The EU Commission Should Follow Its Own Advice on Collective Redress

As mechanisms for collective redress – better known as class action in the U.S. – spread across Europe, the European Commission is preparing to propose important new EU-wide legislation…

By, Lisa A. Rickard, President, U.S. Chamber Institute for Legal Reform

As mechanisms for collective redress – better known as class action in the U.S. – spread across Europe, the European Commission is preparing to propose important new EU-wide legislation on collective redress this month. A Commission report from January highlights the clear need for that legislation to include safeguards against litigation abuse.

The January report looks at what Member States have done to implement the Commission’s 2013 Recommendation on Collective Redress. That Recommendation laid out a comprehensive set of principles for harmonizing collective redress procedure across Europe. The goal of that 2013 Recommendation was to create a clear, balanced path to redress for consumers with safeguards against litigation abuse.

Unfortunately, the report found that while the majority of EU Member States have created or are in the process of introducing collective redress mechanisms, those states are disregarding or unevenly implementing the safeguards from the 2013 Recommendation.

The first, and perhaps most important, example of safeguard neglect is the lack of uniform class certification standards. Before proceeding, prospective classes should have to meet certain standards. The report did not identify any example of a Member State adopting rules to ensure certification. Instead, a wide variety of admissibility standards exist under national laws, meaning that some Member States have insufficient mechanisms to prevent meritless actions from being filed and pursued. This can give plaintiffs’ lawyers an incentive to file claims in the hope of exerting pressure on defendants to settle to avoid publicity and cost, even where claims are unlikely to succeed on their merits. 

The Recommendation had also asked Member States to strike a balance between a right to publish information about a planned action and the risks that negative publicity can unfairly affect defendants. The report says that “spreading information on (intended) collective action may potentially have an adverse effect on the economic situation of the defendant whose liability has not yet been established.” The report also notes that Member States have not taken the necessary steps, and that the necessary protections are “not appropriately reflected in the laws of the Member States.” Look to France as an example. ILR research found that it is increasingly common in France for websites to be established to draw attention to new claims and run extensive media campaigns as soon as a lawsuit is filed to damage the image of the defendants. Before a case’s legitimacy has been established, businesses are already under extreme pressure to pay up.

Many EU Member States are also allowing the traditional “loser pays” principle to be weakened. The report notes that this is a fundamental safeguard against abusive litigation in which the losing party to a lawsuit pays the other side’s expenses. The Commission’s report describes “loser pays” as “one of the basic procedural guarantees for both parties of collective actions,” and warned against potential “incentive[s] for abusive litigation” inherent in unregulated contingency fees. It is now increasingly common for loser pays to apply only in relation to a part of the costs, or even in some cases to apply only against defendants, but never against plaintiffs. 

The January report also finds that not a single Member State has implemented regulation of third party litigation funding, though one (Slovenia) has legislation pending. The rapid spread of this potentially destabilizing and mostly hidden form of finance for mass litigation demands attention.

As things stand, funders can pick and choose the friendliest venues for funding litigation. Some take their cases to a country like Germany, where there are no specific regulations on third party funders. Funders there are known to play very influential roles in the cases in which they’ve invested, including approving briefs in cases before they are filed. Others go to the Netherlands, where funders are free to veto not only decisions made during the case, but even potential settlements.

Without consistent regulation across Europe, funders can avoid stringent rules in one country by taking advantage of courts in other countries where oversight is looser. But the regulation of litigation funding is not the only thing a plaintiffs’ lawyer needs to consider. Without uniform minimal safeguards, the litigation process in each collective redress mechanism will look very different.

All of these examples point to a larger problem. Since no two collective redress mechanisms in the European Union are the same, plaintiffs’ lawyers are incentivized to ‘shop’ for the friendliest venues to file lawsuits. ILR research examined the issues that come with this phenomenon, known as ‘forum shopping’. Essentially, lawyers can look at each state’s mechanism and decide which offers the clearest path to a payday.

Safeguards against this kind of behavior are in the best interests of both consumers and defendants. As the Commission says in its report, “without a clear, fair, transparent and accessible system of collective redress, there is a significant likelihood that other ways of claiming compensation will be explored, which are often prone to potential abuse negatively affecting both parties to the dispute.”

The Commission’s proposal will have a decisive effect on the path of collective redress development in Europe. It is crucial that the Commission gets this right, before Europe follows the US in becoming a lucrative playground for class-action plaintiffs’ lawyers and funders.

The Commission has the opportunity–and the duty–to ensure that the EU’s first model of collective redress is consistent with best practices and is not open to abuse and opportunism. It seems that EU consumers would overwhelmingly support an effort to fulfill that duty. An ILR survey found that 85 percent of EU consumers support the introduction of safeguards for collective redress. The 2013 Recommendation shows the way forward, providing a sensible roadmap for greater judicial efficiency and better access to the courts for consumers.

The Commission’s report makes clear that Member States have not followed the Recommendation. It is therefore essential that the Commission follow its own Recommendation, and include the safeguards in the legislation it intends to propose.