Appeal Court Finds Judicial Bias on Jurisdiction Motion

In a recently released decision, the Ontario Court of Appeal found that a motion judge’s actions on a jurisdiction motion gave rise to a reasonable apprehension of bias.  As a result, the Court of Appeal set aside the order made at the motion and ordered that the jurisdiction motion be heard again before a different judge of the Ontario Superior Court.  The full decision is report at Stuart Budd & Sons Limited v. IFS Vehicle Distributors ULC, 2016 ONCA 60.

 

In the action, various plaintiffs, including plaintiffs in Ontario, sued four foreign defendants for breach of franchise agreements.  The defendants brought a motion to dismiss the action arguing that the Ontario court lacked jurisdiction.  In the alternative, they asked the court to stay the action on the basis of forum non conveniens.  The motion was heard before Justice David Corbett of the Ontario Superior Court of Justice.  Justice Corbett dismissed the motion.  He found that there was jurisdiction simpliciter in Ontario for all claims, including for those claims that had arisen in other Canadian provinces.  He also held that Ontario was the most convenient forum in which a single proceeding would be held. 

 

The defendants appealed from Justice Corbett’s findings relating to jurisdiction simpliciter and forum non conveniens.  However, they also raised, as a ground of appeal, that Justice Corbett’s comments and conduct during the course of the motion raised a reasonable apprehension of bias.  The Court of Appeal agreed with this latter submission.

 

There were two hearings before Justice Corbett.  At the first hearing, the foreign defendants objected to the affidavit evidence filed by the plaintiffs’ sole affiant on the basis that it was extensively based on information without identifying the source of the information and setting out why the affiant believed the information to be true.  Justice Corbett agreed that the evidence presented by the plaintiffs "would be fatal" to their position on the motion.  He therefore adjourned the motion on his own initiative and ordered the plaintiffs to cure the defective affidavit by serving a further affidavit. 

 

After cross-examinations were held, the parties returned before Justice Corbett to argue the motion.  Prior to the lunch breach and before hearing argument on joinder and forum non conveniens issues, Justice Corbett rendered his decision dismissing the motion and referring to it as “an abuse of process”. 

 

Justice Corbett advised counsel that he would be delivering further reasons “for the purposes of any appeal of this decision”.   In his amended endorsement, Justice Corbett dealt with the issues of jurisdiction and joinder presented on the motion.  He concluded the endorsement with a section entitled “Process of this Motion” which he identified as necessary because the motion was “bad” and called for a sterner response.   In the section he criticized the defendants for the amount of time they took to prepare their materials for the initial hearing, and described their objection to the respondents’ evidence as “technical” asking rhetorically “What’s the point?” and concluded that the defendants’ cross-examination on the affidavits were a waste of time. 

 

The decision of a three judge panel of the Court of Appeal – Justices Weiler, Epstein and Huscroft – was written by Justice Epstein.  She found that at various points in the proceedings, Justice Corbett had conducted himself in a manner that gave the appearance that he favoured the plaintiffs’ position.  For example, a reasonable observer could perceive the adjournment that he gave at the first hearing on his own initiative as a judge going out of his way to assist the plaintiffs.  That perception was strengthened by Justice Corbett’s dismissive comment that he did not anticipate that the defendants’ cross-examination of the plaintiffs on their new material would add much to the background.

 

In the second hearing, Justice Corbett dismissed the motion halfway through the full day that had been scheduled without giving counsel the opportunity to make oral submissions on two issues that he properly identified as “principal arguments” joinder of claims and forum non conveniens. 

 

Justice Epstein found that deciding the jurisdictional challenge without allowing for oral argument on these major issues was a cause for particular concern in a case involving multiple parties on both sides.  Although Justice Corbett acknowledged the legitimacy of the defendants’ positions on a few occasions, the overall tenor of his remarks was derisive and suggested a view critical of jurisdiction motions and of this motion in particular, i.e. his finding that the motion was an "abuse of process" and a "colossal  waste of time".   Justice Epstein held that Justice Corbett’s finding that the motion was an abuse of process, made on his own initiative without the benefit of submissions or reference to any legal authority was unwarranted.  Further, Justice Corbett made discourteous comments towards the defendants’ counsel for no apparent reason.  In all three endorsements he repeatedly criticized defendants’ counsel on matters including their advocacy skills, knowledge of the law and handling of the matter.  He made a number of comments for which Justice Epstein found no justification. 

