Canada: The Death Of Indirect Purchaser Claims In Canada?

Last Updated: October 20 2011
Article by Steven F. Rosenhek

The jurisprudence regarding competition class actions was somewhat unsettled in Canada until the British Columbia Court of Appeal released two concurrent judgments, Pro-Sys Consultants Ltd. v. Microsoft Corp. (Microsoft) and Sun-Rype Products Ltd. v. Archer Daniels Midland Co. (Sun-Rype) which found that indirect purchasers of allegedly price-fixed products "have no cause of action recognized in law." This finding seems to depart from the trend of previous decisions which signalled greater opportunities for plaintiffs to achieve certification. Now many believe that the stage is set for the Supreme Court of Canada to clarify the scope of private antitrust enforcement in Canada.

Prior Jurisprudence

Early Canadian jurisprudence had suggested that an uphill battle lay in store for plaintiffs seeking to establish that there were sufficient common issues to achieve certification. Decisions like Price v. Panasonic Canada Ltd., [2002] O.J. No. 2362 (S.C.) and Chadha v. Bayer Inc., [2003] O.J. No. 27 (C.A.) represented early major victories for defendants, as the Courts held that the plaintiffs in those cases had not provided a workable method for determining liability or damages on a class-wide basis. The use of this argument seemed to bode well for defendants in those cases involving indirect purchasers, where the plaintiffs would be unable to produce a method for determining the pass-through of the super-competitive price in relation to damages.

Subsequent decisions in Ontario and British Columbia, however, were far more favourable to plaintiffs in competition class actions, and particularly those involving indirect purchasers. In Irving Paper Ltd. v. Atofina Chemicals, [2009] O.J. No. 4021 (S.C.), the Ontario Superior Court of Justice considered claims of price-fixing by both direct and indirect purchasers of hydrogen peroxide, a chemical used primarily in the manufacture of paper and paper products. Certification was granted, despite the defendants' argument that a class proceeding was unmanageable due to the potential enormity of a class of indirect purchasers that could include all residents of Canada. Leave to appeal to the Ontario Court of Appeal was denied (Irving Paper Ltd. v. Atofina Chemicals, [2010] O.J. No. 2472 (S.C.)).

A few months after Irving Paper was decided in Ontario, the British Columbia Court of Appeal handed down its decision in Pro-Sys Consultants Ltd. v. Infineon Technologies AG, [2009] B.C.J. 2239 (C.A.). That case involved class proceedings against makers of memory chips on behalf of both direct and indirect purchasers in British Columbia. The British Columbia Court of Appeal reversed a lower court decision that had denied certification. While noting the difficulties associated with proving liability and damages, the Court of Appeal allowed certification in the face of claims by indirect purchasers that would have arguably been deemed unmanageable on the basis of earlier Canadian decisions. The Court of Appeal held that expert testimony offered by the plaintiffs in support of a manageable plan for calculating damages should not be subjected to the same scrutiny as would be required at trial. It also noted that the plaintiffs' burden at the certification stage "is not an onerous one [and] requires only a minimum evidentiary basis." On the basis of this relatively low standard, the Court found that given the "flexibility" of class actions legislation, a class proceeding was the preferable procedure, despite the difficulties inherent in a case involving indirect purchasers. Notably, the Court of Appeal pointed to the U.S. plea agreements as a basis for concluding that liability could reasonably be found on a class-wide basis. Leave to appeal to the Supreme Court of Canada was denied.

In a subsequent decision of the Ontario Court of Appeal, the reasoning in Pro-Sys was followed. In Quizno's Canada Restaurant Corporation v. 2038724 Ontario Ltd., [2010] O.J. No. 1444 (C.A.), the representative plaintiff franchisee claimed that Quizno's franchisees had been charged excessive, anti-competitive prices for supplies which had to be purchased from their franchisor. While the court of first instance accepted the defendants' claim that the plaintiffs had not produced a workable method for calculating what the franchisees would have paid in the absence of a violation of the Competition Act, the Ontario Court of Appeal reversed. Among the reasons given for granting certification was that the plaintiffs were required to prove only that there was a "reasonable likelihood" that damages could be proven on an aggregate basis. The Court went on to state that an inability to calculate damages on this basis is not necessarily fatal to certification. While the franchisees in Quizno's were direct purchasers, the decision of the Ontario Court of Appeal highlights the relatively low evidentiary burden which was required of plaintiffs in demonstrating a workable method for determining damages.

The New Judgments

On April 15, 2011, the British Columbia Court of Appeal released the Microsoft and Sun-Rype decision which signified a clear departure from the recent trend of cases that favoured certifying competition class actions in Canada and aligned the state of law of certification more closely with the position in the U.S. Both decisions, by a two-to-one majority, concluded that indirect purchasers of allegedly price-fixed products had no valid cause of action, stating that "Any passing on of the charge did not give rise to a cause of action for its recovery by those whom the charge was in whole or in part said to have been passed on."

The plaintiffs in Microsoft were indirect retail purchasers of computers installed with Microsoft software who alleged that Microsoft engaged in schemes with the manufacturers that constituted anti-competitive behaviour allowing Microsoft to overcharge for its products. Similarly in Sun-Rype, direct and indirect plaintiffs, alleged that the defendant manufacturers conspired to fix the prices of high fructose corn syrup resulting in an unlawful overcharge. The majority in both cases relied upon Kingstreet Investment Ltd. v. New Brunswick (Finance), 2007 SCC 1, [2007] 1 S.C.R. 3, where the Supreme Court of Canada rejected the pass-on defence as a matter of law, in other words, a defendant could not reduce its liability to those who paid an unlawful charge by establishing some or all of it was passed on to others. The majority in Microsoft and Sun-Rype reasoned that it followed from the Kingstreet decision that in the absence of the passing-on defence, a defendant would be liable for both the whole charge paid to it directly from direct purchasers and for all or any portion of the charge passed on to indirect purchasers. To avoid this potential for "double recovery" the majority found that no valid cause of action existed for indirect purchasers.

Future Implications on Competition Class Action Claims

The judgments have significant implications on competition class action claims in Canada. Among these implications, the decisions leave indirect purchasers without any recourse at law for damages under the Competition Act. As noted by the majority in Sun-Rype, these decisions have aligned the law in Canada with federal antitrust laws in the U.S. as reflected by the U.S. Supreme Court's rulings in Illinois Brick Co. v. Illinois and Hanover Shoe v. United Shoe Machinery Corp.

Barring claims by indirect purchasers may also reduce liability for defendants given that a large proportion of competition class actions are comprised of indirect purchasers seeking recourse for harm caused by price-fixing. Furthermore, direct purchasers involved in price-fixing conspiracies with defendants or direct purchasers not concerned by overcharges passed down the distribution chain will likely not launch claims for anti-competitive behaviour. As a result, future class sizes and claims will decrease as indirect purchasers are left with the losses and no cause of action.

Additionally, although class sizes would likely become smaller, it is likely that class certification would be easier to achieve for direct purchasers as it would become much easier to determine where the resulting loss from an overcharge lies. In this regard, the complexities of determining what portion of an overcharge was passed down to indirect purchasers would be avoided as the loss may only fall on the direct purchaser, making it easier to prove loss for certification.

Finally, while not binding outside of British Columbia, these judgments will no doubt be used by defendants to attempt to thwart claims by indirect purchasers in other provinces.

Leave to appeal to the Supreme Court of Canada has been sought in both cases.

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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