- EU’s new Directive on Representative Actions would enable a consumer collective action system
- This could lead to an increase in lawsuits for the sole purpose of financial gain for the entities bringing the claims forward
- The EU should implement safeguard mechanisms to avoid the new Directive from being abused
The COVID-19 pandemic is creating a wave of class action litigation in the United States, where specialized, entrepreneurial claimants’ lawyers can file lawsuits in the name of faceless consumers over practically anything that strikes their fancy. Businesses of all sizes, universities and other employers are facing an increase of expensive and time-consuming lawsuits that rarely benefit the consumers involved.
Belgium could see a similar influx of litigation if it doesn’t carefully consider how to implement the EU’s new Directive on Representative Actions, which will create the first EU-wide consumer collective (class) action system.
Member States will have considerable leeway in implementing the Directive when it comes to rules for ‘domestic’ collective actions. As we have witnessed in the US, any Member State that allows low barriers to bringing lawsuits will be at risk of attracting numerous collective action cases.
The biggest risks to Belgium’s judicial system are posed by the ‘qualified entities’ that will be allowed to bring claims under the Directive. While the Directive includes stringent safeguards for qualified entities bringing cross-border claims, domestic claims don’t have such protections. Belgium’s current legal instrument of group proceedings (the collective redress system) has eligibility criteria in place that exclude profit-seeking entities from bringing claims. Under the new EU system, these groups will be free to create qualified entities that would enable them to bring Europe-wide collective actions in Belgian courts.
The Directive also allows Member States to determine whether ‘domestic’ collective actions should be permitted on an opt-in or an opt-out basis. Belgium currently has a hybrid system that gives courts discretion as to whether the claim should be opt-in or opt-out, which gives a certain degree of protection. Opt-out systems are more vulnerable to abuse, allowing specialized class action lawyers and litigation funders to group unidentified consumers together in order to overinflate claims and maximize profit. By contrast, in opt-in proceedings, the groups tend to include only claimants who are personally and actively interested in pursuing their rights.
Belgium’s business community should urge officials to include more safeguards when implementing the Directive for the benefit of both claimants and businesses.
In the US, small businesses are disproportionately affected by lawsuits when they struggle to afford legal representation. A study by the US Chamber Institute for Legal Reform (ILR) found that the US tort system’s commercial liability costs totaled $343 billion in 2018, and small businesses shouldered $182 billion, or 53 percent, of those costs. This is just one example of the negative impact an overly litigious culture can have on the business community.
There’s still time to prevent a similar scenario from playing out in Europe. Belgium has ample freedom under the EU Directive to set up its own rules that strike the appropriate balance between access to justice for collective redress and preventing profit-seekers from taking over its justice system. Here are some essential safeguards to consider:
- Mandate safeguards for domestic ‘Qualified Entities’. Belgium should apply the same standards for qualified entities in cross-border cases to domestic cases by ensuring that they are non-profit organizations, have some history of representing consumers and have independence from funders and class action law firms.
- Prioritize ‘opt-in’ actions under the Directive. Belgium should prioritize opt-in mechanisms under this Directive, because claimants who are invested in these cases are more likely to claim their rewards.
- Ban punitive damages. The possibility for punitive damages creates an incentive to unfairly inflate claims.
- Include more safeguards for third-party funding. The Government should consider empowering courts to verify the amount of any award that consumers actually receive after third parties take their cut and requiring funders to take responsibility for adverse costs if litigation fails.
- Require certification and admissibility procedures. Unlike the current Belgian collective redress system, the EU Directive does not contain admissibility and certification stages to determine if the claims are suitable for a collective action.
Belgium should thoroughly consider how to implement the EU Directive on collective actions to avoid the problems of the US class action system. Where monetary incentive and opportunity coincide, speculative litigation could prosper.