COURT FILE AND PARTIES

COURT FILE NO.: CV-14-504164-CP

DATE: 20151117

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Gregory Jermaine McCallum-Boxe, Plaintiff / Moving Party

AND:

Sony Corporation, Sony Computer Entertainment Inc., Sony Corporation of America, Sony of Canada Ltd., and Sony Computer Entertainment America LLC, Defendants / Responding Parties

BEFORE: Justice Edward P. Belobaba

COUNSEL: Casey Churko and Linh Pham for the Plaintiff

Dana Peebles for the Defendants

HEARD: November 5, 2015

Proceeding under the Class Proceedings Act, 1992

settlement and legal fees

[1] This proposed class action has settled. Given the modest size and relatively unremarkable nature of this settlement, the plaintiff’s motion for settlement approval would normally have been granted with a brief endorsement. What makes this matter remarkable and deserving of written reasons is the legal fees arrangement between the representative plaintiff and class counsel, the Merchant Law Group (“MLG”). In my view, this particular legal fees arrangement is the very antithesis of what is in the best interests of the class. And the fact that MLG does this in “many” of its class actions is, to say the least, disturbing.

Background

[2] The class action is based on a consumer product warranty complaint. The rubber grips on some of the Sony PlayStation 4 video game controllers were deteriorating prematurely. When customers returned the defective controllers for in-warranty repair or replacement they were obliged to pay the shipping charge. MLG concluded that this was contrary to law.

[3] Two actions were commenced, one in Saskatchewan and this one in Ontario. MLG sued for $10 million, thinking that the class size was significant – they estimated anywhere from several thousand to several hundred thousand class members. As it turned out, only about 400 customers had sent their controllers back for repair or replacement and paid the impugned shipping charge.

The settlement agreement

[4] Both actions have now been settled under one agreement. The settlement agreement provides that each of the 400 customers will receive a $20 reimbursement. The parties agree that on average this amount will more than cover the customer’s shipping costs. The total value of the settlement is therefore $8000. Counsel for the defendants suggests that this could be the smallest Canadian class action settlement on record.

[5] The settlement agreement provides that the defendants will pay a $1500 honorarium to the Saskatchewan plaintiff and $3000 to the Ontario plaintiff herein. The settlement agreement also obliges the defendants to pay legal fees:

Sony will pay legal fees in an amount to be determined by the Ontario Court, with a motion on notice to the Defendants, including submission of the Merchant firm’s dockets to the Court.

[6] I have no difficulty certifying the action for settlement purposes. I have reviewed the pleadings and the filed affidavit material and I find that the five requirements set out in s. 5(1) of the Class Proceedings Act[^1] have been satisfied. I also have no difficulty approving the proposed settlement and the payment of the suggested honoraria. I am satisfied that the $20 reimbursement for shipping costs is fair and reasonable and that the settlement is in the best interests of the class. I am also satisfied that the two representative plaintiffs are entitled to the modest honoraria amounts.

The legal fees provision

[7] The problem is the legal fees provision and the arrangement that MLG made with the representative plaintiff.

[8] On its face, the legal fees provision is easily understood. In addition to the $8000 settlement amount, Sony agrees to pay legal fees directly to MLG in an amount to be determined by this court. MLG must provide their dockets to not only assist the court but also to allow for Sony’s review and critique. Sony tried to argue that they were obliged to pay the legal fees to the class representative and not to MLG directly. I reject this interpretation and I note that my interpretation of this legal fees provision is supported by the affidavit material that was filed by both sides confirming their shared intention that the legal fees would be paid directly to MLG.

[9] Turning then to the task at hand, how should this court determine the legal fees payable to MLG? In Lavier v My Travel Canada,[^2] the Court of Appeal noted that where the legal fees provision is part of the settlement agreement, the court must still apply the norms set out in the CPA (i.e. those that normally apply to the court’s approval of solicitor-client fee agreements) – namely, “whether a fee is fair and reasonable.”[^3] In making this determination, the court must assess “the risks assumed by class counsel and the results achieved for the class …”[^4]

[10] To help me determine what amount would be fair and reasonable, I asked MLG in court if they were entitled to any compensation under the retainer agreement with their client, whether by way of hourly rates and multipliers or contingency amounts. I assumed that MLG, like most class counsel, had a written retainer agreement with a contingency fee arrangement.

Class counsel’s “arrangement”

[11] To my surprise, MLG advised that it had no written retainer agreement for the Sony class action. MLG explained (and follow-up affidavits from the representative plaintiffs confirmed) that in this case the class was not obliged pay any fees or costs whatsoever and that MLG intended to recover their legal fees from Sony “as part of the settlement agreement.” MLG said it currently has similar arrangements in “many” of their class actions.

[12] I must confess that I was somewhat shocked to hear this. An experienced class action firm was telling me in open court, and with a straight face, that “many” of its class action legal fee arrangements were like the one that was before me – no written retainer, no contingency fee provision, simply an agreement with the class representative that MLG would look to recover its legal fees from the defendant as part of the (hoped for) settlement agreement.

