Article Detail



Article

Supreme Court Releases the Indirect Purchaser Trilogy

Date

November 1, 2013

AUTHOR(s)

Sarah W. Corman
Shaun E. Finn


In an important trilogy released October 31, 2013, the Supreme Court of Canada recognized the right of indirect purchasers to assert competition claims while confirming its rejection of the "passing on" defence in this context.

The Supreme Court released decisions on three appeals from consumer class action certification decisions that were heard together over a year ago: Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57 (Pro-Sys), Sun-Rype Products Limited v. Archer Daniels Midland Company, 2013 SCC 58 (Sun-Rype) and Infineon Technologies AG v. Option consommateurs, 2013 SCC 59 (Infineon). Pro-Sys and Sun-Rype are British Columbia cases, while Infineon is a Quebec case decided according to the distinct civil, statutory and procedural laws of that province.

The central issue in these appeals – and the reason they were heard together – is whether indirect purchasers may assert actions based on anti-competitive conduct and, if so, whether classes containing a mix of both direct and indirect purchasers are permissible. Indirect purchasers are those who have purchased the product not directly from the alleged over-chargers, but from an intermediary at some point in the chain of distribution.

In Pro-Sys, the plaintiffs brought a class action against three Microsoft entities alleging they had overcharged for their PC operating systems and applications software which the proposed indirect purchaser class had bought from re-sellers.

The plaintiffs in Sun-Rype alleged that the defendants had engaged in a price-fixing conspiracy involving high fructose corn syrup (HFCS), thereby harming direct and indirect purchasers alike, whether manufacturers, wholesalers, retailers or ordinary consumers.

In Infineon, the petitioner, a non-profit consumer protection association, alleged the respondents had entered into a conspiracy with respect to the sale of dynamic random-access memory chips (DRAM), a component used by various electronic devices to quickly store and retrieve information. According to the petitioner, this conspiracy drove up the price of DRAM for the equipment manufacturers that purchased DRAM directly and the overcharge was ultimately passed on, in whole or in part, to indirect purchasers, who bought the products marketed by the manufacturers.

Together, these three decisions permit, and set out the framework for, indirect purchaser actions in Canada. They also provide some important guidance on other elements of certification including the evidentiary burden and the role of aggregate damages provisions.

Passing-On Defence Rejected

In an earlier non-competition case, Kingstreet Investments Ltd. v. New Brunswick (Finance), [2007] 1 S.C.R. 3 (Kingstreet), the Supreme Court rejected the passing-on defence, following U.S. authorities. The passing-on defence is invoked by defendants who seek to reduce their liability by claiming that the direct purchaser passed on the overcharge to its customers, thereby suffering no loss.

In Pro-Sys, the Supreme Court confirmed that its rejection of the passing-on defence is not limited to the ultra vires taxes context of Kingstreet and applies "throughout the whole of restitutionary law," including competition cases.

Offensive Use of Passing-On Allowed

The Supreme Court held that rejection of the "offensive use" of passing on by indirect purchasers is not a necessary corollary to the rejection of the passing-on defence. In so doing, the Supreme Court rejected the controversial holding of the U.S. Supreme Court in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).

The Court was of the view that indirect purchaser actions are consistent with the objectives of restitution law since these purchasers may have actually borne the overcharge. If so, compensation should be available to them as well and not be limited to direct purchasers who have the ability to pass on the overcharge. The Court noted that there may be instances in which direct purchasers will be reluctant to bring claims and indirect purchaser actions are the only claims brought in respect of overcharges. The Court held that neither the risk of double or multiple recovery where actions are asserted by both direct and indirect purchasers, nor the complexity of proving indirect purchaser damages, warranted a complete bar to these actions in Canada.

No Conflict Barring Mixed Direct and Indirect Actions

Sun-Rype and Infineon considered the availability of class actions brought on behalf of both direct and indirect purchasers. The Court decided that the existence of a mixed class was not prohibitive to certification (called "authorization" in Quebec). Although the Court determined that the certification criteria were not met in Sun-Rype and, as such, that a class action could not proceed, it first found that the presence of a mixed class of direct and indirect purchasers was not a problem. (The problem was that the plaintiffs presented no evidence that there was an identifiable class of two or more members who would be able to determine that they are in fact members of the class – i.e., that they purchased products containing the HFCS at issue.)

In Sun-Rype, the Court found that the interests of direct and indirect purchasers were aligned in establishing liability and the aggregate amount of damages. Any subsequent conflict among class members as to how the aggregate amount should be divided is not a concern to defendants and not a reason to prevent some purchasers from participating in the action.

Multiple Recovery to Be Avoided

A central concern for defendants potentially facing both direct and indirect purchaser actions is the prospect of double or multiple recovery. If defendants are open to indirect purchaser actions but are prohibited from asserting the passing-on defence against direct purchasers, there is a risk of recovery of the same overcharge twice or even multiple times.

In Pro-Sys, the Supreme Court accepted that "this concern cannot be lightly dismissed" and stated that the expectation is that courts will manage the risk when it presents itself. Due to statutory limitation periods, plaintiffs may not sit on their antitrust claims so there should be little risk that new claims in respect of the same overcharges are filed after an award of damages has been made. If this were to happen, the Court suggested that a court considering the claim would recognize that an accounting had already been made by the defendant and would not permit double recovery.

