On April 15, 2011, the Court of Appeal for British Columbia released judgments in two competition class actions which concluded for the first time in Canada that indirect purchasers of allegedly price-fixed products “have no cause of action recognized in law.” Pro-Sys Consultants Ltd. v. Microsoft (Microsoft) and Sun-Rype Products Ltd. v. Archer Daniels Midland Company (Sun-Rype) were appeals heard one after the other by the same panel of three judges. Both cases were decided by a two to one majority and overturned chambers judgments certifying class actions (see Microsoft and Sun-Rype respectively) .
The majority judgments found that the issue of whether indirect purchasers could sue to recover a price-fixing overcharge passed on to them by the defendants’ customers (or other intermediaries in the product distribution chain) was a “pure question of law” capable of being resolved at the pleadings or class certification stage of the case, and that it was “plain and obvious” that indirect purchasers had no such claims.
The judgments in Microsoft and Sun-Rype depart from a clear recent trend in favour of certifying competition class actions in Canada, exemplified by the B.C. appeal court’s late-2009 decision in Pro-Sys Consultants Ltd. v. Infineon Technologies AG , in which large and diverse classes of direct and indirect purchasers have been certified and courts have generally held that questions of the legal sufficiency of claims should be left for the “laboratory of the trial court” and decided on a full factual record rather than on the certification motion.
The judgments significantly alter the competition class action landscape in British Columbia, and potentially throughout Canada.
The Microsoft and Sun-Rype Cases
Microsoft was brought on behalf of a proposed class of all B.C. residents who on or after January 1, 1994 purchased, indirectly, certain Microsoft applications software or operating systems software as part of their computers. The plaintiffs alleged that Microsoft conspired with original equipment manufacturers (OEMs) (among others) to raise the price of the Microsoft operating systems and applications software installed by the OEMs, and that such overcharges were passed on to the plaintiffs as purchasers of the computers. The plaintiffs sought to recover damages for breach of the Competition Act and common law tort, or in the alternative sought disgorgement/restitution of Microsoft’s unlawful gains on behalf of the proposed class. The chambers judge granted the plaintiffs’ motion for class certification in March 2010.
Sun-Rype was brought on behalf of a proposed class of all B.C. residents who purchased high fructose corn syrup (HFCS) or products which contained HFCS from January 1, 1988 to June 30, 1995. The proposed class consisted of direct purchasers such as Sun-Rype, which purchased HFCS from defendants for use in soft drinks it manufactured, and of indirect purchasers who bought various food and beverage products containing HFCS as a sweetener. The plaintiffs alleged that the defendant manufacturers had conspired to fix the prices of HFCS during the proposed class period and that direct and indirect purchasers had paid an unlawful overcharge as a result of the alleged conspiracy. The chambers judge granted the plaintiffs’ motion for class certification in June 2010.
The defendants’ appeals from the certification orders in Microsoft and Sun-Rype were heard consecutively by the Court of Appeal for British Columbia in the fall of 2010.
The Majority Judgments
Writing the majority judgments in Microsoft and Sun-Rype, Lowry J.A. found that there was no basis for the certification orders insofar as they related to indirect purchasers of the allegedly price-fixed products, because the indirect purchasers had no cause of action as a matter of law.
The majority began its analysis with the decision of the Supreme Court of Canada in Kingstreet Investment Ltd. v. New Brunswick (Finance). In Kingstreet, a nightclub sought the return of user taxes on alcohol purchases it had paid to the province of New Brunswick, on the grounds that the taxes were constitutionally invalid. The government defended the claim in part on the basis that the nightclub had suffered no loss from the tax, because it had passed on the charges to its own customers. The Supreme Court in Kingstreet rejected “the passing on defence in its entirety”, finding that it was inconsistent with the premise of restitution law, economically misconceived, and that it created serious difficulties of proof of damages.
Turning to the allegations of unlawful price-fixing in Microsoft and Sun-Rype, Lowry J.A. found that Kingstreet made it “clear beyond question” that “[i]n responding to a claim brought by a [direct purchaser] alone, it would be no answer for the defendants to say the [direct purchasers] suffered less than they were overcharged because they passed some of the overcharge on to the [indirect purchasers]. Rather, the direct purchasers’ “loss was complete at the time the overcharge” was paid, and the direct purchasers “are in law entitled to recover the whole of the amount of the overcharge for which they may establish the defendants are liable to them, regardless of how much of it had been passed on”.
With respect to the potential claims of indirect purchasers, the majority reasoned that if there is no recognized defence of passing on, it must “follow that even though an overcharge may in fact have been passed on … the law does not recognize it: as a matter of law the overcharge or the loss for which the wrongdoer is liable is sustained when the overcharge is paid at first instance”. Accordingly, indirect purchasers “who would seek to recover an overcharge that has been passed on are effectively claiming a loss that in law is not recognized”, and “[f]or that, there can be no cause of action.”
Lowry J.A. noted that if defendants were precluded from raising the passing on defence against direct purchasers, but indirect purchasers were permitted to sue to recover the amount of an overcharge paid by them, the defendants would face the prospect of paying the same loss twice to different plaintiffs. The majority found that “our law will not sanction” such double recovery. It stated that its position was consistent with “American federal law” after the U.S. Supreme Court decision in Illinois Brick Co. v. Illinois, which held that “passing on cannot be used offensively to recover overcharges in an anti-trust action where it cannot also be relied on as a defence.”
