First EU 'collective actions' under the new Directive likely in 2023

Today the provisional agreement on the proposal for a new Directive on representative actions that was reached in June 2020 was formally approved by the European Parliament. The Directive establishes an obligation for member states to create at least one collective redress mechanism, or adapt an existing regime, enabling consumer organisations, regulators and other 'qualified entities' (QEs) to commence representative actions on behalf of consumers.

The final text is expected to be published in the EU Official Journal shortly, after which member states will need to transpose the legislation into their domestic laws. We anticipate that we will see qualified entities bringing representative actions under the new legal framework from 2023 onwards.

Many countries have already adopted rules which facilitate collective redress actions and the European litigation environment has been getting ever more hostile. Litigation funding is on the rise globally and, at the same time, a plaintiff bar is growing in many EU member states. That said, there are several EU member states that do not have collective redress mechanisms today. The requirement for all 27 member states to implement a collective action regime, with the attendant publicity and support for consumer associations, will increase the litigation risk for consumer-facing businesses across Europe.

As to the nature of the Directive, there are two important points to note at the outset.

1. The Directive’s aim is to set down minimum standards and safeguards. Beyond that, the Directive allows a lot of optionality. Member states will implement the Directive in a way that fits in with their existing rules of civil procedure. So, in three years’ time, we are not going to see a single or uniform pan-European collective action regime. Rather, we will likely end up with a patchwork of different rules and some member states will be more attractive for claimants than others; and
2. The Directive obliges member states to have at least one type of collective action regime that meets all requirements of the Directive, but allows them to have other regimes in parallel that are not regulated by the Directive.

Both of these features of the Directive give rise to a real risk of forum-shopping and present challenges for coordination where defendants face multiple (parallel) actions across different member states.

Here are our views on the key features of the new Directive.

Extensive scope

The Directive requires member states to ensure that claims can be brought on behalf of classes of consumers who have been affected by breaches of specific EU consumer protection laws. These cover a variety of consumer-related topics, including product liability, data protection, financial services, travel and tourism, energy and telecommunications. The Directive does not cover actions in respect of competition law, but many countries already have procedures that are designed to facilitate follow-on litigation in this area.

Qualified entities 

The new Directive will enable QEs (which must satisfy certain requirements) to bring representative actions in the EU on behalf of, and in the interests of, classes of consumers.  

QEs can either bring claims in their own country’s court (a domestic representative action) or in another member state’s courts (a cross-border action).

QEs from different member states can join together in a cross-border action to sue a defendant in one country’s courts as a means of pooling costs and risks. This is a real game-changer of the regime: member states with existing collective action regimes must change their laws to allow this to happen. For example, under the Directive, QEs representing Austrian, German, Spanish and French consumers could bring claims in the German courts against a defendant domiciled in Germany.

An organisation must meet certain minimum requirements in order to be designated a QE, and these are tougher for QEs which seek to bring cross-border actions than for those which bring only domestic actions. For example, a QE seeking to bring a cross-border action must meet strict criteria as to their non-profit status and independence and demonstrate a proven history of protection of consumer interests.

These requirements mean that claimant law firms and ad hoc associations are unlikely to be able to form QEs, at least in relation to cross-border actions.

Claims for injunction and redress measures

Member states need to ensure that QEs can seek at least two types of measures:

1. injunctive measures, which aim to halt unlawful practices; and 
2. redress measures, including compensation for harm caused, repair, replacement, price reduction, contract termination or reimbursement.

Opt-in/opt-out

Opt-in mass class action regimes require each individual member of the class to make a positive decision to join the action. Opt-out regimes, by contrast, are brought on behalf of all members of a class, who do not choose to leave it. Whether a collective action regime is opt-in or opt-out is a key factor in determining levels of consumer participation in a claim.

Under the Directive:

• for domestic actions, member states are free to choose whether actions can be brought on an opt-in or opt-out basis; while
• cross-border actions can only be brought on an opt-in basis.

Admissibility criteria

The Directive identifies a number of admissibility requirements for representative actions to proceed, such as the requirement that the alleged infringement harms or may harm the collective interests of consumers, for sufficient information to be provided on the consumers concerned and for courts to be able to dismiss manifestly unfounded cases at the earliest possible stage. This implies the need for member states to introduce a certification or ‘gating’ stage when they come to implement the Directive into national law.

