Collective or Class Actions and Claims Aggregation in the EU: the Defendant’s Perspective

On the introduction of the new EU directive on representative actions, rapporteur Geoffroy Didier was quoted as saying:

This reform strikes the right balance between increasing consumer protection on one hand and the necessary legal safety for companies; it goes even further, by showing that safety and security need to go hand in hand . . . the aim is not to punish anyone, but to compensate victims for any loss. The text also ensures all dangers and failures inherent in American class action are avoided.

It is true that, if introduced with appropriate balance and the necessary safeguards, collective actions offer an opportunity for both claimants and defendants. Effective collective action regimes ought to facilitate claims by sharing costs and representation, so increasing the likelihood of claims being brought. This increases exposure for defendants who might otherwise not have faced such claims or be obliged to pay compensation to claimants that can show they have been harmed by infringing conduct. However, defendants also benefit by attaining greater control and management over response to an ever-expanding complexity of civil claims grounded on regulatory breaches across jurisdictions. Collective actions or the aggregation of claims enables the consolidation of defensive resources and the potential to resolve claims in a coordinated swoop. In other words, collective actions can offer defendants an opportunity to return to business as usual at an earlier stage, instead of managing the demands of multiple resource-sapping claims. However, this opportunity emerges only where the mechanism for recovery is structured with regard to the risk of exploitation of collective action mechanisms by claims lacking substance or foundation.

This chapter reviews the concerns that ought to be weighed in establishing collective action mechanisms and the degree to which these concerns have been addressed adequately by collective action mechanisms introduced within the European Union – providing a defendant’s perspective on whether the opportunity for global resolution of claims in a cost-effective manner has yet been realised. In this light, this chapter considers the recommendations made by the European Commission on collective actions reform as well as the policy drivers informing those recommendations and the modes for collective redress already available in the EU – including the opt-out class action models adopted by the UK, the Netherlands and Italy.

Approach to collective actions and claims aggregation in the EU

The European Commission recommended an expansion of collective redress across the EU as far back as 2013, recognising that:

In order to avoid the development of an abusive litigation culture in mass harm situations, the national collective redress mechanisms should contain the fundamental safeguards identified . . . punitive damages, intrusive pre-trial discovery procedures and jury awards, most of which is foreign to the legal traditions of most Member States, should be avoided as a general rule. [2]

Although the European Commission outlined its thoughts on safeguards and emphasised the need for some action to facilitate collective recovery in 2013, its most recent review of available legal remedies established that only 19 Member States provide some form of recompense for victims of mass harm and that the pursuit of proceedings was chilled by the length and cost of litigation. It has continued to press for effort and its latest initiative on collective redress announced on 11 April 2018 aims to promote consumer recovery in a number of areas including data protection, financial services, travel and tourism, energy, telecommunications, environment and health. [3] The European Parliament approved an amended version of the proposal on consumer collective redress by plenary vote on 26 March 2019 and it is expected that it will be part of the legislative agenda for the new European Parliamentary session established in May 2019. The European Commission concluded that the proposed representative action rules would:

  • strengthen the right to access to justice by allowing consumers to join forces across borders and jointly request that unlawful practices be stopped or prevented, or to obtain compensation for the harm;
  • harmonise collective redress mechanisms and end disparities across Member States;
  • reduce the financial burden and make remedies more accessible through collective representation; and
  • strike a balance between citizens’ access to justice and protecting businesses from abusive lawsuits through the ‘loser pays principle’ introduced by MEPs.

The concept of civil recovery led by representative bodies also has made its way into other EU legislation targeted at securing consumer rights – for example, the online platform-to-business trading practices regulations contained a provision allowing for recovery by representative bodies. [4]

Some Member States have adopted or proposed collective recovery mechanisms of their own – with the UK, [5] the Netherlands and Italy all moving to introduce forms of opt-out collective action along the lines of those available in the US, Canada and Australia. Collective recovery – even if solely led by representative bodies or on an opt-in basis – therefore seems likely to become more widespread across the EU.

Collective action models introduced in the EU: the UK

The UK introduced an opt-out class action for competition claims for causes of action arising after 1 October 2015. Careful consideration was given to the procedural strictures that should govern the regime in order to avoid the perceived risk in encouraging unmeritorious claims. It is worth setting these out before highlighting how claimant firms and litigation funders have already sought to test and bend the safeguards on recovery – arguably to commercial rather than consumer interest.

