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WAR ON PRICE FIXERS
SUPREME COURT RULING OPENS THE DOOR FOR MORE CLASS ACTIONS BY DREW HASSELBACK
A Supreme Court ruling opens the door for more class-action lawsuits.
Two summers ago, Beverley McLachlin, the
17th and current Chief Justice of the Supreme Court of Canada, spoke in Vancouver to the annual convention of the Canadian Bar Association. It’s become tradition for her to appear before the legal community’s largest voluntary group, review some of the court’s recent business, then offer her views on the state of the judicial system. Her remarks contained a quick mention of the court’s upcoming fall session, a busy docket of almost 30 cases, but, for whatever reason, only specifically mentioned a set of three “indirect purchaser” cases that the court would ultimately hear on Oct. 17, 2012. That she would single out these cases, which would examine whether ordinary consumers have a right to sue corporations alleged to have rigged their prices, was a clear indication of how seriously the court was considering the issue.
More than a year has passed since those hearings, but on Oct. 31 the court issued three rulings — Sun-Rype v. Archer Daniels Midland, Infineon v. Option Consommateurs and Pro-Sys v. Microsoft — that have massive implications for consumers, corporations and a unique caste of Canadian legal entrepreneurs, class-action lawyers. The court’s rulings effectively eviscerated every legal argument that corporate defence lawyers have tried to throw in the way of pricefixing lawsuits, one of the biggest specialty areas in the class-action business. As a result, it’s open season on alleged price fixers. The impact reaches far beyond the cases themselves, putting Canadian companies on notice that if they get caught rigging prices, Canada’s regulator, the Competition Bureau, won’t be their only worry.
Suing companies for breaching various provisions of the Competition Act is a lucrative business for class-action lawyers. Still, some plaintiff-side lawyers were nervous. Price fixing, which is illegal under the act, has already led to more than a decade’s worth of legal battles. But most of those cases have settled long before ever facing the ultimate test, a hearing before the Supreme Court of Canada. Had the court revealed a flaw in the legal underpinnings of the three cases in question, a lot of class-action lawyers would have been thrown out of business. There was no need to worry. The court ultimately gave the class-action bar a green light to forge ahead with their brand of justice.
“Price-fixing cases are wide open for business. That’s the bottom line here,” says
J.J. Camp, a plaintiff-side class action lawyer with Camp Fiorante Matthews Mogerman in Vancouver. Adds David Sterns, a plaintiff-side lawyer with Sotos LLP in Toronto: “It’s a bad day to be a price fixer in Canada. It’s a good day for consumers. The court really swept aside many of the arguments that the defendants were clinging to.”
When it comes to monitoring prices, Canada has a federal law, the Competition Act, and a federal regulator, the Competition Bureau, and even a special court for anti-trust matters, the Competition Tribunal. Yet Parliament decided this wasn’t enough, so it tossed private-sector enforcement into the mix. The result is a mini-industry: price-fixing class actions. Lawyers have targeted corporations in a variety of areas: chocolate, vitamins, chemicals, computer chips, auto parts, LCD screens — you name it. Corporate defendants have paid tens of millions to settle these claims without trial, with plaintiff-side lawyers usually collecting about 25% to 30% of the total. Often, the amount left over for individual class members is so small that it’s given to charity, rather than the consumers it was supposed to compensate. The Supreme Court has indicated that it’s okay with that, because, theoretically at least, it deters other companies from cheating.
“We were definitely waiting for this decision because, quite honestly, a negative decision would have been the end of this type of practice. And with this decision, it’s definitely not the end,” says Daniel Belleau, a partner with Belleau Lapointe LLP in Montreal, which represents the plaintiffs in the Option Consommateurs case.
The question, of course, is whether it’s a good policy. “It changes the very nature of what’s going on from a compensatory system to a retribution system,” explains John Callaghan, a litigator with Gowling Lafleur Henderson LLP in Toronto.
The Competition Policy Council, a group of academics, economists and leading competition law practitioners, met just before the decisions came out to consider the value of the private-sector approach. Ultimately, the group decided it supports the concept, but its endorsement seems lukewarm. “Some Council members were concerned relatively easy standing for indirect purchasers could prove a drain on court or others’ resources, and advance rent-seeking lawsuits,” the group says. “Taken together, the Council reached the consensus that the current language in the Competition Act, to the extent to which it permits standing for private actors who can prove they were harmed by anticompetitive behaviour, was appropriate.”
