The European Commission (the “Commission”) has published a draft Directive which, if implemented, would introduce, for the first time in Ireland, a style of class action litigation by consumers against corporates. This would increase litigation risk in Ireland for industry sectors which are subject to EU regulation in areas such as product liability, data protection, financial services, travel and tourism, energy, telecommunications and environment. The draft Directive forms part of a wider legislative package which is referred to as ‘A New Deal for Consumers’.
Representative action, the European way
The draft Directive proposes a new type of ‘representative action, the European way’. This would allow a ‘qualified entity’ take a representative action before a member state Court on behalf of a group of consumers who have been affected by a breach of consumer protection laws to seek redress for the affected group. The consumers concerned would not be parties to the proceedings.
The Commission has for many years been critical of the disharmonised patchwork of collective redress mechanisms available to consumers among member states, particularly following ‘mass harm’ situations. At present consumers in certain member states have the ability to seek redress on a collective basis, whilst this is unavailable to consumers in other member states. The draft Directive, if it becomes law, would introduce the first European-wide collective redress mechanism.
What is the current position in Ireland?
Unlike some other European member states, there is currently no legislative framework, or formal procedure, to facilitate class actions or collective redress in Ireland.
While multi-party litigation can take place before the Irish Courts, this is usually dealt with by way of either one of the parties or the Court itself choosing a ‘test case’ which then serves as a pathfinder for other similar cases. The absence of a procedural structure for multi-party actions was criticised in 2005 by the Law Reform Commission in Ireland, who recommended the introduction of a formal procedural structure for such cases. However, despite this recommendation, no steps were taken by the legislature and the issue of multi-party litigation is now one of the topics under review by a specialist Review Group established in 2017, at the request of the Irish Government, in the context of a broader review of the Administration of Civil Justice in the Courts of Ireland.
Irrespective of the findings and recommendations of this Review Group, which are anticipated in late 2019 or early 2020, it is likely that the Commission’s draft Directive will instead pave the way for collective redress for consumers in Ireland.
What does the draft Directive aim to do?
The draft Directive’s key objective is to allow consumer interest groups across the EU to seek redress on behalf of consumers on a collective basis in so-called ‘mass harm’ situations. Under the draft Directive, a consumer is defined as any natural person acting for purposes outside of their trade, business, craft or profession. To mitigate against the risk of US-style abusive or unmerited litigation, the Commission proposes that representative actions can be taken only by ‘qualified entities’ on behalf of consumers, and not by the consumers themselves or by claimant law firms acting for them.
What is a ‘qualified entity’?
Under the draft Directive, ‘qualified entities’ will need to be designated by member states and will need to satisfy certain criteria. The criteria include: (i) being properly constituted according to the laws of the member state, (ii) having a non-profit character and (iii) having a legitimate interest in ensuring compliance with EU laws. A list of such entities will be made publicly available.
In Ireland, it is likely that consumer organisations such as the Competition and Consumer Protection Commission, would bring such representative actions. However, given the ease with which the relevant criteria could be fulfilled, it is possible that ad hoc litigation vehicles or organisations could be created as ‘qualified entities’. As such, the proposal does potentially raise a possibility of abusive or vexatious litigation.
Who will fund such actions?
In order to issue proceedings and meet any adverse costs orders ‘qualified entities’ will require funding from third parties. In order to minimise the risk of abusive practices, such as the funding of collective actions by competitors, the draft Directive proposes that the qualified entity declares at an early stage of the claim the source of its funds. If funded by a third party funder, the draft Directive states that the funder may not (a) influence decisions of the qualified entity nor (b) provide financing against a defendant who is a competitor of the fund provider.
If passed into law, this aspect of the draft Directive would also represent a particularly novel departure from the current position under Irish law which prohibits the funding of litigation by third parties who have no legitimate interest in the dispute.
What industries are most at risk to representative actions?
The draft Directive states that ‘traders’ can be subjected to such actions. ’Traders’ are defined broadly as “any natural person or any legal person, irrespective of whether privately or publicly owned, who is acting, including through any other person acting in their name or on their behalf, for purposes relating to their trade, business, craft or profession.”
This effectively includes any businesses that deal with consumers. These will in many cases be the same businesses that are already under the spotlight in what is a more and more regulated market, such as financial services companies and on-line traders. We anticipate an increase in claims involving data breaches, product liability, misleading advertising and unfair terms in consumer contracts.
Interplay with GDPR and the potential for increased risk of data related class actions
Interestingly, Article 80 of the EU General Data Protection Regulation (“GDPR”) and section 117 of the Data Protection Act 2018 (the “DPA”) already introduced a watered down form of collective redress for data privacy breaches.
Under Article 80 of GDPR, member states:
- are obliged to grant data subjects the right to mandate a not-for-profit body to lodge a complaint on his or her behalf;
- have discretion to grant a not-for-profit body the right to receive compensation on behalf of data subjects; and
- have discretion to grant a not-for-profit body, independently of a data subject’s mandate, the right to lodge a complaint.
While the draft Directive goes further, it is notable that the DPA gave effect to items 1 and 2 above (item 1 being compulsory). However, the Irish Government elected not to grant item 3. Minister for Justice and Equality Charles Flanagan explained that to allow for this “without the permission or agreement of those individuals … would amount to an extraordinary change in our law” and that this “is not part of our national law or legal system”.
What kind of redress can be enforced under the draft Directive?
The types of redress for consumers which are proposed are:
- Redress measures obliging a trader to provide for, inter alia, compensation, repair, replacement, price reduction, contract termination or refund; and
- Requiring that any settlements entered into by a qualified entity and a trader be approved by the Courts.
The draft Directive – are we facing a deluge of litigation or a storm in a teacup?
The draft Directive will require further consultation in the European Parliament and the European Council and is likely to be amended prior to publication in the Official Journal. It is anticipated, however, that it will be adopted prior to the next EU Parliament elections, scheduled for May 2019.
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 will result in a transposition period and may also result in a degree of variation between member states as to how the mechanism operates.
It remains to be seen what impact the draft Directive will have, if implemented. However, it will undoubtedly be a powerful weapon in a consumer’s armoury. It is telling that, in explaining the consultation process for the draft Directive, the Commission commented that “most stakeholders, with the exception of business organisations, showed overall support for the amendments proposed” and “[in] feedback to the Inception Impact Assessment, responding business representatives and public authorities expressed concerns about the introduction of redress opportunities at EU level”. The concerns put forward by these business representatives no doubt reflect more widespread concerns regarding substantially increased litigation risk in many member states if this is implemented.
Given that there is currently a disparity in the mechanisms available to consumers across EU member states, one can understand the desire to establish a level playing field for consumers. However, until the final form of the Directive, and how it is ultimately transposed into national law, becomes clear, it is difficult to say whether it will alter the litigation landscape in Ireland as substantially as is being heralded. Nevertheless, businesses should be aware of and be ready to deal with a likely increase in consumer litigation following the coming into force of the draft Directive.