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Court shoots down law firms’ class action payout

|Written By Robert Todd

Lawyers who helped secure a $40-million securities class action settlement voiced their disapproval last week at the Ontario Court of Appeal’s decision to uphold a fees award of $6.3 million, about half the amount they had requested.

Jasminka Kalajdzic says the decision highlights the ‘ethical minefield’ class action lawyers sometimes find themselves in.

Sutts Strosberg LLP senior partner Harvey Strosberg, who was among leading class counsel in the case along with lawyers from Koskie Minsky LLP and Groia & Company, says the decision is particularly disappointing in light of the nearly 90-per-cent cost recovery the lawyers achieved.

He noted that while the settlement was for $40 million, about $45 million in claims resulted after the claims processed.

“That is almost an unheard of recovery in a securities class action context,” he says.

“But the Court of Appeal is the Court of Appeal. I’m entitled to disagree with it but I have to respect the decision, and I do. I do respect it and I do accept it with disappointment.”

University of Windsor Faculty of Law professor Jasminka Kalajdzic, who has expertise in class actions, says the decision highlights the “ethical minefield” class counsel find themselves in at times.

“They’re seeking higher counsel fees that will directly result in lower compensation for class members,” says Kalajdzic.

The lawyers in 2004 initiated a class action against Atlas Cold Storage Holdings Inc., a North American company offering temperature-controlled storage units and logistical services. The case centred on allegations of misrepresentations in prospectuses used in the sale of income trust units in the company.

An independent investigation revealed that the company’s net earnings were overstated, prompting a drop in unit trading prices and a restatement of financial results for 2001 and 2002.

In July 2008, Ontario Superior Court Justice Joan Lax certified the case - the first Canadian class action involving an income trust - and backed the $40-million settlement. Class counsel requested a base fee of about $3.25 million, with a multiplier of 3.7 leading to an overall fee of $12 million.

That amount would represent about 30 per cent of gross recovery, noted Lax in her decision in February.

Three objections to the fee request arose, according to Lax.

One said the fees were not justified in light of the fact that the action settled after cross-examinations and three days of mediation and before a trial, defence pleadings or discoveries could take place.

Another objector said he had lost more than $4.50 per trust unit - the amount class members received through the settlement - and that his losses should get priority.

A third objector argued the fees were disproportionate to the settlement.

“In my opinion, these are all valid objections,” said Lax.

She went on to peg the base fee well below counsel’s request, at about $2.4 million, and added a more modest multiplier of 2.6, producing a fee of about $6.3 million - approximately 16 per cent of gross recovery from the settlement.

Lax said that amount created “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 Court of Appeal, in its Oct. 1 decision, backed Lax’s order. It said the judge applied the proper tests in analyzing the fee request.

“It was her call to make,” wrote Justice Jean MacFarland on behalf of justices David Doherty and Marc Rosenberg.

The court added that Lax adequately considered the need to provide fees at a level that encourages lawyers to prosecute similar class actions.

“[The] approved fee represents nearly twice the full docketed fee,” wrote MacFarland.

Nevertheless, Paul Pape of Pape Barristers, who acted for representative plaintiffs at the appeal court, says he is disappointed with the decision.

“There were errors in the judgment below, and there were significant issues raised by the judgment below,” he says. “Although the Court of Appeal disagreed with me, and that’s all that matters, they get the final say.”

Kalajdzic, who previously practised with Sutts Strosberg but was not involved in the case, says it’s not enough for counsel to point to representative plaintiffs who back higher, previously agreed-to rates. The fees also affect hundreds, or thousands, of other class members, she notes.

Another key aspect of the decision is the appeal court’s assertion that motions judges have wide discretion in determining a fair and reasonable fee, regardless of any agreements the parties might have struck, says Kalajdzic.

“There seemed to be some suggestion that because this was not a contingency fee based on a multiplier, that somehow the Class Proceedings Act required a different standard of review,” she says.

“I think the Court of Appeal got it right when they said that no matter what type of arrangement it is, it is subject to review by the judge, and there must be a determination of what is a reasonable and fair base fee.”

While Strosberg hasn’t considered the possibility of an appeal at the Supreme Court, he says it’s unlikely it would show interest in the case.

“I took from the Court of Appeal’s decision that it’s a discretionary call from the judge, so what it means is that you’re not going to get much relief from going upstairs,” he says. “You better get it right in the first place.”

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