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Merchant Law Group under fire in Ontario courts

|Written By Neil Etienne

Controversial Saskatchewan class actions firm Merchant Law Group LLP took a bruising from the Ontario bench, as two justices in three November rulings had choice words for the firm’s tactics.

Justice Paul Perell writes ‘there is a smell of ambulance chasing by the Merchant Law Group.’

In Bancroft-Snell v. Visa Canada Corporation, Superior Court Justice Paul Perell pointed to what he said could possibly be an “illegal” fee-sharing agreement created by MLG when ruling it was unenforceable, and ordered the firm not to be compensated.

MLG was also taken to task in McCallum-Boxe v. Sony for what Justice Edward Belobaba called the “antithesis” of what’s in the best interest for the class, and in Kutlu v. Laboratorios Leon Farma S.A., where Perell held parts of a letter sent to class members was “offensive” because it suggested their counsel was acting “without instructions or improperly” on the class’ behalf in delivering an opt-out notice. The cases have some lawyers saying a national class action regime would be one way to quell questionable tactics and keep matters moving in class actions.

“The Canadian constitution assigns jurisdiction over property and civil rights to the provinces. Class actions must, therefore, proceed through the superior courts of each province,” notes Jay Strosberg, oftSutts Strosberg LLP.

“Unfortunately, some law firms in Canada have abused this structure in order to gain the upper hand in situations where carriage is an issue, and when it comes to the division of fees in the context of a class action settlement.

Strosberg says “the situation has now reached a point of crisis,” adding that in terms of jurisdictional issues and deciding carriage of a matter, “it’s a crisis because it’s causing substantial delays in the prosecution of class actions. As the saying goes, if justice is delayed, justice is denied.”

He says it is unfair to class members who want their actions prosecuted expeditiously, to defendants who want to be exonerated or pay to resolve the issues and move on, and to class counsel, who spend a great deal of time and money arguing carriage motions in multiple jurisdictions. It also places judges in an awkward situation of issuing potentially conflicting decisions.

In Bancroft, Perell approved settlements, contingency fee agreements, and a class counsel fee of $3,384,571, but he ruled a fee-sharing agreement crafted between MLG and Camp Fiorante Matthews Mogerman was unenforceable and ordered Camp not to pay any sums from the settlement proceeds or from any other source, ever, “on account of the unauthorized and possibly illegal” fee-sharing agreement to MLG.  

The case involves interchange fees paid by merchants who accepted payment by Visa or MasterCard credit cards.

Actions were launched in five provinces and, in August of 2014, class counsel, led by lawyers from Camp Fiorante Matthews Mogerman and the late-coming Merchant Law Group, attended a judicial dispute resolution conference that resolved an impasse for carriage in Alberta and Saskatchewan when MLG agreed to stay its rival proposed class actions. Under that agreement, class counsel from Mogerman assumed the responsibility and cost of obtaining stays and they agreed to indemnify MLG for any costs claims in the stayed Alberta and Saskatchewan actions.

Perell said not only did he find the agreement potentially illegal because it would have had class members in Ontario “pay a ransom fee in order to stay late-arriving rival class actions in Alberta and Saskatchewan,” but it did not serve the best interests of the class members and undermines the integrity of the class action regime.

In pointed words, he said it was time to “stop blaming the Canadian Constitution, which creates a federation of jurisdictions, for the so-called jurisdictional problems of national class actions.

“There are already in place the legal tools necessary to stop the multi-jurisdictional tactics of law firms that get in the way of access to justice, behaviour modification,  and judicial economy for Canadian citizens.”

Strosberg says the decision has the potential to create a huge impact in terms of how class counsel deals with similar fee arrangements and carriage battles.

“This is not something Camp Matthews should be criticized for,” he says. “These types of arrangements have been entered into by virtually every class counsel firm in the country, but the ruling is a great excuse why we can’t do it anymore. Justice Perell is giving us the ammunition we need in order to confront the problem of multi-jurisdictional filings in the same case.”