There’s a simple reason these cases proceed as class actions. Individual consumers actually lose very little from price fixing. If any single person was motivated to sue a company, the legal cost of that action would far outweigh any possible recovery. Class actions allow large groups of people to pool resources and fight the litigation en masse. Or so goes the theory. In reality, plaintiffside class-action lawyers flag an interesting case, line up some “representative” plaintiffs to launch the suit, then ask a court to “certify” the lawsuit as a class action. That gives plaintiff lawyers greater latitude in how they prosecute the litigation. And, generally speaking, winning certification of a case has given plaintiffs enough negotiating power to secure out-of-court settlements from corporate defendants.
Put simply, certification is the real battleground for class actions. The three price-fixing cases that wound up before the
Supreme Court involved situations where corporate defendants fought certification tooth and nail. The big issue before the court was whether “indirect purchasers” have a right to sue corporations for alleged breaches of the Competition Act. The Supreme Court answered that they do, but the court went further. “A defendant contesting certification on a price-fixing case has a pretty steep hill to climb now,” says Charles Wright, a plaintiff-side lawyer with Siskinds LLP in London, Ont.
Courts in the United States and Canada have wrestled with how to treat price-fixing cases for a long time. One interpretation of the law, which is based on a U.S. Supreme Court case called Illinois Brick, says that such lawsuits should be available only to “direct purchasers” who may have bought illegally overpriced goods directly from a manufacturer. Yet Illinois Brick is plagued with problems, not the least of which is that ordinary consumers are often several steps removed from manufacturers and their direct purchasers. Canadian plaintiffside class-action lawyers say the right to sue should extend to indirect purchasers — that is, businesses and consumers who may be paying higher prices as an overcharge percolates through the economy.
Decades’ worth of harsh academic commentary in the U.S. has pulverized the value of Illinois Brick as a common law doctrine and put the concept on shaky ground in Canada. Plaintiff-side class-action lawyers came to the Supreme Court equipped with an even stronger weapon, the wording of Section 36 of the Competition Act. The section states that “any person” can sue over alleged price fixing. That has to mean that Parliament allows anyone to sue, including indirect purchasers, they argued. Defenceside lawyers said that interpretation was too simplistic: The right to sue should be limited by the sheer difficulty of proving damages down to the consumer level.
The court rejected Illinois Brick and came down squarely on the side of indirect purchasers. It said these cases are not merely about putting money in the hands of consumers. If the money has to go to charity instead, so be it, since that serves as a deterrent to price-fixing behaviour. “Indirect purchaser actions may, in such circumstances,
THE CHIEF JUSTICE SINGLED OUT THREE “INDIRECT PURCHASER” CASES TWO SUMMERS AGO, INDICATING JUST HOW SERIOUSLY THE COURT WAS CONSIDERING THEM Chief Justice of Canada Beverley McLachlin
be the only means by which overcharges are claimed and deterrence is promoted,” writes Justice Marshall Rothstein in Pro-Sys. “The rejection of indirect purchaser actions in such cases would increase the possibility that the overcharge would remain in the hands of the wrongdoer.”
Jasminka Kalajdzic, a law professor at the University of Windsor, says the Supreme Court’s decision was huge because it settles an important debate about class actions: Should they be about compensating plaintiffs, with deterrence thrown in as a happy consequence, or can they be about deterrence alone? “In Sun-Rype, the majority and dissent both find that class actions, even when they do not compensate class members directly, perform a deterrence function and justify the litigation,” she says.
The result was not a complete win for the plaintiff-side lawyers. The Supreme Court allowed the lawsuits by indirect purchasers in the Pro-Sys and Infineon cases to stand, but the court, in a 7-to-2 ruling, dismissed the Sun-Rype case on the grounds that plaintiffs’ counsel had not been able to properly connect members of the prospective class with the loss. The same products sold to consumers in Sun-Rype contained ingredients that changed over time, depending on commodity prices. This meant consumers didn’t always know when they were buying products that contained overpriced ingredients.
Camp, who represents the plaintiffs in both Pro-Sys and Sun-Rype, takes the mixed result in stride. “We won a massive victory and lost a tiny skirmish,” he says. “The Supreme Court of Canada very happily did the right thing by allowing indirect claims and clearing away any of the legal underbrush about pass through.”
Pass through or passing on was indeed a key challenge for the court. The legal doctrine of passing on has arisen in cases where various Canadian governments have been caught demanding illegal fees or taxes from taxpayers. Businesses have sued governments for the return of the money, while governments have replied that these businesses were never out-of-pocket because they could always hike prices to recoup the money from customers.
