uncommonly individual "common issue" certified
Can a common issue really be "common" when its resolution requires an individual investigation vis-a-vis every class member in a class action? This is the question we are left with following the certification of French and Karas v Smith and Stephenson1 as a class proceeding.
The named defendants in this matter were two registered investment advisors, Karas and Stephenson, their registered dealer and related companies.
The plaintiff class was comprised of investor clients of Karas and Stephenson and individuals who participated in what the plaintiffs called the "Leveraging Scheme."
The Leveraging Scheme was an investment strategy. Under the Leveraging Scheme, investors borrowed money that they then invested in mutual funds or segregated funds.
The plaintiffs pleaded that Karas and Stephenson negligently recommended that all their clients follow the investment strategies in the Leveraging Scheme. The plaintiffs alleged that providing uniform, "one size fits all" investment advice breached industry standards because advisors must consider whether a particular investment strategy is suitable for a particular client in light of that client's investment objectives and risk tolerance.
class action certification in Ontario
Class actions are regulated by statute. In Ontario, an action cannot proceed as a class action unless and until it has first been "certified" by the court under the Class Proceedings Act.2 Certification is not a test of the merits of the claim. Rather, the certification test is "procedural:" it is an assessment of whether the action is appropriately prosecuted as a class action.
As part of the certification test, plaintiffs are required to demonstrate that their claims raise "common issues." "Common issues" are defined as common, but not necessarily identical, issues of fact or law that arise from common, but not necessarily identical, facts. An issue will be "common" where its resolution is necessary to the resolution of each class member's claim and where that issue is a "substantial ingredient" of each class member's claim, although common issues need not predominate over the non-common issues in a case.
the French certification motion
French passed the certification test and was certified as a class proceeding. One of the common issues that was "certified" was whether the defendants Karas and Stephenson breached their duty to individual class members. To prove such a breach, the plaintiffs would need to demonstrate that Karas and Stephenson did not meet the standard required of reasonable investment advisors.
It is questionable whether this matter is properly a "common" issue.
If, as the plaintiffs suggest, the defendants were obliged to ensure that the Leveraging Scheme was suitable for each investor before recommending it, proving a breach of duty would require showing that the investment was not suitable for each individual client in light of their own particular suitability profile. Simply demonstrating that the Leveraging Scheme was ultimately recommended to investors, even if it was recommended to all investors, does not shed light on whether the advisor took appropriate steps before making the recommendation to his client. The necessarily individualized nature of this inquiry seems to suggest that breach of duty is not appropriate to be determined on a class-wide basis as a common issue.
Dealers, advisors and their counsel will undoubtedly want to follow this certified class proceeding, and watch particularly for whether this decision represents a change in the law in this area. It is possible that French may represent a lowering of the threshold for what is considered a "common issue" in a class proceeding.
by Adrienne Boudreau
a cautionary note
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2012