In a recent decision of the Federal Court of Canada, Justice Gascon refused certification, without leave to amend, of a proposed competition law class action alleging that three leading manufacturers (Samsung, SK Hynix and Micron) of Dynamic Random Access Memory Chips (DRAM), a semiconductor memory chip used in most computer products, conspired to limit the global supply and raise the price of DRAM.
While there have been many price-fixing class actions in Canada, this is the first case of supply suppression where allegations regarding conspiracy to restrict output have been made.
The Federal Court confirmed that an oligopoly is not innately anti-competitive. An oligopoly without a coordinated effort to conspire will not amount to conspiracy under section 36 (Recovery of Damages) of the Competition Act for breaches of sections 45 (Conspiracies) and 46 (Foreign Directives) of the Competition Act.
Justice Gascon’s decision is important as it emphasizes the Court’s gatekeeper role in screening a Competition Act class action when a proposed representative plaintiff fails to satisfy the “some basis” in fact criteria for certification. Here, Justice Gascon stressed that there must be evidence to support the existence of a prohibited agreement. Bald unsupported allegations of misconduct are insufficient. Assertions that the products in issue were sold in an oligopoly, that one party published price lists and made them publicly available and competitors then followed with price increases, and that there was “public signalling” do not amount to illegal conduct in the absence of an illegal agreement. In such circumstances a representative plaintiff will not be permitted to pass through the certification gate.
Justice Gascon reaffirmed that the Courts play an important screening role at certification stage in filtering out unfounded and frivolous claims to ensure parties are not being forced to defend themselves against untenable claims, and found that the Plaintiffs' failed in establishing that there was a reasonable cause of action in conspiracy, and consequently the common issues requirement of certification.
No reasonable cause of action or existence of common issues of law or fact
While there is no need to prove actual or likely competitive effects or harm of an agreement/engagement in prohibited conduct in order to succeed in alleging a breach of section 45 of the Competition Act, there must be some basis in fact that an agreement to engage in prohibited conduct existed — which the Plaintiffs' failed to prove. The mere fact that the Defendants raised prices at the same time, without some indirect or circumstantial evidence that there was some type of two way communication to do so, is not enough to meet the certification threshold.
The Court confirmed that evidence of conscious parallelism, where one party publishes price lists and makes them known to competitors, and competitors follow by making an independent decision, does not amount to illegal conduct in the absence of an agreement. Similarly, evidence of ‘public signalling’ is not a breach of section 45 of the Competition Act — there must be two way communication.
There must also be some basis in fact that there was a two way communication amongst alleged conspirators to ground a reasonable cause of action in breach of section 46 of the Competition Act. Section 46 allows one to target subsidiaries operating in Canada that conspire by implementing a foreign communication intended to give effect to a conspiracy entered into outside of Canada that would contravene section 45, despite the fact that there are no immediate parties to the conspiracy.
Test for reasonable cause of action
It is clear in the jurisprudence that the test in certification is not a high bar to meet, particularly in cases of conspiracy. The Federal Court agreed that the courts must be generous when assessing the cause of action of a conspiracy given its innate secret nature, but that it cannot be blind. Even in conspiracy cases, the pleadings cannot boil down to mere speculation or to a fishing expedition. Ultimately the Court found that the Plaintiffs' statement of claim added up to a fishing expedition and did not adequately expose a conspiracy.
Test for common issues
After determining that the Plaintiffs' Statement of Claim did not reasonably ground a cause of action, and while not necessary, Justice Gascon went through the analysis for assessing common issues, confirming that a two step approach is required despite previous uncertainty in the jurisprudence. The two step approach consists of determining that there is some basis in fact in evidence that the proposed common issues: 1. actually exist in fact, and 2. can be answered in common across the entire class. Justice Gascon commented that the two step approach is consistent with the underlying objectives of certification which aims to filter out manifestly unfounded and frivolous claims to ensure that the certification process amounts to more than a mere symbolic scrutiny.
Justice Gascon also clarified that the SCC’s decision in Prosys confirmed that the evidentiary basis for establishing existence of common issues is not as high as proof on a balance of probabilities and that there is no need to demonstrate that the alleged acts actually occurred, but that it did not negate that there needs to be sufficient evidentiary basis (some-basis-in-fact) indicating that a common issue exists in fact, beyond a bare assertion in the pleadings.
When analyzing whether there was some basis of fact to the Plaintiffs’ conspiracy claims, the Court found that:
- the existence of an investigation in China of alleged anti-competitive acts of the Defendants, where no conclusion was made that anti-competitive acts did in fact occur does not amount to some basis in fact;
- bald assertions of alleged coordinated supply restrictions does not amount to some basis in fact;
- the fact that the market in which DRAM is sold is an oligopoly does not amount to some basis in fact;
- evidence of general price increases, without any link to any form of concerted conduct or coordinated behavior does not amount to some basis in fact;
- bald assertions of private communications amongst the Defendants does not amount to some basis in fact;
- public statements regarding increases in price does not amount to some basis in fact;
- prior conduct of price-fixing (rather than supply suppression) by the Defendants in 2008 (Infineon) does not amount to some basis in fact;
- US complaints of a similar nature, without a decision or any type of result does not amount to some basis in fact; and
- an expert report making remarks regarding the features of an oligopolistic market structure does not amount to some basis in fact.
Lack of competition bureau investigation
Also of note is Justice Gascon’s comment that while the absence of any investigation by the Competition Bureau on an impugned conduct is not determinative of the potential existence of section 45 conspiracy, it is certainly telling.
- The Court, in fulfilling its gatekeeper role in Competition Act conspiracy class actions, will require that the plaintiff provide evidence of the illegal agreement in order to support the some basis in fact criteria for conspiracy.
- Evidence of price increases that follow a unilateral public signaling of price increases by one alleged conspirator and which are subsequently followed by competitors is not sufficient to support the some basis in fact requirement for proof of the existence of an alleged illegal agreement.
- Conscious parallelism will not amount to some basis in fact to support the existence of an alleged illegal agreement.