By Keir Baker and Chris Warren-Smith
Morgan Lewis attorneys analyze a landmark representative actions directive that they predict will reshape the landscape for consumer class actions across the EU.
The EU’s landmark Representative Actions Directive is set to reshape the landscape for consumer class actions across the EU. By Dec. 25, 2022, all member states were required to take steps to amend their domestic law to give effect to the requirements of the directive.
All amendments must enter into force on June 25, 2023, setting the scene for a likely increase in representative actions this year and beyond.
This development creates new opportunities for litigation funders and consumer groups, but new risks for companies operating in the EU.
A largely claimant-friendly instrument, the directive is the EU’s answer to the prior patchwork of diverse—and, in many cases, flawed—mechanisms within member states’ national laws by which consumers can bring class actions (group or collective actions) for violations of consumer protection legislation.
However, the directive deliberately falls short of importing US-style class action litigation, with several key provisions targeted at deterring “abusive litigation that would unjustifiably hinder the ability of businesses to operate” in the EU.
Member states must amend their domestic laws to introduce an effective procedural mechanism for representative actions.
As part of this, states should ensure, among other things, that “qualified entities” are empowered to bring representative actions on behalf of consumers. These entities are likely to be public authorities or consumer groups that must meet certain independence and transparency criteria.
Individual consumers will be unable to pursue representative actions and will not be liable for costs of actions brought by qualified entities save in exceptional circumstances.
Member states must also ensure that consumers, represented by qualified entities, are able to seek compensatory remedies, such as damages, and injunctive measures.
However, to discourage “abusive litigation,” member states are not to make punitive damages available and national courts must be empowered to dismiss unfounded cases at early stages.
Member states must guarantee that representative actions are available for violations of 66 different EU consumer protection laws, covering a wide range from general consumer law to data protection, product liability, air and rail travel, and environmental matters.
A “loser pays” principle must be adopted in relation to the costs of a representative action. Any costs-related rules must not prevent qualified entities from being able to exercise their rights and pursue their objective.
Member states must empower their national courts to review and block settlements that either violate mandatory provisions of national law, include unenforceable conditions, or are “unfair.”
Member states must permit litigation funding provided that conflicts of interests are prevented, and funding does not divert any action “away from the protection of the collective interests of consumers.” If justified doubts about a conflict of interest arise, qualified entities must disclose their sources of funds.
The directive is a maximum harmonization effort, affording member states limited discretion for its implementation. However, states are given discretion in respect of certain key aspects, including around the classification of qualified entities, and whether to adopt an opt-in or opt-out model for representative actions.
Similarly, member states have discretion about the criteria for bringing representative actions—for example, the required number of consumers and the required degree of similarity between individual claims—and the scope of document production.
Member states may amend their national laws to introduce mechanisms for representative actions going beyond the directive’s minimum standards. This flexibility is important, as variations in directive implementation across member states could alter the risk profile for companies facing representative actions depending on where claims are brought.
It could lead to forum-shopping by potential claimants, and may even encourage competition among certain member states wanting to incentivize pursuit of cases before their national courts.
Class actions have not historically been within the legal tradition of many member states. Directive implementation should mark a significant shift in the EU class actions landscape and raise awareness of consumer rights and opportunities.
Whether there will be a notable increase in class actions looks likely to differ on a country-by-country basis, depending on how each member state implements the directive.
For example, while Germany looks set to narrowly implement the directive, the Netherlands has taken an expansive approach going beyond the directive’s core requirements to create a claimant-friendly class action regime.
Of interest will be whether certain historically skeptical countries come to embrace class actions. For example, aspects of the Irish legal system make it an attractive jurisdiction for class actions—such as its rules for document production, its common-law origins, and Irish courts’ historically generous damages awards.
Financial products and services will likely continue as one of the mainstays for class actions. The rise of data protection related claims also looks set to continue.
The directive will likely open up markets where class actions for redress measures and litigation funding have historically been limited or prohibited, but where attitudes appear to be changing, such as Ireland and Cyprus.
There is little or no existing case law relating to the directive, and, the provisions of domestic law by which it will be implemented.
In this environment, qualified entities working alongside litigation funders and law firms may look to pursue procedurally creative representative actions to test the limits of the new framework early on. Companies should look to mitigate their risks and monitor developments in anticipation of this.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Keir Baker is an attorney at Morgan Lewis who advises clients on complex commercial disputes in the English courts and in international arbitration.
Chris Warren-Smith is a partner at Morgan, Lewis & Bockius who focuses on corporate investigation and dispute matters, including commercial and international dispute resolution and regulatory enforcement proceedings.
Alasdair Johnston contributed to this article.
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By Keir Baker and Chris Warren-Smith