Canadian COMPETITION LAW

August 9, 2010

COMPETITION LAW PRIVATE ACTIONS

Significant changes have recently been made to the federal Competition Act (the “Act”) that impact private actions in Canada (making it easier for private plaintiffs to commence private actions under the Act’s criminal conspiracy provisions).  At the same time, there have recently been several plaintiff-favourable class action decisions in Ontario and British Columbia that make it easier to certify competition law class actions.  The combined result of these recent developments is that competition law private actions are now of more importance to plaintiffs seeking remedies for anti-competitive conduct under the Act.  At the same time, there appears appears to be an increasing number of private and class actions currently being commenced in Canada.

Generally speaking, parties may commence private actions under the Act for contraventions of either the criminal provisions of the Act or a breach of a court or Competition Tribunal (“Tribunal”) order made under the Act.  Private competition law actions in Canada have typically been commenced in the context of (i) consumers alleging damages as a result of a conspiracy between suppliers (e.g., a price fixing conspiracy relating to a product or key input), (ii) consumers alleging damages as a result of misleading advertising claims (e.g., false or misleading claims in relation to a product, investment or other business opportunity, etc.) or (iii) competitors alleging damages based on misleading claims made by a competitor or alleged conspiracy entered into among other competitors.

Process

Section 36 of the Act creates a statutory cause of action for private parties seeking to commence a private action under the Act.

Section 36 provides that any person that has suffered loss or damage as a result of conduct that is contrary Part VI (the criminal provisions of the Act, which include the criminal conspiracy, bid-rigging and criminal misleading advertising provisions), or failure to comply with a Tribunal or court order under the Act, may commence a private damages action.

Private actions cannot be commenced, however, under the Act’s civil “reviewable matters” provisions (e.g., under the Act’s abuse of dominance, tied selling, exclusive dealing or market restriction provisions, although limited rights of private access are available, with leave, under the latter three provisions, as well as under the Act’s refusal to deal provision).  For example, see: British Columbia Supreme Court Rejects Novus’ Section 79 Predatory Pricing Claim Against Shaw

Private actions may be commenced for contravention of the criminal conspiracy (e.g., price fixing agreements), bid-rigging or criminal false or misleading representations provisions.  Private parties do not, however, have a right to commence private actions for breaches of the civil “reviewable matters” provisions of the Act, which include the merger, abuse of dominance, price maintenance and civil misleading advertising sections.

In the past, the majority of competition law private actions have been commenced for alleged breaches of the criminal conspiracy or criminal misleading advertising provisions (e.g., in relation to alleged price fixing conspiracies, misleading representations in relation to the sale of products or claims in relation to business opportunities).

It has been relatively uncommon for private plaintiffs to commence proceedings under other criminal provisions, although there have been some cases – for example, one case brought for alleged predatory pricing which was, until recently, a criminal offence.

With respect to private actions commenced under the conspiracy provisions of the Act, private action activity may increase following the coming into force of new U.S.-style “per se” criminal cartel rules in March, 2010.

This is because, whereas formerly private plaintiffs, as well as the Competition Bureau (the “Bureau”), were required to establish anti-competitive effects as a key element of a conspiracy offence (i.e., that the alleged illegal conduct prevented or lessened competition “unduly” in one or more relevant markets), this competitive effects test has now been removed from three forms of “hard core” criminal cartel offences as follows: price fixing, market allocation and output restriction agreements.  The key impact of this amendment is that both private plaintiffs and the Bureau will have a lower burden to establish these three forms of “hard core” criminal cartel conduct.

Moreover, the fact that both the former and impending new cartel rules can have a bearing on many forms of common commercial agreements (e.g., joint venture, franchise, dual distribution and licence agreements, among others), it remains to be seen how the Bureau, private parties as well as Canadian courts treat the application of the new cartel rules on commercial agreements and arrangements in Canada.  In this regard, while the Bureau has issued new enforcement guidelines in relation to dealings between competitors, and which address some of the commercial contract issues associated with the new cartel rules, the Bureau’s guidelines are not law and are not binding on either the courts or private parties seeking remedies under the Act.

At the same time, however, some of the former criminal offences in the Act have been repealed, with the result that private actions are no longer possible for certain types of conduct – for example, for predatory pricing, which used to be a criminal offence, but is now dealt exclusively under the Act’s civil abuse of dominance provision.  Also repealed as a result of the recent amendments are the criminal promotional allowance, price discrimination and criminal resale price maintenance provisions (which has been replaced with a civil “reviewable matters” provision, under section 76 of the Act).

