CH-3-4 Managing Legal Risks – Canadian Business and the Law : Book Guide

This Document Contains Chapters 3 to 4 Chapter 3 Managing Legal Risks Instructor’s Manual–Answers by Dorothy DuPlessis and Steven Enman V. CHAPTER STUDY Questions for Review, page 64 1. What is meant by the preventive and reactive approaches to legal issues in a business? Answer: The preventive approach is meant to anticipate problems and through planning to minimize their impact. The reactive approach deals with strategy to efficiently deal with problems after they arise. 2. What is the primary goal of a legal risk management plan? Answer: The primary purpose of a plan is to minimize the impact of legal risks on the organization. 3. How does a legal risk management plan relate to enterprise risk management? Answer: The two must be looked at in unison. In most situations the legal risk management should drive the enterprise risk aspect. 4. What is the value of a legal risk management plan? Answer: The value of a plan is to avoid mistakes that are costly, distracting, and harmful to the organization. 5. What steps are involved in the legal risk management model? Answer: See Figure 3.2 of the text for details. Step 1: Identify the legal risks. Step 2: Evaluate the risks. Step 3: Devise a risk management plan. Step 4: Implement the plan. 6. How can a business identify its legal risks? Answer: A business can use many methods to identify its potential exposure to legal risks. For example, it may assess its functional areas, business decisions, business relationships, or operations and transactions. 7. What legal risks are posed by technology? Answer: Among the legal risks posed by technology are a disruption of operations and a loss of customer and employee data. 8. How is breach of privacy a legal risk? What are the costs associated with a privacy breach? Answer: A breach of privacy is a legal risk because it may result in lawsuits and penalties under privacy legislation. The costs associated with a privacy breach include direct damage costs, liability to others, and the cost of a response plan. 9. How can a business evaluate its legal risks? What is the purpose of evaluating legal risks? Answer: The techniques used to evaluate legal risks vary from a simple, subjective evaluation to a complex statistical approach. The purpose of evaluating legal risks is to recognize that all risks are not alike and to assist in choosing the appropriate risk management strategy. 10. What is the best strategy for managing legal risks? Answer: There is no one best risk management strategy. The best strategy depends on the evaluation of the risk and the organization’s resources. 11. What is an example of risk retention? When is this strategy most appropriate? Answer: Examples of risk retention are self-insurance, insurance policy deductibles, and noninsurance. This strategy is most appropriate when both the probability of a risk materializing and the severity of its impact are low. 12. What is an example of risk avoidance? When is this strategy most appropriate? Answer: Examples of risk avoidance are eliminating products lines, discontinuing operations, and not operating in foreign countries. This strategy is most appropriate when both the probability of a risk materializing and the severity of its impact are high. 13. What procedures are necessary to implement a risk management plan? Answer: There are two stages in implementing a plan: carry it out and monitor and revise. It is crucial to have practices in place and assign specific responsibility for their enforcement. 14. How can a business keep its risk management plan current and relevant? Answer: Constantly monitoring how the plan is dealing with events as they arise keeps the plan current and relevant. As with implementation, specific responsibility must be assigned for keeping the plan current. 15. What legal risks are involved in doing business internationally? How can these risks be managed? Answer: The legal risks involved in doing business internationally include expropriation of property, changes in trade laws, and civil unrest. These risks can be managed by considering business strategies that manage risk, structure foreign investments to take full advantage of protections, determine cost and availability of political risk insurance, and negotiate for international arbitration and stabilization clauses in agreement. 16. How does the management of a legal crisis differ from managing legal risks? Answer: Managing a crisis involves reacting to an event or a situation, whereas managing legal risks involves proactively planning in advance to deal with risks. 17. When should a business seek legal advice? Answer: A business should seek legal advice in a timely fashion as a preventive measure. In terms of reaction, a lawyer should be consulted as soon as a potential dispute arises. 18. What is the role of lawyers in legal risk management? Answer: The role of the lawyer in legal risk management depends, to a large extent, on whether she is outside or in-house legal counsel. That said, the role involves providing an understanding of the organization, an expertise in the law and legal analysis, and independence. Questions for Critical Thinking, pages 64–65 1. The International Perspective box (on page 52) illustrates some of the risks of doing business abroad. How should the legal risk management model be adapted for conducting international business? Which of the four steps of the model are the most important? Answer: This is a straightforward question that illustrates a simple point. Along with the opportunities arising from the global marketplace come additional risks. A business may be comfortable in its local environment, but needs to recognize that its accumulated experience may be much less valuable internationally. There is a greater need for investigation and consultation before embarking on foreign ventures. The same logic applies to some extent in relation to any expansion of business, even if only to a neighbouring province. A business contemplating international transactions may need assistance in the first two steps of the model—identifying and evaluating the risks. Lack of familiarity with the foreign market and environment may create this need. In step one, the focus could be on the business relationships to emphasize the importance of knowing as much as possible about new business associates in other countries. In step two, potential losses may be more difficult to estimate. In step three, greater consideration may be given to the “avoid” option. A business should exercise greater caution in international markets that involve higher risk overall. 2. Risk reduction is a strategy for managing risk. When is it the most appropriate strategy for managing a risk? What are some examples of risk reduction? Answer: Risk reduction is most appropriate for managing risk when the probability of an event occurring is high (i.e., that means there is probably scope for reducing the risk) and the impact of the risk is low (if the impact is high the company should either transfer the risk through insurance or contract or avoid the risk altogether). Examples of risk reduction depend on the risk being mitigated. For example if a business is concerned about the risk of slips and falls by customers it could reduce the risk by installing non-slip flooring, investing in rubberized mats, hiring someone to clean water and debris from floors, putting signs in place warning of hazards, etc. 3. The pharmaceutical industry involves inherent risks. The drugs developed by corporations in the industry may not be as effective as research indicated and over time may produce unexpected, unintended, and serious side effects. How can pharmaceutical corporations use risk avoidance, risk reduction, risk transference, and risk retention in managing these risks? Answer: To manage the risk of adverse health problems arising from drugs, the industry can use all four approaches. The drug companies are engaged in research, development, and testing of many potential new drugs at any one time. They must decide with reference to each drug under development whether to proceed to the market or whether the potential adverse effects (known or unknown) are so great that the market risk should be avoided altogether by discontinuing development. If a drug proceeds to market, then the risk of adverse effects can be reduced through careful testing, manufacture, packaging, labelling, full disclosure to doctors and pharmacists, and follow-up. Risk may be transferred to the medical professionals and consumers through labels and warnings and to insurers through purchase of liability coverage. The remaining risk will be retained by the company. 