Proposals to consolidate and reform Brazil’s class action system

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Gláucia Coelho
Machado Meyer, Sendacz e Opice Advogados, São Paulo
gmcoelho@machadomeyer.com.br

Débora Chaves Martines Fernandes
Machado Meyer, Sendacz e Opice Advogados, São Paulo
dchaves@machadomeyer.com.br

This year marked the 30th anniversary of Brazil’s Consumer Protection Code, the Act which includes most of the rules applicable to collective proceedings in Brazil. It was also during this year that two bills proposing the consolidation of the class action legal background were presented to the Congress, namely bill numbers 4441/2020 and 4778/2020. The bills attempt to concentrate the defence of collective rights before courts legislation into one Act, as they can now be processed together in the Congress. The bills aim to improve the collective proceedings, seeking a higher level of effectiveness in reducing repetitive litigation, in addition to proposing to root out emulative behaviours of parties and the exploitation of loopholes under the current system to achieve purposes completely unrelated to those which were intended by the legislator.

This article will provide a brief critical summary of the proposed changes to legislation that have been considered most relevant to Brazil’s system of class actions.

Adequacy of representation of civil associations

One of proposals which has been widely discussed is the enactment of the concept of adequacy of representation. This requires civil associations to prove they can adequately represent collective interests through the filing of class actions. The proposal also requires for the verification of a class action and the judge’s power to deny standing to associative entities on such a basis.

Despite being one of the foundations for filing class actions in several countries, in Brazil current legislation only requires an association to demonstrate that it has existed for longer than a year and that it includes among its institutional purposes the defence of rights claimed in court.^[1] The bills, on the other hand, expand the list of characteristics and competencies expected from these entities, including proof of the number of associates, their financial capacity (including ability to afford procedural costs), their history of defending collective rights and the degree of representation within the group they intend to represent.^[2] At a judge’s discretion, these provisions in the bills also allow the application other criteria: from the certification phase to final decision. And the fulfilment of these requirements is of such importance that, in Bill No 4778/2020, the judge will not grant any injunctive before verifying the plaintiff’s adequacy of representation.

The purpose of these rules is to prevent abuse perpetrated by sham and self-interested associations, which without having any representation of the group that they intend to defend in court or expertise in claims asserted in the class actions, make use of current rules of exemption from procedural costs to litigate for free to obtain financial gain. Nevertheless, the legal community still has divided opinions on the matter. Although there is consensus that this sort of abusive practice should be restrained, there is a fear that the new rules for assessing adequacy of representation are applied too strictly, and therefore impose obstacles to the broad access to justice, especially in matters of interest and collective repercussion. This may culminate in a severe blow to the articulation and expression of civil society before the courts.

Jurisdiction rules

The current jurisdiction rules for class action in Brazil are quite broad. They allow the filing of collective proceedings where the damage discussed occurred: in the state capital for damages which occurred at a local level; or in the federal district for damages of regional or national reach.^[3] Article 14 of Bill No 4778/2020 proposes to amend this rule of jurisdiction to determine that class actions shall only be brought at state capitals or in the federal district, preferably in specialised courts. Such a rule, despite aiming to ensure a better-quality judgment, by judges who have contact with collective proceedings more frequently, has also not been immune to criticism by Brazil’s legal scholars. Their main concern is the removal of the class action from the location of the damage, therefore making it difficult or disregarding access and participation of the community affected by the damages discussed. This point is especially relevant in cases involving environmental law.

The relationship between individual lawsuits and class actions

In this regard, the bills reiterate the general rule currently in effect,^[4] asserting that class actions do not induce lis pendens for individual lawsuits,^[5] so that the members of a certain class will still have the option to file their individual lawsuits or await the solution of the collective proceeding, so that the class action judgment can be individually enforced. While Bill No 4778/2020 retains the current system, Bill No 4441/2020, however, determines the suspension of individual cases ‘based on the same set of facts’ if there is a pending class action addressing the same issue, leaving it up to the plaintiff to request the continuity of their lawsuit, proving: (1) the urgency of the remedy sought – and harm a suspension would impose to their rights; (2) that their claims are not based on ‘the same set of facts’ as the class action.^[6] Choosing to proceed with their individual lawsuit, the plaintiff cannot benefit from the class action judgment. This proposal aims to endorse the current precedents of Brazil’s Superior Court of Justice, which has been consolidating around the idea that the fluency of collective and individual lawsuits addressing the same themes puts the very effectiveness of the class action system at risk.

