When It Rains, It Pours – Supreme Court of Canada Allows Umbrella Purchaser claims
On September 20, 2019, the Supreme Court of Canada released its highly-anticipated decision in Pioneer Corp. v. Godfrey, addressing how Canadian courts should approach the certification of competition (antitrust) class actions. In the first of a five part series, we summarized the Supreme Court’s findings on the four key issues the Court addressed: (1) umbrella purchasers, (2) loss as a common issue, (3) limitation periods, and (4) whether the Competition Act (the “Act”) is a complete code. In this second part of the series, we go deeper on the Supreme Court’s decision that umbrella purchaser claims can be certified and form part of a class action.
What Are Umbrella Purchasers?
Umbrella purchasers are persons who purchased a product that was neither manufactured nor supplied by the cartel members. The idea is that the cartel members’ activity creates an “umbrella” of supra-competitive prices, causing non-cartel manufacturers to also raise their prices (called an overcharge). If proven, the umbrella purchaser would claim from the cartel members these overcharges, even though the purchaser was not a customer of the cartel members.
The Majority Allows Umbrella Purchaser Claims
The Court approached the question of whether umbrella purchasers have a cause of action under section 36 of the Act as a question of statutory interpretation, and concluded that umbrella purchaser claims are permitted.
Section 36 creates a statutory cause of action that allows for the recovery of damages or loss that resulted from conduct contrary to Part VI of the Act (Offences in Relation to Competition):
36 (1) Any person who has suffered loss or damage as a result of
- conduct that is contrary to any provision of Part IV,
may, in any court of competent jurisdiction, sue for and recover from the person who engaged in the conduct […] an amount equal to the loss or damage proved to have been suffered by him, together with any additional amount that the court may allow not exceeding the full cost to him of any investigation in connection with the matter and of proceedings under this section.
The majority found that the use of the words “any person” in the Act showed an intention to not restrict who could be a possible claimant. It noted that interpreting “any person” as allowing umbrella purchasers to claim damages was consistent with the Act’s objectives and purposes to deter anti-competitive behaviour and compensate victims of such behaviour. Since umbrella purchasers, according to the theory pleaded, are intended by the defendants to pay higher prices as a result of their price-fixing, not allowing their claim would be inconsistent with the compensatory goal of the Act.
The defendants argued that recognizing umbrella purchasers as having a cause of action would expose them to a “potentially limitless scope of liability”. The majority left for another day the decision as to whether the principle of indeterminate liability applies in the context of a claim under section 36 of the Act, finding that, in any event, it did not arise in this case. The majority concluded that recognizing the umbrella purchasers’ cause of action under section 36 did not risk exposing the defendants to indeterminate liability. Rather, the majority held, the defendants’ liability was limited by the class period and by the specific products whose prices are alleged to have been fixed.
In addition, the majority noted that the theory of umbrella effects links the pricing decisions of the non-cartel manufacturers to the cartel members’ anti-competitive behaviour. This allegation is rooted in the theory that, in order for the defendants to profit from the conspiracy, the entire market price for the products at issue had to increase. Otherwise, the defendants would have lost market share to non-cartel manufacturers. The majority concluded that, according to the pleaded theory, umbrella effects are not just a known and foreseeable consequence of what the defendants are doing – they are an intended consequence, and intended consequences are not indeterminate.
The majority did note that section 36 limits recovery to only those purchasers who can show that they suffered a loss or damage “as a result of” the cartel members’ conspiratorial conduct. In order to recover under section 36, the umbrella purchasers will have to demonstrate that the cartel members engaged in anticompetitive behaviour, that the umbrella purchasers suffered “loss or damages”, and that such loss of damage was “as a result of” such behaviour. The statutory text “as a result of” imports both factual and legal causation into section 36. Recovery under section 36 is therefore limited to claimants with a loss that is not too remote from the conduct.
The majority underlined that marshalling and presenting evidence to satisfy the conditions to recover under sections 36 and 45, showing a causal link between loss and conspiratorial conduct, and proving the actus reus and mens rea of section 45, represents a significant burden.
Justice Côté’s Dissent on Indeterminacy and Remoteness
Justice Côté dissented on the issue of umbrella purchaser claims. She agreed with the defendants that the principles of indeterminacy and remoteness, while they relate primarily to liability in negligence, can also inform the analysis of whether there exists a claim for umbrella purchasers under section 36 of the Act.
Indeterminacy is a policy consideration that negates the imposition of a duty of care in negligence where it would expose the defendant to liability in an indeterminate amount for an indeterminate time to an indeterminate class. This concern arises where finding a duty of care between a plaintiff and a defendant would open floodgates, resulting in massive, uncontrolled liability. Remoteness is a related principle that limits the scope of liability in negligence where the harm is too unrelated to the wrongful conduct to hold the defendant fairly liable.
Justice Côté held that it would be unfair to hold the defendants liable to the umbrella purchasers where they had no control over such liability. Indeed, any overcharges that those claimants may have incurred were ultimately the direct result of pricing choices made by a non-cartel manufacturer, regardless of whether those choices were influenced by broader trends in the market. The defendants have control over their own pricing decisions but have no such control over the non-cartel manufacturer’s pricing decisions. Interpreting section 36 in the manner suggested by the majority might well expose the defendants to unbounded liability, capable of encompassing not only the losses of those umbrella purchasers themselves, but also the losses of anyone who was affected by the economic ripples downstream from those umbrella purchasers.
Justice Côté concluded by noting that permitting umbrella purchaser claims under section 36(1) opens up the possibility of recovery for overcharges that result from “conscious parallelism”, a phenomenon which occurs when parties not involved in a price-fixing conspiracy deliberately choose to adjust their prices in order to match those of their competitors, in the absence of any collusion between them. Adopting a comparable or identical pricing policy without an express agreement does not fall within the scope of section 45 of the Act. An interpretation of section 36 that allows umbrella purchaser claims over these kinds of independent pricing decisions would effectively grant a right to recover in circumstances where those pricing decisions are neither criminally prohibited nor actionable in and of themselves, and from parties who neither made nor benefitted from those decisions.
The Impact of Godfrey Going Forward
While the Supreme Court in Godfrey allowed umbrella purchaser claims to exist in theory, significant obstacles will still remain in practice. Indeed, while it will now be harder to contest umbrella purchaser claims at certification, even the majority underlined the significant burden that will ultimately lie on plaintiffs to prove all of the elements of the cause of action, including causation.
Interestingly, we note that while both indeterminacy and remoteness were raised as arguments by the defendants against the recognition of umbrella purchaser claims, only Justice Côté took both principles into account, and concluded that such claims should not be allowed. The majority on the other hand, analyzed the issue of indeterminacy, but did not discuss remoteness. It recognized that recovery under section 36 will be limited to claimants with a loss that is not too remote from the conduct, but seems to have deferred this analysis to another day. The debate on remoteness of damages, as applicable to the facts of each case, therefore remains an open question. Justice Côté’s dissent may therefore be helpful to defendants arguing against umbrella purchaser claims, especially on the merits.
For an in-depth analysis of the three remaining issues (loss as a common issue, limitation periods, and complete code) and their implications on competition class actions and class actions more generally, do not miss the next three parts of this series, which will be published in the upcoming weeks.