In Kutlu, Perell was dealing with an interlocutory motion in which the plaintiff counsel, Kim Orr Barristers, sought a mandatory injunction with respect to activities by Trilogy Class Action Services, which was appointed administrator in Alberta’s Kohler v. Laboratorios Léon Farma SA. The motion also sought an injunction against MLG, class counsel in Kohler, and against the defendant Laboratorios, a defendant in both the certified Alberta Kohler action and the Ontario Kutlu action.

The courts in Alberta certified an expanded definition of the class in Alberta and extended an opt-out period to Nov. 30. It allowed class members who had opted out to revoke that choice and re-enter the claim process.

Perell dismissed the motions and said the Alberta court’s decision to revoke opt-outs was a source of “grief, bad optics, and acrimony between the law firms acting for the parties in the Ontario [Kutlu] action.”

Perell explained in his ruling that the grief came about when Trilogy vetted a letter to class members with MLG and with the lawyers acting for Laboratorios. That letter, drafted by Casey Churko of MLG, was to provide notice of class action certification and settlement to the members and contained a passage that stated Trilogy had received enclosed opt-out forms, and if the members were unaware that the opt-out form was submitted on their behalf, to contact Trilogy immediately.

Perell said the passage about opt-out forms “. . . suggests to the recipient of the letter that his or her lawyer was acting without instructions or improperly in delivering the enclosed opt-out notice.

“Further, in the now-known circumstances of the drafting of this letter, there is a smell of ambulance chasing by the Merchant Law Group to preserve the class size of the Alberta action and to defeat its rival Kim Orr. And for any defendant to have a substantive role in the opt-out process has bad optics,” Perell wrote.

In the absence of a national regime, Strosberg says there are two ways defendants can assist with the process in order to achieve some sort of efficiency.

First, defendants can attempt to co-ordinate with the plaintiffs the prosecution of the actions in multiple jurisdictions with oversight of the judges in each jurisdiction.

Second, he says that, when appropriate, the defence should settle its matters with a singular, well-versed class counsel who has pushed the case forward in one province, then combine with class counsel to move for competing actions in other provincial jurisdictions to be dismissed once the settlement is approved. 

In the Sony matter, MLG successfully argued on behalf of a group of about 400 customers who had purchased PlayStation 4 video game controllers that deteriorated prematurely. Belobaba ruled each member would share in an $8,000 settlement and  he ordered Sony to pay MLG $30,000 in legal costs.

In awarding the fees, however, Belobaba chided MLG for its arrangements with the class members. He said, much to his surprise, there was no written retainer agreement, the class was not obliged to pay fees or costs whatsoever, and that MLG intended to recover legal fees from Sony.

“MLG said it currently has similar arrangements in ‘many’ of their class actions,” Perell wrote. “I must confess that I was somewhat shocked to hear this.”

He said that type of settlement-driven fee arrangement is “fundamentally and profoundly unacceptable” because it discourages maximum commitment on behalf of the class.

“The MLG arrangement will no doubt work for the defendant who is shrewd enough to negotiate a small settlement amount coupled with an attractive legal fees payment to class counsel, and still come out ahead,” Perell wrote in his decision. “Their legal counsel is not only motivated to negotiate a settlement in almost any amount, his or her very involvement in the 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.”

Robert Gain, of Koskie Minsky LLP, says judges are right to be concerned when any firm or lawyer has a practice of not entering into written retainer agreements, or is involved in “any other conduct that calls into question where a class counsel’s interests truly lie.”

“Transparency with the representative plaintiff, transparency with the court on these issues are not best practices, they are requirements and hallmarks that must be scrupulously enforced,” Gain says.

Although they did not return requests for comment by press time, MLG’s Churko was quoted as saying in a Nov. 17 article by the Financial Post: “On the Sony PlayStation class action, Merchant Law Group LLP incurred fees in excess of $200,000. We got the class 100 per cent of their money back, and didn’t ask for a single dime from them to do it. Whether we recovered $8,000, $8 million or 8 cents, that’s the price of justice, and it’s still cheaper than the societal costs of leaving people who were wronged without a remedy.”

Update: This version corrects an error in a quote in the second-last paragraph.

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