4. Risk management is a continuous process that requires commitment, time, and expense. However, the benefits are often difficult to identify because they arise largely from prevention. How can a business decide whether the benefits of a risk management plan compensate for the time and expense involved in its design and implementation? Answer: It is possible to do a cost–benefit analysis of the risk management process itself. How much does it cost to implement, monitor, and revise the plan? How much money does it save? Identify some costly legal difficulties from the past that could have been avoided had a plan been in place. What if the business simply dealt with problems the best it could as they arose? Another way to place a value on the risk management plan is to appreciate the predictability and stability that it can provide to the business. If the worst that can happen has been anticipated and contemplated, those in the business can proceed with greater confidence. 5. A common method of controlling the cost of legal services is to refrain from consulting a lawyer until a serious legal problem absolutely requires it. Another approach is to hire or retain lawyers on an ongoing basis to provide advice as business decisions are made. Which approach is the most expensive? What should a business consider in making that choice? Answer: It could be argued that legal fees should be paid only when absolutely necessary, such as when the business has been sued. A cursory cost–benefit analysis could make this option attractive. Consulting lawyers to minimize legal disputes and plan business activities to deal with risks before they happen may appear to be more costly because the legal fees are a known factor. The long-term savings and the other benefits to the business are more difficult to quantify. Cultivating an on-going relationship with legal advisers can be a source of confidence. The business knows that if a potential legal problem arises, the adviser can be readily consulted and a scramble to find and consult suitable counsel is avoided. Businesses should resist the temptation to focus only on legal fees. Such a focus will result in a false savings in terms of greater, but less obvious, benefits. The costs are obvious, but the quality is more difficult to evaluate. The intangible factors include the degree of comfort with the relationship, the availability of advisers, the degree to which advisers are familiar with the business, and how well the advisers communicate with the business. There is a definite need to regularly evaluate the relationship. If it deteriorates, a client must be prepared to demand improvements or seek other advisers. 6. An article in The Lawyers Weekly, a leading legal publication, is entitled “Corporate counsel key to risk management.” Do you agree with that statement? How can lawyers contribute to risk management? Do you see any problems with outside or in-house lawyer involvement in risk management? [footnotes removed] Answer: It is debatable whether legal counsel needs to or should be involved in all risk management but there is certainly a case for them to be involved in legal risk management. Lawyers are familiar with the law and familiar with the organization because of their role in providing advice to the organization. As mentioned in Business Application of the Law: The Role of Lawyers in Legal Risk Management (page 62), lawyers can offer • an understanding of the organization derived from providing advice on various aspects of the organization’s functions • an expertise in law and legal analysis • an independence that comes from membership in a professional body A potential problem with legal counsel involvement in risk management is their perspective. Most lawyers have been trained to react to an event. They analyze after an event occurs when the place, time, parties, and so on, are known. Involvement in risk management requires lawyers to be proactive and to react to events that have not occurred. This process may be too speculative for some lawyers. An additional problem, in the case of outside counsel, is the delay in the process as the counsel learns about the organization, sifts through the facts, and points out the potential problems. Inside counsel does not have as steep a learning curve. See generally Christine Dobby, “A game of risk,” Financial Post (28 May 2011) FP7; Kenneth Ross, “My life as a preventive lawyer,” National Center for Preventive Law at . Situations for Discussion, pages 65–66 1. Johann is the comptroller of Super Tech Inc., a highly aggressive firm in the high-tech industry that specializes in software development. Sarah, the CEO, prides herself on her ability to make fast decisions and doesn’t worry about documenting her actions. Her favourite sayings are, “We can’t spend all of our time writing things down” and “Why worry? That’s why we have insurance and lawyers.” This approach appears to have served her well, at least in the initial years of the business. Johann is concerned, however, because he is often faced with legal bills without having any knowledge of the issues involved. The firm’s legal costs are steadily increasing. How should Johann present a recommendation to Sarah that Super Tech should develop a legal risk management plan? Answer: Johann’s approach to Sarah will depend primarily on the nature of their relationship and what he anticipates she might find attractive. One approach would be to demonstrate how her approach to risk management has cost the company money. If he has access to the legal bills, he can likely find examples of legal matters that could have been prevented or reduced had some planning occurred. Based on the brief description of Sarah’s attitude, she may respond more positively to hard data and concrete examples than a more general rational plea. The point of this situation is to remind students that an organization must somehow decide that risk management is a good idea because it can produce net benefits for the firm. If the CEO or other senior and influential person is not convinced, the model will not work. 2. If Sarah accepts Johann’s recommendation, whom should he recruit for the risk management team? Should he be the leader of the team? How should he go about identifying the legal risks in the firm’s business? Whom should he consult? Answer: Johann and Sarah will create a risk management team to conduct the exercise. Johann may or may not be the person to lead the team. He may lack the time or the expertise to do so. The team will need to identify the most appropriate approach for analyzing the operation and identify those in the organization who may be most knowledgeable and helpful. The team may want to seek outside advice from lawyers, insurance companies, or other consultants. 