Canada: Supreme Court Of Canada Recognizes Indirect Purchaser Claims

On October 31, 2013, the Supreme Court of Canada (SCC) released long awaited decisions in three high profile class action cases involving alleged price-fixing conspiracies: Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57 [Pro-Sys]; Sun-Rype Products Ltd. v. Archer Daniel Midland Company, 2013 SCC 58 [Sun-Rype]; and Infineon Technologies AG v. Option consommateurs, 2013 SCC 59 [Infineon]. All three appeals were from certification motions. At stake, the fate of indirect purchaser claims in Canada. 

Specifically, the Court in all three cases considered the threshold question of whether indirect purchasers could recover losses that were "passed on" to them by someone else. The Court concluded unanimously on this issue that indirect purchasers do have a right of action. The Court also considered the applicable standard of proof on a certification motion (or motion for authorization in Québec) and whether certification (or authorization) was appropriate in each case.

Background

In Sun-Rype, the plaintiffs commenced a class action in British Columbia to recover alleged overcharges related to high-fructose corn syrup (HFCS), a food additive found in many snacks and beverages. In Pro-Sys, the plaintiffs commenced a class action claim in British Columbia against Microsoft for allegedly overcharging for its PC operating systems and PC applications software. The Sun-Rype class included both direct and indirect purchasers, while the Pro-Sys class was made up entirely of indirect purchasers. Both cases were certified at first instance but reversed by a majority of the British Columbia Court of Appeal, which found that indirect purchasers could not, as a matter of law, recover losses resulting from alleged overcharges.

In Infineon, the plaintiff applied for authorization to institute a class action suit in Québec to recover alleged losses from overcharges for Dynamic Random Access Memory (DRAM) chips that are found in various electronic devices. The motion judge declined to authorize the proposed class action on the ground of lack of jurisdiction of the Québec courts. The Québec Court of Appeal reversed the judgment and authorized the class action, finding that indirect purchasers can bring a claim to recover losses from overcharges.

Indirect Purchaser Actions

Most of the Supreme Court's analysis of the "indirect purchaser" issue is found in the Pro-Sys decision. The Court concluded that indirect purchasers have a right of action and in so doing addressed the various arguments raised by the defendants and relied on by the majority of the BC Court of Appeal, including: (1) denying indirect purchaser claims is a necessary corollary to the rejection of the "passing on" defence because otherwise defendants will be exposed to the risk of double or multiple recovery; and (2) indirect purchaser actions are not viable because of the complexity associated with proof of damages for overcharges allegedly passed on to indirect purchasers.

The Court began by clarifying the scope of its earlier decision in Kingstreet Investments v New Brunswick (Finance), 2007 SCC 1in which it rejected "passing on" as a defence. The Court confirmed that the rejection of the "passing on" defence was not limited to the narrow circumstances of that particular case but instead was generally applicable to restitutionary law.

The Court then rejected the notion that the unavailability of "passing on" as a defence necessarily meant that "passing on" could not be used offensively by indirect purchasers to ground their claims. The respondents in all three cases argued that in the absence of a passing on defence, defendants were vulnerable to multiple overlapping claims from direct and indirect purchasers, each seeking to recover 100% of the alleged overcharge. The Court acknowledged that the potential for double or multiple recovery could not be lightly dismissed. However, the Court suggested that in cases like Sun-Rype where the class is made up of both direct and indirect purchasers, an aggregate award that reflects the entirety of the overcharge will preclude double recovery. Furthermore, in the Court's view, in cases where there are parallel proceedings with direct and indirect claims pending, trial courts will be able to manage the various suits to ensure that defendants do not become subject to multiple recovery.

The Court also rejected the argument that indirect purchaser claims should be barred because of the complexity associated with proving damages for overcharges that may be passed down through numerous levels of a distribution chain. The Court observed that plaintiffs willingly take on the burden of proving their damages at trial, which may require "expert testimony and complex economic evidence". Whether plaintiffs are ultimately able to discharge their burden of proof at trial will have to be determined on a case-by-case basis.

After addressing these arguments, the Court also concluded that allowing indirect purchaser claims also promoted the twin goals of deterrence and compensation and is consistent with the remediation objectives of restitution law.

Standard of Proof on a Certification Motion

The Court next turned to the question of whether the proposed class actions under appeal ought to be certified. The Court first considered what the standard of proof was on a certification motion and, in Québec, on a motion for authorization.

In Pro-Sys and Sun-Rype, the Court confirmed that the plaintiff will satisfy the requirement that the pleadings disclose a cause of action unless, assuming that all of the pleaded facts are true, it is "plain and obvious" that the plaintiff's claim cannot succeed.

