL BIOPHARMA HOLDINGS INC., TRIMEL BIOPHARMA SRL, PAUL MAES and MAES PHARMCONSULT SPRL

Third Parties

Adam J. Stephens, for the Plaintiff

Monique J. Jilesen and Ian MacLeod, for the Defendents, Valeant Pharmaceuticals International Inc. and Valent International (Barbados) SRL

HEARD: April 8, 2015

McEWEN j.

reasons FOR DECISION

[1] The plaintiff Reiner Schenk (“Schenk”) brings a motion for an order approving the Litigation Funding Agreement (the “LFA”) entered into between himself and Redress Solutions PLC (“Redress”). The LFA is conditional on Court approval.

[2] The defendants Valeant Pharmaceuticals International Inc. and Valeant International Bermuda (collectively the “Valeant Defendants”) also bring a motion seeking the following relief:

• an order that Schenk and/or Redress pay security for costs into court; and,

• an order dismissing Schenk’s motion to approve the LFA with Redress or, alternatively, an order approving the LFA only if certain amendments are made to it.

Overview

[3] Schenk resides in Switzerland and has no assets in Ontario. He has commenced this action against the Valeant Defendants and others, seeking damages for breach of contract in the amount of $10 million plus commissions or alternatively, $30 million, for the Valeant Defendants’ breach of their contractual obligation of confidentiality.

[4] It is common ground that the action is complex and will involve extensive documentary production. The trial will take approximately three weeks if the matter is not settled.

[5] Schenk is a person of modest means. He has accordingly entered into the LFA with Redress, conditional on Court approval, which would have Redress fund all of the future litigation costs in the action in exchange for a portion of any monies collected by Schenk by way of settlement or judgment. Redress is a public limited company registered in England. It is a member of the Association of Litigation Funders of England and Wales (“ALF”), which is an independent body that has been charged by the U.K. Ministry of Justice with the regulation of litigation funding in England and Wales. As a member, Redress subscribes to and is bound by a Code of Conduct. There is no evidence to suggest it is other than a legitimate entity in the business of providing funding for litigation.

[6] The Valeant Defendants, however, take exception to the fact the LFA contains a floating cap on the amount that Redress can recover and, amongst other things, provides that in certain circumstances it will not be responsible for the costs of the Valeant Defendants.

[7] I will deal with each of the issues raised by the Valeant Defendants in turn.

The LFA

[8] Third party litigation funding is relatively new in Ontario. Typically, such agreements have arisen in class proceedings. Counsel could not locate any cases in which third party funding has been extended to the context of commercial litigation. This being said, I see no reason why such funding would be inappropriate in the field of commercial litigation. With that said, in examining any proposed third party litigation funding, the statutory and common law prohibition on champerty and maintenance Province of Ontario must be considered.

[9] As stated by the Court of Appeal in McIntyre Estate v. Ontario (Attorney General), 2002 CanLII 45046 (ON CA), 61 O.R. (3d) 257, 218 D.L.R. (4th) 193 at para. 26:

Although the type of conduct that might constitute champerty and maintenance has evolved over time, the essential thrust of the two concepts has remained the same for at least two centuries. Maintenance is directed against those who, for an improper motive, often described as wanton or officious intermeddling, become involved with disputes (litigation) of others in which the maintainer has no interest whatsoever and where the assistance he or she renders to one or the other parties is without justification or excuse. Champerty is an egregious form of maintenance in which there is the added element that the maintainer shares in the profits of the litigation.

[10] This motion thus raises competing concerns about access to justice on the one hand, and the protection of the administration of justice from abuse on the other. The Valeant Defendants concede that third funding party agreements are not per se objectionable, but take issue with the LFA in question.