 

Justice Epstein held that an informed and reasonable observer would see Justice Corbett's amended endorsement, i.e. the endorsement he prepared for appeal purposes, as a desire by Justice Corbett to defend his decision to dismiss the motion.  His comments were motivated by his desire to respond to anticipated challenges to his decision.  Justice Corbett appeared to insinuate himself into the appeal process by attempting to defend his actions and his comments.

 

Justice Epstein considered the legal principles which apply to a motion for judicial bias.  She endorsed the decision of the Supreme Court of Canada in Yukon Francophone Schoolboard, Education Area No. 23 v. Yukon (Attorney General): 

 

What would an informed person, viewing the matter realistically and practically – and having thought the matter through – conclude.  Would he think that it is more likely than not that [the decision-maker], whether consciously or unconsciously, would not decide fairly?

 

Having regard to that question, Justice Epstein concluded that she had no doubt that Justice Corbett was well-intentioned and that he had put a great deal of effort into resolving the jurisdiction issue.  However, her review of the three endorsements led her to conclude that Justice Corbett’s actions gave rise to a reasonable apprehension of bias.  In her opinion, the cumulative effect of Justice Corbett’s conduct was that an informed, reasonable observer, viewing the proceedings as a whole, would conclude that the defendants had not received a fair hearing to which they were entitled.

Regards,

Blair

 

 

 

Happy New Year!

Dear Readers,


All the best for a healthy, happy and prosperous 2016.  See you again soon.


Regards,


Blair

Supreme Court Set to Rule Upon Dismissal Provisions of Canada Labour Code

On January 19, 2016 the Supreme Court of Canada will hear arguments in the case of Joseph Wilson v. Atomic Energy of Canada Limited (“AECL”) (2015 FCA 17).  The case involves the proper interpretation of certain provisions of the Canada Labour Code (“Code”) and whether an employee whose employment is subject to the Code, if dismissed without cause, has automatically been unjustly dismissed. 

 

In this case, AECL had employed Mr. Wilson for four and a half years.  Starting out as a Senior Buyer/Order Administrator, Mr. Wilson had received many promotions.  His last position was Procurement Supervisor, Tooling.  That position was not managerial.  On November 16, 2009, AECL terminated Mr. Wilson’s employment without cause.  AECL offered Mr. Wilson a severance package equal to roughly six months’ pay in exchange for a full and final release.  Had his severance package been determined in accordance with the minimum statutory notice and severance requirements under the Code, he would have been entitled to only 18 days’ pay.

 

Mr. Wilson did not sign the release.  Instead he filed a complaint under Part III of the Code alleging that he had been unjustly dismissed.  At the request of his counsel, Mr. Wilson remained on AECL’s payroll for roughly six months, continuing his access to AECL’s employee benefit programs.  In the end he received the full amount of the severance package AECL had originally offered to him. 

 

An adjudicator was appointed to hear Mr. Wilson’s complaint under the Code.  In the agreed statement of facts placed before the adjudicator, the parties identified two “preliminary questions”:  1.  Whether as a matter of statutory interpretation AECL could lawfully terminate Mr. Wilson’s employment on a without cause basis; and 2.  If so, whether the severance package gave rise to a "just dismissal".

 

The adjudicator accepted Mr. Wilson's submission that dismissal without cause is, by that reason alone, unjust dismissal within the meaning of the Code and that he was therefore entitled to a remedy.

 

Having made that decision, the adjudicator adjourned the hearing, directing the parties to discuss the appropriate remedy in the hopes that it might settle.   Absent settlement, he intended to conduct a hearing to determine whether a remedy was warranted and if so what it should be. 

 

AECL applied to the Federal Court for judicial review of the adjudicator’s decision.  The Federal Court dismissed the appellant’s objection that the judicial review was preliminary and found that the adjudicator’s statutory interpretation decision was unreasonable.  The Federal Court quashed the adjudicator’s decision and remitted the matter back to the adjudicator for decision. 

 

On further appeal to the Federal Court of Appeal, the court dismissed Mr. Wilson’s appeal. 

