Justice Perell in the recent decision of Houle v St. Jude Medical Inc., 2017 ONSC 5129 (“Houle”), has endorsed with some revisions, the use of a creative third party litigation funding agreement, which included a partial contingency fee retainer together with a fee-for-services retainer for Class Counsel, as a way to further the goals of the class action regime.
Because Justice Perell had some concerns with certain provisions in the agreement, including those that seemed to undermine the ability of the representative plaintiffs to control the litigation, and other provisions that could result in overcompensating the third-party funder, he conditionally approved the funding agreement, subject to certain revisions being made to it.
The Claim
In the proposed class action, the plaintiffs, Shirley Houle and Roland Houle (the “Houles”), allege that the Defendants were negligent in the development, manufacture, and distribution of implantable cardiac defibrillators whose batteries were subject to rapid and premature depletion, and that the Defendants failed to warn of such problems. As the matters at issue will involve complex technical and scientific evidence, prosecuting the action will require the retention of experts at considerable expense.
Litigation Funding Agreement
The issue before Justice Perell was whether to grant the motion to approve the Litigation Funding Agreement (“LFA”) between the Houles, Class Counsel, and the third-party funder, Bentham IMF Capital Inc. (“Bentham”).
The LFA required Bentham to pay: disbursements up to a prescribed maximum; costs assessed against the Houles; any security for costs; and 50% of the reasonable docketed time of Class Counsel up to a prescribed maximum. The novelty of the LFA was that it created a hybrid retainer wherein Class Counsel would be paid, in part, for services provided regardless of the success or failure of the class action, with the balance of the retainer being based on a contingency fee agreement. Bentham also had the right to terminate the LFA in certain circumstances.
The Defendants opposed the LFA on the grounds that it was a champertous agreement, and that its termination provision permitted Bentham to control the litigation, thus interfering with the lawyer-client relationship.
Current State of the Law
Justice Perell noted that the law in Ontario has evolved to allow the risk of an adverse costs award to be shifted from a representative plaintiff to a third-party funder, subject to court approval. Following his review of the case law, Justice Perell set out the test for Court approval of such an arrangement, specifically that:
a) the agreement must be necessary in order to provide access to justice;
b) the access to justice facilitated by the agreement must be substantively meaningful;
c) the agreement must be a fair and reasonable one that facilitates access to justice while protecting the interests of the defendants; and
d) the third-party funder must not be overcompensated as that would render the agreement unfair, overreaching, and champertous.
Other principles derived from the case law include the following:
- the 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;
- the representative plaintiff must retain the right to instruct and control the litigation, and must not become indifferent in giving instructions to class counsel;
- the agreement must have a term that the third-party funder will be bound by the deemed undertaking rule and will not disclose confidential or privileged information;
- the third-party funder may be required to pay security for costs;
- prior to certification the court has jurisdiction to approve the agreement and to make an order binding on the putative class members;
- court approval must be obtained and the agreement must be promptly disclosed to the court;
- the defendant and third-party funder should have notice of the motion for court approval of the agreement and be provided an opportunity to make submissions; and
- the representative plaintiff should receive independent legal advice about (a) the law firm’s contingency fee agreement; (b) the third-party funding agreement; and (c) the inter-relationship between these two agreements.
Analysis
Justice Perell was satisfied that the first three factors were met. He then considered the fourth factor, i.e. whether the third-party funder would be overcompensated thereby turning the funder into a champertor. The funder’s reward must be fair to the class members whose access to substantive justice is diminished by having to share their compensation. While the consideration of this factor is mandatory, its application is highly contextual and difficult to apply.
Justice Perell noted that Bentham’s uncapped recovery under the LFA may prove to be unfair and disproportionate, but that it was too early to say whether the LFA’s 2:1 distribution scheme in favour of Bentham made the LFA champertous. Whereas Class Counsel’s proportion of the contingency fee is subject to court approval, thereby ensuring protection of the Class Members, this was not the case with respect to Bentham, as the agreement was written. As such, the LFA did not satisfy the fourth factor.
To resolve this issue, Justice Perell proposed that he would pre-approve part of the contingency fee to be paid to Bentham (10%, being the equivalent of the Class Proceedings Fund levy), but that the final amount of the contingency fee would require subsequent Court approval, which would be based on the actual outcome of the case.
In this way, Bentham would be compensated for taking on the risk, by recovering at least 10%, similar to the Class Proceedings Fund levy, and the Class Members would be protected from overcompensating Bentham, because any amount over 10% would require subsequent Court approval.
With respect to whether the terms of the LFA interfered with the lawyer-client relationship, Justice Perell took issue with a number of the provisions including the following obligations on the part of the Houles: to conduct the action in a way that avoids unnecessary cost; to devote time to prosecuting the action; to follow reasonable legal advice; to remain parties in the action; to not take steps that adversely affect the recoverability of Litigation Proceeds; and to advise Bentham of any event that may give rise to Bentham’s termination rights. These provisions left the impression that the Houles and Class Counsel were promising to prosecute the action on behalf of Bentham as much as, if not more than, on behalf of Class Members.
Interestingly, Justice Perell noted that these provisions would not necessarily be offensive in every case. For example, where the representative plaintiff has been recruited and has little interest in the action because his or her damages are trivial, the behaviour modification goal of class proceedings may be better achieved through the conspicuous involvement of a non-party that is motivated to pursue the wrongdoer. However, this was not such a case.
The termination provision in the LFA also interfered with the Houles’ litigation autonomy as Bentham was given the sole discretion to decide whether the Houles had breached their obligations therein. Practically speaking, this would allow Bentham to control the litigation. However, Justice Perell suggested that this issue could be resolved by making Bentham’s termination of the LFA also subject to the Court’s approval.
Conclusion
Justice Perell concluded that despite having advantageous features that satisfied many of the requisite principles, he could not approve the LFA in its current form. Instead, he conditionally approved the LFA subject to the Houles delivering a revised amended LFA rectifying the issues identified by him. If a revised LFA was not delivered within 60 days, the motion would be dismissed.
Key Takeaways
As the Court itself notes, “the role of third-party funding in the administration of justice remains a work in progress”. Justice Perrell’s decision advances that progress by encouraging creative funding agreements that can further the goals of the class action regime without unduly curtailing the rights of class members.
Of particular note is the Court’s desire to scrutinize agreements that could result in the third-party funder being compensated above the 10% threshold, or that could result in the funder, and not the representative plaintiffs, being in control of the litigation.
This is unlikely to be the last word on these issues as the plaintiffs are seeking leave to appeal.
About the authors
Christopher Wirth and Michael Tersigni, Keel Cottrelle LLP