[11] The main concerns raised by the Valeant Defendants at the motion concerning the LFA are as follows:

(i) given the terms of the LFA, if Schenk is successful then Redress could receive more than 50 percent of the proceeds;

(ii) Redress would receive information and documentation, disclosed by the Valeant Defendants, contrary to the deemed undertaking rule;

(iii) considered as a whole, the LFA restricts Schenk’s ability to instruct counsel except as provided for in the undisclosed engagement letter of Miller Thomson LLP;

(iv) the LFA allows Redress to terminate the LFA on seven days’ notice in the event that it “reasonably ceases to be satisfied about the merits of the claim”; and

(v) the LFA permits Redress to refuse to provide future funding or to unilaterally revise the terms of the LFA in the event that Schenk’s costs at any stage of the litigation exceed the budget by 25 percent.

(i) Redress Could Receive Greater than 50 Percent of the Proceeds

[12] As a preliminary issue, the Valeant Defendants take issue with the fact that Schenk has claimed privilege for the March 12, 2012 letter prepared by Miller Thomson LLP setting out its terms of engagement with Mr. Schenk along with the accompanying litigation budget.

[13] The documents were provided to me on a confidential basis. The Valeant Defendants argue that their ability to make submissions with respect to the LFA has been prejudiced as they do not have information concerning the terms of engagement or the litigation budget. Having reviewed the documents I disagree. The terms of the engagement letter are typical to any litigation retainer and not particularly relevant, if at all, to the issues in this motion. The litigation budget, without disclosing its contents, is a reasonable one and not dissimilar from the litigation budget that has been provided to the Court by the Valeant Defendants. In my view, it would be prejudicial to Schenk to compel production of these documents. Schenk should have a reasonable expectation of privacy over them, and I can see no mischief that will befall the Valeant Defendants by not having access to these documents.

[14] Regarding the LFA however, the Valeant Defendants have raised legitimate concerns with respect to share of the proceeds that would flow to Redress at settlement or judgment. While I am very sensitive to the access to justice concerns raised by Schenk, the LFA, as it is currently drafted, exacts an unfair price from Schenk and places Redress in a position where it is very possible, if not likely, that it would receive more than 50 percent of any recovery.

[15] As currently drafted, the LFA entitles Redress to 30 percent of any settlement. This increases to 50 percent, some 20 months after the agreement date of September 22, 2014 has passed. Additionally, section 3(b) of the LFA, provides that for every 10 percent the costs of the action exceed the litigation budget, Redress shall recover an additional 5 percent of the proceeds. For example, therefore, if the litigation budget is exceeded by 20 percent Redress will get an additional 10 percent of the proceeds. This number continues to climb if the costs continue to grow. Additionally, the provisions of the LFA allow Redress a 5 percent rate of interest, further eroding Schenk’s recovery. While I have noted above that the litigation budget seems to be reasonable, litigation expenses can be unpredictable. This is particularly so in cases involving complex matters and third party proceedings, such as the case at bar.

[16] The LFA in this case is particularly difficult to approve. I was provided with no cases in which an Ontario Court had approved an agreement similar to the one proposed here. The amount of recovery that Redress is entitled to if fees exceed the budget is disproportionate to the amount of excess fees required to trigger the extra payments. By way of analogy, as pointed out by the Valeant Defendants, contingency fee agreements are capped at 50 percent pursuant to O. Reg. 195/04 - Contingency Fee Agreements.

[17] In my view, it would be reasonable to allow a funder a recovery of approximately 50 percent in certain circumstances. This case would, to my mind, fit within that category, since it involves a plaintiff of modest means seeking to pursue significant litigation against corporate defendants involving complicated subject matter and very significant damages being claimed. I cannot, however, countenance the terms of the LFA that provide for a significant recovery for Redress, with an open-ended exposure to Schenk that could result in Redress retaining the lion’s share of any proceeds. Such an agreement, in my view, does not provide access to justice to Schenk in a true sense, but rather provides an attractive business opportunity to Redress who suffered no alleged wrong.

[18] Schenk submits that I ought not to be concerned about the risk of Redress recovering more than 50 percent because, if the budget is exceeded, the LFA allows for Schenk to pay the overage and maintain a 50/50 split. This is of little comfort to me given Schenk has tendered an affidavit asserting that he lacks funds.

