The Supreme Court of Canada has refused to certify a class action lawsuit alleging that video lottery terminal games are illegal. Importantly, the Supreme Court has made it clear that the doctrine of “no tort” is not an independent cause of action in Canada.
Winnings invalidation is available as a remedy for wrongdoing, but the plaintiff must demonstrate all elements of the underlying claim against the defendant such as breach of contract or breach of fiduciary duty. Before this decision, it was unclear whether the plaintiffs could obtain a disgorgation without having previously proven a loss.
The appeal in the Atlantic Lottery Corp. Inc. v Babstock, 2020 SCC 19, arose out of a filing for certification of a class action lawsuit against Atlantic Lottery Corporation (ALC). The application was made on behalf of the Newfoundland and Labrador residents who paid to play Video Lottery Terminal Games (VLTs) in the province. Plaintiffs alleged that VLTs were inherently dangerous and misleading and relied on three pleas in law: waiver of tort, breach of contract and unjust enrichment. Plaintiffs requested an for-profit award based on ALC’s profit from licensing VLTs.
The certification judge denied ALC’s request to strike and upheld the lawsuit. The Newfoundland and Labrador Court of Appeal essentially upheld the certification judge’s conclusions and left all three pleas in law. A majority in the Supreme Court of Canada has upheld ALC’s appeal, rescinded the certification order, and struck the plaintiffs’ statement of claim in its entirety.
The central theses
1. In Canada there is no tort waiver
Plaintiffs alleged that ALC had breached a duty of care to warn VLT users of the games’ inherent dangers – particularly the alleged risk of addiction and suicidal ideation. The Court unanimously rejected the concept of tort waiver as an independent plea, ruling that the novel plea did not exist under Canadian law and had no reasonable chance of succeeding in court.
In the view of the Court, the term itself is a misnomer. Rather than forgiving or renouncing the wrongdoing of the defendant’s conduct, plaintiffs who rely on the doctrine simply choose to pursue an alternative, profit-based remedy. Given the confusion over the meaning, Justice Brown suggested abandoning the term itself.
2. Disgorgation is not a cause for complaint, but is available as a remedy against demonstrable violations
Disgorgement for misconduct is one of the for-profit tools available to claimants who have been wronged by a defendant. However, the Supreme Court noted that the plaintiffs in this case tried to rely on disgorgation as an independent plea.
The Supreme Court made it clear that disgorgation is not a stand-alone cause of action – it is a remedy for wrongdoing. To make a claim for disgorgation, a plaintiff must first demonstrate the elements of an underlying injustice (that is, tort, contract, or equity, or where expressly provided by law). Brown J. expressed this principle undoubtedly, writing that “Granting disgorgement for negligence with no evidence of harm would result in an out-of-law remedy and would be a radical and unexplored development.”
The court found that what the plaintiffs had referred to in their pleading as a waiver of tort was in fact the remedy for disgorgation. Since disgorgation is not an independent plea, the Court brought the action on it. In particular, the ruling in this case did not change the law as to which species would qualify a plaintiff for dismissal, although it limited the circumstances in which disgorgation is available for breach of contract.
3. Disgorgation is rarely a remedy for breach of contract
Plaintiffs also alleged that it was an implicit term of contract between ALC and paid users of VLTs that ALC would provide safe games and act in good faith. Plaintiffs alleged that ALC violated this implicit term by supplying “misleading” VLTs. Plaintiffs only sought non-compensatory remedies (ie, disgorgation and punitive damages) for breach of contract and not ordinary breach of contract damages, usually measured by the position they would have been in when the contract was performed.
The majority of the court ruled that disgorgation for breach of contract is only possible in exceptional cases if (1) other remedies for damages, specific performance and injunction are inadequate; and (2) a plaintiff had a legitimate interest in preventing a defendant from doing business.
Since the plaintiffs in this case had sufficient evidence to assert a claim for damages for the gambling losses incurred, the exceptional circumstances necessary for the disgorgation did not exist.
4. Claims for damages cannot be certified
Finally, the majority in the court found that a class action in which plaintiffs only seek nominal damages should not be certified because a class action is not the “preferable procedure” for such a lawsuit. In the future, the defendants may attempt to use this finding to argue that plaintiffs must indeed have evidence to show that the class has suffered more than nominal harm from a certification application. It is possible, however, that the court intended that this participation only apply to nominal damages granted when the plaintiff has not suffered actual harm, and not to claims for actual harm, even if the harm to any class member is minimal. The dissenting judges of the Court of Justice had confirmed a right to nominal damages.
This decision will have a significant impact on Canadian law and will be of significant interest to a wide variety of litigators and their clients as tort law, civil litigation and class action law overlap.
Perhaps most notably, the majority’s decision to abandon the concept of tort waiver and clarify the availability of disgorgation as a remedy makes it difficult for plaintiffs to advance class actions when harm cannot be proven class-wide.
The need to provide evidence of the causes of damage and damage on an individual basis often makes class actions unmanageable. If the plaintiffs decide to initiate a class action lawsuit, the impact of the Supreme Court decision could reduce the areas of settlement, especially in large class action lawsuits from consumers where the specter of possible remedial action against disgorgation has been raised.
It is likely that the representative plaintiff at Babstock expressly intended to waive any claim for damages in order to make the case more suitable for certification. In the past, representative plaintiffs have often chosen to apply for certification of non-compensatory damage only for the same reason. The majority decision has effectively deprived potential claimants of this previously workable strategy.
Finally, the majority have signaled a more liberal approach to cross-out pleadings than in some previous cases, writing:
A claim will not survive a strike just because it is new. It is beneficial and indeed Critical to the feasibility of civil justice and public access to it is that claims, including novel claims that are doomed to fail, are dismissed early in the process. This is because such allegations “do not provide a legal justification for a lengthy and expensive process” … [emphasis added]
Some might interpret this as a backlash against some cases, suggesting that if a party could not refer to a case where the same claim was made, it would survive a motion among s. 5 (1) (a) of the Ontario Class Proceedings Act or a motion under Rule 21 of the Ontario Rules of Civil Procedure (and the equivalents of these statutes).
Overall, potential defendants will warmly receive the Babstock Supreme Court decision as class actions are likely to be more difficult to certify and novel claims will be easier to make.