3. Johann’s review has identified a particular problem with Super Tech’s software designers. When used by customers, their designs are failing at a higher rate than the industry norm. The designers are unwilling to go back and correct problems because they prefer to develop new products and are under pressure to do so. Super Tech is faced with legal claims and lost customers. How should Johann evaluate and address this problem in the context of his risk management plan, taking into consideration the software designers and the company’s profitability? Which of the four risk management strategies are appropriate? Answer: This risk can be expressed in many ways, but the essence is the risk that customer complaints may become too costly to handle, and company sales may suffer. The obvious way to reduce this risk is to hire more software designers and perhaps split their responsibilities. Have some do the creative development and others do the finishing up. This action is costly in terms of salaries and benefits. These designers are expensive and in high demand. A thorough analysis of this risk could lead to reconsideration of the company’s product development strategy. Competition in the industry may create pressure to be on the leading edge, but lack of support and follow through will undermine creative success. Another reduction option would be to create teams to deal with customer complaints. However, if the problems are with the software itself, dealing with defects as they affect customers individually may be inefficient. 4. Vancouver based retailer Lululemon experienced a problem with its $100 black Lululemon yoga pants. They were too sheer, pilled easily and customers were returning them. Chip Wilson, founder of the company, in an interview with Bloomberg TV stated: “Quite frankly, some women’s bodies just actually don’t work. It’s really about the rubbing through the thighs, how much pressure there is over a period of time.” Numerous media outlets picked up the story and a firestorm of negative comments on social media ensued. Four days later, Wilson apologized on Lululemon’s Facebook page stating, “I’m sad for the repercussions of my actions. I’m sad for the people of Lululemon who I care so much about, who have really had to face the brunt of my actions… I’m sorry to have put you all through this.” What mistakes did Lululemon make in handling this situation? What lessons can be learned? [footnotes removed] Answer: The initial mistake was the founder of Lululemon blaming customers for the pilling thereby creating a public relations problem. The remarks were particularly stupid as apparently Lululemon had previously admitted to product inferiority. Several months earlier it had pulled pants from the shelves because of the sheerness problem. As Jeff Swystun, president and chief marketing officer of Swystun Communications stated: “[Wilson] did two things at once: he disowned responsibility and he disparaged the wrong audience at the same time…” The initial faux pass was exacerbated by Wilson’s non-apology. Rather that apologizing and embracing women of all shapes and sizes, he made a video whereby he does not address women but focuses on how sad he is for the employees. This apology incited even more anger on social media sites. The lessons that can be learned include: • He should never had said what he said in the first place: therefore think of consequences before speaking; • The apology was insincere: only apologize if you mean it. A simple “I’m sorry” would have been a better apology. • He waited four days before issuing an apology: respond immediately to a problem, don’t wait. Sources: John Darwin, “Lululemon founder Chip Wilson’s apology shows us how not to handle a PR crisis,” Social Media Contractors (14 November 2013) online: Social media Contractors . 5. Drake International, a Canadian job placement firm has been a victim of a hacking scheme. The hackers stole a database containing the names, email addresses, phone numbers, and passwords of over 300 000 clients in Canada, Australia, the United Kingdom, and New Zealand. They demanded $50 000 to keep the stolen information private and not publish it on the Internet. The database that was compromised was an old database built under outdated security practices that included unencrypted passwords. What is the risk to Drake of threats from a group of hackers after a security breach? How could Drake have identified and addressed this risk in advance? How should Drake respond to the hackers? [footnotes removed] Answer: The biggest risk to Drake of threats from a group of hackers is that the hackers will release the information, which may result in damage to Drake’s reputation and a potential loss of business. In addition, Drake may incur the cost of contacting affected users to inform them of the breach, to offer an apology, to suggest they change their passwords, and to outline the steps being taken to bolster security. A risk management plan may have identified the existence of the old database built under outdated security practices (unencrypted passwords) and highlighted the need for IT security protection. An organization should have a plan that identifies risks associated with the cyber environment, develop strategies for dealing with the risk such as complying with digital protocols, policies, and procedures (e.g., monitor online activities, use encrypted passwords, update apps and operating systems) and purchase cyber insurance that covers both first and third party liability, and implement the plan and monitor it. Drake should contact law enforcement agencies to report the security breach and the theft of the data. They should not negotiate with the hackers as this will encourage other hackers and they should go public with the information to warn others of the risk. 6. Siena Foods Ltd., located in Toronto, Ontario, is a manufacturer and distributor of prepared meat products. In 2010, the Canadian Food Inspection Agency and Siena Foods issued a health hazard alert warning the public not to consume certain Siena brand ham as it may have been contaminated with Listeria monocytogenes. Food contamination is a major risk in the food processing business, with potentially disastrous consequences for the company and its customers. How should Siena manage this risk? What preventive and reactive action plans should be in place? To what extent can Siena rely on the Canadian Food Inspection Agency to manage the risk? Answer: In terms of preventive plans for the risk of food contamination, Siena can use all four approaches to risk management. The company must first decide which products entail acceptable risks that can be managed and which are so subject to contamination or other problems that the risks associated with such products should be avoided by eliminating them from the product line. For those products that go to market, their risks will be reduced by meticulous processing, testing, packaging, and transportation. Some of the risk may be transferred to distributors and even consumers through package information, such as “best before” dates. Major risk can be transferred through liability insurance. Remaining risks will be retained by Siena. In terms of reactive action plans, Siena must be vigilant in tracking and monitoring potential contamination problems so that products can be recalled and distributors and consumers notified as quickly as possible. Also and as demonstrated in the highly publicized Maple Leaf case, the company must decide in advance whether to accept responsibility quickly and publicly (as Michael McCain did on behalf of Maple Leaf) or adopt a more cautious and defensive approach. The Maple Leaf case also demonstrates the weaknesses in our system of food safety regulation when problems occur. Siena cannot rely on the Canadian Food Inspection Agency to manage the risk associated with food contamination because of the scarcity of regulatory enforcement resources. Investigations with resultant warnings, recalls, and the like often do not happen until after a catastrophic event, such as the death or illness of a large number of consumers. In this case, it might be too late for the company. Recalls, regulatory penalties, and class action lawsuits may be too difficult for the company to recover from. Siena Foods eventually was subject to recall orders and ended up in bankruptcy. The president and owner indicated that the recalls “were very important factors” in the shutdown of the company. See Joanna Smith, “Meat packing plant caught fudging ‘best before’ dates,” The Star (29 June 2010) at . 