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Court Clarifies the Use of Representation Orders Pre-Certification in Class Action

7 minute read

“[T]his is an unusual and rare motion for a proposed class action…”[1] noted Justice Perell in Karasik v Yahoo! Inc. In this proposed class action alleging privacy breaches against Yahoo!, the parties brought a consent motion for a representation order pre-certification.

In this case, in 2017, Altaba Inc. (“Altaba”), sold Yahoo to Verizon Communications Inc., while retaining 50% of Yahoo’s liability for the alleged privacy beaches.[2] These breaches are widely believed to result from Russian state security cyber-attacks that compromised Yahoo user accounts worldwide.

During the 2019 dissolution and wind up of Altaba, the proposed class counsel reached an agreement with Altaba on a sum of funds to be set aside as a holdback against claims for damages arising out of the privacy breaches in the class action (the “Holdback Agreement”).[3]  In order for proposed class counsel to enter into the Holdback Agreement on behalf of all creditors, the putative class members whose personal information was compromised, it sought a pre-certification representation order.

Representation orders are commonly issued by the court in insolvency proceedings in order to facilitate the representation of a large group of individual creditors who are impacted by the insolvency. Representation orders allow the group of individual creditors to be represented by a single voice in the insolvency proceeding. This ensures the group members’ rights are protected and advanced by independent legal counsel. Representative counsel actively participates in the proceeding and receives prior notice of all court motions. Without representative counsel, the individual creditors would likely not receive notice of court motions or have the opportunity to review court materials. It is common for representation orders to be issued for creditor groups comprised of unpaid subcontractors, employees and retirees, and class action shareholders.

Class Proceedings Act

There is no specific provision in the Class Proceedings Act, 1992, (the “CPA”), that addresses representation orders. However, s. 12 of the CPA provides the court with broad discretionary powers to make any order it considers appropriate respecting the conduct of a class proceeding to ensure its fair and expeditious determination and, for the purpose, may impose such terms on the parties as it considers appropriate.[4]

Rules of Civil Procedure

Representation orders and the jurisdiction to appoint representative counsel are contained in Rule 10.01 of the Rules of Civil Procedure:

10.01 (1) In a proceeding concerning,

(a) the interpretation of a deed, will, contract or other instrument, or the interpretation of a statute, order in council, regulation or municipal by-law or resolution;

(b) the determination of a question arising in the administration of an estate or trust;

(c) the approval of a sale, purchase, settlement or other transaction;

(d) the approval of an arrangement under the Variation of Trusts Act;

(e) the administration of the estate of a deceased person; or

(f) any other matter where it appears necessary or desirable to make an order under this subrule,

a judge may by order appoint one or more persons to represent any person or class of persons who are unborn or unascertained or who have a present, future, contingent or unascertained interest in or may be affected by the proceeding and who cannot be readily ascertained, found or served.

(2) Where an appointment is made under subrule (1), an order in the proceeding is binding on a person or class so represented, subject to rule 10.03.

(3) Where in a proceeding referred to in subrule (1) a settlement is proposed and some of the persons interested in the settlement are not parties to the proceeding, but,

(a) those persons are represented by a person appointed under subrule (1) who assents to the settlement; or

(b) there are other persons having the same interest who are parties to the proceeding and assent to the settlement,

the judge, if satisfied that the settlement will be for the benefit of the interested persons who are not parties and that to require service on them would cause undue expense or delay, may approve the settlement on behalf of those persons.[5]

Factors in Granting a Representation Order

Justice Perell considered the factors to grant a representation order in Companies Creditor Arrangement Act (the “CCAA”) proceedings.[6] The factors include

  1. the vulnerability and resources of the group sought to be represented;
  2. any benefit to the companies under CCAA protection;
  3. any social benefit to be derived from representation of the group;
  4. the facilitation of the administration of the proceedings and efficiency;
  5. the avoidance of a multiplicity of legal retainers;
  6. the balance of convenience and whether it is fair and just, including to the creditors of the Estate;
  7. whether representative counsel has already been appointed for those who have similar interests to the group seeking representation and who is also prepared to act for the group seeking the order; and
  8. the position of other stakeholders and the Monitor.[7]

Justice Perell found that many of the factors applied in this case. In evaluating appropriateness of the representation order, the court considered the best interests of the putative class members, noting:

In the circumstances of the immediate case, a holdback, which would, in effect, provide security for the creditors’ claims, is obviously in the best interests of the putative Class Members. They all share a similar interest in achieving a fair holdback amount. As representative counsel, Charney Lawyers could represent their shared interest by negotiating a holdback amount to satisfy claims made in the proposed national class action commenced in Ontario.[8]

The court also considered that without a representation order, each Canadian creditor of Altaba would be required to make an individual claim against Altaba in the parallel Delaware proceedings.[9] Given the large size of the putative class, this is impractical.[10]  The court noted that if the class action proceeded to trial and judgment is awarded, there may be no means to enforce the judgment against Altaba, absent a holdback.[11]

To protect the best interests of the proposed class members, the representation order was granted.

Conclusion

This case emphasizes how the court will interpret the request for a representation order, typically used in an insolvency proceeding, in the context of a class action. While no provision exists in the CPA to provide for such an order, the court highlighted that protecting the best interests of the class, even a putative class, remains of the utmost importance


[1] Karasik v Yahoo! Inc., 2020 ONSC 1440 [Yahoo!].

[2] Ibid at para 7.

[3] Ibid at para 8.

[4] Class Proceedings Act, 1992, SO 1992, c 6 at s. 12.

[5] Rules of Civil Procedure, R.R.O. 1990, Reg. 194, at r. 10.01 (1)-(3).

[6] Yahoo! at para 18 citing to Re CanWest Publishing Inc., 2010 ONSC 1328.

[7] Ibid.

[8] Ibid at para 13.

[9] Ibid at para 14.

[10] Ibid at para 14.

[11] Ibid at para 15.

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