INTRODUCTION
 
This Class Actions update is the second in a regular series covering class action topics with a focus on Alberta.
________________________________________________________________________________________
 
Class action lawsuits are deeply rooted in American legal culture. The number and variety of American class actions significantly eclipses the number and variety of class actions in Canada. Successful class actions in the United States are increasingly spilling over into Canada. An examination of three recent U.S. class action lawsuits vividly illustrates that Canadian companies should take careful note of litigation against their parents, subsidiaries, or affiliates located in the United States.
 
The class action cases discussed below will also be of particular interest to Canadian companies that produce consumer goods, both from a products liability perspective as well as from a securities disclosure perspective. We note the beginning of a trend in the United States where, even when product defects do not cause compensable harm to consumers, the failure of these companies to make fulsome disclosure to investors about these defects may nevertheless attract the attention of the class action bar.
 
 
REEBOK
 
Plaintiffs commenced five class action suits against Reebok International Ltd. (Reebok) in 2010 alleging deceptive advertising involving its EasyTone and RunTone running shoes. Thereafter, the United States Federal Trade Commission (FTC) also filed suit against Reebok based on the same allegations. Reebok has settled the various claims in the United States, including for US$28.5 million to settle a class action in Massachusetts and US$25 million to settle the FTC suit. Shortly after the FTC suit was filed, class action proceedings were filed in Ontario and Quebec against Reebok Canada Inc., Reebok International Ltd., and Adidas Canada Ltd. again alleging deceptive advertising claims. Reebok has agreed to pay between C$1 million to C$2.2 million to settle the claims in Canada.
 
 
SKECHERS
 
In May 2012, Skechers USA Inc. agreed to settle charges laid by the FTC for US$45 million, plus US$5 million for class action attorneys’ fees, based on allegations that it misled consumers about the health benefits of its Skechers Shape-ups shoes. The settlement with the FTC also involved settling class action suits commenced against Sketchers in 42 states. Just prior to the resolution of the FTC charges, class action suits were filed against Skechers USA Inc., Skechers USA Inc. II, and Skechers USA Canada Inc. in Ontario and Quebec alleging the same deceptive advertising claims. The class action suits in Ontario and Quebec are pending.
 
The cases above involving Reebok and Skechers illustrate the speed at which class action litigation can cross the border between Canada and the United States. Canadian subsidiaries, as well as Canadian companies doing business in the United States, should take careful note of current and potential class action litigation in the United States against their parents, subsidiaries, or affiliates.
 
 
LULULEMON
 
Currently, Lululemon Athletica Inc. (Lululemon) faces at least two class action suits in New York alone regarding the recall of its yoga pants. Unlike the product liability suits discussed above, these class actions were launched by shareholders of Lululemon alleging a number of claims, including:
  • The defects in the yoga pants came about as a result of cost-cutting measures to raise profit margins;
  • Shares of Lululemon stock were artificially inflated as a result of positive statements made by the company with respect to its performance; and
  • Lululemon breached its duties to respect the interests of shareholders and to make fulsome disclosure about matters that might impact profitability, including the fact that its yoga pants were allegedly defective.
The class action suits against Lululemon highlight an interesting possibility in the products liability area. There are no claims or allegations that the yoga pants at issue caused any harm or damage to consumers in the physical sense, nor are there any claims or allegations that the yoga pants were marketed with any deceptive or false advertising claims. Nevertheless, Lululemon’s alleged failure to make fulsome disclosure about the potential defects in the yoga pants, combined with the allegations that the pants were defective as a result of cost-cutting measures, led to class actions based on the resulting decline in Lululemon’s share price once the defects in the yoga pants were made public. In our view, this case raises the real risk that the commencement of a product liability class action makes it likely that a separate securities class action suit will follow in the event that the company is alleged to have known about the product liability issues and otherwise failed to make investors aware of those issues. Also, as the case against Lululemon makes clear, even where there is no harm in the physical sense, securities class actions can follow close behind.
 