The UK Competition Appeal Tribunal (CAT) is empowered to grant an application for a collective proceedings order only where:

  • it considers that the person who brought the proceedings could be authorised to act as representative (in accordance with criteria provided by Section 47B(8) of the Consumer Rights Act 2015); and
  • in respect of claims that are eligible for inclusion in collective proceedings (which Section 47B(6) explains must raise the same, similar or related issues of fact or law; and be suitable to be brought in collective proceedings).

Rule 79 of the Competition Appeal Tribunal Rules 2015 (CAT Rules) goes on to provide guidance on considering an application for a collective proceedings order, including that eligible claims must:

  • be brought on behalf of an identifiable class of persons;
  • raise common issues; and
  • be suitable to be brought in collective proceedings (elaborating that suitability warrants consideration of: whether collective proceedings are an appropriate means for the fair and efficient resolution of common issues; the costs and benefits of continuing collective proceedings; whether any separate proceedings have already been commenced by members of the class; the size and nature of the class; whether it is possible to determine if any person is a member of the class; whether the claims are suitable for an aggregate award of damages; and the availability of ADR or other means to resolve the dispute).

Six applications [6] for a collective proceedings order have since been filed with the CAT. While the first two applications considered were not approved, the rulings in these nonetheless indicate that the approach taken in the UK will be relatively generous on the commonality of issues and the quality of the representative. Argument and decisions to date in respect of the ongoing assessment of the MasterCard and Trucks applications confirm this view, and that the UK will follow the approach taken in Canada to the analysis of class certification and analysis. This means that applications with an arguable framework (subject to all the considerations articulated above) will be allowed to progress through certification to allow for disclosure to test whether damage has been suffered by the class, and whether individual claimants stand to participate and be compensated. However, no collective proceedings order has yet been made, and in the applications currently pending, the CAT has not been invited to consider all the relevant matters identified in the CAT Rules. Two key issues have been raised: the approach on whether the claims are suitable for an aggregate award of damages (and the standard to be met by expert evidence filed in support of that position); and questions on funding (specifically whether models proposed by litigation funders that arguably circumvent the procedural prohibition on damage-based agreements may be relied upon).

On damages, the English Court of Appeal issued a judgment on 16 April 2019 that requires the CAT to reconsider its decision to refuse certification of the opt-out class action issued against MasterCard. The CAT had rejected the application for a collective proceedings order in the case on the basis that the economic evidence submitted by the claimant did not calculate compensation by reference to each individual affected. This led the CAT to conclude that there would be an issue at the participation stage in determining whether everyone in the class would be able to show that they had in fact been harmed, going both to causation and ability to distribute the pot.

The Court of Appeal disagreed with the CAT – essentially finding that it had adopted too forensic and detailed an approach at this stage of proceedings. In particular, it made two findings that – if upheld when this matter is heard by the Supreme Court in 2020 – will be fundamental to the development of class actions in the UK and the strategy employed by both claimant representative and defendant in litigation these claims.

First, the Court of Appeal articulated the burden that the claimant representative needed to meet in arguing its position on whether the claims are suitable for an aggregate award of damages at the certification stage stating: ‘. . . the proposed representative should not, in our view, be required to demonstrate more than that he has a real prospect of success.’

Second, the Court of Appeal accepted the claimant representative’s argument that there is in principle no requirement in UK procedural law to assess an aggregate award of damages from the ‘bottom up’ by calculating losses suffered by each affected individual.

The concern prompted by this approach is that a low bar is set for certification and the progress of the claim – bringing with it the costs and burden of disclosure as well as continued exposure to the threat of damages that may well be overstated and not properly recoverable. A Supreme Court judgment that upholds this approach might encourage claimant firms and funders to continue to test the bounds of reasonable recovery, with an eye to a stake in the outcome. However, the courts could still insist upon careful scrutiny of the approach after certification so as to ensure that the balance between compensating interests where harmed and avoiding the undue burden of litigation on defendants is maintained.

