BC Court of Appeal decision
Quebec Court of Appeal decision
Implications: an opportunity for clarification
On December 1 2011 the Supreme Court granted leave to appeal from a pair of British Columbia (BC) Court of Appeal decisions that overturned orders certifying price-fixing claims as class actions. The two BC cases related to allegations of conspiracies to increase the prices of high-fructose corn syrup and computer software. The BC appeals were argued consecutively before the same panel of judges and the decisions were released concurrently. In both instances, the majority of the BC Court of Appeal held that parties which did not purchase products directly from a defendant, and instead purchased such products indirectly from a non-defendant further down the product distribution chain, do not have a cause of action against the defendants in relation to an alleged unlawful conspiracy to fix the product price.
Sun-Rype Products Ltd v Archer Daniels Midland Company(1) was a proposed class proceeding brought on behalf of direct and indirect purchasers of high-fructose corn syrup, a sweetener used in various food products, primarily soft drinks. The claim alleged that the defendants unlawfully conspired to fix the price of syrup sold to direct purchasers and that some of the overcharge was passed through to indirect purchasers, including end consumers.
Pro-Sys Consultants Ltd v Microsoft Corporation(2) was initiated on behalf of retail purchasers of computers installed with Microsoft operating systems and applications software. The action alleged that Microsoft engaged in unlawful anti-competitive behaviour in order to overcharge for its products.
These BC Court of Appeal decisions lie in stark contrast to a recent Quebec Court of Appeal decision in Option Consommateurs v Infineon Technologies AG,(3) which expressly rejected the conclusions in Sun-Rype and Microsoft. Should the defendants in that case seek leave to appeal to the Supreme Court, it is possible that the three cases might be consolidated in some way.
BC Court of Appeal decision
Reasons of the majority
Mr Justice Lowry, for the majority in both cases, relied on recent Supreme Court jurisprudence in concluding that indirect purchasers of products alleged to be the subject of an unlawful overcharge do not have a cause of action for price-fixing. In Kingstreet,(4) a case concerning an unlawful tax, the Supreme Court had determined that a defendant cannot reduce its liability to those which paid an unlawful charge by establishing that some or all of it was 'passed through' to others. In other words, and if applied to the price-fixing context, the defendant is liable to the direct payor of the unlawful charge (the direct purchaser) for 100% of that charge, regardless of any passing through to others (the indirect purchasers). Lowry reasoned that if the law does not recognise pass-through as a defence to a claim, logically, the law cannot recognise pass-through as the basis for a claim. In the context of a price-fixing class action, this means that if direct purchasers are entitled to recover 100% of an unlawful overcharge they paid, regardless of any pass-through, it follows that indirect purchasers cannot claim against the defendant for any portion of the overcharge passed through to them, as that would result in double recovery. In short, because pass-through cannot be a 'shield', it also cannot act as a 'sword'.(5)
Lowry considered and rejected the finding of the motions judge in Sun-Rype (and endorsed by the dissent on appeal, as discussed below) that the problem of double recovery could be avoided through the class action procedure. The motions judge proposed a 'top-down' approach to assessing damages, whereby the class action proceeds first with an assessment of the aggregate unlawful overcharge allegedly taken by the defendants; only after such aggregate assessment would the court be asked to determine how the aggregate amount should be distributed as damages among the direct and indirect purchasers, thus avoiding double recovery. Lowry held that such an approach ignores the fact that, at law, the direct purchasers are entitled to 100% of any unlawful overcharge and the indirect purchasers have no claim for any overcharge that might have been passed through. Referring to recent Supreme Court jurisprudence,(6) he held that the Class Proceedings Act is a procedural statute that can neither create nor modify a cause of action. The fact that the indirect purchasers' claims are being advanced in a class proceeding cannot alter the fact that those claims do not disclose a cause of action.
Reasons of the dissent
Justice Donald, in dissent in both cases, would have dismissed the appeals. Donald agreed with the majority that the defence of pass-though was not available and that the rule against double recovery is a bedrock principle. However, he held that it did not necessarily follow that indirect purchasers had no cause of action based on pass-through. Donald reasoned that the Supreme Court's rejection of the pass-through defence was based on considerations of proximity which would not apply to pass-through as the basis for a claim. He held that it was not plain and obvious that indirect purchaser claims based on pass-through did not disclose a cause of action. Donald further relied on the flexibility of the class proceedings legislation and endorsed the top-down approach to assessing damages suggested by the motions judge in Sun-Rype. Donald concluded that, in employing such an approach, there is no real possibility of double recovery as the total amount will never exceed the amount of the overcharge and therefore there is no justification for barring indirect purchasers from making a claim.
Quebec Court of Appeal decision
On November 16 2011 the Quebec Court of Appeal authorised a proposed class action seeking to recover damages from foreign manufacturers in respect of alleged conspiracies to fix the prices of dynamic random access memory (DRAM), which is used in computers and other electronic devices.
The reasoning adopted by the Court of Appeal allows Quebec courts, at the authorisation stage, to consider as sufficient allegations of an 'aggregate loss' to a class composed of both direct and indirect purchasers. By distancing itself from the logic of recent cases decided by the BC Court of Appeal (as discussed above), this decision highlights the significant disparity in Canadian law on the question of whether indirect purchasers may sue cartel participants in damages.
The proposed class action sought to recover in damages a sum corresponding to all illegal profits realised by the respondents in implementing their price-fixing conspiracies. The motion alleged that the violation by the respondents of their obligations under the Competition Act(7) had rendered them liable for the pecuniary loss suffered by both direct and indirect purchasers of DRAM.
