The EU Representative Actions Directive: settlement

This fourth blog post in our series examining the options open to member states when implementing the Representative Actions Directive ('the Directive') looks at settlement of representative actions. The topic is particularly important in mass claims, where so many people may be affected by the outcome and where a defendant may be reluctant to settle, unless it can be sure that the settlement will bring an end to the litigation as a whole.

The Directive is keen to encourage collective settlements. Under Article 11 of the Directive, parties or the court or an administrative authority can initiate settlement negotiations. Any settlement must be approved by the court or relevant authority, taking into account the interests of all parties and, in particular, those of the consumers concerned. Approved settlements will generally be binding on both parties and the individual consumers.

As ever, there is optionality in the Directive, which may lead to divergences between member states’ approaches to the settlement of representative actions that go beyond existing differences in their procedural rules. For example, the Directive leaves it to member states to decide whether their courts and authorities may reject proposed settlements on the grounds that they are unfair. It is also left to the discretion of the member states whether the relevant consumers may refuse to be bound by the settlement. 

As in our previous blogs we will take a closer look at the current legal framework in our focus group of Austria, Belgium, France, Germany, Italy, The Netherlands and Spain.

Approval of the settlement

The court’s active role in initiating and reviewing any settlement agreements may be an issue for some countries when implementing the Directive where the regime has not previously required judges to do this. This will be new for the Austrian courts and the legislator will have to think carefully about the parameters within which the judges will exercise this new authority.

Judiciary in other jurisdictions are more familiar with this role and procedures for approval are already in place. The Netherlands has a long-standing, albeit not very frequently used, mass settlement procedure. The Dutch Mass Settlement Act (MSA) enables representative entities and defendants to make a joint request to the Amsterdam Court of Appeal ('the Amsterdam Court') to declare a settlement that they have reached legally binding. The Amsterdam Court’s role is to look out for the interests of the injured parties and to ensure that the settlement is not unreasonable. After an opt-out period following the Amsterdam Court’s judgment, the agreement will be binding on all injured parties who did not opt out. The new Act on Redress of Mass Damages, which came into force on 1 January 2020, incorporates the MSA regime and, furthermore, includes tools for the court to encourage the parties to settle, like a mandatory negotiation phase. Therefore, we do not envisage much change in The Netherlands as a result of the Directive.

In Belgium, we also don’t expect significant changes. Under the current class action regime, a settlement must be submitted to, and approved by, the court in order for it to be binding on the entire class. If the settlement includes all the elements required by law, the court must confirm it unless one of the limited grounds of refusal applies. This could be if the agreed redress for the class or a subclass is manifestly unreasonable. The Belgian regime also mandates consideration of settlement: after the class action has been declared admissible, Belgian law requires parties to try to settle before getting into the detail of the case. The settlement phase is between three to six months, with an option for the judge to extend this by a maximum of six months at the parties’ joint request.

Similarly, we don’t expect any substantial amendments to the French mechanism that already contains provisions regarding mediation. This may be ordered to reach a settlement at the initiative of either party or the judge. The mediation may only be ordered with agreement of all the parties. Only the 'qualified entity' (QE) is involved in the process and therefore not the represented consumers themselves. If a settlement is reached by the parties, the court will assess whether it accords with the consumers’ interest and if so, will approve the settlement.

The same applies to Italy. The reform of the class action regime already provides for a settlement mechanism where the settlement must be previously approved by the court and then submitted to the class members for their approval in order to be binding on them.

Similar procedures exist under the German Declaratory Model Action (DMA). Settlements must be approved by the court and must provide for a 'reasonable amicable solution' to end the dispute.

Concerns have been expressed about the option for member states to allow approval for a settlement to be denied on the grounds of unfairness (see above). Aspects of unfairness already play a part in the decision-making process of many European courts. However, the concept of what is fair and unfair in this context will leave room for interpretation and could lead to different member states (or different courts within a member state) taking inconsistent approaches to the approval of settlements.

On whom will the settlement be binding?

Once approved by the court or administrative authority, the settlement becomes binding. An important issue, is on whom it is binding.

While the Directive leaves it to the member states to decide whether the settlement will bind the QE bringing the action and the individual consumers on whose behalf the actions is brought, this decision may have an impact on how attractive claimants will find certain jurisdictions. 

Italy, Germany, The Netherlands and France already have procedures which allow consumers to choose if they wish to be bound by the settlement: 

• a settlement in Italy becomes binding on the consumers only if they do not formally reject it under the April 2019 law (when it comes into force);
• in Germany, under the DMA, no settlement will be effective if 30 per cent or more of the consumers opt out;
• in the Netherlands, consumers can opt out of a court-approved class settlement. Similar to the German DMA procedure, there can be a threshold for acceptance. Parties can stipulate that the settlement will be off the table entirely if more than a pre-agreed percentage of the class opts out; and
• in France, the settlement agreement must provide for publicity measures to allow consumers to decide whether or not they want to opt in.

By contrast, the Belgian regime does not allow for a choice. Consumers who are part of the class are automatically bound. However, as an exception, consumers who are part of the class in opt out proceedings may not be bound if they can show that they could not reasonably have become aware of the admissibility decision during the period allotted for making the decision whether to opt out. Presumably, the Belgian legislator will want to stay rather close to these principles.

In Austria, under the current assignment model, consumers assign their claim to the consumer association, such that any settlement by the consumer association would bring an end to the action and to the underlying consumer claims. In Austria and in Spain, it is therefore unclear if the legislator will provide the consumers behind the QE with the option to opt out of any settlement agreed by the QE on their behalf.

Will other member states include the option for consumers to opt out from the settlement in their legislation? And if they do, might they temper that freedom by imposing that settlement is contingent on a certain participation percentage such as maximum opt out percentage or, as the case may be, minimum opt in percentage?

It will be open to member states to comply only with the mandatory provisions of the Directive or take the opportunity to revise their settlement procedures for mass claims. The result may, again, lead to some member states being seen as more attractive places to bring representative actions than others.

Our next blog post will examine the issues raised in this and the earlier posts in this series with a US lens. To receive notifications of further blog posts on this topic, please sign up here.