Another Sea Change for Global Litigation in Canadian Courts: Indirect Purchasers receive Green Light For AntiTrust Class Actions from the Supreme Court of Canada

In our contribution to last year’s edition of this publication we advised on the growing phenomenon of international law-based tort claims by foreign plaintiffs directed at Canadian companies, primarily those engaged in extractive industries operating abroad (see: "International Human Rights-Based Torts: A New Species of Litigation Risk for Canadian Companies Operating Abroad," 2013 Lexpert® Guide to the Leading US/Canada Cross-border Litigation Lawyers in Canada). Canadian judicial receptivity to "global" litigation has also been given a substantial boost in the antitrust field, the topic we specifically address here. This receptivity, which appears to be replicating itself in Canadian courts more broadly, parallels substantial retrenchment by the US Supreme Court in comparable cases, notably in the context of alleged violations of securities law. See and compare: Hannah L. Buxbaum; "Remedies for Foreign Investors under U.S. Federal Securities Law," 75 Law of Contemp. Prob. 161 (2012); Tanya Monestier, "Is Canada the New Shangri-La of Global Securities Class Actions?" 32 Nw. J. Int’l L. & Bus. 305 (2012); Abdula v. Canadian Solar Inc. et al., 2012 ONCA 211 and Silver v. Imax Corporation (2009), 86 C.P.C. (6th) 273 (Ont. S.C.J.), aff’d 2014 ONCA 90, leave to appeal to SCC granted, 35811 (7 August 2014); Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (U.S. Sup. Ct., 2010).

Last fall, the Supreme Court of Canada released a trilogy of class-action certification decisions: Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57 ("Pro-Sys"); Sun-Rype Products Ltd. v. Archer Daniels Midland Company, 2013 SCC 58 ("Sun-Rype"); and Infineon Technologies AG v. Option consommateurs, 2013 SCC 59 ("Infineon") ("the Pro-Sys Trilogy") that has opened the door for Canadian consumers of imported goods into Canada or product components manufactured abroad to bring class actions as indirect purchasers for damages based on violations of Canada’s competition laws. Indirect purchasers are individuals or companies who have acquired products from resellers; while indirect purchasers have no direct relationship with the antitrust violator, they often bear the ultimate costs of anti-competitive conduct.

In coming to its conclusion, the Supreme Court notably departed from US federal law and the law in many US states, where indirect purchaser claims have been prohibited since the 1977 decision of the US Supreme Court in Illinois Brick Co. v. Illinois, 431 U.S. 170 (1977) ("Illinois Brick"). In so doing, Canada’s highest court held that Canadian courts have jurisdiction over certain antitrust claims brought by indirect purchasers against foreign defendants. This means that Canada’s departure from Illinois Brick will have important ramifications for foreign manufacturers and distributors selling directly or indirectly into the Canadian market.

Faced with the Supreme Court of Canada’s go-ahead for indirect purchaser class actions, foreign manufacturers and distributors can expect plaintiffs’ counsel to become more aggressive in bringing broad-based indirect purchaser class actions in Canada. Given that the US and Canada remain each other’s most important single trading partners, it has become that much more critical for US companies doing business in Canada to consult with Canadian counsel and develop appropriate strategies to minimize their exposure under Canada’s competition laws.

 

Direct and Indirect Purchaser
Claims Distinguished

Section 36 of Canada’s Competition Act R.S.C. 1985, c. C-34 — the US analog to which is s. 4 of the Clayton Act, 15 U.S.C. §§ 12-27 — authorizes any person who has suffered loss or damage as a result of certain anti-competitive actions to sue and recover the loss or damage from the person who engaged in the offending conduct. In most instances these follow-on cases (so called because they follow on the heels of antitrust investigations) arise from price-fixing and bid-rigging schemes. Plaintiffs sue to recover the extra amount they paid for a good, as compared to the price they would have paid in the absence of the anti-competitive conduct. This excess amount is typically referred to as an overcharge.

