How far do EC collective redress plans go?

In its New Deal for Consumers package announced last month, the EC put forward plans to introduce pan-European Union collective redress and penalties of up to 4% of annual turnover for organisations that fall foul of consumer law, among other measures. The proposed pan-European collective redress system was criticised by various stakeholders for being tougher on business than many feared and failing to adequately protect against third-party litigation funders running amok in the EU. Ben Norris spoke to Philip Woolfson, partner, and Alexander Hamels, associate, from law firm Steptoe & Johnson’s Brussels office for their expert take on the plans.

How do the proposals compare with class action legislation in the US?

The collective redress proposal differs significantly from US-style class actions in terms of liability. Recital (4) of the proposal explicitly refers to measures to avoid the misuse of representative actions. Examples of differences and safeguards are as follows:

• European jurisdictions traditionally do not provide for punitive damages, whereas these damages constitute a major liability risk for US businesses when confronted with a class action. The EC’s proposal does not provide for punitive damages. Only the actual damage incurred can be claimed and overcompensation is avoided. However, the proposal does provide for fines; in practice, fines could be similar in size to punitive damages.
• The proposal is more restrictive than US-style class actions in terms of the legal standing of qualified entities, the source of their funds and the nature of the evidence required to support the representative action.
• European jurisdictions are traditionally reluctant to grant excessive attorneys’ fees. For example, in the recent Bosch settlement, the US District Court of the Northern District of California granted $50m in attorneys’ fees on a $327.5m settlement fund (15.3%). Whereas in the Fortis Settlement, an Amsterdam court refused to grant €45m legal fees on a €1.2bn settlement fund (3.75%) because it considered the amount to be disproportionate. In Belgium, the maximum award for attorneys’ fees that a party can claim is capped at €36,000.
• Several Continental jurisdictions prohibit a “no cure, no pay” arrangement between attorneys and their clients, because of concern that such arrangements motivate consumers to litigate even when chances are low. Under the current version of the collective redress proposal, third party funders will be able to offer such services.

Which parts are particularly contentious for business? Which areas do you think will be lobbied against?

Commentaries from representative business organisations are generally averse to the plans. Businesses question the need for a framework of binding collective redress mechanisms, instead of out-of-court solutions, such as the existing alternative dispute resolution framework.

In addition to the existing fines for breaches of competition rules and under the General Data Protection Regulation (GDPR), the enforcement proposal provides for fines. In specified cases, “… the maximum amount… shall be at least 4% of the trader’s annual turnover in the Member State or Member States concerned”, for infringements of consumer protection law, such as unfair contract terms, unfair commercial practices and disclosure requirements. This penalty will be a strong enforcement tool for administrative authorities to encourage businesses to comply with the existing framework of consumer protection, and means there is a substantial legal risk for businesses.

The collective redress proposal further allows cross-border representative actions to be brought before the national court of a member state by several qualified entities, acting jointly or represented by a single qualified entity. We expect business to lobby against a single qualified entity representing consumers EU-wide.

The collective redress proposal obliges the trader to bear the cost of publication of final decisions including, where appropriate, through notifying all consumers concerned individually. However, when a qualified entity loses a class action, the proposal does not explicitly provide for compensation for the trader.

Furthermore, the proposal creates a risk of forum-shopping. Insufficient harmonisation will create differences in the treatment of consumer organisations, depending on which jurisdiction provides the most favourable climate for class actions.

More specifically, the following cause concern:

• The Commission does not specify whether consumers need to ‘opt-in’ (explicitly express their consent to be a part of the class) or to ‘opt-out’ (decline to be a part of the class). Member states remain free to choose between opt-in or opt-out systems or a combination.
• The proposal obliges member states to impose fines for non-compliance with final decisions. It is not clear what these penalties may be, for example default interest rates and a lump sum, or periodic penalty payment. Member states are likely to differ significantly with regard to enforcement mechanisms.
• The Commission further proposes allocation of revenues from fines to purposes that take into account the collective interests of consumers. This could lead to a form of punitive damages.
• Finally, differences will arise regarding the funding of collective actions. The proposal currently allows own funding, third-party funding, legal aid and public funding. Business organisations fear that collective redress mechanisms will become an investment opportunity for third-party funders, with companies offering ‘no cure, no pay’ services – a position that is contrary to the law or professional ethics in several jurisdictions.

