Murphy v. Compagnie Amway Canada

Murphy v. Compagnie Amway Canada
Court (s) Database
Federal Court Decisions
Date
2015-08-07
Neutral citation
2015 FC 958
File numbers
T-1754-09
Decision Content
Date: 20150807
Docket: T-1754-09
Citation: 2015 FC 958
[UNREVISED ENGLISH CERTIFIED TRANSLATION]
Ottawa, Ontario, August 7, 2015
PRESENT: The Honourable Mr. Justice LeBlanc
BETWEEN:
KERRY MURPHY
Plaintiff
and
COMPAGNIE AMWAY CANADA
and
AMWAY GLOBAL
Defendants
JUDGMENT AND REASONS
I. Introduction [1] This is a motion for certification of this proceeding as a class proceeding (the Motion for Certification), in accordance with Part 5.1 of the Federal Courts Rules, SOR/98-106 (the Rules).
[2] The plaintiff is a former member of the network of distributors of the defendant, Compagnie Amway Canada (Amway Canada),[1] a multi-level marketing business specializing in the sale and distribution of home, personal care, beauty and health products, and he claims to have been harmed by the defendant’s business practices. More specifically, he accuses the defendant of operating under a business model that contravenes the Competition Act, RSC 1985, c C-34 (the Act) and argues that he is therefore entitled to claim damages from the defendant pursuant to section 36 of the Act, which gives any person who has suffered loss or damage as a result of anticompetitive conduct prohibited by Part VI of the Act the right to sue the perpetrator of such conduct for the loss or damage suffered.
[3] In this regard, the plaintiff alleges that Amway Canada recruits its distributors—who are referred to as “independent business owners” (IBOs) in Amway Canada’s jargon and form the heart of the company’s business structure—on the basis of false and misleading representations regarding their compensation and the fact that the company in fact operates a pyramid sales scheme, contrary to sections 52, 55 and 55.1 of the Act.
[4] The plaintiff seeks leave to undertake this proceeding on behalf of all persons resident in Canada who have distributed the defendant’s products, since October 2007, excluding the defendant’s employees and their affiliates and family members.[2] The plaintiff is of the view that this class could represent up to 30,000 people.
[5] Having initially set his monetary claim and that of the class members at $15,000, the plaintiff had to reduce the claim to $1,000 because of an arbitration agreement in the contract documents signed by the parties, an agreement to which this Court—and the Federal Court of Appeal after it (Kerry Murphy v Amway Canada Corporation and Amway Global, 2013 FCA 38)—has given full effect, with the Court asserting jurisdiction to rule on claims of $1,000 or less.
[6] For the reasons that follow, I would dismiss the Motion for Certification.
II. Background A. Basis of plaintiff’s action [7] The plaintiff instituted his action in October 2009 by filing a statement of claim (the Statement of Claim). This was done a few weeks after the plaintiff terminated his most recent IBO network membership contract with Amway Canada. This contract was in force from June 2008 to December 31, 2009. At the time, the plaintiff’s spouse, Cheryl Rhodes, was co-plaintiff in this matter. She has since withdrawn from the case.
[8] In the judgment cited above ruling on the applicability and enforceability of the arbitration agreement in respect of the plaintiff’s original claim (Kerry Murphy v Compagnie Amway Canada and Amway Global, 2011 FC 1341 [Murphy]), Justice Richard Boivin (now judge of the Federal Court of Appeal) described Amway Canada’s business model in the following terms:
[6] The defendant markets its products to consumers through a system known as a multi-level marketing plan. This structure consists of a vast network of Independent Business Owners (IBOs). This system is established as follows: the defendant supplies products to its IBOs throughout Canada and then encourages them to recruit other distributors in turn, and so on, which results in the creation of multiple layers of distributors. The sales made by the recruited IBO also compensate the original recruiter IBO in part through a bonus system known as a “sponsorship chain”. The recruitees are known as the “downlines” of the marketing scheme and the recruiters are known as the “uplines”.
[7] When new IBOs are recruited, they must review the Business Opportunity Brochure and they must sign a Registration Agreement, in which they agree to be bound by the defendant’s IBO Compensation Plan and the Rules of Conduct that are set out in the Business Reference Guide.
