Class-action fever threatens Canadian firms
Friday, August 14, 1998 (Globe and Mail)
By Eric Reguly
Forget about hiring brokers and investment advisers. Get a lawyer instead and start a class-action suit. It's easy, it's fun and can produce small fortunes with little effort.
Shareholders of Livent , the live theatre company accused of funny accounting, believe that there's gold in Livent's misfortunes. The first of a flurry of class-action suits came only 24 hours after Livent suspended founder Garth Drabinsky and his sidekick Myron Gottlieb and said it may have to restate financial results for the past two years.
Class-action suits are ubiquitous. News of fresh suits, settlements and court victories are announced every day and some of the numbers are dazzling. On Wednesday, Sumitomo, the Japanese trading group whose unauthorized forays into the copper market cost it billions in the mid-1990s, agreed to pay $99-million (U.S.) to settle six class-action suits filed against it in New York. The tally is bound to rise because a raft of Californian suits remains outstanding.
In the United States, corporations live in fear of class actions. They consider them nothing more than "judicial blackmail" because they are so easy to launch. Defendants rarely admit wrongdoing; they settle to avoid the risk of extremely costly judgments (or so they argue). In the litigation-mad United States, even some of the most frivolous cases succeed. Fans of the absurd fondly remember Milli Vanilli, the late-1980s pop duo who were exposed as frauds when someone figured out their true expertise was lip-synching, not singing. Traumatized Milli Vanilli fans got together, sued and won some money.
The class-action game in the United States has blossomed into a full-fledged growth industry and it threatens to do the same in Canada.
Until a few years ago, such suits were virtually unknown in Canada and it wasn't just because Canadians were famous for their tolerance. Provincial legislation made them difficult, if not impossible, to get started. But recent changes in Ontario, Quebec and British Columbia have opened the doors to class actions. Some lawyers think it is now even easier in Canada than the United States to cobble together a few plaintiffs and certify them as dangerous legal weapons.
In Ontario, for example, a court can certify a "class" with as few as two persons. This would never happen in the United States, where the requirement is for "numerous" members -- generally a 100 or more. Canadian courts also put less onus on the class to show that the "common" issues outweigh the concerns of the individuals.
None of these changes would help plaintiffs much if it weren't for the easy funding provisions. In Canada, you can be dead broke and still play the class-action game.
Ontario plaintiffs have no shortage of funding options. The easiest and most popular is the contingency fee, in which the lawyers do not get paid if the plaintiffs lose. It sounds too good to be true and it is. If the plaintiffs win, the lawyers' fees might be high enough to keep them in Porsches for the rest of their lives. In Ontario, contingency fees are illegal in cases other than class actions. Plaintiffs with no money can also tap into public funds to get their suits launched as long as the fund is replenished with any winnings.
Harvey Strosberg, the lawyer best known for representing the thousands of shareholders who got wiped out in the Bre-X scandal, has come up with the most imaginative method of class-action funding so far. He recruited outside investors to finance a class-action suit against the maker of a defective heart pacemaker. The company recently settled for $24.2-million (Canadian) and the investors, whose names were never disclosed, reaped a 20-per-cent return. This is extremely high-risk investing, of course. Had Mr. Strosberg's campaign failed, investors would have lost everything they put up.
The case raises tricky moral issues. Should people who are not part of a class action -- in this case the investors -- have a stake in the case's outcome? Critics say this financing method may encourage frivilous suits.
Canadian lawyers expect a class-action bonanza in the next few years as plaintiffs learn about the ease of taking companies to court. Deborah Glendinning, a lawyer with Osler Hoskin & Harcourt in Toronto, thinks defendents are in for a shock. "The bottom line is that Canadian corporations now have a much bigger risk management issue to deal with -- one that may not be covered by their historic reserves for litigation-related expenses," she wrote in a recent newsletter.
Will Canada became as trigger-happy with class actions as the Americans? Unlikely, Mr. McGowan says. The reason: In Canada, unlike the United States, the "loser pays" principle is still very much in force. Although it has become far easier in Canada to go after companies that lie and cheat, you had better be sure of your stance. Otherwise, you could end up putting Porsches in the driveways of the bad guys' lawyers.
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