EU group claims law: a balancing of interests

The new group claims law has been endorsed by the European Parliament's legal affairs committee ahead of a formal vote to approve the legislation by MEPs expected to take place this autumn. The new law, which promises to legislate for US-style class action lawsuits across the whole of the EU for the first time, has already been approved by the EU's other law-making institution, the Council of Ministers.

What does it apply to?

The proposed new rules would introduce a harmonised model for representative action in all EU member states and aims to protect consumers by giving them scope for legal redress against businesses responsible for causing mass harm.  For instance, it will provide a framework for individual consumers, who may not decide to litigate in cases of minor damage, to come together to pursue their case more effectively.

The EU group claim law is intended to apply in a wide range of contexts, from data protection to financial services and tourism. However, the representative actions must relate to a narrow set of EU consumer protection directives and regulations, together with their national implementing mandates. If the class action is successful, business may be obliged to provide for compensation, repair, replacement, price reduction, termination of the contract or refund of the price paid.

Qualified entities

So-called qualified entities – organisations or public bodies – shall be empowered and financially supported to launch actions for injunction and redress on behalf of groups of consumers against businesses. Every member state will be required to identify at least one qualified entity which will be authorised to do so.

Member states will also need to designate qualified entities which are entitled to bring cross-border actions. In cases of cross-border lawsuits, it is still unclear what rules will be set out to decide which qualified entity from which country would raise the claim. It is also still unclear what rules will apply if the subjects of dispute in different proceedings partly overlap, but are not completely congruent. The cross-border qualified entities will need to comply with a number of standards, including being independent, non-profit making and have a legitimate interest in consumer protection.

Vexatious claims

To avoid abuse through the raising of vexatious claims, the proposed directive applies the "loser pays" principle ensuring that the defeated party is liable for the costs of the proceedings incurred by the successful party. As a result of this, the qualified entity must provide proof that it can afford to initiate the proceedings.

The new law for group-claims also allows courts or administrative authorities to dismiss manifestly unfounded cases at the earliest possible stage in accordance with national law.

Disclosure

The directive will introduce far-reaching new obligations for many companies, though obligations to disclose evidence will be familiar to businesses involved in litigation in the UK or US. An example of the disclosure obligations provided for in the draft directive is that a defendant company can be requested to provide all evidence relevant to the case.

Opt-in or opt-out

Flexibility has been built into the group-claim law over how the system can be applied in practice across the EU in national cases. Each member state will be able to choose whether the new system of class action should operate on an opt-in basis, according to which potentially affected consumers actively decide to participate in a group claim and register in an action register, or in accordance with the opt-out principle on which the US class action system is based.

However, for cases with cross-border implications, the directive stipulates that consumers can only participate on an opt-in basis.

Settlement and redress schemes

>Collective settlements are encouraged under the new EU law, which addresses a procedure for court or relevant authority approval of the settlement of collective claims which would be binding on all claimants. Whilst there would be time and cost advantages to settling all claims at once, some defendants, including any relevant professional indemnity insurers, may still wish to consider the circumstances of each individual claimant so as to ensure that there is as little over-compensation as possible. This may also impact traditional redress scheme approaches, which may need to adapt to the new EU law in this regard.

Funding

Third party funding is restricted under the new EU law with a strong focus on managing conflicts of interest, mitigating negative impacts on the protection of consumers’ interests, and minimising undue influence of the funding arrangements on the relevant qualified entity.

Existing law on group claims in member states

In several EU countries, group claims are already possible. Germany, for example, introduced the so-called declaratory model action in 2018. Other EU states have also introduced different forms of class actions in recent years, including Italy in 2010, France in 2014 and the Netherlands in 2019. The form of the respective class action regime was left to national legislators, in particular its scope of application. With the proposed new directive, EU policy makers and law makers want a more harmonised approach.

In the UK there is a broad regime for opt-in group actions across a range of policy areas and a bespoke regime for opt-out group actions based on competition law breaches. In addition, the law is developing in the data privacy space. Claimants are increasingly looking to extend the application of the existing representative action procedure and the Department for Digital, Culture, Media and Sport (DCMS) is consulting this year on the possible introduction of new procedures for claims arising from GDPR breaches.

Reform to the framework of enforcement of consumer rights has also been considered, with a green paper published by the UK government in 2018 exploring to the use of alternative dispute resolution (ADR) – such as the Financial Ombudsman Scheme – in a wider range of policy areas. The government has yet to take forward formal proposals based on the feedback it received on the consultation.

Implementation of the directive in the member states

Once the European Parliament vote takes place on the proposed new directive, and on the basis that the legislation is formally approved, the directive will then be published in the EU's official journal and come into force 20 days thereafter. Member states will then have two years from the date of entry into force to implement the directive into national law and further six months subsequent to that to apply it.

It is likely that the new directive will spur an increase in the number of group claims initiated before the courts across the EU as well as the number of consumers participating in those actions. This is because the litigation risk for the individual consumer will be significantly minimised compared to in an individual lawsuit.

At the same time, however, the EU-wide harmonisation of the rules on group claims will make mass action proceedings more predictable for businesses that operate on a cross-border basis. The directive also gives companies the opportunity to reach collective settlements. This would enable companies to bring a large number of proceedings to a conclusion more efficiently. An effective dispute resolution procedure will be welcomed by many and is a necessary part of well-functioning economy – but there will also be concerns that it leads to vexatious litigation and an excessive litigation culture which hampers businesses' willingness to innovate.

In recent years we have seen businesses taking a growing interest in redress schemes as a method of managing negative PR arising from a crisis, preventing actions, as well as mitigating losses which may be recoverable by customers in court of before an ombudsman. The risk here of a streamlined approach to collective actions may further direct businesses to redress schemes in an attempt to maintain control over a systemic problem, prevent such mass actions being brought, and to reduce the risks of judicial subjectivity.

For its part, the EU institutions' push for the new group claims law can be viewed as a reaction to the increasing globalisation of markets and their intention to create predictability and legal certainty for companies and consumers. It remains to be seen how the national legislators will make use of their room for manoeuvre when transposing the directive into national law.