Canada: Supreme Court Of Canada Rules Indirect Purchasers Can Sue For Price-Fixing

On October 31, 2013, the Supreme Court of Canada released its decisions in three related appeals, two from the British Columbia Court of Appeal and one from the Quebec Court of Appeal, all dealing with the certification of price-fixing claims as class actions:

  • Sun-Rype Products Ltd. v Archer Daniels Midland Company1 (Sun-Rype)
  • Pro-Sys Consultants Ltd. v Microsoft Corporation2 (Microsoft)
  • Infineon Technologies AG v Options Consommateurs3 (Infineon)

Although these appeals addressed a number of important issues relating to price-fixing class actions and the certification of class proceedings in general, the key issue before the court in all three appeals related to the viability of claims by "indirect purchasers": consumers and others who did not purchase products directly from a defendant, and instead purchased such products indirectly, often as a component or ingredient of a finished product, from a non-defendant further down the product distribution chain.

In the BC cases, the majority of the BC Court of Appeal held that indirect purchasers do not have a cause of action against the defendants in relation to an alleged unlawful conspiracy to fix the price of the product. The Quebec Court of Appeal came to the opposite conclusion and authorized a price-fixing class action brought on behalf of both indirect and direct purchasers, opening the door for some much-anticipated clarification from the Supreme Court of Canada. Leave to appeal to the Supreme Court of Canada was granted in all three cases and the appeals were heard together on October 17, 2012.

Appeal court decisions

Mr. Justice Lowry of the BC Court of Appeal, writing for the majority in both Sun-Rype and Microsoft, relied on the Supreme Court of Canada's decision in Kingstreet4 in concluding that indirect purchasers of products alleged to be the subject of an unlawful overcharge do not have a cause of action for price-fixing.

In Kingstreet, the Supreme Court determined a defendant cannot reduce its liability to those who paid an unlawful overcharge by establishing that some or all of it was "passed through" to others. In other words, and if applied to the price-fixing context, the defendant is liable to the direct payor of the unlawful charge (the direct purchaser) for 100% of that charge, regardless of any passing through to others (the indirect purchasers). Lowry J.A. reasoned that if the law does not recognize pass-through as a defence to a claim, logically the law cannot recognize pass-through as the basis for a claim. In the context of a price-fixing class action, this means if direct purchasers are entitled to recover 100% of an unlawful overcharge they paid, regardless of any pass-through, it follows that indirect purchasers cannot claim against the defendant for any portion of the overcharge passed through to them, as that would result in double recovery.

In this regard, Justice Lowry referred with approval to jurisprudence of the United States Supreme Court in which that court reached a similar conclusion: in Hanover Shoe, Inc. v United Shoe Machinery Corp.5, the US Supreme Court rejected the defensive use of pass-through; in Illinois Brick Co. v Illinois6 the US Supreme Court held that because pass-through cannot be used defensively it also cannot be used offensively.

Although it did not decide the issue, the majority of the BC Court of Appeal also expressed a concern that allowing both direct and indirect purchasers to pursue claims in the same class proceeding would create a conflict of interest, as it would be in the interests of direct purchasers to argue the overcharge was not passed through to the indirect purchasers, whereas indirect purchasers would be incented to argue it was.

Donald J.A., dissenting in Sun-Rype and Microsoft, and the Quebec Court of Appeal in Infineon took the view that the non-availability of the "pass-through" defence does not preclude indirect purchasers from asserting a claim based on pass-through. They reasoned that the legal impediments to indirect purchaser claims raised by Lowry J.A. could be addressed through the procedural mechanisms of the class proceedings legislation, using a two-stage approach

At the first stage, the court could determine the aggregate of the unlawful overcharge paid by all direct purchasers, irrespective of how much of that overcharge had been passed through to indirect purchasers. Only after such aggregate assessment would the court be asked to determine how the aggregate amount should be distributed as damages among the direct and indirect purchasers.

Donald J.A. held that this approach eliminates the possibility of double recovery because the damages would never exceed the amount of overcharge paid by the direct purchasers. The Quebec Court of Appeal further noted that this approach also addresses (or at least defers) any conflict of interest between direct and indirect purchasers. At the initial stage, direct and indirect purchasers share the same interest, i.e., to obtain the highest possible award for the benefit of the class as a whole.

Supreme Court of Canada decisions

On the seminal issue, the Supreme Court of Canada ruled indirect purchasers can sue for damages in tort or under the Competition Act based on unlawful overcharges passed through to the indirect purchasers by the direct purchasers of the product.

Although the Supreme Court confirmed pass-through could not be used as a defence to direct purchaser claims, the court held that it does not follow that direct purchasers are always entitled to 100% of the overcharge. Where there are claims by both direct and indirect purchasers, direct purchasers will be entitled to only that portion that was not passed through to the indirect purchaser claimants. In each case, the court can ensure the total recovery does not exceed the total of the overcharge, avoiding any double recovery.

