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Private Enforcement

Class action business as usual after SCC decisions

Michael Osborne, The Litigator blog, November 17th, 2013.

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It’s business as usual for class actions after Canada’s Supreme Court issued a trilogy of decisions holding that so-called indirect purchasers can sue for damages caused by price fixing, and that whether indirect purchasers suffered harm can be certified as a common issue in a class action so long as the plaintiffs demonstrate a methodology capable of showing that price fixing overcharges were passed on to the indirect purchaser level.
Indirect purchasers and the passing on problem

Direct purchasers are purchasers who buy directly from the participants in a price fixing conspiracy. They pay more for the product than they would otherwise. Indirect purchasers are those purchasers who buy the product itself from the direct purchasers, or who buy products that include the product whose price was fixed. Some indirect purchasers, particularly consumers, may be at the end of a long line of intermediate purchasers. Indirect purchasers only suffer a loss if the purchasers above them in the distribution chain pass the overcharge on instead of absorbing it. Competitive factors at each level of the distribution chain will impact whether the overcharge is passed on at all, and in what amount.

Claims based on passing on raise a number of problems, however.

First, passing on as a defence has been rejected in a number of court decisions, culminating in the decisions of the Supreme Court in Canfor and Kingstreet. In the US, this same rejection of passing on as defence led the US Supreme Court to reject indirect purchaser claims, which are founded on passing on.

Second, even if indirect purchaser claims are allowed, it is extremely difficult, if not impossible, to determine on a class-wide basis, whether the loss has been passed on to individual indirect purchasers at various levels in the distribution chain. Since the statutory cause of action in the Competition Act for price fixing, and other common law causes of action typically pleaded, require proof of loss as a component of liability, the difficulty of proving loss on a class-wide basis has made it difficult to certify loss as a common issue.

This problem was first considered by the Ontario courts in Chadha v. Bayer Inc. The plaintiffs in alleged that manufacturers of iron oxide pigments for bricks, paving stones, and other building materials conspired to fix prices for the pigments over a 17 year period and proposed a class consisting of “all homeowners or other end users in Canada who have suffered loss or damage as a result of” the alleged conspiracy. In 2003, the Ontario Court of Appeal declined to certify the action, since the plaintiffs had not shown how they would prove at trial that all end purchasers of buildings containing the pigments overpaid for the buildings as a result.

In later cases, plaintiff lawyers avoided the problems identified in Chadha by combining all indirect and direct purchasers into one big class, by pleading causes of action, such a waiver of tort, that may not require proof of loss in order to establish liability, and by tendering economic evidence of pass on. While these tactics were largely successful, the question of whether passing on could found a claim remained unresolved until last week’s Supreme Court trilogy.

From sweetener to software

The trilogy of cases before the Supreme Court involved different products with different distribution chains.

In Sun-Rype, the plaintiffs allege that producers of high-fructose corn syrup (HFCS) agreed to fix prices. The plaintiff class includes both direct purchasers (such as Sun-Rype itself), and indirect purchasers, for example consumers who bought juice containing high-fructose corn syrup.

In Microsoft, the plaintiffs allege that Microsoft conspired with various entities, including computer manufacturers and its own affiliates, to maintain a dominant position in the market for computer operating systems. The plaintiff class includes computer resellers and consumers.

In Infineon, the plaintiffs allege that manufacturers of dynamic random access memory (DRAM) conspired to fix prices. Since this is a Quebec class action, the plaintiff class consists mainly of consumers and small businesses.

The courts of appeal disagree

In Sun-Rype and its companion case, Pro-Sys, the BC Court of Appeal held that indirect purchasers cannot recover losses caused by price fixing conspiracies, even if the loss was passed on by direct purchasers. The Supreme Court’s rejection of a defence of passing on means that direct purchasers are entitled to collect the entire overcharge caused by the conspiracy, leaving nothing left for the indirect purchasers to claim, since the law prevents double-recovery of losses from a defendant.

Donald JA dissented, however. He distinguished between passing-on as a defence and passing-on as a factual occurrence. He accepted that “the rule against double recovery is a bedrock principle”. Double recovery is avoided by including direct and indirect purchasers in one class, so that damages are assessed once, for all purchasers, thus avoiding double recovery.

In Infineon, the Quebec Court of Appeal essentially adopted Donald JA’s dissent.

Collision of legal principles

The Supreme Court was faced with a collision of legal principles:

  • Its earlier, categorical rejection of passing on as a defence
  • The rule against double recovery
  • The statutory directive in section 36 of the Competition Act that “any person who has suffered loss or damage” caused by price fixing can sue the loss “proved to have been suffered by him”
  • The fundamental right of class members to opt out of a class

In order to avoid the collision, one of these principles had to give.

The plaintiffs argued that the rule against passing on should yield. They said that the court’s rejection of this defence in Kingstreet only applied to cases involving unconstitutionally collected taxes.

