“Representative action, the European way” – new consumer collective redress proposals published

Last week, the European Commission published its final draft proposals for a “New Deal for Consumers” package (the “New Deal”). The New Deal proposes the repeal and replacement of the existing Injunctions Directive, as well as revisions to four existing consumer protection Directives. The proposals include:

• Amending the Unfair Commercial Practices Directive, so that a trader which is found to have behaved unfairly or aggressively towards consumers or to have misled them can be fined up to at least 4% of the trader’s annual turnover in each affected Member State.
• Expanding the Consumer Rights Directive, which covers matters such as pre-contractual information and rights for consumers to withdraw from contracts, to cover digital services which are provided in exchange for a consumer’s personal data, as well as for payment, and introducing new rules for online marketplaces.
• Creating a new consumer collective redress regime where EU consumer law has been breached.

In this post, I will focus on the proposed new consumer collective redress regime, which I trailed in an earlier piece (available here). Apologies in advance for the length of what follows…

What is being proposed?

The Commission has proposed a new type of “representative action, the European way”. This would be created by a new Directive on representative actions for the protection of the collective interests of consumers, to replace the existing and much-maligned Injunctions Directive. The proposal is available here.

In essence, it is proposed that a “qualified entity” (see below) would be able to bring a representative action before a member state court or administrative authority on behalf of classes of consumers who have been affected by a trader’s breach of consumer protection laws. This could require the infringing trader to compensate the consumers concerned or take other redress measures.

Where member states don’t already allow representative actions of this sort, then they will be required to introduce them.

Which businesses would be affected?

All businesses that deal with consumers in the EU, including those which are already subject to sector-specific legislation. That includes companies from outside the EU that do business here.

Redress would be available where a trader was shown to have breached identified consumer protection legislation. This includes EU legislation relevant to the protection of the collective interests of consumers in sectors such as financial services, energy, telecommunications, health and the environment. The full list of relevant legislation is available here. As I discuss below, there are some surprising inclusions on the list – for example, the Product Liability Directive, the Eco-Design Directive, and various insurance and financial services regulations.

Who could bring a representative action?

“Qualified entities” – that is, non-profit organisations which represent the collective interests of consumers and which have been designated by member states. The current list of qualified entities is available here. It includes national regulators and consumer associations.

In cases involving allegations of cross-border harm, several qualified entities from different member states could bring a single case in a particular member state’s courts.

The action would be brought against the trader or traders alleged to have caused harm to consumers.

Recital 31 to the draft Directive says that “[c]onsumers should be informed of [an] ongoing representative action”, which suggests that the fact of the claim as well as its outcome (see below) would need to be publicised. 

How would a claim get off the ground?

The proposal envisages that representative actions could be brought either as standalone claims, or following a separate finding by a court or regulator that a trader had broken the law.

Class action regimes around the world typically require a court, at an early stage, to certify a claim as fit to progress by way of class action. Although the draft Directive is vague on the details, it does imply that member states would need to put in place a similar certification stage under the new regime, so that the court or administrative authority could consider issues such as:

• whether the claim is suitable to be brought as a representative action
• whether the qualified entity is properly qualified and has a sufficient interest to bring the action
• the proposed funding of the claim, and whether this raises concerns about abuse of process or conflict of interest
• the identity of the group of consumers concerned by the alleged infringement and the questions of fact and law to be resolved.

Would consumers have to “opt in” to join the action?

In many cases, no. Where, for example, the representative action was brought on behalf of an identifiable class of consumers who have suffered comparable harm (e.g. everyone in a member state who has signed up to particular subscription or contract, which is found to contain unfair terms), then no mandate from individual consumers/class members would be required for the claim to commence.  The same would be true where the remedy sought is limited to an injunction to stop the offending conduct.

In other cases, member states could require individual consumers to agree that the action be brought on their behalf before a declaratory decision or redress order is issued (see below for an explanation of the possible remedies).  But this would not be mandatory.

What would the consumer body have to prove?

This isn’t entirely clear from the proposal, which is vague on the subject of the burden or standard of proof - which would therefore fall to be decided by the member states.

It would however seem that, in cases where a breach had not already been established (see below), it would be for the qualified entity to prove to the court or administrative body that the trader(s) had breached the relevant consumer law(s) and so caused harm to the collective interests of consumers. Presumably, this would be to a civil rather than criminal standard of proof (although this is not stated).

The member state’s ordinary procedural rules would, I assume, also apply. However, the proposal makes clear that:

• A qualified entity that has “presented reasonably available facts and evidence sufficient to support the representative action” should be able to obtain further evidence from the trader which lies within the trader’s control – which may lead to orders for the disclosure/discovery of documents that will be familiar to common lawyers, but less so to those from civil law backgrounds.
• Procedural costs should not constitute “financial obstacles” to the bringing of the action. There is a tension here with the statement elsewhere in the draft that the Directive is not intended to affect national rules on the allocation of procedural costs.
• As well as proof of actual loss not being required, there would be no requirement on the part of the qualified entity to show intention or negligence on the part of the trader.

What happens where an EU regulator or court has already reached a decision on infringement? 

The proof required would be reduced in such cases, provided that the regulatory or court decision was “final” (i.e. non-appealable/not subject to judicial review).

Where a representative action was brought in the same member state that has rendered that earlier final decision, then the final decision would “irrefutably establish the existence of the infringement”, and no further evidence would be required.

Where the final decision was reached by a court or regulator in another member state, there would be a “rebuttable presumption” that the infringement had occurred. Nothing is said about how the trader might go about rebutting that presumption in such circumstances, but the legislative intention appears to be to reverse the burden of proof in such cases.

