European Union: New EU Class Actions Mechanisms To Be Implemented By Christmas

Background

New laws allowing groups of EU consumers to launch class actions against traders are to be implemented by 25 December 2022 and will apply from June next year. The EU's Representative Actions Directive (EU) 2020/1828 represents a major overhaul of the European class actions landscape, introducing mechanisms for group litigation in every one of the EU's 27 Member States, alongside a new cross-border mechanism for class actions.

The changes are inspired by 'Dieselgate' and a concern that globalisation, e-commerce and new technologies have increased the risk of large numbers of consumers suffering harm.

Overview

The new laws will enable 'qualified entities' (generally, consumer organisations) to bring representative actions in the EU in the collective interests of consumers. They distinguish between two types of representative actions those brought in one Member State, and cross-border actions across multiple Member States.

Qualified entities can seek injunctions, damages and/or redress from traders for breach of a wide range of EU laws – in total, 66 pieces of EU legislation covering consumer rights, product liability and product safety, medical devices and medicinal products, data protection, financial services, energy and telecommunications. The ambition is to roll out the class action mechanisms even more widely, with current proposals that they be expanded to cover, eg, forthcoming EU Artificial Intelligence laws.

The new laws in more detail

Types of class action

The new laws provide for two types of class action:

• Cross-border representative actions. Member States must ensure that cross-border actions can be brought in their courts. This means that combined actions can be brought by qualified entities across the EU (eg consumer organisations in Germany, France and Italy could work together to bring all consumer claims in the courts of one of these jurisdictions).

• Domestic representative actions. Member States must have at least one class action procedure to allow representative actions at a domestic level.

The new laws will empower 'qualified entities' to bring representative actions in the EU in the collective interests of consumers. Qualified entities will generally be consumer organisations, although the rules will vary depending on the type of class action being brought.

For cross-border actions, the criteria will be harmonised across the EU – and will be stricter than for domestic actions. In particular, cross-border qualified entities must demonstrate at least 12 months' history of consumer protection, have a non-profit character and be independent. These requirements mean that law firms will not be able to register as cross-border qualified entities. Though, of course, it will be possible still for consumer organisations to instruct law firms to advise them on bringing class actions.

For domestic actions, Member States are free to decide the national criteria for qualified entities. In principle, this means Member States could allow profit-making bodies, including law firms, to be qualified entities for domestic representative actions, although the criteria need to be consistent with the objectives of the Directive.

Qualified entities will not need to individually identify all affected consumers to bring representative actions. To start an action, it will be sufficient simply to describe the group affected by the alleged infringement and set out the issues of fact and law to be resolved. This will lower the burden of identifying common issues and mean that we are likely to see representative actions brought swiftly, for example off the back of media coverage, followed by a period of recruitment of affected EU consumers to the group.

Member States can choose whether to provide for an opt-in or opt-out mechanism, or a combination of both. Jurisdictions that choose opt-out mechanisms are likely to become more attractive forums for test cases. An opt-in mechanism will be required for cross-border representative actions.

The new laws specifically envisage that class actions may be funded through third party funders with an economic interest in the outcome of the proceedings. Such litigation funding is permitted provided it is not detrimental to the collective interests of consumers and is fully disclosed as part of transparency measures.

This opens the door to third party funding of class actions in the EU at a time where there is increased availability of such funding, with reports of record amounts set aside to fund consumer class actions in the EU and UK from 2023.

A final decision on an infringement in one Member State can be used as evidence in proceedings against the same trader for the same infringement in other Member States. There is a risk this could result in 'forum shopping', with organisations pursuing an initial action in one Member State (with the most favourable regime), then bringing follow-on proceedings in others. However, this risk is lower in the final Directive than the Commission's original proposal, which suggested a decision in one Member State should establish a rebuttable presumption of infringement in other Member States (ie the burden of proof would have shifted).

Settlements

To encourage resolution of claims outside of EU courts, the EU has hardwired settlement mechanisms into the new Directive. Courts can invite parties to enter settlement discussions and have powers to review and approve settlements.

The losing party in representative actions will be required to reimburse the winning party's costs (including legal fees). This is designed to act as a deterrent to abusive claims, but it also increases businesses' risk of exposure if defeated, with little offset in terms of their potential to recover full costs, even if successful. In particular, the loser pays principle is subject to an important caveat: individual consumers won't be ordered to pay costs, unless in exceptional circumstances they are found to have deliberately or negligently increased costs. This is a very high bar and in practice means that consumers will not usually be at any risk of loss by participating in representative actions. Losing qualified entities could be held liable, but businesses may find it difficult to recover full costs from these entities (especially where national rules do not allow defendants to seek security for costs), and any recovery will be subject to a 'necessarily incurred' costs assessment before an award is made.

What is the likely impact?

The new class action laws will create mechanisms right across the EU to allow consumers to take collective action against traders in respect of a very wide range of laws including consumer rights, product liability and product safety, medical devices and medicinal products, and data protection.

The EU was reluctant to adopt an approach comparable to the class action system in the US, so recovery is limited to actual loss (not punitive damages) and actions will generally be brought by consumer organisations on an opt-in basis. However, it seems certain that businesses will face an increased risk of litigation in the EU as a result of the new Directive. In particular, the ability to amass claims across the EU makes bringing large collections of relatively small claims a much more viable prospect for consumer organisations, and a much more threatening one for businesses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.