The Preferred Approach to Resolving Issues of Pass Through in Antitrust Claims
(Presented at the 2012 International Cartel Workshop. American Bar Association. Feb 1-3, 2012)
Introduction
Just as numerous countries around the world begin to address civil claims for cartel conduct and decide on the best system to implement, Canada is in the midst of sorting out its preferred position on one of the biggest issues – passing on. This issue will be heard by the Supreme Court of Canada this year, with the outcome shaping the nature and scope of future cases.
In price-fixing conspiracy and other antitrust cases, the concept of passing on – that the direct purchaser of the price-fixed product passed on all or part of any unlawful overcharge to its customers – can be used in two ways: (1) the passing on defence can be used by defendants to try to avoid liability; and (2) fact of pass through can be used by indirect purchasers to establish a claim against the wrongdoers.
The spread of civil cartel litigation from the United States to the rest of the world is a fairly recent phenomenon. Although the United States has a long history of private enforcement of cartels, some of its elements (including its approach to indirect purchaser claims) are viewed critically by lawmakers around the world. Meanwhile, in Canada, private enforcement of illegal cartels is a relatively new experience and, over the past several years, there have been significant developments in the law. The Supreme Court of Canada clarification with respect to the Canadian approach to passing on will further advance the law and may be instructive to other jurisdictions.
The U.S. Approach
In Hanover Shoe Inc. v United Shoe Machinery Corp. [Hanover Shoe],[1] the U.S. Supreme Court rejected the passing on defence on the basis that it undermines the deterrent objectives of antitrust litigation.
In Illinois Brick Co. v Illinois [Illinois Brick],[2] the U.S. Supreme Court held that because passing on cannot be used defensively, it also cannot be used offensively by indirect purchasers. The result of this decision has been subject to considerable criticism on the ground that it leaves many persons injured by the wrongful conduct without any remedy. Since Illinois Brick was decided, more than 35 states have enacted legislation that permits claims by indirect purchasers or interpreted their existing legislation as allowing indirect purchaser claims.[3] This has resulted in a fractured system of redress, with defendants potentially paying treble damages to two levels of purchasers and some, but not all, indirect purchasers being able to assert claims. This fractured approach is flawed, in that it results in multiple proceedings, and creates a potential for duplicative recovery and inconsistent findings.
The Canadian Approach
Some Canadian courts have endorsed a process by which the claims of both direct and indirect purchasers are brought in a single action in the certification and settlement contexts. However, this approach has recently been called into question in British Columbia. In two recent cases, Sun-Rype Products Ltd. v Archer Daniels Midland Co [Sun-Rype][4] and Pro-Sys Consultants Ltd. v Microsoft Corp. [Microsoft],[5] the British Columbia Court of Appeal held that indirect purchasers do not have a claim at law. In both cases, the defendants admitted that the law of Canada does not recognize the passing on defence. The majority for the Court of Appeal held that if passing on cannot be used defensively, it also cannot be used offensively by indirect purchasers to establish a claim. The minority upheld the claims of indirect purchasers, holding that pass through can occur as a factual matter, even if the courts do not permit defendants to use this fact as a defence. The minority held that there were no concerns of double recovery (a main argument against allowing claims by indirect purchasers) in cases where there is a single all-encompassing class. In Option Consommateurs v Infineon Technologies AG [Option Consommateurs],[6] the Quebec Court of Appeal agreed with the reasoning of the minority judgment in Sun-Rype and Microsoft and held that indirect purchasers have a cause of action.
Leave to appeal to the Supreme Court of Canada was granted in Sun-Rype and Microsoft. The Supreme Court of Canada’s decision will provide much needed clarification of the law in Canada on the issue of passing on.
The approach adopted by the minority in Sun-Rype and Microsoft, and followed in Option Consommateurs is the preferred approach. Defendants should not be permitted to avoid liability on the basis that the unlawful overcharge was passed on by direct purchasers. To hold otherwise would undermine the deterrence objective of the antitrust laws. However, the fact that defendants cannot rely on the passing on defence should not preclude indirect purchasers from relying on the fact of pass through to establish their claims. In competition law cases, the alleged overcharge is rarely borne entirely by the direct purchasers. In most circumstances, indirect purchasers will also bear part of the alleged overcharge. A system of redress that permits claims by indirect purchasers is consistent with the objective of providing recovery to all persons injured by the unlawful conduct.
