Houle v. St. Jude Medical Inc., 2017 ONSC 5129
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
SHIRLEY HOULE and ROLAND HOULE
Plaintiffs
– and –
ST. JUDE MEDICAL INC. and ST. JUDE MEDICAL CANADA, INC.
Defendants
Margaret Waddell and Paul Miller for the Plaintiffs
Caroline Zayid and Paul J. Davis for the Defendants
David E. Lederman for the Proposed Third-Party Funder, Bentham IMF Capital Inc.
Proceeding under the Class Proceedings Act, 1992
HEARD: August 22, 2017
PERELL, J.
REASONS FOR DECISION
1. Introduction
1In this proposed class action under the Class Proceedings Act, 1992, S.O. 1992, c. 6, the Plaintiffs, Shirley Houle and Roland Houle, together with proposed Class Counsel, Waddell Phillips Professional Corporation and Howie Sacks & Henry LLP, move for an Order approving a Litigation Funding Agreement between the Houles, Class Counsel, and Bentham IMF Capital Inc. The scheme of the Litigation Funding Agreement is novel, and there are several controversial features, including a hybrid retainer that combines a partial contingency fee with a fee-for-services retainer. Bentham’s share of the contingency fee is untypically disproportionately high. And, among other concerns, there is a problematic termination provision. The Houles, Class Counsel, and Bentham also seek an Order that would make this controversial Litigation Funding Agreement binding on the putative Class Members.
2The moving parties also move for an Order, nunc pro tunc, allowing them to file a sealed copy of the Litigation Funding Agreement and permitting them to serve and file their motion record with some terms of the Litigation Funding Agreement redacted to protect solicitor-client and litigation privilege. As also will appear from the discussion below, the redactions are miniscule and concern only the maximum amount of litigation funding that Bentham would provide.
3The request for a sealing order was not opposed and is granted.
4The Defendants, St. Jude Medical Inc. and St. Jude Medical Canada, Inc. (collectively “St. Jude”) do not oppose the concept of third-party funding agreements, but they object to this particular Litigation Funding Agreement. St. Jude submits that the Agreement’s 2:1 distribution (which favors Bentham) of the 30 to 38% contingency fee makes the Agreement champertous. St. Jude also submits that the effect of the termination provision would permit Bentham to control the Houles’ litigation and thus the Litigation Funding Agreement interferes with the lawyer and client relationship and with the administration of justice and on this account it should not be approved by the court.
5For the reasons that follow, I grant the nunc pro tunc Order, and subject to the revisions to the Litigation Funding Agreement directed below, and subject to the Houles delivering, within 60 days, a signed revised amended Litigation Funding Agreement in accordance with those directions, I conditionally approve the Litigation Funding Agreement. If a revised Agreement is not delivered, the Houles’ motion shall be dismissed.
2. Factual Background
(a) The Proposed Class Action
6In January 2014, Mrs. Houle, who along with her husband are retirees, was implanted with a Fortify Assura ICD device manufactured by St. Jude.
7In October 2016, the University Health Network, the Peterborough Regional Cardiac Device Clinic, and the Canadian Hearth Rhythm Society wrote letters to the Houles and informed them that Mrs. Houle’s defibrillator was one of more than 8,000 devices that were under advisory. The letters explained that the defibrillator might experience unexpected early battery depletion due to lithium cluster buildup and, as a result, might stop functioning within a few hours or days.
8In November 2016, the Houles retained Margaret L. Waddell, then counsel with Phillips Gill LLP, now of Waddell Phillips Professional Corporation, and Paul Miller of Howie Sacks & Henry LLP to act as co-counsel in a proposed class action.
9On March 12, 2017, Ms. Houle’s defibrillator was surgically replaced.
10Later that month, on March 30, 2017, the Houles commenced the proposed class action. The Statement of Claim was served on St. Jude. The Statement of Claim was amended on June 29, 2017.
11The Houles, on their own behalf and on behalf of the putative Class Members seek damages from St. Jude for alleged negligence in the development, manufacture, and distribution of several models of implantable cardiac defibrillators that can be subject to rapid, premature battery depletion and for St. Jude’s alleged failure to warn of the problem when it became known.
12The Houles seek to be representative plaintiffs for the following two classes of Class Members:
(1) all people in Canada who were implanted with one of the Defibrillators [models Fortify, Fortify Assura, Fortify Assura MP, Unify, Unify Assura and Unify Quadra] manufactured between January 2010 and May 23, 2015 (the "Patient Class"), and
(2) all dependants of members of the Patient Class, as defined in the Family Law Act, R.S.O. 1990, c. F.3 and similar legislation in other Provinces.
13On the basis of estimates provided by the Canadian Heart Rhythm Society, Class Counsel believes that there are more than 8,000 members of the proposed Patient Class. There is also a corresponding class of family members making derivative claims.
14The matters at issue in the action involve complex technical and scientific information about the electrophysiology of lithium batteries in defibrillators and, more generally, about electro-cardiomyopathy. Prosecuting the action will require retaining experts at considerable expense.
15The Houles do not have sufficient resources available to them to shoulder the burden of the disbursements for the action, and they would be financially ruined by an adverse costs award.
(b) The Retainer Agreement
16On December 20, 2016, the Houles signed a Retainer Agreement with Class Counsel and they instructed Class Counsel to commence a class proceeding for them and on behalf of the proposed classes. The Retainer Agreement was expressly made subject to court approval as required by the Class Proceedings Act, 1992 and by the Solicitors Act, R.S.O. 1990, c. S.15.
17It will be pertinent to the discussion later to set out the provisions of the Retainer Agreement that directly or indirectly address the conduct, control, and prosecution of the action. These provisions state:
Client to Act in Best Interests of the Class
The Client retains the right to make all critical decisions regarding the conduct of the action only up to certification as a class proceeding. Thereafter, all decisions must be made solely in the best interests of the Class.
The Client acknowledges the obligation to act in the best interests of the Class and that Class Counsel is not obliged to follow instructions from the Client which are, in their professional opinion, not in the best interests of the Class once the action has been certified as a class proceeding.
Disagreement regarding Settlement
- If (a) the Defendants, or any one or more thereof, make an offer to settle the claims of the Class, (b) Class Counsel considers the proposed settlement to be in the best interests of the Class, (c) Class Counsel recommends acceptance of such offer to the Client, and (d) the Client does not consider the proposed settlement to be acceptable, then a counteroffer to settle shall be made to the Defendants upon such terms as the Client considers to be appropriate. If, within 14 days, such counteroffer is not accepted by the Defendants and no improved Defendants' offer is made which is acceptable to the Client, then Class Counsel is hereby irrevocably authorized to accept the Defendants' offer or the improved Defendants' offer, as the case may be, subject to court approval, and on the motion for such court approval an affidavit fully disclosing the Client’s concerns about the proposed settlement shall be filed with the court.
18Under the Retainer Agreement, Class Counsel agreed to prosecute the action for legal fees calculated on a contingency fee of 33% of the total amounts recovered, subject to court approval.
19Class Counsel, however, were unwilling to cover the costs of the disbursements and were not prepared to provide a costs indemnity for the action. The Houles were not prepared to pursue the action without an indemnity, and, therefore, in the Retainer Agreement, Class Counsel were instructed to apply for litigation funding either from the Class Proceedings Fund or from a third-party funder. In the event that litigation funding was not available, the Retainer Agreement provided that at the option of either the Houles or Class Counsel, the class action may be discontinued.
20In providing these instructions, the Houles recognized that fees payable to a third-party funder may be in addition to those payable to Class Counsel and that the terms of any funding agreement would need to be negotiated. They also appreciated that if third-party funding became available, then the retainer agreement would have to be amended.
