Class Curtailed – U.S. Settlement Results in Significant Amendment to Class Definition in IMAX

Plaintiff class action lawyers were unable to convince the Divisional Court to grant leave to appeal an earlier decision of the Superior Court of Justice in which Justice van Rensberg significantly reduced the size of the plaintiff class in Silver v. IMAX.

The IMAX case is a shareholder class action in which investors are alleging that they suffered losses after it was revealed that certain errors had been made in IMAX’s financial disclosure over a period of time.

IMAX’s securities were traded both on the TSX and the NASDAQ.  Approximately 85% of the IMAX securities acquired during the relevant time period were acquired on the NASDAQ.  Parallel class actions were brought in Ontario and in New York claiming damages arising from the alleged misrepresentations.  In 2009, Justice van Rensberg certified the Ontario class action.  This was a “global class,” including both investors that acquired securities on the TSX and the NASDAQ.  In certifying a global class, Justice van Rensberg noted that due to the parallel proceeding in New York, the issue of class definition would necessarily require a “wait and see” approach in the event that developments in New York necessitated some modification to the Ontario class definition.

Although plaintiffs’ counsel in New York had initially sought to pursue the claim on behalf of a “global class” in that jurisdiction as well, ultimately the New York class action was confined to those securities acquired on the NASDAQ exchange.

In early 2012, IMAX entered into a $12 million settlement in the New York proceeding.  As part of the approval process directed by the New York judge, notice of the settlement was widely publicized by way of a notice.  Among other things, the notice included a description of the overlapping proceeding in Canada, and advised that any individual members of the class in the New York action (investors that purchased securities on the NASDAQ) that did not take the positive action of opting out of the New York class action would be bound by the result of the settlement and not permitted to participate in the Ontario class action.  If a class member that purchased shares on the NASDAQ did not wish to participate in the New York settlement, they were free to opt out of the settlement and continue to participate in the Ontario class action.  Only a handful of NASDAQ investors opted out of the New York settlement.

The New York settlement was approved by the New York court in June 2012, conditional on an amendment to the global class in the Ontario action to exclude those investors that would benefit from the settlement.  In other words, NASDAQ investors could not participate both in the New York settlement, and remain parties to the Ontario lawsuit on the same subject matter.

In a motion in the Ontario class action, Justice van Rensberg recognized the New York settlement and amended the class definition to exclude all investors that were bound by that settlement.

The representative plaintiffs in the Ontario action sought leave to appeal Justice van Rensberg’s decision, raising several largely technical ground of appeal.  They argued that:

• Justice van Rensberg did not have jurisdiction to amend the class;
• The issue of class definition was already determined by the certification motion decision, and this motion was merely an attempt to impermissibly re-litigate the certification decision; and
• Justice van Rensberg applied the wrong legal test in deciding to enforce the New York settlement.

In a decision released October 29, 2013 (2013 ONSC 6751), Justice Tzimas  of the Divisional Court rejected all of the plaintiffs’ arguments.  Justice Tzimas held that Justice van Rensberg did have jurisdiction to amend the class.  As to the re-litigation argument, Justice Tzimas noted that the certification decision clearly contemplated the fact that class certification may have to be revisited based on what transpired with the New York action.  Justice Tzimas also rejected the argument that Justice van Rensberg applied the wrong legal test in enforcing the New York judgment.  Justice Tzimas noted that Justice van Rensberg’s analysis in this regard in her decision reflected “the concern to give full meaning to the parties’ access to justice, respect for judicial comity, and common sense.”

The undercurrent of this motion was that plaintiff’s counsel in Ontario thought that they could get a better result at trial (or in a settlement) in Canada for the NASDAQ investors than those investors were able to obtain in the New York settlement.  The decisions of Justice van Rensberg and Justice Tzimas are a welcome development for class action defendants in Canada.  IMAX sends strong message to the Canadian class action plaintiffs’ bar that Canadian courts will recognize foreign settlements in parallel class actions and will not give effect to speculative arguments that a better result might have been achieved in Canada by Canadian class counsel.