October 26 2006
The Ontario Divisional Court recently issued its decision in Serhan Estate v Johnson and Johnson.(1) A majority of the court upheld the Ontario Court of Appeal's decision to certify a product liability class action in connection with the defendant's manufacture and distribution of a defective diabetic blood glucose monitor in the 1990s (for further details please see "Waiver of Tort as a New Cause of Action"). Although the court expressed some concern about allowing the action to proceed on the basis of a cause of action that eliminates the need for the plaintiff to prove it has suffered loss, particularly in a product liability context the majority concluded that the state of the law on waiver of tort is sufficiently uncertain and the policy considerations sufficiently complex, to warrant a hearing on a full factual record.
The court was not unanimous. One judge of the three-member panel issued a strongly worded dissent concluding that, although waiver of tort may constitute a novel and emerging cause of action in Canada, there is no principled basis upon which it can be sustained by the facts of this case.
The claim in Serhan relates to defective blood glucose meters and testing strips used by diabetics to monitor their blood glucose levels. These were manufactured by LifeScan Inc, a wholly owned subsidiary of Johnson and Johnson. The problems were resolved by LifeScan in 1997 and 1998. Following US federal investigations, in December 2000 LifeScan entered into a plea agreement with the prosecution and admitted knowledge of the defects dating back to 1993. Pursuant to the plea agreement, LifeScan paid a fine of US$29.4 million.
In this case the Ontario plaintiffs sought damages for:
The plaintiffs sought to have all the revenue generated from the sale of the defective products held in a constructive trust for the benefit of the class. They also asked for an accounting order and an order for the disgorgement of all such revenue.
The key difficulty with the plaintiffs' claim in this case was their inability to demonstrate that they had suffered any injury or economic loss as a result of using the defendant's defective products. Under Canada's universal healthcare plan, both representative plaintiffs received the meters free through diabetic clinics and hospitals and obtained test strips free of charge under the Ontario Drug Benefit Plan, although each paid a C$2 processing fee per prescription. In the absence of evidence to the contrary, the court inferred that the other members of the plaintiffs' class had also obtained the products through similar means at no personal cost.
Initially the motions judge hearing the certification motion refused to certify the first three claims on the basis that they were not conducive to resolution by a class proceeding. However, the action was certified and allowed to proceed on the grounds that the claim disclosed a cause of action known as waiver of tort.
The main concern regarding the plaintiffs' claim was the difficulty in demonstrating that they had suffered any injury or economic loss as a result of using the defective product. On appeal, the key issue was whether a cause of action can be sustained in the absence of evidence of injury or damages. In response to this problem the plaintiffs argued that the doctrine of waiver of tort is an independent cause of action that can be used to compel a defendant to disgorge an unjust enrichment gained through any type of wrongdoing, regardless of whether the enrichment was obtained at the plaintiffs' expense. The defendant, in response, contended that waiver of tort is nothing more than an equitable remedy which requires the plaintiffs to prove the elements of an underlying tort first.
On appeal, the majority framed the primary issue as whether the concept of waiver of tort constitutes an independent cause of action in Canada and, if so, whether it entitles the plaintiffs to the remedy of either a constructive trust or an accounting in disgorgement of profits.
Waiver of tort
Waiver of tort is not a new concept at common law. However, historically it has been viewed as a choice of remedy as opposed to an independent cause of action. It permits a plaintiff who has suffered little or no damage to base his or her claim in restitution. In exchange for giving up the right to sue in tort, the plaintiff can instead claim the benefits derived by the defendant through its wrongful conduct. In certain situations, it may be to the plaintiff's advantage to seek to recover the amount of the defendant's gain instead of normal tort damages.
In keeping with this historical view, the defendant argued on appeal that waiver of tort is not an independent cause of action, but a parasitic concept which requires the plaintiff to prove the elements of a tort before the court considers the issue of remedy. Given the lower court's refusal to certify any of the plaintiffs' nominate tort claims as common issues for the purposes of a class proceeding, the defendant contended that it was an error of law to permit the waiver of tort claim to proceed.