These are just minimum standards and member states can go further, provided that their national rules do not hamper the effectiveness of representative actions.

Third-party litigation funding and the 'loser-pays' principle

Third-party litigation funding will not be prohibited by the new Directive. However, the Directive imposes requirements for QEs to demonstrate that there are no conflicts of interests in relation to third party funders and ensure that consumer interests are protected, for example by requiring QEs to disclose a list of the funder's actions to the court. 

The attractiveness of each member state’s collective action regime is likely to be driven in part by the availability of third-party litigation funding.

Also of note is that the Directive requires member states to take measures aiming to ensure that procedural costs do not prevent qualified entities from bringing representative actions under the Directive.

To deter abusive litigation, the Directive implements the 'loser-pays' principle, which means that a party which is unsuccessful in litigation must pay some or all of the successful party’s costs, albeit that this is subject to the 'conditions and exceptions' provided for under the national laws of each member state.

Disclosure obligations

The Directive will require each member state to ensure that courts or other administrative authorities can, upon the request of one of the parties, order the other or even a third party to disclose relevant evidence in accordance with national procedural rules. It is unclear how this concept will interact with existing rules in countries whose discovery rules are more limited, but it is another factor that may lead to forum-shopping (with claimants seeking to bring claims in countries with generous disclosure procedures). A fragmented discovery regime between different markets will likely create risks in terms of document management.

What will the future EU collective redress regime look like?

We are not going to see a single or uniform pan-European collective action regime. Here are our predictions for how implementation will play out in certain key European markets.

In Austria, the current government has welcomed the European Union’s approach and the Directive. However, to date, it is unclear how far the Austrian legislator will go and how strict it will adhere to the Directive. In its agenda the Austrian government has already given some indications on the implementation of the Directive, namely:

• maintain the available types of collective actions; 
• adhere to the opt-in principle;
• set high quality thresholds for potential claimant organisations to become QEs; and 
• maintain the loser pays principle and the possibility of third-party-litigation funding.

In Belgium, the implementation of the Directive will not lead to major changes as Belgian law already has a class action regime in place since 1 September 2014 that has anticipated most of the measures of the Directive. Belgian law allows for aggregated individual consumer, self-employed or SME complaints to be brought in a single court action with an opt-in or opt-out system to be agreed between the parties or decided by the judge. The Belgian current regime will only need to be amended to implement certain elements such as: 

• the distinction between qualified entities entitled to bring domestic actions from those entitled to bring cross-border actions; and 
• the provisions dealing with the funding of the qualified entities.

In France, the implementation of the Directive should not revolutionize the regime but is likely to create an opportunity to make it more efficient and attractive. A September 2020 draft bill has suggested various proposals to improve the French regime: 

• adopt a single general framework vs. the five existing systems;
• increase the number of qualified entities;
• enable compensation of all kind of damage;
• introduce loser pays rule vs. current rule where the winning party recovers a marginal portion of its costs; and 
• introduction of a civil fine corresponding to a fraction of the company’s turnover.

In Germany, a new type of collective consumer action (Musterfeststellungsklage – Declaratory Model Action, DMA) was introduced in 2018 which provided for declaratory relief in an opt-in class action framework. However, the current DMA does not meet all the requirements set out in the Directive and differs in its scope. Germany therefore has to either adapt the legal framework regarding the DMA or alternatively introduce a new type of representative action in order to implement the standards set out in the Directive.

In Spain, the key topic remains for the Spanish legislator election of opt-in or opt out mechanism, the definition of the type of association that will be entitled to file the claims, the regulation of third party litigation funding and the implementation of the loser-pays principle, which is rarely enforced in Spain by courts and, actually only involves a proportion of the costs of the defendant.

In the UK, the Directive is unlikely to be implemented. The timing of the Directive means it will not form part of the retained law when the UK leaves the EU, and the UK is not under any obligation to adopt it. There also does not appear to be any particular political will to implement the Directive in the UK, likely because there are already relatively established regimes for bringing collective actions, such as group litigation orders and representative actions.