The turning of the tide in price fixing class actions?

August 2022  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2022 Issue

Class action defence counsel in Canada have long complained that courts certify price fixing class actions too easily. Courts decline to strike dodgy pleadings unless it is “plain and obvious” the case cannot succeed, they will not subject allegations to more than superficial scrutiny, requiring only “some basis in fact”, and they ignore any challenges to expert evidence to avoid a “battle of the experts” at the certification stage.

There are signs that the tide may be turning in favour of a more balanced, less plaintiff-friendly, approach to certification in Canada, however. Three recent decisions illustrate this.

Loblaw

In the October 2021 David v. Loblaw case, an Ontario judge certified a class action alleging that several bakeries and supermarket chains fixed the price for packaged bread for 16 years. Several of the plaintiffs’ claims were not certified, however.

The court refused to certify claims against parent companies of several of the alleged conspirators. The plaintiffs had failed to particularise their allegations against these parent companies. They had not pleaded the conspiracy with “clarity and precision” or described the “overt acts that are alleged to have been done by each of the conspirators”. Instead, they “lumped” the parents in with the subsidiaries, simply because of the parent-subsidiary relationship. Accordingly, these claims did not meet the requirement of disclosing a cause of action.

The court also refused to certify the claims that purchasers of fresh bread overpaid because the conspiracy inflated the price of packaged bread. The plaintiffs’ theory was a variation on what is known as an ‘umbrella claim’. An umbrella claim is brought by those who buy a product from firms that did not participate in an alleged conspiracy. The theory is that non-conspirators will follow the price increases imposed by the conspirators as a rising tide lifts all boats. Here, differences between fresh and packaged bread meant they did not compete and were in different product markets. The plaintiff had no way of showing that a conspiracy to fix prices for packaged bread would also raise prices for fresh bread; he merely speculated that it would. The plaintiff argued that as the conspiracy pushed up the price of packaged bread, consumers switch to fresh bread, which is more expensive. The court characterised this as a ‘Marie Antoinette’ argument, pointing out that increased prices for packaged bread could drive consumers to non-competing products like cake, muffins, crackers, matzah and even vegetables.

The court also refused to certify umbrella claims for consumers who bought packaged bread baked by non-defendants. The plaintiffs’ assurances that they did not intend to lead evidence about the thousands of independently-owned bakeries did not satisfy the court; rather, the pricing by those bakeries was part of the plaintiffs’ claim. This claim was not certifiable because it is not possible to effectively gather and adduce evidence to prove it.

DRAM

Next, in November 2021, the federal court refused to certify a class action alleging that three manufacturers of dynamic random access memory chips (DRAM) conspired to limit global supply and raise prices for DRAM from 2016 to 2018. The court held that the pleadings did not disclose a cause of action because they were “not anchored in material facts”, but instead were “speculative and boil down to bald assertions”. The plaintiffs “fell well short of providing the minimum evidentiary basis required to support the existence of the alleged conspiracy”. The conspiracy alleged by the plaintiffs was different from the usual conspiracy case; their core allegation was that the defendants suppressed the supply of DRAM to increase its price, as opposed to directly conspiring to fix prices for DRAM.

The court emphasised that a conspiracy claim under the Competition Act must provide “material facts and full particulars” of the alleged agreement and any overt acts, “described with clarity and precision”, in furtherance of the conspiracy. The plaintiffs did not do this; they pleaded “conclusory legal statements that paraphrase the language” of the statute. What particulars the plaintiffs did provide were mere speculation. For example, they provided a list of meetings of industry associations, and speculated that the conspiracy occurred at those meetings.

The proposed common issues also failed the “some basis in fact” test. This test requires a two-step approach, the court held; first, the plaintiff must show some basis in fact for the existence of the proposed common issues, and second, that the issues are common. The plaintiffs had argued that they only had to show the second of these steps, that is, that the issues are common, but not that they exist. They objected that requiring them to show the existence of the issues infused the certification process with an inquiry into the merits. The court disagreed, holding that a “a proposed common issue that is not underpinned by some evidentiary foundation supporting a conclusion that two or more class members share an issue that exists in fact is not an issue worthy of certification”. The court reasoned that a “non-existent or fictitious issue has no more basis or justification because it happens to be common to a group of plaintiffs”. Thus, a proposed common issue alleging a wrongful act requires some evidence of the wrongful act.

The DRAM plaintiffs did not meet this test; they failed to show some basis in fact for their conspiracy allegations. The plaintiffs relied on news articles reporting on an investigation by Chinese competition authorities. There were no documents from the authorities themselves, no indication of any findings made by the authorities, nor any evidence that the conduct investigated by Chinese authorities could be an offence under Canada’s Competition Act. There was no evidence of any investigation by US or Canadian competition authorities.

The plaintiffs also relied on expert evidence about the structure of the market for DRAM; but that evidence, as the expert himself admitted, could not support an inference that there was a conspiracy. The same was true of evidence of price increases for DRAM: absent evidence of coordinated behaviour, price increases alone do not provide some basis in fact for the existence of a conspiracy. There was no evidence of concerted price increases, nor of meetings or communications between the defendants.

The fact that some defendants were involved in a price fixing conspiracy some 15 years earlier did not provide some basis in fact for believing that they are involved in one now. Nor did pleadings from a US class action.

Audible

The third decision came in May 2022. The British Columbia Supreme Court refused to certify a claim against audiobook publisher Audible and Apple. The court also dismissed a motion for summary judgment brought by the defendants. The argument centred around the plaintiff’s allegation that an exclusivity clause in a distribution agreement between Audible and Apple breached the Competition Act’s criminal conspiracy provision. That provision prohibits agreements between competitors to fix prices, allocate markets or restrict output. The plaintiff seems to have characterised the exclusivity clause as a form of market allocation agreement. The defendants argued that it was primarily a vertical agreement, not a horizontal one. Because Audible competes with Apple in addition to supplying it with audiobooks, the agreement is what is known as a “dual distribution” agreement, the court noted. Because it can be difficult to characterise dual distribution agreements, the court found that the claim was not bound to fail and refused to dismiss it.

The court went on to refuse to certify the claim because the methodology for assessment of damages proposed by the plaintiff’s expert relied on two assumptions that the plaintiff had since abandoned. The plaintiff had revised his theory of the case shortly before the certification motion, and again during the hearing of the motion. The plaintiff’s proposed solution, namely an adjournment so that the plaintiff could lead new evidence, would be unfair to the defendants, the court held.

Has the tide turned?

There has long been a tension between the theoretical purpose of certification and its practical impact. Certification is, in theory, merely a procedural step in an action. It is not meant to be the determining step in a case.

However, in practice it is just that. Denial of certification effectively ends the case. But so does granting certification, because once the claim is certified, a defendant is “practically compelled to pay a settlement to the plaintiff”, as the Supreme Court has recognised.

These three decisions suggest that Canadian courts are now more willing to take a somewhat harder look at pleadings and evidence at the certification stage. If they survive appeal, they may herald an approach to class proceedings that is more reflective of the stakes involved, not just for plaintiffs, but also for defendants.

 

Michael Osborne is a partner at Cassels Brock & Blackwell. He can be contacted on +1 (416) 860 6732 or by email: mosborne@cassels.com.

© Financier Worldwide

BY

Michael Osborne

Cassels Brock & Blackwell

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