Law Times

Law TiMes • May 10, 2010 An online resource 1.800.263.3269 Focus On SECURITIES LAW Can IPO issuers ward off class actions through arbitration clauses? BY DARYL-LYNN CARLSON For Law Times tracts in an eff ort to protect re- tail companies from lawsuits. In particular, with the grow- A ing trend of class action liti- gation in Canada, companies view arbitration clauses as an important means to mitigate their legal liabilities. Yet in a recent case in On- tario, the courts have sent a message that a clause in a con- tract that mandates arbitration as a means to settle a dispute with a company over a defec- tive product won't always suf- fi ce to resolve the matter. Th e case involves the Ontar- io Court of Appeal's ruling in a class action against Dell Cana- da Inc. that a clause mandating arbitration to settle a disagree- ment with a consumer doesn't preclude such litigation. In the case, cited as Griffi n v. Dell Canada Inc., the plaintiff sought certifi cation of a class ac- tion alleging the company had sold computers with latent defects that caused them to overheat, shut down, and fail to restart. Th addeus Griffi n, who es- sentially represented anyone who had purchased a Dell com- puter and experienced similar problems, asserted his claims based on negligence, breach of contract, unjust enrichment, waiver of tort, and breach of the Competition Act. In addition, consumers have further protection from On- tario's Consumer Protection Act, which shields consumers from being compelled to at- tend arbitrations that can be expensive for people even if the parties reach an agreement. But two similar cases origi- nating from Quebec yielded diff erent results before the Su- preme Court of Canada. In Dell Computer Corp. v. Union des consommateurs and Rog- ers Wireless Inc. v. Muroff , the top court ruled an arbitrator should resolve the disputes unless there are complex questions of law that require a court's attention. So with the evident rise in class actions generally coupled with measures that companies are taking to protect themselves from such litigation, the ques- tion remains as to whether or not arbitration clauses will pre- vail and spread to other sectors. Consider, for instance, a company undertaking an initial rbitration clauses are routinely included in consumer product con- public off ering. Can it in- clude an arbitration clause mandating that shareholders who disagree with its policies down the road resort to a re- course other than litigation? Companies can indeed do so, says Mike Peerless, a part- ner at Siskinds LLP in London, Ont. While there would be no means for securities purchased on the secondary market to include an arbitration clause, he says there's no reason why a company hosting an initial of- fering couldn't. "I don't know of any case that that has happened yet, but on an off ering, there's no reason that an issuer of a secu- rity couldn't put in the off er- ing something that by buying this, the purchaser agrees to participate in arbitration and essentially get it out of the realm of a class proceeding," Peerless notes. He points to the United States, where fi nancial insti- tutions started incorporat- ing arbitration clauses in their credit card contracts with con- sumers as per the Federal Arbi- tration Act. In one case last year, Because class actions law aims to pro- vide access to the courts, 'you can't just contract out of the legislation,' says Mike Peerless. American Express lost its bid to defer to an arbitration clause at the U.S. Court of Appeals for the Second Circuit based on the fact that barring the plaintiff s from pursuing a class action would give the company immu- nity from antitrust liability. Although Peerless says he O'Brien's Encyclopedia of Forms, Eleventh Edition — Corporations, Division II Editor: Aird & Berlis LLP Internet version included with your print subscription. O'Brien's — Corporations, Division II comprises more than 1,200 corporate forms and precedents and is divided into four parts: • General Corporate Documents • Banking and Borrowing • Security Law Precedents • Corporate Acquisitions Covering the federal jurisdiction, as well as the Provinces of Ontario, British Columbia, Alberta, Saskatchewan, Manitoba and Nova Scotia, you can access all of the information currently contained in the print version online. Looseleaf, binders (4) & Internet access • $678 • Releases invoiced separately (1-2/yr) P/C 0870030000 • Vol. 1/2/3/4 ISBN 0-88804-108-X/-120-9/-093-8/-174-8 Regulatory and Corporate Liability: From Due Diligence to Risk Management The Honourable Todd L. Archibald, Kenneth E. Jull and Kent W. Roach This resource deals with issues that are relevant to many areas of the law including occupational health and safety, the environment, competition and securities. Find expert guidance and insightful analysis on: • the basis for regulatory and criminal liability • how regulations apply to organizations and individuals • how the principles of sentencing will impact upon a given scenario • navigating the regulatory and criminal liability systems in Canada Looseleaf & binder • $205 • Releases invoiced separately (1-2/yr) • P/C 0134030000 • ISBN 0-88804-420-8 wouldn't be surprised if a company making an IPO in- cluded an arbitration clause to try to avoid a class ac- tion in the future, he doesn't think it would be successful in the end. "Th e class proceeding leg- islation is designed to allow people access to the courts, and you can't just contract out of the legislation. I think that's what a court would say." But, he adds: "It's certainly possible in the context of a securities case for this to hap- pen as companies are think- ing about this kind of thing and are always looking for ways to limit their liability." Peerless also notes that in class actions such as the one against Dell, the court en- abled the lawsuit to continue over and above the arbitra- tion clause's mandate. Still, he acknowledges that "we don't know how many other times a lawyer has said because there's an arbitration clause, the client should either settle or go through with the arbitration" to resolve the matter. Joel Rochon of Rochon Genova LLP in Toronto says he, too, wouldn't be surprised to see companies including an arbitration clause in their IPO. "Whether or not the use of arbitration clauses may be expanded to fi nd themselves into an IPO is something that remains to be seen," he says. "Th at's not to say there's no room for arbitration clauses because they do serve a legiti- mate purpose." Rochon, who represented the plaintiff group led by Griffi n in the Dell class ac- tion matter, notes the court deferred to Consumer Pro- tection Act amendments that prohibit companies from lim- iting a resolution in a dispute to arbitration. "Th at was a piece of proac- tive legislation designed to pro- tect consumers, and through the Dell decision, the Court of Appeal has indicated that the legislation is applicable," Rochon notes. But in the event of a share- holder dispute, the courts will likely have the last say should a case challenging an arbitration clause arise in that context. LT PAGE 9 For a 30-day, no-risk evaluation call: 1.800.565.6967 LT0510 Canada Law Book is a Division of The Cartwright Group Ltd. Prices subject to change without notice, to applicable taxes and shipping & handling. CA111 (LT 1-3x4).indd 1 www.lawtimesnews.com 5/5/10 11:49:34 AM

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• Plaintiff Rights
• Dangerous Conflicts
• Focus On Securities Law