Canada: Federal Court Of Appeal Rules That Class Proceedings Under The Competition Act Can Be Stayed On The Basis Of An Arbitration Clause

The Federal Court of Appeal recently issued an important ruling in respect of the application of arbitration clauses to private actions and class proceedings involving claims of anti-competitive conduct under the Competition Act. Relying on recent guidance from the Supreme Court of Canada relating to the enforcement of arbitration clauses, the Federal Court of Appeal granted a stay of a class proceeding on the basis that:

As a result of this ruling in Kerry Murphy v. Amway Canada Corporation and Amway Global, defendants may now have the ability to stay future private actions or class proceedings involving claims of anti-competitive conduct where the parties have an existing commercial arrangement that includes a mandatory arbitration provision.    

Factual Background

The appellant, Kerry Murphy (Murphy), was a registered Independent Business Owner (IBO) under the umbrella of the respondent, Amway Canada (Amway), a wholesaler of home, personal care, beauty, and health products. Amway supplies products to its IBOs throughout Canada and then encourages them to recruit distributors for further sales, which results in the creation of multiple levels of distribution. To become an IBO, Murphy had to execute a Registration Agreement with Amway. The Registration Agreement included an Arbitration Agreement which stated that disputes must proceed to binding arbitration. The Registration Agreement also incorporated by reference the Amway Rules of Conduct (Rules of Conduct), which expressly barred class proceedings in relation to claims exceeding $1,000.

In October 2009, Murphy brought a claim to the Federal Court under s. 36 of the Competition Act alleging that Amway provided false or misleading information to distributors contrary to s. 52 of the Competition Act, and that Amway operated an illegal multi-level marketing scheme contrary to s. 55 of the Competition Act. Murphy sought damages of $15,000 and filed a motion for the certification of a proposed class action. In response, Amway filed a motion for an order dismissing or permanently staying Murphy’s action and to compel arbitration on the ground that the Federal Court had no jurisdiction to hear the appeal since the matters raised in the Statement of Claim were subject to mandatory arbitration under the terms of the Arbitration Agreement. The Federal Court found that the Arbitration Agreement and class action waiver were applicable, enforceable, and effectively precluded the initiation of a class proceeding for any amount exceeding $1,000. Murphy appealed this decision to the Federal Court of Appeal.

Jurisdiction of Federal Court of Appeal

The first issue before the Federal Court of Appeal was which arbitration legislation applied and whether the Court had jurisdiction to hear the appeal pursuant to that legislation. The Court held that the Ontario Arbitration Act (OAA) applied. However, s. 7(6) of the OAA contemplates that if a Court stays a proceeding in favour of arbitration – as the Federal Court did – then “[t]here is no appeal from the court’s decision.” The respondent in the appeal argued that the Federal Court of Appeal, therefore, did not have jurisdiction to hear the appeal. The Court disagreed, holding that although the parties were bound by the OAA, the Court was not; in other words, the parties’ agreement could not oust the Federal Court of Appeal’s jurisdiction. This holding highlights the difficulty of drafting arbitration clauses that create certainty for the parties.

Private Claims under Competition Act Are Arbitrable

The Federal Court of Appeal then addressed the issue of whether a private claim for damages under s. 36 of the Competition Act is arbitrable. The Court was guided by the Supreme Court of Canada’s decision in Seidel v. Telus Communications Inc.¹ In Seidel, Ms. Seidel commenced an action under the Business Practices And Consumer Protection Act (BPCPA) against a telecommunications company, notwithstanding an arbitration agreement between the parties. The Supreme Court found that only where a statute can be interpreted as excluding arbitration will the courts refuse to give effect to the terms of an arbitration agreement. This is the same principle the Supreme Court had previously made clear in Dell Computer Corp. v. Union des consommateurs et al.²

Applying this principle to the facts, the Supreme Court in Seidel  found that the wording and context of s. 172 of the BPCPA – one of the sections at issue – demonstrated the legislature’s intent for this section to be a public interest remedy. As private arbitration would not properly serve the policy objectives of this public interest remedy, the Court refused to give effect to the arbitration agreement.

The Federal Court of Appeal considered the Seidel decision and noted two key differences between the legislative schemes in Seidel  and Amway:

1. The BPCPA explicitly states that any waiver of a person’s rights under the BPCPA is void unless permitted by the Act. The Competition Act contains no such provision.

2. Section 172 of the BPCPA granted third parties the right to seek injunctive relief from the Court even if they had not suffered damages personally. In contrast, s. 36 of the Competition Act (like s. 171 of the BPCPA) permits parties a private right to seek compensation for damages they suffered.

The Federal Court of Appeal held that these differences indicated that the legislature did not intend that the s. 36 Competition Act private right of action would oust arbitration agreements or class action waivers. The Federal Court of Appeal also rejected the appellant’s argument that competition law, by its very nature, should never be arbitrated because of the public interest objectives driving the Competition Act.

Implications

The Federal Court of Appeal’s decision confirms that Canada remains an arbitration-friendly jurisdiction, and that the courts in Canada are prepared to enforce mandatory arbitration agreements in connection with proposed private actions or class proceedings under the Competition Act. As a result, defendants may now have the ability to stay future private actions or class proceedings involving claims of anti-competitive conduct under the Competition Act, particularly where the underlying claims are premised on the operation of vertical distribution agreements or consumer contracts that contain a mandatory arbitration provision. The Federal Court of Appeal’s decision also reinforces that the enforceability of arbitration agreements may turn on the interpretation of statutes that were not necessarily drafted with the potential existence of arbitration agreements in mind, rendering the outcome potentially uncertain.

Footnotes

^{1 2011 SCC 15. For a summary of Seidel, please see our Osler Update of March 24, 2011.}

^{2 2007 SCC 34. In Dell Osler acted for the successful appellant.} 

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