Offensive, not defensive, passing on

The Supreme Court, however, attempted to avoid the collision entirely by adopting the distinction between passing on as a defence, and passing on as a factual occurrence.

The court confirmed that it had, in Kingstreet, rejected passing on as a defence in all cases.

However, the court held, that did not prevent indirect purchasers from claiming for damages passed on to them.

But what about double recovery?

Rejecting a passing on defence while allowing those to whom the loss was passed on inevitably raises the spectre of double recovery. If a defendant cannot argue that the direct purchaser’s damages cannot be reduced because the loss was passed on, the direct purchaser will recovery the entire amount. If the indirect purchaser also recovers, the defendant is forced to pay twice (or more).

Double recovery can be prevented through judicial management, the court held. A judge can deny a claim or modify settlement and damages awards in order to account for overlapping claims in other actions, even in different jurisdictions in Canada and outside of Canada. The court avoided the trap that Donald JA fell into of assuming that all claimants can be included in one class. Such an assumption would violate the fundamental right of class members to opt out of a class and start their own law suit.

The court did not offer any guidance, however, as to how a court should prioritize between such overlapping claims.

The court did, however, indicate that the rule against double recovery could result in a claim being denied if the court is unable to avoid a risk of double recovery.

A defence by any other name

The tool chosen by the Supreme Court to avoid double recovery, that is, modifying awards or denying claims, amounts to the application of the passing on defence, notwithstanding the court’s apparent rejection of it. The court endorsed the concept of judges reducing an award to one claimant in order to account for the portion that was passed on to another claimant. The implicitly involves accepting passing on as a defence, not to liability, but to the amount of damages payable to a particular plaintiff. The court went further, endorsing a defence to liability where double recovery cannot be avoided. The indirect purchaser trilogy thus stands for a very limited acceptance of a passing on defence. This defence will be triggered only to prevent double recovery. In other words, price fixing defendants will be made to pay once, in full, but not twice, for the losses they cause.

In the end, then, the principle that yeilded was the rejection of passing on as a defence.

Proving loss as a common issue

Turning to the evidentiary basis needed for loss to be certified as a common issue, the Supreme Court rejected the defendants’ suggestion that the plaintiff’s expert evidence should be subjected to a robust analysis.

In order to obtain certification of loss as a common issue, plaintiffs need to show that they have a methodology that can prove an “impact common to all members of the class”, the court held, citing the leading US case In Re Linerboard Antitrust Litigation. This means that the methodology must be able to show that the overcharge was passed on to the indirect purchaser level in the distribution chain.

Rothstein J., writing for the court in Microsoft, summed up this approach:

In my view, the expert methodology must be sufficiently credible or plausible to establish some basis in fact for the commonality requirement. This means that the methodology must offer a realistic prospect of establishing loss on a classwide basis so that, if the overcharge is eventually established at the trial of the common issues, there is a means by which to demonstrate that it is common to the class (i.e. that passing on has occurred). The methodology cannot be purely theoretical or hypothetical, but must be grounded in the facts of the particular case in question. There must be some evidence of the availability of the data to which the methodology is to be applied.

There is a key difference between the Rothstein J.’s summary, above, and the passage he cited from Linerboard. Where Linerboad, and for that matter, the Ontario Court of Appeal in Chadha, required that plaintiffs prove an impact common to all members of the class, Rothstein J. merely requires that plaintiffs prove that the overcharge reached particular layers in the class and demonstrate an impact “common to the class”. In other words, he does not appear to require that plaintiffs demonstrate that all class members share in the impact.

Aggregate damages provisions cannot be used to establish liability

Class proceedings legislation typically contain provisions allowing a court to determine damages for a class in the aggregate, instead of on an individual basis, but only if “no questions of fact or law other than those relating to the assessment of monetary relief remain to be determined in order to establish the amount of the defendant’s monetary liability” (Ontario Class Proceedings Act, s. 24(1)(b)).

Some courts, including the certification judge in the Microsoft case, have held that aggregate damages be used to establish loss as a component of liability.

Rothstein J. expressly rejected this position, holding that the aggregate damages provisions relate to remedy and are procedural. An antecedent finding of liability is required before the court can resort to the aggregate damages provisions, he concluded. For private damages actions under section 36 of the Competition Act, this includes proof of loss. He wrote:

The aggregate damages provisions of the CPA relate to remedy and are procedural. They cannot be used to establish liability (2038724 Ontario Ltd. v. Quizno’s-Canada Restaurant Corp., 2010 ONCA 466, 100 O.R. (3d) 721, at para. 55). The language of s. 29(1)(b) specifies that no question of fact or law, other than the assessment of damages, should remain to be determined in order for an aggregate monetary award to be made. As I read it, this means that an antecedent finding of liability is required before resorting to the aggregate damages provision of the CPA. This includes, where required by the cause of action such as in a claim under s. 36 of the Competition Act, a finding of proof of loss. I do not see how a statutory provision designed to award damages on an aggregate basis can be said to be used to establish any aspect of liability.

