The European Commission is proposing a directive that would repeal the existing Injunctions Directive and require European Union (EU) member states to introduce into their national laws representative actions for the protection of the collective interests of consumers.
A key feature of the proposed directive would be its sweeping effect on final decisions: “when implementing the actions, EU Member States shall ensure that an infringement harming collective interests of consumers established in a final decision of an administrative authority or a court, including a final injunction order, is deemed as irrefutably establishing the existence of that infringement for the purposes of any other actions seeking redress before their national courts against the same trader for the same infringement.” In addition, a final decision taken in one member state would have to be considered in the courts or administrative authorities of other member states as a rebuttable presumption that an infringement has occurred.
In this hoganlovells.com interview, Dr. Matthias M. Schweiger, a partner in the Hogan Lovells office in Munich, explains the recent developments in class actions, multi-claimant actions, and cross-border litigation in the EU.
What is the intention and status of the proposed directive?
Schweiger: In 2013, the European Commission reviewed the situation in the member states with a view to compensatory collective redress mechanisms. Already, back then, it had issued recommendations for the member states to implement collective actions. But those were just recommendations to the member states, and although the Commission hoped they would follow them, some did and some did not.
Four years later, in 2017, the Commission found that nine member states still had not implemented any such system at all. So it thought about ways to enhance the situation and the proposal takes that into account.
The Commission cannot force the member states, per se, to have civil procedure laws that implement a class action, group action, or other collective action. It looked at the Injunctions Directive, which already provides that member states must allow for actions for an injunction in case of the infringement of consumer rights established by certain Union law. This mechanism is already implemented in all member states. What it did now was say, we’re going to repeal the Injunctions Directive and replace it with a newer, updated system, which will now provide not only for an injunction order but also for a redress order as a measure eliminating the continuing effects of the infringements.
Is the proposed system considered a class action or group action?
Schweiger: Neither. It is a representative action by designated entities, e.g., a consumer association. These qualified entities can ask for an injunction order, establishing the infringement of consumer rights provided for by Union law. But they can also ask for a redress order, which can oblige the trader that infringes the consumer rights to provide for compensation, repair of the good, price reduction, and similar things, as appropriate — and the association does not need to have a mandate by each and every consumer to do so, unless the member state of the action requires that.
So they can bring this representative action, and this is still not a class action, collective action, or something similar. But there’s another mechanism that will give these actions a broader scope: if a final decision in a member state establishes that there was an infringement, this finding shall be irrefutable evidence that the infringement happened for the purposes of any other actions seeking redress before the national courts of that member state against the same trader for the same infringement.
The Commission also wants such final decision to have a cross-border effect, and they want courts and administrative authorities in other member states to accept the ruling to be a rebuttable presumption that the infringement has occurred. So that’s the difference: in the originating member state, it shall irrefutably establish the existence of the infringement, and in the other member states, it’s a rebuttable presumption.
This is how we would come to a broad application of the effects of these actions across Europe. These actions as outlined in the proposal also have special features. For instance, the infringing trader will be required to inform affected consumers at its expense about the final decisions. Another interesting point is that member states shall have the power to designate qualified entities at their request ad hoc for a particular representative action. There could also be settlements subject to the scrutiny of the court or administrative authority. Consumers concerned would be in a position to accept or to refuse to be bound by settlements.
How will this impact companies? Will there be more litigation?
Schweiger: There will be more complex litigation because already — now — the rights under Union law that could be infringed are established within all member states. And we will need to see how the redress orders will relate to individual claims of consumers which might go beyond the scope of the orders. There could also be a race for the final decision, because, as the system stands now, it seems that the first final decision will determine the national and EU-wide effects I was talking about earlier. There could be several actions in different member states and the scope of these actions and the final decisions may diverge to a certain degree. As may be the case, some proceedings might get consolidated under the European rules for jurisdiction.
At the same time, the Commission’s proposal allows for cross-border collaboration of consumer associations and other qualified entities. For instance, one from France, one from Germany, and one from Poland can act together. Then it will be interesting to see where they will actually sue the trader because member states must accept that they sue across borders.
What do you think the impact will be for Germany, specifically?
Schweiger: This representative action, if it comes to Germany, will be one additional measure. The Commission makes it quite clear that existing instruments in the member states, even if they’re going in the same direction, shall not be touched. You could have your national mechanism, but at the same time, the member states must also implement the representative action that the Commission hopes for.