The Court of Appeal acknowledged in MasterCard the ‘obvious’ similarities between the Canadian and UK regimes and referred approvingly by analogy to the Canadian Supreme Court decision in Pro-Sys Consultants Ltd v. Microsoft Corp [2013] SCC 57 among others. The Canadian courts have recently considered the body of authority of certification in Pioneer Corp v. Godfrey [2019] SCC 42 and confirmed that, when considering loss at the certification stage and whether it might be accepted as a common issue, expert evidence need only be plausible or credible without a need to establish each class member that suffered loss or identify those that did not. However, once the question of common issues has been tried and, established, the question of individual class members’ participation will then be considered separately – with each member being required to satisfy the judge that actual loss has been suffered. Certification in the UK, if it follows this model, will not then equate to pay out of material damages to participating claimants without demonstration of harm and actual loss to them at subsequent stages.

Collective actions models introduced in the EU: the Netherlands

The Dutch collective action legislation will apply to events occurring on or after 15 November 2016 and likely will come into effect early in 2020. Although as yet untested, it is clear from the published details that, as with the UK model, consideration has been given to the procedural safeguards necessary to minimise the risks of exploitation.

The legislation will allow recovery of damages on an opt-out basis for Dutch class members and an opt-in basis for foreign class members. Class members may opt-out after the appointment of the lead representative and once a binding settlement agreement has been negotiated and declared binding by the court.

The legislation also permits the parties to the litigation to request the opt-out be extended to those foreign class members who are ‘easily identifiable’. This offers an interesting opportunity for defendants looking to secure global resolution of claims (to the extent possible) where a class of clearly defined scope and with ascertainable quantification on damage might be opened up to close out ongoing litigation risk.

The structure allows for a lead representative or for a representative body to be appointed. If there is more than one interested representative, a lead may be appointed for that group. Negotiation of settlement occurs immediately following appointment of the lead representative and, if that fails, settlement discussions may be ordered at any other point in the proceedings where the court deems it appropriate to suggest that the parties file a settlement proposal.

Collective action organisations will be subject to governance, funding and representation requirements, and the adequacy of these will be assessed at an early stage of the proceedings. Requirements include:

  • the appointment of a three-person board, a supervisory board and an accountant;
  • the creation of a claims website and regular communications with stakeholders;
  • that no profit be gained by the persons that established the organisation; and
  • the claims vehicle showing that it has sufficient means to finance the collective action and sufficient control over the claim (i.e., litigation funders should not take the decision on whether to agree or reject settlement – that decision must be taken in the best interests of the class by the claims vehicle board).

The action also must have a sufficiently close connection with the Dutch jurisdiction to be admissible. The conditions to establish that connection are that:

  • the majority of the individuals represented by the collective action are domiciled in the Netherlands; or
  • the defendant is domiciled in the Netherlands and other factors point to a nexus with the jurisdiction (e.g., turnover, conduct of business); or
  • the event or conduct relied upon in grounding the claim took place in the Netherlands.

The claimant representative must show that collective action is more efficient and effective than initiating individual claims, taking into account the following factors:

  • whether there is sufficient commonality in the factual and legal questions to be answered;
  • whether there is a large enough number of persons potentially in the class; and
  • where the claim is for damages, whether the class members alone or together have a sufficiently large financial interest for recovery by class to be appropriate.

If the claimant representative cannot show that the claim is arguable or otherwise has some foundation as a collective case then a financial sanction can be ordered (understood as up to five times the normal court approved scale of costs).

Collective actions models introduced in the EU: Italy

Italy has decided to expand its existing class action legislation from 19 April 2020. It intends to allow corporate entities to participate as claimants (having previously confined the right to private individuals) and to expand the types of claim than can be pursued from contractual rights, product liability and competition law infringement to include environmental, employment or health care rights. Claims can be for recovery or injunctive relief.

Class representatives and claimant law firms will be able to ask the court to award fees and costs calculated by reference to the size of the class – so incentivising scoping of broad classes and high-value claims. Further, class members may opt-in after a judgment on the merits of the legal claim has been made. The court will appoint a judge to oversee the participation of class members (including opt-ins) and the distribution of damages based on a plan proposed by the class representative. The class representative will be held to the standard of a public officer in this role and must have no conflict of interest with claimants in the scope of the class.

It will be particularly interesting to see how this model evolves in Italy. Its existing system of consumer class recovery has been in place for some time and has resulted in active intervention in competition investigations by consumer organisation Altroconsumo as well as litigation following on to collect damages. The proposed changes to procedure for the timing of participation and the payment to the class representatives and claimant law firms could foster a material increase in the volume of collective claims in Italy in the future.