7. Anna, a customer in a Wendy’s Restaurant, claimed that she bit into a piece of a human finger while eating a bowl of chili. Anna filed a claim for damages. The event attracted wide media attention. Anna gave several interviews in which she graphically described the trauma that she experienced. The volume of business at all Wendy’s outlets in the region plummeted. After several weeks, Wendy’s accused the customer of deliberately placing the finger fragment in the chili. When the finger was examined, it proved to be uncooked. Anna and her husband were eventually charged and convicted of several criminal offences. The finger came from a co-worker of Anna’s husband, who lost it in a workplace accident. Apparently, Anna and her husband have a history of filing false injury claims. Apply the legal risk management model to this situation. What plan should organizations such as Wendy’s have in place to deal with this risk? Answer: Wendy’s faces two risks relating to this situation. One is the obvious risk of food contamination that can lead to customer illness, claims for compensation, and a damaged reputation. The second risk is less obvious—successful organizations, such as Wendy’s, are vulnerable to false or exaggerated claims for compensation. Regarding the first risk, Wendy’s can use a combination of the four approaches that are involved in devising a legal risk management plan. • Avoid or eliminate the risk: Since Wendy’s is in the food service business, it is impossible to avoid the risk of contaminated food, at least regarding the items that Wendy’s chooses to serve. It can, however, put in place a plan to reduce the risk. • Reduce the risk: Wendy’s can reduce the risk of food contamination by implementing practices whereby the process of preparing and serving food is very thorough. This would include record keeping and supervisory checks. The franchise organization of Wendy’s would help greatly in this regard since franchisees are normally required to adhere to detailed operating practices. Ongoing third-party food inspections would also help with the reputation and image of Wendy’s. • Transfer the risk: Wendy’s could transfer some of the risk by having proper insurance policies in place to indemnify Wendy’s from certain losses. • Retain the risk: Wendy’s could retain some of the risk by setting aside an assurance fund to deal with such situations. Regarding the risk of false claims, Wendy’s needs a clear plan for immediate reaction and evaluation. The challenge is to adopt a firm stance without incurring the additional risk of alienating customers with legitimate claims. There should be a clear policy for staff in the restaurant at the time of the incident, along with corporate practices for evaluating and resolving claims. Of course, the public relations issues are of equal or greater importance than the legal considerations. 8. JetBlue is an American low-fare airline. In 2007, its operations collapsed after an ice storm hit the East Coast of the United States. The storm led to the cancellation of over 1000 flights in five days. Other airlines were affected by the storm but were able to rebound within a day or two. JetBlue’s problems dragged on for days. The main problem was JetBlue’s communication system. A large portion of its pilots and flight attendants were not where they were needed, and JetBlue lacked the means to locate them and direct them to where they were needed. How could a risk management plan have addressed JetBlue’s problems? How should JetBlue’s crisis have been handled? Are there opportunities for an organization in responding to a crisis? Answer: A risk management plan could not have prevented the flights cancelled because of bad weather, but a risk management plan could have addressed ice storms and assisted JetBlue in being prepared for the storm. By considering the consequences of bad weather, JetBlue could have had a contingency plan in effect that would have prevented the breakdown of the airline’s operations and not disrupted the travel of its passengers for almost a week. For example, JetBlue could have reduced the risk of a crisis by cancelling more flights earlier, sending passengers home, and resuming schedules within a day or two. Further, a contingency plan could have ensured that that the communication was upgraded so that pilots and flight attendants were not in the dark and were where they needed to be when inclement weather occurred. Indeed, in the wake of the crisis, JetBlue revised its policies and procedures and addressed many of the issues that caused the problems mentioned above. For example, in a subsequent bad weather event, passengers were notified earlier (the day before), which allowed them to adjust their plans. In JetBlue’s case, after initial difficulty, the crisis was handled very well. The chief executive officer acted quickly and publically took responsibility for the situation. He apologized for the situation and promised to make it right for all customers. He followed through with monetary compensation and a bill of rights for passengers. In other words, JetBlue acknowledged the crisis, acted quickly, communicated with stakeholders, and solved the problem. A crisis provides an opportunity to make major transformations, not just transformations that address the crisis but transformations that address other issues as well. It is also an opportunity to put into place preventative measures to ensure a similar crisis does not materialize again. A crisis that is handled well can put the company in a stronger position than it was previously because of the opportunity to overhaul organizational structures and systems. See Debra J. Smith, “JetBlue crisis management,” The Marketplace of Life (28 January 2011) at ; Jena McGregor, “JetBlue’s winter blues,” Bloomberg BusinessWeek (27 November 2007) at . Chapter 4 Dispute Resolution Instructor’s Manual–Answers by Dorothy DuPlessis and Steven Enman V. CHAPTER STUDY Questions for Review, page 91 1. What are some potential business law disputes arising from the operation of a fast-food restaurant? Answer: Some fast-food examples relating to consumers are food poisoning, burns from hot coffee, and so on. In connection with other businesses are disputes with suppliers, franchisors, and the like. 2. What is the goal of negotiation in resolving legal problems? Answer: The goal is to reach a fair and acceptable outcome without resorting to litigation. 3. What happens when negotiations fail? Answer: When negotiations fail, litigation can be used to settle the dispute in court, or alternatively, the parties involved can choose to settle through ADR (alternative dispute resolution). 4. What is the process for attempting to resolve disputes informally? Answer: The process involves investigation, clarification, and contacting the other party. 