The Supreme Court of Canada released reasons for judgment in three cases on October 31, 2013: Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57 (“Pro-Sys“) and Sun-Rype Products Ltd. v. Archer Daniels Midland, 2013 SCC 58 (“Sun-Rype“), both cases on appeal from the British Columbia Court of Appeal, and Infineon Technologies AG v. Option consommateurs, 2013 SCC 59 (“Infineon“), on appeal from the Quebec Court of Appeal.

All three cases required the Supreme Court to consider the law on the certification of class actions and in particular, the law surrounding the composition of classes.

Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57

In Pro-Sys, a class action proceeding was brought by Pro-Sys Consultants Ltd. in which it was alleged that the defendant, Microsoft Corporation (“Microsoft”), overcharged for its operating systems and applications software. The proposed class was comprised of the ultimate consumers of Microsoft’s products, who acquired the products from retailers. The ultimate consumers are also known as “indirect purchasers” because they have no direct commercial relationship with Microsoft.

The British Columbia Supreme Court initially certified the class in Pro-Sys, but that decision was subsequently overturned by the British Columbia Court of Appeal.

The main issue that the Supreme Court was tasked with deciding was the viability of the indirect purchasers’ claims against Microsoft. The first requirement for certification of a proposed class under the Class Proceedings Act, R.S.B.C. 1996, c. 50 (the “CPA“) is that the pleadings disclose a cause of action. The British Columbia Court of Appeal found that the indirect purchasers had no cause of action against Microsoft, and therefore found that there was no basis for certifying the proposed class.

The Court of Appeal’s decision in this regard was based almost solely on the rejection of what is known as the “passing on defence” in Canadian jurisprudence. The passing on defence has been put forth by manufacturers at the top of distribution chains who have been accused of overcharging for products. As part of the defence, manufacturers allege that since parties that purchase overcharged products from them pass on those overcharges further down the distribution chain, those purchasers have not suffered a loss. In simple terms, if a manufacturer sells a product to a distributor for $10 that should cost $5, and the distributor then sells that product to a consumer for $12 instead of $6, that distributor has not suffered a loss and cannot bring a claim against the manufacturer. The loss caused by the overcharges in this example is passed onto the ultimate consumer.

The passing on defence has been rejected by Canadian jurisprudence and by Kingstreet Investments Ltd. v. New Brunswick (Department of Finance), 2007 SCC 1 in particular. The rejection of the passing on defence means that, in practice, direct purchasers such as distributors have a cause of action against manufacturers for overcharges even if that direct purchaser passes on the overcharges to indirect purchasers further down the distribution chain.

In Pro-Sys, Microsoft argued that since direct purchasers such as Pro-Sys Consultants Ltd. had a cause of action against Microsoft, the indirect purchasers (who comprised the proposed class) did not have a similar cause of action. The Supreme Court explicitly rejected this argument, and instead held that the rejection of the passing on defence does not logically lead to a corresponding rejection of what could be called the “offensive use of passing on”. The indirect purchasers, therefore, had a cause of action against Microsoft and the first requirement in the certification of a proposed class was met.

The Supreme Court then went on to consider the various causes of action alleged in the proceeding, such as a breach of the Competition Act, R.S.C. 1985, c. 34, conspiracy, and intentional interference with economic interests. The Supreme Court found that it was not plain and obvious that those causes of action would be unsuccessful. In so finding, the Supreme Court acknowledged that a healthy amount of deference ought to be shown to the applications judge.

Viewing the remaining requirements for certification, the Supreme Court stressed that some basis in fact for each of the requirements must be set out; proof on a balance of probabilities is not necessary. With that in mind, the Supreme Court upheld the findings of the applications judge that:

1. there was a common issue amongst the proposed class;
2. damages could be determined on an aggregate basis; and
3. a class action is the preferable procedure.

In considering whether a class action is the preferable procedure, the Supreme Court noted the objectives of deterrence and behaviour modification, which it found would not be addressed if individual plaintiffs were forced to bring claims on their own.

The Supreme Court unanimously allowed the appeal from the British Columbia Court of Appeal and restored the certification of the class action granted by the applications judge.

