Supreme Court of Canada allows indirect purchasers of products to sue for damages

October 31, 2013

The Supreme Court delivered its long-awaited rulings on October 31 in proposed class actions involving claims for damages for alleged competition law violations brought by “indirect purchasers” of products (Pro-Sys v. Microsoft, Sun-Rype v. Archer Daniels Midland and Infineon Technologies AG c. Option Consommateurs). Indirect purchasers are purchasers of a product (or of another product containing the initial product) who seek recovery for overcharges that are alleged to have been “passed on” to them through the chain of distribution for the initial product. The primary issue in each case was whether indirect purchasers have a legal cause of action allowing them to sue for damages (which typically happens by way of a class action). The Supreme Court held that they do.

In Microsoft, the plaintiffs brought a class action on behalf of indirect purchasers who alleged that the corporation had conspired with manufacturers (among others) to raise the price of its operating systems and software, and that these overcharges were passed on to purchasers of computers. The Sun-Rype case was brought on behalf of a proposed class which consisted of direct and indirect purchasers of high fructose corn syrup (“HFCS”) or products containing HFCS, who similarly alleged that manufacturers had conspired to fix the price of HFCS and that the unlawful overcharges were passed on to class members. Both of the actions were certified as class proceedings in the Supreme Court of British Columbia, but those certifications were reversed by the Court of Appeal in 2011, on the basis that indirect purchasers have no cause of action recognized in law.

On October 31, 2013, the Supreme Court overturned the British Columbia Court of Appeal and ruled that the injury suffered by indirect purchasers is recognized at law, as is their right to bring actions to recover for those losses. Microsoft was treated as the “lead case”. Justice Rothstein, writing for the Court, affirmed that defendants in these kinds of actions could not escape liability for unlawfully increasing prices because the increases were passed on to other consumers; in other words, passing on is not a defence available to a defendant to avoid liability in respect of price increases paid by direct purchasers. Nonetheless, indirect purchasers could seek to recover losses that had been passed on to them. Answering the various objections to this conclusion that have been raised in the case law, Rothstein J. held that: (1) the risks of multiple recovery and the concerns of complexity and remoteness that arise in these situations are insufficient bases for precluding indirect purchasers from bringing actions to recover overcharges that may have been passed on to them; (2) the deterrence function of the competition law in Canada is not likely to be impaired by indirect purchaser actions (indeed, sometimes an indirect purchaser action will be the only means by which overcharges are claimed and deterrence is promoted); (3) allowing these kinds of actions promotes restitutionary principles; that is, the principle of allowing parties who have suffered a harm to be compensated for that harm; (4) persuasive authorities for the contrary view (in particular, longstanding holdings in the U.S.) have come under criticism; and (5) the doctrinal commentary has come to favour the SCC’s conclusion.  Regarding the potential for over-recovery of damages, the Court acknowledged that absent a claim by indirect purchasers, direct purchasers would recover 100% of overcharges; however, that entitlement would be altered when indirect purchasers were included in an action. The Court stated that courts can deny or reduce awards to indirect purchasers where the defendants show that double recovery would occur because of settlements or awards in parallel (foreign) proceedings.

In considering the applicable evidentiary standard, the Court emphasized that the class action certification test is not a merits test. The class representative must show some basis in fact for each of the certification requirements set out in the provincial class action legislation, other than the requirement that the pleadings disclose a cause of action. The Court also stressed that while evidence has a role to play in the certification process, the standard of proof does not require evidence on a balance of probabilities. Rather, there must be sufficient facts to satisfy the judge hearing the certification application that the conditions for certification have been met to a degree that should allow the matter to proceed on a class basis without foundering at the merits stage. The Court acknowledged that the most contentious question involving the use of expert evidence is how strong the evidence must be at the certification stage to satisfy the court that there is a method by which impact can be proved on a class-wide basis. The Court held that the expert methodology must be “sufficiently credible or plausible” to establish some basis in fact for the commonality requirement. This means that the methodology must offer a “realistic” prospect of establishing loss on a class-wide basis. The methodology cannot be purely theoretical or hypothetical, but must be grounded in the facts of the particular case in question; there must be some evidence of the availability of the data to which the methodology is to be applied.

