In Switzerland, plaintiffs are forced to litigate their claims in court individually, even if they are part of a group that is affected by the same underlying damaging event. In the context of the ongoing partial revision of the Civil Procedure Code the Swiss Federal Council is seeking to facilitate actions for damages for large groups. To this end it is proposing amendments to the existing mechanism of a group action through an organization and the introduction of a novel group settlement method.

By Thomas Werlen / Remo Decurtins (Reference: CapLaw-2018-44)

In Switzerland, de lege lata, plaintiffs are forced to litigate their claims in court individually, even if they are part of a group that is affected by the same underlying damaging event (e.g. a group of consumers damaged by a defective product). Such parties, whose rights were violated but who may have incurred a (financial) damage which is relatively low, face significant procedural barriers, in particular the relatively high costs of going to court. These high costs are a combination of high court fees and significant attorney costs. Plaintiffs also face the prospects of protracted legal proceedings, which may increase costs further. As a result, “dispersed damages” (i.e. a large number of affected people, minor damage for each individual) and “mass damages” (i.e. a large number of affected people, medium-size damage for each individual) are often not brought to court, as it is economically not a viable option for any of the damaged individuals to seek legal action.

In the Volkswagen emissions scandal, the Swiss Foundation for Consumer Protection (“Stiftung für Konsumentenschutz”, “SKS”) chose to tackle this problem by having approximately 6,000 Swiss car owners assign their claims for damages against Volkswagen (ranging from CHF 3,000 to 7,000 per car owner) in order for SKS to bring these claims to court collectively. This approach proves to be the expected “uphill battle”: SKS’s group action through an organization (“Verbandsklage”) on the basis of the Swiss Law on Unfair Competition for a determination of the unlawful conduct by Volkswagen was dismissed by the Zurich Commercial Court on 12 June 2018. The reason for dismissal was that Volkswagen in the meantime had ceased the allegedly unlawful conduct which, in the view of the court, renders the legal action moot (it is understood that SKS is appealing this decision to the Swiss Federal Supreme Court). A parallel lawsuit against Volkswagen brought by SKS seeking damages for each car owner is currently pending with the Zurich Commercial Court. Following the “traditional” approach provided by the Civil Procedure Code (CPC), this lawsuit is detailing each car owner’s claims individually, making it extremely lengthy (consisting of approximately 160,000 pages). Thus, it likely will take years before the court will render a decision.

The challenges for damaged car owners to obtain redress from Volkswagen exemplify that there is currently no strong mechanism of group action in place in Switzerland. While the emissions scandal may be the most prominent case, there are many more imaginable situations, which leave a large number of individuals with a relatively low financial damage, such as bank and credit card fees that are too high, violations of data protection regulations, breaches of cybersecurity, prospectus liability, antitrust and unfair competition law violations, defective consumer products, and selling of misleading and/or unfit financial and insurance products.

The Swiss Federal Council is seeking to address this and to facilitate actions for damages for large groups. It is proposing relevant amendments in the context of the ongoing partial revision of the CPC, see 1. below. These proposed amendments are in line with one of the main goals of the ongoing partial revision of the CPC, which is to lower the barriers of access for individuals to court (e.g. through certain facilitations for advance payments on court costs). In the draft CPC of 2 March 2018, the Swiss Federal Council proposes amendments to the existing mechanism of a group action through an organization (“Verbandsklage”, see 2a) below) and the introduction of a novel group settlement method (“Gruppenvergleichsverfahren”, see 2b) below).

1) Background and Previous Developments

Particularly in light of the bankruptcy of Lehman Brothers and the Madoff case, the European Commission in June 2013 issued non-binding recommendations inviting member states to introduce collective redress mechanisms at the domestic level. In line with these recommendations, several EU countries have strengthened existing measures of group action and introduced new measures that are distinctively different from a US style class action model (cf. Thomas Werlen/Jonas Hertner, The Globalization of Class Actions, CapLaw-2013-26).