In the event of parallel suits pending in different jurisdictions that pose the risk of multiple recovery, the Court stated that a judge "may deny the claim or modify the damage award in accordance with an award sought or granted in the other jurisdiction in order to prevent overlapping recovery."

In Sun-Rype, the Court addressed the issue of multiple recovery in actions in which both direct and indirect purchasers are plaintiffs and found that the expert evidence would establish the aggregate amount of the overcharge such that there would be no multiple recovery. The defendants would be responsible for that aggregate amount regardless of how it is ultimately divided among the direct and indirect purchasers.

Although there remain some logistical mysteries as to how the anticipated coordination among courts would work in any particular case, the Supreme Court’s recognition of the issue and strong language used in respect of preventing multiple recovery should provide some comfort to defendants.

Indirect Purchasers Will Continue to Face Challenges Ultimately Proving Their Claims

Although indirect purchasers may now proceed with their actions, this trilogy does not ease the challenges they face in proving their loss at the merits stage. The Court held that the remoteness and complexities associated with proving loss down the distribution chain should not bar indirect purchaser actions, but are real and are burdens that indirect purchasers assume. The Court recognized that "[t]he multitude of variables involved in indirect purchaser actions may well present a significant challenge at the merits stage."

Standard of Proof at Certification/Authorization

In Pro-Sys, the Court explained that the standard of proof that must be applied in the common law certification context is not the balance of probabilities, but rather the test outlined in Hollick v. Toronto (City), [2001] 3 S.C.R. 68: the class representative must show some basis in fact for each of the certification requirements. In other words, the certification analysis is different in nature and scope from that required by a traditional civil trial. The Court declined to follow U.S. authorities which hold plaintiffs to a more rigorous evidentiary standard at certification.

The Supreme Court clarified that in establishing commonality, plaintiffs are not required to adduce some evidence that the acts alleged actually occurred. The evidence required to establish "some basis in fact" goes only to establishing that the issues are common among class members and that the certification criteria have been satisfied.

Reiterating that the authorization process is a filtering mechanism rather than a trial on the merits, the Court in Infineon stated that a Quebec petitioner need not prove his or her allegations on a balance of probabilities, but rather must establish an "arguable case" in light of the facts and the applicable law. The Court agreed with the Quebec Court of Appeal that the allegations made in the motion for authorization, combined with the exhibits filed in support of that motion, established a good colour of right by showing it was at least arguable that an international price-fixing conspiracy had occurred and that this had caused harm to direct and indirect purchasers of DRAM in Quebec. Furthermore, the Court found there was a sufficient prima facie showing that the damages supposedly suffered by the indirect purchasers were a logical, direct and immediate result of the faults alleged.

The Court added that all class members had an interest in proving the existence of a price-fixing conspiracy and ascertaining the amount of the alleged overcharge. This was a sufficiently compelling common issue to move the litigation forward in a meaningful manner.

Expert Evidence of Class-Wide Loss Must Be "Credible or Plausible"

In Pro-Sys, the Court confirmed that the plaintiffs will generally require expert evidence on certification to establish harm on a class-wide basis. This expert evidence must provide a methodology capable of proving that overcharges have been passed on to the indirect purchasers and had a "common impact" on these putative class members. Such evidence cannot simply be theoretical or hypothetical in nature, but must present a workable, practical methodology grounded in ascertainable facts. Should defendants lead conflicting expert evidence on certification, the Court held that it is not the role of the motions judge to resolve these conflicts. This is a matter for the trial judge instead.

Quebec law differs in this respect, as alleged aggregate damages do not require expert evidence at the authorization stage. Indeed, according to the Court, "[a] requirement that applicants adduce such evidence and advance a sophisticated methodology capable of demonstrating an aggregate loss […] would be more onerous than the threshold requirement for art. 1003 [of the Code of Civil Procedure]."

Aggregate Damages Cannot Establish Liability

In Pro-Sys, the Supreme Court disagreed with the British Columbia Court of Appeal’s finding that the aggregate damages provisions in the Class Proceedings Act can be used to establish an element of liability in competition cases, namely proof of loss. The Court clarified that the aggregate damages provisions relate only to the remedy available and are procedural in nature: "[t]hey cannot be used to establish liability." They apply only once liability has been established. Class proceedings legislation is not intended to alter the substantive rights of parties so as to allow a group to prove a claim that could not be proven by an individual.

Jurisdiction Issue

In Infineon, the Court found that the on-line purchase made by the designated member, Ms. Cloutier, was a "remote-parties contract" deemed to have been made in Quebec under the Consumer Protection Act. This meant that the alleged damages were suffered in Quebec, which is sufficient to ground the jurisdiction of Quebec courts under Article 3148 (3°) of the Civil Code of Québec.

Conclusion

Unlike its U.S. counterpart, the Supreme Court of Canada has made it plain that, both in common law Canada and Quebec, indirect purchasers may sue producers or manufacturers for overcharges and courts may certify/authorize class actions that are entirely composed of, or that include, indirect purchasers. Moreover, the Court has distinguished between the analytical standards applicable in the certification/authorization context and at the more onerous merits stage. The indirect purchaser trilogy will not only serve as a guide for lower courts, but could have a transformative effect on Canadian class action law and on consumer litigation more generally.

Expertise