Direct purchasers have long had a cause of action against antitrust violators, even where the direct purchaser has "passed on" the overcharge to its own customers. The "passing-on" defense — invoked by overchargers at the top of the distribution chain to defend actions brought by direct purchasers where the direct purchasers have passed on the overcharge to their own customers — has been rejected in Canada and in the United States. See: Kingstreet Investments Ltd. v. New Brunswick (Finance), 2007 SCC 1, [2007] 1 S.C.R. 3 and Illinois Brick.

The plaintiffs in the Pro-Sys trilogy sought to expand the availability of overcharge claims to indirect purchasers. In the US, indirect purchaser antitrust claims have been barred since the Supreme Court’s decision in Illinois Brick. However, since that decision, over 35 states have enacted so-called "repealer statutes," making Illinois Brick inapplicable at the state level in those states. The US Supreme Court has held that state level repealer statutes are not pre-empted by federal antitrust law. See: California v. ARC America Corp., 490 U.S. 93 (1989) ("ARC America").

In Illinois Brick, an indirect purchaser sought to recover antitrust treble-damages under s. 4 of the Clayton Act by establishing that the direct purchaser, who had paid the overcharge to the antitrust violator, had passed on the overcharge to the indirect purchaser, inclusive of consumers. The US Supreme Court held that because pass-on theory cannot be used defensively by antitrust defendants against direct purchasers, the necessary corollary was that the same theory may not be used offensively by indirect purchasers to ground a cause of action against antitrust defendants.

 

The New (Pro-Sys) Approach in Canada

The Pro-Sys trilogy involved allegations against defendants by classes of direct and indirect purchasers. First, in Pro-Sys, a class of indirect purchasers alleged that Microsoft Corporation and Microsoft Canada Co./Microsoft Canada CIE engaged in unlawful conduct by overcharging for Intel-compatible PC operating systems and applications software; next, in Sun-Rype, a class comprised of direct and indirect purchasers alleged that the defendant companies had engaged in an illegal conspiracy to fix the price of high-fructose corn syrup; and finally, Infineon involved a proposed class action by direct and indirect purchasers under the Québec Code of Civil Procedure, alleging that a price-fixing conspiracy had artificially inflated the prices of dynamic random-access memory chips ("DRAM") and products containing DRAM sold in Québec.

While the three cases each offered their own nuances arising from different facts, the Supreme Court’s key holding, applicable to all, has sent a strong message that indirect purchaser actions are available and, indeed, encouraged in Canada.

 

Canada Rejects Illinois Brick

In Pro-Sys, the Supreme Court upheld — in common with Illinois Brick — the principle that defendants in antitrust and other class actions cannot use the defense of passing-on. The court held that the passing-on defense is contrary to basic principles of restitution; rejecting the passing-on defense ensures that "wrongdoers who overcharge their purchasers do not operate with impunity" and prevents defendants from using any complexity in tracing the overcharge through the chain of distribution as a shield from liability.

However, the court rejected Illinois Brick’s corollary holding that passing-on cannot be used offensively by indirect purchasers to ground a cause of action. Canada’s highest court disagreed fundamentally with the notion that a prohibition on the offensive use of passing-on must go hand in hand with the rejection of the passing-on defense. The court provided four principal reasons for its critical divergences on this point:

 

1.

 

 

The risk of double or multiple recovery can be managed
by the courts: Recovery will be limited to the aggregate amount
of the loss, no matter how it is ultimately shared by direct and
indirect purchasers. Where there is a risk of double recovery,
the courts can manage this risk through practical means, e.g.
by reducing damage awards. However, it will be up to defendants
to prove double or multiple recovery.

 

 

2.

 

 

Indirect purchaser actions should not be barred solely
because of issues of remoteness and complexity associated
with proving damages: Complex evidence, economic theories,
and multiple distribution chains are not new to indirect purchaser actions. These challenges are present in most antitrust cases and should not serve to deny indirect purchasers the chance to make
their case, even if the claim ultimately fails at trial.

 

 

3.

 

 

Indirect purchaser actions further the goal of deterrence: Sometimes, direct purchasers will be reluctant to bring an action against the offending party for fear of jeopardizing a business
relationship. In such cases, indirect purchaser actions may
be the only means of deterring overcharges.

 

 

4.

 

 

Indirect purchaser actions are consistent with the principles of restitution: Indirect purchaser actions are consistent with the remediation objective of restitution law in that these purchasers
often bear the cost of antitrust violations.

