Appellate court removes muzzle on franchisees opposed to Pet Valu case

Canada does not have a majority or “numerosity” test, Mr. Shaw explains. “Even if the class went down significantly in size, it doesn’t destroy the class action. It’s not like a union organizing drive where majority rules.”

The Financial Post
May 30, 2012

Appellate court removes muzzle on franchisees opposed to Pet Valu case
Drew Hasselback

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The Pet Valu ruling grants dissident class members greater liberty in how they might campaign to encourage other class members to opt out of certified class actions.

Class members who choose not to participate in a class action have the freedom to wage public campaigns aimed at convincing other class members to abandon the lawsuit, the Ontario Court of Appeal says.

The decision in 1250264 Ontario Inc. v. Pet Valu Canada Inc. is important because it confirms that the deadline for opt-out periods is effectively carved in stone. It also grants dissident plaintiffs greater liberty in how they voice their opinions over the suit. The appellate ruling reverses a lower court decision that had suggested there were circumstances in which opt-out periods could be extended beyond original expiry dates. The lower court ruling also criticized statements and tactics made by a group opposed to the lawsuit, thus suggesting that anti-lawsuit campaigns by dissident class members would be closely monitored by the court.

“This landmark decision highlights class members’ rights to debate whether or not to opt out of a class action and provides further clarity on the line between persuasive debate and coercive communication,” write Jennifer Dolman, Gillian Scott and Mary Paterson of Osler, Hoskin & Harcourt LLP.

Ontario has an “opt-out” class action regime, which means that potential members of a class are deemed to be included in the certified legal action unless they inform the court that they want to “opt out.” Sometimes class members do this because they want to launch a separate lawsuit of their own. Sometimes they do so simply because they don’t see the need for any lawsuit at all.

The lower court ruling in Pet Valu had attracted a lot of attention because it removed an opt-out deadline — a radical change to Canadian class action law. The appellate court reverses that, confirming that opt-out dates are indeed finite.

Opt-out battles are particularly relevant in franchise class actions. Some franchisees may not want to participate in the class action because they are worried the lawsuit might damage their business relationship with the franchisor. Some also worry the lawsuit might cause harm to the brand.

The Pet Valu case has been acrimonious. The plaintiffs allege Pet Valu breached its contract by failing to share volume discounts and rebates from suppliers with franchisees. Pet Valu denies any wrong doing.

Not every franchisee supports the class action. In fact, several Pet Valu franchisees opposed to the lawsuit engaged in a vigorous telephone and Internet blitz aimed at persuading fellow franchisees to opt out before the deadline on Sept. 15, 2011. The campaign was effective. On Sept. 4, 2011, just before the campaign was launched, only 37 opt-out forms had been filed. But then a group called Concerned Pet Valu Franchisees started working the phones. By the deadline, the number of opt-outs had soared to 140, representing 65% of current franchisees and 10% of former franchisees.

The lower court judge was alarmed by the vigour of the opt-out campaign, which he described as an “unabashed attempt to destroy the class action.” His remedy was to cancel the opt-outs that had been received, then extend the opt-out date to after a decision on the merits. The move attracted a lot of attention from the class action bar. If opt-out periods were allowed to run indefinitely, defendants would be able to negotiate settlements with individual class members at anytime during a class action.

Yet in a unanimous three-judge ruling, Chief Justice Warren Winkler of the Ontario Court of Appeal said the lower court judge went too far. The appellate court restored the opt-outs, then offered some important guidance that will apply to opt-out campaigns in the future. “These former class members had an unassailable right to speak out in opposition to the class proceeding in an attempt to convince other class members to opt out,” the chief justice wrote.

“It’s a pretty careful decision in the sense that he’s annunciated that there’s a line over which nobody can tread when an opt-out opportunity exists,” says Geoffrey Shaw, a litigator with Cassels Brock & Blackwell LLP who represented Pet Valu in the appeal.

At least two important points emerge from the decision.

First, class members are free to communicate with one another during opt-out campaigns. The lower court had tried to control the flow of communication among class members. However, the appellate court basically says class members should be free to engage in inter-class debate, so long as they express business opinions that do not coerce, misinform or threaten or intimate other class members.

Second, the number of class members who opt-out shouldn’t be fatal the class action. The lower court seemed to accept that the massive number of exits somehow threatened the “survival” of the class action. The appellate court said the viability of a class action is not dependent on majority support.

Canada does not have a majority or “numerosity” test, Mr. Shaw explains. “Even if the class went down significantly in size, it doesn’t destroy the class action. It’s not like a union organizing drive where majority rules.”

Indeed, the outcome of the litigation over the opt-out procedure doesn’t eliminate the class action. “The case goes on with the existing members of the class,” said David Sterns of Sotos LLP, a lawyer for the plaintiffs.

The next step in the action is to prepare a motion for summary judgment. No date for that motion has been set.

Financial Post

http://business.financialpost.com/2013/05/08/appellate-court-removes-muzzle-on-franchisees-opposed-to-pet-valu-case/


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