Canadian COMPETITION LAW

April 15, 2011

On April 15, 2011, the British Columbia Court of Appeal allowed Microsoft’s appeal in the Pro-Sys v. Microsoft class action case.  This important decision, in which the Court of Appeal dismissed the plaintiffs’ action and set aside the earlier class certification order received, was issued concurrently with a second Court of Appeal judgment in Sun-Rype Products v. Archer Daniels.

Overview

In this case, the plaintiffs alleged that Microsoft engaged in anti-competitive behaviour allowing it to overcharge for its products.  In particular, the plaintiffs alleged that Microsoft combined with manufacturers and OEMs to exclude competition and that overcharges to upstream direct purchasers were passed through to retail purchasers resulting in actionable tort and restitution claims – in particular, claims including interference with economic interests, conspiracy and unjust enrichment.

Microsoft Corporation and Microsoft Canada Co. appealed from earlier decisions attempting to strike the plaintiffs’ statement of claim and certifying their class action.  In reply to the plaintiffs’ substantive arguments, Microsoft argued, among other things, that: (i) the action was essentially founded in abuse of dominance (the Canadian equivalent of monopolization, a matter exclusively within the jurisdiction of the federal Competition Tribunal), (ii) that the plaintiffs as indirect purchasers, had no claim (based on the theory that there is otherwise no defence to claims by direct purchasers) and (iii) that a common essential element for the plaintiffs’ claims – i.e., an unlawful act – was absent.

With respect to the earlier certification order granted to the plaintiffs, Microsoft also argued, among other things, that: (i) the plaintiffs failed to plead section 36 of the Competition Act (the “Act”) (the provision allowing private parties to commence civil actions under the Act) and (ii) that the certification judge set too low a standard of proof for the plaintiffs’ alleged overcharge at the certification stage of proceedings.

British Columbia Court of Appeal Decision

In short majority reasons issued by Mr. Justice Lowry concurred in by Mr. Justice Frankel, the Court of Appeal held that the plaintiffs had no cause of action maintainable in law, allowed Microsoft’s appeal, set aside the plaintiffs’ earlier certification order and dismissed the plaintiffs’ action.

In coming to its decision the Court of Appeal held that, as the plaintiffs had no cause of action, it was unnecessary to consider the other issues raised on Microsoft’s appeal.  The Court of Appeal based its reasoning on a consideration of the “passing-on defence”, which was raised for the first time in this action on appeal.

In Kingstreet Investments Ltd. v. New Brunswick (Finance), the Supreme Court of Canada rejected the passing-on defence, holding that a defendant cannot reduce its liability to those that paid an unlawful charge (e.g., upstream purchasers) by establishing that some or all of the charge was passed on to others (e.g., downstream purchasers).  As such, the Court of Appeal held that any passing on of a charge is “not recognized in law and so cannot give rise to a cause of action for its recovery by those to whom the charge was in whole or in part said to have been passed on.”  According to Mr. Justice Lowry:

“… were it to be otherwise, in the absence of the passing-on defence, a defendant would be liable for both the whole of the charge passed on (liability to the direct purchasers) and for all or any portion of the charge passed on (liability to the indirect purchasers) … [that] would result in double recovery … which our law does not permit.”

In this regard, the Court of Appeal held that “Canadian law [was] consistent with American federal law” as established by the U.S. Supreme Court in Hanover Shoe v. United Shoe Machinery Corp. and Illinois Brick Co. v. Illinois, and appears to have created a de facto passing-on defence to insulate the defendants from potential double liability.

Implications

These two recent decisions are significant in that, if not reversed, they are likely to seriously circumscribe the ability of indirect purchaseers to seek recovery – at least where direct purchasers may have valid overcharge claims.  The decisions are also slightly surprising in that they both adopt the more restrictive position taken in the leading U.S. Hanover Shoe and Illinois Brick decisions and also reverse what had recently been seen as a more plaintiff-favourable judicial trend for certification in British Columbia.

Having said that, with a vigorous dissent, one would expect the decisions to be appealed to the Supreme Court of Canada.

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