The plaintiffs argued that waiver of tort is a distinct cause of action in circumstances where a defendant has engaged in tortious conduct and where it would be unjust to allow it to retain the fruit of its wrongful behaviour. To found a claim in waiver of tort, the plaintiffs contended that they needed to demonstrate only that the defendant had breached a duty of care owed to the plaintiffs' class and that it had been enriched by the conduct which resulted in the breach. In other words, the plaintiffs would need to prove only the tortious conduct in order to be entitled to a remedy.
The majority was concerned about allowing a cause of action that eliminates the need to prove loss to proceed, particularly in the context of a product liability claim. However, it held that the unsettled state of the law in Canada and the active debate among legal writers, together with the important policy issues engaged, prevented it from concluding that the claim was sure to fail. Instead, it agreed with the motions judge that the issue of whether waiver of tort constitutes an independent cause of action should be considered and resolved on the basis of a full record.
Plaintiffs' entitlement to a constructive trust
Turning to the issue of the remedies that may be available to the plaintiffs should they succeed in establishing liability against the defendant on the basis of waiver of tort, the majority observed that the most challenging aspect of the appeal was determining the plaintiffs' entitlement to the remedies of either a constructive trust or an accounting and disgorgement on the basis of waiver of tort.
In support of their claim for a constructive trust on the basis of waiver of tort, the plaintiffs relied first on the Supreme Court of Canada's seminal decision in Pettkus v Becker.(2) That decision extended the law of restitution in Canada by recognizing constructive trusts as a remedy for unjust enrichment. Although historically the entitlement to a constructive trust has hinged on the existence of a fiduciary relationship, recent cases have imposed constructive trusts to remedy other equitable wrongs, such as a breach of confidence or a breach of good conscience.(3)
In the more recent case of Soulos v Korkantzilas(4) the Supreme Court of Canada set out four conditions which must be satisfied before the court will impose a constructive trust based on wrongful conduct:
The defendant's argument that the plaintiffs were unable to satisfy any of the four conditions was rejected by the court.
With regard to the first condition, the defendant submitted that there was no fiduciary relationship between the plaintiffs and the defendant that could justify the imposition of a trust. In rejecting this argument, the majority held that it is an open question whether the courts will be prepared to identify an enforceable equitable obligation between the manufacturers and/or distributors of healthcare products and their ultimate users - "individuals who are in a vulnerable position in relying on the products".(5) Given the Supreme Court's readiness to recognize new 'equitable' obligations, the majority refused to conclude that one could not be recognized in these circumstances.
With regard to the second condition, the defendant pointed to the absence of an agency relationship between the parties to argue that the claim for a constructive trust must fail. Although the majority conceded that, in most circumstances, the relationship between manufacturer and consumer would not be identified as 'equitable', it refused to discount the possibility that an equitable obligation would be recognized in this type of product liability case in the future. In light of the Supreme Court's willingness to extend the scope of the availability of constructive trusts, and the relevant policy considerations engaged, the majority held that the issue should be determined against the background of a full factual record.
In respect of the third condition, the defendant pointed to the fact that the plaintiffs had not paid any money for the defective products in order to argue that the claim could not succeed. Again, the majority pointed to the developing state of the law and the existence of cases where a constructive trust was ordered in the absence of a pre-existing right to the property to deflect the defendant's objections and permit the claim to proceed.
Finally, in respect of the fourth condition, the defendant contended that, among other things, the absence of any payment by the plaintiffs to the defendant and the substantive law of product liability were factors that would render the imposition of a constructive trust unjust. However, with Soulos having expanded the use of constructive trusts to situations where 'good conscience' so dictates, the majority agreed with the lower court's conclusion that any determination of what constitutes fairness, or the lack thereof, must be determined on the facts.
The law in Ontario suggests that motions judges should be reluctant to strike out novel causes of action. In this case, the majority concluded that entitlement to a constructive trust remained an open question and that the plaintiffs' claim was not "sure to fail". It left undisturbed the lower court's conclusion that if in law no proof of loss is required to make restitutionary remedies available in cases of waiver of tort, the defendant may be found liable to disgorge all or part of the benefits it received from the marketing of the defective blood monitoring products.