[9] The plaintiff, as I have already mentioned, submits in the Statement of Claim that Amway Canada violated sections 52, 55 and 55.1 of the Act in two ways: first, by recruiting its IBOs on the basis of false and misleading representations regarding their prospects for financial success and, more specifically, their compensation; and second, by operating a scheme of pyramid selling. The relevant portions of these three provisions read as follows:
False or misleading representations
Indications fausses ou trompeuses
52. (1) No person shall, for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, by any means whatever, knowingly or recklessly make a representation to the public that is false or misleading in a material respect.
52. (1) Nul ne peut, de quelque manière que ce soit, aux fins de promouvoir directement ou indirectement soit la fourniture ou l’utilisation d’un produit, soit des intérêts commerciaux quelconques, donner au public, sciemment ou sans se soucier des conséquences, des indications fausses ou trompeuses sur un point important.
Proof of certain matters not required
Preuve non nécessaire
(1.1) For greater certainty, in establishing that subsection (1) was contravened, it is not necessary to prove that
(1.1) Il est entendu qu’il n’est pas nécessaire, afin d’établir qu’il y a eu infraction au paragraphe (1), de prouver :
(a) any person was deceived or misled;
a) qu’une personne a été trompée ou induite en erreur;
(b) any member of the public to whom the representation was made was within Canada; or
b) qu’une personne faisant partie du public à qui les indications ont été données se trouvait au Canada;
(c) the representation was made in a place to which the public had access.
c) que les indications ont été données à un endroit auquel le public avait accès.
. . .
[…]
55. (1) For the purposes of this section and section 55.1, “multi-level marketing plan” means a plan for the supply of a product whereby a participant in the plan receives compensation for the supply of the product to another participant in the plan who, in turn, receives compensation for the supply of the same or another product to other participants in the plan.
55. (1) Pour l’application du présent article et de l’article 55.1, « commercialisation à paliers multiples » s’entend d’un système de distribution de produits dans lequel un participant reçoit une rémunération pour la fourniture d’un produit à un autre participant qui, à son tour, reçoit une rémunération pour la fourniture de ce même produit ou d’un autre produit à d’autres participants.
Representations as to compensation
Assertions quant à la rémunération
(2) No person who operates or participates in a multi-level marketing plan shall make any representations relating to compensation under the plan to a prospective participant in the plan unless the representations constitute or include fair, reasonable and timely disclosure of the information within the knowledge of the person making the representations relating to (a) compensation actually received by typical participants in the plan; or (b) compensation likely to be received by typical participants in the plan, having regard to any relevant considerations, including (i) the nature of the product, including its price and availability, (ii) the nature of the relevant market for the product, (iii) the nature of the plan and similar plans, and (iv) whether the person who operates the plan is a corporation, partnership, sole proprietorship or other form of business organization.
(2) Il est interdit à l’exploitant d’un système de commercialisation à paliers multiples, ou à quiconque y participe déjà, de faire à d’éventuels participants, quant à la rémunération offerte par le système, des déclarations qui ne constituent ou ne comportent pas des assertions loyales, faites en temps opportun et non exagérées, fondées sur les informations dont il a connaissance concernant la rémunération soit effectivement reçue par les participants ordinaires, soit susceptible de l’être par eux compte tenu de tous facteurs utiles relatifs notamment à la nature du produit, à son prix, à sa disponibilité et à ses débouchés de même qu’aux caractéristiques du système et de systèmes similaires et à la forme juridique de l’exploitation.
Idem
Idem
(2.1) A person who operates a multi-level marketing plan shall ensure that any representations relating to compensation under the plan that are made to a prospective participant in the plan by a participant in the plan or by a representative of the person who operates the plan constitute or include fair, reasonable and timely disclosure of the information within the knowledge of the person who operates the plan relating to (a) compensation actually received by typical participants in the plan; or (b) compensation likely to be received by typical participants in the plan, having regard to any relevant considerations, including those specified in paragraph (2)(b).
(2.1) Il incombe à l’exploitant de veiller au respect, par les participants et ses représentants, de la règle énoncée au paragraphe (2), compte tenu des informations dont il a connaissance.