5. What issues should a business consider before deciding to proceed with a legal dispute rather than abandon it? Answer: Figure 4.1 contains an extensive bulleted list of such issues as commitment, time, and cost. 6. What is mediation? What are the advantages of mediation as a method of resolving a dispute? Answer: Mediation is an alternate dispute resolution process in which a neutral person assists the parties in settling their dispute. The advantages of mediation include cost, speed, privacy, flexibility, and the chance to preserve relationships. 7. What are the differences between mediation and arbitration? Answer: Mediation is facilitative and non binding. Arbitration is final and binding. 1. Mediation: • Role of Mediator: A neutral third party, the mediator, facilitates communication and negotiation between disputing parties to help them reach a voluntary agreement. • Outcome: The mediator does not make a decision. The resolution is non-binding unless both parties agree to the terms. • Process: Collaborative and flexible, focusing on finding a mutually acceptable solution. • Control: Parties retain control over the outcome. 2. Arbitration: • Role of Arbitrator: A neutral third party, the arbitrator, listens to evidence and arguments from both sides and then makes a decision. • Outcome: The arbitrator's decision is binding and enforceable, similar to a court judgment. • Process: More formal and structured, resembling a court proceeding. • Control: The arbitrator has control over the outcome, and parties must abide by the decision. 8. Why is arbitration particularly attractive in international disputes? Answer: Arbitration resolves such issues as which country’s law applies, which courts have jurisdiction, and how judgments from one country can be enforced in other countries. 9. What are the advantages of arbitration in comparison to litigation? Answer: As a general rule, arbitration is faster, less expensive, and less risky than litigation. In addition with arbitration, the parties can choose the arbitrator and control the process. 10. What are the major steps in the litigation process? Answer: The major stages are pleadings, discovery, trial (and decision), and enforcement. 11. What happens during the “discovery” stage of litigation? Answer: The discovery stage of litigation involves disclosing evidence to support the claims in the lawsuit. 12. Why is settlement out of court more common and preferable than going to trial? Answer: There are many reasons, such as the saving of time and money, and elimination of the uncertain result of a trial. 13. How does a class action differ from a normal lawsuit? Answer: A normal lawsuit involves a claim of one party against another; a class action is a lawsuit launched by one person representing a larger group whose members have similar claims against the same defendant. 14. What is a limitation period? Answer: The period specified by legislation for commencing legal action. 15. To what extent does the winner of a lawsuit recover the expenses of the litigation? Answer: The winner of litigation is awarded the basic amount of the claim plus interest, and, in the usual case, their legal costs. These costs usually fall short of fully compensating the winning party, with the result that even successful litigation involves expense. 16. How does the winner of a lawsuit enforce the judgment? Answer: The winner enforces the judgment by proceeding against the assets of the loser with the assistance of court officials. 17. What factors should be considered before appealing a court decision? Answer: Many factors should be considered, such as time, cost, and the likelihood of losing. 18. What is a contingency fee? Answer: A contingency fee is a fee based on a percentage of the judgment awarded and paid by the client to the lawyer only if the action is successful. Questions for Critical Thinking, page 92 1. Dr. Julie Macfarlane, a professor in the Faculty of Law at the University of Windsor and author of The New Lawyer: How Settlement Is Transforming the Practice of Law, notes that figures out of the United States indicate that 98.2 percent of civil matters are settled before court. The rate is almost as high in Ontario at approximately 95 to 96 percent. Why is settling out of court replacing going to court? Is this a good trend? [footnote deleted] Answer: There are many factors that militate against going to court including the usual ones of cost, the time, and the risk. In addition, other factors that come into play are that the legal system itself promotes settlement through mandatory mediation processes, pre-trial conferences and the like, and lawyers are perhaps becoming more adept at solving their clients’ problems outside of litigation. See Donalee Moulton “Vanishing trials,” The Lawyers Weekly (17 October 2008) at 22. A problem with the increasing trend towards settling out of court is that usually the settlements are private and subject to a confidentiality clause and thereby the settlements are not helpful in guiding conduct. Also the settlement decisions do not establish a legal precedent that contributes to the development of case law 2. The Canadian system of litigation partially compensates the winning party for its legal expenses through an award of “costs,” to be paid by the loser in addition to any damages awarded by the court. In the United States, it is usual for the parties to bear their own costs. Which rule is more fair? Does the awarding of costs encourage or discourage litigation? Answer: It would seem that a system whereby each party bears their own costs is unfair in that it encourages litigation. The disincentives to sue (paying the other party’s legal fees) are not as great as in a system where the loser pays. Further, the U.S. system facilitates weak or nuisance legal cases because the high cost of defending provides a strong incentive to settle these cases. In Canada, the loser pay principle applies to all aspects of the civil process, including motions, trials, and appeals and, as such, represents a significant deterrent to meritless claims. Winners do not usually receive all their costs and a significant factor in calculating the amount of the costs is the presence and the amount of any offer to settle. For example, if a plaintiff wins a case and is awarded damages higher than an offer, costs will be greater than if the offer to settle was greater than the damage award. Thus, the loser pays principle and the effect on costs of offers to settle tends to discourage meritless litigation and encourages settlement of legitimate claims. See Berkley Sells, “Litigation: Some key differences between civil litigation in Canada and the United States—Part 3,” Inside Counsel (12 May 2011) at ; Marie Gryphon, “Greater justice, lower cost: How a ‘loser pays’ rule would improve the American legal system,” Manhattan Institute for Policy Research (December 2008) at . 