21The Houles desired a third-party funding agreement: (a) to cover the costs associated with retaining experts, which expense was anticipated to be in the hundreds of thousands of dollars; (b) to provide funding to pay for the expense of giving notice to Class Members of the various steps in the action, including certification; (c) to protect them from potentially devastating adverse costs awards; and (d) to enable Class Counsel access to the financial resources needed to litigate effectively against St. Jude and to balance the disparity in resources between the parties.
22Class Counsel sought third-party litigation funding from Bentham, which is a corporation that provides litigation funding services in Ontario. Bentham is a publicly-traded litigation funder based in Australia, with an office in Toronto.
23On July 28, 2017, the Houles, Class Counsel, and Bentham signed a Term Sheet setting out the basic terms and conditions of the Litigation Funding Agreement.
24On August 10, 2017, the Houles, Class Counsel, and Bentham signed the Litigation Funding Agreement for which these parties now seek the court’s approval.
25Before signing the Agreement, the Houles received independent legal advice from Jacqueline Horvat of Spark Law LLP. Ms. Horvat is experienced in class action litigation, familiar with third-party litigation funding agreements, and a Bencher of the Law Society of Upper Canada. She first met with the Houles on July 20, 2017 to discuss the Term Sheet. She met them again on on August 10, 2017 before they signed the Agreement.
26The Houles promptly applied for approval of the Litigation Funding Agreement and served the Defendants with a copy of the Agreement with very few redactions. The redactions keep secret the maximum amount of litigation funding that Bentham will provide.
27A complete and unredacted copy of the Agreement was provided to the court in a sealed envelope, which I have opened in order to examine the Agreement.
(c) The Litigation Funding Agreement
28The Litigation Funding Agreement provides that Bentham, on a non-recourse basis, will: (a) pay the disbursements incurred by Class Counsel (such as securing expert reports and providing notice to Class Members) up to a prescribed maximum amount, after which amount, Class Counsel will fund the disbursements; (b) pay any costs that are assessed against the Houles; (c) pay any security for costs; and (d) pay 50% of the reasonable docketed time of Class Counsel up to a prescribed maximum amount.
29It should be noted that the Litigation Funding Agreement requires Bentham to pay a portion of Class Counsel's docketed time, as invoiced and approved by the Houles, to a set maximum, on a non-recourse basis; otherwise, Class Counsel will only be paid pursuant to a contingency fee if the action succeeds. Under the Agreement, Bentham is authorized in the Houles’ name but at its own expense to have any of Class Counsel’s accounts assessed. The novelty here is that the Litigation Funding Agreement creates a hybrid retainer, where the lawyers are paid, in part, for services provided, regardless of the success or failure of the class action, with the balance of the retainer being a contingency fee agreement.
30Under the Litigation Funding Agreement, the Houles and Class Counsel are obliged to keep Bentham regularly informed about the action, but Bentham may not interfere with, or interject itself into, the lawyer-client relationship between the Houles and Class Counsel. Under the Agreement, Bentham may not be provided with information or documentation if, in the reasonable judgment of Class Counsel, disclosure would jeopardize privilege. Bentham agrees that the Agreement is not intended to waive privilege. Bentham agrees to be bound by the implied undertaking rule, and it agrees to maintain all documents disclosed to it in confidence.
31The Litigation Funding Agreement expressly recognizes that nothing within the Agreement will create a lawyer-client relationship between Class Counsel and Bentham, and it is understood that Class Counsel’s professional obligations are owed exclusively to the Class Members.
32In exchange for litigation funding, Bentham will receive a portion of the Litigation Proceeds if the action is successful as follows: (a) if the action settles or is otherwise resolved within 18-months after the Agreement’s execution, Bentham will receive 20% of the proceeds, plus HST; (b) if the action settles or is otherwise resolved between 18-months and 36-months from the Agreement’s execution, Bentham will receive 22.5% of the proceeds, plus HST; and (c) if the action settles or is otherwise resolved after 36-months from the Agreement’s execution, Bentham will receive 25% of the proceeds, plus HST.
33Under the Litigation Funding Agreement, which if approved will supersede and amend the Retainer Agreement between Class Counsel and the Houles, Class Counsel are entitled to a return of: (a) 10% of the proceeds, plus HST, if the action settles or is otherwise resolved within 18-months after the Agreement’s execution; (b) 11.5% of the proceeds, plus HST, if the action settles or is otherwise resolved between 18-months and 36-months from the Agreement’s execution; and (c) 13% of the proceeds, plus HST, if the action settles or is otherwise resolved after 36-months from the Agreement’s execution.
34Thus, under the Agreement, the combined contingency fee for Class Counsel and Bentham ranges from 30% - 38% of the litigation proceeds, depending on the stage at which the action is resolved. The novelty here is that typically the proportionate sharing favours the lawyer and not the third-party funder. In the case at bar, depending on when the action settles, and not taking into account the partial payments for services rendered; the funder to lawyer distribution ratios are 20:10 (2:1); 22.5:11.5 (1.95:1); 25:13 (1.9:1); i.e., the third-party funder’s share of the contingency fee is approximately twice that of the lawyers.
35Under the Litigation Funding Agreement, the Houles promise that they will prosecute the action in a way that avoids unnecessary costs and delay. They promise to provide full, honest and timely instructions to Class Counsel. The Houles also promise to co-operate with Class Counsel in all material matters and to devote sufficient time and attention as is reasonably necessary to prosecute and to conclude the action successfully, and they promise to follow all reasonable legal advice given by Class Counsel in the best interests of the Class.
36The Litigation Funding Agreement contains Parts 5, 7, 8, and 13 that directly or indirectly address the conduct, control, and prosecution of the action. These provisions state:
- PART 5 - CONDUCT OF PROCEEDINGS AND SETTLEMENT
5.1 Conduct of Proceedings and Right to Settle. Subject to the provisions of this Part 5, Claimants will have the sole and exclusive right to direct the conduct of the Proceedings and to settle the Proceedings.
5.2 Communication of Settlement Offers. Claimants will communicate to Bentham the amount and terms of any Settlement offers within one (1) Business Day following receipt of the offer, and advise Bentham of all Settlement offers proposed to be made by Claimants.
5.3 Commercially Reasonable Efforts of Claimants. Claimants undertake to use commercially reasonable efforts to prevail in the Proceedings and to collect the Litigation Proceeds as soon as practicable. Claimants further undertake to take into consideration the advice of the Lawyers when evaluating whether any Settlement offer or proposal should be made or accepted.
- PART 7 - COVENANTS OF CLAIMANTS
7.1 Co-operation of Claimants. At all times during the term of the Agreement, Claimants will:
7.1.1. Conduct the Proceedings in a manner that avoids unnecessary costs and delay and will provide full, honest and timely instructions to the Lawyers;
7.1.2 Co-operate with the Lawyers in all material matters pertaining to the Proceedings and will devote sufficient time and attention as is reasonably necessary to prosecute and conclude the Proceedings successfully;
7.1.3 Follow all reasonable legal advice given by the Lawyers in relation to the Claims and the Proceedings in the best interests of the Class;
7.1.4 Co-operate with Bentham including by being reasonably available at Bentham's reasonable request to discuss the operation of the Agreement by phone or email or in person;
7.1.5 Provide full assistance and co-operation to the Lawyers and Bentham in relation to opposing, taxing, assessing or resolving any application for security for costs or any Defendant's Costs Order.
7.1.6 Remain party to the Proceedings until Final Resolution or Termination of the Agreement;
7.1.7 Use best efforts to prevail in and pursue the Proceedings and to collect any Litigation Proceeds in cash as soon as practicable.
7.2 Co-operation of Lawyers. At all times during the term of the Agreement, Lawyers will:
7.2.1 Conduct the Proceedings efficiently and effectively;
7.2.2 Immediately inform Bentham of any information, circumstance or change in circumstances likely to affect the Claims or any issue in the Proceedings relating to the recoverability of any Litigation Proceeds;
7.2.3 Act in furtherance of Claimants' obligations under the Agreement at all times.
7.2.4 Maintain a record of all funding provided by Bentham of which they are aware under the Agreement.
7.2.5 Use best efforts to prevail in and pursue the Proceedings and to collect any Litigation Proceeds in cash as soon as practicable;
7.2.6 Continue to act for Claimants even if the maximum amount of the Litigation Funding Amount has been reached. If the Litigation Funding Amount is exceeded, Lawyers are responsible for all Over-Budget Fees and Disbursements, which shall be paid only from the Lawyers' Return.
