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THE “ILLUSION OF COMPENSATION”:
CY PRÈS DISTRIBUTIONS IN CANADIAN CLASS ACTIONS
(2014) 92:1 Can. Bar Review [forthcoming]
Excerpt: pp. 16 – 19. Footnotes renumbered.
It is the third argument that is most apposite in the Canadian context. Redish and his colleagues posit that the use of cy près illegitimately transforms enforcement of the underlying substantive law (the laws that are alleged to have been breached by the defendant) from a compensatory framework into the practical equivalent of a civil fine. Put differently, if, as the courts have repeatedly stated, the class action is only a procedural device that does not alter the substantive law, has the payment of settlement monies to non-parties expanded the remedial choices normally available to a wronged party under either the common law or statute? If fixed cy près awards are being granted, thereby depriving class members from even the opportunity of claiming their share of the funds paid by the defendants, have courts replaced the compensatory function of class action litigation with a civil fine model that is unavailable in any other litigation procedure?
That cy près is only used in class action litigation does not by itself delegitimize the use of the device. After all, it is not surprising that such distributions do not arise in regular litigation; in those cases the named parties are before the court and there is no difficulty, therefore, in identifying the recipients of the settlement proceeds.
The normative questions about the legitimacy of this alternative remedial move remain. These various questions can be reduced to one: can deterrence alone justify a class action? Although the OLRC thought not, preferring instead the view that deterrence is an inevitable but important by-product of class actions, there is some academic support for class actions performing solely a deterrence function. Craig Jones has argued that the “main goal of the class action is deterrence; that is, to reduce the systemic risks of business activity to a socially optimal level.” Jeff Berryman and Robyn Carroll have also argued that “all legal systems have behavioural modification as a pervasive concern” and that the fixation on compensation as the sole aim of private litigation is neither intellectually defensible nor factually accurate.
Unlike U.S. courts, which have expressed a lack of sympathy for the argument, there may, in fact, be some support for the deterrence only function of class actions in our own Supreme Court. In Sun-Rype, a price-fixing case decided in October 2013, the majority acknowledged that the difficulty of distributing damages to indirect purchasers frustrated the compensation goal of Canadian competition laws. Nevertheless, “[w]hile cy-pres distributions may not appeal to some on a policy basis, this method of distributing settlement proceeds or damage awards is contemplated by the [British Columbia] CPA, at s. 34(1).” The majority then cited the B.C. equivalent of Ontario’s s. 26, pointed out that nine other indirect purchaser settlements involved cy près distributions, and stated that, while “not the ideal mode of distribution, it allows the court to disburse the money to an appropriate substitute for the class members themselves.” For the latter proposition, the majority cited an American law review piece that, ironically, is critical of cy près, and that recommends judges not be permitted to approve them.
While the inevitable absence of direct compensation to the class was not sufficient to preclude the initiation of a class action, the lack of evidence demonstrating that two or more persons could prove a loss at the hands of the defendants was fatal to certification in the Sun-Rype case. The plaintiffs could not prove that they had purchased products containing the ingredient that was the subject of the alleged price-fixing scheme. The two dissenting justices would have allowed certification anyway, on the basis that aggregate damages caused by the defendants’ conduct could be established, and that the deterrence function of litigation, taken at its purest, justified the action:
Behaviour modification is an important goal, especially in price-fixing cases. While class proceedings are clearly intended to create a more efficient means of recovery for plaintiffs who have suffered harm, there are strong reasons to conclude that class proceedings are not limited to such actions. As I detail below, the CPA is designed to permit a means of recovery for the benefit of the class as a whole, without proof of individual loss, even where it is difficult to establish class membership. Thus, if no individual seeks an individual remedy, it will not be necessary to prove individual loss. Such class actions permit the disgorgement of unlawful gains and serve not only the purposes of enhance access to justice and judicial economy, but also the broader purpose of behaviour modification. Therefore, I am not persuaded that it is a prerequisite that individual members of the class can ultimately prove individual harm.
In the dissenters’ view, individuals need not have to prove individual harm, because individual compensation is not the raison-d’être of the litigation to begin with. Deterrence alone can justify a class action.
