The Pendulum Swings? Recent developments in Canadian ...

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The Pendulum Swings? Recent developments in Canadian competition class actions

Adam Fanaki [email protected] Davit D. Akman [email protected] Reprinted with permission from the Lexpert 2011 Guide to the Leading US/Canada Cross-border Litigation Lawyers in Canada. © Thomson Reuters.

Reprinted with permission from the Lexpert 2011 Guide to the Leading US/Canada Cross-border Litigation Lawyers in Canada. © Thomson Reuters.

other anti-competitive conduct. The statutory right of action for damages is found in s. 36 of the Compe-tition Act (“the Act”). Pursuant to that provision, a person who has suffered loss or damage as a result of, among other things, conduct that is contrary to the criminal provisions of the Act (e.g., conspiracy) may sue for and recover damages.

Much of the litigation in this area has revolved around the issue of whether indirect purchasers are entitled to recover damages or other monetary relief in competition class actions. As discussed below, in recent years, the attitude of Canadian courts towards indirect purchaser actions has swung back and forth as if on a pendulum. In 2009, two plaintiff-friendly decisions from British Columbia and Ontario courts were handed down (see Irving Paper Limited v. Atofi na Chemicals Inc., [2009] OJ no. 4021 (Sup. Ct.)

In the wake of two recent judgments, the future of indirect purchaser class actions in Canada is highly uncertain

THE PENDULUM SWINGS?

RECENT DEVELOPMENTS IN CANADIAN COMPETITION

CLASS ACTIONS

Private competition litigation, particularly class action litigation, is of growing impor-tance in Canada. Many of the proposed competition class actions in Canada have

been brought on behalf of classes of persons referred to as “indirect purchasers.” “Direct purchasers” are plaintiffs who purchased the product in question directly from those suppliers alleged to have engaged in the anti-competitive conduct. In contrast, “indirect purchasers” are plaintiffs who are one or more steps removed from the defendants in the chain of distribu-tion, such as retailers and consumers.

Like direct purchasers of products, indirect purchasers in Canada have pursued statutory, common-law (e.g., tort) and equitable causes of action or remedies to recover damages and/or resti-tution based on allegations of illegal price-fi xing or

By Adam Fanaki and Davit D. Akman; Davies Ward Phillips & Vineberg LLP

COMPETITION CLASS ACTIONS


“...passing-on cannot be raised offensively to recover overcharges in an anti-trust action where it cannot also be relied on as a defence.”

(Q.L.), leave to appeal to Div. Ct. refused, 2010 ONSC 2705 (Div. Ct.) [Irving Paper]; Pro-Sys Consultants Ltd. v. Infi neon Technologies AG, [2009] BCJ no. 2239 (C.A.) (Q.L.), rev’g [2008] BCJ no. 831 (S.C.) (Q.L.) [Pro-Sys]).

However, in 2011, the attitude of Canadian courts moved in a decidedly defendant-friendly direction as a result of the British Columbia Court of Appeal’s (“BCCA” or “BC Court of Appeal”) decisions in Pro-Sys Consultants Ltd. v. Microsoft (2011 BCCA 186, rev’g 2010 BCSC 285 [Microsoft]) and Sun-Rype Products Ltd. v. Archer Daniels Midland Company (2011 BCCA 187, rev’g 2010 BCSC 922 [Sun-Rype]).

In those cases, the BCCA struck proposed class actions on behalf of indirect purchasers (both of which had been certifi ed at fi rst instance) on the ground that indirect purchasers “have no cause of action maintainable in law.” At a minimum, unless the Supreme Court of Canada grants leave to appeal and overturns these decisions, Microsoft and Sun-Rype will bar indirect purchaser class actions in British Columbia. More broadly, these decisions, which bring Canadian law into line with US federal law as refl ected

in the seminal decision of the United States Supreme Court in Illinois Brick Co. v. Illinois (431 US 720 (1977) [Illinois Brick]), cast doubt on the future of indirect purchaser class actions in Canada.

A Diffi cult BeginningFor many years, Canadian courts refused to certify class actions on behalf of indirect purchasers (see, e.g., Chadha v. Bayer Inc. (2003), 223 DLR (4th) 158 (Ont. C.A.) [Chadha]). In several cases, certifi cation was refused on the ground that the plaintiffs had failed to demonstrate a workable methodology for establishing loss or damage on a class-wide basis. Courts expressed concern that without an accept-able methodology for establishing loss, the proposed

class proceedings would become unmanageable and therefore would not be the preferable procedure for resolving the asserted claims.

