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In Practice Series – How To Mitigate The Growing Risk From Consumer Class Actions And Collective Redress In Europe

Jan 11, 2023 In Practice Series – How To Mitigate The Growing Risk From Consumer Class Actions And Collective Redress In Europe

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Authored by: Sarah-Jane Dobson, Partner, thomas panter, senior Associate, Kennedys Law llp

In the last ten years there has been a significant growth in the use of collective redress or representative actions (“group litigation”), a legal mechanism which may stop or prevent unlawful business practices that affect multiple claimants or compensate them for harm caused by these practices, within the EU and UK.

The growth of group litigation across Europe has potentially significant implications for businesses, increasing the scale of financial and reputational exposure from a defective product.

Going forward, it will be more important than ever that businesses have regulatory compliance and civil litigation risk mitigation in mind at every stage of the research and development process.

This growth is poised to continue, and potentially accelerate, with the European Commission’s implementation of Directive “(EU) 2020/1828 on representative actions for the protection of the collective interests of consumers and repealing Directive 2009/22/EC” (the “Directive”).

The deadline for Member States to implement the Directive has just passed, on 25 December 2022, but there is a further six months for new provisions to come into effect.

Across Europe, there has been some controversy around the Directive – some fearing a flood of claims under these laws, others arguing that the law to some extent contradicts legal precedent established by the case law of some of the Member States.

There is considerable disparity across Member States with regards to the implementation of the Directive.

For example, there is a difference between Member States in which local laws on collective redress already exist as compared to others which have no existing collective redress mechanism.

Assessing the full implication of the Directive will require a country-by-country analysis which is beyond the scope of this article, which seeks to set out below instead the high-level minimum requirements prescribed by the Directive and its implications for the EU bloc.

AreaProposed Change
ApplicationAll EU Member States must put in place a minimum requirement for collective redress by 25 December 2022. Specifically, this means there must be at least one effective procedural mechanism that allows “qualified entities” (e.g. consumer organisations or public bodies) to bring a legal action to court for the purpose of either seeking injunction, damages and/or other redress for breach of EU law.

The Directive will not be applicable in the UK following Brexit.
However, the UK is already well renowned for the use of group litigation mechanisms.
It is likely these mechanisms will continue to be used and there may also be a move to adopt aspects of the EU model going forward.

In practice, Member States will be responsible for determining the precise procedural mechanism to ensure compliance with the Directive and can broaden its scope further.
Qualified EntryEach Member State is required to designate at least one qualified entity locally.
A list of entities will be maintained by the European Commission.

Only “qualified entities” are allowed to bring an action according to the Directive.
They are defined by the Directive as: “any organisation or public body representing consumers’ interests which has been designated by a Member State as qualified to bring representative actions in accordance with this Directive.”

Qualified entities will have to publish information regarding all the representative actions in which they are involved, in particular on their website, and must keep the consumers concerned abreast of relevant developments
ScopeActions can only be brought on behalf of and against consumers.

Annex I to the Directive sets out the EU laws for which representative actions can be brought in respect of a breach.
This includes a broad array of laws including those covering product safety, insurance, data protection, financial services, travel and tourism and telecommunications.

Of note for product manufacturers, the Directive expressly refers to the Product Liability Directive 85/374/EEC and General Product Safety Directive 2001/95/EC in Annex I.

Opt-In Vs Opt-Out Litigation
The Directive includes both an opt-in and an opt-out system for participants to a representative action and leaves it to Member States to choose which option they prefer (or a combination of both).

Opt-in” refers to actions brought on behalf of an identified group of claimants who have each proactively chosen to be involved in the action.
Whereas, the “Opt-out” procedure is one in which a claim is brought on behalf of the entire class of potential claimants, without the need for them to proactively choose to participate.
The implication of the latter Opt-out mechanism is that if an action is ultimately successful, the remedy awarded will be available to all potential claimants, regardless of whether they have chosen to participate.
These opt-out actions are more commonly known as “class-actions” and are particularly prevalent in the US.