The Bills adopt diametrically opposed solutions regarding the highly pertinent issue of suspending the statute of limitations for individual lawsuits, that is, if a class action addressing the same claims was filed before. According to Article 26, section 4 of Bill No 4778/2020, the filing of a class action does not interrupt this statute of limitations for individual lawsuits discussing the same facts. Article 15 of Bill No 4441/2020, on the other hand, proposes the interruption of the statute of limitations for the filing of individual lawsuits based on ‘the same set of facts’.

As the two bills have quite different proposals on addressing the interaction between individual and collective lawsuits based on the same set of facts, it is not yet possible to know which position will prevail.

Provisions allowing procedural agreements

Both bills provide for the possibility of the parties entering procedural agreements in class actions, including during the enforcement phase.^[7] The legality of such settlements is under the control of the judge. These rules are unparalleled in Brazil’s current class action system and should be regarded as a positive innovation, since they will allow parties to come up with joint solutions during lawsuits and, especially during the enforcement phase. Depending on the nature of the class action, and the content of the decision rendered in such proceedings, compliance with the court-imposed obligations (eg, obligations to repair damages to historic heritage or the environment) can be more efficient if the parties are free to draw up a timetable and a set of actions to give effect to the judgment. The procedural agreements are a good instrument for achieving this.

Collective res judicata

The upsurge of the standing rules, with the scrutiny of adequacy of representation, interacts with proposals to change the collective res judicata. Currently, the material res judicata only applies for the benefit of the affected community. If the class action is dismissed due to lack of evidence, both class action with new evidence and individual lawsuits may be brought by members of the affected community. The Bills propose changes to this rule so that the material res judicata will applies even in cases are judged against the affected community.^[8] Another collective proceeding with the same claims will only be entertained if the plaintiff demonstrates that the new evidence could not have been produced in the first lawsuit. A poorly conducted class action, without the proper seriousness, commitment and suitability, can therefore end up damaging the rights of a class or of society as a whole.

Small claims class actions

Brazil’s current class action rules do not provide for any specific procedure to address the enforcement phase of collective proceedings that, although discussing relevant themes and with high amounts of collective damages, generate very little individual benefit for the members of the affected community appearing before court to enforce the decision. Article 100 of the Consumer Protection Code authorises collective enforcement of individual damages, only if after one year of the decision in favour of the class, a low number of individuals come forward to collect the damages. Article 8, paragraph 3 of Bill No 4778/2020  allows the immediate collective enforcement of small claims by the class action plaintiff attributing to collective damages, as well as the compensatory effect, and the deterrence effect, paving the way for the doctrine of punitive damages in Brazilian collective proceedings. The amount of damages collectively enforced will be allocated to the fund for the defence of collective rights, managed by a federal council or by state councils in which the Public Prosecutor’s Office and representatives of the community will participate. The resources allocated to such funds will be used to indemnify and repair the injured rights and assets.^[9]

Changes to procedural costs allocation rules

According to current legislation, the legitimate entities for the filing of class actions in Brazil (Public Prosecutor's Office, Public Defender's Office, Civil Associations, Federal entities and public administration entities) are usually exempt from the payment of procedural costs and lawyers’ fees in case of loss – except for civil associations that have been proved to have acted in bad faith.^[10] It is a measure which grants broad access to justice and encourages the use of the collective proceedings. Bill No 4778/2020 reforms the current position, by proposing the amendment of this rule to provide that associations, federative entities and public administration entities, will be responsible for the payment of procedural costs and lawyers’ fees, should the lawsuit be dismissed or judge against the class interests. The Public Defender’s Office and the Public Prosecutor’s Office will be responsible for the payment of such costs if the class action is found to be manifestly unfounded. Such entities will allocate such costs to their annual budgets.^[11] On one hand, these new rules would encourage the plaintiffs to instruct the class action more robustly and better consider the risks of filing these types of lawsuit which are unquestionably onerous for the defendants. On the other, it would also provoke discussion on imposing obstacles to broad access to justice in collective claims.

The Bills inaugurate a new round of attempt to consolidate and improve the rules that govern class actions in Brazil. However, apart from the discussion of their contents, the legal community observes the handling of these Bills with a level of scepticism, since others attempts to create a Brazilian Code of Collective Proceedings (eg, Bill No 5139/2009) were shelved without even being voted on. The hope is that, on this occasion, a topic of such importance and with the potential to help address one of the biggest the Brazilian courts’ problems – the overload of lawsuits – will be carried out successfully, bringing a new lease of life to the class actions in Brazil.