The all-inclusive approach accepted by some Canadian courts, whereby the claims of all levels of purchasers are pursued in a single proceeding, is the preferred approach. Damages should be assessed in the aggregate based on the amount of the unlawful overcharge and then should be apportioned as between the different levels of purchasers based on the extent to which the unlawful overcharge was passed through the distribution chain. This all-inclusive approach was recommended by the Antitrust Modernization Commission in its report commissioned for the President and Congress of the United States.[7]
An all-inclusive approach furthers the main objective stated in the Commission of the European Communities White Paper on Damages actions for breach of the EC antitrust rules[8] – that all persons injured as a result of anticompetitive conduct be able to recover their losses from the wrongdoer. The all-inclusive approach also addresses the EC’s concern that safeguards be in place to avoid the same harm being compensated more than once.
The demise of the passing on defence In Canada
The passing on defence is premised on the theory that direct purchasers’ recovery should be limited to the extent that the direct purchaser was able to pass on its losses to its customers by charging a higher price. The top courts in both the United States and Canada have rejected the passing on defence in particular circumstances, including price-fixing claims in the United States. However, as the Supreme Court of Canada has not ruled on this issue in the price-fixing context, defendants continue to rely on the passing on defence and the possibility that it exists in an effort to defeat certification and avoid liability. The availability of the passing on defence in the price-fixing context will be squarely before the Supreme Court of Canada in the appeals pending in Sun–Rype and Microsoft.
In the United States, it is well settled that the passing on defence is not a valid defence in law. In Hanover Shoe,[9] the U.S. Supreme Court rejected the defence, subject to a narrow exception for instances where the plaintiff has a pre-existing “cost-plus” contract. In that case, the plaintiff brought a claim against the defendant for its alleged monopolization of the shoe manufacturing industry in violation of § 2 of the Sherman Act. The defendant sought to limit the general principle that the victim of an overcharge is damaged to the extent of the overcharge. The defendant argued that the plaintiff’s recovery should be limited to the extent that he was able to pass on his losses to his customers by charging a higher price. The Supreme Court rejected this argument because of the difficulties in proving that the losses had, in fact, been passed on. Also, central to the Supreme Court’s decision was the concern that allowing the passing on defence would undermine the deterrence objective of antitrust litigation.
The Supreme Court of Canada first considered the passing on defence in Air Canada v British Columbia [Air Canada].[10] In Air Canada, the Supreme Court considered whether the plaintiff was entitled to damages in the amount of gasoline taxes paid by them under an ultra vires statute. The Supreme Court held that the passing on defence could be applied in the circumstances to protect the treasury.
The Supreme Court of Canada revisited the passing on defence in British Columbia v Canadian Forest Products Ltd. [Canadian Forest Products].[11] The majority held that the passing on defence did not arise on the facts and did not address the validity of the defence in Canadian law.[12] In a strong dissenting opinion, Lebel J. concluded that the passing on defence was not a valid defence at law. Lebel J. expressed concerns that accepting the defence in the law of tort would make it more burdensome for plaintiffs to recover. Plaintiffs would not only have to prove damages, but would also have to prove that they did not engage in any other business activity that might offset that loss. Every commercial entity could be accused of passing on all or part of any damages suffered by it, by its own rates or charges to its customers. Ultimately, the passing on defence would “result in an argument that no damages are ever recoverable in commercial litigation because anyone who claimed to have suffered damages but was still solvent had obviously found a way to pass the loss on”.[13]
The validity of the passing on defence was again addressed by the Supreme Court of Canada in Kingstreet Investments Ltd. v New Brunswick (Finance) [Kingstreet].[14] Although this case was framed in restitution and dealt with whether monies paid pursuant to an ultra vires statute were recoverable, the general comments made by the court are seemingly applicable to a wide variety of cases, including those relating to anticompetitive behaviour. Writing for the majority, Bastarache J. agreed with the reasoning of Lebel J. in Canadian Forest Products, and observed that there were three major criticisms of the passing on defence: “first, that it is inconsistent with the basic premise of restitution law; second, that it is economically misconceived; and third, that the task of determining the ultimate location of the burden of a tax is exceedingly difficult and constitutes an inappropriate basis for denying relief.”[15]
Notwithstanding these Supreme Court of Canada decisions, defendants continue to argue pass on in the price-fixing context. In some cases, the Canadian courts have declined to deal with the validity of the pass on defence at the certification stage.[16] As stated above, this issue is expected to be finally resolved by the Supreme Court of Canada in Sun-Rype and Microsoft.
