Collective or Class Actions and Claims Aggregation in the EU: the Defendant’s Perspective
The emerging private damages regimes for competition law damages claims in Europe have presented companies involved in competition law infringements with significant challenges. Monetary risks resulting from potential damages payments can easily reach or exceed those resulting from regulatory proceedings. Most recently, defendants are increasingly facing challenges in the form of collective claims or class actions and claims aggregation throughout Europe. Two prominent examples are the collective actions and aggregated claims brought against European truck manufacturers in several European jurisdictions, following a decision by the European Commission in 2016, as well as the litigation against Mastercard in the United Kingdom related to interchange fees.
The consequences for defendants are manifold: defendants in competition law damages claims are confronted with a new category of claimants, namely relatively small claimants that would not or hardly have claimed damages individually. Those claimants may be at different levels in the value chain, meaning that defendants need to develop strategies to avoid double compensation. Furthermore, collective action mechanisms make it attractive for litigation funders to initiate and orchestrate collective actions. As experience in the United States shows, defendants may be de facto forced into settlements to avoid many years of costly litigation with an uncertain outcome.
On the other hand, collective redress mechanisms can also provide an opportunity to avoid a multitude of barely manageable individual proceedings. This, however, applies only if the respective legal regimes are structured in a way that allows efficient handling of collective proceedings. Such proceedings can also easily become highly complex and bind tremendous resources within the companies affected. Wide-ranging disclosure obligations, particularly in the UK, bring further complexity into the proceedings. Experience in recent years has shown that collective actions and other mass claims in many cases progress slowly.
The collective claims regimes in Europe are still relatively new and very much evolving. The most prominent forums for claimants are currently Germany, the Netherlands and the UK. Whereas in Germany and – at least so far – in the Netherlands, individual claims are mostly aggregated through litigation vehicles or joinder of parties, the UK introduced a collective action mechanism for competition law damages claims in 2015, which is similar to that of US class actions. Since then, the responsible London-based special court has attracted various collective claims. Meanwhile claimants’ euphoria has subsided. Not a single application for a collective proceedings order has been successful so far, and many are still pending. Add to that the uncertainties surrounding Brexit. Recently, mass claims have increasingly been brought in Germany and in the Netherlands.
Current legislative environment largely favours collective claims
In several EU member states, collective redress mechanisms have either already been enacted or are on the verge of being introduced. This is a development that is supported by the EU; the overall political mood is largely in favour of collective redress mechanisms.
At the EU level, the new directive on representative actions is about to be enacted shortly. On 16 July 2020, after having reached political agreement on the content of the directive between the European Parliament, the European Commission and the EU Council, the General Secretariat of the Council recommended to the EU Council that it approve the political agreement on the text of the directive.
The purpose of the new directive is to ensure ‘that at least one representative action procedure for injunction and redress measures is available to consumers in all Member States, which allows for effective and efficient representative actions available at national and the Union level’. At the same time, the directive acknowledges the need to prevent abusive litigation.
The scope of the new directive is limited to an enumerated list of EU law provisions, comprising, among other things, product liability, data protection laws, and unfair commercial practices. The directive does not cover competition law damages claims. This fits with the logic of the directive, as it only covers claims brought by consumers. Introducing competition law claims in the directive would have caused claims mechanisms for different claimants, namely consumers on the one hand and entrepreneurs on the other, to fall apart.
The introduction of collective redress mechanisms in competition law damages claims had been discussed in the course of the introduction of the Damages Directive. In the end, several Member States viewed collective actions critically, leading to relevant provisions being dropped from the Damages Directive. Nevertheless, the European Commission continuously recommends the introduction of collective redress mechanisms by Member States in competition law damages cases. Following a Green Paper in 2005 and a White Paper in 2008, the Commission issued a recommendation in 2013 to introduce collective redress mechanisms that included competition law damages claims. This recommendation was repeated in a 2018 report of the European Commission on the implementation of these recommendations.