Plaintiffs' entitlement to an accounting and disgorgement
Even if the plaintiffs' claim for a constructive trust ultimately failed, the majority noted that they might still be able to persuade a court to grant the remedy of an accounting and disgorgement based on waiver of tort. There is considerable uncertainty surrounding the meaning of 'disgorgement' and its application in Canadian law, beginning with the question of whether the remedy is restitutionary in nature. While some legal scholars maintain that it falls squarely within the realm of restitution, others argue that disgorgement is broader than restitution in scope. They note that it can require defendants both to 'give back' something that the plaintiff once had (to remedy enrichment by subtraction) and to "give up" a benefit wrongfully obtained (to remedy enrichment by wrong).
It is in relation to the latter category of benefits that the plaintiffs found their claim to disgorgement in this case. On this basis, it is arguably unnecessary for the court to find the requisite equitable relationship between the parties under the principles outlined in Soulos in order for disgorgement relief to be available. As the defendant's gains were not subtracted from the plaintiffs', the extent of the plaintiffs' loss (if any) does not constitute a limit to the amount of relief granted. On the contrary, they are entitled to disgorgement of the full amount of the benefits gained by the defendant through its wrongful conduct. Recovery is based on the notion that a wrongdoer ought not to be permitted to profit from its own wrongdoing. Equity and good conscience demand that a defendant be required to disgorge that by which it has been enriched.
There is an ongoing debate over whether it is appropriate to award proprietary disgorgement for wrongdoing. As it is a specific goal of class proceedings to correct the behaviour of wrongdoers, the court concurred with the motions judge in concluding that a claim based on waiver of tort giving rise to the remedy of an accounting in disgorgement was not certain to fail and should proceed.
In conclusion, the court noted that, like negligence, the categories of restitution may never be closed. It held that it is "the moral quality of the defendant's conduct that forms the fundamental reason for the court's intervention".(6) The court then observed that:
"there could be no doubt that these defendants were enriched. Is it not unjust for them to retain their gains through their misrepresentations as to the efficacy of a healthcare device relied upon by thousands of diabetics in Canada?"(7)
The challenge, the court conceded, lies in connecting the plaintiffs to these gains in a legally coherent fashion. The court explicitly recognized that it is important to have legally supportable boundaries of liability and recovery in the area of product liability. Thus, the problem with recognizing waiver of tort as an independent action centres on the difficulty of creating sound rules to define the circumstances in which it would and would not apply. In the court's view, the biggest challenge is to identify a legally acceptable way of justifying why the plaintiffs, having suffered no loss, should be entitled to the amount claimed: "[t]he plaintiffs may well face an uphill battle, but they should not be deprived of the opportunity to prove their case at trial."(8)
Dissenting, Justice Chapnik conceded that waiver of tort may constitute a novel cause of action which may not require proof of loss or damage. However, she was not persuaded that this was a case in which such a cause of action could be sustained on the facts as pleaded.
Specifically, Chapnik found that the plaintiffs' claims for both the remedies of a constructive trust or an accounting in disgorgement were certain to fail based on the combined absence of the elements of unjust enrichment, any trust-like relationship and any sort of calculable loss or ongoing deprivation sustained by the plaintiffs. She also expressed concern with the lower court's conclusion that a class proceeding would be the preferable procedure for resolution of the common issues identified, stating that:
"what certification of this case does, in essence, is bring strict liability to Canadian law in the area of product liability. The only goal accomplished would be the punishment of unlawful and inappropriate behaviour by the defendants."(9)
Chapnik observed that this goal may well be moot given the recalls and corrective action taken by the defendant to date. Accordingly, she concluded that she would allow the appeal, reverse the decision of the lower court and dismiss the plaintiffs' motion for certification.
In an earlier stage of this case Justice Ground of the Ontario Court of Appeal granted leave to appeal to the Ontario Divisional Court a decision of Justice Cullity to certify this class action. Ground found that there was good reason to doubt that waiver of tort is an independent cause of action. However, two of the three judges of the divisional court disagreed, finding that the claim based on waiver of tort giving rise to a remedy of disgorgement was not certain to fail. This is clearly an uncertain area of the law and it remains for an appellate court to determine this issue ultimately.
For further information on this topic please contact Susan Wortzman or Gillian T Hnatiw at Lerners LLP by telephone (+1 416 867 3076 ) or by fax (+1 416 867 9192) or by email (email@example.com or firstname.lastname@example.org).
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Susan B Wortzman
Gillian T Hnatiw