3. Class actions are a popular way for a large number of small consumer claims that might otherwise have been ignored to be brought against a corporation. For example, ticket purchasers brought a class action against Ticketmaster alleging that it conspired to have Canadians pay inflated prices for tickets by directing them away from its lower-priced website to its premium-priced website. Ticketmaster settled and concert goers received $36 per ticket for a projected payout of $5 million. Lawyers received 25 percent of each payout for a projected $1.26 million. Who benefits from a successful class action lawsuit? Who loses from a successful class action lawsuit? [footnote deleted] Answer: It is not always entirely clear who benefits from a successful class action lawsuit. Although the plaintiffs may be awarded a large sum of money, the individual entitlement is often paltry (for example, a few dollars for each member of the class in the case against banks for excessive charges) resulting in a very low proportion of class members actually making a claim. Lawyers, conversely, have often benefited handsomely from huge class action fees. For example in a recent payday loan case, Smith Estate v National Money Mart Co, [2011] OJ No 1321 (CA), successful counsel earned a fee of $14.5 million. In the case, the settlement was little or no benefit to class members, and there was no deterrence effect on the company as the law changed. See John Chapman and Adam Stephens, “Rethinking class action settlement,” The Lawyers Weekly (13 May 2011) 9. It has been argued that the ultimate losers in litigation are not the businesses involved, but rather their customers and shareholders. The costs of litigation are ultimately borne by the consumers of goods and services through higher prices or the shareholders through lower profits. This argument posed is basically true, but the marketplace plays a role as well. Corporations that regularly lose lawsuits cannot indefinitely pass those costs on to consumers. Their sales will suffer in comparison with their competitors. Shareholders who experience lower profits will eventually invest elsewhere. The long-term viability of those corporations will suffer. 4. Most jurisdictions in Canada now have an element of mandatory ADR in their systems of litigation. For example, in British Columbia all civil litigation with a few exceptions is subject to mandatory mediation. What is the purpose of requiring ADR prior to litigation? Is it logical to make ADR mandatory rather than consensual? Are weaker litigants at the mercy of stronger parties? Answer: The purpose of requiring ADR before litigation is to encourage settlement and ease the backlog of cases in the courts. The remaining questions are meant to be a caution against accepting ADR as the only package of options for resolving disputes. ADR may not be fair to both parties and simply continue the lack of equality. To impose it on unwilling participants may make little sense and encourage resistance. Perhaps we cannot expect settlements to be fair, but hopefully they will reflect both parties’ view of the best they can get in the circumstances. There is the possibility that forcing parties to get together and discuss their differences might cause some to “see the light” who otherwise might have resisted. There are other approaches for easing the backlog in the courts. Perhaps governments should recognize that the volume of litigation is rising and needs to be addressed with more courtrooms and judges. Who is to say what the optimum volume of litigation is? In cases where ADR has already been attempted, or has no chance of success, to require it is to create another obstacle in the process and make the court backlog worse instead of better. The challenge is encouraging litigants to consider ADR without requiring them to participate in what may be a useless exercise. 5. Alternative dispute resolution has many positive features. It can be faster and cheaper than litigation. And unlike litigation, the process can be confidential and the parties can control the process, the timing, and the selection of the facilitator. Are there any downsides to the avoidance of litigation in favour of ADR in the resolution of disputes? When is litigation the most appropriate method of resolving a dispute? Answer: The downside to the avoidance of litigation in favour of ADR in the resolution of disputes is that ADR is confidential and most often done in privacy. Society does not have the benefit of the knowledge of the settlement, and the ADR settlement does not result in a legal precedent that contributes to the development of the law. Litigation is appropriate for the settlement of a dispute when a party will not engage in ADR, when a party wants to create a legal precedent, when a party wants to generate publicity (as court cases, with few exceptions are public) and perhaps, when a party simply wants his or her “day in court.” 6. Should a mediation clause be included in all commercial contracts? Why or why not? Answer: Marc Gold states a mediation clause should be in all commercial contracts because it can: • Save money because it can be a cost effective alternative to litigation • Save time as litigation is long and takes time away from business responsibilities • Protect important business interests because businesses are in control of the dispute, can select a mediator with business acumen and can focus on business interests as opposed to strict legal rights • Expand business opportunities as mediation can help repair relationships and help the parties continue their relationships for mutual advantage • Preserves legal rights as mediation may not resolve the problem but no legal rights have been lost On the other hand, a mediation clause may not mean much if the parties are not prepared to find a solution to their dispute and a lot of time and effort may be wasted in fruitless mediation. Source: Marc Gold, “Mediation worth a try for business disputes,” The Lawyers Weekly (7 September 2012) 12. Situations for Discussion, page 92 1. General Mills, one of America’s largest food companies updated the legal terms on its website. The new terms provided that any dispute related to the purchase or use of any General Mills product or service would be resolved through binding arbitration. If consumers “liked” General Mills’ social media pages, downloaded coupons from its website, or entered any company-sponsored contests, they were agreeing to have any dispute with General Mills referred to arbitration and could not sue or join a class action. After a public outcry on social media, the company revised its position and sent an email stating that they were reverting to the old terms, which made no mention of binding arbitration. Why do you think the public was upset by a clause requiring disputes to be settled by binding arbitration? Would Canadian courts enforce General Mills rescinded legal terms? [footnote deleted] Answer: The public appears to be upset because the clause would prevent consumers from bringing claims against General Mills in court, thereby preventing a class action. Consumers would have to arbitrate cases against General Mills individually, which may not be as beneficial as a class action. Class action lawsuits are beneficial to consumers because consumers can band together and share costs. Also, the class action is litigated publicly, which can be an advantage to the consumer. Whether a court would enforce a clause like the rescinded General Mills one may depend on the jurisdiction. That said, given its broad scope, it would seem that Canadian courts would be reluctant to enforce it. Ontario, Quebec, and Alberta have passed consumer protection legislation that largely renders this kind of arbitration provision void. Sources: Saya Weissman “What brands should learn from General Mills’ Facebook fiasco,” Digiday (22 April 2014) online: Digiday ; Jeff Gray, “General Mills abandons controversial legal policy to strip consumers of rights,” The Globe and Mail (19 April 2014) online: Globe and Mail . 