Jurisdiction

Under the Act, private action proceedings may be commenced in provincial superior courts or the Federal Court.  However, as the Federal Court has limited jurisdiction, plaintiffs that wish to rely on causes of action in addition to those under the Act – for example, common law causes of action – must commence their proceedings in provincial superior court.

With respect to asserting jurisdiction in relation to cross-border cases, Canadian courts have generally relied on the “real and substantial connection test” to determine whether a court has jurisdiction in the private action context.   The jurisdiction of Canadian courts to hear private actions under the Act is particularly relevant in the context of international price fixing conspiracies, where the agreement may have been formed outside Canada with potential anti-competitive effects in Canada.  There is now, however, authority for the proposition that where a conspiracy is formed abroad, with anti-competitive effects in Canada, a Canadian court will have jurisdiction.

Test

To establish a private action claim under section 36 of the Act, a private plaintiff must establish that the defendant contravened one of the criminal provisions of the Act (e.g., establish all of the elements of a criminal price fixing conspiracy) or breached a Tribunal or court order under the Act and that it has suffered actual damage or loss as a result of the conduct.  In other words, a private plaintiff must establish both the elements of the alleged criminal offence and that it has suffered actual loss or damage as a result of the conduct (and that the damage or loss was caused by the defendant).  Moreover, the absence of a prior criminal conviction does not act as a bar to parties commencing private actions.

The necessity under section 36 for private plaintiffs to establish actual damage may, in many cases, mean that it is easier for downstream purchasers (as compared to a direct competitor) to establish and quantify damages (e.g., consumers paying an overcharge as a result of a price fixing conspiracy engaged in by suppliers, based on misleading claims made by a supplier in relation to a product that does not work, etc.).

Rebuttable Presumption

Section 36, which is the provision under which private actions under the Act are commenced, also contains a helpful rebuttable presumption for plaintiffs.  It provides that the “record of proceedings” in a matter that results in the conviction for a criminal offence under the Act (or a failure to comply with a Tribunal order) is “prima facie” evidence of the alleged conduct in a civil action.  The impact of this presumption is that unless sufficient evidence is adduced to the contrary, a guilty finding in a criminal proceeding, and likely pleadings and agreed statements of fact where a defendant is convicted or has plead guilty, can lead to potential civil liability in subsequent civil proceedings.

Burden

It has been held that the elements of a private action claim under the Act must be established on a higher burden than the normal civil burden of proof (i.e., on balance of probabilities), as a private action is based on an alleged breach of a criminal provision of the Act.

Class Actions

It is also possible to commence class actions under the Act.  For example, competition law class actions can be commenced in British Columbia under the British Columbia Class Proceedings Act and Ontario under the Ontario Class Proceedings Act.  To date, Ontario, Quebec, British Columbia, Alberta, New Brunswick, Saskatchewan, Manitoba and Newfoundland have adopted class action legislation.

The introduction of class action legislation has led to a relative increase in competition law private actions in Canada, largely as a result of consolidating the considerable expenses of commencing competition law private actions.  Competition law class actions are also in many cases “follow on” actions, following announcements by the Bureau or international investigations (and which in many cases did not seriously proceed until guilty pleas or convictions had been obtained).

In order to commence a competition law class action a representative plaintiff must as a first step obtain leave (“certification”) to commence the action as a class action after which, if certification is granted, the action will proceed on its merits.

The test for certification of a class action in most provinces is as follows: (a) the pleadings of notice of application disclose a cause of action, (b) there is an identifiable class of two or more persons, (c) the claim of the class members raises common issues, (d) a class proceeding is the preferable  procedure for the resolution of the common issues and (e) there is a representative plaintiff that: (i) would fairly and adequately represent the class, (ii) has produced a workable plan for advancing the proceedings on behalf of the class and of notifying class members of the proceeding and (iii) with respect to the common issues, does not have interests that may conflict with other members of the class.

One of the primary issues relating to the certification of competition law class actions to date has been difficulties arising from the calculation of damages and, in particular, the challenges in some cases of calculating damages in the context of indirect purchasers (i.e., where it is alleged that that direct purchasers passed on, for example, a price-fixing overcharge to a second downstream level of consumers).  As a result, much of the contested activity in relation to Canadian competition law class actions has been at the certification stage of proceedings.

The leading Canadian case on indirect purchaser class actions had been Chadha v. Bayer, in which certification was denied on the basis that the plaintiffs in that case had not adduced sufficient evidence to establish or calculate harm for the entire class.  As such, the Ontario Court of Appeal found that a class action was not the preferable procedure for resolving the claims (and therefore, that the action should not be certified).

However, as a result of several recent plaintiff favourable class action certification cases in British Columbia and Ontario, these earlier obstacles are thought to have been overcome in part, and it is expected that competition law class action activity in Canada (as well as competition law private actions generally) will increase.