From a public policy perspective, defendants should not be permitted to rely on the passing on defence. Defendants should be accountable for the total unlawful overcharge regardless of whether all or part of that overcharge was passed on by direct purchasers. The wrongful conduct was complete at the time the initial overcharge was imposed. There is no valid difference between the price-fixing cases and the Kingstreet reasons. Claims by Indirect purchasers in absence of a passing on defence.
Ability of Indirect Purchasers to Argue Pass On Offensively and Advance a Cause of Action
Indirect purchasers seeking to recover losses for anticompetitive conduct must rely on the fact of pass through to establish their claims. Their claims are premised on the notion that at least part of the unlawful overcharge was passed on by direct or intermediate purchasers to them.
In Illinois Brick, the U.S. Supreme Court held that because Hanover Shoe made the passing on defence unavailable to defendants in antitrust claims, pass on cannot be argued offensively by indirect purchasers seeking to recover damages in the Federal Court.[17] The U.S. Supreme Court expressed concerns that defendants would be subject to duplicative recovery and that it would take “massive efforts to apportion the recovery among all potential plaintiffs that could have absorbed part of the overcharge-from direct purchasers to middlemen to ultimate consumers.”[18]
Justice Brennan, writing for the minority, stated that there were “sound reasons for treating offensive and defensive passing on cases differently.”[19] Justice Brennan wrote that allowing indirect purchaser claims does not create the danger (as there was in Hanover Shoe) that defendants will escape liability, but rather promotes the deterrent objective of the antitrust litigation.[20] The possibility of double recovery does not justify barring all claims by indirect purchasers without regard to whether the particular case creates a “significant danger of double recovery.”[21] Justice Brennan also wrote that allowing claims by indirect purchasers was consistent with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which was enacted to create “an effective mechanism to permit consumers to recover damages for conduct which is prohibited by the Sherman Act.”[22]
Since Illinois Brick was decided, more than 35 states through legislative reform or judicial decisions have allowed indirect purchasers to recover damages under state antitrust law.[23] The result is that direct and indirect purchaser cases are pursued separately, each with treble damages.
However, even in the Illinois Brick repealer states, many indirect purchasers are left without a remedy. The indirect purchaser cases are often brought on behalf of the end-user of the price-fixed product[24] and intermediate purchasers are left without any remedy. For example, assuming a simple distribution chain where the price-fixed product is sold by the defendant manufacturer to a distributor, who resells the price-fixed product to a retailer for resale to a consumer, the distributor would be able to claim as a direct purchaser. Indirect purchaser cases might be brought for consumers, but some indirect purchasers could be left without a remedy.
In a report prepared for the President and Congress, the Antitrust Modernization Commission criticized the approach under Hanover Shoe and Illinois Brick as leaving “many of those actually injured by antitrust violations without compensation”.[25] The Antitrust Modernization Commission stated that direct and indirect purchaser litigation would be “more efficient and more fair if it took place in one federal court for all purposes, including trial, and did not result in duplicative recoveries, denial of recoveries to persons who suffered injury, and windfall recoveries to persons who did not suffer injury.” [26] To facilitate this result, the Commission recommended that:[27]
- Illinois Brick and Hanover Shoe be overruled to the “extent necessary to allow both direct and indirect purchasers to recover for their injuries”.
- The claims of direct and indirect purchasers should be pursued in a single forum.
- Damages should be calculated based on the overcharges (trebled) incurred by direct purchasers. Damages should be apportioned among direct and indirect purchasers in full satisfaction of their claims, in accordance with the evidence as to the extent of the actual damages they suffered.