Recent developments regarding collective redress in EU countries
Collective proceedings in the UK
In 2015, the UK introduced the option of bringing collective actions for compensation of damages resulting from competition law infringements. While UK law has provided for certain collective claims mechanisms before, the amendment of the Competition Act 1998 by the Consumer Rights Act 2015 was a significant change in the legal regime. Most importantly, the amendment of Section 47B of the Competition Act 1998 made it possible to bring collective claims on an opt-out basis, and also allowed businesses to bring claims. Under Section 47B, a proposed class representative can apply to the London-based Competition Appeal Tribunal (CAT) for a collective proceedings order (CPO) enabling individual competition law claims to be combined in collective proceedings.
Since 2015, nine applications for a CPO have been brought. None has been successful so far but eight out of the nine CPO applications are still pending. The CPO application that has emerged as the lead case is Merricks v. Mastercard. The application was brought in 2016 and dismissed by the CAT in July 2017. Upon appeal by the class representative Walter Merricks, the Court of Appeal reversed the CAT’s decision and ordered that the CPO Application be remitted to the Tribunal for re-hearing. Mastercard appealed this decision of the Court of Appeals to the Supreme Court. A hearing was held by the Supreme Court in May 2020; the decision of the Supreme Court is pending. There are predominantly two issues in dispute in Merricks v. Mastercard: First, the question of the right legal test for certification of a collective proceeding, particularly the standard the proposed expert methodology of the applicant must satisfy at the certification stage. The second is the right approach to distribution of aggregated damages to class members, particularly the question of whether it needs to be ensured that each class member is neither under nor over compensated. The case garnered international attention. For example, Makan Delrahim, Assistant Attorney General at the US Department of Justice, contributed an article on US law experience with class actions. The decision of the Supreme Court in this case will shape the CPO regime in the UK and be determinative for other pending and future CPO applications. All other pending CPO applications have currently been stayed awaiting the outcome of the Supreme Court.
It remains to be seen how the UK as a forum for mass claims will develop in the future. It certainly faces challenges. Most importantly, the imminent Brexit will make the UK less attractive for claimants in European cross-border cases. It is uncertain, for example, whether decisions of the European Commission will have binding effect in post-Brexit UK. Similarly, parties to a damages claim can no longer seek a preliminary reference of legal issues to the European Court of Justice.
The new law on collective actions in the Netherlands
In January 2020, a new Dutch law (the Collective Damages Act) entered into force allowing for damages to be claimed on a collective basis. Previously, it was possible to bring collective claims, but only for declaratory relief and not for monetary compensation. Individual claimants had to demonstrate in individual proceedings that they suffered had damage, relying on the declaratory decision. The new law allows claimants to seek damages collectively. It applies to collective actions filed after 1 January 2020 relating to an event or events that occurred on or after 15 November 2016.
Under the new rules (Article 3:305a of the Dutch Civil Code), only foundations (stichting) or associations (vereniging) established under Dutch law can represent a class of claimants. The party seeking to represent the class must meet several requirements. Among other things, it needs to have sufficient expertise for the class action, be sufficiently transparent about its funding and costs, and have sufficient financial means to bear the costs for the proceedings. In cases where more than one party intend to act as the class representative, the court will designate one representative party. The Dutch class action is based on an opt-out principle, at least regarding parties with their seat in the Netherlands. Foreign parties have the possibility to opt in.
All class actions that are filed have to be registered with the Dutch Council for the Judiciary. Fourteen cases have been registered since January 2020, but none of them concern damages for competition law infringements. This is certainly also owing to the fact that claims can only be brought for events that occurred on or after 15 November 2016 thus precluding older cases. The coming years will show if and to which extent the new options will be used by claimants in competition law cases.
Collective redress mechanisms in further EU countries
Italy will shortly expand the possibility to bring collective actions, with a new law scheduled to enter into force on 19 November 2020. Under the new law, any party whose claims are ‘homogenous’ to those of other members of a class can bring an action, a right previously reserved for consumers. The class action mechanism will also allow claims for damages resulting from competition law infringements. It is based on an opt-in principle. The particularity however is that class members can opt in both once the court declared the action admissible and after the judgement has been delivered.