Whilst the Directive does not prescribe the US-style Opt-out mechanism as a minimum requirement, the absence of an enshrined Opt-out mechanism in the directive suggests trepidation within the EU about opening fully to a potential proliferation of US-style collective redress.

It is likely that those bringing or defending claims across multiple European jurisdictions will consider carefully the availability of an Opt-in or Opt-out mechanism as a strategic decision.
Case ManagementThe Directive does not include any provision about the power of Member States’ courts in terms of case management.
Member States therefore retain discretion on this issue which will vary depending on their national procedural laws and practice.
It may be that some Member States wish to have mechanisms in place, such as test cases or lead cases.

It should, however, be noted that the Directive provides that: “Member States shall ensure that representative actions for injunctive measures, referred to in Article 8, are dealt with due expediency.”
Disclosure And PrivilegeThe rules around disclosure and privilege will vary from one Member State to another, depending on locally applicable laws.
However, it should be noted that Article 18 of the Directive provides that, to a certain extent, disclosure of evidence may be ordered by the domestic courts against the defendant (and a “qualified entity” or any third party, as applicable).
This is subject to domestic procedural rules and EU and domestic rules about confidentiality and proportionality.
Remedies – DamagesThere are several forms of redress listed as being available under the Directive: injunctions (to cease an alleged infringement) and specific redress (fines, compensation, reduction in price and replacement etc).

Crucially the Directive states that Member States, unlike in the USA, should avoid awarding punitive damages to prohibit abusive litigation.
Remedies – NotificationsCompanies involved in any form of representative action will, at their own cost, have to inform consumers of adverse judgments against them.
Cross-Border ImplicationsThe Directive allows for domestic and cross-border group actions by qualified entities including representing groups of consumers from several EU Member States in a single lawsuit before an EU MS national court.

This is one of the most prominent features of the new Directive, in so much as prior to the Directive the lack of ability to bring cross-border disputes and/or the barriers introduced by local legal requirements were argued by many to be prohibitive.
Satellite LitigationFinal decisions handed down in representative actions and relating to the existence of an infringement may be used as evidence in other actions seeking redress for the same infringement.

This has a potentially wide-ranging impact for issues arising from products sold in multiple markets, potentially causing related litigation across the whole of Europe for companies the subject of findings, particularly adverse findings, which are already in practice likely to have more of an impact than positive findings.
Litigation CostsMember States are required to set procedural costs at a level so as to not prevent qualified entities from effectively exercising their right to bring a representative action.

The unsuccessful party will be required to bear the costs of the proceedings, in accordance with national law. Consumers will not be required to pay the costs except in exceptional circumstances.
Third Party FundingThe Directive does not prohibit third-party funding but instead restricts its use.
For instance, Member States must ensure that conflicts of interest between funders and claimants are prevented. They must also take steps to ensure that any third party funding does not impact on the protection of the consumers’ interests, including by ensuring that decisions taken by the qualified entity are not unduly influenced by the funder or that the action is not funded by a competitor of the defendant.
The Directive further provides that the courts will be required to assess compliance with these limitations and will be able to take appropriate measures, if necessary.

Given the increased prevalence of third party funding in litigation generally across Europe, and particularly in the UK, the narrow scope permissible for third party funding is likely to be significant in respect of collective redress mechanisms under the Directive.

