A significant spike in securities class actions became globally evident with the U.S. Supreme Court’s 2010 decision in Morrison[1] .
Countries with class and collective action laws, such as the Netherlands and Germany, witnessed increased securities litigation. Many other countries over the decade enacted new class and collective action legislation. Most recently, the European Union Parliament passed an EU-wide collective action statute, which we review in detail.
Societal Value of the Class Action
The United States class action mechanism dates back more than 100 years.[i] While its purpose and use has evolved over the decades, it is widely recognized as a pivotal procedural mechanism that serves a number of important societal functions and promotes access to justice.
In a recent article by Michael D. Hausfeld, Irving Scher & Laurence T. Sorkin they noted:
From a societal point of view, class actions permit the aggregation of claims which, often because of their comparatively small size, would not be brought as individual claims for economic reasons—the inability to find capable counsel to take on the case, or the inability to afford experts needed to provide expert testimony to support the claims. Thus, from the perspective of compensatory justice, class actions often provide the only mechanism by which large numbers of purchasers suffering similar damages from a common wrong can realize any sort of recovery. From the point of view of the courts, class actions provide a mechanism for bundling such claims of many in a single action, thus assuring that the courts are not overwhelmed by an avalanche of virtually identical claims, all of which might have to be needlessly adjudicated separately. (Emphasis added).[ii]
Additionally, the class action mechanism works to deter nefarious or negligent business practices. It levels the playing field between citizens and companies so our legal system can ascribe or deny blame based on merits of the claims at issue, rather than based upon which party can better afford to litigate aggressively.
It further creates economies in our judicial system, allowing for group resolution and redress.
Used in a variety of litigation settings, including consumer product, human rights, antitrust, and securities fraud, the U.S. class action mechanism has commanded the attention of countries across the globe.
Following Morrison, foreign legislatures have begun enacting class action or class action like mechanisms (collectively known as “collective redress”) while also honoring their own legal system and culture by including with these mechanisms certain reform-centric provisions in an attempt to proactively avoid some of the broader criticisms of the U.S. class action approach. This article addresses the recent class and collective rules promulgated by the EU Parliament.
Current State of Class Action Law in the European Union (EU)
The European Union is in the final stages of enacting its own collective redress regime to provide all EU citizens with uniform group litigation practices. In June 2020, the EU Parliament adopted a collective redress directive, and it is finalizing a long-awaited consumer protection reform introducing a collective action mechanism applicable to citizens of all member states.[iii]
The EU directive effectively demonstrates utility of a uniform collective redress mechanism. Prior to this recent directive, nine of the twenty-seven European Union member states lacked any procedure for collective redress.
For the remaining 18 member states, differing rules created disparities in rights and access to resolution among EU citizens that suffered precisely the same impact from bad corporate acts as did their neighbors just across the border from one another.[iv]
The new EU directive will not affirmatively by its terms supplant country-specific rules, but it will promote uniformity and provide a baseline for certain aspects of collective proceedings. Accordingly, while each country’s collective redress procedure will continue to have its own individual nuances, EU policymakers as a whole have recognized the value of collective redress, the widespread access to justice it provides, and the importance of promoting uniformity and predictability as redress mechanisms are applied.
EU Problem
In 2015, millions of EU citizens were impacted by Volkswagen’s Dieselgate emissions scandal. EU courts offered competing avenues or no avenue of redress to those affected. Some EU member states rushed to pass legislation to provide appropriate procedures to aggregate claims. Still others had collective redress measures in place that had rarely been used and those systems did not have the experience to handle such large and complex litigation.[v]
EU citizens marveled at the $4.3 billion-dollar payout in the United States as a result of massive class action litigation, and these observations sparked a broader conversation about the rights and remedies that should be available to all consumers.[vi]
In 2018, the European Commission introduced a proposal allowing for “qualified entities to bring representative actions against EU businesses on behalf of groups of consumers for remedies while ensuring appropriate safeguards to avoid abusive litigation.”[vii] The Commission was not interested in mirroring precisely the U.S. model due to skepticisms surrounding contingency fees, and what was viewed at times to be an expensive and lengthy class action process.[viii]
EU Solution
On Monday, June 22, 2020, the EU issued a news release announcing that “Parliament and Council negotiators reached a deal on the first EU-wide rules on collective redress.”[ix]
This legislation presents a highly structured scheme that will implement some form of collective redress in all member states and provide for some uniform cross-border processes within the EU.
