On December 11 the Supreme Court of Canada (SCC) will hear the appeal in Godfrey v Sony Corporation1, a case concerning long-debated competition law issues. Most significantly, the court is expected to rule on the status of umbrella purchaser claims, a question that has until very recently split the courts in British Columbia and Ontario. The SCC will also hear argument on whether the Competition Act forms a complete code for price-fixing conspiracy claims, potentially displacing the common law conspiracy causes of action in these cases.
Background to Godfrey
Neil Godfrey initiated a putative class action in British Columbia, alleging the defendants participated in a global price-fixing cartel that overcharged British Columbians for optical disc drives and related products. The proposed class included those who directly or indirectly purchased the defendants’ products, as well as those who purchased products not from the allegedly conspiring defendants, but from the defendants’ non-conspiring competitors. This latter group of class members are known as umbrella purchasers.
As is typical in conspiracy class actions, the plaintiff advanced a number causes of action, including both statutory conspiracy claims under section 36 of the Competition Act and the common law conspiracy claims available in tort law.
Both the court of first instance and the British Columbia Court of Appeal certified the class action against the defendants, including the claims of the umbrella purchasers. The SCC granted the defendants’ motion for leave to appeal in June 2018.
Courts in BC and Ontario grapple with umbrella purchasers
Whether umbrella purchasers may assert claims against price-fixing conspirators has been the subject of recent debate including, for a time, inconsistent appellate rulings from the courts in British Columbia and Ontario.
Ontario says no to umbrella purchasers in Shah
The claims of umbrella purchasers were first seriously addressed by Perell J. of the Ontario Superior Court of Justice in his certification decision in Shah v LG Chem, Ltd. As explained by Perell J., the “theory of umbrella liability is that cartel activity could create an ‘umbrella’ of supra-competitive prices that enable non-cartel members to set their prices higher than they otherwise would have under normal conditions of competition, thus affecting Umbrella Purchasers.”2 In other words, umbrella purchasers claim that the price-fixing conspiracy increased prices of all relevant products in the market, not just those sold by the conspiring companies. As a result, even consumers who did not purchase products directly or indirectly from the defendant conspirators overpaid and suffered damages.
Perell J’s decision in Shah is notable as the most prominent rejection of umbrella liability in Canada. In his view, umbrella liability is inconsistent with restitutionary principles because the defendants did not enjoy any direct or indirect benefit from the harm inflicted on the umbrella purchasers. Further, he found that the recognition of umbrella liability would impose indeterminate liability on the defendants.
BC says yes to umbrella purchasers in Godfrey
In Godfrey, the BC Court of Appeal considered and rejected Perell’s reasoning.
The court examined the competing policy objectives underlying umbrella liability and held that the balance favoured permitting umbrella claims. On one hand, umbrella liability would substantially expand the overall scope of defendants’ liability, which might be perceived to result in unfairness. On the other hand, the recognition of umbrella liability would help promote the objectives of the Competition Act, which include compensation, deterrence, and behavior modification.
Savage JA concluded that the latter objectives were to be assigned greater weight than the former, particularly because the conspirators had, according to the plaintiffs’ pleadings, colluded to distort prices for the products across the entire market. This meant the conspirators must have foreseen not only the injury to the plaintiffs, but must also have intended to harm the umbrella purchasers. For Savage JA, this addressed potential concerns over unfairness to the defendants.
The court also noted that although umbrella liability significantly increases the scope of the defendants’ liability, their liability cannot be described as indeterminate because certain features of sections 36 and 45 of the Competition Act help limit the scope of that liability. Under those provisions, plaintiffs may only recover if they establish the subjective fault of the defendants, and must show they suffered a harm because of a breach of section 45. On that basis, the British Columbia Court of Appeal found the lower court had not erred in certifying the umbrella purchasers’ claims.
Ontario joins the yes camp
While the BC Court of Appeal heard and decided Godfrey, Justice Perell’s decision in Shah continued up the appeal track to the Court of Appeal, which held in favour of umbrella claims.3 The court held that, on a plain reading of the Competition Act, umbrella purchasers were entitled to a remedy provided that they could demonstrate the incurred losses resulting from the defendant’s breach of section 45.
Further, the Court of Appeal held that Parliament did not intend for the principle of indeterminate liability to apply to section 36 and 45 of the Competition Act. Instead, those sections contain inherent restrictions that ensure the scope of defendants’ liability is not unduly expanded. Respecting the umbrella purchasers’ claim at common law, the court found that even stronger limitations in tort, such as the requirements of proximity and foreseeability, safeguard the defendants from indeterminate liability.
While the appellate courts in Ontario and BC have reached agreement, lawyers from coast to coast will still be looking for the SCC to provide guidance in its hearing of the appeal in Godfrey on whether umbrella purchasers have claims and what limitations there are to such claims
Sections 36 and 45 of the Competition Act: a complete code?
The SCC will also hear argument on a second key issue raised by Godfrey. The plaintiffs in Godfrey claimed that a breach of section 45 of the Competition Act can supply the unlawfulness element for certain common law causes of action, in particular the tort of unlawful act/means conspiracy. In response, the defendants argued that Parliament intended for the provisions of the Competition Act to form a complete code displacing concurrent common law conspiracy causes of action.
The complete code issue has also been the subject of considerable debate in the jurisprudence. In Shah, Perell J. held that a breach of the Competition Act could not form the unlawful element of unlawful means/act conspiracy. However, he was reversed by the Divisional Court. The Ontario Court of Appeal had considered the issue in Fanshawe and the BC Court of Appeal had earlier reviewed the issue in Watson, both finding against the complete code argument.4
Savage JA canvassed the jurisprudence and concluded the court was bound by the precedent set in Watson holding briefly that:
In my view, Watson BCCA is directly on point. The very question put before this court – whether a breach of s. 45 of the Competition Act may furnish the “unlawfulness” element for various common law causes of action in tort – was answered in the affirmative in Watson.5
The SCC is set to rule on both the umbrella purchasers issue and the complete code issue in its hearing of the appeal from Godfrey. The competition law bar will also be looking to the SCC to provide guidance on a number of issues at the core of competition class actions, including the requirement that the plaintiff provide a reasonable methodology for establishing harm on a class-wide basis in order to meet the five-part certification test applicable in most Canadian jurisdictions.
The author wishes to thank articling student Felix Moser-Boehm for his help in preparing this legal update.
1 2017 BCCA 302.
2 2015 ONSC 6148, at para 159.
3 2018 ONCA 819.
4 2016 ONCA 621
5 2017 BCCA 302, para 184.