After a long gestation, on 30 June 2020 the Council of the EU published the text for the collective redress directive (the “CR Directive”) (text available here). This legislation is intended to better facilitate collective proceedings for European consumers, whether seeking damages or injunctions.
The CR Directive will require each Member State (“MS”) to ensure that its domestic procedural laws for collective redress meet the minimum standards set out in the directive. As these are minimum standards, it is open to each MS to have collective proceedings/class action mechanisms which go beyond those set out in the CR Directive.
There are two important restrictions to the scope of the draft CR Directive that are worth noting immediately. First, it applies only to claims brought on behalf of consumers; it does not facilitate claims on behalf of legal persons. Second, it applies only to claims for breaches of the specific ordinances listed in Annex 1 to the draft CR Directive. Recital 6 to the draft CR Directive explains that its intended scope is to cover “areas such as data protection, financial services, travel and tourism, energy and telecommunications are covered by the Directive, in addition to general consumer law”. The GDPR is just one of the instruments set out in the Annex.
The next legislative steps are for the Council and the European Parliament to agree the final form of the directive. Ordinarily this entails minimal changes to the text. Once the text is finalised MSs will have 24 months to transpose the text into their domestic law and then a further 6 months to bring the provisions into force.
The remainder of this update briefly summarises how the published text addresses key structural features of collective proceedings mechanisms.
1. Opt-in vs opt-out
Whether a collective redress mechanism operates on an opt-in or an opt-out basis is arguably the most significant feature of its risk profile to potential defendants. Opt-in systems require persons to proactively elect to participate in the class. In contrast, opt-out system automatically include persons within the specified class, unless they elect otherwise. Opt-out mechanisms are therefore particularly effective in aggregating claims where individual losses are low, but where the overall claim value may be very significant.
The draft CR Directive grants each MS discretion on whether they should introduce an opt-in or an opt-out system, but they must implement an opt-in procedure at the minimum. This can be contrasted with the draft text published by the European Commission in April 2018 which required that each MS introduce an opt-out mechanism in certain circumstances including where “consumers concerned by the infringement are identifiable and suffered comparable harm caused by the same practice or in relation to a period of time or a purchase”. Potential defendants will be relieved to see that this text has not survived in the draft CR Directive. Further positive news for defendants is that where a MS chooses to introduce an opt-out system in its domestic law, only consumers habitually resident in that state can be automatically included in the class; persons resident elsewhere must proactively opt-in.[1] This restricts the territorial scope of any opt-out mechanism that a MS chooses to implement. As such, there is no current risk of a pan-European opt-out mechanism being introduced.
The position for injunctive relief is different in that a qualified entity may seek an injunction without the mandate/participation of consumers.[2]
2. Adverse costs rules
Adverse costs rules are very helpful in deterring unmeritorious claims, and a criticism of the U.S. class action system is that there is insufficient risk of adverse costs.
Adverse costs rules are the norm in Europe, albeit some countries operate statutory caps on the quantum of costs that can be recovered by the successful party. The draft CR Directive stipulates that the defeated party should pay the costs of the proceedings borne by the successful party “in accordance with the conditions and exceptions provided for in national law”.[3] This provision therefore retains the position in the domestic law for each MS, but it is comforting that the directive text supports the principle of cost shifting.
Notably the draft text provides that the proposed representative bears the adverse costs risk, rather than the consumers being represented. The exception is that consumers can be ordered to pay costs incurred “deliberately or negligently by [an] individual consumer to the extent [relating] to that consumer’s conduct”. Adverse costs risk can be a disincentive for joining claims, particularly for consumers. Claimant law firms frequently address this concern by purchasing adverse costs insurance. By placing the primary risk for adverse costs on the representative the directive may assist claimant law firms in “bookbuilding” claims, as this reduces the risk of consumers facing adverse costs orders. Insurance will still play a role in limiting the representative’s exposure.
The draft CR Directive requires that MSs take steps to ensure that procedural costs should not prevent claims from being brought.[4] The draft text gives the examples of providing public funding and limiting court or administrative fees.[5] To the extent that domestic adverse costs rules preclude claims being brought, enterprising claimants may argue that those rules breach the CR Directive. This argument is predicated on contending that adverse costs are a form of “procedural costs”.
3. Certification stage
Many collective redress mechanisms have a “certification stage” whereby a court will dismiss claims which fall short of the requisite certification standard.
The draft CR Directive has little to say on this topic. The operative provisions simply state that the courts shall assess the admissibility requirements of a representative action in accordance with national law and the provisions laid down by the CR Directive.[6] Thus, it is once again up to the individual MSs to set and apply their own conditions. The recitals are more directional, explaining that Courts “should verify at the earliest possible stage of the proceedings whether the case is suitable for being brought as a representative action”.[7]
Whilst not strictly a certification process, the draft CR Directive states that MSs shall ensure that a court may decide to dismiss “manifestly unfounded” cases at the earliest possible stage.[8] An early opportunity for summary disposal is welcome, albeit the standard of “manifestly unfounded” is a high threshold.
4. Destination of unclaimed sums
The destination of unclaimed sums is an important issue for defendants, particularly in opt-out mechanisms. In principle all opt-out systems ultimately become opt-in in that members of the class must engage with the distribution process following trial or settlement in order to receive their share of the damages. Many factors influence the rate of participation; there are reports of very low participation rates in consumer claims, potentially as low as 1 per cent.