Switzerland, too, has begun considering amending its laws with a view to introducing group action mechanisms. With the introduction of the CPC in January 2011, there had been a deliberate decision against group action. However, shortly thereafter, the Swiss Federal Council in its report of 3 July 2013 detected deficiencies of the current legal system since factually there is no satisfactory access to court, in particular in cases of “dispersed damages” and “mass damages”. Following up on this report, the Birrer-Heimo motion in 2013 (no. 13.3931) requested the proposition of new laws to strengthen group action.

In this context, the preliminary version of the draft Financial Services Act (FinSA), published in June 2014, contained collective redress mechanisms (cf. Christian Rehm/Thomas Werlen, Paradigmenwechsel in der Primärkapitalmarktregulierung, in: Thomas Reutter/Thomas Werlen (Hrsg.), Kapitalmarkttransaktionen IX, Zurich 2014, S. 87-115). Following strong opposition by the business industry during the FinSA consultation process, however, in the final draft FinSA, published in November 2015, there was nothing left of the originally intended improvements with regards to collective legal protection (cf. Thomas Werlen/Jonas Hertner, Draft Financial Services Act to Expand Clients’ Enforcement Rights vis-à-vis Financial Services Providers, Leaves Key Questions Unaddressed, CapLaw-2016-4; Thomas Werlen/Matthias Portmann/Jonas Hertner, The Enforcement of Clients’ Rights in the Draft Financial Services Act (FinSA) – Update, CapLaw-2017-05). According to the Swiss Federal Council, rather than applying a sectoral approach, collective redress mechanisms should be addressed more generally and, accordingly, they should be included in the process of the ongoing partial revision of the CPC.

2) Proposed Revisions to the Civil Procedure Code to Strengthen Group Action 

In the draft CPC of 2 March 2018, the following two revisions are proposed by the Swiss Federal Council to strengthen group action: amendments to the existing mechanism of a group action through an organization (“Verbandsklage”, see 2.1 below) and the introduction of a novel group settlement method (“Gruppenvergleichsverfahren”, see 2.2 below).

a) Amendment of Group Action through an Organization (“Verbandsklage”) to also allow for Reparatory Actions

De lege lata, associations and other organizations which protect collective interests have the possibility of bringing non-monetary actions for injunction, removal or determination of unlawful conduct in accordance with Article 89 CPC.

This mechanism of group action has proven not to be effective. Since the introduction of the CPC in January 2011, not a single claim according to Article 89 CPC has been launched. Article 10 of the Law on Unfair Competition, which allows for non-monetary actions by associations and other organizations for alleged infringements of unfair competition law, has suffered from a similar fate (recently, it was unsuccessfully invoked by SKS in the Volkswagen emissions scandal, see above).

In the new Article 89a, the draft CPC proposes to extend the existing mechanism of a group action through an organization to also allow for reparatory actions, such as actions for damages and surrender of profits according to the provisions of management without mandate (“Geschäftsführung ohne Auftrag”). Thus, claims resulting from “dispersed damages” and “mass damages” may be litigated in one single proceeding by a non-profit organization that according to its bylaws is authorized to enforce the interest of its members and is suited to do so.

Such proposed reparatory group action through a competent organization will be permitted under the following conditions:

• Each member of the group, on whose behalf the organization litigates, has an underlying individual claim for damages and/or surrender of profits according to applicable law (i.e. Article 89/89a CPC is not the legal basis for individual claims). Having said this, due to its highly personal character, the assertion for compensation for pain and suffering according to Articles 47 and 49 of the Code of Obligations is necessarily excluded from reparatory group action;
• A potential gain in litigation from the assertion of claims by the organization is predominantly allocated to the group of people for whom the organization is active, or is used by the complaining organization exclusively in the interest of these people;
• The affected members of the group have duly authorized the organization to conduct the litigation; and
• The organization is suited to assert reparatory claims, in particular because (i) it is active for the whole of Switzerland or is of importance for the whole of Switzerland or (ii) has long-time experience in the relevant legal field or is authorized by the majority of the members of the group.