 

The Federal Court of Appeal found that the proper interpretation  of the Code had created two schools of thought which have persisted for decades.  The key consideration by the court was whether Part III of the Code ousted the common law of dismissal or whether it accepts the common law as given, supplementing and building upon it.  At common law, an employer could dismiss a non-unionized employee without cause, but is liable to provide reasonable notice or compensation in lieu of notice.  If the employee is given such notice, he or she is not wrongfully dismissed.

 

The Federal Court found that the provisions found in Part III of the Code do not represent a sea-change in the law of dismissal but rather enhance the remedies that may be available in appropriate cases of dismissal.   It will always be for the adjudicator to assess the circumstances and determine whether the dismissal, whether or not for cause, was unjust.  The dismissal of an employee without cause is not automatically unjust.

 

Part III of the Code sets out a complaints mechanism and remedies for “unjust” dismissal.  Specifically, a subsection of the Code empowers an adjudicator to “consider whether the dismissal of the person who made the complaint was unjust”.   The Code does not define unjust.  The Federal Court of Appeal examined whether Part III ousted the common law of employment or supplemented and built upon it as set out in that subsection.  

 

In reaching its decision, the Federal Court of Appeal held that the legislator is presumed not to depart from prevailing common law.   Such prevailing common law can be ousted only by way of explicit language or necessary implication.  An example of necessary implication is where the legislator has provided for something that conflicts with the common law so that the two can no longer live together.  The common law is not ousted unless Parliament has expressed its intentions to do so with “irresistible clearness”.  The Code does not contain text or necessary implication that can be taken to oust the aspects of the common law of employment.  The Code was enacted against the backdrop of the common law and does not explicitly oust it in this respect.   

Wilson has obtained leave to appeal from this decision to the Supreme Court of Canada.

AECL's case at the FCA was argued by my partner Ron Snyder.  I will keep you posted.

Regards,

Blair

Court Appointed Receiver Liable to pay Substantial Indemnity Costs

Earlier this year ( June 9th ), I wrote about a case in which the Court of Appeal for Ontario set aside "breathtakingly broad" receivership orders that put in place an "investigative receivership".  This month, the court released its ruling on costs arising from its decision. See Akagi v. Synergy Group (2000) Inc. 2015 ONCA 771. 

 

On the appeal, the court  had set aside ex parte orders issued by Justice Colin Campbell of the Superior Court of Justice (Commercial List).  The court concluded that the orders appointing the receiver stood “on a fundamentally flawed premise” and were “unjustifiably overreaching in the powers they granted”. 

 

In the court’s view, both the judgment creditor, Mr. Akagi - who commenced the receivership proceedings without taking any initial steps to recover on his judgment - and the receiver, J.P. Graci and Associates Ltd., who took the investigative receivership too far, should bear the cost consequences of the orders having been set aside.

 

Mr. Akagi applied for the initial ex parte order appointing the receiver after obtaining a default judgment in the amount of approximately $147,000 based on allegations of fraud arising out of the loss of funds he had contributed to a tax program marketed and sold by the Synergy Group.  The program was supposed to generate tax loss allocations for him, but did not.  His judgment was against the Synergy Group and certain individuals associated with it.  The initial order made by Justice Campbell granted a receivership over all the assets and undertakings of the Synergy Group and an additional company, Integrated Business Concepts Inc. (“IBC”).   

 

It soon became clear however that the principal purpose of the receivership order was not to recover on Mr. Akagi’s judgment debt but to institute a broad ranging inquiry – a roving “investigative receivership” – into what was alleged to be a much larger tax fraud scheme, and to do so, purportedly on behalf of approximately 3,800 other investors who may have been caught in the tax scheme as well.  None of these investors were a party to the Akagi action or the receivership application, none purported to seek to have their interests protected, and Mr. Akagi and the receiver maintained throughout that they did not purport to represent the interests of those investors. 

 

Subsequently, through a series of further ex parte applications, the receivership order morphed into a wide ranging investigative receivership, freezing and otherwise reaching the assets of 43 additional individuals and entities including authorizing the registration of certificates of pending litigation against their properties.  Only three of these entities and individuals had any connection to the underlying Akagi action and only two were actually judgment debtors.

 

The Court of Appeal set aside the receivership orders on the basis that the receivership had proceeded on an entirely misguided course, the orders were impermissibly over-reaching, and the ex parte proceedings themselves had been tainted by certain procedural errors including the receiver's failure to disclose to Justice Campbell that the Canada Revenue Agency had discontinued its investigation into the tax allocation scheme several months before the receivership was sought when evidence of that inquiry had formed the basis for obtaining the orders.