The Supreme Court applied these holdings to Sun-Rype but, in that case, declined to certify the indirect purchaser class because the plaintiff had failed to meet one element of the certification test: the requirement that there be an identifiable class. The respondents’ evidence was that HFCS and liquid sugar were used interchangeably by direct purchasers during the class period and that a generic label could be used for either type of sweetener. As a result, a consumer who purchased an output product (like a soft drink) could not know whether it actually contained HFCS. The majority of the Court found that the plaintiff had adduced no evidence that could help to overcome the identification problem; indeed, on the evidence presented, it appeared to be impossible to determine class membership. Justices Cromwell and Karakatsanis, in dissent, held that this was setting the evidentiary standard too high.

Notably, in both of these cases, the Supreme Court struck the plaintiffs’ claims based on the doctrine of constructive trust because they disclosed no cause of action. In Microsoft, for example, the plaintiffs claimed, as a remedy for the alleged unjust enrichment of the defendants at class members’ expense, a “constructive trust” over an amount equal to the overcharges; in other words, they asked the court to declare that, as a matter of equity, the defendants were holding the amount of the overcharge in trust for the class members. In previous cases, the Supreme Court had characterized the constructive trust mechanism as a broad and flexible equitable tool used to determine beneficial entitlement to property when a monetary award was inappropriate or insufficient; for example, where a plaintiff had contributed to the development of a specific property and was entitled to a share of it. Here, because the plaintiffs had neither explained why a monetary award was inappropriate or insufficient in the circumstances of the case, nor demonstrated a link between their claim and specific property, they could not satisfy the conditions necessary to ground a claim for a constructive trust. The Court reached the same conclusion in Sun-Rype.

The policy rationale for allowing indirect purchasers to assert passing on as a cause of action was also relevant to Infineon, a case decided under the law of Quebec, and which also raised issues of jurisdiction and the test for certification of a class action in Quebec. That case involved manufacturers of dynamic random-access memory or DRAM, a microchip component of electronic devices, who had acknowledged in other international proceedings having participated in a conspiracy to fix prices. The proposed class in the case included direct as well as indirect purchasers of DRAM. The petitioner was a resident of Quebec who purchased a computer online; it was alleged that the manufacturers had breached the Competition Act and therefore committed a fault giving rise to civil liability under the Civil Code of Quebec. The Supreme Court was satisfied that the facts as alleged demonstrated that damage had been suffered in Quebec, satisfying the jurisdictional requirements of the Civil Code. With respect to authorization (the Quebec analogue to certification), the Court affirmed that the standard is relatively low under the Quebec Code of Civil Procedure: the petitioner need only demonstrate an “arguable” case, by means of allegations and some supporting evidence, that the facts as alleged seem to justify the conclusions sought; in light of that standard a petitioner was neither expected nor required to adduce expert testimony and advance a sophisticated methodology at the certification stage. In the result, for policy reasons, the passing on of price increases could ground a class action (evidentiary concerns, such as the risk of double-recovery, could be assessed on a case-by-case basis). If the petitioner were unable to demonstrate at trial how the loss was passed on and how it was to be calculated, the action would fail at that stage.

While these decisions have been described by some as a “landscape change”, a more temperate assessment is that they represent the latest expression from an appellate court of the unwillingness of Canadian courts to perform a merits assessment of a proposed class action at the certification stage. The Court has affirmed the right of indirect purchasers to sue, which is a right that seemed apparent on the legislative language. Beyond that, the Court indicated that a plaintiff has to do something more than simply say “we can do it”; a methodology grounded in fact and anchored in available data is required.  The Court also recognized the potential for double-recovery and the need to guard against that result, and its suggestions for avoiding double-recovery raise interesting complexities and challenges of proof for both sides.  There is much to digest in the decisions, and much to explore as these competition class actions make their way through the certification process and beyond.

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