The Supreme Court considered, but declined to follow the US Supreme Court's decision in Illinois Brick, which was largely premised on the risk of double or multiple recovery. The Supreme Court held that Canadian courts already have "practical tools" at their disposal to avoid such risks. The court also held that the fact there might be a conflict between the direct and indirect purchasers on the issue of pass-through should not preclude indirect purchasers from participating in the class action. Any such conflict "is not a concern of the [defendants]" and can be addressed at the distribution stage, after settlement or judgment on the aggregate amount of the overcharge.

In addition to the indirect purchaser issue, the Supreme Court's reasons in these decisions cover a number of issues that are important not only to price-fixing class actions but class actions in general, including:

  • The court confirmed the standard of proof on certification motion is "some basis in fact" as established by the Supreme Court in Hollick, and is not the "balance of probabilities" standard.
  • On the issue of the class-wide harm, the plaintiff's expert evidence need only show there is a "reasonable and plausible methodology" for determining harm on a class-wide basis. The judge on a certification motion should not be engaged in resolving conflicts between experts.
  • The court held that the class must be "identifiable" in the sense that prospective class members must be able to determine whether or not they are part of the class based on available evidence. This means indirect purchaser class members must be able to determine whether the finished product they purchased actually contained the price-fixed ingredient or component in issue. The majority of the court upheld the appeal in the Sun-Rype case and denied certification of the indirect purchaser claims on the grounds the indirect purchaser class in that case was not "identifiable" on the evidence.
  • The court confirmed the aggregate assessment of damages provisions of the class proceedings legislation are procedural only and cannot be used to establish liability. In the context of a price-fixing class action, the aggregate damages provisions cannot be used to establish the fact of loss to direct or indirect purchasers.

Significance of decisions

These decisions will have a significant impact on price-fixing class actions in Canada. As a result of the conflict in the appellate jurisprudence, many existing Canadian price-fixing class actions have been on hold for as long as a year pending the release of these decisions. Not only will those cases now proceed, but the filing of new claims is expected to increase, particularly in BC where indirect purchasers have not been able to bring claims since the Court of Appeal's rulings in early 2011.

Further, the arguably low standard of proof on certification motions adopted by the Supreme Court of Canada could result in a greater proportion of these cases being certified as class actions and possibly more cases going to trial. Indeed, the deferral of contested factual and evidentiary issues from the certification judge to the trial judge is a recurrent theme in the Supreme Court's reasons.

Another result of these decisions is Canadian and United States law now directly conflict on whether indirect purchasers can maintain an antitrust price-fixing suit. In Canada, they can, while in the US, they cannot.

The US prohibition on indirect purchaser claims traces back to the US Supreme Court's 1977 decision in Illinois Brick. Since Illinois Brick, a number of individual US states have enacted state law indirect purchaser statutes, which have been held enforceable7. But the state-specific nature of those claims has resulted in smaller, state-based class actions, rather than large national or international class actions. Sometimes, these cases can be removed to federal court under the US Class Action Fairness Act, and then transferred to one federal court for coordinated proceedings under the Multi-District Litigation rules8. But often defendants must defend multiple, separate indirect purchaser lawsuits filed in various state jurisdictions.

The Canadian Supreme Court's decision can also be expected to have significant effects on manufacturers who do business in both Canada and the US. First, the decision may embolden class action plaintiffs lawyers—who have endured a number of significant defeats under US law in recent years—to bring broad-based indirect purchaser class actions in Canada. Second, the decision will likely result in a number of multinational entities confronting litigation under different legal standards simultaneously in Canada and the US. It will, therefore, become increasingly important for corporations facing such circumstances to have experienced counsel capable of coordinating the proceedings in the competing jurisdictions.

Norton Rose Fulbright was co-counsel to Archer Daniels Midland in Sun-Rype.

Footnotes

1 2013 SCC 58: A BC class proceeding brought on behalf of persons in BC who purchased HFCS (high-fructose corn syrup—a sweetener used in various food and beverage products), or products containing HFCS. The claim alleges that the defendants unlawfully conspired to fix the price of HFCS sold to direct purchasers and that some of the overcharge was passed through to indirect purchasers, including end consumers.

2 2013 SCC 57: A BC class proceeding commenced on behalf of BC retail purchasers of computers installed with Microsoft operating systems and applications software. The action alleges that Microsoft engaged in unlawful anti-competitive behaviour in order to overcharge for its products.

3 2013 SCC 59: A Quebec class action against manufacturers of dynamic random-access memory chips (DRAM) on behalf of persons in Quebec who purchased DRAM, or products containing DRAM. The applicant alleges that the defendants were engaged in a global price-fixing conspiracy in the market for DRAM.

4 Kingstreet Investments Ltd. v New Brunswick (Finance), 2007 SCC 1. See also British Columbia v Canadian Forest Products Ltd., 2004 SCC 38 (per Lebel. J, dissenting, though not on this point).

5 392 U.S. 481 (1968)

6 431 U.S. 720 (1977)

7 See Cal. v ARC Am. Corp., 490 U.S. 93 (1989).

8 See 28 U.S.C. § 1332(d) (Class Action Fairness Act); 28 U.S.C. § 1407 (Multidistrict litigation statute).

Norton Rose Fulbright Canada LLP

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