 

The court also noted that, while Illinois Brick remains good law at the federal level in the US, the US Supreme Court upheld the "repealer statutes" enacted by many states at the state level, affirming in ARC America that state-level repealer statutes are not pre-empted by federal antitrust law.

 

 

Why Does a Canadian Case
Matter to Foreign Companies?

In Sun-Rype, the defendants argued that the Canadian courts lacked jurisdiction because the alleged conspiracy was entered into by foreign defendants, outside of Canada, to fix prices for products sold to foreign direct purchasers. The majority of the court agreed with the defendants that conduct cannot be contrary to Part VI of the Competition Act unless there is a "real and substantial connection" to Canada. Applying the framework from its 2012 decision, Club Resorts Ltd. v. Van Breda, 2012 SCC 17, the court found that there is at least some suggestion in the case law that where defendants conduct business in Canada, make sales in Canada, and conspire to fix prices on products sold in Canada, Canadian courts have jurisdiction.

In Sun-Rype, the conduct in question allegedly involved each foreign defendant’s Canadian subsidiary acting as its agent, and the sales in question were made in Canada to Canadian customers and Canadian end-consumers. The Supreme Court held it was not "plain and obvious" that Canadian courts have no jurisdiction over the alleged anti-competitive acts committed in this case. The question remains, however, whether the court would have come to this conclusion had Canadian subsidiaries not been involved.

Québec courts appear to have been given an even wider reach. In Infineon, the court held that Québec courts have jurisdiction under the Civil Code of Québec in respect of an alleged anti-competitive conspiracy which occurred outside of Québec, so long as there is some injury or economic damage to a Québec consumer. This suggests that foreign companies with no presence in Canada beyond having sold products into the Canadian market may nonetheless be required to defend antitrust class actions brought in Québec. Again, however, another open question remains as to whether Infineon’s expansive approach under Québec civil law can also apply to Canada’s common- law jurisdictions.

Another critically important element of the Supreme Court’s message is that the risk of multiple recovery will not prevent indirect purchasers from suing U.S. companies in both the U.S. and Canada. In Sun-Rype, the defendants argued that permitting indirect purchaser class actions in Canada would result in overlapping claims for the same loss. In that case, direct purchasers had already reached a settlement in the US for the alleged overcharges at issue. The court summarily dismissed this argument, again noting the court’s ability to modify settlement and damage awards to reflect amounts already received by plaintiffs in other jurisdictions. Thus, proving overlapping recoveries will require coordinated efforts by counsel — and potentially by the courts — across multiple jurisdictions.

 

Concluding Observations

In the wake of the Pro-Sys trilogy, all foreign companies marketing products into Canada must be prepared to defend indirect antitrust class actions in Canadian courts. Where simultaneous proceedings are brought in one or more foreign jurisdictions and in Canada, counsel will confront potentially differing legal standards — this is certainly the case as between Canadian and US federal and some US state jurisdictions. Foreign and Canadian counsel will need to coordinate strategy across the jurisdictions, particularly in cases where the defendant alleges and must prove double or multiple recoveries in related actions. This is clearly new law carrying with it expanded risk factors for foreign companies doing business in Canada. They are now subject to accountability under Canadian competition laws to a new constituency of potential plaintiffs.

The Pro-Sys trilogy is symptomatic of a shrinking world in terms of legal risk and accountability for business accessing an increasingly globalized marketplace. Not long ago, US Federal Courts were notable outliers for their jurisdictional reach embracing foreign actors and offshore economic activity with incidental impact in the United States. However, as noted at the onset of this article, the US Supreme Court has moved in recent decisions to curtail the extent to which US Federal Courts may continue in the role of dispensing justice with global reach. Canadian courts, on the other hand, appear to be embracing a more flexible and liberal approach to cases with predominately foreign elements and the sufficiency of domestic impact required to warrant the assumption of jurisdiction by a Canadian forum. The scope and extent of this trend will continue to unfold in future cases. In any event, with the Pro-Sys Trilogy the Supreme Court of Canada has opened one prominent avenue of outreach attaching Canadian legal consequences to economic activity abroad which did not exist before.