 

All of the appellants, including IBC and Student Housing Canada Inc., sought their costs on a full or substantial indemnity basis against both Mr. Akagi and the receiver, jointly and severally. 

 

The receiver argued that no costs should be awarded against it because it was proceeding in good faith and simply carrying out what it understood to be its court-ordered mandate.  It’s conduct and activities pursuant to the receivership orders were approved by the court in two orders and the general rule is that a receiver is not exposed to costs against it personally in receivership proceedings.

 

Mr. Akagi argued that his involvement with the receivership had been limited solely to obtaining the initial receivership order and to defend that order throughout the receivership.  He argued against responsibility for costs incurred by the appellants subsequent to the initial order. 

 

The Court of Appeal did not accept that Mr. Akagi’s involvement in the receivership proceedings was minimal or limited to obtaining the initial order.  Mr. Akagi had tenaciously defended the subsequent ex parte orders.  Mr. Akagi’s counsel had attended and participated in various motions, scheduling appointments and examinations.  Mr. Akagi was a central participant on the appeal itself.  He instituted and supported the proceedings throughout.

 

As a result, the Court of Appeal found him responsible for costs. 

 

As for the receiver, the court held that it was also liable to pay costs.   The principle that costs are rarely awarded against the receiver applies only when the receiver is acting in his capacity as receiver in the course of the receivership.  It does not apply where the receiver turns itself into a real litigant, drawing others into the fray and forcing them to defend themselves in what amounted to a process that was extraneous to the creditor-driven receivership.

 

The court did not make a finding that the receiver acted in bad faith.  In its view however, the receiver had misconceived its role, and in the process had lost its objectivity in the notion that it was an investigative receiver.  Mr. Akagi’s claim was a relatively small one that did not justify or require the intrusive and far-reaching mareva like orders that were obtained.  In taking these steps, the receiver undermined its neutral position as an officer of the court and turned itself into a litigant for the cause.  As a litigant, it was subject to the loser pays costs regime that applies. 

 

The court awarded costs against the receiver on a substantial indemnity scale as a measure of its disapproval of its conduct. 

 

It awarded costs against Mr. Akagi on a partial indemnity basis.  It appeared to the court that the receiver was the more active litigant pushing for potential action on behalf of all 3,800 alleged victims and calling the shots on the over-reaching orders that were obtained.  In addition, the court reasoned that Mr. Akagi, as an unpaid creditor at least had some interest in pursuing the receivership.

Regards,

Blair

Ontario Courts Refuse to Stay Action Against Nigerian Defendants

The Court of Appeal for Ontario released its decision in James Bay Resources Limited v. Mak Mera Nigeria Limited, 2015 ONCA 781  this week.  This is an appeal by Nigerian appellants who had lost a motion to stay an action brought by James Bay Resources Limited (“James Bay Resources”) on the ground that the Ontario courts lacked “jurisdiction simpliciter” and Ontario was not the convenient forum for the determination of the dispute between the parties. 

 

James Bay Resources entered into a Memorandum of Understanding (“MOU”) with the appellant, Adewale Olorunsola (“Sola”) on March 3, 2011.  The MOU was negotiated and signed in Ontario.  It set out an arrangement between the parties with respect to the acquisition of Nigerian oil and gas assets. 

 

On February 12, 2012, James Bay Resources and the appellant, Mak Mera Limited (“Mak Mera”) entered into a letter agreement which replaced the MOU (“Agreement”).  The Agreement was far more detailed than the MOU.  Sola signed both the MOU and the Agreement.

 

A dispute arose between the parties in respect of the contractual arrangements.  The dispute was fueled by a letter sent by Mak Mera to Royal Dutch Shell PLL on July 2, 2014.  The letter was copied to James Bay Resources, as well as to many others, including the Nigerian Ambassador to Canada and a number of officials of the Nigerian government.  Madam Justice MacFarland of the Court of Appeal found that absence truth, the statements made in the letter were "quite clearly defamatory" of James Bay Resources.

 

On September 4, 2014, James Bay Resources commenced proceedings against Mak Mera and Sola in Ontario.  On September 16, 2014, Mak Mera, Sola and Sola’s father-in-law (a Nigerian resident and Chairman of Mak Mera), commenced an action in Nigeria against numerous parties including James Bay Resources and its CEO, Stephen Shafsky.  Some of the claims in the Nigerian action were similar to those in the Ontario action. 