7.2.7 Provide to Bentham, as and when requested by Bentham, a copy of any material document or filing made or obtained in the Proceedings by way of discovery, subpoena or any other lawful means, subject to: (a) Bentham's confidentiality obligations under the Agreement, including the deemed undertaking of confidentiality applicable to Bentham pursuant to Part 6 of Exhibit A; (b) Lawyers' reasonable judgment with respect to preservation of all legal privileges of Claimants; and (c) compliance with court orders or other legal restrictions on the sharing of information.
7.2.8 Keep Bentham fully and continually informed of all material developments with respect to the Claims and the Proceedings, no less often than once every three (3) months unless waived by Bentham, subject to the Lawyers' reasonable judgment with respect to preservation of all legal privileges of Claimants.
7.2.9 Within one (1) Business Day, inform Bentham of any application for Security for Costs made by Defendant;
7.2.10 Within one (1) Business Day, inform Bentham of any Court Ordered Costs or of any circumstances which might reasonably give rise to an order for Court Ordered Costs;
7.2.11 Immediately inform Bentham and the Claimants of all Settlement offers or offers to engage in an alternative dispute resolution process received from any Defendant;
7.2.12 Promptly enter into and do all that is necessary to effect any reasonable Settlement, if, in the Lawyers' best judgment the Settlement is in the best interests of the Class, and to enforce any Settlement reached with respect to the Proceedings or the Claims;
7.2.13 Cause any Litigation Proceeds to be received or recovered as quickly as possible, promptly enter, enforce and execute on any judgment obtained in the Proceedings in all appropriate jurisdictions.
7.2.14 Receive all Litigation Proceeds into the Trust Account and comply with Part 3 of this Exhibit A.
7.2.15 Promptly pay out of the Trust Account all amounts payable to Bentham under the Agreement, once such funds are payable, in accordance with the provisions in the Key Terms pursuant to Article 3 thereof titled "Returns and Payment Waterfalls". Only once the Bentham Return and the Lawyers Return are fully paid may Lawyers pay the balance out of the Trust Account to or for the benefit of Claimants, unless otherwise ordered by the court; and
7.2.16 Provide commercially reasonable assistance and co-operation to Bentham in relation to opposing, taxing, assessing or resolving any application for Security for Costs or any Court Ordered Costs and ensure any costs order that is not an order for Court Ordered Costs that is being funded in accordance with this Agreement, is paid in accordance with its terms.
7.3 Ongoing Truth and Completeness of Representations and Warranties. Claimants' representations and warranties to Bentham in the Agreement will remain true, correct and complete at all times during the term of the Agreement.
7.4 Not a Solicitor Client Relationship. Nothing herein will create a solicitor-client relationship between Lawyers and Bentham, and it is understood that Lawyers' professional obligations are owed exclusively to Claimants.
- PART 8 - REPRESENTATIONS AND WARRANTIES
8.1 Claimants' Representations, Warranties and Covenants. The Claimants, jointly and severally, represent and warrant to and covenant in favour of Bentham that:
8.1.1 The Claimants have not taken and will not take any steps or execute any documents which would materially or adversely affect the Claims or the recoverability of the litigation Proceeds;
8.1.2 The Claimants have not engaged and will not engage in any acts or conduct or make any material omissions, agreements or arrangements that would jeopardize Bentham's right to receive the Bentham Return in respect of the Claims or the litigation Proceeds;
8.1.3 The Claimants are not insolvent or subject to any proceeding in respect of voluntary or involuntary bankruptcy, winding-up, dissolution, liquidation, arrangement or compromise with creditors, or appointment of any person with powers similar to a receiver;
8.1.4 The Claimants disclosed or have made available to Bentham all material documentation and other Information and facts in their possession or control relevant to the Claims or the Proceedings;
8.1.5 There is no Information or facts in the knowledge, possession or control of the Claimants that is or is reasonably likely to be material to Bentham's assessment of the Claims or the Proceedings that has not been disclosed to Bentham;
8.1.6 The Claimants believe that the Claims are meritorious;
8.1.7 Except for the Proceedings, no litigation has been commenced by or against or, to the best of its knowledge, is threatened against the Claimants which may materially and adversely affect the Claims or the recoverability of the litigation Proceeds;
8.1.8 The Claimants have the full capacity to bring the Claims, pursue the Proceedings and direct the Lawyers;
8.1.9 The Claimants have not failed to disclose to Bentham any fact or fact of which they are aware that would, if Bentham had been so advised, be reasonably expected, individually or in the aggregate, to have led Bentham not to enter into this Agreement;
8.1.10 The Recitals stated on page 1of the Agreement are true and correct.
- PART 13 - ACKNOWLEDGEMENTS
13.1 By executing the Agreement, Claimants acknowledge that Bentham is not a law firm and neither Bentham nor its Affiliates (other than professional advisers) are engaged in the practice of law or any other professional activity. Bentham and its Affiliates are not providing any legal advice to Claimants, and Claimants have not and will not rely on Bentham or its Affiliates for legal, tax, accounting or other professional advice. Claimants acknowledge that they have received independent legal advice with respect to this Agreement.
13.2 Subject to Part 5, by executing the Agreement, Bentham acknowledges that Claimants are the sole persons with authority to direct Lawyers with respect to the Proceedings and possess the exclusive authority to make all decisions relating to the Proceedings, provided that Claimants considers Lawyers' reasonable advice with respect to any such decision.
37The Litigation Funding Agreement contains a termination provision as follows:
PART 10 TERMINATION
10.1 By Bentham. Bentham will have the right, in its sole discretion, to terminate the Agreement upon ten (10) days' written notice to Claimants from and after the occurrence of any of the following events, so long as such event is continuing at the end of the ten (10) day period:
10.1.1 Any material breach by Claimants of a provision in the Agreement;
10.1.2 Any representation or warranty made by Claimants in this Agreement or in any document provided at any time to Bentham in connection herewith is, in any material respect, either incorrect or misleading;
10.1.3 The Lawyers seek to withdraw or do withdraw from the Proceedings or fail to comply, in any material respect, with any of Claimants' reasonable instructions;
10.1.4 Either of the Claimants becomes insolvent or becomes subject to any proceeding in respect of voluntary or involuntary bankruptcy, winding-up, dissolution, liquidation, arrangement or compromise with creditors, or appointment of any person with powers similar to a receiver, and the Court does not grant an order permitting the Claimants to continue in their capacity as representative plaintiffs, or the court does not grant an order replacing the Claimants with another representative plaintiff;
10.1.5 Bentham, acting reasonably, ceases to be satisfied in relation to the merits of the Proceedings; or
10.1.6 Bentham reasonably believes the Proceedings or the Claims are no longer commercially viable.
10.2 Information from Claimants. Claimants will provide written notice to Bentham of any event or circumstance that could reasonably be expected to give rise to a termination right pursuant to Clause 10.l promptly (but in no event more than five (5) Business Days) after becoming aware of the event or circumstance.
10.3 By Claimants. Claimants will have the right, in their sole discretion, to terminate the Agreement upon ten (10) days' written notice to Bentham from and after a failure by Bentham to fulfill (i) Payment of part of the Litigation Funding Amount, (ii) payment of any Court Ordered Costs or (iii) payment of any Security for Costs in accordance with the terms of this Agreement, so long as such failure is continuing at the end of the ten (10) day period and such failure to fulfill payment is not the subject of a continuing dispute undertaken by Bentham in good faith.