In Canada, some courts have permitted indirect purchasers to advance a claim. For example, in Chadha v Bayer Inc.,[28] a price-fixing case brought on behalf of a class consisting entirely of indirect purchasers, the Ontario Court (General Division) dismissed the defendants’ motion to strike the plaintiff’s statement of claim for failure to disclose a cause of action. The Ontario Court held:
The claim appears to be novel, but given the overall purpose and object of the Competition Act to discourage anti-competitive practices and to protect the public from such practices, it is my view that it cannot be said with the degree of certainty necessary at this stage of the proceeding that a party in the position of the plaintiffs has no right of action.[29]
In the same case, on certification, relying on Hanover Shoe and Illinois Brick, the defendants again argued indirect purchasers do not have a cause of action. The certification judge held that although these authorities “deserve serious consideration by this court, they are plainly not binding.”[30] The certification judge observed that the decisions are based on policy considerations relating to the enforcement of American antitrust laws and “these policies may well differ from the values underlying Canadian competition law.”[31]
Some Canadian courts have also certified class actions on behalf of classes consisting of both direct and indirect purchasers. For example, in Irving Paper Ltd. v Atofina Chemicals Inc.,[32] the Ontario Superior Court of Justice certified an action on behalf of all persons in Canada who purchased hydrogen peroxide, products containing hydrogen peroxide and/or products produced using hydrogen peroxide. The Ontario Superior Court of Justice rejected the defendants’ arguments that the proposed class was overly broad in that it may include virtually all individuals and businesses in Canada. The Court held that “it is no response to the plaintiffs’ proposed class definition that because it is so large, it is unsuitable. If that were so, defendants engaged in ‘bad behaviour’ affecting large numbers of the population could do so with relative immunity, knowing that class proceedings were not available and individuals affected would be most unlikely to bring an individual action.”[33]
However, the recent decisions of the British Columbia Court of Appeal in Sun-Rype and Microsoft create some uncertainty as to whether indirect purchasers in Canada have a cause of action.
Sun-Rype relates to an alleged price-fixing conspiracy in the market for high fructose corn syrup, a sweetener used in various food products and soft drinks. The action was certified as a class proceeding on behalf of both direct and indirect purchasers of high fructose corn syrup.[34] The British Columbia Court of Appeal partially overturned certification, holding that indirect purchasers do not have a cause of action.[35]
The majority held that, in law, direct purchasers are able to recover the whole of the overcharge regardless of whether they were able to pass on all or part of the overcharge.[36] Defendants cannot rely on the passing on defence. Interestingly, this point was conceded by defence counsel, which we believe was a first. The majority found that, if there is no defence of passing on, those who seek to recover an overcharge that was passed on to them are effectively claiming a loss that is not recognized in law.[37] Thus, the majority reasoned that it follows that indirect purchasers have no cause of action. As the passing on defence is not recognized in law, the fact that some of the overcharge was passed on cannot be relevant to establishing a cause of action.[38]
The majority held that direct purchasers should be entitled to the whole of the overcharge regardless of pass on in the same way as if they were the only plaintiffs in the action.[39] Anything less would deprive them of what they would legally be entitled to recover.[40] The majority wrote that the class proceeding legislation is a procedural statute that cannot create or modify a cause of action.[41] The direct purchasers’ right to recovery cannot be compromised by the form of procedure, nor can indirect purchasers acquire a cause of action that they would not otherwise have.[42]
The majority expressed concerns that allowing indirect purchaser claims would create the potential of double recovery (something the law will not sanction) – defendants could be liable to direct purchasers for the full overcharge and to indirect purchasers for whatever portion of the overcharge that was passed on to them.[43]
In contrast to the majority decision, the minority held that the certification judge correctly drew a distinction between the pass on defence and the fact of pass through.[44] The minority agreed with the certification judge’s reasoning on this point. The certification judge found as follows:
- Pass through could occur in fact, even if the court does not allow defendants to use this fact as a defence.
- Defendants face potential liability to the class as a whole. At the certification stage, it does not matter which part of the class ended up with the loss. The focus is how much was the wrongful gain. By including both direct and indirect purchasers in the class and using econometric methods to determine the total amount overcharged by the defendants to the class as a whole, there will be no possibility of over recovery.
- The need to show a “credible and plausible methodology” for calculating pass through (as required in recent Canadian jurisprudence) eliminates the concern about the evidentiary complexity of calculating pass through.[45]
The minority stated that double recovery is the main argument against claims by indirect purchasers.[46] However, there is no realistic possibility of double recovery with a single all-encompassing class. Class proceedings are “flexible enough to create ways and means of avoiding overrecovery.”[47] The minority observed that the fact that double recovery can be hypothesized is not a good reason to deny a claim where no threat of double recovery exists.
In Microsoft, the plaintiffs allege various anticompetitive conduct which allowed the defendants to overcharge for their products. The action was certified as a class proceeding on behalf of retail purchasers of Microsoft products.[48] The appeal was decided in conjunction with Sun-Rype.
