Supreme Court of Canada Rules Indirect Purchasers Can Sue for Passed-Through Losses

The Supreme Court of Canada (SCC) released its decisions in the following three proposed class actions seeking damages under the Competition Act:

> Sun-Rype Products Ltd. v Archer Daniels Midland Company, 2013 SCC 58, on appeal from the British Columbia Court of Appeal (alleged price-fixing of high fructose corn syrup);
> Pro-Sys Consultants Ltd. v Microsoft Corporation, 2013 SCC 57, on appeal from the British Columbia Court of Appeal (alleged Competition Act claims with respect to computer software); and
> Infineon Technologies AG v. Option Consommateurs, 2013 SCC 59, on appeal from the Quebec Court of Appeal (alleged price-fixing of DRAM computer memory).

Although these appeals addressed a number of important issues relating to class actions and the certification of class proceedings in general, the key issue before the SCC in all three appeals related to the viability of claims by “indirect purchasers”: consumers and others who did not purchase products directly from a defendant, and instead purchased such products indirectly, often as a component or ingredient of a finished product, from a non-defendant further down the product distribution chain.

Mr. Justice Lowry of the BC Court of Appeal, writing for the majority in both Sun-Rype and Microsoft, relied on the SCC's decision in Kingstreet Investments Ltd. v. New Brunswick (Finance), 2007 SCC 1 in concluding that indirect purchasers of products alleged to be the subject of an unlawful overcharge do not have a cause of action. In Kingstreet, the SCC determined that a defendant cannot reduce its liability to those who paid an unlawful overcharge by establishing that some or all of it was “passed through” to others. In other words, a defendant is liable to the direct payor of the unlawful charge (the direct purchaser) for 100 per cent of that charge, regardless of any passing through to others (the indirect purchasers). Lowry J.A. reasoned that if the law does not recognize pass-through as a defence to a claim, logically the law cannot recognize pass-through as the basis for a claim. In the context of an antitrust class action, this means that if direct purchasers are entitled to recover 100 per cent of an unlawful overcharge they paid, regardless of any pass-through, it follows that indirect purchasers cannot claim against the defendant for any portion of the overcharge passed through to them, as that would result in double recovery.

Donald J.A. of the BC Court of Appeal, dissenting in Sun-Rype and Microsoft, and the Quebec Court of Appeal in Infineon, took the view that the non-availability of the “pass-through” defence does not preclude indirect purchasers from asserting a claim based on pass-through. He reasoned that the legal impediments to indirect purchaser claims raised by Lowry J.A. could be addressed through the procedural mechanisms of the class proceedings legislation using a two stage approach.

At the first stage, the Court could determine the aggregate of the unlawful overcharge paid by all direct purchasers, irrespective of how much of that overcharge had been passed through to indirect purchasers. Only after such aggregate assessment would the court be asked to determine how the aggregate amount should be distributed as damages among the direct and indirect purchasers. Donald J.A. held that this approach eliminates the possibility of double recovery because the damages would never exceed the amount of overcharge paid by the direct purchasers.

On the seminal issue, the SCC ruled that indirect purchasers who can establish they have suffered a loss that was passed through by the direct purchasers of the product have a cause of action to claim that loss.  Although the SCC confirmed that pass-through could not be used as a defence to direct purchaser claims, the SCC held that it does not follow that direct purchasers are always entitled to 100 per cent of the overcharge. Where there are claims by both direct and indirect purchasers, direct purchasers will be entitled to only that portion that was not passed through to the indirect purchaser claimants. The SCC held that Canadian courts have “practical tools” at their disposal to insure that the total recovery against any defendant does not exceed the total of the overcharge, thus avoiding double recovery. The SCC also held that the fact that there might be a conflict between the direct and indirect purchasers on the issue of pass-through should not preclude indirect purchasers from participating in the class action. Any such conflict “is not a concern of the [defendants]” and can be addressed at the distribution stage, after settlement or judgment on the aggregate amount of the overcharge.

In addition to the indirect purchaser issue, the Supreme Court's reasons in these decisions cover a number of issues relevant to class actions and the certification of class proceedings in general. The reasons are outlined below.

The Supreme Court held that the standard of proof on a certification motion is “some basis in fact” as established by the SCC in Hollick, and is not the “balance of probabilities” standard. 

On the use of expert evidence on class-wide harm at the certification stage, the SCC held that the expert evidence must demonstrate that there is a “reasonable and plausible methodology” for determining harm on a class-wide basis.

The majority of the SCC held that the class must be “identifiable” in the sense that prospective class members must be able to determine whether or not they are part of the class based on available evidence. On this basis, the majority denied the plaintiffs' appeal in the Sun-Rype case and denied certification of the indirect purchaser claims on the grounds that the indirect purchaser class in that case was not “identifiable” on the evidence.

The Supreme Court of Canada confirmed that the aggregate assessment of damages provisions of the class proceedings legislation are procedural only and cannot be used to establish liability. In the context of a class action based on the Competition Act or another cause of action where proof of loss is an essential element of proving liability, the aggregate damages provisions cannot be used to establish the fact of loss to direct or indirect purchasers.

Sun-Rype Products Ltd., Wendy Weberg, Pro-Sys Consultants Ltd., and Neil Godfrey were represented by J.J. Camp, Reidar Mogerman and Melina Buckley of Camp Fiorante Matthews Mogerman. Michael Sobkin appeared as the latter's SCC agent.

Option consommateurs was represented by Daniel Belleau, Maxime Nasr and Violette Leblanc of Belleau Lapointe.

Archer Daniels Midland Company and ADM Agri-Industries Company were represented by Michael Brown of Norton Rose Fulbright Canada LLP and Gregory Nash and David Yule of Nash & Company.

Cargill, Incorporated, Cerestar USA, Incorporated, formerly known as American Maize-Products Company, and Cargill Limited were represented by Kenneth McEwan and Eileen Patel of Hunter Litigation Chambers.

Corn Products International, Inc., Bestfoods, Inc., formerly known as CPC International, Incorporated, Casco Inc. and Unilever PLC doing business as Unilever Bestfoods North America were represented by Stephen Schachter, Geoffrey Gomery and Peter Senkpiel of Nathanson, Schachter & Thompson LLP.

Microsoft Corporation and Microsoft Canada Co./Microsoft Canada CIE were represented by Neil Finkelstein and Brandon Kain of McCarthy Tetrault LLP and James Sullivan and Catherine Beagan Flood of Blake, Cassels & Graydon LLP.

Infineon Technologies AG and Infineon Technologies North America Corp. were represented by Yves Martineau of Stikeman Elliott LLP.

Samsung Electronics Co. and Samsung Semiconductor Inc. were represented by Francis Rouleau of Blake, Cassels & Graydon LLP.

Micron Technology, Inc. was represented by Éric Vallières, Martin Low, Andrei Pascu and Sidney Elbaz of McMillan LLP.

Hynix Semiconductor Inc. was represented by Madeleine Renaud, Céline Legendre and Warren Milman of McCarthy Tétrault LLP.

The Attorney General of Canada was granted intervenor status and was represented by John Tyhurst of the Attorney General of Canada.

The Canadian Chamber of Commerce was granted intervenor status and was represented by Davit Akman and Adam Fanaki of Davies Ward Phillips & Vineberg LLP.

Canadian Federation of Independent Grocers was granted intervenor status and was represented by David Sterns and Jean-Marc Leclerc of Sotos LLP.