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Canadian Courts Derail McDonald's Monopoly Settlement

The world's largest fast-food chain thought it closed the book on the embarrassing fiasco surrounding a series of promotional games in April 2003, when Judge Stephen Schiller of the Circuit Court of Cook County, Ill., approved a global settlement in Boland v. McDonald's. But someone forgot about Canada.

In a February 2005 decision the Ontario Court of Appeal allowed a parallel Canadian class action to proceed despite an American settlement that purported to bind Canadian class members. The ruling in Currie v. McDonald's Restaurants of Canada Limited and Simon Marketing Inc. came as a rude surprise to American companies that expect Canadian courts to rubber stamp U.S. class action settlements. The decision means U.S. companies seeking an end to litigation by settling in a U.S. court have no assurance they will not face further exposure in Canada.

"That's a big problem for defendants in a borderless commercial environment in which there is a significant degree of overlap in class action jurisdiction," says Martin Doane, a partner at Doane Phillips Young in Toronto and co-counsel for Greg Currie, the representative plaintiff in the Canadian proceedings.

The decision is even more shocking in light of the Supreme Court of Canada's much-ballyhooed December 2003 judgment in Beals v. Saldanha, which strictly limited discretion of Canadian Courts to reject American judgments.

"Our courts have a history of giving full cooperation to the enforcement of international judgments unless there is a compelling reason not to do so," says Marvin Huberman, a senior litigator at Teplitsky Colson in Toronto.

Unfortunately for McDonald's, the Court of Appeal found such a "compelling reason" in Boland.

Playing Around

In a six-year period beginning in January 1995, McDonald's sponsored 61 promotional games at its restaurants in North America, including "The Deluxe Monopoly Game at McDonald's," "Disney's Masterpiece Collection Trivia Challenge" and the "Who Wants to be Millionaire Game at McDonald's."

Customers played the games by peeling off game pieces attached to food packaging.

An FBI investigation subsequently revealed that Jerome Jacobson, director of security at Simon Marketing, McDonald's outside marketing agency, had embezzled $24 million in prizes by rigging the promotions.

Jacobson was indicted in Florida on Aug. 21, 2001. The next day, plaintiffs' lawyers filed a class action in Cook County, claiming McDonald's has deprived its patrons in both the United States and Canada of the opportunity to win the prizes.

During the subsequent criminal proceedings, Jacobson--who pleaded guilty to embezzlement in September 2002--testified that McDonald's had told him the company didn't want any high-value prizes awarded in Canada.

"It turned out that there were aspects of the fraud that were unique to Canada," Doane explains.

McDonald's settled the class action in April 2003 and Schiller gave the settlement preliminary approval the following month. McDonald's didn't admit liability, but agreed to run new contests with prizes totaling $25 million that the company would randomly award to patrons at selected McDonald's restaurants over a designated period. McDonald's also agreed to pay $3 million toward the plaintiffs' legal fees. In exchange, the plaintiffs agreed to release "all claims."

Schiller ordered McDonald's to publish notice of the settlement in five publications in the United States, including USA Today. He also specifically provided for notice of the settlement to Canadian plaintiffs. He required McDonald's to place two ads in MacLean's, the leading English-language newsweekly in Canada, and in each of three prominent French-language newspapers in Quebec.

Sometime between May and September 2003, Greg Currie, a McDonald's patron in Canada, heard about Jacobson's claim that McDonald's was trying to avoid handing out high-value prizes in Canada. No such allegation had ever been made in Boland. Currie commenced a class action in the Ontario Superior Court of Justice against McDonald's in October 2003. The class action was based on Jacobson's allegations, as well as those in the Boland complaint. No member of Currie's class appeared or took part in any way in the American proceedings.

Meanwhile, Schiller already had given the U.S. settlement final approval in January 2003, and the court issued its formal order in April.

Later in the year, McDonald's asked Justice Maurice Cullity of the Ontario court to dismiss Currie's action. But Cullity refused, concluding that the notice given to the Canadian members was so inadequate it violated the rules of natural justice.

McDonald's appealed to the Ontario Court of Appeal, but a unanimous panel upheld the ruling. At the heart of the appellate decision lies a keen awareness of the frailties of American class action procedures.

Canada Rules

Defendants in class actions in Canada and the United States, the court noted, seek to enforce judgments and settlements as widely as possible to avoid further litigation against them. Hence the court recognized a need to "guard against potential abuses by ... defendants who welcome class action suits as a vehicle for limiting overall liability, sometimes at bargain-basement prices."

As Doane sees it, this passage demonstrates the court's concern over the infamous "forum shopping" that goes on in U.S. state courts and the system of elected judges (all judges are appointed in Canada), some of whom reportedly receive generous campaign donations from plaintiffs' lawyers.

"There's an enormous concern in Canada about collusion between the plaintiffs' bar and defense counsel in U.S. state-based class actions," he says. "If Canadian and other foreign courts blindly enforce U.S. settlements, they'll be transporting the injustice around the world."

Doane's co-counsel, Chris Paliare, a partner at Paliare Roland in Toronto, describes the collusion as "a rush to the bottom, in which defendants give plaintiffs' lawyers a lot of money for fees in return for a cheap binding settlement approved by a judge who doesn't actually adjudicate the case."

According to the Court of Appeal, then, class action plaintiffs are different from the "typical plaintiff," and the rules for enforcing class action judgments should reflect those differences. In particular, a representative plaintiff typically represents the class, and members of the class rarely have personal involvement in the litigation. Therefore, individual class members weren't required to "fend for themselves." Rather, the Illinois court had a duty to ensure all class members were adequately represented and protected. This included notifying the class of the settlement properly so as to give individuals the opportunity to opt-out.

This didn't happen in Boland. Indeed, the evidence established that the notice as published in Canada reached only 29.9 percent of Canadians who frequent burger restaurants. The contents of the notice also were

suspect:"[The] wall to wall legalese [of the notice] conveys no more than a hint of its eye-glazing opaqueness," the court wrote.

Because the notice procedure was so "woefully inadequate," the court concluded, it was unfair to bind the Currie class to the terms of the Boland settlement.

That's bad news for McDonald's: the American settlement will cost them about $25 million, but Currie is suing for more than $80 million.

"It's a qualitatively different case in Canada," Paliare says. "We're asking McDonald's to disgorge all the money they got from people who bought food in the belief that they had a fair chance to win a prize."

Still, the news isn't all bad for U.S. companies.

Keeping Canadians Happy

"It's important to remember that Currie starts with the proposition that Canadian courts have the necessary tools to enforce American settlements and that in general they should enforce them," says Joel Richler, a partner at Blake Cassels & Graydon and the attorney who represented McDonald's Corp. in Currie. "In the end, the case confirms that Beals applies to class actions, albeit with adjustments for their unique aspects."

However, in-house counsel in the United States are on clear notice that any global settlement will have to satisfy Canadian standards of procedural fairness and natural justice, especially with respect to notice, representation and the right to opt out.

"Currie creates greater certainty in enforcement law," says Malcolm Ruby, a partner at Gowling Henderson Lafleur in Toronto and an expert in Canadian foreign enforcement law. "That presents an opportunity for American defense counsel to structure their settlements so that they are indeed enforceable in Canada."

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Julius Melnitzer

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