Various stakeholders complain that safeguards in the EC’s 2013 recommendations on collective redress are missing from the recent proposals. Should they be concerned and what effect could this have on cases brought against companies, litigation they face and resulting costs?

Companies confronted with a collective action will face major organisational challenges, such as management of the class, verification of documentation and notification requirements. These challenges will trigger substantial costs, especially in an opt-out system.

For example, in a Dutch class action of 2009, Shell was ordered to send 110,000 notices in 22 different languages to class members located in 105 different countries.

A company could be required to notify consumers of a preliminary decision on admissibility or jurisdiction for the class action, only to find that the actual claim is rejected on the merits at a later stage of the procedure.

The Commission’s proposal does not harmonise rules on awards of legal costs, leaving intact existing national rules providing for a “loser pays” principle. Many member states will therefore apply some form of loser pays principle In current civil procedural law, the ‘loser-pays principle’ is, subject to conditions, widespread across the EU. This principle is likely to apply to class actions, unless member states choose other rules when implementing into national law. The proposal requires a qualified entity to demonstrate that it has sufficient financial resources “to meet any adverse costs should the action fail”.

However, a claim for legal expenses may prove limited in practise, in view of national law caps on the total award. These caps already result in insufficient compensation for costs actually incurred in litigation.

For example, in Belgium, a company can only claim an amount of €90 to €12,000 for a non-quantifiable claim and €1,200 to €36,000 for a claim of more than €1m.

The EC says law firms won’t be able to bring cases that instead need to be run by a qualified entity. How do you think this will work in practice according to the proposed text? Is it enough to stop US-style mass litigation?

The current proposal introduces a low threshold for entities to be designated as a qualified entity. A qualified entity only needs to comply with the following criteria:

• It must be properly constituted according to the law of a member state
• It must have a legitimate interest in ensuring that provisions of Union law covered by this Directive are complied with
• It must have a non-profit-making character.

Furthermore, a qualified entity needs to declare at an early stage of the action the source of the funds used for its activity and the funds that it uses to support the action. It needs to demonstrate that it has sufficient financial resources to represent the best interests of the consumers concerned and to meet any adverse costs should the action fail.

Member states can designate an entity as a qualified entity on an ad hoc basis. This gives flexibility to consumers to establish a non-profit entity when confronted with a consumer law infringement.

Law firms are not entitled to represent a class in their own name; they must represent a qualified entity.

The proposal differs from US-style mass litigation at different levels (see above: punitive damages, procedural limitations, legal expenses, prohibition of ‘no cure, no pay’). The Commission considers that these differences are sufficient safeguards to avoid certain excesses in US practice.

Could a company be hit by the GDPR and these collective redress proposals for the same misdemeanor?

The mechanism for collective redress under GDPR and the collective redress proposal overlap; they are not mutually exclusive.

• The GDPR provides for a specific regime of administrative fines and collective redress, as follows:
• The data subject may lodge a complaint with the supervisory authority
• The supervisory authority may initiate an administrative procedure on its own initiative
• The data subject may bring a claim against the company on an individual basis
• A representative organisation may bring a claim on instruction by the data subject or on its own initiative (when such action is provided by national law).

The GDPR is, however, also listed in Annex I of the collective redress proposal and therefore comes within the material scope of the proposal.

In principle, a data subject will be able to bring an infringement to court on the grounds of both GDPR and the collective redress proposal. Given the procedural differences between the texts (for example with regard to the identity and recognition of the qualified entity, remedial and other measures and the procedural safeguards), this could lead to forum-shopping.

It is unclear how data and consumer protection authorities will coordinate with each other and there is, therefore, the risk of a dual fine for the same infringement, which, in turn, could breach prohibitions on ‘double jeopardy’ and even the right to a fair trial.