In the recent litigation funding approval decision of Pass Herald v. Google LLC, 2024 FC 305, the court considered whether there should be a cap on the combined recovery of class counsel and a litigation funder. The defendants suggested that the court impose a cap on their combined recovery in the range of 33-35%. The court refused to do so. Its analysis sheds light on the way that litigation funders – who provide a variety of fees, disbursements and adverse costs funding on a non-recourse basis[1] – share in the risks of class proceedings.
Background
This case is a proposed class action against Google, Meta, and certain related entities for anti-competitive conduct relating to digital advertising products and services. The plaintiff, the operator of Crowsnest Pass Herald newspaper (“Pass Herald”), claims $4 billion in damages against all defendants for breach of sections 45-47 of the Competition Act, R.S.C. 1985, c. C-34 (the “Act”) and $4 billion in damages against Google for breach of section 52 of the Act. The digital advertising space is highly technical and complex, and extensive expert evidence is required to prove the causes of action.
Pass Herald sought funding to pursue its claims. It entered into a litigation funding agreement (“LFA”) with a funder “for several million dollars in funding for various types of disbursements”[2] and adverse costs protection. The LFA entitled the funder to a return of 3% of the damages plus a multiplier of deployed funds, ranging from twice to six times the capital advanced. The LFA included a cap on the funder’s return and a priority payment of $12.5 million to class members.
The Court found that it was in the best interests of justice to approve the LFA. The LFA satisfied the relevant factors underlying the test for approval, including that it is necessary to facilitate access to justice by class members, will make a meaningful contribution to deterring wrongdoing, is not champertous, and is fair and reasonable to current and prospective class members. The latter conclusion, as it relates to the funding return, was restricted to a pre-approved return of 10%. The court preserved discretion to consider whether to award the full funder’s return provided in the LFA in the “very limited and purportedly unrealistic or unlikely scenarios”[3] where a low case resolution would translate into the funder’s return exceeding the pre-approved amount.
Commentary
As part of its analysis, the court considered the defendants’ submission that the agreed-upon return was not fair and reasonable because it did not cap what portion of the damages would be paid to counsel and the funder. The defendants suggested that the court cap the collective recovery at 33-35%. This was “based on the 30-35% 'presumptive range of validity' of the combined return for the funder and Class Counsel, as referenced in Difederico and the jurisprudence cited therein.”[4]
Importantly, the concept of “presumptive validity” was developed in the context of class counsel fees alone. Historically, it did not concern a funder’s return but was concerned solely with fee approval. The concept originated in Cannon v. Funds for Canada Foundation, 2013 ONSC 7686, where the Ontario Superior Court of Justice found that a “one-third contingency fee agreement … should be accorded presumptive validity” and that this “would encourage greater use of the class action vehicle, enhancing access to justice.”[5]
Although a few courts appear to have extended the concept of the “presumptive range of validity” to the notion of a combined return, this has generally occurred where class counsel have been paid a significant portion of their fees by a funder throughout the litigation.[6] In such arrangements, class counsel significantly de-risks itself by earning fees regardless of the outcome of the litigation. The funder – who reduces class counsel’s risk and bears greater risk by paying fees in addition to disbursements and adverse costs – assumes a large portion of any 30-35% recovery agreed upon by the plaintiff and the funder. Thus, while there have been funding structures that limit combined returns to around 35%, the funder is typically entitled to most of that recovery, with class counsel receiving a smaller portion of their contingency fee entitlement.
The court recognized some of these nuances in refusing to impose a cap on combined recovery in Pass Herald v. Google LLC, 2024 FC 305. It distinguished Drynan v. Bausch Health Companies Inc. 2020 ONSC 4379,[7] one of the cases relied upon by the defendants, on the basis that class counsel in that matter was paid 80% of its fees by the funder and therefore “was taking far less risk than in the present circumstances.”[8] The court also noted that “[t]he appropriate time to assess Class Counsel’s return is at the proposed settlement stage, or in rendering judgment if no settlement is reached. Consequently, the imposition of a cap on the combined return of [the funder] and Class Counsel is not appropriate at this point in the proceeding.”[9]
Final Observations
On funding approval motions, courts are required to consider the impact of funding on the recovery available to class members. At the same time, courts recognize that funding is often necessary for class members to achieve any recovery at all.
In Pass Herald v. Google LLC, 2024 FC 305, the court demonstrated an awareness of some of the commercial realities and risks faced by commercial litigation funders, including “the time value of money [and] the fact that [the funder’s] risk increases with time.”[10] The time value of money concept provides that a dollar today is worth more than a dollar recovered in the future, because of potential earnings on today’s dollar in the interim and the increased cost of money over time owing to inflation. When funders agree to fund an action, they exchange the time value of money (and the risk of loss on multiple fronts) along with many other layers of risk and uncertainty for a return. The amount of the return – along with a degree of certainty around the funder’s return, which is a significant risk-mitigation tool given its inability to control or direct the litigation – is what makes a particular lawsuit viable or not to fund.
[1] Litigation funding is distinguishable from litigation lending. Litigation lenders provide funds on a recourse-basis, meaning that, unlike litigation funders, they are entitled to repayment of their principal plus any return or interest irrespective of the outcome of the litigation.
[4] Pass Herald Ltd. v. Google LLC, 2024 FC 305 at para. 65. See fn 5 for some background to the jurisprudence cited in Difederico v. Amazon.Com Inc., 2021 FC 311 ("Difederico").
[6] As set out above, in relation to the presumptive range of validity for a combined return, the court references Difederico at para. 65 and three cases cited therein. The first of those cases was Drynan v. Bausch Health Companies Inc., 2020 ONSC 4379, in which class counsel were paid their fee on an hourly basis, throughout the litigation, at a rate of 80%. The second case was Houle v. St. Jude Medical Inc., 2018 ONSC 6352 ("Houle"), in which the funding agreement provided for class counsel to be paid their hourly fee in real time at 50%. Moreover, the paragraph in Houle cited by Difederico concerned contingency fees only. The third case is Cannon v. Funds for Canada Foundation, 2013 ONSC 7686, which, as explained above, makes no reference to litigation funding.
[7] Notably, in that case, class counsel and the funder agreed to a collective cap; the court did not impose it.
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