Is US-style class action litigation coming to Europe?

The spectre of US-style litigation coming to Europe has long been a concern for corporates, especially when it comes to class actions, says Tony Dowding For class action litigation, the sums involved can be huge, both in terms of damages and defence costs, not to mention the time and effort it takes to defend against such claims, and the impact not only on the company but also its directors and officers. US-style litigation has not yet arrived, but there have been some moves recently that have caused some concern. A recent court case in the UK, and the arrival of the Collective Redress Directive in the EU, are seen by many as a warning sign, although protections are in place that should mean that Europe does not go the way of the US just yet. Most countries in Europe now have an established collective action mechanism, though procedures vary and, in some jurisdictions, are confined to consumer claims. However, the state of affairs in Europe has changed significantly in recent times, according to Henning Schaloske, partner at Clyde & Co in Duesseldorf, following the large losses suffered by investors in the wake of the global financial crisis and the bolstering of consumer rights across Europe, most notably from the General Data Protection Regulation (GDPR). He says that with the Collective Redress Directive, he expects the European landscape to continue to evolve. The directive requires member states to implement minimum standards by December 2022, for consumer collective redress for claims within the scope of the GDPR, financial services and product liability. Significant impact Kenny Henderson, partner at CMS, says that the implications of the directive are significant. “Countries must enable ‘qualified entities’ to bring claims on behalf of consumers on an ‘opt-in’ basis. Importantly, the provisions in the directive are minimum standards, so member states are free to go further and, for example, have ‘opt-out’ collective redress mechanisms that automatically coalesce the class. Opt-out devices are typically associated with the US, but they are increasingly a feature of the European class action landscape and the directive will accelerate that trend,” he says. Nima Rafiee, underwriting manager, financial lines, AIG EMEA, says the directive is likely to increase the number of class action-type lawsuits against companies, especially those with heavy B2C exposure such as those operating in the financial services, travel and tourism, energy and telecommunications industries. He stresses that most companies and industries will be affected to a certain degree as the directive also targets data breaches. “These type of lawsuits, if they gain traction, will likely be expensive and time consuming to defend,” he adds. Mr Schaloske explains that the directive “will introduce a quite far-reaching new tool for qualified entities, especially consumer associations, to bring claims against companies where individual claimants may so far refrain from enforcing claims”. In particular, he notes that the directive will allow the enforcement of damage claims and will not be confined to declaratory rulings. He adds that one potential area that could become relevant are claims under Article 82 of the GDPR, because claimants may not only bring claims for material but also immaterial damages, for example following cyberattacks and data breaches. Law firm Kennedys says the directive is widely expected to result in the proliferation of collective actions brought against businesses across the continent, already fuelled by the influence of US class action law firms and third-party litigation funders setting up shop in the European market. “The increasingly digitalised and technological global market within which businesses are operating is particularly conducive to collective actions, as evidenced by the recent group proceedings brought against EasyJet and BA. The directive will provide a direct platform for future similar actions that could potentially involve thousands, if not millions of consumers, particularly if such actions are brought on an opt-out basis,” says Kennedys. Collective actions on the rise It is not just the directive that is causing concern. Europe is already seeing a rise in collective actions, and a recent decision in the UK highlights the issue. The UK Supreme Court’s decision in Merricks v Mastercard, a collective action on behalf of 46 million consumers for £14bn, has been described by one law firm, DAC Beachcroft, as “a seismic step towards the US-style model of class action litigation”. It adds: “There are a number of extant multi-claimant claims in the competition sector that were, effectively, stayed pending this decision, which are now likely to be able to proceed efficiently with the use of collective proceedings orders. The decision also has the potential to open the floodgates for collective opt-out actions by many claimants, whose ability to participate in, and benefit from, large-scale competition damages claims will be greatly increased.” A recent report from Allianz Global Corporate & Specialty (AGCS), in collaboration with Clyde & Co, notes that securities class actions are presenting a significant risk to corporates and their directors and officers, adding that litigation funding is common in both consumer and shareholder collective redress actions, and in a number of jurisdictions it has acted as a catalyst for the use of collective actions. In the report, AGCS states: “The use of collective action presents a significant risk to companies that often face a tremendous exposure to damages (and, in some jurisdictions, punitive damages) and costs, given the size of the class, in addition to considerable operational and reputational damage from dealing with large-scale litigation. Securities class actions also present a serious and growing risk for directors and officers.” Clyde & Co says: “Overall, we are seeing a step change in Europe’s litigation industry. Litigation funders, combining with new collective action options, are forming a growing trend of collective redress. The net result is increased liability exposure for commercial clients, as the hurdles for European consumers to embark on this type of action are lowered.” How to respond? So what do risk managers need to do to make sure they are covered for this potentially escalating risk? Clearly, they should be checking their liability insurance coverage, looking out for exclusions, and having conversations with brokers about whether they require additional cover and higher limits. They should also examine the scope of policies, as traditional liability policies may not cover, for example, losses arising from cyber events, and look closely at the terms of the insurance, in particular exclusions and notification requirements. Mr Schaloske says: “When looking at D&O insurance, it is also worth bearing in mind the limits of D&O Side-C cover, which frequently has a high retention and is expensive to purchase. If obtained, it should be noted that there is also the risk that entity cover will erode the cover available for directors.” There are also a number of differences in the handling of large group claims which risk managers should note, according to Mr Schaloske. “Defendant companies need to deal with the claimants (who may be headed by a representative body) and there may even be several different claimant groups to tackle, each with different agendas. This can make settlement of the claim more challenging,” he says. “In addition, risk managers should envisage that funders are likely to be operating in the background and contemplate the impact this may have on the litigation – more resources are available so claims may not be able to settle quickly, plus there are other interests to be taken into account. The presence of funders undoubtedly changes the dynamics of the litigation, which risk managers should remain cognisant of,” he adds. Mr Henderson says that what is required initially is a good understanding of the claims that a corporate is likely to face under the changing procedural rules for class actions. Once the primary liability is understood, be that data protection class actions or antitrust class actions, corporates can ensure they have proportionate measures in place, he says. While there are clearly signs of change in Europe, Mr Rafiee thinks the directive is unlikely to usher in a new era of US-style litigation, for a number of reasons. “For cross-border claims, the EU directive does not allow for contingency fees and only allows not-for-profit organisations to pursue these claims on behalf of consumers, which is far different from the model in the US. It also has some restrictions around litigation funding and there are still uncertainties [about whether] the EU and its member states will adopt an opt-in or opt-out principle, the latter being the one adopted by the US and one main reason for the litigation activity and size of settlements [there]. Currently in the EU, the opt-in principle is by far the most common.” And he notes that for many years several EU countries have had mechanisms in place for collective consumer actions without much activity. Mr Schaloske agrees that it is unlikely that the landscape will start to mirror the US, noting that it is the combination of an aggressive litigation culture, plaintiff bar contingency fees, jury trials and punitive damages that makes the US system challenging. No mechanism in Europe mirrors this and legislators have been keen to ensure that there are safeguards against the environment swinging this way, he says. “That having been said, the increase in collective actions in Europe has resulted in US firms establishing outposts in a number of jurisdictions (most notably, the Netherlands) and there has been an increase in homegrown claimant lawyer firms advertising their services. This is set alongside the increasing prevalence of litigation funders in many jurisdictions, which has been shown to spur on collective actions,” says Mr Schaloske.

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