The majority, however, is not prepared to adopt this fairly radical worldview. To say that behaviour modification is an objective of class actions does not mean that the promise of deterrence is a sufficient justification for proceeding as a class. In the words of Justice Rothstein: “[T]he circumstances here demonstrate that class proceedings are not always the appropriate means of addressing behaviour modification. In cases in which loss or damage due to price-fixing cannot be proven, the appropriate recourse may be for the Commissioner of Competition to charge the defendants under the Competition Act.” The majority, it seems, is not prepared to accept the complete outsourcing of the public law function of regulatory bodies to private entrepreneurial lawyers.
If deterrence alone is the function of class proceedings, as the dissenting judges in Sun-Rype suggest, then much of the class action procedural apparatus would need to be revisited. Why the fiction of a representative plaintiff if the class is amorphous and no member, not even the representative plaintiff, will be expected to prove loss or receive compensation? If ensuring disgorgement of wrongful gains in the hands of the defendants is the primary focus, is much of the current certification test moot? With compensation to class members no longer an objective, cy près distributions could well become the norm, rather than the exception.
But as the majority’s more cautious approach to the pure deterrence theory of class actions exhibits, the ‘conversion’ of our litigation model to a civil fine regime is not inevitable. Rather, the limited use of cy près – as a last resort, when compensation is truly not feasible, and when other regulatory oversight mechanisms fail – illustrates a continued adherence to the traditional goals of our civil justice system, of which deterrence is but one aim.
For this reason, I propose that our courts strictly scrutinize the threshold question as to when direct compensation is truly not feasible. Judges must hold both plaintiff and defence counsel’s feet to the fire; what efforts were made to locate class members, or distribute funds to them efficiently? Assuming the judge is satisfied that it is impossible or economically unfeasible to compensate all class members, is cy près the appropriate alternative? In the context of residual cy près, perhaps courts have been too quick to dismiss pro rata apportionment of residue to the class members who have successfully claimed a share of the settlement proceeds. After all, it is rarely the case that claimants receive 100% of their losses in a settlement claims process. Is a top-up of those losses as good a policy decision, or even better, than a cy près distribution to an uninjured third party?
 Redish et al., supra note 2 at 644-646.
 See e.g., Bisaillon v. Concordia University, 2006 SCC 19 at paras. 17-22; Hollick v. Toronto (City), 2001 SCC 68 at para. 14; Hislop v. Canada (Attorney General), 2009 ONCA 354 at para. 57, leave to appeal to SCC refused,  SCCA No. 264.
 OLRC Report, supra note 11 at 145.
 Craig Jones, “The Class Action as Public Law” in Janet Walker, ed. Class Actions in Canada (Emond Montgomery, 2014) at 29. See also Craig Jones, Theory of Class Actions (Toronto: Irwin Law Book, 2003).
 Jeff Berryman and Robyn Carroll, “Cy- près as a class action remedy – justly maligned or just misunderstood?” inKit Barker and Darryn Jensen eds., Private Law: Key Encounters with Public Law (Cambridge University Press, 2013).
 Marek v. Lane, supra note 2 (per Chief Justice Roberts). See also In re Thornburg Mortgage Inc. Securities Litigation, 2012 US. Dist. LEXIS 170875 at 24 [class actions are not “free-standing device(s) to do justice”].
 Sun-Rype Products Ltd. v. Archer Daniels Midland Company, 2013 SCC 58 at paras. 24-27 (per Rothstein J.).
 Ibid. at para. 25.
 Ibid. at para. 26.
 D. Blynn, “Cy Pres Distributions: Ethics & Reform” (2012), 25 Geo. J. Legal Ethics 435. Blynn, a law student, argues that judges are susceptible to corruption and improper influence in being asked to approve donations to organizations that may benefit judges themselves.
 Sun-Rype, supra note 76 at paras. 62-73.
 Ibid. at para. 97 (per Karakatsanis J.).
 Ibid. at para. 79 (per Rothstein J.).
 J. Kalajdzic, “Public Goals by Private Means, & Public Actors Protecting Private Interests: A Response to Professor Jones” (2013) 53 Can. Bus. L.J. 371.
 There are examples of pro rata apportionment of either residue or amounts due to class members that are too small to distribute. See e.g. the Plan of Allocation in the Arctic Glacier class action settlement, online: http://www.classaction.ca/CMSFiles/PDF/Securities/Arctic/Plan%20of%20Allocation.pdf.