2. Cameron and Tyler Winklevoss entered into a settlement with Facebook over their allegations against Mark Zuckerberg, the founder of Facebook. They alleged that they had hired Zuckerberg, their classmate at Harvard University, to work on their social networking site, Connect, but instead, he stole their idea and launched his own site. The dispute was settled for $20 million cash and $45 million in Facebook shares. Three years later, the Winklevoss twins attempted to have the settlement overturned on the basis that they had been misled during negotiations about the value of the shares they would receive as part of the settlement. They lost their attempt at both the US Circuit Court and the US Court of Appeals. The result illustrates that courts are generally very reluctant to reopen settlements. Why are courts reluctant to reopen settlements? What steps can be taken to reduce the possibility of litigation after a settlement? [footnote deleted] Answer: Courts are reluctant to reopen settlements because of the sanctity of contracts and a desire to ensure that litigation does not go on forever. Courts will generally enforce the terms of a settlement unless the settlement was unconscionable, fraudulent, or based on a party’s misapprehension of a material fact known to the other party, or the lawyer representing the party was not retained or did not have authority to settle the action and this limitation was known to the other party, or the party lacked the legal or mental capacity to enter into the settlement agreement at the material time. See Morant v Sun Life Assurance Company of Canada, 2014 ONSC 2876. To reduce the possibility of a release being set aside with resultant litigation, the settlement process should be documented, and all documents complete and signed. Also, there should be a lawyer’s certificate indicating legal advice was given and the client is of sound mind, understands the settlement is final and binding, is satisfied with the information provided, and has no outstanding requests for information. See Will O’Hara, “Releases that don’t stay final,” The Lawyers Weekly (29 May 2009) at 13; Marg Bruineman, “How to avoid settler’s remorse,” Law Times (6 October 2014), Online: Law Times . 3. York University launched a lawsuit against its former assistant vice-president Michael Markicevic, accusing him of masterminding a $1.2 million fraud. The case was a year and a half old and not close to trial when Ontario Superior Court Justice D.M. Brown ruled on a preliminary matter and speculated that the final legal bills for the defendants might be more than $800 000. He wrote: “If we have reached the point where $800 000 cannot buy you a defense to a $1.2 million fraud claim, then we may as well throw up our collective hands and concede that our public courts have failed and are now open to the rich.” What factors contribute to the high cost of justice? How could access to justice be improved? [footnote deleted] Answer: According to Justice Brown “at the root of the problem is a belief that ‘trials are bad’ and ‘mediation will solve all problems’, which took hold in recent decades and sapped the will to move cases swiftly to trial. One cannot overstate the oppressive effect on judicial morale of the endless waves of cases which seem to be going nowhere in a civil justice system that is sinking.” A report issued by the Canadian Bar Association’s assess to justice committee believes that the problem is so acute that it can’t be repaired in the short term. It proposes a series of actions including: using technology to improve access to justice and reinvent the delivery of legal services; legal insurance; more publicly funded legal aid; the integration of law as a life-skills course in schools; the creation of legal capabilities training modules to deal with life transitions; legal health checklists to “create awareness of common legal problems”; and reforming the courts to provide “active case management, judicial dispute resolution, specialization, court simplification, and active adjudication models.” Others suggest the root problem is the lack of competent legal services at a reasonable cost and suggest reducing the monopoly enjoyed by lawyers by enrolling more students in law school, decreasing articling periods, and qualifying more people to practice law. Alan Shanoff, “Social justice: real access to justice means reducing lawyers’ roles,” The Law Times (28 October 2013) online: Law Times . 4. The Loewen Group, based in Burnaby, B.C., was one of the largest owners of funeral homes in North America. Throughout the 1980s and 1990s, the company pursued a strategy of growth through the aggressive acquisition of U.S. funeral homes. In 1990, Loewen purchased Wright & Ferguson, the largest funeral operation in Jackson, Mississippi. Shortly after the purchase, a dispute arose concerning an earlier contract involving Gulf Insurance. Gulf alleged that Loewen had breached this earlier contract and sued Loewen for damages of $107 million. In 1995, a Jackson jury awarded the plaintiff $100 million in compensation and $400 million in punitive damages. The award equalled almost half the value of Loewen’s assets and almost 13 times its 1994 profit of $38.5 million. Loewen vowed to appeal. However, under Mississippi law, Loewen was required to post a bond of 125 percent of the award—$625 million—while appeals were pending. Rather than face several years of uncertainty, the company agreed to a settlement worth about $175 million. Despite the settlement, the litigation seriously undermined Loewen’s equity value and credit rating. The company eventually went bankrupt. Shareholders who lost their equity filed claims under NAFTA but were unsuccessful. What does this case illustrate about the risks of doing business internationally and the uncertainties of litigation? How could Loewen have tried to avoid these uncertainties? [footnote deleted] Answer: This case illustrates the usual uncertainties of litigation and, in addition, the high risks involved in litigation in another jurisdiction, where potential damages are much greater, juries are unpredictable, and the mere fact that Loewen is a “foreign” company in the American courts may prejudice its position with a jury. The case also demonstrates that one disastrous lawsuit can jeopardize the company’s financial health and continuity. To avoid these uncertainties, Loewen could have been more aware of the rules in the jurisdictions where it was doing business, could have ensured that all contracts contained provision for commercial arbitration to resolve disputes, and could have attempted to limit damages in its contracts in the event of breach. Perhaps the most important point is that letting litigation run its course is a very risky proposition, even when one is confident of success. There are no guarantees in litigation, and in cases such as this one, the downside can be disastrous. 5. A woman from British Columbia, Saliha Alnoor, recently sued Colgate-Palmolive, alleging that she was injured by a defective toothbrush. She stated that the toothbrush snapped as she was brushing her teeth, which injured her gums and caused them to bleed profusely. Alnoor claimed that she had endured permanent injury and sought damages, including $94 000 in anticipated treatments. Colgate denied any wrongdoing. Soon after the trial began, the judge made several rulings against Alnoor, who was self-represented. Alnoor later agreed to drop her claim in response to Colgate’s offer to waive legal costs against her (estimated at about $30 000) if she did so. According to the National Post, Alnoor's brother stated as follows: “We spent $21 000 on lawyers and experts, but we have no regrets. Now we know how justice works. Now we are much wiser.” Do you agree with Colgate’s approach to Alnoor’s litigation? What are the risks Colgate faced from the litigation? What are Alnoor’s risks? [footnote deleted] Answer: Colgate obviously spent time and money in defending the lawsuit, and it may have simply been cheaper to settle the lawsuit with Alnoor. However, the downside to settling perhaps frivolous, foolish, and vexatious lawsuits is that settlement may attract other frivolous, foolish, and vexatious lawsuits. The risks from the litigation faced by Colgate are as follows: • It could lose and have to pay damages and costs to the plaintiff. • Whether it wins or loses, it will incur legal costs, as well as costs associated with the time of its employees. • Whether it wins or loses, the litigation will generate negative publicity about the company and its products. The risk for Alnoor is if she loses she may be responsible for some or all of Colgate’s costs. She did not incur legal fees in the actual litigation as she represented herself. 6. In 1959, the Canadian-born Lord Beaverbrook, a newspaper baron and member of Sir Winston Churchill’s World War II war cabinet, established an art gallery in Fredericton, New Brunswick. Situated on the banks of the St. John River, the Beaverbrook Art Gallery houses an impressive collection of over 3000 pieces of Canadian and British art as well as unique sample of works from international artists. In 2004, two charitable foundations founded by Lord Beaverbrook claimed ownership of over 200 paintings and sculptures, arguing that the paintings had not been gifts to the gallery but were merely on loan. More specifically, the United Kingdom Beaverbrook Foundation (Foundation “A”) claimed ownership of 133 paintings valued at more than $200 million, including JMW Turner’s Fountain of Indolence valued at $25 million and Lucien Freud’s Hotel Bedroom valued at $5 million. The Canada Beaverbrook Foundation (Foundation “B”) claimed ownership of another 83 pieces of art. Both Foundations launched lawsuits against the Gallery and its board of directors in Great Britain, while the Gallery sued the Foundations in N.B. In 2006, the Gallery and Foundation A agreed to arbitration. Lawsuits by Foundation B were set aside pending the outcome of the arbitration with Foundation A. The parties chose retired Supreme Court Justice Peter Cory as arbitrator, and hearings were held in public in Fredericton and Toronto. In March 2007, Cory ruled that of the 133 works, 85—including the core of the collection—belonged to the Gallery, and the other 48 belonged to the Foundation A. Cory also ordered Foundation A to pay $2.4 million in compensation for several paintings it removed from the gallery over the years and costs of $4.8 million. Foundation A appealed, as under the terms of the arbitration a disputant could appeal if it felt that the arbitrator’s ruling contained legal errors or disregarded important rules of evidence. In September 2009, a three-person appeal panel composed of retired judges upheld Cory’s ruling in its entirety. In July 2010, Foundation A filed an application in the Court of Queen’s Bench of New Brunswick to appeal the panel’s results on a point of law. Before a hearing on the application was held, the parties reached a confidential settlement. Each side is estimated to have spent more than $10 million in legal fees. The dispute between Foundation B and the gallery settled in 2014, with the foundation receiving 43 and the gallery receiving 35 of the 78 works in dispute. Why do you think the Foundation A (the UK Foundation) and the Gallery chose arbitration for their dispute? What were the advantages of arbitration for the parties? How well did the dispute resolution methods work for the gallery and the foundations. [footnotes deleted] Answer: Why the UK Foundation and the gallery chose arbitration over litigation is a matter of speculation. It was not because of privacy as the arbitration was held in public and perhaps not for the cost saving as both parties spent millions on legal fees. It may have been because of the ability to select the arbitrator and the flexibility that arbitration afforded in terms of timing, locations for the hearings, and rules for proceeding. The advantages of arbitration are that it can be quicker and less costly than litigation, it can be private, there is a choice of process and arbitrator, and the decision may be binding. None of the parties probably think that arbitration or litigation worked particularly well for them. In the case of the arbitration, both parties spent a considerable amount of money on legal fees, the arbitration process took almost five years, and the relationship between the gallery and the foundations has been severely impaired. On the upside for the gallery, ownership of some of the paintings has been clarified and the dispute has generated considerable interest in the gallery and its art collection. The litigation was settled out of court so it is unknown how well this method would have worked for the parties. 7. In 1997, the Flynns hired Applewood Construction to build them an environmentally friendly home. The house was erected on a concrete slab. The Flynns moved into their new home and discovered within the first year that the concrete slab had cracked, causing considerable damage to the structure. The Flynns successfully sued Applewood for damages, but before they could collect, Applewood went out of business. In 2005, the Flynns sued Superior Foundation, who had been hired by Applewood to pour the concrete slab. What defence might Superior have against the Flynns’ claim? [footnote deleted] Answer: This case illustrates the crucial importance of limitation periods as a potential block to litigation, whatever the merits of the claim might be. In this case, the claim against Superior was commenced eight years after the work was done and at least seven years after the defects were discovered. In Nova Scotia, where the case on which the situation is based was decided, the applicable limitation period was six years. See Flynn v Superior Foundations Ltd, 2008 NSSC 296. Legislation in Nova Scotia permits the court to consider the circumstances and waive the limitation if justified. In this case, the court found no basis for doing so and halted the suit. Note that limitation periods are generally being shortened. For example, in Ontario, there is now a limit of two years applied to most civil lawsuits. 8. In 2008, several hundred people became ill and a number of them died as the result of an outbreak of the listeria bacteria. The illnesses were traced to the consumption of deli meats that were produced from a single processing plant operated by MegaMeats Inc. Those most affected by the bacteria were the elderly, the very young, and those who were already ill. Is this an appropriate situation for a class action lawsuit? What do the victims have in common? How are their claims different? What process must be followed? How should MegaMeats deal with these claims? Answer: This appears to be an appropriate situation for a class action lawsuit since the cause of the loss of all victims was the same: the failure of MegaMeats to take reasonable care to ensure the safety of their products for consumption. The victims all became ill (and tragically a number died) from consuming tainted meat. However, the impact on individual victims may be quite variable in at least two ways. The actual degree of illness will vary among victims and, to a large extent, this variability will be a function of pre-existing conditions in terms of age, general state of health, and particular illnesses that could make victims more vulnerable to this specific bacteria. The class action process requires the members of the class to come together in a single action and have their claim certified by the court as a class action. In practice, there are several law firms who identify potential class actions and actively recruit class members. MegaMeats’ reaction to these potential claims is a matter of strategy determined by such considerations as the company’s public relations concerns and potential litigation costs. Since this situation is roughly based on Maple Leaf Foods, we can consider Michael McCain’s acceptance of responsibility on behalf of the company and the speedy resolution of the class action suit. Other companies have reacted in quite different ways in similar situations. Solution Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085