Canada: No Work No Pay – Fee Sharing Agreements Are Subject to Court's Review

Class counsel are not permitted to pay off their rival firm using proceeds from the settlement funds in order to avoid competing actions, the Ontario Court of Appeal recently held. This type of payment arrangement was first brought before the Superior Court for approval in the Visa/MasterCard Class Actions, in the form of a fee sharing agreement. Both the Superior Court and the Court of Appeal rejected the agreement on the on ground that it was not in the best interests of the class members.

The Visa/MasterCard Class Actions

Beginning in 2010, a number of class actions were brought in several provinces across Canada, on behalf of merchants who accepted payments by Visa or MasterCard credit cards from their customers. These class actions were identical, each alleging that Visa, MasterCard and several other banks and major financial institutions conspired to fix, maintain, increase or control the merchant discount fees paid by the plaintiff merchants. Three law firms acted as class counsel in the proceedings in Quebec, British Columbia and Ontario, with British Columbia being the lead jurisdiction. The representative plaintiffs for each action signed a contingency fee agreement with their respective class counsel, which provided for a legal fee of up to 25-30% of any settlement, in addition to disbursements.

In August 2013, Bank of America agreed to settle for $7.75 million and to cooperate with class counsel in the ongoing class proceedings against the non-settling defendants. The following year, the British Columbia action was certified for the purpose of partial settlement.

While class counsel were in the process negotiating for settlements, the Merchant Law Group also commenced two "copycat" class proceedings in Alberta and Saskatchewan that were essentially identical to the existing Visa/MasterCard Class Actions. The carriage dispute was eventually resolved after class counsel and Merchant entered into a fee sharing agreement, under which Merchant would be paid a portion of class counsel's legal fees in exchange for staying its rival proceedings in Alberta and Saskatchewan.

After the Bank of America settlement, two additional defendants, Citigroup and Capital One also agreed to settle. Class counsel sought approval of the settlements and their fees and disbursements from the courts, and were successful in British Columbia, Quebec, Alberta and Saskatchewan. When the settlement was brought before the Ontario Superior Court of Justice for approval, however, the motion judge Perell J. decreased class counsel's legal fees by 10% and expressed his strong disapproval of the fee sharing agreement.

Perell J. rejects the fee sharing agreement

The fee sharing agreement between class counsel and Merchant, which was characterized by Perell J. as a "ransom fee", provided that Merchant was to receive up to $800,000 from the legal fees recovered in the Visa/Mastercard Class Actions. Perell J. held that the fee sharing agreement did not form a fair and reasonable component of class counsel's legal fees because class members should not pay for legal services that were useless to them. As if the 10% fee deduction was not enough to send a message, Perell J. also declared that the fee sharing agreement was unenforceable in its entirety and ordered class counsel "not to pay any sums from the settlement process or from any other source now or in the future on account of the unauthorised and possibly illegal Fee Sharing Agreement". Class counsel appealed.

(For a discussion of Perell J.'s decision, see Copycat class actions criticized.)

Court of Appeal: fee sharing agreement was not in the best interest of the class members

There were two main issues on appeal. First, whether the motion judge was entitled to deal with the fee sharing agreement in the course of determining whether the fees to be paid by class members to their class counsel as a result of the settlements were fair and reasonable. Second, whether the motion judge's order to reduce class counsel's fees and to declare the fee sharing agreement unenforceable in its entirety was appropriate.

Class counsel argued that the fee sharing agreement is a separate contractual agreement, and is therefore outside the purview of the fee approval process under s.32 of the CPA. The Court of Appeal disagreed. Such a literal and narrow interpretation of s.32 would neglect the important supervisory role that the court plays in ensuring that fees and disbursements are fair and reasonable. The fee sharing agreement is subject to the court's review because it is a component of the fee package that class counsel are seeking approval on, and it is "an agreement about how the fees paid to class counsel by the class members are to be paid and then shared", which would ultimately reduce the amount to be received by class members from the settlement. In any event, even if the motion judge does not have the authority to review the fee sharing agreement under s.32, s. 12 still provides the court with the broad and general power to to make any order it considers appropriate respecting the conduct of the class proceeding to ensure its fair and expeditious determination, and to impose any terms on the parties as it considers appropriate.

Turning to Perell J.'s decision to reduce class counsel's fees, the appeal court held that it was open to him to impose the fee reduction and to prohibit class counsel from sharing its fee with Merchant, because he had concerns about the potential abuse and harm to the integrity of class actions, and felt the need to address them. In both Perell J. and the Court of Appeal's view, Merchant was simply paid to not interfere with existing class proceedings. It would not be fair and reasonable and in the best interest of the class to require class members to pay up to $800,000 out of their settlement funds to lawyers whose services were of little value and made no contribution to the settlement. There is no evidence that the carriage settlement and fee sharing agreement benefited the class members in any significant way, the court added. On the contrary, the Court of Appeal found that only class counsel would stand to benefit from the fee sharing agreement because it would safeguard their retainer from a competitor.

Despite agreeing with Perell J.'s decision in most part, the Court of Appeal held that he went too far in declaring that the fee sharing agreement unenforceable in its entirety and prohibiting class counsel from paying Merchant from any source whatsoever. Merchant may still have personal rights vis-a-vis class counsel, and it would be unfair to deprive them of the procedural rights to make submissions on this particularly issue without notice. The Court of Appeal amended Perell J.'s order to state that only paragraph 6 of the fee sharing agreement is unenforceable and that class counsel may not pay any sums from legal fees or settlement proceeds to Merchant.

The future is bleak for copycat actions

Both the Superior Court and the Court of Appeal have sent a strong message that the court will not hesitate to intervene in circumstances where law firms commence copycat actions simply for the purpose of extorting fees from class members, particularly when they have provided no valuable service or benefit to the underlying actions. Simply put, a carriage dispute is between counsel, and the court will not allow the financial burdens associated with such a dispute to be transferred onto class members. The Court of Appeal expressed its attitude towards copycat actions succinctly:

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