As I was reading the Globe and Mail this morning, I saw an article about an Ontario Superior Court decision in Silver v.Imax Corp., upheld on appeal, that the test for questions on cross-examination on affidavits prior to class certification is that the question have a "semblance of relevance." The defendants had argued that "there is no pre-action right of discovery and as a general rule a plaintiff cannot compel production and disclosure from a prospective defendant" but in the view of Madame Justice Van Rensburg were not able to come up with a workable alternative.
I hadn't been aware of this one, but it raises interesting issues. This is the first case to deal with Part XXIII.1 of the Securities Act (Ontario), which imposes civil liability for secondary market disclosure. The defence bar is up in arms, saying that this will tie corporate executives up dealing with plaintiffs' fishing expeditions, effectively forcing them to discuss a settlement. The plaintiffs' bar feels that they are dead in the water if they can only have access to materials that are already in the public domain as they have to obtain leave from a judge to commence the action and in so doing, must prove they have a reasonable chance of success. In fact, both sides may rue this decision.
The Toronto Stock Exchange Committee on Corporate Disclosure (more commonly known as the Allen Committee after its chair, Tom Allen), for which I was TSX staff co-ordinator, considered whether there should be constraints on the abilities of plaintiffs to commence class actions. The context was the situation in the United States, where entrepreneurial plaintiff's lawyers would launch a class action immediately following a significant drop in a company's stock price. The demands on executives’ time (particularly in open-ended discovery) and uncertainty of litigation were so great that companies would settle cases that had little or no merit.
While the Committee was deliberating its final report, the U.S. Congress adopted the Private Securities Litigation Reform Act, which attempted to address some of the most egregious abuses. One of the major provisions of that Act (now § 27(b) of the Securities Act of 1933) deals with discovery, stating that ‘[i]n any private action arising under this title, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds, upon the motion of any party, that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.”
I had thought that the requirement that leave be obtained for class actions originated with the Allen Committee, but on rereading their report I realized that I had, to quote the outgoing U.S. President, “misremembered.” The Committee considered a requirement that the securities commissions act as a gatekeeper, but felt that the existing disincentives to litigate in Canada would act as a sufficient deterrent to meritless actions. In fact, some on the Committee were concerned that the chance of a lawsuit was still so low that the threat of litigation would not be a sufficient incentive for companies to improve their disclosure practices (and, it was hoped, avoid ever making the misrepresentations that would land them in hot water).
With the courts grappling with the parameters for class actions (and whether to grant leave to proceed) for the first time, I think it is important to remember basic principles. The requirement for leave was not, I think, to balance the fact that plaintiffs do not have to prove reliance on a defendant's misrepresentation, as argued by the defendants. Having a requirement that a plaintiff prove reliance would make the liability provisions self-defeating. Class actions would not be possible as the individual issues (whether a given plaintiff was aware of a misrepresentation and relied on it to his or her detriment) would overwhelm the common ones. The amount an individual shareholder lost in any given instance would generally be too small to justify litigation.
The requirement for leave addresses the abusive litigation seen in the United States. It would make sense to leave the threshold for leave fairly low so that extensive discovery is not needed. Otherwise, the court could end up engaging in a mini-trial simply to decide whether there should even be a trial. That would serve neither plaintiffs nor defendants. The test should be whether the plaintiff has pled with such particularity that it is clear the lawsuit has merit and should proceed, with discovery falling after certification. If, on the other hand, the plaintiff's position is "we're pretty sure there's been a misrepresentation but won't know for sure until we've looked at everything the defendant has," leave shouldn't be given as the suit is clearly speculative.
It is unfortunate if courts hold the plaintiff to such a high standard that all of the litigation tactics normally seen at trial were used for leave applications. This will ultimately cost both plaintiffs and defendants and is not the outcome I believe the legislature had in mind when it adopted the civil liability provisions.