Christopher Naudie, Geoffrey Grove,
Sylvain Lussier Ad. E.
Nov 17, 2011
The class proceedings in DRAM arise from a historical international antitrust investigation relating to the pricing of memory chips in the electronic components industry. In brief, DRAM is a type of semiconductor memory found in many commonly-used electronic devices, including computers, cell phones, gaming consoles and other devices. Following a lengthy investigation in the U.S., Europe, Asia and elsewhere, a number of foreign manufacturers negotiated pleas with the U.S. Department of Justice. However, these pleas were specifically limited to certain sales to original equipment manufacturers based in the U.S. To date, there have been no criminal proceedings or pleas in Canada. Indeed, there remains ongoing uncertainty whether the criminal provisions of the Competition Act have any application to alleged anti-competitive conduct involving foreign participants that occurred entirely outside Canada.
In spite of the absence of any criminal proceedings in Canada, a coordinated group of plaintiffs initiated class proceedings in B.C., Quebec and Ontario against the foreign manufacturers. In their claim, the plaintiffs sought to represent a consolidated class that included all direct and indirect purchasers of DRAM or products containing DRAM in Canada from 1999 to 2002. Given the ubiquity of electronic products in the modern consumer marketplace, the size of the proposed class in Canada was potentially enormous. Moreover, given that DRAM is a small component product that is distributed internationally through a wide variety of complex distribution channels, the plaintiffs faced a significant challenge in demonstrating a uniform class-wide impact, since a small overcharge imposed in another country may have simply dissolved in a long international distribution chain before reaching Canada.
The certification proceedings were first argued in B.C. At first instance, the B.C. Supreme Court denied certification. On appeal, a majority of the B.C. Court of Appeal reversed. In a leading decision released in November 2009, the B.C. Court of Appeal granted certification of a combined direct and indirect class. While the B.C. Court of Appeal acknowledged the significant evidentiary challenges associated with proving a class-wide impact for such a component product across many distribution channels, the Court held that the class plaintiffs were only required to demonstrate a “plausible methodology” for the purposes of certification. In applying this new standard, the Court of Appeal found that the plaintiffs had met their evidentiary burden and the Court certified a consolidated direct and indirect class of purchasers in B.C. (See our Osler Update dated April 15, 2011, on these rulings.)
In coordination with these proceedings, the plaintiffs sought authorization of a similar class proceeding in Quebec. At first instance, the motions court refused authorization to institute a class action proceeding under Quebec’s unique rules. First, the court found it did not have jurisdiction over the foreign defendants, particularly since the plaintiffs were relying on foreign pleas in respect of conduct that occurred outside Canada. Second, the court held that, even if it had jurisdiction, the plaintiffs had failed to meet the test for authorization in Quebec. Under Quebec law, the evidentiary burden for certification/authorization is generally lower relative to other jurisdictions. Under the key component under Article 1003(b) of the Code of Civil Procedure, the plaintiff is only required to allege specific facts in its motion for authorization that seem to justify the conclusions sought. In its prior holding in Harmegnies1, the Quebec Court of Appeal had previously held that pursuant to this test, a plaintiff must generally allege specific facts that constitute a prima facie demonstration of the “collective character” of the loss. In applying this standard, the Court held that the plaintiffs in DRAM had failed to meet this standard, since the plaintiff’s motion was largely predicated on foreign pleas and it was unclear whether there was any “collective” harm in Quebec.
On appeal, the Quebec Court of Appeal unanimously reversed these findings. With respect to jurisdiction, the Court of Appeal found that even though there are territorial limits on the application of the conspiracy offence under section 45 of the Competition Act, the Court could still exercise jurisdiction in respect of the plaintiff’s allegations of “extracontractual liability” (i.e., the plaintiff’s claims in tort) given the plaintiff’s allegation that class members had suffered harm in Quebec. With respect to the test for authorization/certification, the Court of Appeal held that the motions judge had applied an overly broad reading of its prior decision in Harmegnies. While the Court of Appeal acknowledged that the allegations in the motion relating to loss were “bare-boned” and that the plaintiffs had not adduced any expert evidence, the Court of Appeal nonetheless found that the plaintiffs had met the test for authorization/certification under Article 1003 – since the plaintiffs had alleged sufficient facts in its pleadings and with reference to foreign pleas to establish, prima facie, that all members of the class – including indirect purchasers – had suffered a loss.
The Quebec Court of Appeal also specifically addressed the standing of indirect purchasers to pursue a claim for damages arising from anti-competitive conduct under the Competition Act. In its decision, the Court of Appeal took note of the motion judge’s favourable comments relating to the U.S. Supreme Court’s decisions in Illinois Brick 2 and Hanover Shoe3. In addition, the Court of Appeal acknowledged the B.C. Court of Appeal’s recent decisions in Sun-Rype4 and Microsoft5 which held that indirect purchasers have no cause of action for damages under the Competition Act. However, the Quebec Court of Appeal in the DRAM disagreed with these decisions, and specifically endorsed the dissenting opinion in Sun-Rype and Microsoft. First, the Court held that concerns regarding “double recovery” raised in Hanover Shoe do not apply in cases where “the direct and indirect purchasers have banded together to claim the aggregate of the losses they have suffered from the respondents”. Second, while the Court acknowledged the evidentiary difficulties of establishing pass-through in a complex distribution chain, the Court held that it would be “inappropriate, once damage is alleged, to say that the class action should not proceed past the authorization stage because the challenge is too great.” As a result, the Court held that it was premature to dismiss the claims of indirect purchasers, and it certified a consolidated direct and indirect class of purchasers in Quebec.
The Court of Appeal’s decision in DRAM represents a significant development in antitrust law and class action jurisprudence in Canada for three reasons. First, in its decision, the Court appears to have departed from its prior precedent in Harmegnies and has set a low evidentiary bar for the certification of antitrust class actions in Quebec, even in cases involving a foreign product and a complex distribution chain where the potential impact on class members is uncertain at best. Second, the Court has confirmed that it will exercise jurisdiction over foreign manufacturers that engage in wrongful extracontractual conduct. However, in so doing, the Court appears to have confirmed that there are strict territorial limits on the application of the conspiracy offence over foreign defendants under the Competition Act. Third, the Court held that it remains open for the courts in Quebec to certify indirect purchaser claims. While the Court stopped short of finding an outright cause of action on behalf of indirect purchasers, the Court unanimously expressed its disagreement with the B.C. Court of Appeal’s adoption of the rule of Illinois Brick.
The plaintiffs in Sun-Rype and Microsoft have sought leave to appeal to the Supreme Court of Canada, and the Supreme Court of Canada’s ruling on the leave application is pending. Given the conflicting rulings between the B.C. Court of Appeal and Quebec Court of Appeal, there is a compelling case to be made that the Supreme Court of Canada needs to intervene to clarify this fundamental question of antitrust law and policy.
1 Harmegnies v. Toyota Canada Inc., 2008 QCCA 380.
2 Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
3 Hanover Shoe v. United Shoe Machinery Corp., 392 U. S. 481 (1968).
4 Sun-Rype Products Ltd. v. Archer Daniels Midland Company, 2011 BCCA 187.
5 Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2011 BCCA 186.