The Overall Consequences:

The overall legal consequences that are likely to flow from the adoption and implementation of the Directive across the EU are wide-ranging and significant, as follows:

  1. A continuing proliferation of larger legal actions
    The longer term consequences are likely to be a continuing growth in collective redress driven by a growing acceptance by European regulators and law-makers for this mechanism of consumer redress.
    As the regulatory environment becomes more accepting of this type of redress we are seeing a growth of claimant law firms collaborating with experienced US counterparts to share resources and further fuel growth of larger group actions.
  2. There is still scope for substantial variance between Member States
    Significant discretion is given to individual Member States about how key areas of the mechanism are implemented.
    Equally, there are countries where established collective redress mechanisms already go considerably further than the Directive and, therefore, it is important that companies understand the risk profile for each country to which they market products.
    This is likely to result in ‘forum shopping’ whereby those bringing actions select those jurisdictions with the most favourable combination for their cases.
    It also means companies should be aware of the factors that are likely to deviate between Member States and change the nature of litigation they are involved in, even using the harmonised Directive mechanisms.
  3. Collective Redress will be a novel concept in certain Member States
    In countries such as Germany, Finland, Czech Republic and Sweden, where no significant collective redress mechanism existed and/or such actions are fairly rare, the Directive is driving change in the legal framework such that the risk profile for producers launching products in these markets will likely increase more significantly than in other EU jurisdictions.
  4. Some remedies prescribed will be novel to certain Member States
    Penalties including fines for the failure or refusal to comply with an injunctive measure will be common in many Member States already for consumer actions.
    However, a number Member States currently do not impose penalties for non-compliance with a consumer group action judgement.
    Also, under regimes such as that in Germany, consumers have to bring a separate enforcement action against the infringing trader.
  5. Brexit will have implications for companies trading in the UK
    The UK, not having adopted the Directive prior to Brexit, will be able to take its own stance in respect of this area of law. The UK already has a well-established legal framework for collective redress and a growing and increasingly sophisticated industry attached that has led to a surge in group action claims in recent years. The key issue for UK practitioners in the coming years will be the extent to which legislators seek to broaden the circumstances by which US style “opt-out” collective redress is permissible beyond the narrow scope currently allowed, which is for breaches of competition law only.

Checklist To Limit Risk:

[Downloadable version Here]

Companies should always refer to the specific regulations and guidance in place in the jurisdictions they are operating.

However, the following general principles may provide some helpful pointers for staying on the right side of the law: 

  1. Prevention is the best form of cure so of course ensuring that, as far as possible, compliant and safe products are released to market is paramount.
    To this end implementing a specific quality and safety review of any final product with regulatory compliance and civil litigation risk mitigation in mind should be common practice.
  2. Product development processes should consider the associated civil liability from potential defect and consumer redress.
  3. Undertaking periodic risk exposure reviews for all product lines, to include the risk from civil liability including representative action.
    Ideally such a review should consider the implications country-by-country, given the variance in the Directives implementation.
    If a product-specific risk exposure review has not taken place for a considerable period, it would be prudent to do so now in light of the implementation of the Directive and the potential for material change in risk profile.
  4. Robust post-market surveillance following the release of a product must ensure any material change in product compliance and/or safety is monitored, escalated and addressed as appropriate, including through software or hardware mechanisms.
  5. Track and consider the implementation of the Directive across Europe and be aware of the benefits or pitfalls in respect of the unique mechanisms available in each country and how this might benefit or hinder any case brought or defended in that jurisdiction, so informed decisions can be made if a choice of jurisdiction is possible.
  6. Identifying reliable partners in each jurisdiction for managing corrective actions and civil liability matters.
  7. Review documents produced as part of product development, regulatory compliance and after-market surveillance, in particular commercially sensitive documents, having in mind the greater power of the Courts to compel disclosure from both this Directive and the recently proposed revision to the Product Liability Directive.
  8. Companies should ensure existing and new insurance policies provide suitable coverage to reflect the higher potential financial exposure from representative actions that may encompass many thousands of individual claims.

Stay Compliant With Global Regulations

Catch up with our previous editions of our In Practice Series –

  1. How To Avoid “Greenwashing”,
  2. How To Be An ESG-Conscious Product Manufacturer,
  3. How To Get Ready For The New Product Liability Laws In Europe
  4. How To Prepare For The Upgraded Digital Services Laws In Europe

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