The State of Umbrella Damages in Canadian Antitrust Litigation

by Bennett Jones LLP

Judges in Ontario and B.C. have reached different decisions on whether cartel members may be liable for umbrella pricing. These two cases of first impression may be headed for the Supreme Court of Canada.

Umbrella claims are not unusual in U.S. antitrust litigation, though not all U.S. courts have permitted such claims to proceed. Last year, the European Union Court of Justice held that umbrella pricing claims are allowed in European cartel cases.

What is Umbrella Pricing?

Umbrella pricing is where cartel outsiders increase their prices for substitute products because of reduced quantities and increased prices by cartel members. The higher prices charged by the cartel members create an umbrella effect and enable non-cartel members to raise their prices to at or just below the cartel price without losing sales. For example, in the EU case, the plaintiff bought elevators and escalators from both members of the cartel and non-cartel members. It alleged that its damages included amounts paid to the non-cartel members that had raised their prices higher than they would otherwise because of the non-competitive market.

What Are These Cases About?

In Shah v LG Chem, Ltd., the plaintiffs commenced an action on behalf of direct and indirect purchasers of rechargeable lithium ion battery cells. The defendants are designers and manufacturers of the cells. The cells are incorporated into electronic consumer products such as computers and tablets. The plaintiffs proposed class included purchasers who bought cells and products containing cells manufactured by non-cartel manufacturers. On the certification motion, Justice Perell of the Ontario Superior Court held these umbrella purchasers have no cause of action and refused to certify a class including umbrella purchasers:

  • umbrella pricing claims are inconsistent with restitutionary law because there is no indirect transfer of wealth between the umbrella purchasers and the defendants or any collateral benefit to the defendants
  • umbrella claims would cause indeterminate liability on the defendants, which would make the defendants liable for the “advertent, inadvertent, voluntary, or involuntary conduct” of the non-cartel members

In Godfrey v Sony Corporation, the plaintiffs alleged that the defendants participated in a global cartel to increase or maintain the price of optical disc drives and products containing ODDs. As in Shah, the proposed class definition included umbrella purchasers: purchasers of ODDs and ODD products not manufactured or supplied by the cartel members. Justice Masuhara of the B.C. Supreme Court, with the benefit of the Shah decision, expressly rejected Justice Perell’s reasoning.

First, Justice Masuhara agreed that umbrella purchaser claims were inconsistent with restitutionary law but, in his view, restitutionary law does not determine the scope of claims under the Competition Act. Second, he reasoned that purchases from cartel members would exceed umbrella purchases, which would lead to significant double liability for the defendants but not an indeterminate amount. Third, the non-cartel members’ pricing is not independent because it is a reaction to the cartel’s market price distortion. Finally, Justice Masuhara concluded that umbrella purchaser claims furthered the goals of the Competition Act, including compensation, deterrence and behaviour modification.

What is the Impact of These Cases?

Both cases may be reviewed: the defendants in Shah have sought leave to appeal to the Ontario Divisional Court, and the time limit for an appeal in Godfrey to the B.C. Court of Appeal is imminent. It’s important to remember that both cases were decided on a preliminary basis and not after a full trial or with the benefit of a full evidentiary record. Given how few class actions go to trial, these decisions are significant because they set up an important debate in Canadian antitrust litigation. Given the current divergence in the jurisprudence, it seems as if these cases might be destined for the Supreme Court of Canada.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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