Thursday Thinkpiece: Kalajdzic, Cashman & Longmoore on Ethical Concerns About Third Party Funding of Class Actions
Each Thursday we present a significant excerpt, usually from a recently published book or journal article. In every case the proper permissions have been obtained. If you are a publisher who would like to participate in this feature, please let us know via the site’s contact form.
Justice for Profit: A Comparative Analysis of Australian, Canadian and U.S. Third Party Litigation Funding
Jasminka Kalajdzic, Peter Kenneth Cashman and Alana M. Longmoore
American Journal of Comparative Law, Vol. 61, No. 2, 2013
III. Canada . . .
C. Ethical Concerns
As a result of Strathy J.’s decision in Dugal [2011 ONSC 1785 ], and unless a higher court disagrees with his interpretation of the relevant statutes, it appears that maintenance and champerty laws, which remain in force in all of Canada, will not bar commercial litigation funding of class actions.104 The three principal mischiefs that champerty rules aim to cure are the promotion of unnecessary litigation by a non-party; intermeddling in the conduct of the litigation; and the over-compensation of the funder. Judicial oversight of TPLF in class actions goes some distance toward ensuring that these three evils are avoided.
In the context of champerty cases, courts have long scorned the “stirring up” of litigation.105 In one of the earliest class actions, Winkler J. (as he then was) voiced similar disapproval of an investment scheme in which the funder created a syndicate of investors and then retained counsel and identified the cause of action.106 In that case, Winkler J held that the Class Proceedings Act:
does not envisage that causes of action, legitimate though they may be, will be identified and class members recruited, for the ultimate financial gain of the organizers. Instead, the legislation anticipates a genuine representative plaintiff. The purpose of the legislation is to facilitate the litigation of causes of action and not to generate them for financial gain.107
It is not clear, however, how long courts can maintain a principled rejection of funder-initiated litigation. The classic paradigm of client-initiated lawsuits does not reign in class actions. It is now accepted that, in the name of access to justice, class counsel may identify causes of action and recruit representative plaintiffs. It is foreseeable, therefore, that the same principles will be used to support the argument that a funder-identified lawsuit, brought to class counsel with whom a working relationship has been forged, equally promotes justice for wronged, albeit unaware class members, and ought to be approved.
Class action judges have repeatedly stressed that class representatives must be genuine and active, not mere pawns of class counsel.108 On this basis, courts have held that they are
entitled to know whether some other party is funding the litigation and, if so, who is doing so and on what terms. The answers go to the independence and motivations of the representative plaintiff as well as the ability of the representative plaintiff to see the action through to completion. [. . .] In the context of third party funding arrangements, the Court has been particularly concerned to know the details of the arrangements with the third party to ensure that the representative plaintiff, and not the third party, is actually calling the shots.109
Concerns regarding officious intermeddling are at least partly addressed by express provisions in the funding agreement that re- strict the role of the funder in the conduct of the litigation to that of an interested but experienced observer who is entitled to be kept apprised of important developments in the case, but who is not permitted to withdraw from the funding arrangement unless plaintiff’s counsel fails to prosecute the attention entirely or the representative plaintiff changes counsel.110 John Rossos, the principal of BridgePoint (the funder in the Alberta and Nova Scotia class actions referred to earlier), observed that funders trust the expertise of class counsel and are therefore happy to act as passive investors.111 Yet, in the same article, Rossos argues that third party funders’ “specialized knowledge or relevant expertise may add significant value to class counsel by assisting in the development of a litigation strategy or plan, the recruitment of experts, the compilation of evidence, and the evaluation of the terms of any settlement.”112 Even if not rising to the level of “officious intermeddling” for the purpose of maintenance laws, the involvement of another significant stakeholder in the litigation requires careful consideration by the judge managing the class action.
Whether, and to what extent, funders actually become involved in Canadian class actions is not entirely clear, given that not all of the agreements are disclosed publicly. According to plaintiffs’ counsel in the Hobshawn case, the funder had no involvement other than to be apprised of developments in the litigation.113 The agreements in Dugal and Sino-Forest stipulated that control of the litigation remained with the plaintiff. There is nothing to suggest that those contractual provisions have not been honored. The dynamics of the private relationship between lawyer-funder-client, however, are neither openly discussed nor easily ascertainable.
Potential overreaching by the funder as well as subtle pressure on counsel to take a course of action that is at odds with the interests of the class both affect the independence of counsel. The funder, potentially carrying a portfolio of cases—perhaps with the same class counsel—may have a risk tolerance different from that of the representative plaintiffs and class members; it is therefore not an answer to simply say that the interests of the funder align with those of the class.114 These concerns are more pronounced where counsel and the funder have an ongoing business relationship in a number of concurrent or potential actions.115 It is unclear whether close judicial supervision is sufficient to guard against improper interference on the part of the commercial financier.
The third concern in the champerty analysis, the potential over-compensation of the funder, can also be addressed through judicial oversight. Worries about the financial exploitation of the class by funders have been partly assuaged by negotiated caps on the levy to be charged by the funder, and a percentage on return that is less than the Class Proceedings Fund’s 10% levy. As explored with the lawyers interviewed, however, the market rates for TPLF will vary according to the amounts advanced. The contracts approved in Dugal and Hobshawn were mainly indemnity agreements, with only modest disbursement funding. Where funding arrangements include financing of disbursements and/or legal fees, the levy will exceed 10%. In those cases, the comfort provided by the Class Proceedings Fund benchmark will disappear, and judges will be left with the difficult task of assessing what levy is high enough to compensate the funder for the risks borne, but not so high as to amount to financial exploitation.
104. For a thorough analysis of champerty and maintenance laws in the context of commercial litigation funding of individual litigation, see Puri, supra note 63.
105. Newswander v. Giegerich (1907),39 SCR 354, at 360.
106. Smith v. Canadian Tire Acceptance Ltd, supra note 69.
107. Smith v. Canadian Tire Acceptance Ltd, supra note 69, para. 72.
108. Most recently see Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252 (CanLII), at para. 357. 109. Id., at para. 361.
110. Interview with respondent 6, supra note 97.
111. John P. Rossos, Access to Justice: Using Third Party Financing to Fulfill the Promise of Class Action Litigation, 5:1 CAN. CLASS ACTION REV. 100, at 117 (2009).
112. Id., at 119.
113. Telephone interview with Clint Docken, Sept. 5, 2012 (notes on file with authors).
114. A number of commentators have made this claim. See, e.g., Burch, infra note 141, and Rossos, supra note 111, at 108.
115. On this point, we disagree with Lyon who has argued that if the attorney can overcome his own pecuniary interest in a lawsuit (by virtue of the contingency fee), then he can “overcome his concern for the interests of a third party to whom he is not otherwise beholden”: Jason Lyon, Revolution in Progress: Third-Party Funding of American Litigation 58 UCLS L. Rev. 571 (2010). The creation of a market in TPLF and of repeat players as between funders and class counsel renders counsel at least somewhat “beholden” to his or her financier.