On 24 November 2020, the European Parliament endorsed the Council proposal for a Directive on class actions. The Directive will enter into force on 24 December 2020. New rules will therefore come into play by mid-2023 following a transposition and application period.
The heart of the Directive is a new system of representative action, under which certain “qualified entities” (e.g. consumer organisations or public bodies) will be able to bring actions for injunction or compensation on behalf of groups of consumers in a way similar to US-style class actions. This is intended to increase consumer protection by making it easier for consumer protection organisations to take action over mass consumer rights violations. Consequently, the Directive applies to all areas of law that are subject to EU consumer protection rules, giving the Directive a comparably wide scope and encompassing areas as diverse as data protection, travel, tourism, health, financial services, energy and telecommunications.
The Directive replaces the older Directive on injunctions for the protection of consumers’ interests. Under that Directive, qualified entities were already able to bring actions for injunction. The new Directive expands on this by allowing them to bring actions for redress, which can take a variety of forms, such as damages, reimbursement or product repair – notably, though, not punitive damages.
Qualified entities may bring claims in their host State or in any other EU Member State, provided they meet a number of criteria applicable to cross-border claims: Qualified entities acting in States other than their host State must be independent and permanently established, must represent consumer interests and must be not-for-profit, while States have significantly more room for transposition in purely domestic matters.
The new Directive applies to representative actions filed after the Directive enters into force. To the extent that these actions are based on breaches of consumer protection legislation which occurred after that date, they will also interrupt the period of limitation.
Member States still have significant choices to make in transposing the Directive into national law, though, particularly since the Directive follows the principle of minimum harmonization, leaving States free to pursue an even higher level of consumer protection. Member States must choose whether consumers are automatically members of the representative action (“opt-out”) or have to explicitly join the suit (“opt-in”), and the Directive contains no explicit rules on representative actions filed simultaneously and the resulting risk of diverging decisions. While the Directive also contains rules on out-of-court settlements which provide that in principle these may also extend to other claims by the consumers, Member States may introduce provisions allowing their courts to reject settlement agreements which are “unfair”.
The Directive attempts to protect companies by following the general procedural principle of “loser pays”. However, since the claim can only be brought by a qualified entity, this means that that entity bears the financial risk of an unsuccessful action, while consumers are not exposed to any financial risks. Member States may also permit third parties to fund the qualified entities, but must ensure that this is transparent and does not endanger the qualified entity’s independence, so that competitors will not generally be permitted to fund representative actions. Nevertheless, the Directive does not bar legal tech companies and commercial litigation funders as long as conflicts of interest are avoided and the consumers’ collective interests remain paramount.
According to the Directive, Member States can also ensure adequate financing by providing legal aid, reducing court fees, or by permitting qualified entities to charge (moderate) fees for those wishing to join the representative action. Depending on how the Directive is transposed into domestic German law, some commentators nonetheless fear that the Directive will lead to an “Americanisation” of the litigation market based upon strong litigation funders, particularly since conditional fee agreements would also be one way of funding litigation.
In a further nod to the Common Law, the Directive contains provisions permitting qualified entities to apply for disclosure of evidence, which is intended to reduce the information gap between consumers and companies, although companies may refuse disclosure on grounds such as confidentiality or disproportionality. For German lawyers, this is a major change, since this kind of “discovery” and the associated risk of “fishing expeditions” are historically alien to German procedural law, although recent developments in European cartel damages law have introduced similar disclosure mechanisms.
A major issue for companies, particularly those active across the EU area, is the question of jurisdiction. The Directive does not contain explicit rules on this, but merely refers to the standard European rules, in particular the Brussels Ia Regulation. Depending on the circumstances, this may mean that qualified entities can choose between several different national fora, potentially giving rise to “forum shopping” as claimants choose legal systems most advantageous to their cause and leading some commentators to fear a “race to the bottom” as Member States vie to make their jurisdictions more attractive.
A final uncertainty is the relationship between the Directive and the current German Capital Markets Model Case Act (KapMuG), which has led to substantial litigation against a number of companies represented by SZA. Under this 2018 law, claimants must first apply for a declaratory judgment before being able to seek redress in separate subsequent proceedings. While the Directive has the advantage of allowing qualified entities to file for redress directly, the Capital Markets Model Case mechanism is wider in scope and extends beyond EU consumer protection law. Currently, it is unclear how the legislator will address this.
In sum, the new Directive significantly improves the position of consumers, but may not protect (multi-national) companies sufficiently against abusive proceedings, particularly given the risk of exposure to litigation in inclement jurisdictions. The possibility of for-profit enterprises funding litigation, wide rules on jurisdiction and extensive disclosure obligations create significant risks for companies. Although European class actions are unlikely to arise before mid-2023, companies will be well-advised to assess these procedural risks ahead of time in a proactive manner, particularly by drawing on expertise from those jurisdictions which already have experience with representative actions.
This client briefing constitutes a non-binding overview of recent developments in German competition law and is not intended to replace individual legal advice. In case of comments or questions please contact: