EMC Prevails in Climate Change Securities Fraud Action

We recently wrote about a Complaint (the Complaint) brought by the State of New York against ExxonMobil Corporation relating to alleged climate change disclosure securities fraud. In December 2019, the Supreme Court of the State of New York dismissed the State of New York’s allegations (People of the State of New York v. Exxon Mobil Corporation, 452044/2018). This post briefly discusses the dismissal and its implications.

Background

In 2013, ExxonMobil received various inquiries and shareholder proposals requesting more information about how it factored climate change risks and regulations into its business decisions. In exchange for the withdrawal of two shareholder proposals, ExxonMobil agreed to publish two reports with additional information about the manner in which ExxonMobil handles regulatory changes with respect to emissions of greenhouse gases.

The reports were published in 2014. The State of New York alleged that, through the reports and other statements, ExxonMobil made various material written and oral misrepresentations and omissions that tended to mislead the public about ExxonMobil’s plans with respect to the risks of climate change regulation. The key allegation was that ExxonMobil engaged in a “longstanding fraudulent scheme” that was “sanctioned at the highest levels of the company”, “effect[ively] erect[ing] a Potemkin village to create the illusion that it had fully considered the risks of climate change regulation and had factored those risks into its business operations”.

The Decision

The Court dismissed the Complaint on December 10, 2019, holding that the State of New York had failed to prove by a preponderance of evidence that ExxonMobil made any material misrepresentations about how it managed the financial risks of climate change and related regulatory developments.

In particular, the Court:

  • Rejected the State of New York’s contention that reasonable investors would attach material significance to the fact that ExxonMobil internally determines when it is appropriate to apply the cost of greenhouse gas emissions with respect to specific projects;
  • Found that there was no allegation and no proof that anything ExxonMobil was alleged to have done or failed to do affected ExxonMobil’s balance sheet, income statement or any other financial disclosure;
  • Found that the State of New York’s case was largely premised on projections of proxy costs and greenhouse gas emissions costs in 2030 and 2040, and “[n]o reasonable investor during the period from 2013 to 2016 would make investment decisions based on speculative assumptions of costs that may be incurred 20+ or 30+ years in the future with respect to unidentified future projects”; and
  • Held that ExxonMobil’s disclosures with respect to climate change regulation were not intended to enable investors to conduct meaningful economic analyses of ExxonMobil’s internal planning assumptions, and no reasonable investor would have viewed “speculative assumptions about hypothetical regulatory costs projected decades into the future as significantly altering the total mix of information” made available to the public.

Takeaways

Market participants can expect to face a range of proceedings relating to their approach to climate change and environmental regulation styled as securities claims. The dismissal in New York v. Exxon Mobil suggests that courts will apply existing securities law analyses to such claims. As the Court noted, “this is a securities fraud case, not a climate change case”.

The case also reinforces the importance of material climate change-related risk disclosure. As we recently wrote, the Canadian Securities Administrators (CSA) has released a Staff Notice on such disclosure and identified specific issues and questions corporations should consider when preparing the risk sections in their MD&As and AIFs.

 

The author would like to thank Samantha Black, articling student, for her contributions to this article.

US federal court holds unsponsored ADRs may be subject to US securities laws

On January 28, 2020, in a case that potentially expands the liability of foreign companies, the US District Court for the Central District of California denied a foreign defendant’s motion to dismiss securities law claims brought by US purchasers of its unsponsored, unlisted American Depository Receipts (ADRs). Specifically, in Stoyas v. Toshiba Corp., — F. Supp. 3d —, No. 15-cv-4194, 2020 WL 466629 (C.D. Cal. Jan. 28, 2020), the District Court held that Plaintiffs sufficiently pled that their purchases of Defendant’s unsponsored ADRs on the over-the-counter (OTC) market constituted domestic transactions in securities, as well as alleging the Defendant’s plausible participation in the establishment of the ADR program so that the Defendant’s alleged conduct was “in connection with” Plaintiffs’ purchases. The District Court permitted Plaintiffs’ separate claims under Japanese securities laws to go forward as well, concluding that principles of international comity and forum non conveniens did not bar the exercise of supplemental jurisdiction over such claims.

Background

In June 2015, Plaintiffs filed a class action lawsuit under Sections 10(b) and 20(a) of the US Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder, as well as claims under Japan’s Financial Instruments & Exchange Act (JFIEA), against Defendant Toshiba Corporation (Toshiba) based on the alleged deliberate use of improper accounting practices. The District Court dismissed the Plaintiffs’ complaint with prejudice, 191 F. Supp. 3d 1080 (C.D. Cal. 2016), concluding that the OTC market on which the ADRs were exchanged was not an “exchange” under the Exchange Act and that the Plaintiffs failed to adequately plead Defendant’s involvement in the ADR transaction at issue. The District Court also dismissed the Plaintiffs’ claims under JFIEA on the basis of international comity and forum non conveniens.

On appeal, the US Court of Appeals for the Ninth Circuit, 896 F.3d 933 (9th Cir. 2018), reversed the District Court’s decision in light of Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), and relevant Second Circuit Court of Appeals cases. In Morrison, the US Supreme Court held that US securities laws only apply extraterritorially to (1) “transactions listed on domestic exchanges” and (2) “domestic transactions in other securities.” The Ninth Circuit agreed with the District Court that the OTC market did not qualify as an “exchange” under Morrison’s first prong. It held, however, that ADRs were “securities” under the Exchange Act and would therefore be subject to US securities laws if purchased in a “domestic transaction.” In determining whether a transaction is “domestic,” the Ninth Circuit adopted the Second Circuit’s standard in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), which provides that a “transaction occurs when the parties incur irrevocable liability.” The Ninth Circuit acknowledged that specific allegations regarding this irrevocable liability standard, i.e., where purchasers incurred the liability to take and pay for securities and where sellers incurred the liability to deliver securities, in addition to allegations regarding Defendant’s involvement in the ADR transaction to make its alleged conduct to be “in connection with” Plaintiffs’ purchases as required by Section 10(b), were missing from Plaintiffs’ complaint. To that end, the Ninth Circuit remanded the case for Plaintiffs to amend their complaint.

After the US Supreme Court denied Defendant’s petition for certiorari to review the Ninth Circuit’s decision, Plaintiffs filed a second amended complaint (SAC) with the District Court.

The District Court’s decision

On remand, the District Court denied the Defendant’s motion to dismiss the SAC.

First, the District Court held that Plaintiffs adequately alleged that the ADR transaction was “domestic” under Morrison. The Plaintiffs alleged, for instance, that the tasks carried out by the broker, the placement of buy orders, the payment of the purchase price and the transfer of title all took place in a single transaction in the United States, which the District Court held led to a “plausible inference that the parties incurred irrevocable liability within the United States.” In contrast, the Defendant argued that the Plaintiffs would have first purchased Toshiba stock in a foreign transaction and then, in a second transaction, deposited the shares with the issuer in exchange for the ADRs at issue here. The court stated if “discovery ultimately reveals that the ADR transaction involved an initial purchase of common stock in a foreign transaction, as the Defendant contends, [that] can be a matter properly raised at the summary judgment stage.”

Second, the District Court held that the Plaintiffs sufficiently pled that the Defendant’s alleged conduct was “in connection with” the ADR transaction. In reaching this conclusion, the District Court focused on whether the Defendant participated in or consented to the establishment of the unsponsored ADR program. The District Court pointed, for instance, to Plaintiffs’ allegations regarding “the nature of the . . . ADRs, the OTC Market, the Toshiba ADR program, including the depositary institutions that offer Toshiba ADRs, the Form F-6s, the trading volume, the contractual terms, and Toshiba’s plausible consent to the sale of its stock in the United States as ADRs.” Further, the District Court focused on the Plaintiffs’ allegation that the Bank of New York Mellon, one of Toshiba’s ten largest shareholders and one of the depositary institutions for Toshiba ADRs, held 1.3 percent of Toshiba’s outstanding stock, and the Plaintiffs’ assertion that it is unlikely for that many shares to be obtained without the consent, assistance or participation of Toshiba. Based on the foregoing, the District Court concluded that the Plaintiffs sufficiently alleged Toshiba’s plausible participation in the establishment of the ADR program.

The District Court next analyzed whether comity or forum non conveniens principles warranted dismissal of the Plaintiffs’ claims. Because the Plaintiffs and the proposed class were all US nationals and plausibly satisfied Morrison’s requirements to plead a domestic transaction, the District Court held the allegations in the case were “sufficient to permit this case to move forward in this forum.” The District Court also stated that “[i]n light of the court’s conclusion that Plaintiffs have sufficiently alleged Securities Exchange Act claims, the court concludes that comity and forum non conveniens do not compel dismissal of Plaintiffs’ JFIEA claim.” The District Court did not elaborate on the latter point, noting that it declined to review prior briefing on this issue to which the Defendant referred the Court. In light of the foregoing, the District Court decided to continue to exercise supplemental jurisdiction over the Plaintiffs’ JFIEA claim.

Implications

Stoyas signals the potential expansion of liability for foreign entities who have unsponsored ADRs issued in the US. One critical feature will be the extent to which the foreign entity participates in, or consents to, the unsponsored ADR program in order to make any alleged misconduct to be “in connection with” the purchase and sale of the ADRs. Foreign entities therefore might wish to review the degree to which they are involved in unsponsored ADR programs as part of a comprehensive risk analysis of potential liability under US securities laws.

Stoyas might also open the door for courts to exercise supplemental jurisdiction over foreign-law claims where US investors adequately allege US securities claims in the same suit.

One thing is for certain: Stoyas bears watching as the case proceeds into discovery and as to how persuasive the decision is for other US federal courts.

An investigator’s misconduct can lead to a stay of proceedings

In the last 5 years, investigators with the Quebec securities regulator, the Autorité des marchés financiers (AMF), have more and more often turned to authorizing judges to secure search warrants allowing them to enter people’s homes and collect evidence. The hearings before the authorizing judges are held ex parte and authorization is granted on the basis of the affidavit filed by the AMF investigator.

Despite the Zalat v. R. (2019 QCCA 1829) being a criminal case, the teachings of the Quebec Court of Appeal, described below, are easily transposable to a securities litigation setting.

The Quebec Court of Appeal in Zalat ordered a stay of the proceedings against Zalat for possession and careless storing of a restricted weapon, on account of the misconduct of the main investigator, Sergeant-Detective McCann, which was found to have undermined the integrity of the judicial process. The firearm had been seized by the police during the execution of a search warrant which was authorized by a judge on an ex parte basis, relying on a sworn affidavit of McCann setting out information provided by a police informant as verified by the police.

Five failings of McCann were analyzed by the Court of Appeal:

  1. His systematic and intentional destruction of notes of discussions with any of the thirty-odd police informants under his control (including the one on whom he relied in his affidavit to obtain the search warrant targeting Zalat’s home) after he had completed a “source report”.
  2. His patently unreasonable interpretation of the Montreal Police Service Policy which required McCann to place all documents regarding a police informant in a sealed, confidential envelope to be sent to a specific team within the Police Service, which not only did not justify his destruction of his notes, but also breached his duty to preserve evidence. In so acting, McCann’s conduct denoted unacceptable negligence, indifference or carelessness towards the criminal process and the rights of an accused.
  3. His knowledge that the destruction of the notes of his discussion with the police informant in this case would prevent Zalat from being able to use them in Court. The Court highlights McCann’s testimony under oath that he took as few notes as possible, “knowing what could come of them in court”.
  4. The affidavit signed by McCann and presented to the authorizing judge was found lacking in many respects.

He purposefully failed to inform the authorizing judge that he was the officer in control of the police informant on whom he relied in his affidavit.

He drafted his affidavit to lead the authorizing judge to believe that he gained knowledge of the facts alleged in his affidavit through a document provided by the police informant where no such document existed.

He attributed to the police informant information that was a lot more precise than what had in fact been provided by the police informant.

He destroyed the notes of the discussion with the police informant, prohibiting any verification of the accuracy of the statements in the “source report” and his affidavit.

  1. McCann’s favouring of the end result of his search and seizure, regardless of the impact of his conduct on the process leading to the seizure. The Court highlights McCann’s comment to the trial judge that whatever decision she reached on the possible exclusion of the seized evidence, he knew that he had taken a firearm off the streets and “that’s what mattered”.

The Court held that the authorization process leading to the issuance of a search warrant could not perverted in this way and that courts should not tolerate such a lack of transparency in an ex parte proceeding seeking permission to search a person’s home. This was a clear case warranting a stay of proceedings.

Alberta Court Finds that Administrative Penalty Survives Bankruptcy

In January 2020, Madam Justice B.E. Romaine of the Court of Queen’s Bench of Alberta (Court) ruled that an administrative penalty levied against the Respondent by the Alberta Securities Commission (ASC) survived his discharge from bankruptcy. (See Alberta Securities Commission v Hennig, 2020 ABQB 48)

The administrative penalty was levied in 2008 against the Respondent after the ASC found that he was responsible for misrepresentations in the financial statements of a public company of which he was a director and officer; that he financially benefited from the misrepresentations; that he participated in market manipulation; and that he made ongoing misrepresentations to ASC staff.

An appeal by the Respondent was later dismissed.

The Respondent filed an assignment in bankruptcy in 2010.  Nearly a decade later, Romaine J. was tasked with deciding whether the administrative penalty should survive the Respondent’s discharge from bankruptcy.

A discharge from bankruptcy releases an individual bankrupt from all provable claims in bankruptcy, subject to certain statutory exemptions under s. 178(1) of the Bankruptcy and Insolvency Act (BIA).

The Respondent argued that the statutory exemptions should be construed narrowly and not as capturing his administrative penalty.  The ASC argued that the statutory exemptions should capture any decision of a regulatory authority that involves the public interest.

Romaine J. did not accept either submission – at least not fully.  She interpreted s. 178(1) purposively.  The purpose underlying BIA, s. 178(1)(e) was precluding dishonest debtors from benefitting from their dishonesty.  Not all administrative penalties should survive a bankrupt’s discharge; however, the Respondent’s administrative penalty resulted from conduct that caused property to pass based on fraudulent misrepresentations and false pretenses.

The Respondent’s administrative penalty was imposed in response to his fraudulent conduct, and consistently with the ASC’s mandate to protect the public interest and promote the integrity of the capital markets, and would therefore survive any discharge from bankruptcy under BIA, s. 178(e)

 

Insider trading prosecutions may increase after Second Circuit decision lowered barriers to convict

The Second Circuit recently determined that the criminal securities fraud provisions that were enacted as part of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) have less onerous requirements for proving insider trading than under the general antifraud provisions of the Securities Exchange Act of 1934 (Exchange Act), specifically Section 10(b) of the Exchange Act. Section 10(b) has been the traditional way for prosecutors to charge insider trading. Pursuant to Supreme Court rulings, an insider must breach a duty of confidentiality and receive a “personal benefit” in order to have engaged in the illegal tipping of material, non-public information to others. Similarly, in order to prosecute the recipient of a tip for insider trading, prosecutors had been required to prove that the tippee knew that the source of the information had breached his or her duties by disclosing the information. In a 2-1 opinion issued on December 30, 2019, the Second Circuit upheld the convictions of several defendants for, among other things, violating the Sarbanes-Oxley securities fraud provision by engaging in insider trading despite the jury’s acquittal on the Section 10(b) charges because of the lack of proof that the tipper received a personal benefit. United States v. Blasczczak, No. 18-2825 (2d Cir. Dec. 30, 2019).

To read the full article, please click on this link.

Blockchain law: Laying down the law for digital assets

Federal legislators, regulators and enforcers have been making enforcement pronouncements and new proposals to try to keep up with the social, economic, political and legal issues posed by the issuance, use and trading of digital assets built on blockchain technologies. In this edition of his Blockchain Law column, Robert A. Schwinger describes some of the recent developments.

Read the entire column.

Proposed Changes to the Ontario Class Proceedings Act, 1992 Would Benefit Defendants and Their Insurers in Securities Class Actions

The Ontario government’s recent announcement of proposed changes to Ontario’s class proceedings legislation bodes well for defendants and their insurers. If the amendments become law, they would provide greater latitude to defendants seeking to narrow or dismiss claims prior to certification, make certification a somewhat steeper hill for class counsel to climb, and provide mechanisms to prevent duplicative multi-jurisdictional class actions from proceeding in Ontario. Details of certain of these proposed changes include the following:

Early dismissal motions and dismissal for delay

Prior to the motion for certification, motions by defendants that may dispose of the proceeding in whole or in part or narrow the issues to be determined would be permitted. Currently, Ontario courts tend to discourage motions of this nature prior to certification. This is a welcome change for defendants. As well, a proceeding could be dismissed if, by the first anniversary of the day on which the proceeding was commenced, the representative plaintiff has failed to file a final and complete motion record for certification.

A stricter test for certification

The amendments provide that certification will only be granted if “the questions of fact or law common to the class members predominate over any questions affecting only individual class members”.  This test would more in line with the test for certification applied in the United States, which requires a predominance of the common issues over individual issues. These changes may create additional obstacles to plaintiffs seeking certification in cases involving significant individual issues.

Determining preferable forum for multi-jurisdictional class actions

If a class proceeding has been commenced in a Canadian jurisdiction other than Ontario involving the same or similar matters and some or all of the class members, the court will be required to determine whether it would be preferable for some or all of the claims or common issues of the class members to be resolved in the proceeding commenced in the jurisdiction outside of Ontario.  This will avoid the expense of duplicative class actions proceeding in Ontario and another province.

Appealing certification orders

Defendants and plaintiffs will be able to appeal certification orders directly to the Court of Appeal, instead of first having to appeal to the Divisional Court, and then seek leave to appeal to the Court of Appeal. This will save the cost of appeals to the Divisional Court.

Third-party funding

Third party funding agreements would require approval by the court based upon specified criteria and on notice to the defendant. A defendant would be able to recover a costs award made against the representative plaintiff directly from the funder, to the extent of the indemnity provided under the approved funding agreement.

The Scope of “Will Say” Statements: In the Matter of BDO Canada LLP

In BDO Canada LLP (Re), 2020 ONSEC 2, a panel (the Panel) of the Ontario Securities Commission (OSC) considered a motion brought by Staff alleging that BDO Canada LLP (BDO) failed to meet the standard imposed by the Ontario Securities Commission Rules of Procedure and Forms (Rules) in the preparation of its witness summaries. The motion is part of a larger proceeding against BDO related to alleged breaches of the Securities Act, RSO 1990, C S.5 in connection with audits conducted by BDO. As a part of pre-hearing disclosure, Staff and BDO exchanged summaries of the anticipated evidence of witnesses that each party intended to call to testify at the merits hearing.

Staff cited two main deficiencies in BDO’s witness summaries. Firstly, all nine of the witness summaries used the words “including, but not limited to” when describing the anticipated evidence of the witness. Further, for the eight witnesses who were interviewed by Staff during the investigation, the witness summary stated that the witness would testify in a manner that is “broadly consistent with” that witness’ earlier testimony. Secondly, Staff submitted that the witness summaries did not properly identify the documents to which the witness is expected to refer.

While the Panel acknowledged some deficiencies in the witnesses statements, the motion was ultimately dismissed, with the Panel determining that the deficiencies did not rise to the level necessary to conclude, ahead of the merits hearing, that they failed to comply with Rule 27(3). The Panel noted that witness summaries are not typically provided to a panel unless there is a specific need to review them in response to an allegation that a witness has exceeded the scope of what was disclosed in the summary.  It is otherwise difficult to assess the adequacy of a witness summary without the benefit of witness testimony at a merits hearing against which to compare.

Here, the Panel noted that of the eight individuals interviewed by the OSC, the witness summaries incorporated by reference the transcripts of those witnesses’ interviews. BDO’s counsel acknowledged during oral argument that the words “including, but not limited to” with respect to the witnesses’ expected testimony were “largely nominal” and of no real value.  The Panel indicated that, as a result, the substance of those witnesses’ testimony would be limited to whatever substance may be found in the transcripts.

As it relates to the identification of documents to which the witnesses were expected to refer, the witness summaries identified “the hearing brief of BDO, which is expected to include, among other documents, BDO’s Audit Working Papers and e-mail correspondence relating to the audits in question”.  The Panel determined that it was illogical and of no assistance for BDO to refer to a hearing brief which did not yet exist.  Accordingly, BDO’s witness summaries would be effectively read to refer to BDO’s Audit Working Papers and e-mail correspondence.  While Staff contended that BDO’s description was overly broad given the expansive scope of discovery, the Panel declined to order further and better witness summaries, reasoning that it would be difficult for the Panel to determine how the list of documents ought to be narrowed.  However, the Panel did observe that BDO may face cost consequences if the hearing panel determines that BDO’s choice not to narrow the list of documents referred to in the witness summaries unnecessarily lengthened the proceedings.

Only time will tell whether BDO’s witness summaries comply with Rule 27(3) or whether they are too perfunctory to properly disclose the substance of testimony that BDO’s anticipated witnesses seek to give.

The author would like to thank Nazish Mirza, articling student, for her contribution to this article.

Ding-Dong Dunsmuir is Dead: What Minister of Citizenship and Immigration v. Vavilov Means for the Ontario Securities Commission

The decision of the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v. Vavilov (2019 SCC 65) and its companion decision in Bell Canada v. Canada (Attorney General) (2019 SCC 66), both released on December 19, 2019, breathe new life into the statutory right of appeal contained in section 9 of the Ontario Securities Act, R.S.O. 1990, c. S. 5.  Section 9 allows a person or company directly affected by a final decision of the Ontario Securities Commission (OSC) to appeal to the Divisional Court.  Following the decisions in Vavilov and Bell Canada, such appeals will no longer be reviewable on a deferential reasonableness  standard.

The decisions also signal that even where the reasonableness standard does apply, the court’s review must entail a “robust” evaluation of the tribunal’s decision.

The Dunsmuir Regime

Beginning with the decision of the Supreme Court of Canada in Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557 Canadian courts have given decisions of provincial securities commissions a high degree of deference even in relation to the interpretation of the regulators’ home statutes, notwithstanding the existence of statutory rights of appeal and the absence of a privative clause.  Courts “looked past” appeal clauses in securities legislation because securities regulators were perceived to have greater relative expertise as it related to matters of securities law.

The decision in Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190 and its subsequent interpretation by the courts put the nail in the coffin for meaningful review of decisions of administrative tribunals like the OSC, by applying a deferential reasonableness standard of review to both judicial review and appeal of decisions of such tribunals, except in exceptional circumstances involving true questions of vires or jurisdiction, general questions of law of central importance to the legal system as a whole, or questions related to the jurisdictional boundaries between two administrative bodies.

The application of Dunsmuir deference and the reasonableness standard of review effectively rendered OSC decisions appeal proof.

Impact of Vavilov

The Vavilov decision is important for two primary reasons:

  • It sets out a revised framework for determining the standard of review of the merits of administrative decisions (other than review related to a breach of natural justice and/or the duty of procedural fairness) that clearly distinguishes between reviews and statutory rights of appeal; and
  • It clearly articulates how review on a standard of reasonableness should proceed.

Presumed Application of the Reasonableness Standard

Vavilov dictates that analysis of the applicable standard of review begins with a presumption that a deferential reasonableness standard is the applicable standard in all cases, including with respect to questions related to the interpretation of an administrative decision maker’s enabling statute. Reviewing courts should derogate from that standard only where required by a clear indication of legislative intent, either:

  • Where the legislature explicitly specifies the standard of review or there is a statutory right of appeal; or
  • Where the rule of law requires that the standard of correctness to be applied for certain types of legal questions, namely:
  • constitutional questions;
  • general questions of central importance to the legal system as a whole; or
  • questions regarding the jurisdictional boundaries between two or more administrative bodies

The Court left open the possibility that new categories could be recognized as requiring a derogation from the application of the reasonableness standard. However, jurisdictional questions are no longer to be treated as a distinct category attracting review using a correctness standard.

Statutory Appeals are to be Determined Using Appellate Standards of Review

Significantly, the existence of a statutory appeal mechanism (like section 9 of the Ontario Securities Act) rebuts the presumption that a reasonableness standard applies and signals the application of appellate standards of review, to be determined according to the nature of the issues on appeal.

Therefore, where a court is hearing an appeal from an administrative decision, it must apply the standard of correctness to questions of law, and the standard of palpable and overriding error for questions of fact and questions of mixed fact and law with no readily extricable legal questions.

Accordingly, in a statutory appeal from a decision of an OSC hearing panel, the reviewing court will determine questions of law, including questions of statutory interpretation and those concerning the scope of a decision maker’s authority, on a correctness standard.  This represents a welcome and marked change from Dunsmuir and opens the door to greater interference by the Divisional Court in the determination of questions of law by OSC panels.

What the Reasonableness Standard Entails: Not a Rubber Stamp

In Vavilov the Supreme Court offers a clearer articulation of what the reasonableness standard entails:

  • Review on a reasonableness standard is intended to be “robust”. It is not a “rubber stamping” process or a means of sheltering administrative decision makers from accountability.
  • The requirements of the duty of procedural fairness and whether it requires a decision maker to give reasons for its decision will impact how a court conducts a reasonableness review.
  • The focus of a reasonableness review will be on the decision actually made by the decision maker, not on the conclusion the court itself would have reached. It includes both the decision-making process and its outcome: “a reasonable decision is one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker”.
  • Reasonableness is a single standard that accounts for context. What is reasonable in a given situation will depend upon the constraints imposed by the legal and factual context of the decision under review.
  • Formal reasons for a decision should be read in light of the record and with sensitivity to the administrative setting in which they were given:
  • Written reasons should not be assessed against a standard of perfection;
  • Courts should pay “respectful attention” to the application by decision makers of specialized knowledge and “demonstrated expertise”; and
  • The reviewing court should consider the history and context of the proceedings in which the decision was rendered, including the evidence before the decision maker, submissions of the parties, publicly available policies informing the work of the decision maker, and past decisions of the administrative body.
  • However, where reasons contain a “fundamental gap” or reveal “an unreasonable chain of analysis”, even if the outcome could be reasonable under different circumstances, it is not appropriate for the court to fashion its own reasons to buttress the administrative decision, and the decision will generally fail to meet the requisite standard of justification, transparency and intelligibility.
  • A reasonable decision is one that is (1) based on an internally coherent reasoning and (2) justified in light of the legal and factual constraints that bear on the decision. Relevant factors in evaluating whether a decision is reasonable will include the governing statutory scheme, other relevant law, principles of statutory interpretation, the evidence before the decision maker and facts of which it may take notice; the parties’ submissions; past practices and decisions of the administrative body; and the potential impact of the decision on the party to which it applies.
  • Reasonableness review “does not give administrative decisions makers free reign in interpreting their enabling statutes”.  The governing statute will always act as a constraint on administrative decision makers. Although a decision maker’s interpretation of its statutory grant of authority is generally entitled to deference, “the decision maker must nonetheless  properly justify that interpretation”.
  • Whether an interpretation is justified will depend on the context including the language in the legislation describing the limits of the decision maker’s authority. Where the legislature has used broad, open-ended or highly qualitative language like “in the public interest”, it contemplates that the decision maker is to have greater flexibility in interpreting that language.
  • Depending on the statutory language chosen by the legislature, questions relating to the scope of a decision maker’s authority may support only one interpretation of the scope of an administrative decision maker’s authority or more than one such interpretation.
  • Minor missteps should not result in the decision being overturned. Any shortcomings in the decision must be “sufficiently central or significant” to render the decision unreasonable.

This explanation of what review on a reasonableness standard should involve is unlikely to be of much significance to parties to proceedings before the OSC given the existence of a statutory right to appeal decisions rendered by it that are final.  In general, judicial review of preliminary or interlocutory decisions is discouraged by the courts. Further, the Court specifically noted that the framework for review of decisions on the merits set out in Vavilov does not apply to reviews relating to breach of principles of natural justice or the duty of procedural fairness.

Implications

As a result of Vavilov, we anticipate that appeals of OSC decisions to the Divisional Court, which will now be governed by standards of appellate review rather than Dunsmuir reasonableness, will likely increase in frequency.  In theory, the odds of success on appeals grounded in alleged errors of law should also improve.

Disclosure of evidence by the Crown in electronic format needs to be organized and accessible

In a judgment released on December 10, 2019, the Court of Quebec, Criminal and Penal Division, in R. v. Morris, 2019 QCCQ 7635, confirmed that when the Crown chooses to disclose its evidence in a criminal or regulatory proceeding in an electronic format, it has a duty to organize the evidence and format it in a way that makes it accessible to the defendant.

In this case, in connection with alleged breaches of the Tax Administration Act, the Crown disclosed most of its evidence – roughly 50,000 items – in electronic format, on CDs, DVDs and USB keys, through six successive waves.

The Defendant complained that this electronic disclosure was not organized and came without any search engine or software allowing for searches by keywords or by field or even allowing the identification of duplicates as between waves of disclosure. The Defendant argued that his right to full answer and defense protected by Section 7 of the Canadian Charter of Rights and Freedoms was infringed as a result and sought an order compelling the Crown to redo its disclosure so that it would be accessible.

The Court held that any sizeable disclosure by the Crown of evidence in an electronic format must be organized and must include a search tool allowing the Defendant to:

  • search the entire disclosure at once (even if there is more than one wave of disclosure),
  • to do searches by keywords or by field such as date, author, recipient, subject; and
  • maintain the links between documents and their respective attachments or, in other words, allow for the identification of families of documents.

In closing, the Court mentions that on the eve of 2020, the Crown must provide the necessary tools associated to the volume of evidence disclosed in an electronic format. Failure to do so can, as in this case, breach a Defendant’s right to full answer and defence and could compromise the holding of a trial within reasonable delays.

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