Some further EU member states have collective redress mechanisms covering competition law infringements, such as Belgium and France. Competition law claims have not, however, played a significant role in these jurisdictions so far. Other countries have collective redress mechanisms for selected areas of law, which do not include competition law. In Germany, for example, consumer protection organisations can seek declaratory relief in certain areas of law, which then has a binding effect on all persons who signed up to a register before the oral hearing.
Claims aggregation as an alternative model to bundle claims
Many other European jurisdictions – including Germany – do not provide collective redress mechanisms as such (e.g., collective or class actions) for competition law damages litigation. There are, however, alternative models that allow for claims to be bundled to a certain extent and thereby partially mitigate the manifest disadvantages and inefficiencies of fragmented individual damages claims. These deficiencies include the vast number of mostly standardised if not even automated court submissions and the complex deadline management that lead to major inefficiencies and tie up significant resources at court. However, the alternative bundling mechanisms present major challenges of their own, and courts have objected to several forms of such bundling in recent decisions. It is important, both for claimants and for defendants, to be aware of these judgments and closely monitor the further development in order to determine the opportunities presented by but also limits of such alternative bundling mechanisms.
Two alternative models for bundling claims shall be presented in the following, based on the situation in Germany: the assignment of claims to litigation vehicles and the joinder of various parties.
Assignments to litigation vehicle
One form of bundling is the assignment of claims to a litigation vehicle. Potentially damaged parties assign their claims to an entity that is usually founded particularly for such purpose and supported by a litigation funder. The entity acts as plaintiff in court, that is, as litigation vehicle. The parties may in return receive either a fixed sum for their assignment or, more often, a certain percentage of any damages successfully claimed in court. However, it is important to note that with the assignment of the claim the matter is not yet settled for the assignor. The assignor still has to support the proceedings by submitting documents, providing information and witnesses, etc. This usually involves considerable additional effort.
Such assignments to litigation vehicles mitigate the inefficiencies of fragmented individual damages claims to a certain extent, but are accompanied by difficulties of their own. Needless to state that the extent of the submission and the structured handling of the numerous relevant facts and legal issues pose a major challenge for courts. But, most of all, courts have objected to several forms of litigation vehicles in recent decisions, which significantly raises the bar for this bundling mechanism. Some of these objections are listed in the following:
Correct assignment of claims is key to a litigation vehicle model, but this is where the problems start, such as obtaining powers of representation, sufficient determination of assigned claims or the presentation of the (original) deeds of assignment. If the assignment agreements are void, the litigation vehicle lacks the capacity to sue, resulting in a dismissal of the claims. In this regard, it is important to note that an expiry of the statute of limitations may also prevent any remedying of such defects by a renewed assignment at a later point in time.
The litigation vehicle has to be sufficiently funded, as assignments can otherwise conflict with public policy and therefore be null and void. The reason for this is that assignments of claims must not be misused to deprive the defendant and the court of the opportunity to have legal costs reimbursed if the plaintiff’s claim is dismissed. Court costs and attorney fees in cartel damages litigation can be significant, which is why sufficient funding of a litigation vehicle can be challenging for claimants. From a defendant’s perspective, it is key to properly assess and contest funding models of litigation vehicles.
Professional rules of conduct in some countries may prohibit or limit contingency fees, that is, fee models where the attorney fees depend on the outcome of the case or the success of the lawyers’ work or in which lawyers are compensated with a percentage of the amount recovered. This imposes strict limits on the payment mechanisms within litigation vehicle schemes, especially if lawyers have shareholdings in the litigation vehicle.
