The Collective Redress Directive – EU class actions on the horizon?
The new EU Directive on representative actions for the protection of the collective interests of consumers (the “Directive”) requires EU member states to put in place procedures by which qualified entities are able to bring representative actions to seek injunctions, damages and other redress on behalf of consumers. Although the member states have two years to implement the Directive and a further six months to apply the new provisions, companies active in Europe are advised to familiarise themselves with the upcoming changes to minimise potential risks.
Implementation of the Directive
The approach to collective redress is not consistent across the member states of the EU. Some European jurisdictions do not yet have any collective redress instruments in place, while others have developed specific but limited procedures against the background of their own legal traditions. When implementing the Directive, member states may try to take account of local particularities and customs, which could lead to a confusing thicket of regulations across the EU. The Directive grants member states room to manoeuvre in some areas and strict guidelines in others:
- The representative actions envisaged under the draft Directive are in principle limited in scope: the infringement for which representative proceedings may be brought must relate to a wide but limited set of European Directives and Regulations on consumer protection as set out in Annex I to the Directive. However, the member states are free to apply the provisions of the Directive to additional areas, which could create significant additional risks for companies.
- Under the Directive, the EU member states are obliged to make at least one representative action procedure available to consumers. Qualified entities must be able to obtain (i) injunctive relief and (ii) redress (including compensation, repair, replacement, price reduction, contract termination or reimbursement, but not punitive damages).
- As collective damages actions are unknown in some EU jurisdictions (e.g. Germany), the Directive includes safeguard measures to prevent abuse. One of these measures is to limit the right of action to qualified entities that have been designated by a member state. For cross-border cases, these entities must comply with certain criteria that are listed in the Directive. For domestic actions, member states are entitled to set out criteria that must only “be consistent” with the objectives of the Directive. Member states enjoy a considerable degree of discretion in this regard and may even designate a qualified entity on an ad hoc basis for the purpose of bringing a particular domestic action.
- During the legislative process, it was discussed at some length whether consumers must actively join the collective action (“opt-in”) or whether a qualified entity can sue on behalf of all consumers who do not explicitly decline to take part (“opt-out”). The final text adopted both approaches. Under the Directive, individual consumers shall not be required to expressly agree to be represented by the qualified entity in a claim seeking an injunction. Where substantive redress is sought in a cross-border case, individual parties will always be obliged to opt in. In purely national proceedings, however, the decision is left to the member state, which may also decide to require the participation of a minimum number of consumers before permitting the claim to proceed.
- As outlined in our more comprehensive overview, the Directive also includes provisions on the effect of collective actions on individual claims and parallel proceedings, disclosure, the allocation of costs, third party funding and settlements, which give member states room to manoeuvre.
- There is only limited, if any, guidance on procedural aspects such as admissibility, evidence and means of appeal.
Pitfalls for companies
For companies, how the Directive is ultimately implemented will be crucial:
- First, companies should check whether the member states in which they are active have extended the implementation of the Directive to areas not listed in the Directive (e.g., competition law, which is currently outside the list in Annex 1). Such gold-plating could pose significant additional risks.
- Second, if certain member states opt for more consumer-friendly legislation than others (e.g. in relation to the consumer quorum, limitation periods or opt-out mechanisms), qualified entities may launch their representative actions in these jurisdictions. They may very well also choose jurisdictions that have procedural advantages from their point of view (e.g. in relation to admissibility requirements or disclosure) and/or lower thresholds for classifying as a qualified entity. The Directive does not prevent or regulate such forum shopping. It is thus important for companies to monitor the legislation in all relevant member states instead of focussing on the larger ones or the “usual suspects”.
- Third, it is unclear whether parallel proceedings in a number of member states can be avoided. Effective litigation management will therefore require a strategic and coordinated approach across jurisdictions.
Generally, while member states have some leeway in how they implement the Directive and the risks for companies could differ accordingly, the litigious landscape in Europe will undoubtedly change significantly. It is to be expected that the Directive will lead to an increase of collective actions in the EU. We will be monitoring the implementation process closely and will continue to update you on progress at national level as well as cross-jurisdictional issues, as they arise.