Lexpert US Guides

COMPETITION CLASS ACTIONS corporated, the idea being that the ultimate price of the device is necessarily a reflection of the total cost of its constituent components. legislation to overcome the rule with respect to antitrust claims subject to the jurisdiction of the state courts. EASIER SAID THAN DONE DEVELOPMENTS IN CANADA Although easily stated, the causal connection between the alleged illegal conduct and the alleged damages in such cases is subject to harrowing evidentiary uncertainties: how can anyone be certain that the initial overcharge for the component was passed along the supply chain or distribution network (entirely or partially) to become incorporated in the price paid by consumers for the end product? Some distribution chains may have more than a dozen participants, each operating in distinct markets with different price/demand elasticity characteristics — simply put, at some points in the supply chain it may be possible to "pass on" some or all of the price increase to the next participant in line. At other points in the chain, it may be impossible and the price increase may have to be absorbed by the middleman, who is forced to accept a reduction in profits as a result. Recognizing this economic reality raises the question: which participants along the supply chain have a cause of action for damages, and how can you tell? In Canada, the issue of indirect purchaser claims didn't arise until some 20 years after the decision in Illinois Brick, but coincidentally on the basis of remarkably similar facts. In Chadha v. Bayer Inc. (2003), 63 O.R. (3d) 22 (C.A.), the Ontario Court of Appeal dismissed a class action by homeowners claiming damages for an overcharge in the cost of bricks — in fact, it was alleged that Bayer and other manufacturers had conspired to fix the price of iron oxide pigment used to color the bricks, the cost of which was then passed on down the supply chain to the homeowner. The court considered the rule in Illinois Brick laid down by the US Supreme Court, but explicitly refused to incorporate it into Ontario law, holding instead that the plaintiffs had failed to demonstrate the existence of any methodology that would ever allow them to show as a matter of fact that the overcharge in the cost of iron oxide pigment had been passed on to the end users of the bricks. The decision in Chadha, however, was careful to leave open the possibility that this demonstration might be made in some other case with more amenable facts. Subsequent to the decision in Chadha, the Superior Courts of the various provinces certified a number of class actions that included classes of indirect purchasers, usually by consent for purposes of settlement, but also in a small number of contested actions. Until the recent spate of actions now under consideration by the Supreme Court of Canada, these decisions either did not comment on the indirect purchaser issue, or left it as an issue to be resolved on the merits of the claims. The issue has been thrust to the forefront, attracting the attention of the higher courts, as a result of more recent jurisprudential developments that have followed a trajectory very similar to that of the caselaw in the US that ultimately led to the adoption of the bright-line rule in Illinois Brick. First, in the Supreme Court of Canada decision in British Columbia v. Canadian Forest Products Ltd., [2004] 2 S.C.R. 74, the passing-on defense was raised by a forestry company against a claim brought by the provincial Crown. In that case, Justice Louis Lebel, writing for the minority, vociferously insisted that the defense of "passing on" "must not be allowed to take hold in Canadian jurisprudence" and would have ruled in favor of the province. (The majority appeared not to disagree on this narrow point, but rather held that no loss had been incurred that was susceptible of being "passed on" in the first place.) Then, four years later, in the case of Kingstreet Investments Ltd. v. New Brunswick (Finance), [2007] 1 S.C.R. 3, a unanimous Supreme Court, this time explicitly adopting the reasoning of Justice Lebel in Canadian Forest Products, rejected the validity of the passing on defense "in its entirety" (para. 51) in Canada as a matter of law. By this point it was apparent to many practitioners that the Canadian courts were retracing the steps of the US Supreme Court some three decades later. As in Hanover Shoe, the defense of passing on by direct purchasers had been firmly rejected with the Supreme Court of Canada's decision in Kingstreet. All that remained was to complete the circuit with a decision analogous to Illinois Brick, and the establishment of a rule prohibiting the use of passing on as the basis for a positive claim by indirect purchasers. Progress towards this outcome appeared to fall at the first hurdle, however, when the Supreme Court of Canada declined to hear an appeal of a decision of the British Columbia Court of Appeal that had certified an indirect purchaser class action in Infineon Technologies AG, et al. v. Pro-Sys Consultants Ltd., et al. (SCC case number 33522). However, two THE US EXPERIENCE The federal courts of the United States first confronted a variant of this problem in the 1960s, culminating in the US Supreme Court decision in the case of Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968). In Hanover Shoe, a shoe manufacturer sued a machinery supplier over its inflated monopolistic pricing. The machinery supplier defended the claim on the basis that any overcharge for the machinery supplied to Hanover Shoe was simply an input cost like any other (such as shoe leather, rubber soles, laces, etc.) that was necessarily passed on to the ultimate consumer of the product, and thus no loss was actually suffered by Hanover Shoe. The US Supreme Court rejected this defense and held that a direct purchaser could sue under the relevant US antitrust legislation (section 4 of the Clayton Act) for the full amount of the overcharge. The court further determined that as a matter of policy, the possibility that all or part of the overcharge had been passed on to others in the supply chain was not relevant for the assessment of damages under the Act. Hanover Shoe thus established the rule that the "passing on" of a price increase to market participants further down the supply chain did not constitute a valid defense to a charge of price-fixing under US antitrust legislation. The next "shoe" to drop (as it were) came in the US Supreme Court decision in the case of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), where the court, following its reasoning in Hanover Shoe to the effect that there was no defense of "passing on" to a charge of price-fixing, held that indirect purchasers could not assert a positive claim for damages on the basis that an illegal overcharge had been "passed on" to them by direct purchasers and on down through the distribution chain. In Illinois Brick, several hundred local governments together with the State of Illinois sued a group of manufacturers of building supplies and masonry products for allegedly fixing the price of concrete blocks used in municipal and state construction projects. The state and local governments were indirect purchasers three levels removed from the direct purchasers of the product. The rule barring claims by indirect purchasers formulated in Hanover Shoe and Illinois Brick remains good law today in US Federal Court (subject to two very narrow exceptions that are really just adaptations of the original rule, involving "cost-plus" contract pricing, and purchases by controlled subsidiaries of the end-user of the product), but several American states have passed www.lexpert.ca | LEXPERT • December 2013 | 37

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