Sun-Rype Products Ltd. v. Archer Daniels Midland, 2013 SCC 58

Sun-Rype, the companion case to Pro-Sys, also concerned a certification of a class action. The defendant in the Sun-Rype proceedings was the manufacturer of high fructose corn syrup, and was alleged to have conspired to fix the price to the detriment of those below it in the distribution chain. The plaintiffs were a proposed class comprised of both direct and indirect purchasers of the corn syrup.

In Sun-Rype, the Supreme Court was again asked to consider the viability of claims made by indirect purchasers and again found that indirect purchasers do have a cause of action against manufacturers of products. The principal difference between the Sun-Rype case and the Pro-Sys case was the composition of the respective proposed classes of plaintiffs: the proposed class in Sun-Rype consisted of both indirect and direct purchasers, whereas the proposed class in Pro-Sys consisted only of indirect purchasers.

The Supreme Court found that it was unimportant that the proposed class in Sun-Rype consisted of both indirect and direct purchasers; a mixed class may lead to more complications than would otherwise exist, but those difficulties do not preclude a mixed class from being certified.

The proposed class in Sun-Rype was not certified; however, because the Supreme Court agreed with the British Columbia Court of Appeal’s finding that there was no identifiable class of indirect purchasers. The principal problem for the proposed class was a lack of evidence establishing that the proposed class members actually purchased a product containing corn syrup manufactured by the defendant. Simply put, the indirect purchasers could not trace the sweeteners used in products to the corn syrup made by the defendant. Just as this would have been fatal if the indirect purchasers had brought claims on their own, so too was it fatal to their claims as part of a proposed class under the CPA.

The Supreme Court also dismissed the claim on behalf of the direct purchasers for a constructive trust, as there was an insufficient connection to property, which is a necessary element of the claim. The Supreme Court ruled 7-2 on these issues, with Justices Karakatsanis and Cromwell dissenting.

Infineon Technologies AG v. Option consommateurs, 2013 SCC 59

Infineon entailed similar issues to those in Pro-Sys and Sun-Rype, but was decided under the regime of the Quebec Civil Code. The defendant companies in Infineon manufacture and sell a microchip that allows information to be stored and rapidly retrieved electronically. The defendant admitted to participating in an international conspiracy to fix prices and thereby eliminate competition; it had been subject to fines in both the United States and Europe.

The plaintiffs in Infineon were a group of direct and indirect purchasers of the defendant’s microchip. Certification of the group was not granted at the application level, was granted by the Quebec Court of Appeal, and was confirmed unanimously by the Supreme Court.

One of the key issues the Supreme Court was required to decide related to the jurisdiction of the Quebec courts to deal with the allegations raised. In the end, the Supreme Court upheld the decision of the Quebec Court of Appeal to the effect that where damage is suffered in Quebec, the Quebec Civil Code gives jurisdiction to the Quebec courts to hear matters. In Infineon, despite the widespread business of the defendant, the damage was found to have occurred in Quebec.

The remainder of the Supreme Court’s decision in Infineon largely followed the framework of the Pro-Sys and Sun-Rype cases. Considerations such as the commonality of interests among the members of the proposed group were determined in favour of the plaintiffs. Any conflicts that could arise between direct and indirect purchasers had not yet manifested themselves and could be dealt with in the future should those conflicts arise.

Option consommateurs was allowed to continue to act as the representative plaintiff in these proceedings despite the arguments of the defendant to the effect that Option consommateurs was conflicted in its role; it was argued that its advocacy for the rights of consumers ran counter to the interests of the direct consumers. The Supreme Court rejected the arguments in this regard, stated that it was premature to deal with Option consommateurs’ potential conflicts, and stated that it would be most appropriate to deal with actual conflicts if and when those conflicts actually arise.

Conclusion

The conclusions to be drawn from the three cases above are that:

1. indirect purchasers have a cause of action against manufacturers of products;
2. indirect purchasers and direct purchasers can together comprise a class for the purposes of class action lawsuits;
3. any conflicts that could arise between direct purchasers and indirect purchasers do not preclude the two groups from forming a class; conflicts ought to be dealt with once they arise; and
4. regardless of the composition of a class, evidence must still be advanced to demonstrate the connection between the members of that class and the actions/products of the defendant manufacturers.

Justice Rothstein wrote both the Pro-Sys and the Sun-Rype decisions, while Justices LeBel and Wagner wrote the Infineon decision. All 9 judges participated in the three hearings.