For Germany, this means that we are looking to get two new legal mechanisms in the future, although the recently adopted German action is much closer and the EU representative action is farther away. The EU representative action is by now just a proposal by the Commission and it may take up to 18 months to adopt national provisions and another six months to apply the latter. We don’t know yet how long the legislative process will take until the directive is implemented. The ordinary legislative procedure applies, which gives the same weight to the European Parliament and the Council of the European Union. We are also having EU-wide elections in 2019.
Tell me about the significant legal mechanisms in Germany.
Schweiger: In Germany, there is no such thing as a class action or group action. For disputes about claims concerning capital market investments, a special legal mechanism was created years ago. This is some kind of model proceeding, where certain facts or points of law can be established by way of a model decision, and the issue gets resolved in a binding manner for those proceedings that are connected with the model proceeding. But this is limited and applies to certain disputes around capital investments.
In regards to mass claims, there are simple means in the civil procedure by which cases can be joined for combined trial, but that is the extent of it in Germany. Trying many individual cases together is sometimes perceived as impractical.
For a long time, there has been a discussion to implement some sort of proceeding that would facilitate the handling of mass cases by the courts. But until recently, there was no consensus for the way this should be established. German politicians were always eager to point out that a U.S.-style class action is not what they want, but they couldn’t agree on any UK-type group action or the kind of actions that were established in France in the past years.
But recently, things changed. 2018 will be a year of change for litigation in Germany. A bill on a collective action mechanism in consumer matters has been in the works by the Ministry of Justice for Consumer Protection for years, but they did not manage to get this bill into the legislative process before the 2017 elections, so they had to start again. And we were in some sort of political stalemate for some months, so we had no government that pursued these plans further. But since spring, there is the new government, and in its coalition contract it explicitly said we’re going to implement this new action by the first of November 2018. This was exactly the type of action that was already prepared by the Ministry for some time.
November is right around the corner.
Schweiger: That is right. And they didn’t hesitate for a minute to pursue the plans. In early May, the government agreed on the bill and brought it into the legislative process. The bill passed in parliament on 14 June 2018 and the law will enter into force by 1 November 2018. Unless something very extraordinary happens, we can expect the action to be available by 1 November 2018.
What types of companies in Germany will most likely to be impacted by these consumer suits?
Schweiger: The action has a broad focus. The bill explicitly says that the action should not be constrained to certain areas of civil law, but applied broadly. So the scope for application is basically any consumer and company relationship. In the early drafts, it seemed that the scope could be reduced to a contractual relationship between the consumer and the company, but we’re already beyond this. Certain wording in the bill makes it clear that any type of consumer relationship of a company can be in the scope of the action.
This German action is a representative action, too, so it can only be brought by certain qualified organizations that have a specific standing to sue, such as consumer associations, and the trial will be only between the consumer association and the defendant company.
Consumers will benefit from these actions in a very specific way. The Ministry of Justice and for Consumer Protection will set up a so-called litigation register which will be handled by a subordinate agency, the Federal Office of Justice. When an action is brought and is admissible, it will be published in this register, and that is where consumers can register their claims against the company in case they are pertaining to the same facts of the case. Once they are registered and there is a final judgment in the representative action, the defendant company and the registered consumers will be bound by the judgment. When there is the follow-up lawsuit between the registered consumer and the defendant company, both will be bound by the declaratory judgment, no matter whether the defendant company has won or lost in the representative action.
There are two ways to resolve the representative action. One way is the final judgment. There are only two stages in the proceedings as the Court of Appeals are the court of first instance for these actions and the Federal Supreme Court will decide on appeals on points of law. The other way is a settlement between the plaintiff and defendant company, and for the benefit of the consumers — as the registered consumers are not part of the proceedings, there is a special mechanism for them to be bound by the settlement. If there is a settlement proposal and it gets approved by the court, it will then be served to the registered consumers and they can opt-out of the settlement. If less than 30 percent opt-out, the settlement will become binding for those consumers that did not opt-out.
Are consumer rights now considered more important in the EU, or is there a need to have these types of lawsuits so they can determine the best way to handle them?
Schweiger: It’s both, actually. For many years, consumers in Europe, particularly in Germany, felt that U.S. consumers are better off because they get their class actions and their class settlements, and by those means seemingly easy access to compensation. So they are in favor of legal instruments that seem to be somehow similar. As mentioned earlier, collective redress has been on the European agenda for some years now and there is an initiative by the European Commission called "New Deal for Consumers". The proposed directive is part of that.
Still, many European countries don’t have collective redress actions in their legal traditions for civil procedure and managed to live without them for decades. So we will see how it will all fit together. They are on the rise and, to some extent, will be implemented. What is now important is to navigate these developments and be aware of their impact on litigation.