Due diligence defence
Défense
(2.2) A person accused of an offence under subsection (2.1) shall not be convicted of the offence if the accused establishes that he or she took reasonable precautions and exercised due diligence to ensure
(2.2) La personne accusée d’avoir contrevenu au paragraphe (2.1) peut se disculper en prouvant qu’elle a pris les mesures utiles et fait preuve de diligence pour que :
(a) that no representations relating to compensation under the plan were made by participants in the plan or by representatives of the accused; or
a) soit ses représentants ou les participants ne fassent aucune déclaration concernant la rémunération versée au titre du système;
(b) that any representations relating to compensation under the plan that were made by participants in the plan or by representatives of the accused constituted or included fair, reasonable and timely disclosure of the information referred to in that subsection.
b) soit leurs déclarations respectent les critères énoncés au paragraphe (2).
. . .
[…]
55.1 (1) For the purposes of this section, “scheme of pyramid selling” means a multi-level marketing plan whereby
55.1 (1) Pour l’application du présent article, « système de vente pyramidale » s’entend d’un système de commercialisation à paliers multiples dans lequel, selon le cas :
(a) a participant in the plan gives consideration for the right to receive compensation by reason of the recruitment into the plan of another participant in the plan who gives consideration for the same right;
a) un participant fournit une contrepartie en échange du droit d’être rémunéré pour avoir recruté un autre participant qui, à son tour, donne une contrepartie pour obtenir le même droit;
(b) a participant in the plan gives consideration, as a condition of participating in the plan, for a specified amount of the product, other than a specified amount of the product that is bought at the seller’s cost price for the purpose only of facilitating sales;
b) la condition de participation est réalisée par la fourniture d’une contrepartie pour une quantité déterminée d’un produit, sauf quand l’achat est fait au prix coûtant à des fins promotionnelles;
(c) a person knowingly supplies the product to a participant in the plan in an amount that is commercially unreasonable; or
c) une personne fournit, sciemment, le produit en quantité injustifiable sur le plan commercial;
(d) a participant in the plan who is supplied with the product
d) le participant à qui on fournit le produit :
(i) does not have a buy-back guarantee that is exercisable on reasonable commercial terms or a right to return the product in saleable condition on reasonable commercial terms, or
(i) soit ne bénéficie pas d’une garantie de rachat ou d’un droit de retour du produit en bon état de vente, à des conditions commerciales raisonnables,
(ii) is not informed of the existence of the guarantee or right and the manner in which it can be exercised.
(ii) soit n’en a pas été informé ni ne sait comment s’en prévaloir.
. . .
[…]
(1) False and misleading representations [10] In this regard, the plaintiff alleges that Amway Canada promotes its business model by emphasizing the unlimited opportunities for an IBO to develop a lucrative business that will ensure the IBO’s financial independence, freedom and success, whereas in reality, in his view, nearly all IBOs lose money or earn a zero or negative net income.
[11] More specifically, he submits that Amway Canada’s representations regarding IBOs’ compensation do not meet the requirements of section 55 of the Act. On this point, he argues that said representations are based not on real data regarding the compensation that a “typical participant” in its multi-level marketing plan actually receives, or is likely to receive, as said section requires, but on outdated figures based on the “gross” income of an “active” participant, that is, on figures that do not account for the operating costs incurred by IBOs and that rely on a sampling of IBOs that is not representative of the “typical participant”.
[12] The plaintiff argues on this point that the information on the compensation of a “typical participant” should be representative of the smallest income range earned by more than 50% of the participants in such a marketing plan, an approach which, unlike what Amway Canada does, excludes compensation data from the handful of participants earning a high income.
[13] He therefore alleges that Amway Canada is violating not only section 55 of the Act, but also section 52, by knowingly or recklessly making representations to the public that are false or misleading in a material respect related to the promotion of its business interests.
(2) Amway’s business model is in the nature of a scheme of pyramid selling [14] The plaintiff alleges that Amway Canada’s multi-level marketing plan has the following two characteristics of a scheme of pyramid selling. First, this system links an IBO’s membership or access to the full benefits of the plan, such as performance bonuses, to the monthly purchase of a significant quantity of Amway products at a price higher than cost, which is contrary to paragraph 55.1(b) of the Act.