The Court also confirmed that the standard to be applied in respect of the remaining four certification requirements is "some basis in fact". In discussing that standard, the Court emphasized the importance of the courts' gatekeeper function at the certification stage, expressly "reaffirming the importance of certification as a meaningful screening device".  In Pro-Sys, the Court was clear that more than "symbolic scrutiny" is required.  Rather, the certification motion judge must find that "[t]here [are] sufficient facts to satisfy [her] that the conditions for certification have been met to a degree that should allow the matter to proceed on a class basis without foundering at the merits stage".  Applied to expert evidence put forward by plaintiffs to satisfy the court that a methodology exists by which loss can be proved on class-wide basis, this standard requires that the proposed methodology "must offer a realistic prospect of establishing loss on a class-wide basis so that, if the overcharge is eventually established at the trial of the common issues, there is a means by which to demonstrate that it is common to the class (i.e. that passing on has occurred)".  Further, "[t]he methodology cannot be purely theoretical or hypothetical but must be grounded in the facts of the particular case in question" and "[t]here must be some evidence of the availability of the data to which the methodology is to be applied".

In Infineon, the Court found that the standard of proof for authorization of a class action pursuant to art. 1003 of Québec Civil Code of Procedure, chapter C-25 (CCP) is that of establishing an "arguable case", which is "less demanding than the ["some basis in fact" standard] that applies in other parts of Canada". Applying that standard at the authorization stage, the motions judge plays the role of filter, dismissing frivolous motions and authorizing only those proposed class actions that meet the legal threshold requirements of art. 1003 CCP.

Certification

The Court then assessed the certification requirements in issue in each of the appeals in light of the applicable standards.

In Sun-Rype, the Court denied certification and dismissed the appeal despite having found that indirect purchasers have standing to sue. The Court concluded that the certification requirement that there be an identifiable class of two or more persons could not be met because there was no way for consumers to know whether they had purchased a product containing HFCS as the food labels during the class period did not disclose this information definitively.

In Pro-Sys, there was no concern with class members being able to self-identify. A potential class member would be able to ascertain whether he or she had purchased a Microsoft product within the class period. Accordingly, the Court allowed the appeal and certified all of the causes of action except the constructive trust claim (discussed below).

In Infineon, the Court found that the criteria of art. 1003 CCP were met. With respect to the requirement that the facts alleged seem to justify the conclusions sought, the Court found that it was not unreasonable to conclude that a price-fixing conspiracy that has international impacts may affect Québec consumers. Regarding prejudice, the Court ruled that proof of global prejudice is sufficient at the certification stage. Finally, with respect to causation, the Court distinguished indirect damage from the indirect victim. At the certification stage, the petitioner only needs to demonstrate that it is possible to assert that the loss is the direct consequence of the injurious act. The Court found that even if the indirect purchasers may be indirect victims, the alleged prejudice suffered is the direct consequence of the price-fixing conspiracy of the defendants.

Some Other Points of Interest

The Court's decisions in Pro-Sys and Sun-Rype include other findings and principles that may be of interest to those practicing in the area, including the following:

  • A constructive trust for purely monetary losses will not be certified where (among other things), the plaintiff is unable to establish (1) a link or causal connection between his or her contribution and the acquisition of specific property and (2) that a monetary award would be inadequate. In Pro-Sys and Sun-Rype, the pleadings based on constructive trust were struck by the Court on this basis.
  • Areas of unsettled law such as "waiver of tort", "unlawful means conspiracy" and "unlawful interference with economic interests" (the proper approach to the "unlawful means" requirement common to the last two causes of action will be determined in another case pending before the SCC) will continue to be certified as long as they remain in flux since it is not plain and obvious that they cannot succeed at trial.
  • The Court affirmed that cy-près payments, while not perfect, promote deterrence and are an established part of the class action regime in Canada.
  • According to the Court, it is not plain and obvious that unjust enrichment requires a direct relationship between the defendant and the plaintiff. As a result, the Court certified the unjust enrichment claim in Pro-Sys despite the absence of a direct link between the plaintiff and Microsoft.
  • The Court held that it is not plain and obvious that Canadian courts do not have jurisdiction over a conspiracy formed outside Canada for the purposes of the statutory cause of action for damages in s. 36 of the Competition Act where, as in Sun-Rype "the conduct in question, while perpetrated by foreign defendants, allegedly involved each respondent's Canadian subsidiary acting as its agent. The sales in questions were made in Canada, to Canadian customers and Canadian end-consumers."
  • The aggregate damages provisions in the British Columbia Class Proceedings Act cannot be relied on to establish proof of loss where proof of loss is an essential element of proving liability. Aggregate damages are only applicable once liability is established. The purpose of these provisions is to provide a method to assess the quantum of damages on a global basis, not to establish the fact of damage.

*The authors would like to thank the following people for their advice and guidance in drafting this article: John Callaghan, Julie-Martine Loranger, Scott Kugler, Davit Akman and Joëlle Boisvert.

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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