Canada: Supreme Court Certifies Price-Fixing Class Actions Brought By Indirect Purchasers; Confirms Low Evidentiary Threshold For Certification

Last Updated: November 18 2013
Article by Heenan Blaikie

On October 31, 2013, the Supreme Court of Canada (the "Court") released its decisions in Pro Sys Consultants Ltd. v. Microsoft Corporation1 ("Pro-Sys"), Sun Rype Products Ltd. v. Archer Daniels Midland Company2 ("Sun-Rype"), and Infineon Technologies AG v. Option consommateurs3 ("Infineon"), (the "Trilogy"). In these long awaited decisions, the Court certified indirect purchaser classes in two cases4 and recognized that indirect purchasers of cartelized products (including Canadian consumers) have the right to pursue damages in private antitrust cases under the Canadian Competition Act.

The Court also confirmed the evidentiary standard on certification hearings under provincial class action legislation. However, the Court left key issues regarding how such class actions are to be managed unanswered. As trial courts wrestle with issues left open by the Court, much remains unanswered in how antitrust price-fixing cases will be managed in Canada.

By way of background, in split decisions in Pro-Sys and Sun-Rype, the British Columbia Court of Appeal held that indirect purchasers of cartelized goods did not have a right to sue under the Competition Act. The British Columbia Court of Appeal adopted the United States Supreme Court decisions in Hanover Shoe v. United Shoe Machinery5 which rejected the "passing-on" defence and Illinois Brick Co. v. Illinois6 where the court held, as a corollary to Hanover Shoe, that indirect purchasers had no cause of action to recover overcharges on cartelized goods which may have been passed on to them through the distribution chain. It dismissed the indirect purchaser claims and found that only direct purchasers had a cause of action.

In contrast, the Québec Court of Appeal reversed a decision of the Québec Superior Court and certified indirect purchaser claims in Infineon, rejecting the approach in Illinois Brick and the majority decision of the British Columbia Court of Appeal in Sun-Rype and Pro-Sys.

The Trilogy is significant to both the antitrust law bar, in finally determining whether indirect purchasers have a cause of action in Canada, as well as the class action bar, in reaffirming the certification test in Quebec and the common law provinces.

Indirect purchasers can participate in price-fixing class actions

In the Trilogy, the Court has clearly and definitively rejected the "passing-on defence" in Canadian law. The "passing-on defence" is typically raised by defendants that seek to limit their liability to direct purchasers who managed to pass on any overcharge to others in the distribution chain. The "passing-on defence" would allow defendants to argue that direct purchasers suffered no loss, having recovered any overcharge by passing it to others in the distribution chain. In rejecting the availability of the defence, the Court expressly accepted the US decision in Hanover Shoe, and confirmed that its own decision in Kingstreet Investments Ltd. v. New Brunswick (Finance)7 is not limited to the circumstances of that case, but applies to Canadian law of restitution in general.

However, the Court expressly rejected Illinois Brick (that passing-on cannot be raised offensively by indirect purchasers) as the "necessary corollary" of the rejection of the passing-on defence. Canadian consumers, regardless of whether they were direct purchasers or indirect purchasers of cartelized goods, have a right to maintain a cause of action against cartelists to recover an overcharge that has been passed on to them in price-fixing cases. However, as a result of the rejection of the passing-on defence, direct purchasers would be permitted to recover the entire amount of the overcharge, even if the overcharge had been passed on in the absence of actions by or including indirect purchasers.8

In the Court's view, the inclusion of direct and indirect purchasers in the same class does not enhance the risk of double recovery or multiple liability. The availability of the use of the aggregate damages provisions under provincial class action legislation provides trial courts with the tools to apportion recovery between direct and indirect purchasers once liability is established. Recovery by all class members from the defendants would be limited to the amount of the overcharge. Plaintiff's counsel could then determine (with the court's approval) the method of apportioning those damages to class members at different levels of the distribution chain.9 The Court held that Canadian courts can further manage the risk of multiple recovery by reducing damage awards or settlement amounts to account for recoveries in other actions or jurisdictions.10

The Trilogy deals only with the question of whether indirect purchasers can assert a cause of action to recover illegal overcharges passed on to them. However, it does not resolve any substantive issues regarding the nature of such claims in the context of statutory claims asserted under s. 36 of the Competition Act, or the interrelationship of indirect purchaser claims and direct purchaser claims in the context of the common law claims asserted by the representative plaintiffs in each of the Trilogy cases.

Evidentiary standard for certification

From the perspective of class action lawyers, the Trilogy reaffirms the evidentiary standard applicable on certification in both Quebec and the common law provinces.

