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Class, Do Your Homework: Causation and Damages Methodologies at Certification

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Overview

In Andriuk v. Merrill Lynch Canada Inc., the Alberta Court of Appeal affirmed a certification judge’s decision that an action, commenced pursuant to Alberta’s Class Proceedings Act, did not meet the requirements for certification of a class proceeding, based on a failure to demonstrate a viable methodology for establishing causation and damages on a class-wide basis.

The Court, relying on the Ontario precedent of Chadha v. Bayer Inc. found that Justice Martin, the certification judge, had

correctly stated the applicable principle. Where questions relating to causation or damages are proposed as common issues, the plaintiff must demonstrate (with supporting evidence) that there is a workable methodology for determining such issues on a class-wide basis. [emphasis added]

Class counsel had failed to demonstrate that it had a methodology that was capable of establishing the common issues of causation and damages across the class, and the Court of Appeal was satisfied that Justice Martin “applied a thorough and careful balance of compelling interests,” and that there was “no basis to interfere with her decision.”

Background & Decision

John Andriuk, a Calgary businessman, and his company, John Andriuk Investments Ltd. brought an action on behalf of all persons and corporations who held investment accounts with national investment brokerage Merrill Lynch in relation to a speculative biotech stock called Onolytics Biotech Inc. (‘Onolytics’). The plaintiffs claimed that Merrill Lynch breached a number of duties owed to them and preferred its own interests to its clients’ when it found that the plaintiffs collectively held too much Onolytics stock at its Calgary branch.

According to the plaintiffs' claim, near the end of 2000, due to Merrill Lynch’s failure to properly monitor the concentration in securities at its Calgary office, the plaintiffs had accumulated 22% of the issued and outstanding trading shares in Onolytics, which was a breach of securities regulations at the time. The plaintiffs alleged that Merrill consequently mandated financial advisors to solicit sales of their Onolytics holdings, encouraged clients who wished to retain the stock to move it to another brokerage, and reduced the margin percentages previously extended on Onolytics shares. According to the plaintiffs, these actions were in Merrill’s best interests, but contrary to the Plaintiffs’ interests, as they caused an artificial reduction in the value of the plaintiffs’ investments.

On the certification motion, Justice Martin noted that “the Plaintiffs’ entire theory of liability rests on common causation and damage” and that they

have offered no evidence to substantiate their novel theory of liability. They indicate that they will proffer an expert after examinations for discovery who will tease out the impact of the Defendant’s mandated actions… They have not provided any indication in this certification hearing of a methodology for doing so.

Her Honour explained that to certify a class action based on price depreciation theory as a common issue for causation and damages, the plaintiffs needed to show that it was possible to show that they could prove the essential elements of their claim. Justice Martin concluded this reasoning by stating that “the absence of any methodology[…] prevents this court from accepting aggregate damages as a common issue on this record.”
The Alberta Court of Appeal, after noting the substantial deference accorded to a certification judge absent an extricable error of law, affirmed Justice Martin’s finding that the plaintiffs had to demonstrate a workable methodology for determining common issues like causation and damages. The Court noted that this requirement was recently reaffirmed in Pro-Sys Consultants ltd. v. Microsoft Corp, in which the Supreme Court clarified that while class counsel need not implement its methodology to establish actual losses to the class at a certification motion, it must demonstrate that the methodology is capable of doing so. In the Court’s words, “the methodology must offer a realistic prospect of establishing loss on a class-wide basis” and cannot be “purely theoretical or hypothetical, but must be grounded in the facts of the particular case in question.”
The Court was also cautious to state that the plaintiffs’ failure to adduce expert evidence about its methodology was not necessarily determinative, and that “the need for expert evidence would depend upon the nature of the case and the determination of the common issues.” Nevertheless, the plaintiffs had failed to meet their burden to demonstrate a workable methodology to prove the common issues in the case.
Importantly, the Court of Appeal also affirmed Justice Martin’s comments that notwithstanding some debate in jurisprudence over the role for a certification judge to remedy deficiencies in a plaintiff’s claim, “it was not her role to fill gaps in the pleadings in order to satisfy the criteria for certification.” Although a certification judge can take a generous approach to pleadings, Justice Martin’s finding that “there are so many difficulties in the manner in which this application has come forward that even a generous approach cannot fill the numerous gaps” was upheld by the Court of Appeal.

Significance

Although this decision does not create any new principles in class actions jurisprudence, it does send a clear message: Class counsel must do their homework before a certifications motion, especially if the claim involves complex common issues such as causation or damages. It will not suffice for class counsel to state that they have experts who can address these issues after examinations for discovery. When the certification motion arrives, there must be a methodology that is demonstratively capable of establishing common issues.

Defence counsel in class action proceedings are well-advised to consider retaining their own experts to critically assess any methodology proffered by the plaintiffs on causation or damages, and to provide their own analysis about whether issues like loss to the class can be proven. If the plaintiffs have failed to secure an expert for the certification motion, as was the case here, then it would be especially advisable for defence counsel to adduce their own expert evidence. Notably, in this case, Merrill Lynch had an expert who testified at the certification motion that “there is no methodology to establish class-wide harm and there are too many individual circumstances, factors and considerations for each potential claimant to assess causation and damages on a class-wide basis.”

Case Information

Andriuk v. Merrill Lynch Canada Inc., 2014 ABCA 177

Docket: 1301-0280-AC

Date of Decision: May 27, 2014

Albert Court of Appeal Breach of Duty certification class action common issues methodology price depreciation theory

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