Judge calls for presumptive validity for 33% class counsel fees

Class action plaintiffs’ counsel are welcoming a Superior Court judge’s call to afford presumptive validity to one-third contingency fee agreements.

Ontario Superior Court Justice Edward Belobaba initially approved legal fees of 25 per cent after a partial settlement in a case arising out of a charity tax receipt scheme “because frankly, that’s what other judges were doing” and asked for written submissions to convince him that the 33-per-cent fee agreed to in the retainer agreement was fair and reasonable.

But after reviewing decisions that capped legal fees in the 20- to 25-per-cent range, Belobaba said he was unconvinced by their discussion of “arguably irrelevant or immeasurable metrics such as docketed time (irrelevant) or risks incurred (immeasurable.)”

“If the settlement is in the best interests of the class and the retainer agreement provided for, say, a one-third contingency fee, and was fully understood and agreed to by the representative plaintiff, why should the court be concerned about the time that was actually docketed? This only encourages docket-padding and over-lawyering, both of which are already pervasive problems in class action litigation,” Belobaba wrote in his Dec. 19 decision in Cannon v. Funds
for Canada Foundation.

“In my view, it would make more sense to identify a percentage-based legal fee that would be judicially accepted as presumptively valid. This would provide a much-needed measure of predictability in the approval of class counsel’s legal fees and would avoid all of the mind-numbing bluster about the time-value of work done or the risks incurred.”

The court certified the class action two years ago after representative plaintiff Michael Cannon sued on behalf of 10,000 taxpayers who invested in the Donations For Canada gift program between 2005 and 2009. The $144-million program promised charitable tax credits worth four times the cash donation received, but donors ultimately ended up out of pocket after the Canada Revenue Agency reassessed their returns and demanded repayment plus interest.

In October, the court approved a partial settlement with several defendants, including prominent Nova Scotia tax lawyer Edwin Harris, whose biography and comfort letter appeared in the program materials. The partial settlement was worth $28.2 million with counsel for the plaintiffs claiming one-third, or $9.4 million, based on their contingency-fee agreement.

Belobaba suggested legal fees of one-third of a settlement would be a fair level for presumptive validity since it falls in line with percentages traditionally charged and accepted in the personal injury field.

Paliare Roland Rosenberg Rothstein LLP’s Margaret Waddell, who with co-counsel Sam Marr of Landy Marr Kats LLP represented the plaintiffs in Cannon, says the decision brings Ontario in line with other provinces where judges have been much less reticent to sanction legal fees of more than 25 per cent.

“I think some judges look at the numbers and they seem big compared to your average personal injury cases. It’s probably bigger than anything they saw in their own practices, which can make it harder to digest. It’s a matter of them becoming aware of and comfortable with these amounts as much as anything,” says Waddell. “Hopefully, the other class action judges in Ontario will follow suit and say, yes this is the way things should go.”

Jonathan Ptak, a partner with Toronto’s Koskie Minsky LLP, calls Belobaba’s decision a “sensible and refreshing” approach to class action legal fees.

“Representative plaintiffs are typically very well briefed by counsel. They are aware of the nature of litigation and risks involved when they reach agreement with class counsel,” he says.

Belobaba found the presumption of validity is rebuttable but only “in clear cases based on principled reasons.” They include:
Where there is a lack of full understanding or true acceptance on the part of the representative plaintiff. “Settlement agreement notices should bold-face or highlight the legal fees portion in order to focus class members’ attention on the amount being requested. Affidavits from the representative plaintiffs or class members supporting the legal fees request would certainly be relevant,” wrote Belobaba.

Where the agreed-to contingency amount is excessive. “If class counsel seek higher amounts, say 40 or 50 per cent, they should be prepared to provide a detailed justification because these higher amounts fall outside the penumbra of what, in my view, is currently acceptable,” wrote Belobaba.

Where the application of the presumptively valid one-third contingency fee results in a legal fees award that’s so large as to be unseemly or otherwise unreasonable.

According to Ptak, these “safety mechanisms” offer protection to the public and the class while simplifying the process for approving counsel fees. He says presumptive validity would improve access to justice by giving lawyers a level of certainty about their potential return on a particular case.

“I think the decision strikes the correct balance,” he says. “Access to justice begins with the representative plaintiff and with class counsel. If class counsel has some predictability about their fees, at the end of the day they may be more willing to take on certain types of cases.”

Belobaba also predicts presumptive validity would also “take the pressure off certification-motion costs awards as a method for forward-financing the class action” as well as hasten the demise of “multipliers” in class action retainer agreements.

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