In June of this year, the European Commission issued non-binding recommendations inviting member states to introduce collective redress mechanisms at the domestic level. In addition, key EU member states have already implemented or are currently considering introducing class action legislation. This article provides an update on pending proposals towards a EU class action system and gives a brief overview of existing group redress provisions in selected member states.

By Thomas Werlen /Jonas Hertner (Reference: CapLaw-2013-26)

1) Background

A group expected to number in the millions sues Google for alleged privacy violations. Tourists sue a travel operator for putting them up in accommodations inferior to what was promised. Thousands of plaintiffs seek damages for the meltdown of a nuclear power plant. These sound like the everyday stories of the class action system in the United States, yet these actions were brought in the U.K., Italy, and Japan respectively. There is a clear global trend towards collective actions. Predictions are that there will be a significant increase in the adoption of class action procedures throughout the world in the next decade. And although criticisms of the U.S. system abound – for example, objections to contingent fee agreements and binding those who do not optout – components of U.S. procedure are finding their way into the procedures of other nations. A number of states allow collective actions to be prosecuted by private individuals, as opposed to requiring a public official or other public organization to bring them, and allow for the recovery of money damages. Yet more recent legislation and current proposals on the European continent are diverging significantly from the U.S. model (cf. Quinn Emanuel Urquhart & Sullivan, LLP, Business Letter November 2013).

Following an extensive consultation and review process, the European Commission (Commission) presented its proposals for the implementation of collective actions in the EU in June of this year. The non-binding Commission Recommendation – pursued by the Commission’s Health and Consumer Affairs Directorate – invites EU member states to introduce collective redress systems at the national level (cf. Commission Recommendation of 11 June 2013 on common principles for injunctive and compensatory collective redress mechanisms in the Member States concerning violations of rights granted under Union Law (Recommendation), OJ L 201, 26 July 2013, p. 60 – 65). The Recommendation’s key features are (1) an “opt-in” mechanism, (2) representative actions can be brought by pre-designated or certified bodies, (3) safeguards for minimising the abuse of litigation.

Against this background, the objective of this article is to provide an overview of these recent developments in the field of collective action in the EU.

2) Towards a European Collective Action Scheme

Collective actions are comparatively new in the European Union. Although a number of measures for the purpose of protection of consumers’ collective rights had been in effect, these have been mainly targeted at injunctive relief rather than damage claims (e.g. the Directive 98/27/EC of the European Parliament and of the Council of 19 May 1998 on injunctions for the protection of consumers’ interests (later codified as Directive 2009/22/EC)). The Commission long hesitated to take a position on collective redress for consumers (cf. Commission Communication “Towards a European Horizontal Framework for Collective Redress”, COM(2013) 401 for a detailed chronology). Then, in June of this year, in order to improve access to justice while simultaneously avoiding abusive litigation, the Commission adopted a Recommendation stating that within two years, all EU member states should adopt mechanisms for collective redress which allow multiple claimants to seek relief on a collective basis and/or through a representative plaintiff. The Commission (via its Competition Directorate) has also adopted a draft Directive on competition law private damages actions (Proposal for a Directive of the European Parliament and the of the Council on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member states and of the European Union, COM(2013) 404, 11 June 2013) and a Communication on quantifying harm in competition law actions, as well as a draft nonbinding Communication and Practical Guide on the quantification of harm in antitrust infringement cases. Interestingly, the Commission has dropped references to collective actions in the draft Directive on competition law and it is now the Recommendation that serves as a reference document for member states. The Commission’s ambition at this stage is thus not to harmonize the national systems, but to gather common, nonbinding principles that provide member states guidance in creating such mechanisms. Member states are asked to implement these principles by 26 July 2015. The Commission’s
Recommendation requests that member states incorporate the following elements into their collective redress systems:

a. Representative standing should be limited to non-profit making entities authorized by member states to bring such claims. The objectives of these entities should align with the rights claimed to be violated, and they should have sufficient resources to handle the claim.

b. The class should include only members who affirmatively opt-in.

c. Claimants should be required to declare the source of their funding. Third-party funders should be prohibited from influencing procedural decisions, including on settlement, and should not be compensated on a contingency fee basis unless third-party funding arrangements are subject to regulation by a public authority.

d. Member states should provide for evaluation at the earliest possible stage of litigation (and on the court’s own motion) as to whether conditions for collective actions are satisfied.

e. There should also be some cursory early examination of the elements to eliminate manifestly unfounded cases.

f. The parties should be encouraged both before and during litigation to settle.

g. Member states should ensure that it is possible to disseminate information about the action in a manner that balances freedom of expression with a defendant’s right to protection its reputation, such as via a national public registry.

h. Only compensatory damages should be permitted; punitive damages are discouraged.

i. Losing parties should reimburse prevailing parties for necessary legal costs.