10.4 Consequences of Termination.
10.4.1 If Bentham terminates the Agreement pursuant to any of Clauses 10.1.1 to 10.1.4 of this Exhibit A, then Bentham will continue to be entitled to the Bentham Return out of any Litigation Proceeds recovered by Claimants, paid in the order of priority provided for in Article 3 of the Key Terms.
10.4.2 If Bentham terminates the Agreement pursuant to Clause 10.1.5 or 10.1.6 of this Exhibit A, or if Claimants terminate the Agreement pursuant to Clause 10.3 of this Exhibit A, then Bentham will not be entitled to the Bentham Return but will instead be entitled to be paid an amount equal to the Expended Litigation Funding Amount out of any Litigation Proceeds recovered by Claimants, paid in the order of priority provided for in Article 3 of the Key Terms.
10.4.3 If the Agreement is terminated pursuant to Article 4.2 of the Key Terms, and no new funding agreement is entered into with Claimants' new lawyers, then Bentham will be entitled to be paid an amount equal to the Expended Litigation Funding Amount out of any Litigation Proceeds recovered by Claimants, paid in the order of priority provided for in Article 3 of the Key Terms.
10.4.4 All obligations of Bentham under the Agreement will cease on the date the Termination becomes effective, other than obligations accrued prior to that date. Such accrued obligations include:
10.4.4.1 Payment of any outstanding Legal Fees, Disbursements, Court Ordered Costs and Security for Costs payable by Bentham pursuant to the Agreement incurred up to the date the Termination becomes effective;
10.4.4.2 Payment of any court ordered Security for Costs (which, for the avoidance of doubt, relates only to Security for Costs which are ordered after the date Claimants sign the Agreement but before the date the Termination becomes effective); and
10.4.4.3 Payment of any Court Ordered Costs where the Costs Order or the obligation of the Claimants to pay Court Ordered Costs is made prior to the date the Termination becomes effective.
10.4.5 Upon any Termination, Bentham will be entitled, in order to protect its own interest in relation to the Agreement, to keep copies of the Confidential Information provided to it pursuant to the Agreement, subject to Bentham's ongoing obligations pursuant to Clause 6.1 of this Exhibit A (Implied Undertaking of Confidentiality), Clause 6.5 of this Exhibit A (Non-Disclosure of Information) and Clause 6.7 of this Exhibit A (Confidentiality Procedures).
10.4.6 The following are continuing obligations and survive Termination, subject to the further conditions set out above in this Clause 10.4 Part 6 of this Exhibit A (Confidentiality and Provision of Documents), Part 7 of this Exhibit A (Covenants of Claimants), Part 11 of this Exhibit A (Governing Law) and Part 12 of this Exhibit A (Notices).
10.5. Continued Performance. Unless and until the Agreement is terminated under this Part 10, each Party will continue to perform its obligations under the Agreement notwithstanding the existence of any dispute among the Parties.
38Bentham sought an opinion from the Financial Services Commission of Ontario (FSCO), the provincial regulator for Ontario’s insurance regime. FSCO confirmed that the Litigation Funding Agreement is not insurance for the purposes of the Insurance Act, R.S.O. 1990, c. I.8.
(d) Illustration of the Operation of the Litigation Funding Agreement
39It is helpful for the discussion below to provide an illustration of how the Litigation Funding Agreement would operate if it was approved by the court. This illustration is largely derived from an illustration set out in the Agreement itself. The assumed facts of the illustration are as follows:
a. The possible recovery for the class ranges from nil to $80 million.
b. The Houles’ action has high litigation risk, given that while the defibrillators may have been defective, St. Jude has a strong defence that it met the standard of care. Moreover, the quantification of damages will be difficult and will require individual trials for Class Members.
c. Without any admission of liability, between 18-months and 36-months from the Agreement’s execution, St. Jude agrees to settle the litigation and agrees to pay $20 million, all inclusive, in settlement proceeds.
d. At the time of the settlement, Bentham has paid $0.5 million in disbursements, $0.5 million in security for costs, and it has paid Class Counsel $1.0 million for legal services; i.e., 50% of Class Counsel’s invoices to the Houles; thus, at the time of the settlement, Bentham has sunk expenses of $2 million.
e. The security for costs will be refunded as part of the settlement.
f. St. Jude’s lawyers were matching Class Counsel’s work in the action, and at the time of the settlement, Bentham was exposed to a $2.0 million adverse costs award to St. Jude.
40Based on these assumed facts, the Litigation Funding Agreement would operate as follows:
a. Out of the settlement proceeds, Bentham will receive $5.1 million ($4.5 million (22.5%) plus HST of $0.6 million).
b. From the settlement proceeds, subject to court approval, Class Counsel will receive $2.6 million ($2.3 million (11.5% contingency fee) plus $300,000 HST) in full settlement for its legal fees; i.e., Class Counsel, who will have already received $1.0 million for services rendered, will receive an additional $2.6 million and write off the unpaid portion of its invoices to the Houles in consideration of Class Counsel’s share of the settlement funds.
c. After the deductions for Bentham and for Class Counsel from the settlement funds, Class Members will recover $12.3 million.
41By way of contrast and comparison to this illustration, had the Houles received funding from the Class Proceedings Fund with the Fund and Class Counsel each paying $0.25 million in disbursements and assuming that the court approved a contingency fee of 24% to Class Counsel with the Fund entitled to its additional 10% share of the net recovery, then:
a. Class Counsel will receive $5.7 million (inclusive of fee, HST, and disbursements).
b. The Class Proceedings Fund will receive $1.7 million (the levy on net recovery plus disbursements).
c. The Class Members will recover $12.6 million.
42Seven observations pertinent to the determination below of whether the Litigation Funding Agreement in the case at bar is champertous and pertinent to the risk and reward analysis below may be made from these illustrations; namely:
First, the outcome of the settlement in gross terms is that the $20 million settlement is distributed 61.5% to Class Members, 25.5% to Bentham, and 13% to Class Counsel.
Second, the net outcome of the settlement (i.e. taking into account that Bentham has paid Class Counsel $1.0 million and paid disbursements of $0.5 million) is that the $20 million settlement is distributed 61.5% to Class Members, 18% to Bentham, 18% to Class Counsel, and 2.5% for disbursements.
Third, by way of comparison, had litigation funding been arranged with the Class Proceedings Fund, then the distribution of the $20 million settlement would have been 63% to Class Members, 28.5% to Class Counsel, and 8.5% to the Class Proceedings Fund.
Fourth, between 18 and 36 months, Bentham’s return on its investment of $1.5 million is $3 million, being an annualized return of between 67% and 133%.
Fifth, between 18 and 36 months, Class Counsel’s return on its investment of $1.0 million (its unpaid invoices for legal services) is $3.3 million (the paid legal services plus its share of the settlement fund) being an annualized return of between 110% and 200%.
Sixth, at the time of the settlement, Bentham was exposed to a loss of $4 million ($1.0 million paid to Class Counsel, plus adverse costs indemnity of $2 million, plus $0.5 million for disbursements, plus $0.5 million for security for costs) and Class Counsel’s downside was writing off $1.0 million in unpaid invoices.
Seven, at the time of the settlement, the range of the Class Members’ potential recovery was between nil and $80 million and its actual gross recovery was $20 million with a net recovery of $12.3 million, representing an 85% discount of the maximum access to substantive justice. (The individual Class Members’ recovery will be further reduced by the subrogated claim of provincial health insurers.)
3. The Current State of the Law about Third-Party Funding
43Ontario’s class actions regime, unlike other Canadian jurisdictions (such as British Columbia), follows the “ordinary costs” or “loser pays” rule, which provides that the losing party can expect to pay costs to the successful party at any stage of the proceeding. Section 31 of the Ontario Class Proceedings Act, 1992 provides that s.131(1) of the Courts of Justice Act, R.S.O. 1990, c. 43 applies to class proceedings and that representative plaintiffs are responsible for paying costs, rather than the class members. The exposure to an adverse costs award is designed to be a significant economic barrier to litigation.