In Microsoft the Court of Appeal set aside the certification order and dismissed the action altogether because the case had been brought only on behalf of indirect purchasers.
In Sun-Rype, the class consisted of both direct and indirect purchasers of HFCS. The Court of Appeal set aside the certification order and remitted the certification application back to the chambers judge for further consideration.
Donald J.A. dissented in Microsoft and Sun-Rype, disagreeing with the majority’s conclusion that it was “plain and obvious” indirect purchasers had no cause of action. The dissent agreed with the majority’s view that “the pass-through defence is dead”. However, Donald J.A. found that the “corollary proposition barring a pass-through claim is by no means a logical or legal necessity.”
While recognizing the validity of the “bedrock principle” against double recovery, the dissenting judge wrote that “the double recovery rule should not in the abstract bar a claim in real life cases where double recovery can be avoided.” Donald J.A. noted that in Sun-Rype “the remedies sought are either aggregate damages or a constructive trust in restitution – one amount for the entire class” of direct and indirect purchasers, and that there was “no realistic possibility of double recovery with a single all-encompassing assessment.” The dissent also noted that “class proceedings are flexible enough to create ways and means of avoiding overrecovery.”
Donald J.A. found that denying indirect purchasers a cause of action could undermine the goals of class proceedings legislation, which include increasing access to justice and behaviour modification. He reasoned that without the participation of indirect purchasers, the “case may not be economically viable and the alleged wrongdoers will retain most of their ill-gotten gains with the result that the class action goals of deterrence and behaviour modification will be lost”. The dissent further noted that in Microsoft, the direct purchasers were alleged co-conspirators with the defendants who would be unlikely to sue in their own right.
The dissent found that the U.S. federal rule barring indirect purchaser antitrust suits has been the subject of considerable public policy debate in the U.S. and that many states have enacted “Illinois Brick repealer” statutes which give indirect purchasers the right to bring claims in state courts. Donald J.A. found that courts in the U.S. “repealer” states have expressed the view that the “complexity” of proving damages in indirect purchaser cases, relied upon by the U.S. Supreme Court to bar such suits, was in fact manageable and the damages issues capable of resolution.
Donald J.A. identified the prior “judicial reluctance in Canada to strike [indirect purchaser] claims prior to a full trial on the issue” as a reason favouring the rejection of “the defendants’ attack on the pleading” at the certification stage of the case.
Implications of the Judgments
The judgments can be expected to have a significant impact on the competition class action landscape in Canada. For example, it would appear open to defendants in certified class actions involving claims by indirect purchaser plaintiffs to seek summary dismissal of the indirect purchaser claims and modification of the certification order on the basis of the Microsoft and Sun-Rype judgments. (The judgments would not be expected to have much impact on certified cases involving only direct purchaser classes, such as Steele v. Toyota Canada Inc.)
While not binding in Ontario, the judgments may lead to judicial reconsideration of the view that indirect purchasers may plead a cause of action predicated on price-fixing. More than a decade ago, the certification judge in Chadha v. Bayer found that it was not “plain and obvious” that indirect purchasers had no cause of action, and rejected the Illinois Brick rule as inapplicable in Ontario. Although the order granting certification in Chadha was reversed on appeal, the Ontario appellate courts reversed the decision on the basis that the indirect purchaser plaintiffs had not presented a sufficient evidentiary record to support certification. The Court of Appeal for Ontario expressly left open the possibility that a sufficient showing could be made by indirect purchaser plaintiffs in future cases. However, Chadha predates the Supreme Court’s decision in Kingstreet, and the judgments in Microsoft and Sun-Rype provide a basis on which defendants may renew arguments that indirect purchaser claims are barred as a matter of law.
The exclusion of indirect purchaser plaintiffs could cause fundamental changes to the nature of competition class actions in Canada. The proposed classes in most competition class actions consist largely (if not overwhelmingly) of indirect purchasers. In many price-fixing class actions, the direct sales of defendants into Canada are miniscule in comparison to their sales in foreign jurisdictions, and the vast majority of direct purchasers of the allegedly price-fixed product are located outside of Canada (and thus are not members of the proposed class). The exclusion of indirect purchasers from the proposed class would thereby result in significantly smaller classes and claims in these actions.
On the other hand, one of the principal arguments against class certification raised by defendants in many competition class actions in Canada is that proving proposed class members have paid an overcharge raises individual rather than common issues for class members, and that the need to resolve those “proof of loss” issues to establish the defendants’ liability to the class renders the proposed class proceeding unmanageable. The difficulties proving loss are particularly acute where the proposed class is large and consists primarily of indirect purchasers who may be multiple steps down multiple product distribution chains from the defendants. Removing the “pass-on defence” and indirect purchaser plaintiffs from these cases as a matter of law would eliminate the need to consider the layers of distribution below the direct purchasers, and make proof of loss for the proposed class a less complex inquiry. In a direct-purchaser only regime, class certification might well become easier to achieve.
The plaintiffs have stated that they will seek leave to appeal to the Supreme Court of Canada