 

James Bay Resources moved in The Federal High Court of Nigeria to strike the Nigerian action on the grounds that the Nigerian court lacked jurisdiction.  It was unsuccessful.  James Bay Resources is appealing that order.

 

On March 2, 2015, Mak Mera and Sola moved to strike or permanently stay the Ontario action.  Justice Paul Perell of the Ontario Superior Court of Justice concluded that Ontario had jurisdiction simpliciter and identified several presumptive factors that would apply, including that Sola is an Ontario resident and both the MOU and the Agreement were negotiated and signed in Ontario.  Justice Perell also found that the Agreement provides that it is governed by Ontario law and contains a choice of forum clause that names Ontario as the jurisdiction where any disputes would be resolved.  He noted, “Neither Mak Mera nor Mr. Sola has advanced any cogent argument that there is a rebuttal of the contractual connection as a presumptive factor.  Their arguments may be relevant to the issue forum conveniens, but jurisdiction is not rebutted.”.  Mak Mera and Sola appealed to the Court of Appeal. 

 

The appellants made no oral submissions rebutting the contractual connection as a presumptive factor.  Justice MacFarland held that the arguments raised on appeal went to the merits of the claims, not to jurisdiction of the Ontario courts.  Those issues did not displace or challenge the fact that both agreements (the MOU and the Agreements) were negotiated and signed in Ontario and that Sola is an Ontario resident – both are strong, presumptive factors.   

 

The appellants also argued that Justice Perell had erred in law by failing to specifically consider comity in his analysis.  Justice MacFarland embarked on a detailed analysis of the goal of comity in jurisdictional motions.  She referred to the decision of the Supreme Court of Canada in Van Breda v. Village Resorts, [2012] 1 SCR572:

 

The goal of the modern conflicts system is to facilitate exchanges and communications between people in different jurisdictions that have different legal systems.  In this sense it rests on the principle of comity.  But comity itself is a very flexible concept.  It cannot be understood as a set of well-defined rules, but rather as an attitude of respect for and deference to other states and, in the Canadian context, respect for and deference to other provinces and their courts.  Comity cannot subsist in private, international law without order, which requires a degree of stability and predictability in the development and application of the rules governing international or inter-provincial relationships.  Fairness and justice are necessary characteristics of a legal system, but they cannot be divorced from the requirements of predictability and stability which assure order in the conflicts system.   In the words of LaForest J., in Morguard, “what must underlie a modern system of private, international law and principles or order and fairness, principles that ensure security of transactions with justice”.

 

Accordingly, Justice MacFarland found that comity is not a stand-alone factor.  She held that it was part and parcel of the forum non conveniens assessment in a given case.  In dismissing the appeal, Justice MacFarland held that Justice Perell had considered the issue of comity in his analysis.  He had done so implicitly when he outlined and considered all of the relevant factors in coming to his conclusion that Nigeria was not the more convenient forum. 

 

Justice Perell was aware of the Nigerian litigation which was started after the Ontario action.  He was aware that James Bay Resources had filed a statement of defence in that action, and brought an unsuccessful motion to strike and was appealing the dismissal of its motion.  The appellants had cited no law for their argument that by filing a statement of defence in the Nigerian action, James Bay Resources had attorned to the jurisdiction of the Nigerian courts. 

 

Justice MacFarland agreed with Justice Perell’s conclusion that “balancing all factors, Nigeria is not clearly the appropriate forum for the dispute and Ontario is not forum non conveniens.”.

Regards,

Blair

 

 

Court of Appeal Finds Judicial Bias in Bizarre Child Custody Case

In a recent decision (Clayson-Martin v. Martin, 20015 ONCA 596), the Court of Appeal for Ontario overturned a family trial judge’s decision on the basis of a reasonable apprehension of bias.

 

The case involved a custody and access dispute over children aged 10 and 7.  At trial, the judge granted the wife sole custody of the children.  The wife appealed that decision because it provided for the children to have generous access to the husband.  The wife submitted that access should have been terminated because the husband tried to kill her.  The case garnered some notoriety in the news because of the alleged attempted murder.  The couple separated as a result of an incident which occurred while they were on vacation in Jamaica.  Each party alleged that at the end of the vacation, while they were on a deserted road from which the husband had wanted to photograph their hotel, the other attacked with a knife. 