44As it has evolved, the class action regime of the Class Proceedings Act, 1992 and the Law Society Amendment Act (Class Proceedings Funding), 1992, S.O. 1992, c. 7, which established the Class Proceedings Fund, which is administered by the Law Foundation of Ontario, reduces the economic barriers that confront a group that has been harmed by a wrongdoer in three ways.
First, by allowing the certification of a representative action on behalf of the group, the scheme levels the litigation playing field between the Class Members and the defendant.
Second, the cost of obtaining legal services to prosecute the claim is addressed by the scheme permitting contingency fee agreements subject to the approval of the court as to the amount and reasonableness of Class Counsel’s fee.
Third, while the representative plaintiff, but not the Class Members, is exposed to an adverse costs award payable to the defendant (which is a formidable barrier having regard to the extraordinary and indeed financially devastating legal expense of a class action), the scheme allows the risk of an adverse costs award to be shifted to:
i. Class Counsel, if it agrees to indemnify the representative plaintiff;
ii. the Class Proceedings Fund, if it agrees to accept the risk in exchange for a 10% levy; or,
iii. a third-party funder, if the court approves of the third-party funding agreement.
45As just noted, with respect to addressing the risk of an adverse costs award, a representative plaintiff may apply to the Law Foundation to ask that the Class Proceedings Fund be responsible for the disbursements of an action, and if the Fund agrees to provide this funding, then the Law Foundation becomes liable for the defendant's costs in the proceeding should the defendant be entitled to costs and should the defendant apply to the Foundation for payment of them. A defendant who is entitled to make an application may not recover any part of the costs award from the plaintiff: Law Society Act, R.S.O. 1990, c. L.8., s. 59.4(3); Garland v. Consumers Gas, 2004 SCC 25, [2004] 1 S.C.R. 629.
46Where the Class Proceedings Fund accepts the risk, if the representative plaintiff’s class action succeeds, then pursuant to Ont. Reg. 771/92, there is a levy payable to the Fund equal to the sum of the amount of any financial support paid for disbursements and 10 per cent of the amount of the award or settlement funds to which one or more persons in the class is entitled.
47In determining whether to provide support and thus shield the representative plaintiff from costs and expose itself to a corresponding liability, the Class Proceedings Committee that manages the Class Proceedings Fund is directed by the Law Society Act and the related regulations to have regard to: (a) the merits of the plaintiff’s case; (b) whether the plaintiff has made reasonable efforts to raise funds from other sources; (c) whether the plaintiff has a clear and reasonable proposal for the use of any funds awarded; (d) whether the plaintiff has appropriate financial controls to ensure that any funds awarded are spent for the purposes of the award; (e) any other matter that the Committee considers relevant; (f) the extent to which the issues in the proceeding affect the public interest; (g) the likelihood that the proceeding will be certified; and (h) the available money in the fund. See: Law Society Act, ss. 59.2-59.3; Ont. Reg. 772/92, s. 5.
48In the case at bar, Class Counsel is not prepared to provide an indemnity agreement and there is no evidence that an application has been made to the Class Proceedings Fund. Thus, the fundamental issue in the immediate case is whether the court should approve the Litigation Funding Agreement among the Houles, Class Counsel, and Bentham.
49In Ontario, up until relatively recently, third-party funding agreements would have been regarded as illegal as maintenance or champerty, which is a particular kind of maintenance, namely maintenance of an action in consideration of a promise to give the maintainer a share in the proceeds or subject matter of the action: Buday v. Locator of Missing Heirs Inc. (1993), 16 O.R. (3d) 257 (C.A.) at pp. 262-63.
50In Ontario, the law of champerty and maintenance still applies under the ancient An Act Respecting Champerty, R.S.O. 1897, c. 327. The public policies supporting the torts of champerty and maintenance are the goals of discouraging unnecessary litigation prompted by a non-party stirring up strife in order to profit from it and of preventing a non-party from meddling and perhaps controlling somebody else’s litigation.
51The elements of a claim of champerty are: (1) the defendant for an improper motive (officious intermeddling) provides assistance to a litigant in a lawsuit against the plaintiff; (2) the defendant has no personal interest in the lawsuit; (3) the defendant's assistance to one of the litigants is without justification or excuse; and, (4) the defendant shares in the spoils of the litigation: Smythers v. Armstrong (1989), 67 O.R. (2d) 753 (H.C.J.); Trendex Trading v. Credit Suisse, [1982] A.C. 679 (H.L.); Oseco Inc. v. Jansen (1989), 71 O.R. (2d) 151 (H.C.J.); George Biro Real Estate Ltd. v. Sheldon, [1965] 1 O.R. 49 (H.C.J.).
52The law in Ontario, however, has developed and evolved so that supporting another's litigation is not categorically illegal and, thus, contingency fees and third-party funding of litigation became a possibility. The policy change was the recognition that the financial assistance of a third-party funder might be the only means for a litigant to achieve access to justice.
53In Ontario, the change in the law began with McIntyre Estate v. Ontario (Attorney General) (2002), 61 O.R. (3d) 257 (C.A.). In this case, Mrs. McIntyre brought an action against Imperial Tobacco for the alleged wrongful death of her husband. Mrs. McIntyre's lawyers had agreed to take on the case with a contingency fee agreement, and Mrs. McIntyre sought a declaration that the agreement was not illegal as champerty. Associate Chief Justice O'Connor, writing for the Ontario Court of Appeal, concluded that contingency fee agreements are not categorically illegal because the law had developed to recognize that a person supporting another's litigation or taking an assignment of another’s litigation and pursuing it might have a justifying motive or excuse. In such circumstances there would be no officious intermeddling or stirring up strife, which were necessary elements of the tort of maintenance.
54In McIntyre Estate, the Associate Chief Justice concluded, however, that it was premature to determine whether the particular contingency fee agreement was champertous. The prematurity problem arose because to determine whether an agreement was champertous, it would be necessary to examine the facts of the particular case and also the motivation of the alleged maintainer. Whether a particular agreement was champertous might not be ascertainable until the end of the litigation.
55In Metzler Investment GMBH v. Gildan Activewear Inc., [2009] O.J. No. 3315 (S.C.J.), Justice Leitch dismissed a motion for approval of a third-party funding agreement between the plaintiffs and Claims Funding International PLC ("CFI"), an Irish corporation. In this case, Metzler Investment sued Gildan Activewear because of an alleged misrepresentation that affected the value of Gildan's shares in the secondary market. Before certification, Metzler Investments sought approval of the third-party funding agreement with CFI. The terms of the proposed third-party funding agreement were that CFI agreed to pay any adverse costs award in exchange for an uncapped 7% share of any recovery in the litigation. CFI acknowledged that Class Counsel's duties were to the plaintiffs and not to CFI, and the plaintiffs promised that they would conduct the proceeding in a manner that avoided costs and delay and they promised to provide full and honest instructions to class counsel. Dealing only with the situation as between the plaintiffs and CFI, Justice Leitch ruled that a third-party funding agreement was not categorically champertous and thus was capable of being approved. However, applying the rationale of the McIntyre Estate case, she declined to approve the third-party funding agreement because until the outcome of the litigation was known, it could not be determined whether a 7% share of the recovery was fair and reasonable.
56Dugal v. Manulife Financial Corp., 2011 ONSC 1785, additional reasons 2011 ONSC 3147, was the first case in Ontario in which a third-party funding agreement was approved. In this case, Mr. Dugal and the other plaintiffs sued Manulife because of an alleged misrepresentation that artificially inflated the value of its securities. Before certification, Mr. Dugal applied for approval of a third-party funding agreement with CFI, the same funder that had failed to obtain approval in Metzler Investment. Under the proposed third-party funding agreement, CFI agreed to pay $50,000 for disbursements and to indemnify the plaintiffs if there was an adverse costs award. In return, CFI was to receive a 7% share of the proceeds of any recovery in the litigation to a maximum of $5 million before certification and to a maximum of $10 million after certification. CFI acknowledged that Class Counsel's duties were to the plaintiffs and not CFI, and the plaintiffs promised that they would conduct the proceeding in a manner that avoided costs and delay and they promised to provide full and honest instructions to Class Counsel. CFI was entitled to terminate only if the plaintiffs breached their obligations under the agreement.