Local limitations to the provision of legal services also pose a major obstacle for litigation vehicle schemes. In Germany, for example, out-of-court legal services are only admissible to the extent they are expressly permitted by the law. In this regard, first instance courts have determined that assignments of claims which serve to jointly pursue such claims in court based on a profit-sharing agreement with the involvement of a litigation funder are not permitted under the Legal Services Act. The main consideration in the specific case was that the activity of the litigation vehicle was directly targeted at court proceedings and, thus, not comparable to collection services, which would be permitted under the Legal Services Act. Thus, the involvement of a lawyer by the litigation vehicle as well as the registration as a collection service provider could not change the inadmissibility of its activity under the Legal Services Act. However, clarification by higher instance courts is still pending and the correct distinction between collection services and legal services will be key in this regard.
Last but not least, conflicting interests between assignors to the litigation vehicle may also give defendants room to contest the validity of assignments. The bundling of claims from different market levels, in particular, will create such conflicting interests. Damages can only have occurred at one or the other market level, if at all. It is unclear how potential damages payments should be distributed among the assignors under such circumstances.
To conclude, a litigation vehicle may to a certain extent serve as an efficient way to bundle damages litigation, but – with a view to the current case-law – it is a challenging task to set up a litigation vehicle model properly that will hold up to the courts’ scrutiny.
Joinder of parties
Another way to bundle claims is a joinder of parties. For example, under German law, several parties may jointly sue if they form a community of interest with regard to the disputed right; if they are entitled to the same factual and legal cause; or if similar claims form the subject matter in dispute and such claims are based on an essentially similar factual and legal cause. In case of such joinder of parties, the plaintiffs may submit joint briefs and the case will be heard jointly.
Competition law damages litigants are increasingly attempting to make use of this procedural mechanism to bundle claims, especially invoking the third variant of a similar factual and legal cause. However, contrary to the assignment model, there will not be a single plaintiff, but all parties will be plaintiffs. Thus, they have to play an active part in the proceedings, submit briefs, participate in oral hearings and bear the costs of the proceedings in the event of defeat. There are separate procedural law relationships between the defendants and each individual plaintiff.
While mitigating some of the inefficiencies of fragmented individual damages claims, joinder of parties faces similar challenges as other means of bundling. Various different and in some cases irreconcilable interests may be combined in one proceeding (e.g. potentially damaged parties from different market levels). In addition, the procedural handling of very broad joinders of parties entail major practical difficulties, starting with an extremely comprehensive caption of orders or the factual impossibility to request the parties to appear in person during an oral hearing. In addition, they may require a determination of the court of jurisdiction in the first place.
These challenges lead to an increasing tendency of courts to separate very broad or inhomogeneous joinders of parties – upon complaint of the defendant – on the basis that they do not fulfil the requirements for admissibility or based on factual reasons subject to the court’s reasonable discretion. Differing legal interests as well as a lack of procedural efficiency will be compelling reasons for a separation of proceedings. This significantly limits the opportunities of this model to effectively bundle cartel damages claims beyond a group of very few homogenous plaintiffs.
Strategic challenges for defendants facing collective actions or aggregated claims
First and foremost, defendants facing a collective action or an aggregated claim need to ensure proper management of the matter. Collective actions and aggregated claims raise a multitude of factual, legal and strategic issues that need to be addressed in the right way and require significant human and financial resources.
For example, in aggregated claims, it is an important task to identify which claims are properly proven by the claimants, and which can be contested. Depending on the number of claimants and the number of transactions involved, this can lead to significant red tape involving thousands of invoices and other documentary evidence. IT-based solutions can support in the management of such issues. In jurisdictions with a broad disclosure regime, particularly in the UK, disclosure obligations are a further considerable burden in the litigation.
Every management of collective actions and aggregated claims requires careful consideration of the issue of overlapping claims. In many cases, collective actions and aggregated claims allow smaller claimants to pursue their claim for damages. Such claimants are often indirect purchasers of allegedly cartelised products who claim damages for the same products like direct purchasers. There is a risk of a defendant paying damages twice. The avoidance of such double compensation is one aspect that needs to be taken into account.