One of the most important cases in Canada involving the certifi cation of indirect purchaser class actions is the decision of the Ontario Court of Appeal in Chadha. That case involved a proposed class action alleging that the defendant manufactur-ers had conspired unlawfully to fi x the price of iron oxide pigments – additives used to colour concrete bricks and paving stones used in home construction – over an approximately six-year period. The proposed class consisted of an estimated 1.1 million indirect purchasers (i.e., persons who had purchased build-ings and other products that contained the pigment from someone other than a defendant).

In concluding that the proposed class action should not have been certifi ed at fi rst instance, the Court of Appeal found, among other things, that the certifi ca-tion motion judge had erred in certifying liability as a common issue. Noting the “many problems of proof facing the [plaintiffs] with respect to the pass-on issue, including the number of parties in the chain

of distribution and the ‘multi-tude of variables’ which would affect the end-purchase price of a building,” the appellate court found that the plaintiffs had not shown that there was a “method [that] could be used at a trial to prove that all end-purchasers of buildings constructed using some bricks or paving stones that contain the respondents’ iron oxide pigment overpaid for the buildings as a result.” In the court’s view, the absence of an acceptable methodol-ogy for proving loss or damage on a class-wide basis meant that individual trials would be needed to establish the fact of loss (and therefore liability),

with the result that the proposed class action was unmanageable, and therefore was not the preferable procedure for resolving the asserted claims.

One Hand Giveth?More recently, however, Ontario and British Colum-bia courts issued decisions that appeared to relax the standard required for certifi cation of class actions on behalf of indirect purchasers. In September 2009, the Ontario Superior Court of Justice issued the fi rst decision by a Canadian court in a contested case certi-fying a price-fi xing class action on behalf of a class that includes indirect purchasers. In Irving Paper, Justice Helen Rady certifi ed under the Ontario Class Proceedings Act, 1992, S.O. 1992, c. 6 a class action



on behalf of all persons in Canada who purchased hydrogen peroxide, products containing hydrogen peroxide or products using hydrogen peroxide in Canada between January 1, 1994 and January 5, 2005. In June 2010, the Ontario Divisional Court denied the defendants’ motion for leave to appeal that certifi ca-tion order.

The certifi cation order in Irving Paper was followed, in November 2009, by a decision of the BC Court of Appeal certifying under the British Colum-bia Class Proceedings Act, R.S.B.C. 1996, c. 50 (the “BC CPA”) a class action on behalf of a class of direct and indirect purchasers of semiconductor memory chips known as dynamic random access memory (or “DRAM”) in Pro-Sys. On June 3, 2010, the Supreme Court of Canada denied leave to appeal from the decision of the BC Court of Appeal.

The Irving Paper and Pro-Sys decisions represent signifi cant departures from the approach taken in previous cases in Canada concerning the certifi ca-tion of indirect purchaser class actions, and from US federal law, which generally bars indirect purchasers from asserting claims in price-fi xing class actions. The decisions suggested a potentially important, plaintiff-friendly shift (in at least two Canadian juris-dictions) in the approach to certifi cation of antitrust claims asserted by or on behalf of indirect purchasers.

Among other things, in both cases, the courts held that, at the certifi cation stage, a judge need only be satisfi ed that there is some basis in fact for concluding that damages can be proved on a class-wide basis at trial; it is not necessary or appropriate to subject the proposed methodology to rigorous scrutiny or even to decide if it accords with sound principles of econom-ics as a pre-condition for certifi cation. In Irving Paper, for example, the Divisional Court expressly disagreed with the defendants’ submission that a certifi cation motion judge must weigh confl icting expert evidence adduced by the parties. The court also rejected the defendants’ submission that “Chadha requires a certi-fi cation judge to evaluate the evidence respecting a methodology and make fi ndings as to whether or not the methodology accords with sound principles of economic science.”

The British Columbia Court of Appeal took a similar approach in Pro-Sys. The court was critical of the certifi cation judge’s “rigorous scrutiny” of the plaintiff’s proposed methodology as setting the bar “too high” at the stage of certifi cation, and concluded that the evidentiary burden the plaintiff must satisfy at the certifi cation phase is a low one, requiring only “a minimum evidentiary basis.” The Court of Appeal found that this burden could be satisfi ed by showing that there was “a credible or plausible methodology” for the determination of damages using regression techniques that “in theory” might be able to address class-wide loss.