57Justice Strathy (as he then was) approved the third-party funding agreement in Dugal because Mr. Dugal’s individual claim was modest and there would be no access to justice for the class members because “no person in their right mind would accept the role of representative plaintiff if he or she were at risk of losing everything they own.” Justice Strathy felt that unlike the situation in Metzler, he could determine whether the third-party funding agreement was champertous without waiting for the outcome of the litigation. This advance determination of the fairness of the contingency fee was possible because CFI’s 7% share was below the 10% levy of the Class Proceedings Fund and because it was a capped share it might even be considerably less than 7% of the eventual recovery. In paragraph 33 of his decision, Justice Strathy stated:
- …. While it is true that one may not be able to say, with absolute certainty, that there is no possibility that the funding agreement might result in a "windfall" recovery to CFI, the possibility of such a recovery, when balanced against the probability of protracted litigation and a somewhat speculative result, is a factor that a commercial risk-taker must take into account in determining the amount of its compensation. The assessment of the risk can always be defined with greater precision when more information is available, but the fact of the matter is that the plaintiff asks for a decision now.
58After Dugal v. Manulife Financial Corp., a series of cases developed both the substantive law and also the procedural law associated with the approval of third-party funding agreements. See: Fehr v. Sun Life Assurance Company of Canada, 2012 ONSC 2715; The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, 2012 ONSC 2937, (in which an agreement similar to the agreement in Dugal was approved); Bayens v. Kinross Gold Corporation, 2013 ONSC 4974; Berg v. Canadian Hockey League, 2016 ONSC 4466.
59In Bayens v. Kinross Gold Corporation, supra, the financial terms of the third-party funding agreement were that the funder would provide an indemnity in respect of an adverse costs award up to $5.0 million and in return, receive 7.5% of any net recovery (net of class counsel’s fees, taxes, and disbursements) if the action resolved before certification or 10% if resolved later. Under the agreement, class counsel was obliged to periodically report to the funder but the agreement provided:
The Claimants shall have control over the conduct of the Proceedings and, in accordance with the Overriding Objective, shall have the right to conduct the Proceedings as the Claimants consider appropriate, including the right: (a) to compromise the Causes of Action and/or the Proceedings against any Defendant on any terms they consider appropriate; and (b) to abandon, withdraw or discontinue the Proceedings or any part of the Proceedings.
60These cases recognized that third-party funding agreements are not categorically illegal, but may be illegal if they are champertous or if they run afoul of provincial statutes or regulatory regimes such as the Insurance Act and the framework it establishes for regulating insurance in Ontario.
61In Schenk v. Valeant Pharmaceuticals International Inc., 2015 ONSC 3215, Justice McEwen refused to approve a third-party funding agreement because it was champertous. In this case, Mr. Schenk a resident of Switzerland without assets in Ontario and without the means to finance his litigation signed a third-party funding agreement with Redress Solutions PLC, an English corporation that was a member of the Association of Litigation Funders of England and Wales, which is an independent body that has been charged by the U.K. Ministry of Justice with the regulation of litigation funding. Mr. Schenk’s action was against Valeant Pharmaceuticals for $30 million for breach of contract or breach of confidence. Under the funding agreement, depending upon the duration of the litigation, Redress was entitled to receive between 30% and 50% of any settlement and it was entitled to recover an additional 5% for every 10% that the costs of the litigation exceeded the litigation budget. Since there was no cap on the percentage, it was conceivable that Redress would recover more than 50%; i.e., more that Mr. Schenk, Justice McEwen concluded that the agreement was champertous.
62In a point that I will return to below, in obiter Justice McEwen concluded, however, that the litigation funding agreement was not objectionable on the grounds that Redress had the right to terminate if it became unsatisfied about the merits of the claim or when Mr. Schenk’s costs exceeded the budget by 25%. Valeant Pharmaceuticals submitted that these provisions were objectionable because they meant that Redress had a means to control the litigation. Justice McEwen rejected this submission and stated at paragraph 23 of his decision:
- I will deal with these two issues collectively since the Valeant Defendants submit that the LFA [litigation funding agreement] 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.
63A review of the above case law reveals that to approve a third-party funding agreement, the court must be satisfied that: (a) the agreement must be necessary in order to provide access to justice; (b) the access to justice facilitated by the third-party funding agreement must be substantively meaningful; (c) the agreement must be a fair and reasonable agreement that facilitates access to justice while protecting the interests of the defendants; and (d) the third-party funder must not be overcompensated for assuming the risks of an adverse costs award because this would make the agreement unfair, overreaching, and champertous: The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, supra; Bayens v. Kinross Gold Corporation, supra; and Berg v. Canadian Hockey League, supra.
64Further, a review of the above case law reveals that the third-party funding agreement must not interfere with: the lawyer-client relationship; the lawyer’s duties of loyalty and confidentiality; or the lawyer’s professional judgment and carriage of the litigation on behalf of the representative plaintiff or class members: Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra. The representative plaintiff must retain the right to instruct and control the litigation and the representative plaintiff must not become indifferent in giving instructions to class counsel in the best interests of the class members: Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra.
65The case law also establishes that the third-party funding agreement must contain a term that the third-party funder will be bound by the deemed undertaking rule and will be bound not to disclose confidential or privileged information: Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra.
66The third-party funder may be required to pay into court security for the defendant’s costs: Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra.
67The case law also establishes that before the certification of a proposed class action under the Class Proceedings Act, 1992, the court has jurisdiction to approve a litigation funding agreement and make an order that will be binding on the putative class members should they not opt out of the action: Dugal v. Manulife Financial Corporation, supra; Fehr v. Sun Life Assurance Company of Canada, supra; The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, supra; Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra.
68Court approval of a third-party funding agreement must be obtained and the agreement must be promptly disclosed to the court: Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra.
69The defendant to a class proceeding should have notice of the motion for court approval of the third-party funding agreement and be provided with an opportunity to make submissions: Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra. The third-party funder is entitled to notice of the motion and to make submissions to the court as a “party who will be affected by the order sought” pursuant to Rule 37.07 of the Rules of Civil Procedure.
70The representative plaintiff should have had independent legal advice about: (a) the law firm’s contingency fee agreement; (b) the third-party funding agreement; and (c) the inter-relationship between the third-party funding agreement and the contingency fee agreement: Bayens v. Kinross Gold Corporation, supra; Berg v. Canadian Hockey League, supra.
4. Analysis and Discussion
71The general test for determining whether to approve a third-funding agreement is that the agreement should not be champertous or illegal and it must be a fair and reasonable agreement that facilitates access to justice while protecting the interests of the defendants. The underlying or overarching issue presented by the Houles’ motion for approval of the tripartite agreement among the Houles, Class Counsel, and Bentham is that of determining what principles or what factors should the court use to decide whether to approve a particular third-party litigation funding agreement.
72I say a “particular” third-party funding agreement because deciding whether to approve a third-party funding agreement will depend upon the particular circumstances of each case. A fact-based analysis is required because what is acceptable; i.e. what is approvable in one case may not be approvable in another case. Each and every class action raises its own concerns.
73In the context of class proceedings, from the perspective of legal policy about the administration of justice, third-party funding agreements are justified as a matter of necessity. This is the paramount factor, but it is not the first principle or factor to consider. Rather, the first principle or factor in determining whether to approve a third-party funding agreement is whether the procedural, technical, and evidentiary requirements to enable the court to scrutinize the agreement are satisfied.