In addition, the development of more and more mechanisms for collective redress across Europe increases the possibility of forum shopping for claimants. Particularly in EU-wide competition law infringements, litigation funders can choose among many jurisdictions where they might lodge their claim. Even within one and the same jurisdiction, some courts are more attractive for claimants than others because of the judges’ views on relevant legal aspects. For example, while some judges show great reluctance to order the disclosure of documents, others are more willing to do so.
A further important issue is the question of litigation funding. Both for ‘typical’ class actions in the UK and in the Netherlands and for litigation vehicle models such as in Germany, claimants need to ensure sufficient funding. The funding arrangements are often complex and in some cases can be contested. Sufficient funding of claimants is also important for defendants in order to ensure coverage of their costs in case the claim is dismissed.
Where are we heading?
The environment for collective actions and claims aggregation is currently very dynamic. The existing collective action regimes are still relatively new and further jurisdictions are following. Claimant law firms and litigation funders furthermore develop and try out different forms of claims aggregation. Litigation funders are currently willing to invest enormous sums of money in mass claim models. It will, therefore, be interesting to see how the different models and activities of claimants evolve over the coming years. This will heavily depend on how successful the claimants are in the cases which are currently pending before the courts across Europe.
From a defendant’s perspective, the lawmakers and courts need to strike the right balance between the need for suitable mechanisms to address a multitude of ‘micro-damages claims’ on the one hand, and the risk of abusive litigation driven more by the interests of litigation funders than by those of class members on the other hand. If such balance is found, collective actions can also help defendants manage complex litigation, in particular when scattered and relatively low-value damages claims are involved.
1 Johannes Hertfelder is a partner and Ines Bodenstein is a counsel at Gleiss Lutz.
2 Proposed Directive (EU) 2020/… of the European Parliament and of the Council on representative actions for the protection of the collective interests of consumers, and repealing Directive 2009/22/EC, see current draft at https://data.consilium.europa.eu/doc/document/ST-9592-2020-INIT/en/pdf.
3 Recital 7 of the draft directive.
4 Recital 10 of the proposed directive.
5 See Annex 1 to the proposed directive.
6 Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0104&from=en.
7 Commission Recommendation of 11 June 2013 on common principles for injunctive and compensatory collective redress mechanisms in the Member States concerning violations of rights granted under Union Law, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013H0396&from=EN.
8 Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the implementation of the Commission Recommendation of 11 June 2013 on common principles for injunctive and compensatory collective redress mechanisms in the Member States concerning violations of rights granted under Union law (2013/396/EU), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0040&from=DE.
10 Claim no 1266/7/7/16, Walter Hugh Merricks CBE v. Mastercard Incorporated and Others.
11 Makan Delrahim, Merricks v. Mastercard: ‘Passing on‘ the U.S Experience, https://www.competitionpolicyinternational.com/merricks-v-mastercard-passing-on-the-u-s-experience/.
12 Wet Afwikkeling Massaschade in Collectieve Actie (WAMCA).
14 Higher Regional Court of Düsseldorf, judgment of 18 February 2015, VI-U (Kart) 3/14, para.64 – Zementkartell-Sammelklage.
15 In Germany: Section 49(b) Federal Lawyer’s Act.
16 Regional Court of Munich, judgment of 7 February 2020, 37 O 18934/17, paras 139 et seqq; cf also: Regional Court of Braunschweig, judgment of 30 April 2020, 11 O 3092/19, Regional Court of Hannover, judgment of 4.05.2020, 18 O 50/16.
17 Section 3, German Legal Services Act.
18 Cf. Press reporting on an oral hearing at the Regional Court of Munich in the trucks damages litigation: https://www.lto.de/recht/kanzleien-unternehmen/k/lg-muenchen-i-deutsche-bahn-schadensersatz-lkw-kartell-37o1860217/ (last retrieved: 17 September 2020).
19 Section 59 and 60, German Code of Civil Procedure.
20 Section 145, German Code of Civil Procedure.