[15] Second, the plaintiff alleges that IBOs cannot avail themselves of a buy-back clause, or one that allows them return products in saleable condition, on reasonable commercial terms. According to the contract between an IBO and Amway Canada, the IBO cannot return products to Amway Canada after buying them from the company. Rather, buy-back is allegedly left entirely up to the discretion of the IBO from whom the products were purchased, and ultimately to the discretion of Amway Canada, and is conditional on terminating the membership contract of the IBO seeking the buy-back, which is contrary to paragraph 55.1(d) of the Act. According to the plaintiff, the formal requirements to be met are such that they discourage IBOs from availing themselves of said buy-back clause, which once again is contrary to this provision.
(3) Right to recovery of loss or damage suffered
[16] The plaintiff submits that subsection 36(1) of the Act confers the right to claim and recover loss or damage resulting from what he views as the anti-competitive conduct of Amway Canada. He alleges that between June 2008 and August 2009, the period during which his most recent IBO network membership contract with Amway Canada was in effect, he suffered losses totalling $15,000. Subsection 36(1) reads as follows:
Recovery of damages
Recouvrement de dommages-intérêts
36. (1) Any person who has suffered loss or damage as a result of
36. (1) Toute personne qui a subi une perte ou des dommages par suite :
(a) conduct that is contrary to any provision of Part VI, or
a) soit d’un comportement allant à l’encontre d’une disposition de la partie VI;
(b) the failure of any person to comply with an order of the Tribunal or another court under this Act,
b) soit du défaut d’une personne d’obtempérer à une ordonnance rendue par le Tribunal ou un autre tribunal en vertu de la présente loi,
may, in any court of competent jurisdiction, sue for and recover from the person who engaged in the conduct or failed to comply with the order an amount equal to the loss or damage proved to have been suffered by him, together with any additional amount that the court may allow not exceeding the full cost to him of any investigation in connection with the matter and of proceedings under this section.
peut, devant tout tribunal compétent, réclamer et recouvrer de la personne qui a eu un tel comportement ou n’a pas obtempéré à l’ordonnance une somme égale au montant de la perte ou des dommages qu’elle est reconnue avoir subis, ainsi que toute somme supplémentaire que le tribunal peut fixer et qui n’excède pas le coût total, pour elle, de toute enquête relativement à l’affaire et des procédures engagées en vertu du présent article.
B. Procedural history [17] The procedural history of this action is already rather extensive, which explains why, despite having been instituted nearly six years ago, we are still only at the stage where we must decide whether it can go forward as a class proceeding and certain preliminary motions are still pending.
[18] When the Statement of Claim was filed, as we have seen, in October 2009, Amway Canada reacted by submitting a number of preliminary motions, including one to have the case dismissed, or permanently stayed, on the basis that the plaintiff’s claim is subject to a compulsory binding arbitration process under the contract he signed when he joined Amway Canada as an IBO.
[19] Amway Canada submits that it is up to the arbitrator described in the arbitration agreement, not this Court, to rule on the scope, validity and enforceability of said agreement. In a judgment dated July 2, 2010, Justice Robert Mainville (now a judge on the Quebec Court of Appeal), who managed the proceeding as required under Rule 384.1, rejected this argument and concluded that this issue is within the jurisdiction of the Court (Cheryl Rhodes and Kerry Murphy v Compagnie Amway Canada et Amway Global, 2010 FC 724). That judgment was appealed, but Amway Canada discontinued its appeal a few months later.
[20] In the meantime, in June 2010, the plaintiff filed the Motion for Certification. This motion was eventually scheduled to be heard at the same time as the motion to stay proceedings based on the arbitration agreement. The Court was also asked to rule on this same occasion on two other preliminary motions filed by Amway Canada: one to strike some affidavits and exhibits filed in support of the Motion for Certification, and the other for a confidentiality order regarding responses to certain undertakings made during the cross-examination of one of Amway Canada’s affiants.