The law has six noteworthy features, outlined in detail below:
- requirement that a “qualified entity” lead the litigation;
- establishment of national registers to provide a central resource regarding collective proceedings across EU countries;
- trans-substantive applicability, unlike the laws in many EU states;
- implementation of a “Loser-Pays” cost model;
- preservation of individual member state’s autonomy to implement the legislation over domestic actions; and
- default opt-in collective action as a uniform procedure for cross border actions to promote uniformity and provide access to justice across the EU, while leaving member states the ability to create an opt-in or opt-out regime for domestic disputes.
Arguably the most notable aspect of the EU collective redress mechanism – and a significant departure from US law – is the requirement that a qualified entity bring the case.
According to the legislation, only state-certified non-profit organizations can act as a qualified entity to initiate representative proceedings—not private law firms.[x]
Qualified entities must be independent public bodies or consumer organizations with a legitimate interest in pursuing the interest of the consumers, with other specific criteria mandated specifically by each member state.[xi]
The EU legislative bodies created the requirement of a qualified entity to reduce costs that would prevent an injured party from otherwise initiating a claim. According to the EU parliament, this was a problem faced in American class action litigation due to contingency fees charged by private attorneys. Accordingly, the EU requires that the qualified entity must disclose all relevant financial information to ensure their third-party funding will not have an impact on the outcome of the litigation.[xii]
A second noteworthy feature of the legislation is that it calls for the establishment of cross-border registers to create transparency for EU citizens across all member states.[xiii]
The registers will provide comprehensive and objective information on all processes to obtain compensation through the collective redress regime. Not only will the registers provide procedural information to potential litigants, they will drive the harmonization of existing laws throughout the EU.
The registers will record unlawful conduct that has been previously decided in other member states through their collective redress procedure. If certain conduct is included in this register, it creates a rebuttable presumption of breach in an action brought in another member state—promoting uniformity among EU nations.[xiv]
Third, the directive was drafted with the intention of providing protections and recovery opportunities for consumers; however, EU lawmakers developed the legislation to be trans-substantive in nature-- meaning a class action mechanism will be available to citizens for the infringement of most EU laws.[xv]
This aspect of the reform is exceptionally progressive for European countries, casting a wide net rather than contributing to a strict statutory interpretation. European lawmakers predict that the data protection, financial services, environment and energy, telecommunications, and health sectors will face the largest impact.[xvi] Notably, employment claims are omitted from the collective redress process.[xvii]
Fourth, the EU Parliament embraced a Loser-Pays system, consistent with UK law. The EU Parliament found that this approach appropriately balances access to justice for smaller claims that are aggregated (which individual claimants would otherwise not pursue for economic reasons), while also placing a higher burden on plaintiffs seeking recovery to pursue legitimate actions, thus, providing a safeguard intended to protect businesses of abusive litigation.[xviii] Under this system, the losing party bears the cost of all fees incurred as a result of the litigation.
Fifth, the EU collective redress legislation is intended to supplement and not supplant existing member state collective action law. When implementing the collective redress procedure, the EU is giving member states flexibility to apply the mechanism as appropriate for their legal and cultural systems when dealing with domestic claims. This reform is not intended to preclude existing class action procedures or repress member states from further creating their own mechanism, but rather create a minimum threshold procedure that allows EU citizens an established mechanism for redress, regardless of their national citizenship. Unsurprisingly, EU style collective actions will not be available to global claimants and can only be brought by EU citizens. However, member states retain the ability to expand their own national procedures to include international class action litigants, regardless of their citizenship.
The sixth feature addresses an ongoing EU debate regarding the benefits of an opt-in versus an opt-out model. Under the new EU law, member states have the choice to implement either an opt-in or opt-out regime to govern domestic disputes. While the EU has expressed skepticism over an opt-out model, the Netherlands has demonstrated its practicality in Europe with the Collective Damages Act of 2020 (WAMCA). Since passing this legislation, the Netherlands has received international attention and acknowledgment that class action litigation in the Netherlands will be more attractive and accessible for claimants, largely due to the opt-out structure.[xix] It also can benefit the defendant, who can resolve disputes globally and obtain certain and complete resolution.
However, for cross-border litigation, the EU legislation explicitly provides that such actions require an opt-in mechanism to provide consistent and fair redress opportunities to EU citizens.[xx] EU courts by default will impose an opt-in regime akin to Finland, France, and Poland with a Loser-Pays cost model to promote uniformity across the EU and fairness regardless of individuals’ domicile within the EU.[xxi] When faced with an opt-in collective action, claimants need to affirmatively express intent to be included in the litigation as a class member. A concern with this methodology is that it has the potential to disenfranchise the claimant whose damages are relatively small.