Risks inherent in collective actions recovery in the EU

There is a powerful case for saying that collective actions recovery should not be opened up to the private sector and the vagaries of market incentives. The outlook on regulation and consumer welfare in the EU is markedly different to that in the US – the EU ensures consumer protection through careful regulatory frameworks and guidance. There is a real risk that collective actions will be treated as a commercial opportunity by funders and law firms rather than operating to vindicate consumer rights and secure compensation for those harmed by regulatory infringements. Further, it carries the risk of distorting the application of regulatory frameworks and carrying with it chilling effects on innovation and productivity.

Effective private enforcement can be positive and act as a support to public enforcement, which is necessarily subject to limited resources and the context of regulatory priorities. This was recognised by the European Commission when recommending reform in 2013. Collective private enforcement can be an effective lever to protect consumer concerns, particularly in the context of dominant service provision (including transport, energy, telecoms, digital or financial services) and where individual claims might not be cost-effective to pursue. An example where this may prove to be the case is the US$124 million stand-alone competition litigation claim filed recently against three UK train operators alleging a collective abuse of dominance by failure to make boundary fares accessible to passengers holding a Travelcard. [7]

However, the potential benefit to consumer welfare should always be weighed against the need to safeguard against the risk of punitive outcomes or forcing a settlement not fairly due – again, as recognised by the European Commission. The experience in the US is that a failure to control claims that go beyond compensation and that carry a financial incentive for representatives, law firms and funders promotes the pursuit of unmeritorious claims. The cost and time of defending such claims coupled with the risk of very high damages awards may drive defendants to settle and force unfair outcomes.

Enforcement, whether public or private, needs to account for the policy drivers underpinning regulation, including how they should be weighed against each other. The convergence of competition, consumer and data privacy regulation – soon to be followed by environment, product liability and financial services if we observe the EU proposals and the Italian reform – demand that collective recovery be entrusted to representatives that not only understand the regulatory objectives in play but are also concerned to uphold and represent those interests for the benefit of all consumers. In circumstances where the EU does not propose to supervise or endorse suitable representative bodies, it will fall to the courts to ensure that integrity and expertise is considered to be at the core of suitability when appointing a class representative as well as in applying other certification criteria.

The defendant’s perspective remains that collective recovery could prove an opportunity as well as a risk. It is to be hoped that the policy drivers that have informed the careful structuring of proposal on collective action in the EU (as well as in the UK, the Netherlands, Italy and any other jurisdictions that follow) continue to influence the way in which these mechanisms are applied and evolve over time so as to preserve that balance. The rapid expansion in the EU of litigation funders and firms specialising in claimant collective recovery indicates that tensions and uncertainty remains in that regard and that collective actions may yet be seen as an area for investment while the available nascent mechanisms for recovery are tested. However, the litigation of issues affecting multiple claimants demands a strategy that delivers finality and consistency across jurisdictions – whatever mechanism of litigation is chosen – and collective litigation could offer defendants a route to secure that in the European Union if implemented with necessary and appropriate care.


Notes

1 Francesca Richmond is a partner at Baker McKenzie.

3 See COM(2018) 183: Communication on the New Deal for Consumers, https://ec.europa.eu/info/law/law-topic/consumers/review-eu-consumer-law-new-deal-consumers_en and also COM(2018) 184 on representative actions COM(2018) 185 on unfair terms in consumer contracts. See the underlying analysis of the available systems PE 608.829 October 2018, published here www.europarl.europa.eu/RegData/etudes/STUD/2018/608829/IPOL_STU(2018)608829_EN.pdf.

5 Introduced in the UK by Section 47B of the Competition Act (governed by Rules 73–98 of the CAT Rules, with further guidance in Section 6 of the 2015 Guide to Proceedings). UK domiciled entities must opt out; entities in other Member States may opt-in.

6 Case 1257/7/7/16 Dorothy Gibson v. Pride Mobility Products Ltd; Case 1266/7/7/16 Walter Hugh Merricks CBE v. Mastercard Inc and others; Case 1289/7/7/18 Road Haulage Association Ltd v. Man SE and others; Case 1282/7/7/18 UK Trucks Claim Ltd v. Fiat Chrysler Automobiles NV and others; Case 1305/7/7/19 Justin Gutmann v. London & South Eastern Railway Ltd; Case 1329/7/719 Michael O’Higgins FX Class Representative Ltd v. Barclays Bank PLC and others.

7 Case 1305/7/7/19 Justin Gutmann v. London & South Eastern Railway Ltd.

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