[21] In addition to his own and that of his spouse, Ms. Rhodes, the plaintiff filed three affidavits in support of the Motion for Certification:
The affidavit of Bruce A. Craig, a former deputy attorney general in the Wisconsin Department of Justice, who states that in this capacity, between 1967 and 1997, he was involved in several cases dealing with companies operating schemes of pyramid selling in the United States, including Amway, whom the state of Wisconsin accused of attracting distributors through false representations regarding their compensation; The affidavit of Robert Fitzpatrick, an American who presents himself as an expert on the multi-level marketing industry, and who attempts to show that, as is the case in the United States, the vast majority of people who join Amway Canada’s IBO network, whose business model is allegedly similar to that of the American parent company, incur more expenses than can be covered by the income generated; and The affidavit of William Powell, who says that he was a member of Amway Canada’s IBO network on two occasions, between 1994 and 1998 and between 2002 and 2007, and claims that he was never able to generate any net income, on either occasion.
[22] Amway Canada responded by filing the following:
An affidavit by Gary VanderVen, who at the time held the position of Director, Business Conduct and Rules and Business Support Materials Administration at Amway Corporation’s office in Ada, Michigan; An affidavit by Jeff W. Johnson, who at the time held the position of National Sales Manager – Canada & Caribbean at Amway Canada; The affidavit and expert report of Anne T. Coughlan, a marketing professor at the Kellogg School of Management of Northwestern University, in Illinois; and Affidavits from Merel Weber, Ronald Maintland, Youngio Han, Oksoo Han, Jay Morrow, Kimberly D. Coles, Garry Coles and Esmon Emmons, eight members of Amway Canada’s IBO network who testify about their experience as members and, in certain cases, about discussions they may have had with the plaintiff regarding his relationship with Amway Canada.
[23] On November 23, 2011, Justice Boivin, who took over as case management judge, decided, as we have seen, that the arbitration agreement was applicable and enforceable with respect to the plaintiff’s claim and therefore stayed the proceeding, as permitted under subsection 50(1) of the Federal Courts Act. In the circumstances, he found that there was no need to rule on the other three motions. Although he allowed the motion to stay proceedings, he stated that the Court nevertheless had jurisdiction to proceed with claims not exceeding $1,000 (Murphy, above at para 28).
[24] Dissatisfied with that judgment, the plaintiff filed an appeal, but it was dismissed by the Federal Court of Appeal on February 14, 2013 (Kerry Murphy v Amway Canada Corporation and Amway Global, 2013 FCA 38). A few days later, he applied to the Court to amend his claim so as to reduce the quantum to $1,000 and thereby lift the stay of proceedings issued on November 23, 2011. Amway Canada objected to that application, arguing that the stay was final in nature and therefore could not be lifted.
[25] In an order dated October 9, 2013, Justice Boivin lifted the stay of proceedings, on condition that the plaintiff’s amended claim—with which he proceeded on October 17, 2013—in fact limits the claim to $1,000 or less and that the plaintiff formally wave his right to bring a claim for the remainder before an arbitrator, as he otherwise would have been allowed to do under the arbitration agreement between the parties. This time, Amway Canada was dissatisfied with the decision, so it appealed to the Federal Court of Appeal to have the permanent nature of Justice Boivin’s stay from November 2011 recognized. That appeal was dismissed on May 27, 2014 (Compagnie Amway Canada and Amway Global v Kerry Murphy, 2014 FCA 136).
[26] The preliminary issue related to the presence of an arbitration agreement in the contract between the parties being settled, the Court must now decide whether the plaintiff’s action can be certified as a class proceeding.
[27] Two other preliminary motions remained pending while this issue was being settled: the motion by which Amway Canada was trying to have the affidavits and exhibits submitted in support of the Motion for Certification struck, and the motion for a confidentiality order regarding the responses to certain undertakings made during the cross-examination of one of its affiants. Given the conclusions I have reached in respect of the Motion for Certification, there is no need to dispose of the other two motions.
[28] Amway Canada also announced its intention to challenge the constitutionality of section 36 of the Act on the grounds that it is ultra vires Parliament. The parties nonetheless agreed to link the necessity of debating this issue to the outcome of the Motion for Certification.