What Happens Next
The European Union has an extensive comment process to provide citizens with the most comprehensive reforms possible coming from the European Commission, the European Parliament and the European Council. In order to pass legislation, the Commission must draft the proposal which will then be sent to the Parliament and Council where amendments and revisions are typically made.
Once each body revises the legislation, it sends the revised legislation to its counterpart, which either confirms or further edits until a final agreement is reached.
The EU legislatures were several months into the negotiation phase in March of 2020, when the COVID-19 pandemic stalled negotiations. When the Council and Parliament began to meet again in June, the collective redress reform was on the top of the agenda, demonstrating its importance. Ultimately, it was finalized on June 22, 2020.
Member states will have two years to integrate the new directive into their national laws. Following this timeline, it is possible that we will not see real-world implementation of this reform until 2022. Further, the flexibility given to member states regarding how they will implement the reform nationally will provide a source of conversation and debate over the coming months that is likely to drive consensus among member states on additional points of procedure and law, as well as demonstrate the public policy and cultural underpinnings of their decisions.
Whatever the final product for each member state, it is indisputable that the EU will soon offer multiple attractive venues for class and collective action litigation. Additional debate by country on their substantive provisions is sure to drive further consensus and uniformity as laws are formally implemented across the EU. Nonetheless, in this important first step, the EU has embraced collective mechanisms as a path to achieving justice for consumers and investors throughout this part of the world.
Steve Cirami is Vice President, Head of Class Actions & Corporate Actions, Broadridge Financial Solutions. This article has been prepared with input from several Broadridge associates on the Global Class Action team. However, special thanks and recognition for her invaluable research and writing goes to Emily Fallon, Hofstra Law School Class of 2022, Summer 2020 Legal Intern at Broadridge Financial Solutions.
[1] Morrison v. National Australia Bank, 561 U.S. 247 (2010).
[i] See Calabresi & Schwartz, The Costs of Class Actions: Allocation and Collective Redress in the U.S.. Experience, Eur. J. Law Econ. (2011) 32(2): 169-183. Rule 23 goes back to the original Federal Rules in 1938, and the modern Rule was adopted in 1966.
[ii] Michael Hausfeld and Lauren Sorkin, In Defense of Class Actions: A Response to Makan Delrahim’s Commentary on the UK Mastercard Case, Competition Policy International (June 8, 2020) https://www.competitionpolicyinternational.com/in-defense-of-class-actions-a-response-to-makan-delrahims-commentary-on-the-uk-mastercard-case/#_ednref15.
[iii] Directive on Representative Actions for the Protection of the Collective Interests of Consumers, and Repealing Directive 2009/22/EC.
[iv] European Parliament Press Release, First EU Collective Redress Mechanism to Protect Consumers (Jul. 12, 2018).
[v] Dieselgate—Will Class-Action Lawsuits Come to Germans’ Rescue?, The DW, https://www.dw.com/en/dieselgate-will-class-action-lawsuits-come-to-germans-rescue/a-44227778
[vi] David H. Kistenbroker, Joni S. Jacobsen and Angela M. Liu, Global Securities Litigation Trends, Harvard Law School Forum on Corporate Governance (Jul. 29, 2019).
[vii] Council of European Union Information Note, Proposal on Representative Actions for the Collective Interests of Consumers (Apr. 3, 2019).
[viii] Jamie Humphreys and Tracey Bischofberger, This is Not a Class Action: Proposed Directive to Introduce Group Actions Across the EU Gaining Momentum, Cooley Pub. Co., (Oct. 29, 2019).
[ix] supra note 6.
[x] Id.
[xi] I. Benohr, The United Nations Guidelines for Consumer Protection: Legal Implications and New Frontiers, 43 Journal of Consumer Policy 105, 114 (2020).
[xii]supra note 6.
[xiii] Id.
[xiv] Id.
[xv] supra note 6.
[xvi] Id.
[xvii] Id.
[xviii] supra note.6, note 5.
[xix] Our Courts and the World: Transnational Litigation and Civil Procedure: Complex Transnational Litigation: Who’s Afraid of U.S.-Style Class Actions, 18 Sw. J. Int’l L 509.
[xx] supra note 6.
[xxi] Id.
Published September 17, 2020.
