Objection, Your Honour! Can class members dispute settlement orders in class actions?

By Daniel MacDonald

A feature unique to class actions is that class members are not always happy with settlements. Occasionally, class members object to settlements but judges approve them anyway. Is there recourse for class members when this situation arises?

Last month, the Alberta Court of Appeal ruled that unhappy class members have no right to appeal a settlement order and have no other recourse. In the judgement, Home Depot of Canada Inc. and Wal-Mart Canada Corp. (two of the approximately 850,000 class members in this class action) sought standing to challenge the approval order issued last year. At the original fairness hearing, Home Depot and Wal-Mart had argued that the settlement was unfair, unreasonable, illegal and/or otherwise not in the best interests of the class members. Specifically, they had asserted that, in their interpretation of the settlement terms, the settling defendants were released from liability for future anti-competitive behaviour. The motion judge agreed with the plaintiffs’ interpretation of the release but ruled that, because settlements are a matter of contract, they can “forgive or license continued alleged wrongdoing” as long as the release as a whole is in the best interests of class members.

The core issue at the Court of Appeal was not the merits of the settlement, but rather whether class members (as opposed to the representative plaintiff) have standing to appeal a settlement order in the first place. Without standing, the class members’ arguments on the merits are moot.

Alberta’s Class Proceedings Act (the “CPA”) provides a mechanism for appeals under section 36. The objecting class members argued that they had a right to appeal the settlement pursuant to s. 36(2) of the CPA and Rule 14.4(1) of the Alberta Rules of Court. Additionally, they asserted that permission to appeal could be granted pursuant to s. 36(3) of the CPA, which allows class members to “stand in the shoes” of a representative plaintiff if the representative plaintiff does not appeal (or abandons an appeal) under this section. The court denied standing to class members in each of these scenarios and in doing so was consistent with the appeal courts in Ontario, British Columbia, Quebec and Saskatchewan, which ruled similarly in parallel proceedings.

Settlement Order Unreviewable
The implication of this judgement is that settlement approval orders are not subject to review of any kind. While a representative plaintiff technically has standing to appeal the order, practically speaking, a representative plaintiff is highly unlikely to challenge a settlement after it has been approved, given that they are one of the parties proposing the settlement in the first place.
Implicit in the requirement for court approval of a class action settlement is the recognition that there is a potential for a conflict of interest to arise during settlement negotiations and that absent class members’ interests need to be protected. This procedural safeguard serves no other purpose. On this basis, it is curious why settlement orders would therefore be unreviewable. How can the court recognize the need for oversight on the one hand, while denying an important oversight procedure – appellate review – on the other?

Second Opt-out
This judgement also limits the potential for the development of class actions with multiple opt-out opportunities. Wal-Mart and Home Depot argued that there should have been an additional opt-out right provided to class members once there was an agreed upon settlement. They noted that the CPA does not specifically preclude multiple opt-outs and argued that the court has the jurisdiction to order a second opportunity for class members to exclude themselves from the litigation.

While the court accepted that more than one opt-out opportunity may be provided, it held that the option should be granted sparingly. An acceptable situation is when a class action involves sequential settlements; class members can settle with a sub-set of the defendants and still opt-out of any future settlements with other defendants – particularly if the settlement terms are different. The judge can stipulate that the first opt-out deadline does not apply to future settlements. In this case, the court found that ordering a second opt-out was not required. It relied on the fact that both Wal-Mart and Home Depot had considerable advance warning that a single opt-out right would be granted and neither class member took issue with this point or sought to appeal.

The court likely has two policy concerns in mind in considering whether to exercise its authority to offer a second opt-out. First, given that the legislation is silent on this point, it may be hesitant to deviate from the “single opt-out rule” that has developed in common law jurisdictions in Canada. While class actions are recognized at common law in Canada, the procedures are governed by statute and the court may feel that significant changes are best left to provincial legislatures.

Second, the court is almost certainly concerned about how a second opt-out right will impact the behaviour of settling class members. The court signaled this concern when stating: “What class members cannot do is take the benefits of earlier settlements and then object to the existing single opt-out regime after appeal rights have long since expired.” In theory, it is reasonable for the court to be concerned about class members “sitting on the sidelines” during settlement negotiations only to opt-out when the finalized settlement is undesirable. What is less clear, is whether this is a realistic problem that the court needs to be sensitive to. This reasoning also ignores positive incentives that would arise from a second opt-out opportunity. Representative plaintiffs and settling defendants would arguably be encouraged to strike better deals (that ameliorate class-wide concerns) if they had to consider the possibility of a settlement that only binds the portion of the class that has not opted out on second opportunity.

From a legal perspective, the decision in this case appears sound and creates consistency across common law jurisdictions in Canada. From a policy perspective, however, the decision creates barriers to substantive justice for class members. By endorsing settlement orders that are effectively unreviewable, and demonstrating a reluctance to recognize multiple opt-out opportunities within a class action, the court has prioritized certainty in judicial decision-making over access to appellate review for class members. An enduring question from this case (and the line of cases before it) is whether the price of judicial certainty is worth the cost of access to justice for objecting class members.

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