C. Conditions for certifying class proceeding [29] According to Rule 334.16, a class proceeding will be certified where the following conditions are met:
the pleadings disclose a reasonable cause of action; there is an identifiable class of two or more persons; the claims of the class members raise common questions of law or fact, whether or not those common questions predominate over questions affecting only individual members; a class proceeding is the preferable procedure for the just and efficient resolution of the common questions of law or fact; and there is a representative plaintiff or applicant who (i) would fairly and adequately represent the interests of the class, (ii) has prepared a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members as to how the proceeding is progressing, (iii) does not have, on the common questions of law or fact, an interest that is in conflict with the interests of other class members, and (iv) provides a summary of any agreements respecting fees and disbursements between the representative plaintiff or applicant and the solicitor of record.
[30] To succeed in having a proceeding certified as a class proceeding, a party must show that it has met each and every one of these conditions. However, once this burden has been discharged, the Court has no discretion in the matter and must grant certification (Buffalo v Samson Cree Nation, 2008 FC 1308, [2009] 4 FCR 3 [Samson], at paras 34-35; affirmed by the Federal Court of Appeal, Buffalo v Samson Cree Nation, 2010 FCA 165).
[31] Rule 334.18, meanwhile, sets out the factors that cannot be used to justify not certifying a proceeding as a class proceeding. The Court cannot refuse to issue such a certification on the grounds that the relief claimed (i) includes a claim for damages that would require an individual assessment after a determination of the common questions of law or fact, (ii) relates to separate contracts involving different class members, or (iii) are sought for different class members.
[32] In addition, under Rule 334.18, the fact that the precise number of class members or the identity of each member is not known, or that the class includes a subclass whose members have claims that raise common questions of law or fact not shared by all of the class members, cannot serve as grounds for refusing to certify a proceeding as a class proceeding.
[33] Moreover, as the Court noted in Samson, above, it must always be remembered that determining whether a proceeding should be certified as a class proceeding is a procedural matter. The issue is therefore not whether the litigation can succeed, but rather how the litigation should proceed (Samson, at para 12).
[34] Finally, a motion for certification of a proceeding as a class proceeding must be examined by considering the underlying objectives of class proceedings. These objectives—judicial economy, access to justice and behaviour modification—were articulated as such by the Supreme Court of Canada in Hollick v Toronto (City), 2001 SCC 68 [2001] 3 SCR 158 [Hollick], a case instituted under Ontario class action legislation (Class Proceedings Act, 1992, S.O. 1992, c. 6), which inspired in large part the drafting of Part 5.1 of the Rules (Samson, at para 41):
[15] The Act reflects an increasing recognition of the important advantages that the class action offers as a procedural tool. As I discussed at some length in Western Canadian Shopping Centres (at paras. 27-29), class actions provide three important advantages over a multiplicity of individual suits. First, by aggregating similar individual actions, class actions serve judicial economy by avoiding unnecessary duplication in fact-finding and legal analysis. Second, by distributing fixed litigation costs amongst a large number of class members, class actions improve access to justice by making economical the prosecution of claims that any one class member would find too costly to prosecute on his or her own. Third, class actions serve efficiency and justice by ensuring that actual and potential wrongdoers modify their behaviour to take full account of the harm they are causing, or might cause, to the public. . . .
III. Issues [35] At issue here is whether the Motion for Certification met the criteria set out in Rule 336.16.
[36] Amway Canada argues that the plaintiff did not meet any of these criteria.
IV. Analysis A. Do the pleadings disclose a reasonable cause of action? [37] It is trite law that the onus is on the plaintiff to establish “some basis in fact” for each of the conditions listed in Rule 334.16(1), except for the condition that the pleadings disclose a reasonable cause of action, which must instead be assessed in accordance with the standard applicable to motions to strike. According to that standard, the pleadings disclose a reasonable cause of action unless it is “plain and obvious” or “beyond reasonable doubt” that the proceeding, “assuming all facts pleaded to be true”, cannot succeed (Samson, above at paras 32 and 43; Hollick, above at para 25; Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57, [2013] 3 SCR 477, at para 63; Hunt v. Carey Canada Inc., [1990] 2 SCR 959, at page 980).