For the same reasons expressed in Sun-Rype, the minority decision held that indirect purchasers have a claim in a competition law case.[49] The plaintiffs alleged that Microsoft combined with original equipment manufacturers (“OEMs”) to achieve the overcharges. The minority decision held that, on the facts of this case, if the court were to give effect to the argument that indirect purchasers have no claim, the OEMs who are alleged to have participated in the unlawful activities would have valid claims and the innocent victims would have no means of recovery.[50]
In Option Consommateurs, the plaintiff sought to certify a class on behalf of both direct and indirect purchasers of DRAM (a semiconductor memory chip). The plaintiff sought recovery on behalf of direct and indirect purchasers in an amount equal to the aggregate amount of the unlawful overcharge.[51] In holding that indirect purchasers have a cause of action, the Quebec Court of Appeal agreed with the approach of the minority in Sun-Rype.[52] The Quebec Court of Appeal held that there was no risk of double recovery on the facts – the plaintiffs seek a single, aggregate loss in an amount equal to the total overcharge.[53] The Court of Appeal stated that the complexity of proving pass through is an evidentiary issue, the preclusion of the passing on defence does not mean, as a matter of fact, that pass on did not occur.[54] If the defendants faced an independent action by direct purchasers and paid to them the full amount of the overcharge, notwithstanding that pass on occurred, the direct purchasers would have been unjustly enriched at the expense of the indirect purchasers.[55] This occurs regardless of whether indirect purchasers have a legal means of recovering from the direct purchasers who were unjustly enriched.[56] Where direct and indirect purchasers join together to claim a single amount as the total of the unlawful overcharge, there is neither the risk of double recovery nor the risk of unjust enrichment.[57]
In the pending appeals in Sun-Rype and Microsoft, the Supreme Court of Canada is expected to provide some much needed guidance on the issue of whether indirect purchasers in Canada have a valid claim in law. Leave to appeal has been sought in the Option Consommateurs case and, if leave is granted, that case could be heard at the same time.
In price-fixing conspiracy and other antitrust cases, the unlawful overcharge is rarely borne entirely by direct purchasers. Where it can be established that all or part of the unlawful overcharge was passed through to indirect purchasers, the indirect purchasers should be able to recover for their losses. Allowing claims by indirect purchasers is consistent with the objectives of antitrust legislation – to provide recovery to those persons injured by anticompetitive conduct. Privity should not be a pre-requisite to recovery.
Standing of Indirect Purchaser Claims
Tied to the issue of whether indirect purchasers have a cause of action, is the question of which indirect purchasers have standing to advance a claim. To date, the analysis in Canada has focused on the cause of action aspect and limited consideration has been given to the issue of standing. Meanwhile, in the United States, the courts have developed some guidelines for which indirect purchasers have standing in an antitrust case.
In the United States (in the Illinois Brick repealer states), antitrust standing is about the question of “which persons have sustained injuries too remote [from an antitrust violation] to give them standing to sue.”[58] The courts have likened the analysis to that of “proximate cause” in the context of the common law.[59] The EC Draft Guidance Paper Quantifying Harm in Actions for Damages Based on Breaches of Article 101 or 102 of the Treaty on the Functioning of the European Union also discloses a requirement of causality or proximity between the wrongful act and the alleged harm.[60]
In the United States, there is some variance between the states on the exact principles to be applied; however, generally speaking, there are two general requirements for standing:[61]
- A plaintiff must demonstrate injury of the type that the antitrust laws were intended to prevent and that flows from that which makes the defendants’ acts unlawful. An allegation that the plaintiffs were required to pay supra-competitive prices as a result of the defendants’ anticompetitive conduct would generally satisfy this requirement. An “antitrust” injury requires that the plaintiff is a participant in the market in which trade was restrained.