Due to the “opt-in system”, a group action judgment has no legally binding effect on people who have not authorized the complaining organization to litigate on their behalf. This cuts both ways: on the one hand, people that do not form part of the group will not benefit from a potential collective gain in litigation. On the other hand, these people would not be barred to litigate their claims individually, if they would choose to do so.

In order to ensure that damaged people actually know of a collective lawsuit to be filed by an organization (and thus may opt in), the organization must properly inform the members of the group known to them and also the public of the lawsuit and its content.

b) Introduction of a Novel Group Settlement Method (“Gruppenvergleichsverfahren”) 

A group settlement method, a new mechanism proposed in Articles 352 a–k of the draft CPC, is based in particular on a similar method used in the Netherlands since 2005 (cf. Thomas Werlen/Jonas Hertner, The Globalization of Class Actions, Cap-Law-2013-26) and was the favored mechanism by the Swiss Federal Council in its report of 3 July 2013 (see above in 1.).

This new mechanism allows organizations that have standing for a group action according to Article 89 CPC on behalf of their represented people to enter into a settlement with a damaging party.

Such settlement is then to be submitted to the competent court, with a request for approval of the group settlement and for declaring it binding for all people affected by the damage caused. The competent court will convene the parties to a public hearing and will also order the parties to inform all damaged people known to them as well as the public of the settlement and the possibility to attend this hearing.

The court will approve the group settlement and will declare it binding for all people affected if the following statutory criteria are met:

• The group settlement is in writing, contains certain minimum information and has been duly submitted to the court by both parties;
• The agreed upon compensation seems to be appropriate;
• If the amount and means of damages are not specified yet, an independent instance is determined that will assess the damages;
• The group of affected people is large enough so that it is justified that the settlement is declared binding for all people;
• The relevant organization can validly represent the affected people; and
• The interests of the people affected by the group settlement are safeguarded from an overall perspective.

This group settlement method follows an “opt-out system”. This means that through the court’s approval and binding declaration, the group settlement has the impact of a final court decision for all people affected by the damage caused, whether they were directly involved in the proceedings or not. Affected people that do not want to be bound by the group settlement need to declare their wish to opt out within a period of three months (or immediately after they find out about it). Following such opting out, they are free to individually pursue their legal claims against the damaging party.

3) Notes and Outlook

The aforementioned proposed revisions to the CPC – (i) the amendment of the mechanism of a group action through an organization to also allow for reparatory actions and (ii) the novel group settlement method – would certainly facilitate collective redress in the event of “dispersed damages” and “mass damages”, at least to some extent. In a future Volkswagen emissions scandal case, a stronger mechanism of group action would be in place than there is now.

The consultation process for the draft CPC was completed on 11 June 2018. Not surprisingly, while there was positive feedback from the consumer side (including SKS), the proposed measures were met with resistance by various stakeholders of the Swiss economy (including economiesuisse). Inter alia, it is alleged that the effectiveness of these measures has not been proven, that these measures are not compatible with the Swiss legal system and that, due to such consumer-friendly measures, the economy would be destabilized.

While some of the reservations certainly are justified and need to be carefully assessed, a fear of an “Americanization” of Swiss civil proceedings – that at least for some seems to inform their resistance – is not warranted. Such a Swiss system of group action would still be rather moderate and in any event far away from the notoriously plaintiff-friendly system of group action in the United States. The US style group action model not only allows a group of people with related legal claims to bring their claim to court together in one action and a verdict to be generally binding on all members of the group (class action with an “opt-out system”), but also provides for punitive damages (in addition to actual damages), extensive discovery and trial by jury.

In any event, it remains interesting to see whether the proposed new mechanisms to facilitate group action in Switzerland will stand their ground in the current review phase and later in the parliamentary discussion. For the time being, it is difficult to predict when a revised CPC (with or without these new mechanisms to facilitate group action) would enter into effect.

Thomas Werlen (thomaswerlen@quinnemanuel.swiss)
Remo Decurtins (remodecurtins@quinnemanuel.swiss)