The Supreme Court of Canada recently considered a trilogy of
class-action cases, including Pro-Sys Consultants Ltd. v.
Microsoft Corporation, 2013 SCC 57. Justice Rothstein gave the
unanimous opinion of the Court, confirming the certification of the
plaintiffs' class proceeding. More importantly, the Court
clarified the state of the law regarding the "passing-on"
of improperly high prices through the supply chain. In a decision
that relied heavily on considerations of public policy, Justice
Rothstein reaffirmed that the defence of passing-on was not
available in Canada, but that the unavailability of this defence
did not preclude an action on the basis of improperly high prices
passed on to an indirect purchaser.
The defence of passing-on is typically argued by a party that
overcharges at the top of a distribution chain where it is sued for
the value of that overcharging by a direct purchaser who had
subsequently sold that product to another purchaser. The
overcharger would argue that the purchaser has suffered no damages,
because it has "passed on" the overcharge to consumers
further down the distribution chain. This argument was
categorically rejected by the Court as being incompatible with the
principles of restitutionary law.
In light of the Court's position, Microsoft argued that if
passing-on is not available to an overcharger as a defence, then it
equally should be unavailable to an indirect purchaser as the basis
of a claim. That is, an indirect purchaser should not be able to
make a claim against the overcharger, in symmetry with the
rejection of the passing-on defence. On the surface, this argument
seems logical. Microsoft relied heavily on the US Supreme Court
decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977),
which espoused this exact view. The Court in that case determined
that the use of passing-on as the basis for a claim should be
rejected, Microsoft put forward a number of policy considerations
that it claimed militated against allowing a claim for overcharging
by indirect purchasers. These included the potential for double
recovery by both direct and indirect purchasers and the remoteness
and complexity of determining what overcharging, if any, was passed
on to the indirect purchaser. Justice Rothstein also noted that the
Court in Illinois Brick considered the effect on the deterrence
model contained in anti-trust legislation.
Justice Rothstein did not find these arguments persuasive,
noting that the Courts would be able to manage any potential for
double recovery, that the plaintiff would bear the burden of
demonstrating its losses, and that a bar on indirect purchaser
actions would not improve deterrence. He also noted that allowing
indirect purchaser actions is consistent with the principles of
restitutionary law, and that the decision in Illinois Brick has
been subject to considerable criticism in the United States and has
been changed by legislative action in several jurisdictions
Ultimately, the Court found that the rejection of the defence of
passing-on did not preclude indirect purchaser actions.
The Court's decision is a practical one, although not
legally satisfying. All of the same considerations apply to an
indirect purchaser action as to the defence of passing-on, and yet
the Court has accepted the former and rejected the latter. This is
not a logical distinction. If, as the Court held, it is too
difficult to ascertain whether an overcharge had been passed on to
an indirect purchaser or not, then it must be too difficult to
determine whether that indirect purchaser was in fact overcharged.
The evidentiary difficulty is the same in either case. This writer
thinks that there is a strong legal argument that passing on should
be a legitimate defence and offence, but that question can be saved
for another day. Regardless, the cognitive dissonance of allowing
the passing-on of damages as a cause of action, while
simultaneously disallowing the use of such passing-on as a defence,
is an untenable position.
Clearly, there are many policy considerations that must be
weighed. The fact that foreign legislatures have enacted laws
allowing indirect purchaser actions proves that this issue is
largely a matter of public policy. The Court has inserted itself
squarely into this political realm, in large part on the basis of
criticism levelled against a foreign legal ruling. It reached a
decision that is likely sound from a public policy perspective, but
has rejected the logical extension of its position on the defence
of passing-on. This inconsistency should not be created by the
courts on the basis of their interpretation of public policy. The
Court would have been better to follow its decision on the
passing-on defence to its rational conclusion and let the
legislature worry about the public policy imperatives.
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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