The European Commission (Commission) has launched a public consultation to determine if it would be beneficial to introduce European Union legislation aimed at achieving a coherent approach towards "collective redress" in the EU. The Commission has said it will to steer clear of U.S.-style class actions, and indeed the entire tone of the consultation is one of caution and moderation. While past initiatives by the Commission focused on antitrust and consumer protection, the current consultation is not limited to any particular area of the law or industry sector.

What is "collective redress"?

As the Commission sees it, "collective redress" encompasses any mechanism to end or prevent unlawful business practices that affect a multitude of claimants or provide compensation for the harm caused by such practices. Collective redress procedures therefore could include bundling of multiple claims into a single claim or the entrustment of public or other representative entities with enforcement of collective claims. It could also include out-of-court dispute resolution.

In this context, the Commission identifies two main forms of collective redress: injunctive relief (actions to terminate illegal behaviour) and compensatory relief (actions seeking payment of monetary damages for harm caused by such behaviour).

With limited exceptions in areas of consumer and environmental laws, each of the 27 EU member states currently is free to decide whether or not it will implement "collective redress." National tort laws and civil procedure are one of the few aspects of member state legal systems that the EU so far has been reluctant to "harmonize" through directives and regulations.

As regards compensatory relief, some member states (such as the United Kingdom) have introduced procedures for collective claims, while others are fiercely opposed to collective redress of general application (like Germany). Even among member states that have implemented collective redress, the systems differ. The areas of differences include: in what sectors collective redress is permitted; rules on legal standing; what victims may use collective redress procedures (individuals, small businesses); the binding effect of a judgment (for those who opt in or opt out); the time at which claimants are individually identified (when the representative action is brought or later); the funding of collective redress actions; the distribution of proceeds; and the use of alternative dispute resolution mechanisms.

The Commission's current stance

The Commission is proceeding cautiously, for good reason. In summer 2009, the Commission's Directorate General for Competition proposed to introduce a collective redress system in the field of competition law. This followed public consultations in 2005 and 2008. At the last minute, the Commission shelved the Directorate's draft Directive. One reason was the strong opposition the Commission faced by member states, which argued that the legal framework for damages cases was up to the member states.

In parallel, the Commission's Directorate for Consumers and Health twice sought the general public's opinions on collective redress. One of the options it presented as part of the 2008 consultation was whether the EU should introduce a "measure to ensure that a collective redress judicial mechanism exists in all Member States." An overwhelming majority of stakeholders rejected that option.

(For more information on the member state response to collective redress, see here.)

Accordingly, the tone of the current consultation is non-committal: "Nothing is decided at this point. The Commission will take into account all views to identify whether collective redress may or may not be a suitable subject for EU legislation."

The Commission's Q&A

The consultation's preliminary focus is developing common principles that could guide future EU initiatives for collective redress.

The consultation consist of 34 questions, which cover (1) the need for effectiveness and efficiency of redress, (2) the importance of information and the role of representative bodies, (3) the need to take account of collective consensual resolution as a means of alternative dispute resolution, (4) the need for strong safeguards to avoid abusive litigation, (5) availability of appropriate financing mechanisms, notably for citizens and small businesses, and (6) the importance of effective enforcement across the EU.

Rejection of U.S.-style class actions

Back in 2009, the draft Directive on antitrust damages actions was shelved at the last minute, following the rumoured personal intervention of the Commission's President. This is widely thought to be due to fears, held by the EU Parliament and some member states, that the draft Directive would lead to U.S.-style class actions in the EU. The draft Directive included an opt-out system whereby identified or identifiable victims would be included automatically in a representative group led by a qualified entities such as consumer groups.

This is seen as undesirable by the EU, due to a belief that U.S.-style actions lead to unmeritous litigation. From the Commission's perspective, this is because the U.S. system creates economic incentives for parties to file a case even if, on the merits, it is not necessarily well founded. It believes that these incentives are created by the absence of limitations on standing (virtually anyone can bring an action on behalf of an open class of injured parties), the availability of punitive damages, the possibility of contingency fees for attorneys and the wide-ranging discovery procedure for procuring evidence.

In the consultation paper, the Commission makes clear it does not intend to adopt a mechanism in the EU for collective redress that will increase the risk of unmeritous litigation; it firmly opposes the creation of any such economic incentives for abusive litigation. Instead it suggests the introduction of safeguards, inspired by the existing national systems, such as the "loser pays" fees principle.

Next steps

The consultation period closes on 30 April 2011. Citizens, organisations and public authorities are all encouraged to respond. The Commission afterwards will hold a public hearing and then publish a report, together with all the public submissions, although respondents may limit disclosure of their identity or parts of their responses. The final decision on whether new EU legislation is needed will be based on the outcome of the consultation. If the Commission deems it necessary or appropriate , the Commission may also carry out a detailed impact assessment exploring all possible actions.