Within two years following implementation of the Recommendation, the Commission will evaluate its effects and impact. The overarching ambition of the Recommendation is to encourage member states to provide access to justice through collective action schemes under domestic law while ensuring that abusive litigation is avoided through suitable procedural limitations and safeguards (not least, European countries are interested in introducing collective actions as U.S. courts have taken to exclude non-U.S. claimants from suits against non-U.S. companies filed in the U.S.). In particular, the Commission expressly seeks to avoid the introduction of punitive damages, contingency fees for lawyers, U.S.-style pre-trial discovery and “opt-out” procedures. The Commission has stated that it considers an efficient justice system, i.e. legal certainty and a reliable legal environment, as essential for the EU to remain competitive at the global level. But having identified a “justice gap”, the Commission is contemplating procedural law solutions on the basis of EU law as well (existing (quasi-)procedural law on the basis of EU law are the European Small Claims Procedure applicable to consumer claims resulting from cross-border sales, the European Order for Payment Procedure directed at cross-border debt recovery, the Mediation Directive promoting ADR in all cross-border civil disputes).

A number of EU member states already had implemented collective litigation procedures prior to the issuance of the Commission’s recommendation. Whether and to what extent those states may revise their mechanisms (as well as whether additional states will enact class legislation) remains to be seen. During the recent consultation process, the Commission identified three main areas where current national legislative frameworks diverge: (1) the scope of the provisions, i.e. whether laws apply generally or relate exclusively to limited areas of law or losses, (2) whether standing is granted to individual claimants or actions can only be brought by accredited organizations, (3) whether participating claimants need to “opt-in” or “opt-out” of collective actions. Below are, by way of example, four specific examples of current member state legislations.

a) The United Kingdom

While the English Civil Rules allow a party to represent a class of claimants, that party can represent them only if they share the “same interest”. English courts have construed this requirement narrowly, thereby limiting the utility of this rule. Aggravated and exemplary damages are rare in the UK; awards are more restrained and largely based on actual losses (cf. Quinn Emanuel Urquhart & Sullivan, LLP, Business Letter November 2013).

A more common type of collective action is the group litigation order (GLO). A GLO is not a representative action procedure; rather, similar to the United States’ Judicial Panel on Multidistrict Litigation, which leads to creation of “MDLs” where multiple parties bring the same claim in at least more than one federal jurisdiction, a GLO is a case management device for handling and coordinating multiple, independent claims. Any party to a claim may request a GLO, which may be granted if the claims presented give rise to common or related issues of fact or law. If granted, a single court will be assigned to manage the GLO and all claims will be transferred to the so-called “management court.” The management court is afforded great discretion and flexibility in managing group litigation, and charged with implementing a procedure which best serves the specific needs of a particular set of claims (cf. Quinn Emanuel Urquhart & Sullivan, LLP, Business Letter November 2013).

Where a judgment or order is issued in relation to one or more GLO issues, unless otherwise stated that judgment or order is binding on the parties to all other claims that are on the group register at the time of issuance. The management court may give directions as to the extent to which that judgment or order is binding on subsequently added claims.

GLOs, as a mechanism effectively requiring claimants to “opt-in”, have not been used extensively in the UK. Against that background, the UK government has announced in January that it will pursue plans to extend the power of the Competition Appeals Tribunal (CAT) and to allow “opt-out” class actions for breaches of competition law. Under the new regime, CAT will have the power to hear collective claims for damages brought by claimants or by representative body (e.g. consumer association) (cf. the Draft Consumer Rights Bill as presented to Parliament in June 2013, <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/206367/bis-19-925-draft-consumer-rights-bill.pdf> (accessed on 17 October 2013)). These changes, however, are not expected to come into law before 2015.

b) Germany

Germany has a number of procedures that allow representative action on claims concerning consumer protection and antitrust law. For example, German law provides for multiple claimants to join an action if their claims arise from the same transaction or occurrence, or if there is a common question of law or fact relating to all claims. Moreover, individuals may pool their interests for legal enforcement and assign those interests to a new entity who acts as the plaintiff in a court proceeding. There are, however, strict limitations on the use of such litigation pools. Finally, there are several organizations that have the authority to enforce consumer protection and unfair competition law.

There is an important limitation on Germany’s ability to adopt formal class action procedures. Germany’s constitution prohibits court judgments from having a negative preclusive effect on non-parties-thus raising the question of whether issues can be decided that will affect absent class members, that is, anyone other than what we think of in the United States as class representative. At least some commentators see this as an impediment to expanding class action procedures in Germany in the near future (cf. Quinn Emanuel Urquhart & Sullivan, LLP, Business Letter November 2013).

c) France

France’s Parliament is currently debating legislation that would allow consumer class actions (permitting non-consumer class actions is not under consideration) (see for current status <http://www.assemblee-nationale.fr/14/dossiers/projet_de_loi_consommation.asp> (accessed on 16 October 2013)). Under the proposed law only accredited consumer associations (which excludes law firms) would have standing to
sue any defendant in any line of business (Draft proposal available under <http://www.assemblee-nationale.fr/14/projets/pl1357.asp> (accessed on 16 October 2013)). The class action would permit compensation for harms (1) suffered by groups of consumers in similar or identical circumstances; (2) due to breaches of consumer and competition laws; (3) in connection with the sale of goods or services; (4) due to anticompetitive practices under French or European law. The proposed law would only compensate consumers for economic losses, i.e. tangible damages; non-pecuniary damages fall outside the scope of the proposed bill as well as punitive damages.

