Canada: Supreme Court Of Canada Will Hear Indirect Purchaser Appeals

Today, the Supreme Court of Canada granted leave to appeal from the British Columbia Court of Appeal's decisions in Pro- Sys Consultants Ltd. v. Microsoft Corporation, 2011 BCCA 186 and Sun-Rype Products Ltd. v. Archer Daniels Midland Company, 2011 BCCA 187. The BC Court of Appeal had held that indirect purchasers in price-fixing class actions do not have a cause of action recognized in Canadian antitrust law. The Supreme Court's decision to hear the appeals signals its intention to rule on this important issue arising in price-fixing class actions and dividing provincial appellate courts. A decision on the merits of the appeal is likely to be the most significant to date involving antitrust class actions in Canada.

Background

Whether indirect purchasers have a cause of action is a fundamental issue in Canadian and American antitrust law. The U.S. Supreme Court addressed the issue in the 1970s, but Canadian appellate courts have only recently considered it. In its 1968 decision in Hanover Shoe Inc. v. United Shoe Machinery Corp, 392 U.S. 481 (1968), the U.S. Supreme Court rejected what is known as the passing on defence. Defendants cannot reduce their liability by arguing that the plaintiff passed on some of its damages to others.

Creative defence counsel seized upon the result in Hanover Shoe. They argued that if defendants cannot use passing on as a defence, plaintiffs, and specifically indirect purchasers, cannot use it as a sword. Indirect purchasers do not have a direct relationship with defendants. Rather, their relationship is with the direct purchasers who they allege passed on damage to them, usually in the form of higher prices for finished products.

In Illinois Brick v. Illinois, 431 U.S. 720 (1977), the U.S. Supreme Court agreed with defendants and held that indirect purchasers do not have a cause of action. Only direct purchasers do. Allowing claims by both direct and indirect purchasers would create the risk of double recovery and make the process of determining who had suffered what proportion of the price overcharge too complex. Conversely, giving direct purchasers access to 100 percent of the recovery would incentivize these entities to aggressively prosecute antitrust claims.

Several American states have enacted repealer statutes to permit indirect purchaser actions, but the rule in Illinois Brick remains federal law.

In Canada, the Ontario Court of Appeal considered Illinois Brick in Chadha v. Bayer Inc. (2003), 63 OR (3d) 22 (CA) but decided that the evidence in the case did not support that damages had been passed on to the indirect purchasers. Since that time, a handful of Canadian courts have certified antitrust class actions with direct and indirect purchasers included in the classes on contested certification motions.

Recent Conflict in Canadian Appellate Jurisprudence

The BC Court of Appeal's decisions in Microsoft and Sun-Rype on April 15, 2011, were a significant departure from previous jurisprudence on the indirect purchaser issue in Canada. The majority's decision relied on a 2007 decision of the Supreme Court of Canada in Kingstreet Investments Ltd. v. New Brunswick (Finance), 2007 SCC 1, [2007] 1 SCR 3. In Kingstreet, the Supreme Court of Canada rejected the defence of passing on, just as the U.S. Supreme Court had in Hanover Shoe nearly 40 years before. Applying Kingstreet, the BC Court of Appeal held that the law did not recognize the fact that harm had been passed on. Thus, passed on damages could not support a defence (the situation in Kingstreet) or ground a cause of action (the situation in Microsoft/Sun-Rype). It rejected the plaintiffs' arguments that the unique procedural structure of a class action relieved against some of the traditional problems with proving whether harm had been passed from direct to indirect purchasers. The majority reasoned that procedural legislation, such as the Class Proceedings Act, could not affect substantive rights, such as the existence of a cause of action. It held that indirect purchasers do not have a cause of action and denied certification of their claim as a class proceeding.

On November 16, 2011, the Quebec Court of Appeal directly questioned the result in Microsoft and Sun-Rype. In Option Consommateurs et al v. Infineon Technologies AG et al, 2011 QCCA 2116, it certified a class of direct and indirect purchasers of DRAM, a component in electronic devices. In doing so, it expressly adopted the minority's position from the Microsoft and Sun-Rype decisions. In the Court's view, it was too early to determine whether any damages had been passed on to indirect purchasers, although it commented on several occasions that such proof might be very difficult at trial. It rejected the defendants' arguments that recognizing a claim by indirect purchasers would result in double recovery. It suggested that a class action which combines direct and indirect purchaser into one class means that the issue of double recovery does not arise.

Just days later in Ontario, Justice Rady granted the defendants leave to appeal certification to the Divisional Court in Fanshawe College v. LG Philips LCD Co. et al on the basis that "the availability of the passing on defence is a fundamental issue underlying most price-fixing cases and as such, warrants review by an appellate court in Ontario." Her Honour commented that "whether indirect purchasers have a cause of action is in a state of uncertainty" and noted that the Microsoft and Sun-Rype decisions conflict with the certification order in the LCD case, and the recent Quebec Court of Appeal decision in the DRAM case.

What to Expect Now

With the Supreme Court to decide whether indirect purchasers have a cause of action during the next two years, it is likely that many current antitrust class actions will effectively be on hold while the parties await the decision from the Supreme Court. Whether plaintiffs' counsel choose to press forward with contested certification motions in select cases given the uncertainty is an open question. To date, some courts have held that antitrust class actions should wait for certainty so that the parties and the courts do not waste scarce resources making submissions that will be overtaken by a decision from the Supreme Court. Others have held that plaintiff class members will be irreparably prejudiced by delaying proceedings for several years.

In the authors' view, an action's stage and the composition of the class will determine whether plaintiffs' counsel are likely to attempt to move it forward in the face of the pending decision by the Supreme Court. Plaintiffs' counsel must approach an action proceeding to trial differently than one pre-certification. Likewise, plaintiffs' counsel may wish to press forward where the class is mostly direct purchasers, since a decision from the Supreme Court may have less impact on that action no matter which way the Court decides.

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.