74In the immediate case, these factors have been satisfied; namely: (a) the Houles have received independent legal advice; (b) the retainer and third-party funding agreements have been disclosed to the court; (c) the retainer and third-party funding agreements have been disclosed to the defendant with appropriate redactions; (d) there are appropriate confidentiality provisions in the third-party funding agreement; (e) there is the willingness and the ability of the third-party funder to post security for costs; (f) evidence of the background factual circumstances has been proffered; and (g) the affected parties have been given notice and an opportunity to be heard.
75The second and next factor to consider is the necessity principle. This principle is paramount. If third-party funding is not necessary, it should not be approved. The rationales for allowing what otherwise would be champerty and maintenance, which is to say the officious intermeddling of a non-litigant in another’s litigation are that: (a) but for the third-party’s financial assistance, the litigant would have no access to justice; and, or (b) but for the third-party’s financial assistance, society would be bereft of a means to modify the behaviour of wrongdoers who have harmed a group. One or the other of the rationales for a litigation funding agreement; i.e.: (a) enabling access to justice; or (b) discouraging or deterring wrongdoing, must be present or the agreement should not be approved.
76In the immediate case because the Houles’ and the Class Members’ claims are not financially trivial, both rationales are present. In the case at bar, neither the Houles nor Class Counsel are prepared to accept the risk of an adverse costs award and neither can finance what would be a prohibitively expensive action to prosecute. Bentham’s involvement is necessary. Thus, the second factor or principle is satisfied in the case at bar.
77Pausing here, it is worth noting that the case at bar is not a case, as was, for instance, Dugal v. Manulife Financial Corp., supra where the representative plaintiff’s individual loss is trivial to modest. It is a matter of degree, but in those cases, the rationale for approving third-party funding agreements is likely more about behaviour management than it is about access to justice. As a further illustration of this point imagine a products liability class action, different from the one at bar, where 10 million class members each suffered an arguable $10 loss and no personal injury. The behaviour modification of curbing an aggregate $100 million wrongdoing to the class members could justify third-party funding in that case.
78Moving on in the analysis, the third principle or factor, which is mandatory, is that the third-party funder make a meaningful contribution to access to justice or behaviour modification. In order to be approved, the third-party funding must not only be necessary, it must also be sufficient to achieve the goals of the class action regime or the administration of justice.
79In my opinion, in the case at bar, the Litigation Funding Agreement satisfies the sufficiency factor. The novelty of the hybrid retainer that combines a partial contingency fee with a fee-for-services retainer strikes me as a positive factor. I agree with the sentiments of Class Counsel eloquently expressed during argument that this approach which partially protects the financial and human capital of class counsel may expand the roster of firms prepared to assume the risks of class action litigation. My own anecdotal observation is that given the expense and forensic risks of class action litigation, class counsel firms are few and those firms take on only a fraction of the cases that would gratify the goals and policies of the class action regime.
80Moving on to the next factor, in the context of class actions, the fourth principle or factor in determining whether to approve a litigation funding agreement is that the third-party funder not be overcompensated (unduly rewarded) in the particular circumstances of the case for its assuming the risks of the litigation in whole or in part. This penultimate-predominant factor is given substantial weight because overcompensation moves the third-party funder into the role of a champertor.
81The third-party funder’s reward must be fair to the class members whose access to substantive justice is diminished by having to share their compensation. This principle or factor is mandatory, but its application is highly contextual and difficult. In McIntyre Estate v. Ontario (Attorney General), supra, Associate Chief Justice O’Connor, and in Metzler Investment GMBH v. Gildan Activewear Inc., supra, Justice Leitch, concluded that the assessment of the fairness of the third-party funder’s reward could not be determined until the outcome of the litigation was known.
82There is common sense in Associate Chief Justice O’Connor’s and Justice Leitch’s view, because it makes sense in knowing how large or small is the pie before deciding how it should be cut up and served. It also makes sense in knowing the quantity and the quality of the contribution made to earn one’s share of the pie. It also makes sense to have a better idea of the reality of the risk with the benefit of hindsight.
83However, in Dugal v. Manulife Financial Corp., supra, The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, supra, and Bayens v. Kinross Gold Corporation, supra, although the court was concerned about a premature approval, it was possible for the court to approve the third-party funding agreement before knowing the outcome of the action and the quality of the contributions to that outcome. In my opinion, however, the explanation for why approval was possible and appropriate in those cases is that the third-party funders in those cases were asking less, and possibly considerably less, in compensation than the alternative of the 10% levy of the Class Proceedings Fund. The courts in those cases were not approving a third-party funding agreement that had the potential to be champertous.
84In the immediate case, the fourth principle or factor is not satisfied. In the case at bar, Bentham will be rewarded more than the Class Proceedings Fund levy, and unlike the cases where third-party funding agreements have been approved, Bentham’s recovery is uncapped and its eventual recovery may be unfair and disproportionate because the recovery cannot be adjusted by the scrutiny of court approval. The eventual value of the contingency fee might be unfair and disproportionate for a variety of reasons; visualize: (a) a high reward to the third-party funder could be unfair, if it turned out that the risk was overestimated or not real and there was a provident settlement or judgment against St. Jude of which the third-party funder took a disproportionately high share; or (b) a high reward to the third-party funder could be unfair, if it turned out the risk was real, but the Houles or Class Counsel caved to the pressure and there was an improvident settlement that essentially cheaply licensed the wrongdoing without providing meaningful compensation to the Class Members or meaningful behaviour modification of St. Jude.
85In the case at bar, it is too early to say whether the Litigation Funding Agreement’s 2:1 distribution (which favors Bentham) of the 30 to 38% contingency fee makes the agreement champertous. I reject the Houles’ and Bentham’s argument that high contingency fees have been eventually approved in other cases where third-party funding has been approved and that it should, in any event, not matter to the Class Members how somebody else’s share of the prize is distributed. A major problem with this argument is, as noted above, that in the other cases where the third-party funding agreements have been approved, the court was only insulating from later adjustment (at the fee approval hearing) a minority portion of the contingency fee and a minority portion less than the un-adjustable levy of the Class Proceedings Fund; however, in the case at bar, the court is being asked to pre-approve the third-party funder receiving the majority portion of the contingency fee. In the case at bar, Class Counsel’s proportion of the contingency fee, which is subject to court approval, is reduced as is the court’s ability to reach an outcome that is fair to the Class Members.
86In the case at bar, there is, however, a straight-forward answer to these problems associated with potential overcompensation to Bentham and unfairness to the Class Members.
87The answer does not involve altering the contingency fee scheme of the Litigation Funding Agreement. Rather, the answer is for the court to treat Bentham in the same fashion as it would treat the Class Proceedings Fund and to make the balance of Bentham’s share of the contingency fee subject to subsequent court approval. In other words, the balance of Bentham’s contingency fee claim would be treated in the same way as Class Counsel’s share of the contingency is treated. Under this approach, the right to a contingency fee agreement is approved, a part of the contingency fee is pre-approved (10%), but the eventual amount of the fee will have regard to the actual outcome of the case. In this way, Bentham is protected for taking on the risk (because it will not do worse than the Class Proceedings Fund would have done) and the Class Members are protected from overcompensating Bentham because the court must approve the balance of the contingency fee.
88Moving on again in the analysis, the fifth principle or factor, which is mandatory in cases where the Class Members have substantial claims, is that the third-party funding agreement must not interfere with the lawyer-client relationship, the lawyer’s duties of loyalty and confidentiality, or the lawyer’s professional judgment and carriage of the litigation on behalf of the representative plaintiff or class members.
89In the immediate case, the fifth principle or factor is not satisfied. In the case at bar, the Litigation Funding Agreement talks the talk of non-interference, but the Agreement belies any assurances of the Houles’ having autonomy and having control and carriage over the action. In the case at bar, one gets the impression from reading the Litigation Funding Agreement that the Houles and Class Counsel have promised to prosecute the proposed class action as much, if not more, on behalf of Bentham than on behalf of the Class Members.
