Contingency Fee Agreement Subject to the Discretion of the Court, as per Atlas

On October 1st, 2009, the Ontario Court of Appeal released its judgment in Sutts, Strosberg LLP v. Atlas Cold Storage Holdings Inc., 2009 ONCA 690. The significance of this case lies in its status as one of the few securities class actions in Canada. One counsel submitted that this “was the third largest securities class action settlement in Canadian history” and “the first class proceedings related to an income trust.”

Securities class actions are a relatively new development in Canada due to recent legislative changes. Amendments to the securities statutes in each province have opened doors and led to an increase in the filing of securities class actions. As of December 2005, Ontario, the first province to amend its Securities Act, imposes civil liability on the failure to give continuous disclosure. The rest of the provinces, other than PEI and the territories, have followed suit. In essence, if a director or officer fails to ensure that the company discloses adverse material information, then they will likely be faced with a class action lawsuit by shareholders who bought shares in the secondary market during the time period when the information was not disclosed.

These amendments were enforced to facilitate judicial economy, access to justice, and deterrence. However, the amendments incorporated restrictions such as a cap on damages and rules that required the losing side to pay the legal fees and expenses of the winning side, to discourage a tumultuous increase in suits similar to what has happened in the U.S.. Another amendment that facilitates access to justice is contingency fees, which are permitted in all provinces. The contingency fee agreement is required to be in writing, stating the terms as well as providing an estimate of the expected fee. Nonetheless, the agreement is not enforceable unless approved by the court. The agreements are subject to the discretion of the court. Atlas, as detailed below, shows us the courts’ practical considerations of contingency fee agreements and determining class counsel fees.

The Claim

A securities class action arising from the sale of trust units in Atlas Cold Storage Income Trust (Atlas), which began in 2004, alleged that the financial statements of Atlas were misrepresented.

Atlas, an income trust trading on the TSX, was designed to pay unit holders regular income distributions and provide them with an opportunity for capital appreciation as a result of Atlas’s ownership of Atlas Cold Storage Holdings Inc. (Atlas Holdings), operators of North America’s second largest temperature-controlled distribution network.

An investigation revealed that Atlas’s net earnings were overstated. Following the close of trading on August 29, 2003, Atlas announced that it would be restating its financial statements for fiscal years 2001 and 2002.

The plaintiffs alleged that Atlas misrepresented its prospectuses, financial statements and press releases.

The Settlement

Justice Lax of the Ontario Superior Court of Justice approved a $40 million settlement in exchange for releases and a dismissal of the class action. She fixed the class counsel’s fees at $6,300,000. The appellants argue that this amount is approximately one-half the amount agreed upon in their contingency fee agreements.

The Analysis

Section 32(2) of the Class Proceedings Act, 1992, S.O. 1992, c.6, states that an “agreement respecting fees and disbursements between a solicitor and a representative party is not enforceable unless approved by the court, on the motion of the solicitor.”

Justice Lax stated that the Class Counsel’s fees “are to be fixed and approved on the basis of whether they are fair and reasonable in all the circumstances.” What constitutes “fair and reasonable” must be determined “in light of the risk undertaken and the degree of success or result achieved.” She considered various factors in determining the reasonableness of the fee, including the time expended, factual and legal complexities, degree of responsibility, and degree of skill and competence.

She concluded that although it’s important to encourage experienced counsel to take on meritorious cases that are tough—especially because shareholder class actions are a newly developing area of law in Canada—in this case, the risks were not as great as counsel contended. The risks were spread across three firms and received support from the Class Proceedings Fund. She found class counsel to be “experienced, creative”, “thorough and diligent”, and “deserving of being fairly compensated at a level significantly above an amount that might be considered a reasonable base fee given the risks involved.” In light of the reduced risk, the result achieved was considered the best that could be achieved in the circumstances.

Justice MacFarland of the Ontario Court of Appeal, in agreement with Justice Lax, concluded that “[i]t was her call to make. Absent any palpable and overriding error, of which none have been demonstrated, it is not for this court to interfere.”

The fees, as per Justice Lax, were “$6,290,746 rounded to $6.3 million” which represented “roughly 16% of gross recovery and a more equitable sharing of net recovery as between class members and class counsel. This falls within the range of percentages of gross recovery that have been accepted in other cases.”

The Implications and Policy Considerations

Canadian courts are increasingly following the US style of litigation aimed at high risk and high reward class action suits. Although the cap on damages and the “loser pays” rule are intended to limit superfluous class actions, the sanction of contingency fees has led to an inevitable increase in class action lawsuits.

Atlas is a good example of the practical considerations that have to be kept in mind when considering contingency fees. The courts in Atlas disregarded the contingency fee agreement in favor of an amount that is “fair and reasonable”. No matter how well a contingency fee agreement is drafted, if the case does not warrant the work involved, or does not reflect the level of complexity or skill required, then the court will throw out the agreement and enforce their own “fair and reasonable” amount. Thus, a detailed analysis and investigation of the facts must be conducted before taking on any case. The question is whether contingency fee agreements hold any value in the face of court discretion.

Many criticize the court’s approach, stating that judges indulge in speculation based on the reasonableness of hours and the value of lawyers’ time, resulting in a decision that would be different depending on the mood of the lawyer. The decision to award fees is dependent on the discretion of the courts and subject to the bias of the judges.

Other than access to justice, legitimating contingency fees is intended to provide fair and reasonable compensation, and act as a real economic incentive for solicitors in the future to take on these sorts of cases and to do well. It is unclear at this point whether the sanction of contingency fees, in the face of the restrictions, will aid or hinder the ability of plaintiffs to bring securities class actions in Canada.