 

The marriage was in trouble in 2010.  The wife wanted to separate from the husband.  He persuaded her to go on one last trip with him to Jamaica for a week in December to try to save the marriage.

 

After leaving the hotel on December 23, 2010, the husband drove the wife to a secluded road where on the wife’s evidence, he slit her throat, forced her into the vehicle after she attempted to flee, strangled her and then drove 17 kilometres before she was able to jump from the moving vehicle and escape.  She was taken to a hospital by a passerby.   

 

On the husband’s evidence, he testified that the wife attacked him with a knife.  He assumed, although he did not see, that she sustained a wound on her neck by her own hand when he, in self-defence, pushed her hand bearing the knife away from him.  This story differs from the one he told Jamaican police at the time of the incident.  At that time he said that his wife was injured by a Jamaican man who had attempted to rob the couple. 

 

Surprisingly, the trial judge concluded that he could not find on a balance of probabilities that the husband had attacked the wife and that if anything, the evidence “tilts in the opposite direction”.  He was not prepared to make a finding either way. 

 

Before the Court of Appeal, the wife’s counsel began her argument by outlining the facts that were not in dispute:  

 

1. the wife suffered a knife wound to her throat, 10 cm in length extending from ear to ear, and which caused profuse bleeding;
2. there were only two people present at the time, the wife and the husband;
3. the wife suffered a deep cut to her thumb;
4. the husband suffered no knife injuries;
5. the husband forcibly carried the wife back to the car, shoved her in the driver’s side and held her as he drove from the scene;
6. the husband drove for 10 kilometres with the wife bleeding profusely and did not stop once to get help;
7. the husband also drove into a dirt road during this time;
8. the wife was observed to have her feet dangling out of the car and screaming for help;
9. the wife either jumped, was pushed, or slipped out of the moving car;
10. the husband, after the wife exited the car, continued to drive, leaving the wife with her throat slit by the side of the road;
11. the husband did not stop or use his cell phone to get help;
12. the husband repeatedly told police that a big Jamaican man had attached them, slit the wife’s throat and fought with them;
13. the husband admitted that the story he told police involving a Jamaican man was a complete fabrication;
14. his stated reason for telling this lie was to protect his wife from being charged with his attempted murder;
15. the husband maintained this lie even after he was arrested and charged with attempted murder of his wife;
16. the wife’s version of what occurred has been consistent throughout:  “my husband slit my throat”.    

 

There were several grounds of dispute including that the trial judge’s conduct during the trial raised a reasonable apprehension of bias. 

On that issue, the Court of Appeal found as follows: 

“The test for bias is well settled – would a reasonable and informed person viewing the matter realistically and practically and having thought it through, conclude that the judge, consciously or unconsciously would not decide fairly.”

 

The objective of the test is to ensure not only the reality, but also the appearance of a fair and adjudicated process.  The court found that the trial judge did not analyse the evidence that came from an independent witness that collaborated the wife’s version of the event.  Instead he rejected the entirety of this evidence because of a minor inconsistency – an inconsistency by which he was also mistaken in the detail.  The trial judge was dismissive of expert evidence which supported the wife’s version of the events.  Again, he focused on a minor inconsistency. 

 

The trial judge was extremely critical of the wife’s evidence, which was troubling in contrast to the generosity with which he treated inconsistency in the husband’s evidence.  While the wife’s inconsistencies were all emphasised, the significant and material inconsistencies in the husband’s evidence were ignored.  This suggested an uneven treatment of the evidence and amounts to an error of law.

 

When questioning witnesses himself, the trial judge appeared to be filling holes in the husband’s testimony. 

 

The trial judge was extremely rude and disruptive of the wife’s counsel. 

In the end, the court found that the trial judge committed several reversible errors.  The trial judge relied on inadmissible hearsay evidence that permeated his entire credibility analysis.  He treated the evidence of the parties unevenly in a way that gave rise to a reasonable apprehension of bias and amounted to an error in law.   Lastly, he failed to consider the full range of factors effecting the best interest of the children which also constituted a reversible error.  As a result of these and other errors, the court set the decision aside and ordered a new trial. 