Under the French system, the defendant against whom the action is filed has an obligation to inform and notify potential consumers of the existence of this claim. As currently written, the legislation provides for “opt-in” class actions, where consumers would only be members of the class if they affirmatively expressed their desire to join it. If they do not opt-in, class members may not share in any recovery but retain their right to pursue individual relief. Under the current proposal, any contractual stipulation that would prohibit a consumer from participating in a class action is deemed null and void.

d) Netherlands

The Dutch system knows three main mechanisms for collective redress (english translations of the provisions available at <http://www.dutchcivillaw.com>): (1) “claims bundling”, whereby multiple claims are purchased by a litigation vehicle and pursued in its own name in return for a share of any recovery, (2) a court-based collective action that may result in a declaration of liability potentially supporting further litigation or settlement, and (3) the Collective Settlements of Mass Claims Act (WCAM) by which collective settlements may be declared binding on an “opt-out” basis (the WCAM procedure is increasingly significant as it is being used to achieve settlements which purportedly bind class members domiciled in multiple jurisdictions. Cf. U.S Chamber Institute for Legal Reform, “Collective Redress in the Netherlands”, 6 February 2012).

The WCAM came into force in 2005. Like the U.S. class settlements, it operates on an “opt-out” basis. It facilitates the collective settlement of mass damages claims: a group of injured parties can establish an association or a foundation representing their interests by virtue of its articles of association in settlement negotiations with the damage paying party. Compensation may be paid on the basis of “damage classes”. If a settlement is reached, the injured parties may file a joint petition with the Amsterdam Court of Appeals to declare that settlement agreement collectively binding. There are no limitations under this scheme as to the types of claims that can be brought or settled collectively other than that the injured parties claim has to result from one or more similar acts by the respondent. To be valid, settlement agreement must contain: (1) the occurence to which the settlement agreement relates, (2) a description of the class of persons affected, (3) the compensation to be paid, (4) details of the eligibility for receiving compensation, and (5) details of the compensation’s calculation. If the settlement agreement is approved by the Amsterdam Court of Appeals, related proceedings pending in the Netherlands are automatically suspended until the end of the “opt-out” period, and the agreement becomes binding on the class of claimants unless they expressly choose to opt out within a certain period following the approval (three months, generally). By electing to opt out, a claimant avoids being bound by the terms of the agreement, while those who remained in the class are able to collect their compensation within the timeframe agreed upon in the agreement (one year max.).

The Dutch class settlement system is being used frequently. It is particularly notable for its availability to foreign parties even if there is little, if any, connection to the Netherlands (thus allowing for worldwide settlement of class actions). Dutch courts have taken to accept jurisdiction if it is a Dutch foundation or association that enters into the settlement on behalf of potential claimants. The WCAM was amended in July of this year to further facilitate collective settlements, inter alia by making it available to the trustee and creditors in bankruptcy proceedings and by introducing the possibility for pre-trial hearings before the district court for the purpose of getting the parties to reach an agreement (separate from the amendments to WCAM, the Dutch Code of Civil Procedure provides now for the possibility to submit a direct request to the Supreme Court for prejudicial questions of law).

3) Conclusions

While many elements of civil procedure (such as punitive damages or extensive pretrial discovery) have never been successfully exported from the U.S., core principles of U.S. class action practice seem to have taken root in many international jurisdictions. Some deem it the democratization of justice globally while others view the proliferation of class actions as exporting a weapon of mass destruction, but there is one thing about which there can be no disagreement: class action practice has established a beachhead in virtually every developed nation around the globe (cf. Quinn Emanuel Urquhart & Sullivan, LLP, Business Letter November 2013). The U.S. model of aggregate actions forms the bedrock from which other nations’ procedures are developing. This holds true not only for the EU and various EU member states as described in this article, but also for many other jurisdictions (Argentina, Australia, Brazil, Bulgaria, Canada, Chile, China, Denmark, Finland, Indonesia, Israel, Italy, Norway, Poland, Portugal, South Africa, Spain and Sweden).

Yet, significant uncertainty about the future development of a European collective redress mechanism remains – on the one hand it is still unclear whether member states will respond to the Commission’s recommendations by creating or amending domestic civil procedure law, on the other hand the European collective action project remains vague due to considerable disagreement amongst member states with regard to the question whether binding legislation should be introduced on EU level (states considering binding EU rules with regard to specific policy fields or issues only are Denmark (with regard to cross-border collective redress), The Netherlands (with regard to private international law aspects of collective redress), Sweden and the UK (with regard to competition law)).

Against this background, Switzerland, too, has begun considering amending its laws with a view to introducing collective action mechanisms.