This spring, the B.C. Court of Appeal released two decisions that could mark the end of indirect purchaser class actions in Canada.

In a price-fixing conspiracy, the manufacturers of competing products typically agree to increase the price of their products and not undercut each other.  The effect of the manufacturers’ agreement is that the “direct” purchasers of their products pay more (the “overcharge”) than they would have paid but for the price fixing conspiracy.  However, direct purchasers of the conspirators’ product are often not the end users of the product.  In many cases, direct purchasers incorporate the conspirators’ product into another product and sell that product to an end user.  This second level purchaser is referred to as an “indirect” purchaser.

Depending on market conditions, direct purchasers may pass on some of the overcharge to their customers.  Since it is often assumed that at least some of the overcharge was passed on to indirect purchasers, class actions are generally commenced on behalf of direct and indirect purchasers on the basis that both groups have suffered a loss as a result of the conspiracy.  The practice of “following the money” will likely change as a result of the B.C. Court of Appeal’s decisions in Sun-Rype Products Ltd. V. Archer Daniels Midland Company, 2011 BCCA 187 (Canlii) and Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2011 BCCA 186 (Canlii).

In Sun-Rype and Pro-Sys, the Court of Appeal held that the passing-on defence had been conclusively rejected by the Supreme Court of Canada in Kingstreet Investments Ltd. v. New Brunswick (Finance), 2007 SCC 1 (Canlii) and therefore it was no longer recognized at law.  The passing-on defence allowed a defendant to argue that a direct purchaser’s loss is not equal to the overcharge because the direct purchaser has passed-on some or all of the overcharge to its customer. While the elimination of the passing-on defence could lead to windfall recoveries by direct purchasers if they did in fact pass on the overcharge, it eliminates the need for very complex economic analysis into whether the overcharge or part of it was actually passed-on.

Although the Court of Appeal was unanimous that the passing-on defence was not recognized at law, the Court split on the issue of how this affected indirect purchaser claims.  The majority held that since the law does not recognize the passing-on of an overcharge, not only is a defendant precluded from relying on the passing-on defence but indirect purchasers are also precluded from recovering the overcharge.  According to the majority, even though s. 36 of Competition Act provides, in part, that “any person who has suffered loss or damage as a result of [price fixing] conduct... may... sue for and recover from the person who engaged in the conduct... the loss or damage proved to have been suffered by him...”, indirect purchasers did not have a cause of action because they had not suffered a recognizable loss.  In addition, the majority reasoned that if indirect purchasers could recover the passed-on overcharge it would result in a double recovery from the conspirators who would already have paid damages to direct purchasers without deduction for any part of the overcharge that had been passed-on.

These decisions of the B.C. Court of Appeal bring the law of British Columbia in line with American federal law which has not recognized the passing-on defence since Illinois Brick Co. V. Illinois, 431 U.S. 720 (1977) and Hanover Shoe, Inc. V. United Shoe Machinery Corp., 392 U.S. 481 (1968).  It is interesting to note that in Illinois Brick and Hanover Shoe, the U.S. Supreme Court construed away similar language to s. 36 of the Competition Act that was found in s. 4 of the Clayton Act.  Some states have since passed repealer statutes that specifically provide for indirect purchaser claims.  No such repealer statutes have been enacted in Canada.

It is expected that the plaintiff will seek leave to appeal to the Supreme Court of Canada in both of these cases.  If leave is granted, the Supreme Court of Canada will be forced to consider whether the judicial economy that would be achieved by eliminating the passing-on defence should trump express statutory language in the Competition Act that grants “any person who suffered a loss” a right of action.