Special thanks to Brendan O’Grady (a senior associate in our Litigation & Government Enforcement Practice Group) and Anton Rizor (articling student in our Toronto office) for co-authoring this blog.
In Flesch v Apache Corporation, the Alberta Court of Appeal (“ABCA”) upheld the certification of an employee class action arising out of the cancellation of long-term incentive compensation plan. This case is significant because the court discussed its gatekeeping function in the certification of class actions, and it serves as a warning to employers who seek to amend or cancel incentive plans.
In July 2017, the Apache Corporation (“Apache”), an American oil and gas company, announced the closure of its Canadian operations. Through a series of amalgamations, Apache’s Canadian subsidiary, Apache Canada, was sold to the company that became Paramount Resources (“Paramount”). Apache cancelled all awards under its long-term compensation plan, including restricted stock units, stock options, and performance awards. Apache advised the over 300 transferred employees that they would participate in Paramount’s compensation plan.
The employees alleged that Paramount’s plan was less remunerative. They claimed damages for breach of contract, breach of duty of good faith, breach of fiduciary duty, and unjust enrichment.
The chambers judge granted the employee group’s application for class action certification against Apache, Paramount, and individual board members. They appealed certain aspects of the certification.
The majority of the ABCA upheld the certification, affirming the chambers judge’s reasoning on most grounds. It rejected the appellant’s argument that there was no basis in fact to conclude that they were common employers because they were subsidiaries or affiliates. The court also rejected Paramount’s argument that they should not be included as a defendant because Apache could be held liable.
The ABCA overturned the certification of the unjust enrichment claim as a common issue because it had no reasonable prospect of success.
One element of the test for certification is whether the pleadings disclose a cause of action. The requirement has a lower bar than the other elements. It will be satisfied unless, assuming the facts are true as pleaded, it is “plain and obvious” that the claim cannot succeed. The majority applied this standard test.
In a concurring decision, Justice Slatter held that the court should exercise a more robust gatekeeping function at certification. He noted that “cluttering up class action proceedings with collateral and marginally relevant causes of action” does not serve the objectives of Alberta’s class action regime. Instead, mirroring the Federal Court Rules and jurisprudence, Justice Slatter held that the court should raise the standard to require “pleadings to disclose a reasonable cause of action.” He envisioned that the court would apply a generous test to the main cause of action and the more rigid standard to secondary causes of action.
- Justice Slatter suggested an enhanced gatekeeping function for courts for certifying class actions. While Justice Slatter concurred in the result, his reasoning was not part of the majority decision, so it’s not clear to what extent his comments will impact future decisions. It will be interesting to see whether other courts follow his suggestion.
- Employers need to be aware of the risk of class proceedings associated with revising or cancelling incentive compensation programs. This is especially important in the context of workforce transitions.
- A successor company may not be shielded from class proceedings based on the conduct of prior employers.
- Employers and their directors need to be aware that class proceedings can be certified against individual managers of incentive programs for breach of fiduciary duty.