In particular, the British Columbia Court of Appeal, in Pro-Sys Consultants Ltd. v. Infineon Technologies AG, involving a class action on behalf of a class of purchasers of dynamic random access memory referred to as “DRAMS” (the “DRAMS” case), recently took a highly flexible and plaintiff favourable approach to the certification of competition law private actions in British Columbia.

The DRAMS case followed shortly after another plaintiff—favourable competition law class action decision in Irving Paper Limited v. Atofina Chemicals Inc. et al., in which the Ontario Superior Court of Justice certified a contested price-fixing class action involving indirect purchasers.  This was, in fact, the first Canadian decision certifying a contested price-fixing class action on behalf of indirect purchasers.

It is now widely thought that the recent amendments to the Act (removing the competitive effects test from section 45), together with several plaintiff-favourable competition class action decisions, has substantially lowered the bar both to commence private actions in Canada, as well as to commence class actions.

DRAMS Case

On June 3, 2010 the Supreme Court denied leave to appeal in the DRAMS case.

In this important case, leave to appeal to the Supreme Court was sought from the British Columbia Court of Appeal that had approved the DRAM memory price-fixing class action.  The British Columbia Court of Appeal had reversed the British Columbia Supreme Court’s decision and certified the class action against a group of five technology manufacturers accused of fixing their prices for computer memory chips.

The Court of Appeal held that the British Columbia Class Proceedings Act should be “construed generously in order to achieve its objectives” – for example, to improve access to justice and avoid duplication in legal proceedings.  The impact of the recent Supreme Court decision to deny leave in this case is that the British Columbia Court of Appeal’s decision is now the latest appellate judgment on the certification of competition law class actions in Canada and the first Canadian appellate decision certifying a contested competition law class action.

It is also thought that the Court of Appeal’s decision has significantly lowered the bar to certify competition law class actions in Canada, including those involving indirect purchasers, which has been a significant obstacle to obtaining certification in past cases.

The respondent computer firms in this case include Infineon, Hynix Semiconductor Inc., Samsung Electronics Co. Ltd., Micron Technology Inc. and Elpida Memory, Inc., who together represent approximately 76% of the global production of dynamic random access memory that provides electronic memory and information retrieval for computer and telecommunications products.  Three of the respondents have settled U.S. class action proceedings for USD $160 million and all of the respondents, with the exception of Micron, have pleaded guilty to criminal cartel charges in the U.S. and have paid fines totalling about USD $731 million.

This case is one of several recent plaintiff-favourable price-fixing class actions under the Competition Act, including a recent Ontario indirect purchaser certification judgment (the hydrogen peroxide case) in which the Ontario Superior Court granted certification in a case involving an indirect and direct class.

Together with the recent sweeping changes to the Competition Act, which have significantly lowered the bar to establish criminal conspiracies in Canada, this most recent plaintiff-favourable price-fixing class action case is expected to lead to a marked increase in competition law class action activity in Canada.

Limitation Period

The limitation period during which plaintiffs must commence a private action under the Act is two years from the later of: (a) the day on which the relevant anti-competitive conduct was engaged in (or court or Tribunal order was contravened) or (b) the day when any criminal proceedings were “finally disposed of”.

Remedies

Under section 36 of the Act, the potential remedies for a successful competition law private action are the actual damages (i.e., compensatory damages) proven as a result of the criminal violation (or breach of a Tribunal or court order).

In contrast to the United States however, only single damages, not treble damages, are available to successful plaintiffs in Canada.  This is intended as one of several procedural safeguards against strategic litigation.  Moreover, there is some authority in Canada that punitive or exemplary damages are not available.  As a practical matter, however, the majority of private actions in Canada have resulted in settlements.

In addition, in Canada the general rule is that the successful party in an action, whether the defendant or plaintiff, is entitled to recover the costs of a proceeding, including its legal fees and disbursements.

As a result of the potential remedy limitations under the Act, it is common for private plaintiffs to argue common law causes of actions together with claims under the Act (e.g., common law conspiracy, unjust enrichment, unlawful interference with economic interests, etc.).

Implications of Recent Competition Private Action Activity

This is a very interesting time for competition law private actions, class actions and private access cases in Canada based on the recent sweeping amendments to the Act and recent plaintiff favourable class action cases in British Columbia and Ontario.

Some of the potential key impacts of the recent developments include: (i) an increase in the number of competition law private actions commenced following the March, 2010 implementation of the new criminal conspiracy rules, (ii) an increase in the number of competition law class actions commenced following the recent British Columbia and Ontario class action certification cases, (iii) increased compliance costs for firms to review their policies and comply with the new rules and (iv) possible increased strategic litigation.

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