Ontario refuses to certify indirect purchaser class action

July 1, 2001

Canadian courts have recently dealt with the problem of antitrust class action lawsuits brought by indirect purchasers of products, the same idea the U.S. Supreme Court wrestled with in Illinois Brick Co. v. Illinois 431 U.S. 720 (1977), but with a very different result.

In its precedent-setting decision in Chadha v. Bayer Inc., (May 14, 2001) the Ontario Superior Court of Justice Divisional Court reversed a lower court’s decision to certify a proposed class action lawsuit alleging a price-fixing conspiracy contrary to the Competition Act (the Act). In Chadha, the plaintiffs alleged that the defendants had entered into an agreement that amounted to a conspiracy to fix the price of iron oxide pigment (used in various construction materials) to unduly prevent or lessen competition within the meaning of section 45(1)(c) of the Act. The action, which sought damages of $150 million, was brought on behalf of over one million Canadians who claimed that they had purchased homes that included building products containing iron oxide pigment manufactured by the defendants between 1985 and 1992.

“Pass-On” Problem

In its 2-1 decision, the Divisional Court held that an indirect purchaser of a product must establish on a balance of probabilities that he or she has suffered loss or injury as a result of the actions of the defendants. For an indirect purchaser to establish such economic injury, he or she must show that at each sale through the various links in the chain of distribution, each seller passed on to each subsequent purchaser all or part of the alleged overcharge by the original conspirators.

The majority of the Court found that this “passon” issue could not be resolved on a classwide basis - in this particular case - because each claim involved different intermediaries and factors unique to each end user of the product. As a result, the majority of the Court refused to certify the proposed class action. The Court found that the “pass-on” issue was of particular difficulty given the facts of the case in which the purchase price of a building or personal home depends on a multitude of subjective factors, such as the bargaining skills of the purchaser as compared to those of the vendor. The Court also took judicial notice of the fact that multiple variables such as regional differences and delivery costs have an impact on the market for newly constructed buildings or personal homes and, consequently, on the final purchase price of each such building.

The Ontario Court cited Mouhteros v. DeVry Canada Inc. (1998), 41 O.R. (3d) 63 stating that the presence of individual issues will not be fatal to certification and recognized that virtually every class action contains individual issues to some extent. However, in this particular instance, it was determined that each class member’s experience was idiosyncratic, and liability would be subject to numerous variables for each class member making the proposed class action completely unmanageable.

By contrast, the U.S. Supreme Court decision in Illinois Brick closed the door in the U.S. on claims by indirect purchasers alleging that they had been injured as a result of a price-fixing conspiracy. However, the Ontario Divisional Court did not dismiss the idea that indirect purchasers could hold a defendant liable – perhaps even in a class action lawsuit in an appropriate case - if the facts of the case were such that it could be established that an overcharge had in fact been passed on.

Dissenting Position

In dissent, O’Driscoll J. concluded that the alleged impracticality or inefficiency of identifying individual class members is not a bar to certification under the Class Proceedings Act, 1992. O’Driscoll J. held that the measure of damages is not dependent upon the individual idiosyncrasies of class members and that damages could rationally be determined through the application of accepted economic formulae and statistics.

The Divisional Court’s decision in Chadha is likely to be appealed to the Ontario Court of Appeal. The ultimate decision in Chadha will be of significant importance given the number of guilty pleas the Competition Bureau has obtained with respect to price-fixing conspiracies in recent years.

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