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“Technically and Substantively Unfair”: The Case against Case Splitting in Secondary Market Class Actions

On July 26, 2018, Justice Perell of the Ontario Superior Court of Justice released his decision in Johnson v. North American Palladium Ltd. The case serves as a reminder that the rules of evidence and procedural fairness are of no less application in the class action context, and in particular on a motion for leave under Part XXIII.I of the Ontario Securities Act.

In March of 2016, the representative plaintiffs commenced a putative securities misrepresentation class action against North American Palladium ("Palladium") and its officers and directors, as well as KPMG as Palladium's auditor. The allegations concerned statements made in Palladium's corporate public disclosure documents, and the plaintiffs advanced,inter alia, a statutory cause of action for which leave is required under the Securities Act. As part of that leave motion, the parties agreed to a timetable for the exchange of affidavit evidence, and cross examinations. The plaintiffs duly served their motion record, which contained several affidavits including that of a proposed chartered accountant expert, Mr. Talebi.  The defendants each served affidavits from both fact witnesses and experts in response to the Talebi report. However, by way of reply, the plaintiffs served a reply report of Mr. Talebi as well as an additional expert report of Mr. Mintzer (the "Mintzer Affidavit") which, while ostensibly prepared to address a question of causation raised anew in the Palladium expert's report, in fact opined on all aspects of the case and summarized and expanded on the evidence contained in the prior affidavits delivered by the plaintiffs.

Consequently, Palladium and KPMG moved to strike the Mintzer Affidavit.

In granting the motion of the defendants, Perell J. canvassed the standard applicable on Part XXIII.I leave motions, as well as the Rules of Civil Procedure with respect to the presentation of evidence on motions and applications.  It was noted that the modern commercial practice is to order the sequence of evidence by the moving party's affidavits, followed by that of the respondents, and if necessary reply evidence of the moving party.  Cross-examinations are then conducted, followed by the exchange of written submissions. While no specific Rule applies, the law against case-splitting stipulates that reply evidence should be limited to "proper reply":

The rule against case-splitting that applies at hearings and trials restricts reply evidence and reply submissions to matters raised by the defendant or responding party and does not permit the plaintiff or applicant to deliver new evidence. The rationale is that the defendant or respondent is entitled to know and to respond to the case being made against him or her, and, therefore, the plaintiff or applicant should not split his or her case and take the opponent by surprise and without an opportunity to respond. It is intrinsically unfair for a plaintiff, applicant, or moving party to add new evidence or new argument after the defendant, respondent, or responding party has completed his or her evidence and argument.  Reply evidence is admissible only when defendant, respondent, or responding party has raised a new matter that could not be reasonably anticipated by the plaintiff, applicant, or moving party or where the reply evidence is in response to an issue enlarged by the opponent in a manner that could not have been reasonably foreseen.

Similarly, and absent leave of the Court, a party should not be permitted to file additional affidavit materials after cross-examination to correct deficiencies, or to otherwise bolster its case.

Perell J. applied these principles and concluded that the Mintzer Affidavit contravened the case management timetable, as well as the rule against case-splitting.  In short, the expanded scope of the Mintzer Affidavit to replicate and improve upon the earlier affidavit of Mr. Talebi "set a litigation trap" for the defendants. While the defendants had no obligation to file evidence on the leave motion, they "responded to the case they thought they had to meet, and it is to spring a trap to now make them respond to a different case."  The rule against case-splitting is of particular salience in the context of leave motions:

From a policy perspective, a defendant to an action under Part XXIII.1 of the Ontario Securities Act should not be exposed to unexpected adverse procedural and evidentiary consequences if he or she does join issue with plaintiff by filing affidavit evidence and producing documents upon which the plaintiff can build its case; thus, the rule against case-splitting is appropriate to be applied on a leave motion, especially in a case where the parties can be taken to have expected the rule against case-splitting to apply because they had agreed to a formal timetable.

The reply evidence presented a "genuine case of case-splitting" and appeared to be an instance wherein the Mintzer Affidavit was being used to "correct deficiencies in the plaintiff's case in chief."

The question of whether reply evidence may amount to case-splitting must be decided on the circumstances and exigencies of each matter, and in some instances it may be appropriate to admit the reply evidence and to allow a sur-reply or to impose terms.  Justice Perell ultimately concluded that fairness dictated that the Mintzer Affidavit be struck in its entirety, with leave to file a new affidavit confined solely to the issue of causation per the "original expectation" of the defendants.