[13] It must be obvious to anyone who gives this even a moment’s thought, that this type of settlement-driven legal fees arrangement in class action litigation is fundamentally and profoundly unacceptable. It provides all the wrong incentives. The MLG arrangement discourages maximum commitment on behalf of the class because even if class counsel should win at trial, they will not be entitled to any compensation, whether from the recovery (no such agreement is in place) or via the plaintiff’s claim for costs (no costs can be awarded because the representative plaintiff has no liability to pay legal expenses.[^5]) The MLG arrangement encourages only a minimal commitment on behalf of the class leading to sub-optimal settlements negotiated by class counsel who are primarily interested in recovering a generous legal fees payment.

[14] The MLG arrangement will no doubt work for the defendant who is shrewd enough to negotiate a small settlement amount coupled with an attractive legal fees payment to class counsel, and still come out ahead. It most decidedly does not work for the members of the class. It is obviously not in their best interests. Their legal counsel is not only motivated to negotiate a settlement in almost any amount, his or her very involvement in the negotiation with the defendant creates a glaring conflict of interest because every dollar that can be deducted from the class members’ settlement amount is a dollar that can potentially be added to class counsel’s legal fees amount.

[15] Judges should as a rule approve legal fee arrangements that incentivize class counsel to press for the highest possible recovery for the class and should reject arrangements such as this that encourage premature, sub-optimal settlements negotiated by class counsel trying to extract an almost risk-free payment for themselves.

[16] In short, the MLG arrangement - “don’t worry about our legal fees, we’ll get the defendant to pay them as part of the settlement agreement” - is, as I have already noted, the antithesis of a legal fees arrangement that is in the best interests of the class. I doubt that any Canadian judge concerned about the viability of the class action vehicle and the overall best interests of the class would ever approve such a one-sided agreement. MLG would be wise to quickly abandon this settlement-driven legal fees arrangement.

Determining fair and reasonable legal fees

[17] Here, of course, the actual arrangement between MLG and the two representative plaintiffs, although in my view deplorable, is not before me for review and approval. What is before is the legal fees provision that is set out in the settlement agreement. And here, ironically, the actual settlement achieved, although a mere $8000, is fair and reasonable and, as I have already found, in the best interests of the class.

[18] So, after a somewhat lengthy detour denouncing the settlement-driven MLG arrangement, I must return to the task at hand and acknowledge that I am still obliged to determine the amount that Sony should pay to MLG under the legal fees provision in the settlement agreement.[^6]

[19] MLG suggests a number of possible payment scenarios from partial to full indemnity, as well as one involving a 1.5 multiplier. All of the scenarios would result in a legal fees award ranging from $120,000 to $225,000. The defendants, not surprisingly, oppose any such payment. They criticize class counsel’s dockets as being excessive; they remind the court that the value of the overall settlement is a meager $8000; and they suggest that no fees should be awarded and at most no more than $24,000, the amount that was spent by the defendants on a partial indemnity basis.

[20] Several observations are in order. This is a legal fees award not a costs award and thus MLG is entitled in principle to be paid a fair and reasonable legal fees amount that is undiluted by the application of a partial indemnity standard. However, it is important to note, given the settlement-driven arrangement with the representative plaintiffs, that MLG did not assume much risk in this litigation and it is even more important to note that the legal fees awarded should be proportional to the result achieved, here a very modest $8000 settlement.

[21] In my view, after taking all of these factors into account, I find that a fair and reasonable legal fees award is at most $30,000.

Disposition

[22] The proposed class action is certified for settlement purposes. The settlement agreement is approved. The payment of the requested $1500 and $3000 honoraria to the two representative plaintiffs is approved. And, further to the settlement agreement, this court has determined that the defendants should pay MLG its legal fees in the amount of $30,000. Order to go accordingly.

Belobaba J.

Date: November 17, 2015

[^1]: Class Proceedings Act, 1992, S.O. 1992, c. 6

[^2]: Lavier v. MyTravel Canada Holidays Inc., 2013 ONCA 92, [2013] O.J. No. 674 (C.A.)

[^3]: Ibid., at paras.26- 27.

[^4]: Ibid., at para. 27.

[^5]: Labourers Pension Fund of Central and Eastern Ontario (Trustees of) v. Sino-Forest Corp., 2015 ONSC 6354 at para. 109: “It may seem a trite observation but for a litigant to have a claim for costs, he or she must have incurred a liability to pay for legal expenses. This is an old principle: the litigant must have a liability to pay his or her own lawyer in order to claim indemnification for that liability.”

[^6]: I cannot refuse to enforce the legal fees provision in the settlement agreement just because the underlying settlement-driven “arrangement” would not be approved if it was before the court – the latter is obviously not before the court for approval.