Canada: The Court Should Take A Pass On Public Policy

Last Updated: December 9 2013
Article by Stephen Mulrain

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 there.

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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