Global Taxes

The European Representative Action Directive

Wednesday 4 August 2021

Thomas Wambach

Heuking Kühn Lüer Wojtek, Hamburg

t.wambach@heuking.de

Felix Dressel

Heuking Kühn Lüer Wojtek, Hamburg

In November 2020, the European Parliament and the Council of the European Union passed Directive EU 2020/1828 on the new European Representative Action.[1] This article aims to give an overview over the new collective remedy and the debate it has caused.

Summary of the Directive

Qualified entities

The Directive authorises ‘qualified entities’ to bring representative actions against companies whenever they violate European consumer protection laws.[2] The Member States have full discretion to define who has standing in domestic representative actions. In cross-border disputes where the qualified entity files a complaint in another Member State, it has to meet six criteria to show standing.[3] Compliance with these criteria shall be monitored regularly[4] – at least every five years – in order to avoid complaints by entities who lack standing.[5]

Remedies

The qualified entities may now ask for injunctive relief and redress. The latter includes compensation, repair, replacement, termination of contracts, refund or price reductions.[6] Punitive damages must not be awarded.[7] This distinguishes the European approach from US law, where punitive damages are a permissible and frequent remedy. Existing contractual and non-contractual rights of the consumer are explicitly not affected by the Directive.[8]  Prior to the Directive, consumer protection agencies could only ask for injunctive relief. In Germany, for example, the relatively new model declaratory action (Musterfeststellungsklage) only permits declaratory judgments but no other remedies.

Consumer participation

The Member State may determine if and how a consumer may participate in the process. Once the consumers are involved, they may not file a separate action.[9]

The Directive permits opt-in or opt-out mechanisms for consumer participation. In an opt-in mechanism, the consumer has to join the action actively. In an opt-out mechanism, every affected consumer is automatically part of the representative action unless they explicitly decide to exit the action.[10] While the Member State may choose between the models in domestic disputes, the Directive stipulates an opt-in mechanism in cross-border disputes. Otherwise, the court’s ruling will not be binding for the customer.[11]

Litigation funding

The Directive expressly permits funding of the litigation by third parties,[12] provided that the protection of the collective interests of the consumers is not compromised.[13] The financier must not unduly influence the conduct of the case by the qualified entity.[14] In case of a violation of these rules, the qualified entity may be banned from further pursuing the action.[15]

Implementation period

Member States have two years to implement the Directive and another six months to pass the law. The European Collective Action shall hence become part of the European procedural landscape between the end of 2022 and the first half of 2023.

Discussions about the Directive[16]

Qualified entities

The Directive’s definitions of qualified entities for domestic and cross-border representative actions has been criticised.[17] Some authors complain that the Directive left the definition of the criteria domestic qualified entities have to meet to the Member States, while others found the criteria for such entities in cross-border disputes to be too narrow.[18] For example, authors found a minimum number of members for the qualified entities to be desirable in order to prevent pro forma or a ‘one-person entities’.[19] Business associations in particular fear to be taken to court by entities who lack members or have no track record as advocates of consumer interests. Sufficient funding is also considered as a necessary requirement[20] for a qualified entity, including transparency of the origins of the funds.[21]

The discussion about the requirements of a qualified entity for domestic disputes is relevant because cross-border litigation will probably be the exception. The qualified entity has the mission to protect consumer rights in its Member State. There it is domiciled, represents its members and generates its funds. It will therefore be inclined to pursue a claim rather at home than in another Member State. This raises concern of a ‘race to the bottom’ by the Member States when they define the criteria of the qualified entity. There is definitely an incentive to lower standards in order to attract litigation. However, this does not necessarily imply that any given entity will be able to file representative complaints. The Directive calls for a minimum standard. The criteria the Member States stipulate have to be consistent with the objective of the Directive to protect consumer rights by an efficient representative action.[22] In addition, overly strict criteria could have a prohibitive effect and hence might run counter to the objective of the Directive to protect consumer rights.