At first instance, the respondents all moved to have the motion dismissed on jurisdictional grounds. Their motions were granted by Justice Mongeau on June 17 2008. In obiter, the motions judge mentioned that, notwithstanding the question of territorial jurisdiction, he would have refused to allow the class action to proceed on the merits. Among other reasons, he stated that indirect purchasers could not invoke the passing-on doctrine in the context of an action in damages against manufacturers. In other words, Mongeau indicated that the loss alleged by indirect purchasers in this context did not exist as a matter of law.
In reasons written by Justice Kasirer, the Court of Appeal held that the trial judge had erred in law by granting the respondents' motion to dismiss for want of territorial jurisdiction. In so doing, the court clarified the scope of Article 3148(3) of the Quebec Civil Code with respect to the type of 'financial loss' suffered in Quebec that is sufficient to allow the courts to exercise their international jurisdiction over foreign defendants.
In relation to the indirect purchasers' right of action, the court stated that a petitioner which seeks to recover the collective losses of both direct and indirect purchasers need not allege that the loss suffered by direct purchasers was effectively passed on to indirect purchasers. For the purposes of authorisation, it sufficed to allege that:
- an aggregate amount corresponding to the illegal overcharge is sought on behalf of the class as a whole, irrespective of how much of that sum has been passed on to indirect purchasers; and
- such loss is recoverable as a matter of law.
On this latter point, the court took issue with the majority's reasons in Sun-Rype and Microsoft. Contrary to Lowry of the BC Court of Appeal, the Québec Court of Appeal took the view that the non-availability of the passing-on defence in Canada does not preclude indirect purchasers from asserting that passing-on has occurred as a matter of fact. The court noted that, although the difficulties associated with proving such factual passing-on should not be underestimated, this is an evidentiary issue to be addressed at a common issues trial on the merits.
Finally, in discussing whether the proposed class representative could adequately represent the class as a whole, the appeal court addressed the possibility of a conflict of interest within the proposed class. Bearing in mind that the proposed class is composed of both direct and indirect purchasers, the potential conflict would stem from the direct purchasers' interest in raising the argument that none of the losses that they have suffered were, as a matter of fact, passed on to indirect purchasers, whereas the core of the indirect purchasers' theory of the case would lead to the opposite conclusion. The court dismissed this concern. In fact, it found that. because the proposed class sought to recover the losses suffered by all class members as an aggregate amount, direct and indirect purchasers shared the same interest (ie, to obtain the highest possible award for the benefit of the class as a whole). The court recognised that a conflict of interest could arise at the later stage of distribution of the award among all class members, but considered that this potential conflict did not constitute sufficient grounds to deny the authorisation of the class action.
Implications: an opportunity for clarification
Many price-fixing class actions certified in Canada have included both direct and indirect purchasers, often with reference to an approach similar to the top-down approach endorsed by the dissent in the Sun-Rype and Microsoft appeals(8) and in the recent decision of the Quebec Court of Appeal in Infineon Technologies.
As a result, there are now conflicting decisions from appellate courts in different provinces on the key issue of whether indirect purchasers have a cause of action in the context of a price-fixing case. Now that leave to appeal has been granted in Sun-Rype and Microsoft, it is hoped that the Supreme Court will provide a clear answer to this important question. These two appeals from BC may also provide an opportunity for the Supreme Court to resolve other important issues common to price-fixing cases, such as whether the interests of indirect and direct purchasers are in conflict and whether the existence of pass-through – if legally relevant – can properly be determined on a class-wide basis. This is an important issue that is also raised in Infineon Technologies, which may reflect an intention on the Quebec Court of Appeal's part to lower the threshold for authorisation of antitrust class actions. The respondents in Quebec's Infineon Technologies could be expected to file a leave application and to request a consolidation of the appeals before the country's top court.
The Supreme Court's decision is bound to have an impact not only on future price-fixing class actions in Canada, but also on a number of existing class actions currently before the courts in different provinces, many of which include indirect purchasers as members of the class.
For further information on this topic please contact Michael Brown or Michael Kotrly at Norton Rose OR LLP's Toronto office by telephone (+1 416 216 4000), fax (+ 1 416 216 3930) or email ([email protected] or [email protected]). Alternatively, please contact Eric C Lefebvre or Vincent Rochette at Norton Rose's Montreal office by telephone (+1 514 817 4747), fax (+ 1 214 286 5474) or email ([email protected] or [email protected]).
(1) Sun-Rype Products Ltd v Archer Daniels Midland Company, 2011 BCCA 187. In this case the court also granted the defendants' motion for leave to cross-appeal with respect to whether the plaintiffs' claims in constructive trust disclose a cause of action.
(2) Pro-Sys Consultants Ltd v Microsoft Corporation, 2011 BCCA 186.
(3) 2011 QCCA 2116, Forget, Pelletier and Kasirer JJ.A.
(4) Kingstreet Investments Ltd v New Brunswick (Finance), 2007 SCC 1. See also British Columbia v Canadian Forest Products Ltd, 2004 SCC 38 (per Lebel. J, dissenting, though not on this point).
(5) Justice Lowry's reasons are consistent with earlier jurisprudence of the United States Supreme Court on these issues: see Hanover Shoe, Inc v United Shoe Machinery Corp, 392 US 481 (1968); Illinois Brick Co v Illinois, 431 US 720 (1977).
(6) Bisaillon v Concordia University, 2006 SCC 19, para 17.
(8) See Pro-Sys Consultants Ltd v Infineon Technologies AG, 2009 BCCA 503 and Irving Paper Limited et al v Atofina Chemicals et al, (2008) 89 OR (3d) 578 (Sup. Ct.) leave to appeal denied 2010 ONSC 2705.