Collective Redress Directive - the European class action is coming (Part 2)

Even though the formal adoption of the “Directive on representative actions for the protection of the collective interests of Consumers” (“the Directive”) and its implementation by the national legislators are still outstanding and leave some room for discretion, companies are well advised to familiarise themselves with the upcoming system of collective redress, to adapt their analysis of litigation risks and to implement measures to avoid collective redress litigations. In Part 2 of our series on the proposed Directive, we, inter alia, explain the impact of collective actions on individual claims and take a look at disclosure obligations. We also provide a glimpse at what EU institutions will do next to bring the Directive into force.

Which impact does a collective action have on individual claims?

According to the Directive, Member States should ensure that consumers who are represented by a qualified entity within a representative action for redress can neither be represented in other representative actions nor bring individual actions with the same cause of action and against the same trader (Art. 5b (3a)). Injunction measures issued under the Directive should be without prejudice to individual redress actions brought by consumers (rec. 15f). While it goes without saying that consumers should not be able to be represented in a collective action and bring an individual action simultaneously, the question arises as to how the Member States will be able to ensure that consumers will not “take the double track”, especially at EU-level. It seems necessary to establish an EU-wide register of actions which is accessible not only for relevant courts, but also for affected traders.

As regards the suspension of limitation periods, the Directive stipulates that Member States shall ensure that pending representative actions for redress measures as well as for injunction measures have the effect of suspending or interrupting applicable limitation periods in respect of consumers concerned by the action (Art. 11). In case of a representative action for injunction measures, the possible suspension or interruption of limitation periods applicable to subsequent claims for redress requires the qualified entity to provide sufficient information on the group of consumers concerned by the action (rec. 12b, 35).

How does the Directive prevent abuse?

The Directive highlights that it is important to ensure the necessary balance between access to justice and procedural safeguards against abusive litigation which could unjustifiably hinder the ability of business to operate in the internal market. To prevent the misuse of representative actions, elements such as punitive damages should be avoided (Art. 1(1), rec. 4).

In particular, the Directive tries to strike a balance between access to justice and protecting traders from abusive claims through the Parliament’s introduction of the “loser pays principle”, which ensures that the defeated party pays the costs of the proceedings of the successful party (Art 8a(1)). To further avoid abusive lawsuits, the Directive stipulates that courts or administrative authorities may decide to dismiss manifestly unfounded cases at the earliest possible stage of the proceedings in accordance with national law. (Art. 5(6)).

With these rules, the Directive takes into account some of the concerns raised by various industry representatives that aim to avoid a US-style litigation industry with forced early settlements even in legally meritless cases. It remains to be seen whether the degree of protection is sufficient.

Which disclosure obligations are foreseen?

The Directive provides that courts will have the power to order that further evidence is disclosed by the defendant trader if the qualified entity has “presented reasonably available evidence sufficient to support the representative action, and has indicated further evidence which lies in the control of the defendant or a third party”. Vice versa, the defendant trader will be able to request evidence from the entity and third parties (Art. 13).

Under German law, a court may order the other party or a third party to produce documents only if the reference is sufficiently specific to identify the document. The mere assertion of the existence of documents which have not been further specified is insufficient (Art. 142 CCP). The wording of the Directive („indicated further evidence“) suggests less stringent requirements. The restriction that courts and administrative authorities should only order the presentation of evidence “in accordance with national procedural rules” and “subject to the applicable Union and national rules on confidentiality and proportionality” makes it difficult to predict how each Member State will transpose the provision on disclosure into national law.

What consequences does this have for the existing German collective redress system?

Against this background, the existing German Model Declaratory Action Act (Musterfeststellungsklagengesetz – “MFKG”) faces competition from various sides:

  • On the one hand, there is the threat of inner-German “cannibalism”. Generally, the Directive shall not prevent Member States from adopting or maintaining in force procedural means aimed at the protection of the collective interests of consumers at national level (Art. 1(2)). However, it obliges the Member States to “ensure that the redress measure entitles the consumers to seek recovery of the damages without the need to bring a separate action” (Art. 5b(5)). As the “need to bring a separate action” is a distinct feature of the MFKG, the German legislator will be forced to introduce a separate, probably more attractive mechanism, thereby rendering the MFKG obsolete, or to adapt the MFKG accordingly.
  • On the other hand, Germany competes with other Member States. All Member States will have to make cross-border representative actions available. This will allow qualified entities to bring one single set of proceedings before the court of one Member State to address an infringement spanning multiple Member States, subject to the rules on private international law (cf. Art. 2(3)). Accordingly, qualified entities will look for the most attractive forum. This new level of forum shopping comes at a point in time when the judicial systems of some member states are under scrutiny due to increasing political interference.
What’s the way forward?

As for the next steps before adoption of the draft Directive, we are expecting a vote on the draft by the Council of the European Union by October 2020, and a vote in the plenary meeting of the European Parliament by December 2020. The Member States will then have two years from the entry into force of the Directive to implement it into national legislation and another six month to apply the new provisions. Hence, we expect the new rules to enter into force in 2023.The period until the rules apply, should be used by companies to familiarise their employees with the new rules and implement appropriate risk prevention mechanisms.