Canada: The Supreme Court Of Canada Opens The Door To Indirect Purchasers In Price-Fixing Class Actions

Last Updated: December 9 2013
Article by Kate Southwell

The Supreme Court of Canada has recently released three related and highly anticipated decisions clarifying whether indirect purchasers have the right to bring an action to recover losses that were passed on to them by anti-competitive behaviour.

These decisions: Pro-Sys Consultants Ltd v Microsoft Corporation, 2013 SCC 57,  Sun-Rype Products Ltd v Archer Daniels Midland Company, 2013 SCC 58, and Infineon Technologies AG v Option consommateurs, 2013 SCC 59,  will almost certainly open the floodgates to a wave of class actions relating to alleged anti-competitive behaviour.

Who Are Indirect Purchasers?

For the purposes of this publication, the term 'overchargers' will be used to refer to parties at the top of the distribution chain that are alleged to have engaged in anti-competitive behavior.

In price-fixing cases, direct purchasers are those customers who have bought the product directly from the overchargers. Indirect purchasers are those customers who did not buy the product directly from the overchargers but instead bought the product from another party further down the chain of distribution.

The key issue before the Supreme Court was whether indirect purchasers have a cause of action against parties at the top of the distribution chain who are alleged to have engaged in anti-competitive behaviour, on the basis that the indirect purchasers were injured as a result of an overcharge being passed down to them.

The State Of The Law Before The Recent Supreme Court Of Canada Decisions

Previously, case law was mixed with respect to whether indirect purchasers had a cause of action against overchargers, particularly in the context of price-fixing class actions.

When Courts have rejected claims by indirect purchasers, they have usually done so for one or more of three reasons: (1) The rejection of "passing on" as a defence, (2) American jurisprudence holding that indirect purchasers do not have a cause of action, and (3) concerns about double recovery.

In the past, overchargers have invoked a defence of "passing on" against direct purchasers in price-fixing actions. This defence allowed overchargers to assert that the direct purchaser had passed on any overcharge to indirect purchasers, and thus the direct purchaser had suffered no loss. 

The passing on defence has since been rejected, both in Canada and the United States.

Some courts have held that, since the defence of passing on has been rejected, a necessary corollary is the rejection of the offensive use of passing on. They held that if overchargers are not permitted to rely on a defence of passing on, then indirect purchasers should not be able to rely on passed on overcharges as the basis of a claim. This was the position taken by the US Supreme Court in Illinois Brick Co v Illinois, 431 US 720 (1977) ("Illinois"), a seminal US case, which some Canadian courts have found persuasive.

Finally, some courts have held that if passing on may be used offensively but not as a defence, then overchargers could be liable to all purchasers in the chain of distribution. Direct purchasers and indirect purchasers could both independently seek recovery of the entire amount of the overcharge. This raises the risk than an overcharger could be subject to double or even multiple recoveries.

The Supreme Court of Canada Clarifies - Indirect Purchasers Can Have a Cause of Action

The recent trilogy of Supreme Court of Canada decisions have made it clear that indirect purchasers can have a cause of action against overchargers.

The Supreme Court held that the rejection of passing on as a defence did not necessitate its rejection as an offensive tool for indirect purchasers. It held that US jurisprudence was not persuasive and noted that the leading case of Illinois had been overturned by legislation in many US states.

Finally, the Supreme Court held that the risk of double or multiple recoveries could be managed by the courts. Where actions by direct and indirect purchasers are pending at the same time, the defendant can bring evidence of the risk of multiple recovery and ask the court to modify any damages award accordingly. Similarly, if the defendant raises evidence of parallel suits pending in multiple jurisdictions, it can ask the court to modify the damage award accordingly to prevent multiple recovery.

In finding that indirect purchasers can have a cause of action against overchargers, the Supreme Court was influenced by the idea that the rejection of indirect purchaser actions "would increase the possibility that the overcharge would remain in the hands of the wrongdoer."

As a result, the Supreme Court certified a class of indirect purchasers in one action and a class of both direct and indirect purchasers in another action. The Supreme Court refused to certify the third action on grounds unrelated to the ability, generally, of indirect purchasers to bring a claim against overchargers.

What Will Be the Impact of These Decisions on Price-Fixing Class Actions?

The ability of indirect purchasers to bring claims against overchargers can be expected to significantly expand the number of class actions alleging anti-competitive behavior.

Generally, a product will have more indirect purchasers than direct purchasers. Allowing indirect purchasers to form a class, with or without direct purchasers, will increase the number of potential class members and thus the likelihood of a class action.

Additionally, direct purchasers often have close business relationships with overchargers. This can make direct purchasers reluctant to bring an action against overchargers, or it can lead to settlement outside of formal court proceedings. Indirect purchasers may be more willing to bring class actions against overchargers, as they don't typically have the same close business relationship.

Many potential class actions were held in abeyance while potential class members waited for confirmation from the courts about whether indirect purchasers may be part of a class against overchargers. With the Supreme Court's recent ruling paving the way for indirect purchasers, we can expect to see a marked increase in the number of price-fixing class actions in the coming years.

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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