Following closely on the heels of its three recent decisions addressing the criteria for certification of class proceedings, the Supreme Court of Canada has further clarified the "preferable procedure" requirement for class certification (i.e. the requirement that a class action be the preferable procedure for the resolution of the class members' claims). On December 12, 2013, the Supreme Court released its decision in AIC Limited v. Fischer, 2013 SCC 69. That case involved a class proceeding instituted following a settlement between AIC Limited and CI Mutual Funds with the Ontario Securities Commission (the "OSC") in respect of "market timing" trading in mutual funds. The Supreme Court rejected the defendants' argument that regulatory proceedings commenced by the OSC against the defendants were preferable to a class proceeding for purposes of resolving aggrieved investors' claims, and in doing so enumerated for the first time a series of questions to be addressed by courts when approaching the preferability analysis.
The recent increase in class action activity across Canada, combined with the growing assertiveness of regulatory authorities, has given rise to the proliferation of class proceedings instituted following public settlements of charges or investigations brought by regulatory agencies. Thus, it has become common (perhaps even near-automatic) for entrepreneurial class action plaintiffs' counsel to monitor public settlements between regulatory agencies and industry players in various sectors, and institute civil proceedings against settling defendants based on information contained in the publicly disclosed terms of settlement. One early example of such a claim involved an investigation by the OSC of mutual fund managers into "market timing" trading in mutual funds, a practice which was alleged to have caused long-term investors to suffer losses in the value of their investments. The OSC probe focused on whether the fund managers had taken reasonable steps to protect the funds from harm that could arise from frequent market timing trading, rather than on the "market timers" whose activities directly caused harm to the fund. The fund managers ultimately entered into settlement agreements with the OSC, and paid large amounts into a fund that was partly used to compensate aggrieved investors. Following the public disclosure of these settlements, class actions were instituted against the various fund managers claiming additional civil damages.
One of the primary defences raised by the fund managers in the class action was that the settlements with the OSC had provided an effective remedy for class members by providing compensation to investors and modifying the behaviour of the fund managers, who ceased permitting market timing trades in their mutual funds. As such, the OSC had provided a fast, efficient and gratuitous remedy to class members that constituted a "preferable procedure", or better alternative, to proceedings by way of class action. In the Ontario Superior Court, the certification judge accepted this defence and refused to certify the class action. On appeal, the Ontario Divisional Court overturned the first decision and certified the class action, on the basis that the OSC investigation and settlement were in furtherance of a primarily regulatory, not compensatory, function, and as a result, the remedial powers available to the OSC were insufficient to enable it to fully address the class members' claims. The Divisional Court also noted that it was possible that the class action proceedings would result in greater monetary recovery by investors, over and above the compensation obtained through the OSC settlements.
The Ontario Court of Appeal upheld the decision of the Divisional Court, and the Supreme Court of Canada in turn upheld the decision of the Ontario Court of Appeal. The Supreme Court further clarified that it is the plaintiffs' burden to provide "some basis in fact" to show that a class proceeding is preferable to an alternative process (for example by providing greater monetary recovery) and emphasized that the required comparison cannot ignore the question of whether a cost-benefit analysis supports the plaintiffs' contention that the proposed class proceeding is the preferable way to address their claims. The decision in AIC is significant in that it puts prospective defendants on notice that the settlement of regulatory charges or investigations is potentially only the first step in resolving alleged regulatory offences or wrongdoing. To the extent that the regulatory settlement becomes public, the next phase in the process will be the inevitable class action claiming civil damages based on the same facts, over and above the amounts paid in settlement of the regulatory proceedings. Forewarned is forearmed.
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