In a Landmark Trilogy, Supreme Court of Canada Allows Indirect Purchasers to Sue for Competition Act Violations

Suzanne Chiodo

In three highly anticipated decisions, the Supreme Court of Canada has held that indirect purchasers can commence class action lawsuits in Canada. The three decisions, Pro-Sys Consultants Ltd. v. Microsoft Corporation, Sun-Rype Products Ltd. v. Archer Daniels Midland Company and Infineon Technologies AG v. Option consommateurs, not only allow indirect purchasers to sue for damages for violations of the Competition Act, but also reinforce the low evidentiary burden at the certification stage of class proceedings.

Facts

The facts in all three cases are similar. The plaintiffs alleged that the defendants engaged in a price-fixing conspiracy which allowed them to overcharge purchasers for their products. These purchasers were both direct and indirect purchasers. The direct purchasers consisted of manufacturers who used the defendants' products in their manufacturing process: software for computers (Pro-Sys), semiconductor memory products for consumer electronics (Infineon), and high fructose corn syrup for soft drinks (Sun-Rype). The indirect purchasers bought the goods from the direct purchasers and were usually the end consumers of the products.

The plaintiffs in each case claimed that, due to the anti-competitive behaviour engaged in by the defendants contrary to s. 45(1) of the Competition Act, they could sue for recovery of damages under s. 36(1) of that Act. This section states that "[a]ny person who has suffered loss or damage" as a result of anti-competitive behaviour may sue for and recover damages from the person who engaged in the conduct. The actions were commenced to recover the overcharges that the defendants would not have been able to levy but for their price-fixing conspiracy.

The core issues before the Supreme Court were:

(i) Are indirect purchaser actions available as a matter of law in Canada?

(ii) What are the evidentiary requirements on a motion for certification for such actions?

The Decisions by the BC and Québec Courts of Appeal

In both the Sun-Rype and Pro-Sys cases, the British Columbia Court of Appeal held that indirect purchaser actions are not available in Canada as a matter of law. It concluded that because the "passing-on" defence is not recognized in Canada - that is, defendants in an action for price-fixing cannot raise the defence that the direct purchaser has passed the cost down to the indirect purchasers, and has therefore suffered no loss - then the rule should apply equally to plaintiffs. Consequently, indirect purchasers (to whom the cost has been passed down) cannot rely on "passing-on" to found a claim.

The BCCA therefore found that the pleadings did not disclose a cause of action as required by s. 4(1)(a) of the Class Proceedings Act. It allowed the respective appeals and overturned the certification orders of the motions judges.

In contrast, in Infineon Technologies, the Quebec Court of Appeal found in favour of the indirect purchasers, holding that a cause of action could be founded on the passing on of overcharges. That Court found there was no risk of double recovery because the class comprised both direct and indirect purchasers and the Court could apportion the damages among the different classes. Furthermore, it held that preventing indirect purchasers from suing for overcharges could lead to the unjust enrichment of direct purchasers if the latter decided not to commence an action.

The Quebec Court confirmed there is a low evidentiary burden on the plaintiffs, consistent with the low threshold requirements of art. 1003 of the Quebec Code, which requires that the plaintiff show an arguable case that the injury was suffered. Here, the Quebec Court found that their allegations of causation (deemed to be true for the purposes of the motion) were sufficient evidence of loss at the authorization (certification) stage. The Court therefore allowed the appeal and granted the motion for authorization.

The Supreme Court of Canada Decision

In all three cases, the Court found that the rejection of "passing-on" as a shield does not preclude its use as a sword. In other words, indirect purchasers can sue for losses that are passed on to them by direct purchasers.

The Court addressed the policy arguments against allowing indirect purchaser actions. The first of these is the complexity that comes from tracing an overcharge through multiple points in the chain of distribution. The Court held that the determination of damages was to be done on a case-by-case basis and on a full factual record; the plaintiffs assumed the burden of proving that the increased price was in fact passed on to them, and indirect purchasers should not be precluded from doing so at trial purely because of the complexity of the task.

The second argument is the risk of multiple recovery if purchasers at various points in the chain of distribution sue at the same time, together (as in Sun-Rype and Infineon), separately, or in different jurisdictions. The Court held that any duplicate actions could be managed by the courts and damages awards modified accordingly. Because theCompetition Act restricts recovery for individual actions to two years and anti-trust actions are usually long and complex, potential plaintiffs were unlikely to wait to sue and hence the defendant is likely to be aware of any competing proceedings well before trial. The risk of indirect purchasers claiming for damages already awarded to direct purchasers is therefore remote.