This approach is questionable. Among other things, it is at odds with the Supreme Court’s decision in Hollick v. Toronto (City), [2001] 3 SCR 158, which requires a proposed representative plaintiff “to come forward with suffi cient evidence to support certifi -cation, and [also] appropriately allows the opposing party an opportunity to respond with evidence of its own.”

Moreover, the conclusions of both courts are troubling and potentially problematic insofar as they may be interpreted as authorizing certifi cation motion judges to: give plaintiffs’ proposed methodologies for establishing damages on a class-wide basis superfi -cial scrutiny and little or no consideration or weight to criticisms of such methodologies by experts of the defendants; and/or fi nd that plaintiffs have discharged their burden of showing that harm can be established on a class-wide basis even where the evidence does not establish that the proposed methodology of the plaintiffs has been “developed with some rigour and will be suffi ciently robust to accomplish [its] stated task” (Pro-Sys [S.C.] at paras. 139–41).

The importance of the “gatekeeper” function exercised by the court when class certifi cation is sought cannot be overstated, and has been recog-nized by Canadian and American courts on many occasions. Our courts have recognized that an order granting certifi cation can impose upon the parties, and on the courts, an intolerable burden that is differ-ent in nature and in kind than might arise in ordinary civil litigation. In these circumstances, granting certifi cation orders based on “junk science” rather than on the basis of carefully considered and reliable methodologies that will permit sound conclusions to be reached at trial on a class-wide basis would be manifestly unfair, and would defeat the important objectives underlying class-action legislation.

As a matter of principle and policy, the “wait and see” or “take it on faith” approach implicit in the standard articulated by the Divisional Court in Irving Paper and by the Court of Appeal in Pro-Sys may be seen by some as an abdication of the courts’ impor-tant gatekeeper function in respect of applications for certifi cation. The low bar to certifi cation adopted in both of these cases has the potential to cause signifi -cant unfairness and mischief.

The decisions in Pro-Sys and Irving Paper also appear to be out of step with the growing trend in US courts of requiring a thorough and rigorous analysis at the class certifi cation phase, including the weighing of confl icting expert testimony, to determine whether the Rule 23 requirements for certifi cation have been satisfi ed. In the parallel US hydrogen peroxide price-fi xing class action litigation, for example, the United States Court of Appeals for the Third Circuit vacated a decision of the US District Court for the Eastern District of Pennsylvania, in which the District Court



had certifi ed a class action on behalf of direct (as opposed to indirect) purchasers of hydrogen perox-ide. Among other things, the Third Circuit found that the District Court had failed to conduct the required “rigorous analysis” of competing expert evidence adduced in respect of certifi cation in determining whether the plaintiffs had put forward a workable methodology for determining class-wide harm or “antitrust impact” (see In re Hydrogen Peroxide Antitrust Litigation, 2008 U.S. App. LEXIS 26871).

Many observers believed that Irving Paper and Pro-Sys marked the advent of a much more liberal judicial attitude towards competition class actions in Canada.

One Hand Taketh Away?This view may now have to be re-assessed in light of the latest Canadian judicial pronouncements on indirect purchaser class actions — two decisions of the BC Court of Appeal, which held that indirect purchasers “have no cause of action maintainable in law.” These decisions mark the fi rst time a Canadian court has held conclusively that indirect purchaser actions are not available in Canada as a matter of law.

The two cases, Sun-Rype and Microsoft, were heard together by a single panel of the BC Court of Appeal.

In Sun-Rype, the plaintiffs alleged that the defen-dants conspired to fi x the price of high fructose corn syrup (“HFCS”), a sweetener used in various food products. The proposed class consisted of both direct and indirect purchasers resident in British Columbia who purchased HFCS or products containing HFCS in the period between January 1, 1988, and June 30, 1995.

In Microsoft, the proposed class was composed exclusively of indirect purchasers, namely persons resident in British Columbia who indirectly acquired (e.g., through the purchase of new computers pre-installed with Microsoft’s software) Microsoft operating systems and applications software on or after January 1, 1994. The plaintiffs alleged that Micro-soft had engaged in anti-competitive conduct, which resulted in overcharges that were passed through to end-users.

The British Columbia Supreme Court had certifi ed both proposed class actions, applying the BC Court of Appeal’s decision in Pro-Sys. In the Microsoft case, for example, the certifi cation motion judge concluded that the plaintiffs had “demonstrated a plausible methodology for proving class-wide loss,” while in Sun-Rype, the motions judge found that the plaintiffs’ proposed methodology was not a “patently unsound” way of proving indirect harm on a class-wide basis.