[38] In particular, neither the length and complexity of the issues, the novelty of the cause of action, nor the potential for the defendant to present a strong defence should prevent the plaintiff from proceeding with his or her case (Hunt, above at page 980).
[39] In the present case, the question whether there is a reasonable cause of action must therefore be analyzed on the basis that that the facts alleged in the Statement of Claim are true. The evidence filed by one party or the other in the Motion for Certification is, in principle, of no assistance to me at this stage of the examination of said Motion (Le Corre v. Canada (Attorney General) et al, 2005 FCA 127, at paras 12 to 18 and 25; Bédard v Canada (Attorney General), 2007 FC 516, at paras 70 and 80; Bédard v Kellogg Canada Inc., 2008 FCA 125). I find that the following passage from Tiboni et al v Merck Frosst Canada Ltd et al (Court File No. 04-CV-45435 CP0 – July 27, 2008), rendered by the Ontario Superior Court of Justice, gives a good summary of the approach to be adopted when determining whether the proceeding that a party wants to have certified as a class proceeding discloses a reasonable cause of action:
[56] The requirement in section 5(1)(a) is to be considered on the basis of the pleading alone. The question is whether material facts that constitute a cause of action have been pleaded. Evidence is inadmissible and it must be assumed that—unless manifestly incapable of proof—the allegations of fact in the statement of claim will be proven at trial. Moreover, unless it is plain and obvious that the existence of a cause of action would be rejected on the basis of the allegations of fact, the requirement in section 5(1)(a) will be found to be satisfied.
[40] The plaintiff is of the view that the Statement of Claim indisputably discloses a reasonable cause of action, insofar as the following is alleged therein:
a. the action is based on subsection 36(1) of the Act, which provides that any person who has suffered loss or damage as a result of conduct that is contrary to any provision of Part VI of the Act may, in any court of competent jurisdiction, sue for and recover from the person who engaged in the conduct an amount equal to the loss or damage suffered, together with any additional amount that the court may allow;
Amway Canada engaged in conduct that is contrary to sections 52, 55 and 55.1 of the Act, all of which are provisions of Part VI; more specifically, Amway made false representations concerning the prospects for financial success and compensation for IBOs and unlawfully operates a scheme of pyramid selling; and the plaintiff, as an IBO, suffered damage as a result of this conduct.
[41] Amway Canada disagrees. It raises several defences, most of which draw support from the cross-examination of the plaintiff on the affidavit he signed in support of the Motion for Certification and from the evidence that Amway Canada itself filed in response to said Motion, which at this stage of the analysis, however, as we have just seen, is not permitted. My analysis will therefore be strictly limited to the contents of the Statement of Claim (Bédard v Canada (Attorney General), above at para 80; Tiboni, above at para 56).
(1) Limitation [42] First of all, Amway Canada submits that the plaintiff’s action is time-barred and therefore clearly certain to fail. On this point, it notes that under paragraph 36(4)(a) of the Act, an action based on conduct that is contrary to any provision of Part VI must be brought within two years of the date of the conduct in question. It argues that the cross-examination of the plaintiff has established that, before joining Amway Canada’s IBO network in June 2008, the plaintiff had joined that network twice, in 1999 and 2002, and that he had done so on the same conditions, on the strength of the same representations and on the basis of the same business model as in June 2008, such that his action should have been brought within two years of his initial signup in 1999.
[43] However, it is well established that, under the Rules, a limitation period cannot be considered as a basis for striking an action and, therefore, cannot be used to establish, at this stage, that an action has no chance of succeeding. Under the Rules, the effect of a statute of limitation must be pleaded in defence, so as to allow the opposing party to argue that its cause of action was not time-barred when the action was brought by proving, for example, the recurrence of the wrongful conduct (Watt v Canada (Transport Canada), Docket No. A-448-97 – Federal Court of Appeal – January 21, 1998 – application for leave to appeal to the Supreme Court of Canada dismissed – 231 NR 396n; Kibale v Her Majesty the Queen (1991), 123 NR 153 (FCA)). In the present case, even if I could consider the fact that in June 2008 the plaintiff was already on his third contract of membership in Amway Canada’s IBO network, it would clearly be premature to discount this possibility.