Regards,

Blair

 

Avon Settles Bribery Related Class Action

 

Avon Products Inc. (“Avon”) recently settled a class action lawsuit brought against the beauty products company and two former executives concerning Avon’s compliance with the US Foreign Corrupt Practices Act (“FCPA”).  Avon settled the lawsuit despite the fact that the US District Court for the Southern District of New York (“Court”) had granted a motion to dismiss the lawsuit.  In the action, certain of the company's shareholders had alleged that Avon and its former executives had issued materially false and misleading statements concerning Avon’s compliance with the FCPA by concealing that the company had given bribes to Chinese government officials by various means, including providing lavish gifts and paying travel expenses improperly.

 

In 2008, Avon publicly announced that it had received allegations of potential FCPA violations in connection with its business in China and that it had disclosed such information to the US Department of Justice (“DOJ”) and the US Securities and Exchange Commission (“SEC”).  That initial press release was the first in a series of public statements by Avon relating to the potential FCPA violations and after each announcement, Avon’s stock price fell.  The class action claimed that Avon had artificially inflated its stock price by intentionally misleading shareholders about the company’s compliance with the FCPA.  The shareholders alleged that the defendants knew that Chinese officials were being bribed years before the company publicly disclosed it in 2008.  The action also alleged that Avon embraced a corporate culture that was “actively hostile” to effective oversight and hid its dependence on corrupt activities to boost their sales revenue. 

 

In December of 2014, the DOJ and SEC levied fines of $135 million to Avon for violating the FCPA - $68 million was paid to settle the DOJ’s criminal investigation and $67 million was paid to settle the SEC’s civil investigation.  As part of the settlement, Avon was also required to retain an independent monitor to review its FCPA compliance program for a period of 18 months, followed by an additional 18 months of self-reporting on its ongoing compliance efforts

 

Shareholder litigation is a common occurrence following or during FCPA investigations of public companies – both securities class actions and shareholder derivative actions.  In a derivative action shareholders file suit against members of the board of directors or corporate officers on behalf of the corporation itself for a wrong the corporation has suffered. 

The Court dismissed the action on the grounds that the plaintiffs had failed to demonstrate that Avon made any false statements regarding the use of bribes.  The Court held that in order to survive the motion to dismiss, the shareholders were subject to “heightened pleading requirements” but had failed to plead facts that were sufficient to demonstrate that Avon’s officers had met the intent to deceive Avon’s shareholders or the intent to report misleading statements regarding Avon’s business successes in China before or after 2008 when the company reported that it had become aware of the allegations. 

 

Under the heightened pleading requirements for securities fraud complaints, shareholders must plead sufficient facts with enough particularity to constitute fraud and plead with particularity facts that demonstrate a strong inference that Avon and its officers and directors intended to deceive their shareholders or were severely reckless. 

 

The Court found that Avon’s statements in its ethics policies regarding its high standards for ethics did not constitute fraud.  It found that these general statements of the company’s commitments to high standards of business ethics were not materially misleading to shareholders finding that the statements were mere “puffery” or generalizations regarding Avon’s integrity upon which reasonable investors would not rely.

  

The Court held that bare assertions about executives of Avon having information adverse to the disclosed filings were not sufficient to demonstrate that they were actually aware of alleged bribes paid to Chinese officials.  The shareholders merely alleged that executives “should have been aware” of the bribes.  The Court held that such facts were too conclusory and lacked sufficient detail to demonstrate intent to mislead. 

 

After 2008, the mere fact that Avon received a whistle-blower report regarding potential violations did not demonstrate that the company and its directors knew the allegations to be true.  They were permitted to conduct an internal investigation before announcing that the company received a report of a potential FCPA violations.

 

The Court also held that the plaintiffs failed to allege particularized facts showing that the company misled investors with regard to its internal investigation or compliance procedures.

 

When Avon first learned about potential FCPA problems in China through an internal audit report, it consulted an outside law firm but did not carry out a thorough investigation.  Instead, it simply directed that internal control measures be instituted at its subsidiary.  However, no such measures were taken and there was no follow up on the compliance initiatives.  The full-blown internal investigation only took place a few years later after a new CEO received a whistle-blower letter.  By this time, much of the damage had been done. 

Settlement of the class action came at a time when Avon had moved to dismiss an amended complaint filed by the shareholders' lawyers

Regards,

Blair