After months of negotiations, the European Parliament, the European Council and the European Commission reached a compromise agreement on the content of a new Directive on consumer collective redress last week, which was approved by the Legal Affairs Committee on Tuesday. These reforms were originally proposed by the Commission as part of its “New Deal for Consumers”, but there are significant differences in the final text. We take a look at the agreement in detail below.
The new Directive will enable “qualified entities” (generally consumer organisations) to bring representative actions in the EU in the collective interests of consumers. It distinguishes between two types of representative actions – those brought in one Member State, and cross-border actions across multiple EU countries.
Qualified entities can seek injunctions and/or redress from traders for breach of a wide range of EU laws – in total, 52 pieces of EU legislation covering consumer rights, product liability and product safety, as well as data protection, financial services, travel and tourism, energy, telecommunications and health. Redress measures will include compensation, repair, replacement, price reduction, contract termination or refund.
The new Directive is inspired by cases like “Dieselgate”, and the EU’s belief that globalisation and digitalisation have “increased the risk of a large number of consumers being harmed by the same unlawful practice”. Whilst there was a desire to innovate and harmonise collective redress measures, there was also a reluctance to adopt an approach in the EU comparable to the class action system in the US.
So what balance does the agreed text of the new Directive strike?
Well, on the one hand, recovery is limited to actual loss (not punitive damages), and cross-border actions can only be brought by eligible non-profit consumer organisations (not law firms), on an opt-in basis. So the EU system of representative actions is different to the US class action system. In addition, the EU has sought to build in protections to prevent abuse (loser pays, powers to dismiss unmeritorious claims, requirements to disclose source of funding).
On the other hand, the agreed text provides a mechanism to take collective action against traders in respect of a very wide range of consumer rights. Moreover, at a national level, Member States are largely free to set their own requirements for qualified entities, and can choose whether representative actions are opt-in or opt-out. It remains to be seen how the requirements will be implemented across the EU (Member States have two years), but the Directive does leave it open for some Member States to adopt different forms of representative action. Those Member States that take the most consumer-friendly approach are likely to become the forums of choice for cross-border actions.
It seems certain that product manufacturers and retailers (amongst others) will face an increased risk of litigation in the EU as a result of the new Directive. It empowers consumer organisations to bring representative actions for compensation for defective products, to force traders to repair, replace or provide refunds for products, or to seek injunctions to stop existing practices, including the sale of products. These powers are not new in most Member States, but the ability to amass claims across the EU makes bringing large collections of relatively small claims a much more viable prospect for consumer organisations, and a much more threatening one for businesses. Be in no doubt – the new Directive represents a significant change to the consumer rights landscape.
The agreement in detail
Key elements of the agreed final text of the Directive include the following.
- Initiating actions. The Directive is clear that qualified entities will not need to individually identify all affected consumers to bring representative actions. Rather, to start an action it will be sufficient to simply describe the group affected by the alleged infringement and set out the issues of fact and law to be resolved. This means we are likely to see representative actions brought swiftly, for example off the back of media coverage, followed by a period of recruitment of affected EU consumers to the group.
- Domestic representative actions. Member States must have at least one representative action procedure to allow representative actions at a domestic level by designated national qualified entities. Member States that have existing procedures may already meet requirements; others will need to introduce them.
- Cross-border representative actions. Member States must ensure that cross-border actions can be brought in their courts by qualified entities designated by other Member States to bring cross-border actions. The Directive specifically foresees combined actions brought by qualified entities across the EU (e.g. consumer organisations in Germany, France and Italy could work together to bring all consumer claims in the courts of one of these jurisdictions).
- The criteria for designation as a cross-border qualified entity will be harmonised across the EU – and will be stricter than for domestic actions. In particular, cross-border qualified entities must demonstrate at least 12 months’ history of consumer protection (i.e. they can’t be set-up as a special purpose vehicle for action by consumer organisations), have a non-profit character and be independent and not influenced by third parties who have a financial interest in the outcome of the proceedings (other than consumers). These requirements mean that law firms will not be able to register as cross-border qualified entities.
- For domestic actions, Member States are free to decide the national criteria for qualified entities, provided they are consistent with the objectives of the Directive. In principle, this means Member States could allow profit-making bodies (even law firms) to be qualified entities for domestic representative actions, although such criteria could be challenged as inconsistent with the objectives of the Directive, and these bodies would not be able to bring cross-border actions.
- Opt-in / opt-out. Member States can choose whether to provide for an opt-in or opt-out mechanism, or a combination of both. An opt-in mechanism will be required for cross-border representative actions.
- Decisions set precedents. A final decision on an infringement in one Member State can be used as evidence in proceedings against the same trader for the same infringement in other Member States. There is a risk this could result in “forum shopping”, with organisations pursuing an initial action in one Member State (with the most favourable regime), then bringing follow-on proceedings in others. However, this risk is lower with the agreed position than with the one originally proposed by the Commission, which suggested a decision in one Member State should establish a rebuttable presumption of infringement in other Member States (i.e. the burden of proof would have shifted).
- Settlements. To encourage resolution of claims outside of EU courts, the EU has hardwired settlement mechanisms into the new Directive. Courts can invite parties to enter settlement discussions and have powers to review and approve settlements.
- Protections against abusive litigation.
- Loser pays principle. To reduce the risk of vexatious litigation, the losing party in representative actions will be required to reimburse the winning party’s costs (including legal fees). This is designed to act as a deterrent to abusive claims, but it also increases businesses’ risk of exposure if defeated, with little offset in terms of their potential to recover full costs, even if successful.
- In particular, the loser pays principle is subject to an important caveat – individual consumers won’t be ordered to pay costs, unless in exceptional circumstances they are found to have deliberately or negligently increased costs. This is a very high bar and in practice means that consumers will not usually be at any risk of loss by participating in representative actions. Losing qualified entities could be held liable, but businesses may find it difficult to recover full costs from these entities (especially where national rules do not allow defendants to seek security for costs), and any recovery will be subject to a “necessarily incurred” costs assessment before an award is made.
- Powers to dismiss unmeritorious claims. Courts and administrative authorities will be able to dismiss “manifestly unfounded” cases at the earliest possible stage of the proceedings to prevent abusive actions being brought.
- Source of funds for the action: qualified entities will be required to disclose the sources of funds used to support each representative action. Actions against businesses must not be funded by competitors or other third parties with a financial interest.
- Procedural rules. Much of the detail on how representative actions will work in practice has deliberately been left to Member States. This includes rules regarding admissibility of evidence, means of appeal, the required degree of similarity between claims which form the group and the minimum number of consumers needed to constitute a representative action. It remains to be seen what degree of variance there will be between Member States, but some jurisdictions are likely to become more attractive forums for claims by consumer organisations than others.
To become law, the Directive now needs to be formally adopted and then published in the Official Journal of the European Union. The Directive will enter into force 20 days following its publication and Member States will then have 24 months to transpose the Directive into their national laws, and an additional six months to apply it.
Please get in touch if you’d like to know more about how these laws may affect your business. For more information about the background to the new Directive, please see our previous blogs on the negotiations process here and here.