The relevant market can include related markets that are “inextricably linked” with the market for the price-fixed product. For example, in In re Flash Memory Antitrust Litigation,[62] the indirect purchasers sued manufacturers of NAND flash memory products (used in computers, consoles, etc). The defendants moved to dismiss, contending indirect purchasers were not in the same market because they purchased the NAND flash memory as part of finished products. The Court did not dismiss the complaint, because while NAND flash memory has a variety of applications, it provides essentially the same functionality, digital storage. The court held that, while the markets for NAND flash memory and products containing NAND flash memory “technically may be different, in practice, both markets are inextricably intertwined and there is inherent cross-elasticity of demand between the two.”[63]
In contrast, in a series of cases relating commenced by credit card users,[64] it was alleged that Visa and MasterCard violated antitrust laws by requiring merchants, who accept Visa and MasterCard, to accept Visa and MasterCard debit cards as well. Visa and MasterCard charged the merchants a fee for each purchase made by their customers on their Visa and MasterCard debit cards. The plaintiffs alleged that merchants passed on these fees by raising the prices of goods sold to consumers. The court refused standing on the basis that the plaintiffs were not participants in the relevant market – the business of providing debit services to merchants. The plaintiffs were asserting a derivative injury based on the theory that the fees were passed on through the increase of prices of thousands of unrelated goods.
- A plaintiff must show that he is a proper plaintiff in light of the factors expressed in Associated General Contractors v California State Council of Carpenters [AGC].[65] These include: (a) the directness or indirectness of the asserted injury; (b) the existence of an identifiable class of persons whose self-interest would normally motivate them to vindicate the public interest in antitrust enforcement; (c) the speculativeness of the alleged injury; and (d) the difficulty of identifying damages and apportioning them among direct and indirect victims so as to avoid duplicative recoveries.
The application of the AGC factors is fact-based and the relative importance of any single factor will vary from case to case.[66] In applying these factors, the courts will consider inter alia the nature of the product, the length and complexity of the chain of distribution (including whether the price-fixed product was substantially altered in the chain of distribution), and the complexity of assessing damages.[67] Standing is more readily granted where the price-fixed product is not substantially altered in the chain of distribution and/or where the price-fixed product forms a large component of the end product.[68]
As the law in Canada and other jurisdictions continues to develop, it might be necessary for the lawmakers and courts to consider whether it is appropriate to create some boundaries in terms of which indirect purchasers have standing to bring antitrust claims. It is possible that these jurisdictions will turn to the U.S. experience for guidance. Given the underlying objectives of the antitrust legislation – to provide remedies for persons injured by antitrust conduct – lawmakers and courts should generally be reluctant to deny standing, especially where the plaintiffs are able to demonstrate injury.
The complexities of the distribution chain should rarely be used as a basis to deny standing. The courts have demonstrated an ability to deal with complex economic analysis. Where it is not feasible to trace the unlawful overcharge through the entire distribution chain – because evidentiary shortcomings and/or the costs of obtaining the relevant evidence and tracing the overcharge through the entire distribution chain(s) is disproportionate to the benefit – damages can be awarded on an average or proportional basis or a cy-pres basis to organizations that act for the benefit of indirect purchasers.
Resolution of Direct and Indirect Claims in a Single Proceeding is the preferred approach
In Canada, most price-fixing conspiracy cases have been commenced in a single proceeding on behalf of both direct and indirect purchasers.
In the settlement context, claims of indirect purchasers are typically resolved in tandem with the claims of direct purchasers. The settling defendants will consent to certification for settlement purposes of a broader class (generally consisting of all purchasers of the price-fixed product, including manufacturers, distributors, intermediaries and consumers) in order to achieve a more fulsome release.[69] The settlement proceeds are distributed to direct and indirect purchasers based on an estimate of the extent to which the alleged overcharge has been passed through the distribution chain.