What remedies would be available if the case is made out against the trader?

The representative action would be to seek “measures eliminating the continuing effects of the infringement”, such as redress orders – by which the trader would be required to provide for compensation, repair, replacement, price reduction, contract termination or reimbursement of the price paid, as appropriate. The draft Directive is clear that, in mass harm cases, awards should be compensatory and not punitive.

In other words, the trader could be required to pay out large sums of money following a finding against it.

In cases where the consumers harmed by the infringement were readily identifiable and suffered comparable harm caused by the same practice, compensation would have to be paid direct to the consumers concerned.

In cases where consumers had each suffered a small amount of loss, such that it would be disproportionate to distribute the redress to them, redress would be directed towards “a public purpose serving the collective interests of consumers” – the Commission gives the examples of a consumer legal aid fund, awareness campaigns or “consumer movements”.

In other, more complex, cases the court or authority would, “exceptionally”, be empowered to issue a declaratory decision establishing the liability of the trader, which would facilitate individual follow-on damages claims by individual consumers.

An injunction to stop misconduct could also be obtained at the same time as any order for redress.

The trader would be required to publicise any final decision against it or settlement reached (see below) at its own expense. The draft Directive notes that “The reputational risks associated with spreading information about the infringement are… important for deterring traders [from] infringing consumer rights.”

Will all claims go to trial?

No, as - given the claimant-friendly nature of the regime - there may well be incentives for traders to settle. The proposal indeed encourages member state courts and administrative authorities to “invite” a qualified entity and a defendant “to reach a settlement regarding redress within a reasonable set time-limit”, and provides for court scrutiny of settlements. Individual consumers would not have to sign up to any settlement that was reached (which would of course remove much of the benefit of settling for businesses).

Will these proposals actually become law?

The publication of this and the other New Deal proposals on 11 April was obviously the first stage in the formal legislative process, and the draft Directive will doubtless be amended as it makes its way forward. That said, MEPs tend to like doing things that protect their constituents and there is political will to tackle apparent deficiencies in consumer protection in the wake of various well publicised scandals. The legislative process is also likely to be expedited, given that the next European Parliament elections are scheduled take place in May 2019.

For readers in the UK, it is unclear whether the new regime will form part of UK law post-Brexit – a lot depends on the timing. This may be an interesting topic for a follow-up post…

My initial reactions to the proposed new collective redress regime

In my earlier post on this subject, I set out various concerns about what I understood was then being proposed in this area. Suffice it to say that these have not been resolved by the Commission’s final proposal...

I will share my thoughts with you further in coming weeks, but here are some initial observations:

• The various press releases, briefing documents and other materials issued alongside the proposal emphasise repeatedly that this is not a proposal to create US-style class actions, and that strong safeguards are baked in to the draft Directive to prevent abuse. While it is true that there are controls on who can act as a qualified entity and that there does seem to be some type of certification mechanism envisaged for claims (see above), the proposed regime will doubtless be received with great enthusiasm by claimant law firms. The actions that are envisaged would be large and challenging cases, and regulators and consumer associations might well need support to bring them. Despite the safeguards in the proposal, there is a risk that lawyers, claims farmers and other intermediaries, as much as consumers themselves, will benefit from the new regime.
• A qualified entity is likely to have little difficulty in getting a claim off the ground under the current proposal. Member states are indeed instructed to ensure that no costs or other procedural obstacles stop this from happening. The proposed certification requirements (see above) are less rigorous, as currently drafted, than those of many class action/group litigation mechanisms elsewhere – although there would be scope for member states to flesh these out when implementing the Directive.  Overall, the proposals do still raise the prospect of unmeritorious claims being brought in order to exert pressure on defendants to settle. Indeed, the provisions regarding evidence could encourage “fishing expeditions” – whereby actions are begun in the hope of flushing out documents and other evidence that would harm a defendant’s case.
• The suggestion that prior final decisions of a court or regulator will “irrefutably establish” or at the very least raise rebuttable presumptions as to liability are concerning from the perspective of defence rights. Different member states have very different procedural rules and rules of evidence. The EU has itself acknowledged that the quality of different member states’ justice systems varies significantly (see the EU’s Justice scoreboard 2017, here). This raises the possibility that a “bad” decision of one member state’s courts against a trader will tilt the scales unfairly in subsequent proceedings. There are checks and balances built into the proposal – the decision must after all be a final one, i.e. validated by the highest court of appeal in the relevant country – but this remains of concern to me.
• The fact that the proposal takes the form of a Directive means that member states will be required to transpose it into their own legal systems, taking account of their existing legal and procedural rules.  This alone is likely to lead to significant variation between member states in how the mechanism operates.
• The list of legislation which, if breached, could give rise to a representative action is a long one. There are some odd inclusions on that list. In light of my own area of practice, for example, I was interested to see that the Product Liability Directive appears there. The essence of that regime is that the burden is on the claimant to prove that a product was defective, that he or she suffered damage, and that the damage was caused by the defect. Individual-level questions predominate. How would this be scaled up to a representative action under the new collective redress regime? How would the very clear provisions of the EU product liability regime concerning the burden of proof sit with the burden-shifting provisions of the proposed regime?
• Similarly, it is interesting to see the new General Data Protection Regulation (GDPR) appear there, given that the GDPR itself introduces a collective redress regime for the exercise of data subjects’ rights.

Given the growing interest in this area at a legislative level in numerous countries, we will be discussing managing global group claims risk in a rapidly evolving landscape at our next client Risk Academy on 25 April. Please contact Ashmita Garrett (ashmita.garrett@freshfields.com) if you would be interested in attending.