Rothstein J. held, nevertheless, that whether damages should be assessed in the aggregate could be certified as a common issue, but that issue can only be determined at trial after a finding of liability has been made.

The debate in Sun-Rype

In the result, the Supreme Court certified Microsoft and Infineon as class proceedings, but not Sun-Rype.

In Sun-Rype, the problem was that HFCS and liquid sugar were used interchangeably by direct purchasers during the period of the alleged conspiracy, and there was no distinction between the two in labeling of end products. As a result, indirect purchasers could not know whether they had bought products containing HFCS or not, making it impossible to determine who is a member of the class. The proposed class proceeding thus failed a fundamental requirement of having an identifiable class of two or more persons and could not be certified.

Karakatsanis J. penned a dissent in which Cromwell J. concurred. She held that class proceedings legislation is designed to permit recovery for the benefit of the class as a whole, without requiring proof of individual loss. Aggregate damages provisions can be used once “liability to the class” has been determined.

Karakatsanis J. then went further still, holding that class proceedings legislation does have “substantive implications”. In the case of price fixing actions under section 36 of the Competition Act, it allows individuals to obtain remedies that would not otherwise be available to them because “of difficulties of proving the extent of their individual loss”. The entire passage is worth quoting at length:

[107] For these reasons, I am not persuaded that the issue of whether an individual can prove individual loss is a necessary enquiry at certification. In sum, while class actions are a procedural vehicle, they are not merely procedural. They make possible claims that are very complex or could not be prosecuted individually, not only because it would be inefficient or unaffordable, but also because it may be extremely difficult to prove individual claims. The CPA does have substantive implications: it creates a remedy that recognizes that damages to the class as a whole can be proven, even when proof of individual member’s damages is impractical, and that is available even if those who are not members of the class can benefit.

[108] I agree with Justice Rothstein that the aggregate damages provisions relate to the assessment of damages and cannot be used to establish liability. However, where proof of loss or detriment is essential to a finding of liability, for example in a cause of action under s. 36 of the Competition Act, or in tort, expert evidence may provide a credible and plausible method offering a realistic prospect of establishing loss on a class-wide basis. See Pro-Sys, at paras. 120 and 140. While these provisions do not create new causes of action, they permit individual members of the class to obtain remedies that may not be available to them on an individual suit because of difficulties of proving the extent of their individual loss. The aggregate damage provision and cy-près awards promote behaviour modification and provide access to justice where it otherwise may be difficult to achieve. [Emphasis added]

The problem with this analysis is that the Competition Act could not be more clear: a private action is available only to those who have “suffered loss or damage as a result of” price fixing (and other competition crimes), and plaintiffs can recover “an amount equal to the loss or damage proved to have been suffered by him”.

It is hard to interpret this passage as anything other than a finding that class proceedings legislation modifies the requirement of proving damages expressly set out in the section 36.

However, it is a basic principle of Canada’s federal structure that provincial legislation cannot amend federal legislation, nor vice versa. As a matter of constitutional law, provincial class proceedings legislation cannot substantively change a federal statute.

In any event, the majority, led by Rothstein J., expressly rejected Karakatsanis J.’s approach since it conflicts with the principle that class proceedings legislation does not create new causes of action or alter existing ones. He wrote:

[75] As I understand it, Justice Karakatsanis’s point is that where liability to the class has been proven there is no requirement to prove any person is a member of a class or that any person has suffered individual damage. The necessary implication is that class proceeding legislation alters existing causes of action. For example, s. 36 of the Competition Act creates a cause of action for “[a]ny person who has suffered loss or damage”. My colleague’s approach would suggest a class action claim could proceed under s. 36 of the Competition Act without any person establishing that they had suffered loss or damage. However, the CPA neither creates a new cause of action nor alters the basis of existing causes of action. Rather, it allows claimants with causes of action to unite and pursue their claims as a class.

Here, Rothstein J. appears to recognize that section 36 requires that each and every member of the class must prove damages, and that class proceedings legislation cannot remove this requirement. Yet his own reasons in Microsoft and Sun-Rype appear to do just that. In dealing with the evidence required to assess the commonality of the issue of loss, Rothstein J. held that the plaintiff needs to demonstrate a methodology for establishing that the overcharge has been passed on to the indirect purchaser level in the distribution chain. It remains to be seen whether Rothstein J.’s reasons will be interpreted in future cases as confirming that loss or damage must be proven for each class member, as section 36 explicitly requires.

Business as usual

The indirect purchaser trilogy confirms the established practice in Canada in price fixing class actions of grouping all direct and indirect purchasers into one big class. One the question of certifying the fact of loss as a common issue, the decision confirms the trend toward a relatively permissive test on certification of this issue. The extremely difficult task of proving that there was a price fixing overcharge, and that the overcharge was passed on to each layer of the class, and in what amounts, is left to trial.

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