On appeal, however, Justices P.D. Lowry and S. David Frankel of the BC Court of Appeal (Justice Ian

Donald dissenting), held that the plaintiffs’ claims in both actions should be struck because it is “plain and obvious” that indirect purchasers have no cause of action recognized in Canadian law.

The majority based its conclusion on the Supreme Court of Canada’s decisions in Kingstreet Investments Ltd. v. New Brunswick (2007 SCC 1 [Kingstreet]) and British Columbia v. Canadian Forest Products Ltd. (2004 SCC 38 [Canfor]). Canfor was an action by the Province of British Columbia to recover, among other things, lost stumpage fee revenues. In dissent (but not on this point), Justice Louis LeBel rejected the passing-on defence, although he left open the possibility that such a defence might apply in the area of restitution. In Kingstreet, however, the Supreme Court unanimously rejected the defence in the resti-tutionary context. That case involved restitutionary claims by nightclub operators to recover constitution-ally invalid user charges that the Crown had sought to retain, in part, on the basis that the nightclub owners could not recover amounts they had already passed on to their customers through increased prices. The Supreme Court held that a defence of this nature was inconsistent with the law of restitution, was economi-cally misconceived and was exceedingly diffi cult to apply. The court rejected the defence “in its entirety.”

Applying the Kingstreet and Canfor decisions to the competition law context, Justice Lowry (who wrote the reasons of the majority) held that it is “clear beyond question” that the passing-on defence is not available in Canada and that it follows ineluctably that indirect purchasers to whom an overcharge was alleg-edly passed on, either in whole or in part, cannot, as a matter of law, maintain a cause of action in respect of any corresponding loss they had allegedly suffered. Otherwise, defendants could face the impermissible prospect of double recovery, i.e., they could be liable to direct purchasers for 100 percent of the overcharge they paid and could also be liable to indirect purchas-ers for whatever amount of the overcharge may have been passed on.

Justice Lowry also emphasized that he considered Canadian law on this issue to be consistent with US federal law, observing (among other things) that “[u]nder American federal law, it has been clear … that passing-on cannot be raised offensively to recover overcharges in an anti-trust action where it cannot also be relied on as a defence.”

In the result, the majority of the BC Court of Appeal allowed the defendants’ appeal in Sun-Rype, set aside the certifi cation order and remitted the certifi cation application to the lower court for further consideration. In Microsoft, the majority set aside the certifi cation order and dismissed the action in its entirety because the proposed class consisted solely of indirect purchasers.



Justice Donald wrote dissenting reasons. As discussed more fully below, although he agreed with the majority that the “[t]he Supreme Court of Canada has defi nitively struck down the pass-through defence,” he rejected the majority’s conclusion that it is plain and obvious “that the rejection of the pass-through defence necessarily invalidates an [indirect purchaser] claim.”

The End of Indirect Purchaser Class Actions?As noted above, the majority and the dissent in Sun-Rype and Microsoft reached opposite conclusions concerning the implications that abolishing the pass-through defence should have on the right of indirect purchasers to recover overcharges allegedly passed on to them by direct purchasers. While the majority concluded that the Supreme Court’s rejection of the passing-on defence in Kingstreet barred claims by indirect purchasers as a matter of law, the dissent rejected this view.

The majority’s concern to avoid double recovery and to ensure consistency in the law is compelling. Consistent with the US Supreme Court’s decision in Illinois Brick, Justice Lowry explained in Sun-Rype that “if a defendant cannot raise a passing-on defence, it can have no liability to other than a direct purchaser for what may have been passed on. The law must be consistent. Passing on cannot be denied in one context and recognized in another.”

The analysis in the dissenting reasons of Justice Donald is problematic in several respects. By way of illustration, while he recognized the rule against double recovery as a “bedrock principle” and acknowledged the principle that the BC CPA cannot create (or modify) a cause of action, Justice Donald failed to apply these principles. Among other things, Justice Donald concluded that because the claims at issue in Sun-Rype and Microsoft were brought as part of proposed class actions, overrecovery could be avoided. In his view, the trial judge in those cases could ensure that, in total, the recovery of all direct and indirect purchasers did not exceed 100 per cent of the alleged overcharge. On this basis, Justice Donald held that indirect purchasers do, in fact, have a cause of action available to them.