Finally, the Court held that allowing indirect purchaser actions would not frustrate the deterrence objectives of Canadian competition laws; in fact, such actions may sometimes be the only way in which overcharges are claimed, especially where the direct purchaser is alleged to be a party to the conspiracy (as in Pro-Sys), or would be reluctant to disrupt a business relationship with its supplier. Although actions necessitating cy-près distributions, rather than compensating the actual indirect purchasers, may result, such actions would still act as a deterrent to anti-competitive practices.

Allowing indirect purchasers to sue for damages would, the Court found, also result in restitution to those actually harmed by the overcharges who, for the most part, are the end consumers to whom the inflated costs have been passed on.

The appeals in Pro-Sys and Infineon were allowed, and the class actions certified or authorized. While the analysis of the indirect purchaser cause of action was similar in Sun-Rype, Rothstein J. dismissed the appeal in that case because there was no identifiable class of indirect purchasers. High fructose corn syrup and liquid sugar were used interchangeably during class period, and food labeling did not identify which product was used. It was therefore impossible for any class members to be identified. (Justices Karakatsanis and Cromwell dissented on this point).

Analysis

The complexities of proving damages in indirect purchaser actions and the spectre of multiple recovery have been the main deterrents to allowing indirect purchaser class actions in Canada. The Supreme Court recognized that these factors could pose difficulties, but downplayed their importance at the certification stage, arguing that such questions could be addressed at trial. In doing so, the Court emphasized the low evidentiary requirements for certification. This is apparent in the Infineon decision, where Justices LeBel and Wagner held, at paras 59 and 65:

[59] At the stage of authorization of a class action, the court plays the role of a filter. It need only satisfy itself that the applicant has succeeded in meeting the criteria set out in art. 1003 of the [Code of Civil Procedure], bearing in mind that the threshold provided for in that article is a low one.

[65] [T]he authorization process does not amount to a trial on the merits. (...) although the claim may in fact ultimately fail, the action should be allowed to proceed if the applicant has an arguable case in light of the facts and the applicable law.

The departure from the heavy evidentiary burden of proof imposed on plaintiffs in Chadha v. Bayer is a significant development. Chadha was one of the first price-fixing conspiracy class actions in Canada to proceed to a contested certification. In that case, the Ontario Court of Appeal laid down high evidentiary standards in requiring that, at the certification stage, the loss must be proven on a class-wide basis (overlooking the fact that, unlike in the United States, pre-certification discovery is not available as a matter of right in Canada). The Supreme Court in the Pro-Sys trilogy clarified this evidentiary requirement. It stated that, while the plaintiff must demonstrate a methodology by which the loss can be proven at trial, it does not have to prove the loss itself at the certification stage. Furthermore, direct purchasers do not have to be included in these actions, so long as there is some methodology capable of showing that the losses were passed on to the indirect purchasers. This more flexible and realistic approach will make it much easier for indirect purchasers to pursue their actions to certification.

The Pro-Sys trilogy opens the door for indirect purchasers to sue for damages in price-fixing cases. This is a positive development for Canadian consumers who are affected by anti-competitive practices. By reinforcing the low evidentiary requirement at the certification stage, the Supreme Court has also made the prosecution of price-fixing class actions less onerous, more accessible, and truer to the foundational purpose of all class actions: access to justice.


2013 SCC 57, see online: http://scc.lexum.org/decisia-scc-csc/scc-csc/scc-csc/en/item/13320/index.do [Pro-Sys].

2013 SCC 58, see online: http://scc.lexum.org/decisia-scc-csc/scc-csc/scc-csc/en/item/13319/index.do [Sun-Rype].

2013 SCC 59, see online: http://scc.lexum.org/decisia-scc-csc/scc-csc/scc-csc/en/item/13318/index.do [Infineon].

RSC 1985, c C-34 [Competition Act].

Kingstreet Investments Ltd. v. New Brunswick (Department of Finance), 2007 SCC 1.

RSBC 1996, C 50 [CPA].

(2003), 63 O.R. (3d) 22 [Chadha]. Rochon Genova acted as counsel for the plaintiffs.