In a prior ruling, the Supreme Court ruled passing on has no place in Canadian
law so when the Court of Appeal in British Columbia heard the Sun-Rype and Pro-Sys cases, it refused to certify the class actions. The B.C. court was concerned that some indirect purchasers could pass on an overcharge to a subsequent level of consumers, while at the same time participate in a pricefixing lawsuit. Thus, they could conceivably benefit from a “double-recovery.”
While Justice Rothstein upheld — even broadened the scope — of the ban on the passing-on defence in Canadian law, he rejected the argument that this ban should result in the denial of indirect purchaser claims. In a stunning example of judicial jujitsu, Justice Rothstein writes that just because passing on is not allowed as a defence doesn’t mean plaintiffs are barred from using it on offence.
“In my opinion, allowing the offensive use of passing on should not frustrate the deterrence objectives of Canadian competition laws,” Justice Rothstein writes. “The rationale for rejecting the passing-on defence because it frustrates enforcement is not a reason for denying an action to those who have a valid claim against the overcharger.”
Michael Osborne, a partner with Affleck Greene McMurtry LLP in Toronto, says allowing passing on as a legal offense while disallowing it as a defence is just playing a word game. “This is a legal traffic accident. It’s the collision of a lot of principles.” Adam Fanaki, a partner with Davies Ward Phillips & Vineberg LLP in Toronto, adds: “I don’t think there’s really much attempt to justify, from a legal perspective, why it’s applicable in one context but not in the other.”
Yet Ira Nishisato, a partner with Borden Ladner Gervais LLP in Toronto, says the court may have had no other choice. The court couldn’t avoid reaching a decision simply because too many competing concepts were at play. “The Supreme Court of Canada has clearly favoured practicalities over technicalities. These decisions are a strong endorsement of the objectives of consumer protection law and anti-trust law.”
Another defence-side challenge emerged from the complexity of these cases. Lawyers argued that the right to sue should be limited by the sheer difficulty of proving damages down to the consumer level. Price fixing is not a linear thing. There isn’t a simple straight line that connects the precise amount of a company’s illegal overcharge with the few extra cents or dollars an endconsumer must pay for something. “Price fixing is like a rock dropped into the lake,” Osborne says. “The ripples never stop. And these are ripples in choppy water, so they’re constantly bumping into winds and waves.”
The Supreme Court rejected the suggestion that following an overcharge through the economy is too impossible for the courts. “Indirect purchaser actions should not be barred altogether solely because of the likely complexity associated with proof of damages,” Justice Rothstein writes in Pro-Sys.
Still, Paul Martin, a litigator with Fasken Martineau DuMoulin LLP in Toronto, wonders if the court passed the buck on a number of issues on the assumption that lower courts can manage them. For example, a common question in price-fixing cases is whether to lump direct and indirect purchasers into a single class, or treat them separately. “The Supreme Court basically doesn’t give guidance to the lower courts in that regard,” he says.
Another issue that has attracted some comment is the Supreme Court’s decision not to raise the bar on the quality of evidence brought forward in favour of certification motions. Defence-side lawyers had hoped the Supreme Court would follow the current trend in the U.S., which is to toughen the standards for certification. “Perhaps most surprising is that the court didn’t raise the level of scrutiny that motions judges must give to expert evidence at the certification stage to the same level as in the U.S.,” says Emrys Davis, a litigator with Bennett Jones LLP in Toronto.
Defence-side lawyers love to point out how few of the funds recovered in settlements are actually disbursed to consumers. Theargument roils J.J. Camp. “I call bullshit on that,” the feisty trial lawyer of more than
40 years says. Camp’s firm was one of four that recently negotiated a $23.2- million settlement of a chocolate price-fixing action with four candy bar manufacturers where the disbursement terms ensure that 75% of the proceeds go to actual individuals or, as he puts it, “Our moms and dads and warm, live fleshy people.” He cites other recent examples — a case involving computer memory chips, and another involving computer screens — where similar rules are in place to ensure the money goes to consumers.
The defence bar and those cynical about price-fixing class actions might be doing a great job of saying consumers don’t get the money, but Camp says the recent facts show otherwise. “No. 1, we’ve turned that corner. It just isn’t true. And No. 2, I’m sorry, but deterrence is way more important than quibbling about where the money goes.”
As of Oct. 31, Canada’s highest court agrees with him.