[19] Therefore I do not approve the LFA on the basis that it constitutes champerty and maintenance. My finding, however, is without prejudice to Schenk’s ability to either negotiate a more satisfactory agreement with Redress or another funder. Notwithstanding this finding, I will carry on and analyse the other submissions put forth by the Valeant Defendants for convenience. In these circumstances it is appropriate for me to seize myself of any further motions concerning litigation funding.

(ii) Should Redress Receive Information and Documentation Disclosed by the Valeant Defendants Contrary to the Deemed Undertaking Rule?

[20] Redress has agreed to submit and attorn to the jurisdiction of this Court for all purposes related to the litigation including the enforcement of any costs order made in favour of the Valeant Defendants. Accordingly, Redress will be subject to the deemed undertaking rule (to which it also consents). Furthermore, although Redress does not have any assets in Canada, it is an established funder and a member of the ALF and is subject to a voluntary code of conduct, to which I expect would conform in the within litigation.

[21] In these circumstances, it is reasonable for Redress to be provided with information and documentation disclosed by the Valeant Defendants. I acknowledge that this is not a perfect situation for the Valeant Defendants, but it is reasonable in all of the circumstances. It takes into account the Valeant Defendants’ privacy concerns, Schenk’s access to justice concerns, and Redress’ concerns about receiving meaningful information so that it can properly monitor the claim and assess its own risk.

(iii) The LFA Restricts Schenk’s Ability to Instruct Counsel

[22] Having reviewed the engagement letter of Miller Thomson LLP, I am of the view that there are no reasonable concerns in this regard.

(iv) The LFA permits Redress to Terminate the LFA on Seven Days’ Notice in the Event that it Reasonably Ceases to be Satisfied About the Merits of the Claim

(v) The LFA permits Redress to Refuse Further Funding or Revise the Agreement if Schenk’s Costs Exceed 25 Percent

[23] I will deal with these two issues collectively since the Valeant Defendants submit that the LFA gives Redress the ability to put extreme pressure upon Schenk and may therefore exert undue influence in the litigation. I do not agree. In the context of this case I do not find that allowing a funder an opportunity to exit the agreement in the circumstances specified in the LFA or when offers to settle are served is unreasonable. This is particularly true in this case where, as will be noted below, both Schenk and Redress do not oppose an order for security for costs, offering some protection to the Valeant Defendants. Overall, it is fair and reasonable to allow Redress to terminate funding in the circumstances proposed.

Security for Costs

[24] Schenk and Redress do not dispute the Valeant Defendants’ entitlement to security for costs if the LFA is approved. The LFA has not been approved as of yet. I will therefore defer this issue until such time the matter returns before me to deal with the issue of the LFA, other funding, or whether Schenk wishes to pursue the matter without third party funding. It is premature to deal with the motion for security for costs until the above is clarified.

Other Issues

[25] The parties, at the hearing of the motion, agreed on a number of issues that were outlined in the draft order prepared by the Valeant Defendants. If and when the matter returns to me, these issues can also be finalized.

Disposition

[26] The motion to approve the LFA is dismissed on a without prejudice basis to Schenk to bring a further motion in this regard.

[27] The Valeant Defendants’ cross-motion for security for costs and certain amendments to the LFA is deferred to the return of the motion. Costs are similarly deferred.

[28] If the parties are able to come to an agreement with respect to the issue of funding, but not costs, I can be spoken to solely with respect to the issue of costs.

[29] The Miller Thomson LLP engagement letter of March 9, 2012, and the litigation budget shall remain in the court file under seal. If the matter returns before me I will want to see a copy of a completely unredacted LFA, as the one that was presented at the motion contained a few small redactions.

[30] As noted, I remain seized of the issue of any further motions related to the litigation funding.

Mr. Justice T. McEwen

Released: June 8, 2015