 
KEY TAKEAWAYS
 
Given the trends in product liability class actions, and follow-on securities class actions, companies should be watchful and monitor developments in the United States. Moreover, companies should not only prepare for class action litigation resulting from potential product liability suits, but also follow-on securities lawsuits in the event that fulsome disclosure is not made about the defects to shareholders.
________________________________________________________________________________________
 
 
KOWCH V. GIBRALTAR MORTGAGE LTD.
 
Under s. 37 of the Alberta Class Proceedings Act, courts have broad discretion to award costs against an unsuccessful representative plaintiff, as provided for under the Alberta Rules of Court. Rule 10.32 of the Alberta Rules of Court provides that courts may consider a wide range of factors when determining whether a costs award should be made. This is a notable feature of Alberta class action law because in most other provinces courts are only permitted to award costs against an unsuccessful representative plaintiff in exceptional circumstances.
 
The Alberta Court of Queen’s Bench recently released a decision providing guidance on how judges should exercise their discretion to award costs. This decision, Kowch v. Gibraltar Mortgage Ltd., is the first published decision to consider Rule 10.32, a rule added to the Alberta Rules of Court in 2010. In Kowch, Master W.S. Schlosser was called upon to rule on costs after the defendants successfully applied to strike a proposed class action. Master Schlosser listed 11 factors to be considered when awarding costs under Rule 10.32:
  • The result. Generally, costs follow the event.
  • The strength of the case. A speculative or obviously limitation-barred action may justify making a costs award against the plaintiff.
  • The amount claimed and the amounts recovered. This will determine the appropriate quantum of costs. In Alberta, party and party costs are awarded based on a schedule which provides for costs in lump sum amounts based on the quantum of the claim.
  • Reciprocity. Generally, unsuccessful defendants are required to pay costs in class actions, so it may be unfair to protect unsuccessful plaintiffs from the same liability.
  • Public interest. Plaintiffs who bring suits which involve matters of public interest may justifiably be spared from cost awards.
  • Type of action. Master Schlosser drew a distinction between class actions which are “essentially ‘private litigation seeking to obtain remedy for discrete community’” and true class action litigation, and noted that it is unfair for plaintiffs bringing essentially private actions to benefit from the class proceedings framework by avoiding cost awards.
  • Novel point of law. Class actions involving novel points of law may not attract cost consequences.
  • Test case. Test cases may not attract a costs award.
  • Access to justice. Where there is some broad public interest involved in the case or the plaintiffs are members of a disadvantaged group, costs may not be awarded.
  • Formal offer. The normal rule in Alberta is that litigants who fail to accept a formal offer of settlement made by the opposing party, and who fail to achieve a result in court that is better than the formal settlement offer, are subject to an award of costs that is double what it otherwise would have been, unless special circumstances apply. This rule applies generally in the class proceeding context as well, though, as in regular proceedings, judges have the discretion to decline to award double costs if special circumstances apply.
  • Costs per counsel or costs per defence. In regular proceedings, costs are often awarded per counsel rather than per pleading. However, Master Schlosser noted that because class actions are litigation on a much larger scale, it may be appropriate to take into account the number of pleadings filed. In this case, Master Schlosser went to a “middle ground” and awarded, in effect, half of a unit of costs per statement of defence filed.

 

KEY TAKEAWAYS

Though costs rarely come close to covering a defendant’s legal fees in regular proceedings or in class action proceedings, it is important for defendants in Alberta class proceedings to be aware that cost awards may be available to them in the event they successfully oppose a certification motion. Accordingly, the ability to make a no-costs settlement offer can be a negotiating advantage for defendants. On the other hand, the ability to make a formal offer to settle which could result in an award of double costs is also a very important strategic consideration in regular litigation and, given the magnitude of class proceedings and the potential costs associated with them, can similarly be of strategic importance in the class proceedings context.
 
For further information, please contact:
 
David Tupper       403-260-9722

Dalton McGrath   403-260-9654

Keith Marlowe     403-260-9632

Caroline Smith    403-260-9683
 
or any other member of our Class Actions group.