The destination of unclaimed funds should be less of an issue for opt-in mechanisms. By their nature the affected consumers have identified themselves, making meaningful distribution far easier than for an opt-out class. The draft CR Directive once again gives MSs full discretion stating that each MS may lay down their own rules on the destination of unclaimed sums.[9]
5. Punitive/exemplary damages
The recitals to the draft CR Directive state that, to prevent the misuse of representative actions, punitive damages should be avoided: “This Directive should not enable punitive damages being imposed on the infringing trader, in accordance with national law.”[10]
6. Standing
The draft CR Directive provides that qualified entities (“QEs”) have standing to bring representative proceedings. Different requirements apply for “domestic representative proceedings” than for “cross-border representative proceedings”. The former are where a QE brings a claim in the MS where the QE is officially designated. The latter are where a QE brings a claim in a different MS. The domicile of the consumers being represented has no bearing on whether the claim is a domestic or a cross-border representative action.
As to the requirements for QEs bringing “domestic representative proceedings” the draft CR Directive is somewhat vague, merely requiring that MSs must ensure that the criteria for the QEs “are consistent with the objectives” of the CR Directive “to make effective and efficient functioning of such actions”.
The criteria for QEs bringing “cross-border representative proceedings” are more prescriptive including that the QE must:[11]
- have been properly constituted and demonstrate at least 12 months of actual public activity in the field of consumer protection;
- have a legitimate interest in protecting consumer interests as provided by Union law covered by the CR Directive;
- be non-profit making;
- be independent and not influenced by persons, other than consumers, who have an economic interest in the bringing of any representative action (e.g., funders) and have established procedures preventing such influence (as well as conflict of interest between itself, its funders and consumer interest); and
- publicly disclose (in particular on its website), in plain and intelligible language, information demonstrating compliance with the qualifying criteria and information about the sources of its funding in general, its organizational, management and membership structure, objectives and activities.
MSs have discretion to extend these more stringent qualifying criteria to QEs bringing domestic representative actions. However, the requirement that criteria for QEs bringing domestic representative proceedings should not preclude the “effective and efficient functioning” of claims suggests that qualifying criteria that go yet further and impede the functioning of the CR Directive may be prohibited.
7. Role of litigation funders
The draft CR Directive provides that insofar as litigation funding is permitted by domestic MS law, conflicts of interest should be prevented and that funders should “not divert the action from the protection of the collective interests of consumers.”[12] Thus, the directive imposes restrictions on the degree of control which a funder has over the conduct of a dispute even if there was no pre-existing restriction in domestic law.
QEs bringing a representative action for redress must disclose to the Court or administrative authority a financial overview listing sources of funds used to support the action. Finally, funders cannot support claims against their competitors nor against entities on whom they are “dependent”.
8. Effects of final decisions
A final decision on the existence of an infringement can be used as evidence by both parties in the context of any other actions seeking redress “against the same trader for the same infringement”.[13]
Comment
Agreement on the text for the CR Directive is a significant step in the evolution of collective proceedings in Europe.
The CR Directive is part a broader trend of European countries amending their domestic procedural law to facilitate collective proceedings, including for opt-out class actions. Some of these changes are as follows:
- France introduced an option to bring a representative action (action de groupe) in 2014;
- introduction of an opt-out class action mechanisms in the UK for competition claims in 2015 (see LawNow articles here and here);
- Germany enacting a "model declaratory action" (Musterfeststellungsklage) in 2018;
- the English Court of Appeal ruling in October 2019 which permitted an opt-out data protection class action to proceed against Google (see Law Now article here);
- introduction of an opt-out class action mechanism in the Netherlands in January of this year; and
- Scotland introducing a new mechanism for class actions to come into force on 31 July 2020 (see LawNow article here).
As explained, the CR Directive sets forth minimum standards that each MS must meet. But developments at national law – some of which are listed above – demonstrate that there is no standardisation across Europe. Rather, we have a complex patchwork of opt-out and opt-in mechanisms with each representing a very different risk profile for would-be defendants.
Finally, Brexit still looms large for the UK. Given that the UK left the EU on 31 January 2020 and the transition period is set to expire at the end of 2020, there will be no requirement for the UK to implement the CR Directive. Although the UK Government has previously indicated that it was willing to stay aligned with the EU on consumer issues, this is subject to the ongoing negotiations and political will to do so. The extent of any continued alignment, not only on collective redress but wider consumer rights, should become clearer over the coming months.
[1] Draft CR Directive, article 5b, paragraph 3.
[2] Draft CR Directive, article 5c, paragraph 2.
[3] Draft CR Directive, article 8a, paragraph 1.
[4] Draft CR Directive, article 15, paragraph 1.
[5] Draft CR Directive, article 15, paragraph 1a.
[6] Draft CR Directive, article 5, paragraph 1c.
[7] Draft CR Directive, recital 18.
[8] Draft CR Directive, article 5, paragraph 6.
[9] Draft CR Directive, article 5b, paragraph 6.
[10] Draft CR Directive, recital 15a.
[11] Draft CR Directive, article 4, paragraph 3.
[12] Draft CR Directive, article 7, paragraph 1.
[13] Draft CR Directive, article 10.
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