Canadian COMPETITION LAW

October 31, 2013

Earlier today the Supreme Court of Canada (“SCC”) released three long-awaited companion judgments that finally create clarity and certainty in the area of indirect purchasers’ ability to commence competition law class actions in Canada.  (“Indirect purchasers” are consumers that have not purchased a product directly from an alleged overcharger, such as in a price-fixing cartel, but from a direct purchaser or another intermediary in the distribution chain.)

The cases are: Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57; Infineon Technologies AG v. Option consommateurs, 2013 SCC 59; and Sun-Rype Products Ltd. v. Archer Daniels Midland Company, 2013 SCC 58.

While each of the decisions (two originating from the British Columbia Court of Appeal and the third from the Quebec Court of Appeal) considered a number of class action related issues, the most closely anticipated aspect of them was whether or not the Court would clear the way for indirect purchasers to commence competition law class actions in Canada.  In two unanimous and one majority decision, the SCC has now established that indirect purchasers, whether as a part of single or multiple classes (i.e., alone or together with direct purchasers), may indeed bring such actions.

The decisions are clear, well reasoned and logically reconcile some of the competing considerations at issue with indirect purchaser claims, including addressing the risk of double (or multiple) recovery; the evidentiary challenge of establishing pass through damages (and allocation among direct and indirect classes); and two of the principal policy rationales for indirect claims: compensation of harmed consumers and deterrence of price-fixing and other illegal activities.

Moreover, it seems to me on my initial read of these cases, which will undoubtedly start Canada’s plaintiffs’ bar class action engines once again, that they just make sense and allow parties that have been harmed by cartel conduct to be tasked with the burden of proving (or not) that such harm has been suffered.

Pro-Sys

Of the three judgments released today, the “lead” decision for the indirect purchaser issue is the SCC’s judgment in Pro-Sys (Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57), in which the SCC has reversed the British Columbia Court of Appeal’s (“BCCA”) decision, held that indirect purchaser claims can proceed and restored the application judge’s earlier certification order.

Factually, representative plaintiffs in this case brought a class action against Microsoft Corporation and its affiliate Microsoft Canada alleging that Microsoft engaged in unlawful conduct by overcharging indirect consumers for its Intel-compatible operating systems and software.  While certified at first instance, the BCCA subsequently reversed the lower court’s holding finding that indirect purchaser actions were not available as a matter of law in Canada.

In a unanimous decision by a panel of nine justices, with reasons delivered by Rothstein J., the SCC cleared the way for indirect purchaser class actions by rejecting the proposition previously held by the BCCA that because the “passing on defence” has been rejected in Canada, that “pass on” based claims by indirect purchasers (i.e., “offensive claims”) should similarly be rejected.  (The “passing on defence” is one in which an overcharger at the top of a distribution chain, such as in a price-fixing case, argues that a direct purchaser’s claims against it should not succeed where the direct purchaser may have passed the overcharge on to its own customers.)

The SCC came to its decision allowing indirect purchaser claims for the following reasons:

1.  Courts can manage potential multiple recovery risks.  First, the SCC held that any risk of double or multiple recovery where actions by direct and indirect purchasers are pending at the same time (or parallel suits are pending in multiple jurisdictions) can be adequately managed by courts.  Moreover, it is open to defendants to adduce evidence of potential multiple recovery and seek to have any damage awards modified by a court.

2.  Complexity and remoteness are the plaintiffs’ burden.  Second, the SCC held that indirect purchaser actions should not be barred altogether merely based on the likely complexity associated with establishing damages to indirect purchasers.  It reasoned that indirect purchasers “willingly assume the burden of establishing that they have suffered loss”; that damages assessments necessarily involve expert testimony and complex economic evidence; and that whether or not the damages burden is met by indirect purchaser classes is a factual question to be decided on a case-by-case basis.

3.  “Offensive” use of pass-on claims would not frustrate deterrence.  The SCC held that the “offensive use” of pass on claims would not frustrate the deterrence objectives of Canadian competition laws and that such actions may, in fact, be the only means by which cartel based overcharges are claimed and deterrence promoted – for example, in cases where direct purchasers are reluctant or unwilling to sue suppliers.  Quite to the contrary, the SCC agreed with Brennan J. in his dissenting opinion in the U.S. Illinois Brick case in which he reasoned there that an offensive use of passing on creates little danger an overcharger will escape liability and frustrate deterrence objectives but “[r]ather, the same policies of insuring the continued effectiveness of the [antitrust] action and preventing wrongdoers from retaining the spoils of their misdeeds favor allowing indirect purchasers to prove that overcharges were passed on to them.”

4.  Indirect purchaser actions are consistent with restitution principles.  Finally, the SCC reasoned that allowing indirect purchaser actions is consistent with the remediation objective of restitution (i.e., to provide a mechanism to compensate parties that have actually suffered harm and not, for example, reserving such rights to only direct purchasers that may in fact have passed on any overcharges).

In addition to the above, the Court also reasoned that in the United States the federal judicial opposition for indirect purchaser suits (emanating from Illinois Brick) has in many cases been circumvented by “repealer statutes” at the state level and that academic or “doctrinal” thinking had now also shifted toward an increased recognition of indirect purchaser class action rights.

Sun-Rype

In addition to the above rationales for allowing indirect class action claims, in its companion Sun-Rype decision the SCC also considered how, if at all, such rights should be affected where both direct and indirect claims were involved.

In this regard, the Sun-Rype case involves both direct and indirect purchaser class claims alleging an illegal conspiracy to fix the price of high fructose corn syrup, an input used as a drink additive.  As in Pro-Sys, the BCCA had also held that indirect purchasers had no cause of action (and on the same basis as in Pro-Sys – i.e., the rejection of the passing on defence by defendants in Canada meant that the offensive use of passing on by plaintiffs was also unavailable).

In reversing the BCCA, a majority of the SCC held that the inclusion of direct and indirect classes alone was insufficient to warrant dismissing the action for several reasons.

First, as here, where damages are claimed in the aggregate (i.e., a single global sum for direct and indirect classes), there can be no double or multiple recovery by plaintiffs.  In other words, the damages assessment exercise (though complex) is ultimately with respect to preventing multiple recovery one of apportioning damages between plaintiff classes according the harm suffered.  To this reasoning the SCC added that, to the extent there was conflict between class members as to apportionment of damages, “this was not a concern of [defendants] and not a basis for denying indirect purchasers the right to be included in a class action.”

Second, courts also have the ability to modify settlement and damage awards to accord with any awards that may have been received in other jurisdictions (which may be argued by respondents).

Third, the Court rejected in part arguments by the respondents that any small amounts that may be recovered by indirect plaintiffs would not satisfy the policy objectives of deterrence and compensation.  While the Court conceded that any small awards (or approximate or so-called “cy-pres” distributions) would not necessarily further a compensation objective, it could not equally be concluded that permitting such awards would not further deterrence.

Overall, as discussed above, these important Supreme Court decisions reconcile previous conflict between appellate courts in British Columbia, Quebec and Ontario and clearly now open the door for indirect purchaser suits in Canada.  They will also likely lead to a reinvigorated use of class actions, by both direct and indirect classes, to pursue Competition Act claims.

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