Ontario Court Refuses to Approve New Litigation Funding Model for Class Actions

October 25, 2017

Written By Ranjan K. Agarwal, Lincoln Caylor and Ian W. Thompson

The Ontario Superior Court of Justice has added to its growing collection of cases that increase court scrutiny over litigation funding and contingency fee arrangements. In Houle v St Jude Medical Inc, 2017 ONSC 5129 [Houle] the plaintiffs proposed a new model for funding agreements. The Court refused to approve the agreement because, in its view, the fee structure was unfair.

Background

Contingency fees and third-party litigation funding agreements are relatively new to the Ontario civil litigation system. Legislative changes, recent case law and the overarching goal of increasing access to justice have opened the door to these arrangements, particularly in the class action context.

The classic contingency fee or third-party funding agreement provides compensation through a defined percentage of any proceeds recovered from the action. In exchange, the lawyer or third party forgoes a predefined compensation plan, such as charging by the hour, and often agrees to cover the plaintiff’s disbursements. To get the Court’s approval, class counsel must show that the agreement and the corresponding fees are reasonable. Courts are not reluctant to deny or amend a request relating to fees if they feel that the fee structure or amount requested is unfair.

The Houle Decision

Houle is a product liability class action. The representative plaintiffs signed a retainer agreement with class counsel, who agreed to prosecute the action for a 33% contingency fee. Counsel however were unwilling to indemnify the representative plaintiffs from an adverse costs award and would not cover any disbursements.

Instead, Bentham IMF Capital Inc. agreed to cover these risks and expenses. The agreement signed between the plaintiffs, class counsel and the litigation funder addressed disbursements and protected the plaintiffs from adverse costs awards. It also set out a “novel” payment scheme that combined a partial contingency fee with a fee-for-services retainer. Class counsel agreed to lower their share of any proceeds to between 10 and 13 percent, depending on the time required to resolve the action, and Bentham agreed to pay counsel 50 percent of their reasonable docketed time, up to an undisclosed amount.

Bentham agreed to this structure in exchange for receiving between 20 and 25 percent of the potential proceeds. Depending on the length of the dispute, counsel and Bentham would therefore receive between 30 and 38 percent of the class funds.

Justice Perell identified this hybrid approach of giving class counsel a smaller share on contingency in exchange for paying half of their docketed time as a novel, positive feature of the agreement and suggested that this arrangement could incentivize more firms to take on class action work. However, Justice Perell was unwilling to approve the agreement as drafted and instead offered alternative provisions that would meet his requirements.

Justice Perell objected to Bentham’s uncapped, high percentage share of the proceeds. Instead, Justice Perell conditionally approved an arrangement that would allow Bentham to collect a guaranteed 10 percent of the proceeds, while requiring court approval for any amount over 10 percent. He justified this approach by comparing it to the Class Proceedings Fund, which covers disbursements and accepts the risk of an adverse costs award for 10 percent of any funds received by the class. Justice Perell rationalized that this smaller, pre-approved share would protect Bentham from taking on the risk of funding the litigation, while also protecting the class members from potentially overcompensating Bentham. By requiring court approval of any further compensation, Justice Perell found that the class would be protected if it turned out that Bentham was overcompensated for taking an overestimated risk.

The agreement’s termination clause was also scrutinized by Justice Perell. This clause gave Bentham extensive rights to unilaterally terminate the agreement, including if Bentham determined it was no longer satisfied about the merits of the claim, or if it believed that the action was no longer commercially viable. Justice Perell found these rights effectively gave Bentham control over how the litigation would be run. He would not allow the termination rights to stand on their own, but offered a “straight-forward” solution: make any termination subject to court approval.

Impacts

Houle is a further example of the Court imposing control over how lawyers and third parties are compensated for prosecuting a class action. The Court remains unwilling to cut a blank cheque to those profiting from the litigation in fear of overcompensating them at the expense of the class members (who are “absent” from the proceeding). Justice Perell’s reasons suggest that a third-party funding agreement has a better chance of approval if the funder’s share is no more than the 10 percent levied by the Class Proceedings Fund, and the funder agrees to cap the amount it can collect. Without these terms, the Court is reluctant to fully approve a funder’s share of the proceeds and will retain oversight over the final amount awarded.

The plaintiffs are appealing Justice Perell’s decision to clarify the funder’s ability to terminate the agreement and receive pre-approved levels of compensation. In effect, Justice Perell took on the roll of negotiating with the funder, leaving the final price for the funding to be determined later. There is a risk, if the decision is upheld, that this decision will chill non-traditional funding arrangements.

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