Tony Merchant and the Missing Fee Agreement: Why All the Fuss?

In an article in the National Post last week, Justice Belobaba is described as having ‘scorched’ Merchant Law Group for its “profoundly unacceptable fee agreement” with its client, the class representative in McCallum-Boxe v. Sony. While there are many unsavoury and arguably unethical practices for which Merchant may be justly criticized, this fee arrangement does not merit the same level of excoriation.

The case involved a very small settlement in a class action against Sony. The judge approved the $8000 payment to the class, but was shocked to discover that class counsel had not required the class representatives to sign a contingency fee agreement at the outset of the litigation, and that the law firm expected to recover fees directly from the defendant. There are two issues, then: one is that there is no written agreement between counsel and the representative plaintiff, as is the norm in class actions across Canada, and the second is that the contingency fee is not connected to the recovery by the class and is therefore ‘settlement-driven’.

No Fee Agreement

While unusual, the lack of a written fee agreement does not undermine the class action regime. A retainer agreement between the rep plaintiff and class counsel at the outset of litigation is, to my mind, window-dressing. The agreement is not like an ordinary contract between counsel and client; it purports to bind an untold number of other people in the class, and it is subject to the overriding obligation under the Class Proceedings Act that the court approve any fee to be paid to class counsel. The case law establishes that only a fair and reasonable fee may be awarded, bearing in mind the work performed by counsel, the risks taken and the outcome of the case. None of these factors can be evaluated at the outset of litigation. Moreover, the representative plaintiff is often recruited by class counsel and has little to no bargaining power, so that the fee agreement is essentially a contract of adhesion. For these and other reasons, fee agreements in class actions simply cannot be treated like an ordinary retainer in binary litigation, nor like any other contract to be enforced by the court. I have written more extensively about this topic elsewhere, including here.

And if none of that is convincing, consider that in the US, where contingency fees in class actions have a much longer pedigree than in Ontario, there is no written fee agreement between class counsel and the rep plaintiff. The fee is awarded by the court, using many of the same factors employed by our judges. A written agreement, therefore, is superfluous.

No Connection Between Fee and Class Recovery

The judge’s second concern was that the failure to make the fee contingent on the recovery achieved for the class creates perverse incentives. Merchant has no incentive to maximize the settlement for the class because his fee is not calculated as a percentage of the recovery; instead, he extracts the money from the defendant. From a business perspective, this practice is perplexing. Why would a litigator give up the right of a first charge on the proceeds of litigation? But from the perspective of the class, the risk of sub-optimal settlements is not significantly higher than in the traditional contingency fee arrangement. To better understand this argument, I set out Justice Belobaba’s critique in full:

[13] It must be obvious to anyone who gives this even a moment’s thought, that this type of settlement-driven legal fees arrangement in class action litigation is fundamentally and profoundly unacceptable. It provides all the wrong incentives. The MLG arrangement discourages maximum commitment on behalf of the class because even if class counsel should win at trial, they will not be entitled to any compensation, whether from the recovery (no such agreement is in place) or via the plaintiff’s claim for costs (no costs can be awarded because the representative plaintiff has no liability to pay legal expenses.[1]) The MLG arrangement encourages only a minimal commitment on behalf of the class leading to sub-optimal settlements negotiated by class counsel who are primarily interested in recovering a generous legal fees payment. (emphasis mine)

The judge went on to state that counsel’s “very involvement in the [settlement] negotiation with the defendant creates a glaring conflict of interest because every dollar that can be deducted from the class members’ settlement amount is a dollar that can potentially be added to class counsel’s legal fees amount” (para. 14).

Three points may be made in reply. First, s. 32(4) of the Class Proceedings Act contemplates that a court may determine class counsel’s fee in the absence of an approved fee agreement. Second, class members who succeed at trial are still entitled to costs, even in the absence of a fee agreement. The appropriate analogy is not to self-represented litigants but to clients represented by pro bono counsel; the case law is clear that costs may be awarded in the latter scenario.[2] For both of these reasons, it is not true that if the Merchant Group wins at trial, “they will not be entitled to compensation”. Third, there is an inherent conflict of interest whenever class counsel negotiates a settlement concurrently with a fee deal, with or without a fee agreement, but it is not a disqualifying conflict. Our courts settled the issue in the early days of class actions in Ontario.[3] Whether the fee is included in the ‘all-in’ settlement amount or is in addition to it, defendants will almost always approach settlement as a global figure, and in this sense, it is true that “every dollar that can be deducted from the class members’ settlement amount is a dollar that can potentially be added to class counsel’s legal fees amount”. Rather than create perverse incentives, former Chief Justice Winkler held that the “ability of the defendant to consider its total exposure to both damages and fees may encourage settlement.”[4]

I will concede that it may be more tempting to negotiate a small settlement amount if the fee amount is untethered to the sum to be paid to the class. However, any settlement must be approved by the court, just as any fee must be adjudged to be fair by reference to the sum obtained for the class. With or without a written fee agreement, counsel will be paid more if the class gets more.

Justice Belobaba ultimately awarded Merchant $30,000 in fees, an amount with which I do not quarrel. At the end of the day, he determined what was fair and reasonable in all of the circumstances. That is precisely what a judge ought to do. The existence of a contract with the representative plaintiff is neither necessary as a matter of law nor preferable as a matter of ethics to get us to the right result.

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[1] For this proposition, Justice Belobaba cited Labourers’ Pension Fund of Central and Eastern Canada v Sino-Forest Corporation, 2015 ONSC 6354, where Justice Perell held that for a litigant to be entitled to claim costs, it had to have an obligation to pay for legal services. He then stated that it was for this reason self-represented litigants were generally not entitled to costs.

[2] 1465778 Ontario Inc. v. 1122077 Ontario Ltd., 2006 CanLII 35819 (ON CA)

[3] Dabbs v. Sun Life Assurance Co. of Canada, 1998 CanLII 14627 (ON SC).

[4] Dabbs v. Sun Life Assurance Co. of Canada, 1997 CanLII 12294 (ON SC), (1997) , 35 OR (3d) 708 at 714.

Comments

  1. No quarrel with this thoughtful blog posting, but a quarrel with the Court’s assertion that no costs could be awarded because the representative plaintiff had no liability to pay legal expenses. In Fong v Chan, 1999 CanLII 2052, 46 OR (3d) 330 (CA), the Ontario Court of Appeal said (at para 121) that it was “difficult to justify a categorical rule denying recovery of costs by self-represented litigants” and that, in addition to indemnification, costs rules also served to encourage settlements and to discourage and sanction inappropriate litigant behaviour. For an interesting application and in-depth subsequent analysis, albeit in the context of family law, rather than class action law, see Jordan v. Stewart, 2013 ONSC 5037. In that case, the unsuccessful father, who had spent $400,000 on legal fees himself, was ordered to pay the self-represented mother $90,000 in costs. Only a relatively small portion of that order related to her (unbundled) legal fees.