Remedies

Because of the numerous possible remedies beyond injunctive relief, commentators worry that a litigation industry might evolve that is only interested in its share of monetary awards. The fact that the specific facts and circumstances of an individual case will not matter was also met with criticism, as it may cause under or overcompensation.[23] The limitation to declaratory judgments, like in the German model declaratory action, is therefore preferred by some, particularly German commentators who speak for the industry as possible defendants or lawyers’ associations.[24] It has to be noted that the discussion is biased and the authors’ interests determine their standpoint. The industry as potential defendant has no interest in wide variety of remedies that can be awarded to injured customers.

Nonetheless, there are several strong arguments in favour of a wide variety of remedies. The fear that the facts of a particular case will not be taken into account is not justified.[25] Specific solutions are possible if the subject matter of the dispute is a series of faulty products. In such cases, the judge may issue guidelines how to calculate the individual damages. The mere possibility of a less-than-perfect result in some cases does not justify the rejection of the effective enforcement of consumer rights as a whole. Moreover, practitioners made the experience in past instances of serial or mass litigation that the facts of the cases were similar. Otherwise, there would be no reason for a collective action. Even the affected companies could benefit in the end as well. They avoid lengthy and cost-intensive proceedings against individual consumers.[26]

Furthermore, the scare of a litigation industry is outdated. It already exists in the EU. During the Volkswagen diesel scandal, a handful of law firms filed tens of thousands of complaints with all regional district courts in Germany in a short period of time by using sample written submissions. The fee revenue in these cases presumably exceeded €50m. On the other hand, a representative action concentrates the dispute in one venue and thereby saves valuable resources of other courts.

Consumer participation

The decision for an opt-in or an opt-out model is of utmost importance for the effectiveness of the representative action. The discussion about the models again reflects the contradicting interests of the possible parties in collective actions.

The Federation of German Industries (Bundesverband der Deutschen Industrie or BDI), amongst others, unequivocally prefers an opt-in solution.[27] It worries that an opt-out model would carry the risk of damaging the reputation of the sued company and thus forcing it into a settlement. Furthermore, the company would no longer know who is affected and how high the damages will be. Ultimately, an opt-out system also increases the consumer's risk of receiving an undesired redress. They would have to actively opt out of the process to avoid this consequence. This would require knowledge of the proceeding that cannot be taken for granted. [28] 

On the other hand, consumer rights advocates prefer an opt-out solution. They assert it would achieve the goal of consumer protection more effectively than an opt-in mechanism particularly when the damage is only minor.[29] Rational apathy because of a negative cost-benefit analysis will then not occur. Avoiding rational apathy was one of the motives for the Directive.

Still, for purposes of practicality and uniformity of the law the opt-in model might be preferable. If the consumer has to register their complaint, both the qualified entity and the defendant get a clear picture of the number of affected persons and the possible total amount of the damages. An opt-in model avoids discrepancies between domestic and cross-border disputes, as the Directive demands an opt-in model for the latter. It will further be easier to distribute funds from a money award or settlement amount to the registered consumers. In an opt-out model, the beneficiaries of the compensations have to be identified before funds can be transferred. Finally, a consumer who is not even willing to fill out a form to pursue their rights evidently has no interest in pursuing their rights and therefore does not deserve protection.

Litigation funding

The Directive’s permission of litigation funding is also subject to discussion. Again, the main objection is the possible rise of a litigation industry that has other interests in mind than consumer protection. A third party takes a high financial risk when it decides to fund the proceedings. Consequently, the protection of the collective interest might therefore be only of minor importance to the financier.[30] Commentators therefore suggest banning contingency fees for the financier.[31]

On the other hand, economic considerations will limit the number of financiers who support litigation funding. Litigation financiers will only fund proceedings if the prospects of success are high. Only when there is a prospect of a reward that significantly exceeds the costs will the third party fund the proceedings. As there is no jury trial in civil matters in the EU, the outcome of the proceeding is more predictable than in jurisdictions with juries in civil matters. As the Directive imposes the costs on the losing party, filing meritless complaints in hope of a settlement could be costly. Moreover, the advantages of litigation funding have to be taken into account. Qualified entities will, in most cases, be less well funded than the defendants who will presumably be big corporations in most cases. They can and will devote considerable funds to fight the claims. In order to create a level playing field, litigation financing is therefore desirable.[32]​​​​​​​

Conclusion

The new representative action will fundamentally change the European litigation landscape.  In spite of criticism the Member States will act courageously and establish a procedural system that facilitates the enforcement of consumer rights instead of looking for ways to curtail them.

