This spring, the B.C. Court of Appeal released two decisions
that could mark the end of indirect purchaser class actions in
In a price-fixing conspiracy, the manufacturers of competing
products typically agree to increase the price of their products
and not undercut each other. The effect of the
manufacturers' agreement is that the "direct"
purchasers of their products pay more (the "overcharge")
than they would have paid but for the price fixing
conspiracy. However, direct purchasers of the
conspirators' product are often not the end users of the
product. In many cases, direct purchasers incorporate the
conspirators' product into another product and sell that
product to an end user. This second level purchaser is
referred to as an "indirect" purchaser.
Depending on market conditions, direct purchasers may pass on
some of the overcharge to their customers. Since it is often
assumed that at least some of the overcharge was passed on to
indirect purchasers, class actions are generally commenced on
behalf of direct and indirect purchasers on the basis that both
groups have suffered a loss as a result of the conspiracy.
The practice of "following the money" will likely change
as a result of the B.C. Court of Appeal's decisions in
Sun-Rype Products Ltd. V. Archer Daniels Midland Company,
2011 BCCA 187 (Canlii) and Pro-Sys Consultants Ltd. v.
Microsoft Corporation, 2011 BCCA 186 (Canlii).
In Sun-Rype and Pro-Sys, the Court of Appeal
held that the passing-on defence had been conclusively rejected by
the Supreme Court of Canada in Kingstreet Investments Ltd. v.
New Brunswick (Finance), 2007 SCC 1 (Canlii) and therefore it
was no longer recognized at law. The passing-on defence
allowed a defendant to argue that a direct purchaser's loss
is not equal to the overcharge because the direct purchaser has
passed-on some or all of the overcharge to its customer. While the
elimination of the passing-on defence could lead to windfall
recoveries by direct purchasers if they did in fact pass on the
overcharge, it eliminates the need for very complex economic
analysis into whether the overcharge or part of it was actually
Although the Court of Appeal was unanimous that the passing-on
defence was not recognized at law, the Court split on the issue of
how this affected indirect purchaser claims. The majority
held that since the law does not recognize the passing-on of an
overcharge, not only is a defendant precluded from relying on the
passing-on defence but indirect purchasers are also precluded from
recovering the overcharge. According to the majority, even
though s. 36 of Competition Act provides, in part, that
"any person who has suffered loss or damage as a result of
[price fixing] conduct... may... sue for and recover from the
person who engaged in the conduct... the loss or damage proved to
have been suffered by him...", indirect purchasers did not
have a cause of action because they had not suffered a recognizable
loss. In addition, the majority reasoned that if indirect
purchasers could recover the passed-on overcharge it would result
in a double recovery from the conspirators who would already have
paid damages to direct purchasers without deduction for any part of
the overcharge that had been passed-on.
These decisions of the B.C. Court of Appeal bring the law of
British Columbia in line with American federal law which has not
recognized the passing-on defence since Illinois Brick Co. V.
Illinois, 431 U.S. 720 (1977) and Hanover Shoe, Inc. V.
United Shoe Machinery Corp., 392 U.S. 481 (1968). It is
interesting to note that in Illinois Brick and Hanover
Shoe, the U.S. Supreme Court construed away similar
language to s. 36 of the Competition Act that was found in
s. 4 of the Clayton Act. Some states have since
passed repealer statutes that specifically provide for indirect
purchaser claims. No such repealer statutes have been enacted
It is expected that the plaintiff will seek leave to appeal to
the Supreme Court of Canada in both of these cases. If leave
is granted, the Supreme Court of Canada will be forced to consider
whether the judicial economy that would be achieved by eliminating
the passing-on defence should trump express statutory language in
the Competition Act that grants "any person who
suffered a loss" a right of action.
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