90In the case at bar, the interference with the Houles’ litigation autonomy can be demonstrated by comparing the concise provisions in the Retainer Agreement between the Houles and Class Counsel that directly or indirectly address the conduct, control, and prosecution of the action with the expanded provisions in the Litigation Funding Agreement that address these matters.
91Thus, for example, under clause 7.16 of the Litigation Funding Agreement, the Houles promise to use their best efforts to win the action and to collect any proceeds in cash as soon as practicable (see also clause 5.3). Further examples of promises that connote or denote that the Houles are working on behalf of Bentham and that negate the idea that they are in control of their own litigation are: (a) clause 7.1.1, where the Houles promise to conduct the action in a way that avoids unnecessary costs and delay and where they promise to provide full, honest and timely instructions to Class Counsel; (b) clause 7.1.2, where the Houles promise to co-operate with Class Counsel and to devote sufficient time and attention to conclude the action successfully; (c) clause 7.1.3, where the Houles promise to follow all reasonable legal advice given by Class Counsel in relation to the claims (see also clause 5.3); (d) clause 7.1.6, where the Houles promise to remain parties to the action; (e) clause 8.1.1, where the Houles promise and represent to Bentham that they will not take any steps that would adversely affect the claims or the recoverability of the Litigation Proceeds; and (f) clause 10.2, where the Houles promise to notify to Bentham of any event or circumstance that could reasonably be expected to give rise to a termination right. All of these promises are offensive to the idea that the Houles are dominus litus.
92In a similar way, the promises extracted from Class Counsel, which promises are made to Bentham about how Class Counsel should conduct the action denigrate the notion that the Houles are the genuine client. Rather, clauses 7.2.1, 7.2.2, 7.2.3, 7.2.5, 7.2.12, and 7.2.13, suggest that Class Counsel are serving the interests of Bentham with respect to the conduct of the action.
93Therefore, in my opinion, clauses 5.3, 7.1.1, 7.1.2, 7.1.3, 7.1.6, 7.2.1, 7.2.2, 7.2.3, 7.2.5, 7.2.12, 7.2.13, 8.1.1 and 10.2. are overly broad and intrusive. These clauses interfere with the lawyer and client relationship and with the Houles’ autonomy as the genuine plaintiff of the proposed class action. The Retainer Agreement reveals that much less intrusive provisions could be substituted in a way that was fair to the Class Members and also fair in protecting Bentham’s investment in the litigation. I direct that before the Litigation Funding Agreement can be approved the above clauses should be deleted and replaced. Corresponding amendments are also required to clause 10.4, which describes the consequences of termination.
94To be candid, some of these clauses in the Litigation Funding Agreement would not necessarily be offensive in other class action cases, where it actually might be preferable transparently to allow Class Counsel alone or in partnership with a third-party funder to control the litigation. In cases where the representative plaintiff has been recruited and he or she has little or no skin in the action because his or her damages are trivial, the behaviour modification goal of class proceedings might be better achieved by accepting the conspicuous involvement of a non-party who has an entrepreneurial motivation to pursue the wrongdoer. To be candid, in some cases, it is pretentious for the court to play an ostrich with its head in the sand to ignore the reality that the entrepreneurial class counsel is more interested in pursuing the wrongdoer than is the genuine plaintiff with a cause of action. The case at bar is, however, not one such case. The Houles are genuine plaintiffs, and the Class Members have good reason to pursue compensation for their injuries.
95Turning to the termination provision in the Litigation Funding Agreement, it too interferes with the Houles’ litigation autonomy.
96In the case at bar, Part 10 of the Litigation Funding Agreement is different from the situation in Schenk v. Valeant Pharmaceuticals International Inc., supra. In that case, Justice McEwen concluded that the litigation funding agreement was not objectionable on the grounds that the third-party funder had the right to terminate if it no longer thought the claim was potentially meritorious. The immediate case is different. In the immediate case, Bentham has extensive rights to trigger the termination provision by deciding in its sole discretion that the extensive promises or representations in the Litigation Funding Agreement have been breached. Practically speaking, those extensive provisions along with the termination provision, allow Bentham to control whether and how this litigation will proceed. Unlike the situation in Schenk, allowing Bentham an opportunity to exit the Agreement in the extensive circumstances specified in the Agreement is unreasonable.
97There is, however, a straight-forward answer to the problems of the termination provision in the case at bar.
98The answer is to make any termination subject to court approval. Under the Class Proceedings Act, 1992, the discontinuance or settlement of a class action requires court approval. In normal litigation, once a defendant has entered a defence, the plaintiff cannot withdraw or discontinue without leave of the court. The third-party funder should be treated in a similar fashion, and its termination of the agreement should be subject to court approval. In my opinion, there is nothing unfair in imposing this requirement. In this regard, it should be recalled that after its own due diligence and evaluation of the risk, Bentham undertook to provide the funding and to assume the risk in consideration of what in the case at bar is a contingency fee equal to or greater than the contingency fee for Class Counsel. Class Counsel is not able to abandon the action without approval to get off the record, and Bentham should not be in a better position. (I observe that any motion for approval to terminate should be heard by a judge other than the judge case managing the action and the motion should be heard without notice to the defendant who is not a party to the Litigation Funding Agreement.)
99Thus, more precisely, in the case at bar, clauses 10.1.2 (which is redundant), 10.1.5 and 10.1.6 should be deleted, and clause 10.1 should be revised to read:
10.1 By Bentham. Subject to court approval, Bentham will have the right to terminate the Agreement upon ten (10) days' written notice to Claimants from and after the occurrence of any of the following events, so long as such event is continuing at the end of the ten (10) day period:
10.1.1 Any material breach by Claimants of a provision in the Agreement;
10.1.2 The Lawyers seek to withdraw or do withdraw from the Proceedings;
10.1.3 Either of the Claimants becomes insolvent or becomes subject to any proceeding in respect of voluntary or involuntary bankruptcy, winding-up, dissolution, liquidation, arrangement or compromise with creditors, or appointment of any Person with powers similar to a receiver, and the Court does not grant an order permitting the Claimants to continue in their capacity as representative plaintiffs, or the court does not grant an order replacing the Claimants with another representative plaintiff;
100Moving on to the sixth factor or principle, it is that the third-party funding agreement not be illegal on some basis independent of champerty and maintenance. For instance, it is conceivable that a third-party funding agreement, which can be designed in myriad ways, might be subject to regulatory compliance under, say, the Insurance Act, supra or the Ontario Securities Act, R.S.O. 1990, c. S.5. This illegality factor is not engaged in the case at bar.
101To conclude the analysis and discussion, the role of third-party funding in the administration of justice remains a work in progress. In the case at bar, for the above reasons, I cannot approve the Litigation Funding Agreement in its current state. However, if the problems in the Litigation Funding Agreement, noted above, were resolved, I would be able to approve the Agreement because it has some advantageous features and it satisfies many of the principles or factors that test whether a third-party funding agreement should be approved.
5. Conclusion
102Therefore, for the above reasons, I grant the nunc pro tunc Order, and subject to the revisions to the Litigation Funding Agreement directed above, and subject to the Houles delivering, within 60 days, a signed revised amended Litigation Funding Agreement in accordance with those directions, I conditionally approve the Litigation Funding Agreement. If a revised Agreement is not delivered, the Houles’ motion shall be dismissed.
103This is not a case for costs.
Perell, J.
Released: August 29, 2017
CITATION: Houle v. St. Jude Medical Inc., 2017 ONSC 5129
COURT FILE NO.: CV-17-572508 CP
DATE: 20170829
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
SHIRLEY HOULE and ROLAND HOULE
Plaintiffs
– and –
ST. JUDE MEDICAL INC. and ST. JUDE MEDICAL CANADA, INC.
Defendants
REASONS FOR DECISION
PERELL J.
Released: August 29, 2017
