Canada: Illinois Brick Comes To Canada

On April 15, 2011, the British Columbia Court of Appeal released companion reasons for judgment in Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2011 BCCA 186 (Microsoft) and Sun-Rype Products Ltd. v. Archer Daniels Midland Company, 2011 BCCA 187 (Sun-Rype). The decisions are of great significance because the Court refused to certify the claims of the indirect purchaser classes on the basis that indirect purchasers do not have a cause of action. These are the first decisions of a Canadian appellate court to decide this issue and, while the plaintiffs are likely to seek leave to appeal to the Supreme Court of Canada, they represent the most significant judicial development in Canadian antitrust class actions in recent memory.

The plaintiffs in Microsoft and Sun-Rype alleged that the defendants engaged in anticompetitive behaviour resulting in overcharges paid by consumers. In Microsoft, a class comprised entirely of indirect purchasers alleged that Microsoft and computer manufacturers had conspired to reduce competition for Microsoft's products. The plaintiff alleged that indirect purchasers had paid higher prices for Microsoft's software as a result. In Sun-Rype, both direct and indirect purchasers claimed that the defendants had conspired to fix the price of high fructose corn syrup. The plaintiffs in both actions alleged that direct purchasers had passed on some of the initial overcharge causing indirect purchasers to pay higher prices. Lower courts had certified both actions.

On appeal, the defendants argued that indirect purchasers have no cause of action. Since the law precludes defendants from relying on the passing-on defence in an action brought by direct purchasers, defendants cannot be liable to both direct and indirect purchasers or they would face double-liability.

The majority of the Court of Appeal agreed. Justice Lowry, writing for the majority, began with the Supreme Court's decision in Kingstreet Investments Ltd. v. New Brunswick (Finance), 2007 SCC 1 (Kingstreet), in which the defence of passing-on had been rejected. In Kingstreet, the plaintiff restaurant had sued to recover a user charge tax that was said to have been unconstitutional. The government claimed that the restaurant had suffered no damage because it had passed on the tax charge to its customers. The Supreme Court rejected the government's defence of passing-on because it was inconsistent with restitution law, economically misconceived, and created serious difficulties of proof. The result of applying this decision in an antitrust context is that direct purchasers can recover 100 percent of any overcharge paid by them, no matter how much of the overcharge they passed on to their own customers.

Relying on Kingstreet, Justice Lowry reasoned that if defendants cannot use the passing-on defence as a shield, plaintiffs cannot use it as a sword. Indirect purchasers cannot rely on the fact of passing on when the law has rejected it as a defence. If they could, the result would be double recovery since direct purchasers could recover 100 percent of the overcharge and indirect purchasers could recover the amount of the overcharge that was passed on to them.

The Sun-Rype defendants had advanced this argument in the court below but Justice Rice, the application judge, had rejected the defendants' arguments and had, for two main reasons, certified the indirect purchaser claims. First, Justice Rice had found that, although courts do not allow a defendant to use passing-on as a defence, courts can still find that passing-on had occurred as a fact. Thus, indirect purchasers could claim for the amount of the overcharge actually passed on to them. Second, Justice Rice had said that there would be no double recovery in a class action in which both direct and indirect purchasers are class members. In these circumstances, the court could assess damages on a class-wide basis using the total amount of the overcharge to the entire class.

The Court of Appeal respectfully disagreed with Justice Rice's reasons. Justice Lowry held that because the law has rejected the passing-on defence, the fact that some of the overcharge has been passed on cannot be relevant to establishing a cause of action. He also held that the composition of the class is irrelevant. To return anything less than 100 percent of the overcharge to direct purchasers would compromise their legal entitlement. The Class Proceedings Act is a procedural statute that cannot affect the substantive legal rights of direct and indirect purchasers. Courts cannot allocate the overcharge between direct and indirect purchasers using the Class Proceedings Act and thereby reduce the legal entitlement of direct purchasers. Justice Lowry distinguished other class proceedings that had certified indirect purchaser classes on the basis that those decisions were in the context of settlement, the issue had not been argued, or they were distinguishable on the facts.

Justice Lowry also considered the American federal jurisprudence in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968) and Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) which had also rejected indirect purchaser actions. The Microsoft and Sun-Rype decisions bring Canadian jurisprudence in line with these decisions. Justice Lowry noted that some American state legislatures have enacted repealer statutes to permit indirect purchaser actions. Moreover, some state courts permit indirect purchaser actions to proceed. However, he found that the decisions of these courts are usually based on policy rather than strict legal principles. He commented that "they do not come to grips with the absence of a legal basis for an indirect purchaser's cause of action once it is accepted there is no passing-on defence, as since Kingstreet, I consider it must be accepted here."

On the basis that indirect purchasers have no cause of action, Justice Lowry allowed the defendants' appeals with respect to the indirect purchaser classes and refused to certify the indirect class in both Microsoft and Sun-Rype. However, he dismissed the appeal with respect to the Sun-Rype direct purchasers.

In dissent, Justice Donald would have followed Justice Rice's reasons in the court below and would have upheld certification of indirect purchaser claims. The plaintiffs will likely point to Justice Donald's dissenting reasons to support their application for leave to appeal to the Supreme Court.

If the Supreme Court hears an appeal, the plaintiffs will likely focus on the policy rationales for certifying indirect purchaser claims embraced by certain American state courts. They will likely characterize Justice Lowry's decision as overly technical and at odds with the purposes of class proceedings and the Supreme Court's direction that courts should interpret the Class Proceedings Act in a broad and purposive manner. The defendants will likely rely on Justice Lowry's reasons and the foundational principle forbidding double recovery.

If the Supreme Court decides to hear the appeal, its final decision on this issue is likely more than a year and a half away. Depending on their stage of proceeding, many Canadian antitrust class actions may effectively be on hold until the Supreme Court weighs in on this issue with a decision that will bind courts across Canada.

Less certain is what happens if the Supreme Court refuses to hear the appeal. Currently, Microsoft and Sun-Rype are only binding in British Columbia. It is possible that without guidance from the Supreme Court other provincial courts will decline to follow the British Columbia Court of Appeal on this issue. Thus, the national implications of these decisions remain to be seen.

Yet, for the moment, Microsoft and Sun-Rype bring Canadian jurisprudence on this issue into line with American federal court jurisprudence. These decisions also present defendants in Canadian antitrust class actions with a powerful new weapon to defeat certification of indirect purchaser claims. A wave of motions to decertify already certified indirect purchaser claims would not be surprising.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Emrys C. Davis
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