The Optimum Solution: Justice Perell Urges Fairness and Restraint in Awarding Aggregate Damages
After more than a decade of litigation, the litigants in Spina v. Shoppers Drug Mart Inc., 2023 ONSC 1086 finally have a decision on the merits. Success was divided. To the extent liability could be established, Justice Perell held that damages ought be proven by way of individual issues trials.
Spina confirms important legal principles governing aggregate damages claims. In particular, the decision is a reminder that the social utility of aggregate damages in a class proceeding does not excuse a plaintiff who seeks such an award from their obligation to demonstrate that aggregate damages are available and appropriate in the circumstances.
Before granting an award of aggregate damages, the Court must be satisfied that the defendants’ monetary liability can be “fairly and reasonably” determined without proof by individual class members, and that there is a viable methodology. If the plaintiff cannot meet this burden, the appropriate means through which to quantify damages will be by individual issues trials.
Spina arose from a franchise dispute between pharmacists who owned and operated Shoppers Drug Mart stores as franchisees (the “Associates”) and Shoppers Drug Mart (and its parent company and affiliates, collectively “Shoppers”).
The claims were based around two franchise contracts; referred to as the 2002 Associates Agreement and the 2010 Associates Agreement (collectively, the “Agreements”). Under the Agreements, Associates did not earn a salary for their work as pharmacists or managers. Rather, they shared in the profits, if any, of the store, with a guarantee of minimum earnings (even if the store was unprofitable). Shoppers incurred expenses for its role in the operation of the store’s businesses and recovered some of these expenses through fees charged to the Associates. Shoppers provided equipment to the stores, which it leased to each business. The Associates were essentially managed by Shoppers, where Associates had to exclusive buy their store merchandize from Shoppers via Shoppers’ centralized distribution centers.
The Associates alleged Shoppers perpetuated seven breaches of contract, breached its statutory and common law duties of good faith and fair dealing, and was unjustly enriched. The Associates sought aggregate damages for a number of their claims.
Both Shoppers and the Associates moved for summary judgment. In a 170-page decision, Justice Perell granted both motions in part, and dismissed both motions in part. Justice Perell did not award any aggregate damages.
The Aggregate Damages Claims
At the certification hearing, Justice Perell refused to certify aggregate damages as a common issue because, the Associates conceded an aggregate award was not methodologically possible. Nevertheless, the Associates argued that they were entitled to seek aggregate damages on summary judgment.
The Associates sought aggregate damages for three categories of claim: (i) Optimum Fee Claims, (ii) Shoppers Charges Claims, and (iii) Professional Allowance Claims, each of which arose from alleged breaches of one or both of the Agreements:
- Optimum Fee Claims: the Associates alleged Shoppers breached the 2002 Agreement as well as its statutory and/or common law duty of good faith by charging the Associates a fee to participate in Shoppers’ “Optimum” customer loyalty program.
- Shoppers Charges Claims: the Associates asserted Shoppers breached the Agreements by charging fees in excess of the actual costs it incurred for certain services enumerated in the Agreements. The Associates further argued that the charges breached Shoppers’ statutory and common law duties of good faith, and caused Shoppers to be unjustly enriched.
- Professional Allowance Claims: the Associates asserted Shoppers’ policy of retaining “Professional Allowance Payments”, which are payments generic drug manufacturers were permitted to pay to primary care providers in exchange for carrying their generic drugs, breached Shoppers’ contractual obligations under the Agreements, its statutory and common law duty of good faith, and caused Shoppers to be unjustly enriched.
The Associates relied on expert evidence from Mr. Howard Rosen, a business valuator. Mr. Rosen’s methodology was to calculate on an annual basis, the unauthorized Optimum Fee, the overcharge for the Shoppers Charges, and the withheld Professional Allowances and then to severally apply these amounts to Shoppers’s aggregate financial information for that year. Mr. Rosen conducted his “top down” analysis by: (a) assuming that planned and actual store profitability could be applied equally among all Associates and then applying the total amount of excess Shoppers Store Charges and the Professional Allowances in each year first to cover any underage in total store profitability; (b) calculating the increase in Associate earnings resulting from covering the underage; then (c) then applying the balance of excess Shoppers Charges and the Professional Allowances in each year to calculating the increase in Associate earnings.
In calculating the increase in Associate earnings, Mr. Rosen used an assumed 25% midpoint between the 20% and 30% received by Associates as a percentage of any overage in-store profitability.
Shoppers attacked the methodology on two key grounds:
- the methodology itself was fundamentally flawed because it relied on assumptions and facts not borne out by the evidence; and
- the use of an aggregate model would result in injustice to Shoppers by overstating the extent of Shoppers’ liability.
Shoppers was successful on both fronts. Although Justice Perell held it remained open to him to grant an award of aggregate damages absent certification of aggregate damages as a common issue, he declined to grant the award(s) because the plaintiffs had not established there was a feasible methodology for an aggregate damages assessment, and because the proposed methodology would incorrectly quantify Shoppers’ liability.
To the extent liability could be established, Justice Perell held that damages ought be proven by way of individual issues trials.