Class proceedings are common in Canada. Every year, dozens of class actions are commenced asserting different kinds of legal claims and involving all manner of industries. Businesses should be aware of class action developments to ensure that they can proactively assess and minimize any potential liability. This publication will focus on three legal areas with important recent developments: (1) the enforceability of arbitration clauses in standard form contracts; (2) important securities law developments; and (3) emerging cryptocurrency class actions.
Enforceability of Arbitration Clauses in Standard Form Contracts
Mandatory arbitration agreements are common in standard form contracts. An arbitration agreement requires any dispute arising from the underlying contract to be resolved in private arbitration instead of a court proceeding. Such agreements are often accompanied by class action waivers, which prohibit claimants from participating in any class actions involving claims arising from the underlying contract.
While arbitration agreements are generally enforceable in Canada, consumer protection legislation in some Canadian provinces invalidates arbitration agreements and class action waivers in consumer contracts. Canadian courts have also found that arbitration agreements can be unenforceable if they violate public policy or are unconscionable. This section discusses recent cases that illustrate when a court will enforce (or decline to enforce) an arbitration agreement in a standard form consumer contract.
These recent cases make clear that business wishing to impose enforceable arbitration agreements in standard form contracts should ensure that the mandatory arbitral process is transparent, fair, and accessible. Businesses cannot avoid legal claims by imposing a dispute resolution process that is too onerous for consumers to pursue. However, courts will give effect to arbitration agreements freely entered, even in standard form contracts, where not prohibited by statute or public policy and not unconscionable.
British Columbia Court of Appeal Upholds Partial Stays of two Proposed Class Actions
The British Columbia Court of Appeal upheld a lower court decision to enforce arbitration agreements and partially stay two proposed class proceedings.
Williams v Amazon
In Williams v. Amazon.com Inc., 2023 BCCA 314, the British Columbia Court of Appeal upheld a partial stay of a proposed class action in favour of arbitration, finding that the arbitration agreement was neither unconscionable nor contrary to public policy. The court did, however, allow the class action to proceed in respect of claims advanced under consumer protection legislation because those claims fell outside the ambit of the arbitration agreement.
In the underlying dispute, the Appellant/Plaintiff alleged that third-party booksellers were required to enter into certain arrangements that unduly favoured Amazon sales over their own sales on the Amazon platform, leading to reduced competition and higher prices. Among other relief, the Appellant sought damages under competition legislation, the common law tort of conspiracy and relief under consumer protection legislation.
Amazon applied to stay the class proceedings. Amazon relied on an arbitration agreement in the standard form contract that the Appellant signed when registering his account. It also contained a class action waiver and a choice of law clause (in favour of the United States). The lower court granted Amazon’s application.
On appeal, the Appellant alleged that the lower court judge erred by failing to find the arbitration agreement unconscionable or contrary to public policy. The Court of Appeal affirmed that the arbitration agreement was not unconscionable. Although the court found an inequality in bargaining power because the Appellant had no opportunity to negotiate the standard form contract of adhesion, this inequality did not result in an “improvident bargain” (meaning an unconscionable arrangement that unduly advantaged one party and unduly disadvantaged the other).
The Court of Appeal also held that the arbitration agreement did not violate public policy. Rather, the arbitration agreement had been tailored to the individual needs and circumstances of consumers.
Businesses should note that this arbitration agreement was not nearly as harsh on claimants as other arbitration agreements which have been found to be unconscionable. Crucially, this agreement entailed a modest up-front administration fee of USD $200.00, Amazon was required to refund the up-front fee for all claims of less than $10,000.00 and Amazon was not to seek their legal costs except against frivolous claims. Further, an arbitration could be conducted by telephone, by written submissions, in the country where the claimant lived, or at a mutually agreed upon location. This arbitration agreement did not operate as an effective bar to claimants pursuing their claims.
The Supreme Court of Canada declined to hear an appeal of Williams.
Petty v. Niantic
The same panel of judges decided Petty v. Niantic Inc., 2023 BCCA 315 as a companion case to Williams. In Petty, the British Columbia Court of Appeal upheld a partial stay of a proposed class action in favour of arbitration, finding that the arbitration agreement was not unconscionable or contrary to public policy despite an inequality of bargaining power in a contract of adhesion. The court stayed all claims advanced in the proposed class action except claims under consumer protection legislation.