At the certification stage of the proceedings, the motions court is required to assess the validity of the proposed class action in light of criteria applicable to the certification of class actions. In the Trilogy, the Court once again confirmed that the standard for certification is low, operating to screen or filter claims without any merit. It is not meant to be an assessment on the merits, particularly given the lack of any pre-certification discovery. Plaintiffs are not required to establish more than a "good colourable right" or "some basis in fact" for each element of the certification test, save for the requirement that the pleadings disclose a cause of action. Significantly, the Court reaffirmed its decision in Hollick v. City of Toronto12 and expressly rejected recent US decisions imposing a higher evidentiary threshold.13

Despite reaffirming that the certification test is low, the Court only certified two of the three proceedings on its application. In dismissing the certification motion in Sun-Rype, the Court found a lack of an identifiable class, which is required by s. 4(1)(b) of the British Columbia Class Proceedings Act. The Court held that the plaintiffs did not introduce sufficient evidence to show that members of the proposed class could identify that they purchased a good containing the cartelized product (high fructose corn syrup), since there was an uncartelized substitute that might also have been used in products purchased by end-use consumers.

The Court's analysis must be understood within the certification framework. The Trilogy does not change existing law on certification of class actions or existing law on price-fixing. At trial, judges will still have to determine whether a plaintiff is entitled to compensation.

Jurisdiction of the courts over foreign defendants

In Infineon, the Court discussed the issue of jurisdiction of Quebec courts and confirmed the reasoning of the Court of Appeal: Quebec courts have jurisdiction over a claim – be it a class action or an individual claim – when economic damage is suffered, as opposed to merely recorded, in the province. Damage suffered in Quebec is an independent connecting factor and there is no need for the alleged conspiracy to have occurred in Quebec. In Infineon, since petitioners suffered a pecuniary loss as a direct result of a contract made in Quebec, the jurisdiction of Quebec courts is established. In such a context, the existence of a contract concluded in Quebec14 is a juridical fact relevant to the issue of jurisdiction, regardless of the fact that the respondents were not parties to the contract.

Similarly, the Court affirmed the application of the "real and substantial connection" test in determining whether the British Columbia court15 had jurisdiction over conduct of foreign defendants. It clarified that recent decisions clarifying the test for jurisdiction16 have not overruled case law determining jurisdiction over foreign participants in price-fixing conspiracies.17

Conclusion

The Court has answered some of the high-level conceptual issues in consumer price-fixing class actions. It has adopted a policy-based approach based on restitutionary concepts with a view of compensating the ultimate victims of antitrust price-fixing cartels through the disgorgement of the overcharge to direct and indirect purchasers. The Court relied heavily on the ingenuity of trial counsel and trial judges to avoid the risk of double recovery or multiple liability. How this will be managed in practice is entirely unclear and may well yet require the Court to grapple with the questions left unanswered in the Trilogy.

Footnotes

1 2013 SCC 57, on appeal from the British Columbia Court of Appeal. The proposed class in Sun-Rype comprised of direct and indirect purchasers of purchasers of high fructose corn syrup or products containing high fructose corn syrup, a sweetener used in food products.

2 2013 SCC 58, on appeal from the British Columbia Court of Appeal. The proposed class in Pro-Sys comprised entirely of indirect retailer purchasers of licenses for Microsoft software or operating systems.

3 2013 SCC 5, on appeal from the Québec Court of Appeal. The proposed class in Infineon consisted of direct and indirect purchasers of dynamic random access memory ("DRAM") products, a product used in the manufacture of electronic devices. The central issue in each appeal was whether the indirect purchasers of the products alleged to have been the subject of price-fixing can maintain a cause of action against manufacturers.

4 In a split decision, the indirect purchaser class in Sun-Rype was not certified.

5 Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968) ("Hanover Shoe").

6 431 US 720 (1977) ("Illinois Brick").

7 2007 SCC 1, [2007] 1 S.C.R. 3.

8 Pro-Sys, paras. 24-34, 50; Sun-Rype, paras. 22-23; 38; Infineon, paras. 101-112. It is interesting to note that the Court did not discuss the specific language of the statutory cause of action contained in s. 36 of the Competition Act. Section 36 provides for compensation for "an amount equal to the loss of damage proved to have been suffered." It is unclear how the Court's statement at para. 23 of Sun-Rype that, in the absence of an indirect purchaser action, direct purchasers would be able to recover the entire amount of the overcharge is consistent with a statutory cause of action that requires actual damage or loss.

9 Sun-Rype, paras. 17-21; Infineon, para. 115.

10 Pro-Sys, paras. 35-41.

11 Meeting the low threshold set out in Hunt v. Carey Canada Ltd. [1990] 2 SCR 959.

12 [2001], 3 SCR 158.

13 See for example, In re: Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305 (3rd Cir. 2008); Wal-Mart Stores, Inc. v. Dukes, 564 U.S. _____ (2011).

14 The contract was concluded over the Internet and was deemed under the Quebec Consumer Protection Act, R.S.Q. c. P-40.1, to have been concluded in Quebec.

15 This test applies to all Canadian common law provinces.

16 See Club Resorts Ltd. v. Van Breda 2012 SCC 17.

17 See Vitapharm Canada v. F. Hoffmann-LaRoche Ltd., (2002) 20 CPC (5th) 351 (ONSC), Fairhurst v. Anglo American PLC, 2012 BCCA 257 and British Columbia v. Imperial Tobacco Canada Ltd., 2006 BCCA 398.

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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