In those Canadian cases that have certified claims on behalf of direct and indirect purchasers, the courts have accepted the plaintiffs’ approach of determining the global damages figure (in an amount equal to the total unlawful overcharge) and then allocating damages among the different levels of purchasers based on the extent to which the overcharge was passed through the distribution chain. The plaintiffs in these cases submitted expert evidence to the effect that pass-through can be measured using a regression analysis.[70]
In Pro-Sys Consultants Ltd. v Infineon Technologies AG,[71] the British Columbia Court of Appeal certified a class consisting of all levels of purchasers of DRAM. The Court of Appeal held that, at the common issues trial, the trial judge would determine aggregate losses on a class-wide basis. The trial judge could then distribute the award by assessing loss on an individual basis, an average or proportional basis or a cy-pres basis. The participation of the defendants would not be necessary at this point.[72]
In Option Consommateurs, the Quebec Court of Appeal accepted the process of determining the aggregate damages in an amount equal to the unlawful overcharge and then apportioning the damages as between direct and indirect purchasers.[73]
Vitapharm Canada Ltd. v F. Hoffmann-La Roche Ltd.[74] involved claims by direct and indirect purchasers of various vitamins. In the context of a contested carriage motion, the court endorsed a system whereby all levels of purchasers could claim for their losses in a single proceeding. The court further held that “upon a determination of the common issues, including the global damages with respect to a product, the plaintiffs would seek directions as to the appropriate manner and means of distribution amongst the class members.”[75] Until determination of the common issues, including the assessment of global damages for each product, there is no divergence of interests among class members and through the “common pursuit of the common issues, all class members are more likely to maximize the quantification of their overall, global damages and achieve their ultimate, shared goal of a fair and just resolution of the claims of all class members.”[76]
In Canadian settlements, various mechanisms, including expert economic evidence and mediations, have been used to determine the allocation of settlement proceeds between different categories of purchasers. A mediation process was recently used, in the United States, in the context of the air cargo shipping services class action where Lufthansa paid a single amount to resolve all direct and indirect claims.[77]
The approach of resolving the claims of all levels of purchasers in a single action is consistent with the approach recommended by the Antitrust Modernization Commission:
Legislatively overruling Illinois Brick and Hanover Shoe will allow a limitation of the defendants’ liability to treble the overcharges suffered by the direct purchasers as a result of the initial overcharge. These damages should be allocated among the different claimants, whether direct or indirect purchasers, according to the evidence regarding their actual damages.
Consolidating all claims in a single proceeding will facilitate an appropriate allocation of relief among the claimants by the court. In addition, once all parties are before a single court, a global settlement becomes possible. Many of these disputes are likely to be settled; once liability and total damages are established, allocations of damages may often be determined by settlements among the claimants. Furthermore, limiting damages to the amount of the initial overcharge should streamline resolution of the litigation. Indeed, once the amount of overcharge has been determined, it may be possible to resolve the issues of how to allocate those damages among direct and indirect purchasers without the further involvement of the defendants.[78]
The all-inclusive approach has a number of benefits:
- Avoidance of multiplicity of proceedings. Multiple proceedings create a host of problems: parties, in particular, defendants, are forced to undergo duplicative and wasteful litigation; judicial resources are wasted; inconsistent findings are made; and there is potential for duplicative damages.
- Ensuring recovery by those injured. Allowing both direct and indirect purchasers to claim through a single proceeding will ensure that all those injured by the unlawful conspiracy are compensated for their losses. Relying on expert evidence, damages can be allocated based on the extent to which the illegal overcharge was passed through the chain of distribution. While this will undoubtedly be a difficult task, the court is commonly asked to consider expert economic evidence and victims of an illegal cartel should not be denied recovery simply because calculating damages is difficult.
On this point, there is a key distinction between Canada and the United States. In Canada, damages are paid based on the injured party’s actual losses (the total damages award is the aggregate amount of the illegal overcharge). In the United States, “treble” damages are available. This means that the injured party will receive damages in excess of his or her actual losses.
- Avoidance of a windfall to direct purchasers. In certain circumstances, direct purchasers will only absorb a small part of the illegal overcharge. For example, where the direct purchaser is a distributor who re-sells the price-fixed product without any further processing, the direct purchaser will be able to pass on much of the overcharge to his, her or its customers. Allowing these direct purchasers to claim the full overcharge results in a windfall for the direct purchasers while leaving those persons injured by the alleged conspiracy entirely without compensation.
- Encourages settlement. Defendants can resolve all claims as part of a single global settlement, negotiating with a single set of counsel and seeking court approval from a single court.
Conclusion
Although Sun-Rype and Microsoft have created some uncertainty in Canada with respect to the claims of indirect purchasers, the courts in Canada had been moving towards a fair approach to the issue of pass through and had been dealing with claims in an efficient manner. The approach endorsed by some Canadian courts in pursing the claims of all levels of purchasers in a single proceeding is the preferable system of redress. It permits all persons injured by anticompetitive conduct to recover for their losses without creating the potential for duplicative recovery and inconsistent findings. The all-inclusive approach also minimizes the burden on the judiciary. Such an approach would be consistent with the recommendations of the Antitrust Modernization Committee and the White Paper commissioned by the European Commission. Clarity from the Supreme Court of Canada is welcome and should serve to limit some of the interlocutory proceedings presently seen in the practice area.