In the underlying dispute, the Appellants/Plaintiffs filed a proposed class action against the developers, producers, and distributers of popular online video games. The Appellants sought remedies for alleged statutory breaches, illegal gaming, and other wrongs with respect to “loot boxes” and other purchases made in video games. The Respondents applied for a stay of proceedings pursuant to the International Commercial Arbitration Act.
This statute provides that the party seeking the stay has the onus of establishing that the technical pre-requisites for a stay are met. If the pre-requisites are met, the burden shifts to the opposing party who can only avoid the stay by demonstrating that the arbitration agreement was void, inoperative or incapable of being performed.
The parties agreed that the Respondents/Defendants had met the pre-requisites for a stay and that any claims under consumer protection legislation were exempted from any such stay. The Appellants argued that the entire class action should proceed because the arbitration agreement was unconscionable and contrary to public policy.
The lower court partially stayed the class action after finding that the arbitration agreement was neither unconscionable nor contrary to public policy. The lower court made the following key findings:
- There was no inequality of bargaining power between the parties. The use of video games and the ability to purchase “loot boxes” within the games are not an “important element of everyday life which made the [Appellants] particularly dependent or vulnerable in terms of their need to access the game platforms.”
- There was “no evidence of a special relationship of trust.”
- The “costs of arbitration and arbitration procedure are sufficiently described in the arbitration agreement and there is no indication the appellants were unable to understand the arbitration agreement.”
- The arbitration agreement was not an “improvident bargain”, meaning that it did not unduly advantage the Respondent or unduly disadvantage the Appellant.
- The filing fee for commencing arbitration was “relatively modest”. While the legal costs of advancing a claim through arbitration or in Small Claims Court would exceed the value of the claim, this was mitigated by provisions for reimbursement of filing fees, arbitrator fees, and legal costs. The arbitration agreement also foresaw that the Respondents would not seek their legal costs other than where there is an arbitral finding of frivolity.
- Arbitrations could be conducted in writing.
- Customers may “opt-out” of the arbitration agreement within 30 days of agreeing to it. Even if they do not “opt-out”, customers can proceed with an action in Small Claims Court rather than arbitration.
- Arbitral or small claims proceedings were a viable method of resolving the disputes.
The Court of Appeal upheld the stay of the proposed class action for all claims except those under consumer protection legislation.
Of note to businesses, once again, this arbitration was not overly burdensome on claimants and did not operate as an effective bar to pursuing claims.
The Supreme Court of Canada declined to hear an appeal of Petty.
Ontario Superior Court Declines Motion to Stay in Cryptocurrency Class Action
The Ontario Superior Court came to the opposite conclusion in a recent decision, refusing to stay a class proceeding against a cryptocurrency trading platform in favour of arbitration.
The court held that the arbitration agreement contained in the Defendant’s website terms and conditions was “unconscionable” and “contrary to public policy”, in part due to the disproportionate cost to pursue a claim compared to the monetary value of disputes arising from the agreement. The court was also concerned about the “logistical complexity” of the arbitration agreement.
Supreme Court of Canada to Clarify Meaning of “Material Change” in Securities Class Actions
Secondary market purchasers frequently bring securities class actions in Canada alleging failure to make timely disclosures of material changes. But what constitute a “material change”?
The Supreme Court of Canada will soon hear the appeal of Markowich v Lundin Mining Corporation, 2023 ONCA 359 on this issue. The Supreme Court’s eventual ruling will impact all reporting issuers because they must disclose material changes immediately.
The appeal of Markowich arises from in the context of a securities class action certification motion. The Court of Appeal had arguably broadened the scope of events that could constitute a “change” in Markowich and in a companion case called Peters v SNC-Lavalin Group Inc., 2023 ONCA 360. While Markowich and Peters concern Ontario’s securities legislation, the reasoning of the decision and the eventual Supreme Court guidance are relevant to public issuers across Canada.
In Markowich, the Plaintiff sought leave to commence a secondary market claim alleging that the Defendant mining company failed to make timely disclosure of an unstable pit wall and a subsequent rockslide. The company disclosed the event a month later in a news release causing their share price to fall the next day by 16 per cent. A shareholder of the mining company brought a class action on behalf of all persons who acquired securities in the mining company between the day that the pit wall instability was detected and the date that the company disclosed the instability and the ensuing rockslide.