Corporations as potential defendants should not be too critical about the Directive either. They might benefit from the effects of the process as well. Instead of having to deal with tens of thousands or more individual disputes they can focus on one lawsuit. The recent past has showed that corporations can no longer escape liability by relying on consumers’ rational apathy. Current information technology (‘legal tech’) makes it possible for specialised law firms to file any given number of complaints at any time.

 

[1] On the question of EU competence: Dangl, EuZW 2020, 798.

[2]  The laws that are subject to the Directive are listed in an Appendix.

[3]  Art.4, para.3 of the Directive requires public consumer protection activities for at least twelve months as a non-profit-organisation.

[4]  Art. 5 para. 3 of the Directive

[5] See also Recitals 25et seqq.

[6] See also Recitals 37et seqq.

[7]  See Recital No. 10

[8]  Art. 2 para. 2 of the Directive

[9] Art. 9 para. 4 of the Directive. For the different options see Recitals no. 43et seqq.

[10] Recital no. 43.

[11] Art. 9 para. 3 of the Directive.

[12] Scherer, VuR 2020, 83, provides basic information on litigation funding.

[13] Art. 10 para. 1 of the Directive, see also Recital No. 52.

[14]  Art. 10 para. 2 of the Directive.

[15]  Art. 10 para. 4 of the Directive

[16]  Much of the literature cited deals with the 2018 proposal. The criticism is only discussed to the extent that it is still valid today.

[17] For the legal standing of a public law entity: HDE Opinion of 20 June 2018, p. 6.(HDE is the Handelsverband Deutschland, an association of German retailers)

[18] See DAV Opinion No. 49/2018 p. 17et seqq. in particular with regard to financing; BDI Opinion of 1 August 2018 p. 11et seqq. (DAV is the Deutscher Anwaltsverein, the association of German attorney; BDI is the Bundesverband der Deutschen Industrie, the federal association of manufacturers and industrial service providers).

[19] BDI Opinion of 1 August 2018 p. 12.

[20] DAV Opinion No. 49/2018 p. 17.

[21] BRAK Opinion No. 30/2018 p. 3. (BRAK is the Bundesrechtsanwaltskammer, the German federal bar association)

[22]  Art. 4 para. 4 of the Directive.

[23] See, for example, Lühmann, NJW 2019, 570 (572); BRAK Opinion No. 30/2018 p. 4 with reference to the VW diesel scandal.

[24] BRAK Opinion No. 30/2018 p. 4; in this respect probably also BDI Opinion of 01 August 2018 p. 17;  probably also DAV Opinion No. 49/2018 p. 20.

[25]  This was already the subject of lively discussion during the introduction of the model declaratory action: Prütting, ZIP 2020, 197 (201) with further references. An example to the contrary is the settlement in the Volkswagen diesel scandal where the parties built clusters to take the age and purchase prices of the cars into account. These clusters were able to individualise the compensation paid to the customers with a reasonable accuracy.

[26]   The best example is the Volkswagen diesel scandal, where some 240.000 cases were settled in the German Model Declaratory Action (Musterfeststellungsklage) saving Volkswagen from defending itself in the same number of cases against customers.

[27]  See also: GDV Opinion of 18 June 2018 p. 4; HDE Opinion of 20 June 2020 p. 5.

[28] BDI Opinion of 01 August 2018 p. 14et seqq.

[29] Cf. Tilp/Schiefer, NZV 2017, 14 (17).

[30] BDI Opinion of 01 August 2018 p. 19.

[31] BDI Opinion of 01 August 2018 p. 21.

[32] Cf. on the general problem of litigation costs and financing: Scherer VuR 2020, 83 (83).