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EU member states and lawmakers reach political agreement on class action lawsuits

  • Germany
  • Litigation and dispute management

30-06-2020

Introduction

On 22 June 2020, after several months of wrangling between the EU institutions and its member states, the European Parliament and Council negotiators agreed a reconsidered text for the proposed Collective Redress Directive.

History of Legislation

This draft Directive has been subject to an intense debate driven by the question, how to implement a representative action model that works both domestically and on a cross-border-basis. Being part of the “New Deal for Consumers“ which was launched in 2018, this Directive mainly aims to increase consumer protection. The intention to boost consumers‘ rights rapidly gained pace following the so called Dieselgate scandal, in which Volkswagen allegedly used software to cheat diesel emissions tests. This recent mass harm scandal has led to thousands of regulatory investigations and lawsuits. That is probably why the European lawmakers became concerned trying to strike a balance between the legitimate protection of consumer interests and the need for legal certainty for businesses.

After the first draft was issued in April 2018, the Directive was then substantially re-written in November 2019 followed by tripartite negotiations with the European Parliament, Commission and Council. Unsurprisingly, further negotiations to settle the draft were delayed due to the outbreak of SARS-CoV-2.

Whilst latest revised text was published on 30 June in full, the European Parliament initially issued a press release confirming the mechanisms and scope being put forward:

Directive

The deal on bloc wide rules will allow so called „qualified entities“ to bring a claim on behalf of consumers. While some member states already provide this type of group claim, the Directive will significantly increase the option to seek compensation through bringing collective action against companies, particularly where a class will cross EU borders. Each member state will need to nominate at least one qualified entity – such as consumer organizations or non-profit independent groups. The permission of a qualified entity to bring cross-border representative actions demands compliance with certain standards, especially they must be non-profit. On designation criteria for qualified entities, the rules distinguish between cross-border cases and domestic ones. For cross border, entities have to demonstrate 12 months of activity in protecting consumers‘ interest, have a non-profit character and ensure their independence from third parties whose economic interests oppose consumers’ interests. Anyhow, the qualified entities will be empowered and financially supported to launch class actions on behalf of consumers. These entities will guarantee consumers access to justice.

Furthermore, the “loser pays“ principle has made it into the final proposals. Therefore the unsuccessful party needs to meet the successful party’s costs. This principle is likely to act as a significant deterrent to the bringing of unmeritious claims, while certainly also increasing the exposure for companies of being sued. These particular rules at last strike a balance between access to justice and protecting businesses from abusive lawsuits.

In order to avoid further abusive lawsuits, the European Parliament negotiators insisted 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 – before costs mount up. This sort of built-in safeguard aims at avoiding the excesses of US class action lawsuits backed by litigation funders.

Future prospects

The compromise agreement, as published on 30 June, is still subject to a formal approval by the European Parliament and Council. The Directive will come into force 20 days after its publication in the Official Journal of the EU. Member states will have 24 months to transpose the Directive an then further six months to apply it.

The new Directive may be applauded by consumers and groups looking to protect customer interests. The scope of collective action would include trader violations in areas such as data protection, financial services, travel and tourism, telecommunications, health and environment as well as air and train passenger rights. Businesses should expect to see an expansion in class actions outside the US.

Summary

It is quite likely that there will be a quantifiable influx within the EU in representative actions under the new legal framework. In addition to the above mentioned, the consumer protection is – at least on a long term basis – likely to be deemed a matter of Corporate Compliance. Until further notice, the draft Directive as published on 30 June will be subject to further legal analysis.