In Peters, the Plaintiff sought leave to commence a secondary market claim concerning a material change in a fraud and corruption prosecution. The Defendant engineering company had discussed with prosecutors a potential remediation agreement. Prosecutors eventually advised in a phone call that the Defendant would not be invited to negotiate such an agreement, but the Defendant could submit additional materials. After a month of further discussions and review of the additional materials, prosecutors ultimately confirmed that there would be no remediation agreement, at which point the Defendant disclosed this to shareholders. A shareholder filed a class action on behalf of all persons who acquired securities in the company between the date of the initial phone call advising that that the company would not be invited to negotiate a remediation agreement and the date the company disclosed that information.
The Plaintiffs in both cases sought leave under the applicable securities legislation to bring a statutory cause of action against the Defendants for failure to make timely disclosure. The Plaintiffs also sought to certify the proceedings as class actions. The lower courts denied leave and declined to certify both proceedings.
A two-part test is applied to determine whether an event is a material change: (1) Has there been a change in the business, operations, or capital of the issuer?; and (2) Is the change material (i.e., would it be expected to have a significant impact on the value of the issuer’s shares)?
On the first question, the Court of Appeal in Markowich adopted a generous approach to the concept of a “change in the business, operations or capital”, finding it must be interpreted broadly and viewed within the specific factual context of each case. A “material change” does not need to be as significant as the company completely changing directions in its line of business, stopping operations or changing its capital structure. The Court of Appeal in Peters found that the only limit on what constitutes a “change” are the qualifying words in the definition, meaning that the change must be “in the business, operations, or capital.” External circumstances that may impact share prices but do not affect a change in the issuer’s business, operations, or capital do not qualify as material changes.
On the second question, the Court of Appeal in Markowich held that it was “reasonably possible” that the wall instability and rockslide constituted a material change, and thus granted leave for the action to proceed under securities legislation and remitted the certification issue back to the lower court.
It is important to note that this decision was rendered in the context of a motion for leave, meaning that the court was only assessing whether there was a “reasonable possibility” that the Plaintiff could succeed at trial. It is not a final adjudication of whether these events were material changes.
Meanwhile, in Peters, the Court of Appeal found that the initial phone call could not have been a change in the Defendant company’s business, operations, or capital and found that there was no reasonable possibility of success at trial. Accordingly, the Court of Appeal dismissed the appeal.
The Supreme Court will need to balance competing policy considerations. An overly narrow interpretation of “material change” may lead to limited disclosure and a lack of transparency. An overly broad interpretation may be too cumbersome for reporting issuers and could interfere with the effective operation of the business. Affirmation of the broad test will also increase class actions exposure.
Emerging Trend: Cryptocurrency Class Actions
Cryptocurrency class actions are an emerging trend in Canada. In recent years, cryptocurrency class actions have been filed in several legal areas, including under securities, consumer protection, and competition legislation. It is expected that this trend will continue to increase as the use of digital assets and cryptocurrencies becomes commonplace.
Canadian securities regulators have been making efforts to accelerate aggressive enforcement proceedings in cryptocurrency matters. In September 2023, provincial regulators reported that they had taken action in 16 cryptocurrency-related enforcement matters in the prior year, as well as issuing 422 alerts, cautions, and warnings related to cryptocurrencies. It is expected that enforcement numbers will increase, which is consistent with the Ontario Securities Commission’s commitment to “strengthen oversight and enforcement in the crypto asset sector” for 2024-2025. This increased regulatory scrutiny may result in further cryptocurrency class actions which often follow on the heels of regulatory enforcement actions.
The Ontario Superior Court recently certified a class action against a cryptocurrency exchange platform for remedies stemming from alleged breaches of Ontario’s Securities Act. The Plaintiff alleged that the platform was marketing and selling securities without registering with the securities regulator or filing a prospectus. This certification decision did not decide the merits, which (subject to any appeal of the certification decision) will be contested at a common issues trial.
While cryptocurrency class actions are still emerging in Canada, there was a surge in filings in the United States amid a turbulent cryptocurrency market in 2022. Plaintiffs have mostly filed securities class actions against crypto exchanges and trading platforms for alleged sales/offerings of unregistered securities and failures to make disclosures. Many such cases remain ongoing, including some that are in the early stages of litigation. US class action filings often precede Canadian filings, so it is probable that more Canadian cryptocurrency class actions are to come.