This reasoning, with respect, appears to confuse the avoidance of an undesirable consequence with the existence of a substantive cause of action. It cannot be right that indirect purchasers have a cause of action that, ex hypothesi, is not available to them merely because of the form of the proceeding in question. Class action legislation is purely procedural in nature and does not have the purpose or effect of conferring causes of action that would not otherwise exist.

Further, and in any event, Justice Donald’s conclu-

sion that overrecovery can be avoided through a “single all-encompassing assessment” in a class proceeding overlooks at least two practical realities of class action litigation in Canada. First, not all class actions in Canada are commenced on behalf of both direct and indirect purchasers and, even when they are included in a single case, not all direct and indirect purchasers in an entire distribution chain may be part of the class. Indeed, they routinely are not.

It is not at all unusual to have parallel class actions in different provinces that include overlapping claims asserted on behalf of class members who reside in different parts of Canada. In those circumstances, a court’s assessment in a single class action of damages or of an amount to be paid by way of restitution would not be “all-encompassing,” with the result that a defen-dant could face liability in respect of the same loss at least twice to different plaintiffs.

Second, because there is no equivalent in Canada to the US multi-district litigation system, there is no readily available mechanism to consolidate paral-lel class proceedings in multiple provinces involving overlapping or duplicative claims. The absence of such a mechanism makes overlapping awards and, thus, overrecovery a distinct possibility.

An Uncertain FutureThe long-term impact of the four decisions discussed in this article remains to be seen but could be dramatic. Much will depend on whether the Supreme Court of Canada grants leave to appeal from and ultimately affi rms or overturns the decisions in Sun-Rype and Microsoft. The impact of the Sun-Rype and Microsoft decisions could be felt immediately in a number of pending indirect purchaser class actions across Canada. Indeed, it has already been felt in at least one such class action. On August 19, 2011, Justice David Masuhara of the British Columbia Supreme Court ordered a “pause” in steps taken by either party in the Pro-Sys (DRAM) class action pending the outcome of the leave to appeal applications (see Pro-Sys Consul-tants Ltd. v. Infi neon Technologies AG, 2011 BCSC 1128).

In the longer term, Sun-Rype and Microsoft could limit the number and scope of competition class actions in Canada. Among other things, because indirect purchasers frequently comprise the whole or a signifi cant part of proposed plaintiff classes in competition class actions in Canada, a bar on indirect purchaser claims is likely to, inter alia, reduce class sizes as well as the total number of class actions.

The implications of the Irving Paper and Pro-Sys decisions will turn on a number of considerations, including whether the BC Court of Appeal’s determi-nation that indirect purchasers do not have standing



Recently acted as Senior Deputy Commissioner of Competition at Canadian Competition Bureau and, previously, as Special Counsel to the Commissioner of Competition. Has acted as counsel for private parties and the Commissioner of Competition in a number of signifi cant litigated proceedings before the Competition Tribunal and in class actions and other complex proceedings before various Canadian courts. Frequently recognized as a leading advisor on all aspects of competition law, including merger transactions and criminal investigations.

Acted as counsel in numerous signifi cant and complex litigation matters, including precedent-setting cases such as the Supreme Court of Canada’s landmark commercial law decision in BCE Inc. v. 1976 Debentureholders. Counsel in domestic and international class actions before various courts and in connection with high-profi le cartel investigations. Counsel to the Commissioner of Competition in the price maintenance case recently brought against Visa and MasterCard. One of the 2010 Lexpert Rising Stars: Leading Lawyers Under 40.

Adam FanakiDavies Ward Phillips &

Vineberg LLPTel: (416) 863-5564

Fax: (416) [email protected]

Davit D. AkmanDavies Ward Phillips &

Vineberg LLPTel: (416) 367-6903

Fax: (416) [email protected]

to sue is affi rmed or overruled by the Supreme Court or, if leave to appeal is denied, is followed outside of British Columbia.

Another important consideration may be whether, assuming it grants leave to appeal in Sun-Rype and Microsoft (a proposed cross-appeal by the respon-dents in Sun-Rype challenges the standard enunciated

and applied by the Ontario courts in Irving Paper and by the BC Court of Appeal in Pro-Sys) the Supreme Court addresses and resolves the clear inconsis-tency between the decisions of the courts of Ontario and British Columbia in Chadha and Pro-Sys and provides guidance to lower courts with respect to the standard to be applied at certifi cation in assessing the adequacy of methodologies put forward by plaintiffs’ experts for proving harm on a class-wide basis.

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