(2) False and misleading representations [44] On this point, Amway Canada submits that on its very face, the plaintiff’s action reveals flagrant contradictions that undermine any reasonable chance of success. It argues that the plaintiff cannot criticize it for giving the impression that most IBOs generate substantial revenue while at the same time stating in its brochures and information guides for the public and in its contracts with its IBOs that the average gross monthly income of an “active” IBO is $181. It further submits that the whole question of whether the information regarding IBOs’ compensation complies with the requirements of subsection 55(2) of the Act is irrelevant because, in its view, the plaintiff became a member of its network not because of, but in spite of, this information.
[45] At this stage of the analysis, where I must assume the facts alleged in the Statement of Claim to be true and must be satisfied, on this basis, that the plaintiff’s action is manifestly improper, I cannot agree with these arguments. According to my understanding of the Statement of Claim, the plaintiff is criticizing Amway Canada for painting a glowing picture of the prospects for financial success for those who join its IBO network when the vast majority of IBOs lose money, as was the case for him, and the average monthly revenue advertised by Amway Canada, while modest, is still inaccurate and masks the fact that the vast majority of IBOs lose money. As I understand it, paragraph 35 of the Statement of Claim states that if this reality had been presented to him as Amway Canada was obliged to do, in his opinion, under the Act, he would not have joined the IBO network in June 2008 and consequently would not have incurred the losses and damage that he allegedly suffered. Regarding this last point, the plaintiff alleges the following at paragraph 11 of the Statement of Claim:
As distributors of the Defendants products, Plaintiffs never made any net income: they lost money despite having invested resources, time and energy. In fact, since June 2008, the Plaintiffs have lost over $15,000;
[46] When accepted as true, I cannot agree that these recriminations, in light of sections 52, 55 and 36 of the Act, have no chance of being accepted, in whole or in part, in a judgment on the merits.
[47] In the alternative, Amway Canada argues that the plaintiff’s allegations that the information it disseminates regarding the IBOs’ compensation—namely, that the average gross monthly income is $181—does not comply with subsection 55(2) of the Act are without merit, for the following reasons:
Subsection 55(2) does not require Amway Canada to take into account the attrition rate of newly recruited IBOs—which, according to the plaintiff, is 50%—when putting together this information; The concept of “active participant”, on which said information is based, amply fits the concept of “typical participant” referred to in subsection 55(2) and is sufficiently inclusive such that the advertised average gross monthly income of $181 would be an underestimate;
c. Subsection 55(2) concerns only the compensation that IBOs can expect to receive, not the operating expenses that they are likely to incur to generate revenue, such as the cost of purchasing Amway products or training materials for IBOs;
In any event, said expenses were taken into account when putting together the information on IBOs’ compensation, since this information concerns only “gross” IBO income; and An IBO is under no obligation to purchase Amway products or training materials, be it terms of preset quantitative or monetary thresholds or otherwise, and therefore is under no obligation to incur operating expenses, which under Amway Canada’s sales model are left entirely up to the discretion and good judgment of the IBO.
[48] In my opinion, these arguments, as attractive as they may seem at first glance, require a foray into the merits of the case. They are based on Amway Canada’s own conception of subsection 55(2) of the Act, particularly on the concepts of “compensation under the plan” and “typical participants”, whereas this provision does not appear to have been the subject of judicial interpretation as of yet. They are also based on its own vision of its business model and its relationship with IBOs, which is a question of mixed fact and law greatly contested by the plaintiff.
[49] A determination of whether this disclosure by Amway Canada regarding IBO compensation is contrary to the requirements of subsection 55(2) also requires a judicial definition of the “compensation actually received” by a typical participant, or of compensation “likely to be received”, having regard to the “relevant considerations” listed in that paragraph, for example, the nature of the product, including its price and availability, and the nature of the relevant market for the product, as well as the characteristics of the multi-level marketing plan in question and similar systems and the legal form of the business operation. This question also requires a legal interpretation of what constitutes fair, reasonable and timely disclosure based on information within the knowledge of