Third-party litigation funding approval a win for class action plaintiff bar

The approval of a third-party funder for a class action brought by Tim Hortons franchisees against their franchisor is a win for the plaintiffs' side class action bar and part of the increased acceptance of third-party funding in Canada, say lawyers.

JB & M Walker Ltd v. TDL Group, where the court approved third-party litigation funding, will give class action plaintiffs more choice of representation, says Andrew Winton, a partner at Lax O’Sullivan Lisus Gottlieb LLP.

“It makes class action more acceptable to not just well-funded firms but to other firms who would otherwise be willing to take on class action cases but are concerned about the contingencies,” says Winton, whose firm often acts on a contingency fee basis and in class actions and acted last year for litigation funder Bentham IMF in an approval for third-party funding motion in the Loblaws bread price-fixing case David v. Loblaw.

“It opens the door for more creative arrangements in order to enable clients to attain the council they want,” says Naomi Loewith, investment manager and legal counsel at Bentham IMF. While contingency fees allow lawyers to take on clients without money, Loewith says, the lawyer still has to work without fees in the interim.

“This opens the door for law firms to be fully paid their hourly fees, which really enables a much wider group of law firms to now do class action,” she says.

With first contingency fees and then the law society’s class proceeding fund, which will pay for disbursements and costs, Loewith says litigation funding is the next step in the evolution of financing class actions. Litigation funding is well established in Australia, the U.K. and the U.S. and Loewith says it is now “taking off” in Canada.

JB & M Walker Ltd v. TDL Group involved the alleged misuse of advertising funds by TDL Group, which franchisees pay into as part of their franchise agreement. To fund the litigation, the Tim Hortons franchisees entered a deal with Galactic TH Litigation Funders LC and it was approved on Feb. 11 by Superior Court Justice Edward Morgan. Loewith says that, unlike commercial litigation, for example, class actions and insolvency cases, because the court has a supervisory role to protect the interests of the parties not appearing in court — such as the class members — the third-party funding needs to be approved by the court.

In his decision, Morgan wrote that according to the Class Proceedings Act and as per the test laid out in Houle v St. Jude Medical Inc., a third-party funder needs court approval, and to be approved the agreement cannot be “champertous or illegal and it must be a fair and reasonable agreement that facilitates access to justice while protecting the interests of the defendants.”

Winton says that, in approval motions for litigation funding agreements, the court’s primary concern is that the third party not be exerting control over the plaintiffs.

“And that seems to be the animating feature of the analysis. Where control remains vested with the plaintiffs, then the agreement generally will be approved,” he says.

The collection of franchisees suing their company had been bankrolled by the Great White North Franchisee Association, but the alliance of Tim Hortons franchisees was no longer able to fund the litigation as of last summer and the plaintiffs could not afford it on their own. In similar cases, lawyers may wait to be paid until the case concludes and the class proceedings fund handles the disbursements and costs, but that arrangement was not sufficient here because plaintiff’s counsel could not work under those conditions.

Galactic TH Litigation Funders LC, a New York City-based company, was required to agree to attorn to the court’s jurisdiction, respect confidentiality of all communication related to the case and abide by the undertaking rule, and, under their agreement, there can be no termination of the funding arrangement without court approval.

Apart from paying lawyers while they work on the case, the financial commitment of a security for costs also makes pursuing class actions prohibitive because neither plaintiffs or their defendants have the funds on hand, says Winton.

“If someone is in a class action with multiple defendants, the costs that you'd be seeking for security could be quite sizable. You could be looking very quickly at getting into a seven-figure order for security,” Winton says.

Under their agreement, Galactic promised to post security if necessary, pay for any costs award made against the plaintiff and respect the deemed undertaking rule from the Rules of Civil Procedure. This means documents or other evidence they are made aware of through their involvement in the proceedings cannot be used outside of the proceedings. The motion also included an affidavit from chairman and CEO of Galactic Frederick Schulman, showing the company had assets of $33 million and net equity of $29 million, satisfying Morgan of their ability to meet their obligations.

For its trouble, the plaintiffs will pay Galactic between 22 and 26 per cent of the settlement or award, which, along with the lawyer fees, would still be well below a “typical 33-per-cent-plus contingency fee arrangement,” which Morgan said satisfied him that the funder was not being overcompensated.

In Houle, Justice Paul Perell said of the usefulness of third-party funders: “Class counsel firms are few and those firms take on only a fraction of the cases that would gratify the goals and policies of the class action regime.”

Jennifer Dolman, a partner at Osler Hoskin & Harcourt LLP in Toronto, is counsel for the defendant TDL Group Corp. and declined Legal Feed’s request for comment.

Richard Quance of Himelfarb Proszanski is acting for the plaintiffs and could not be reached for comment before deadline.