Class actions, collective actions, model declaratory actions. Representative types of legal actions have been on everyone's lips and discussed on the national and EU level since the 2017 diesel emissions case. Recently, the EU Commission has made a proposal for a Directive on representative actions for the protection of the collective interests of consumers.
In some member states, however, the EU's proposal is not a great novelty. In France, the option to bring a representative action (action de groupe) has existed since 2014. In Germany, the Bundestag has recently adopted an act to introduce a "model declaratory action" (Musterfeststellungsklage), which will come into force on 1 November 2018. This act will allow consumer protection associations to clarify facts or legal questions in favour of at least ten consumers. In the meantime, harmed consumers in Germany must take individual legal action against large corporations, which currently particularly applies to drivers of diesel cars.
Upon the adoption of the EU Directive and its transposition into national law by the national parliaments, consumers throughout the EU will profit from the opportunity to seek collective redress on the basis of the provisions set out in the EU Directive. Compared to already available models of collective redress in the member states, the EU proposal provides for a very far-reaching protection of consumers, going partially even beyond those already existing models.
Details of the EU proposal for representative actions
The EU proposal for representative actions applies only to infringements of specific EU laws relevant for the protection of consumers in different economic sectors, such as distance marketing of consumer financial services, consumer credit agreements, privacy and electronic communications, passenger rights when travelling or certain aspects of the sale of consumer goods and associated guarantees. The scope of the EU proposal is therefore narrower than the model that will be introduced in Germany. For the German ”Musterfeststellungsklage” it is sufficient that a consumer has suffered a loss during any transaction with a trader.
Risk of a claims industry?
Within the European representative action model only "qualified entities" can assert the consumers' rights. Member states will be responsible for approving these entities, which must have a legitimate interest in the case, work on a non-profit basis, and disclose their sources of financing.
These requirements are deemed necessary since representative actions can open the floodgates to an emerging claims industry, from which law firms specialising in this area could profit like it is the case in the US. In the EU model, however, qualified entities must fulfil fewer requirements to seek representative actions than in member states. Furthermore, there are no guarantees that qualified entities will be strictly and regularly monitored in member states. Consequently, the possibility of “ad hoc formations” of entities, which only appear to be non-profit, cannot be excluded under the EU proposal.
Direct claims for performance
This risk of abusive litigation seems even higher in view of the far-reaching aims of the representative action model in the EU proposal. The EU proposal allows qualified entities to seek a specific performance – especially, compensatory redress – directly from a defendant. In contrast, only certain preliminary questions – the most important being the question of responsibility for the damage suffered by the consumer – can be clarified in the model declaratory action that will soon come into force in Germany. Consequently, compensation claims still must be asserted in an individual proceeding.
Automatic involvement of all consumers
According to the EU model, once a collective action has been submitted, all affected consumers are automatically part of the representative action. Authorised entities to seek representative actions do not need a mandate from a single consumer concerned. This is the actual ground-breaking part of the EU proposal. The automatic involvement, which critics call "forced involvement", of all consumers concerned contradicts the legal tradition of representative actions, which holds that a respective claimholder can decide to either opt in or out of a collective legal action.
Equal or unequal opportunities for sued companies?
The sheer mass of potential claimants and the ‘naming and shaming’ publicity resulting from a representative action provides entities with considerable leverage against companies. In addition, entities have the right to carry out some sort of discovery, which obliges companies to disclose certain information. As a result, the "equal opportunities" for consumer rights as proclaimed by Justice Commissioner Vera Jourová could create detrimental unequal opportunities for the sued companies.
It remains to be seen whether companies will agree to possibly expensive settlement agreements at an early stage or will "litigate to the end", and accept the risks of having to pay compensation and even disclosing sensitive information. One thing is certain: Should the EU proposal on representative actions become binding national law, the consequence will be a considerable tightening of the law for the companies affected.
For more information on how this Directive can affect your business, feel free to contact one of our CMS legal experts.