Trying to improve consumer protection across Europe with the help of profit-driven investors is doomed to fail - but almost no one wanted to listen ... and now it is coming.
It all started very well, when the European Commission published its 'common principles for injunctive and compensatory collective redress mechanisms' on 11 June 2013. Written by civil procedure experts from Unit A.1 (DG Just), this document made very balanced proposals on how those new rules could be included in the legal systems of the Member States without disrupting their legal traditions or existing rules. Even more importantly, the document listed various important safeguards for avoiding an US-style lawsuit market here in Europe (e.g. admissibility criteria [paragraph 8-9], the loser-pays-principle [13] or opt-in [21-24]). Everyone was aware how bad such a system would be for the consumer and also recognized the policy initiatives by the US-government as well as several federal states to stop the excesses that took place in the past decades.
How a scandal changed everything
Yet, everything changed with the Diesel emissions scandal. Feeling more and more pressure to respond decisively - especially with a European election ahead - the European Commission decided to make a U-turn in late 2017. After a heated meeting between the Commissioner in charge and a CEO, the topic was given to the consumer protection Unit E.2 (DG JUST) with the clear assignment to create something against 'misbehaving' companies. Without any expertise in civil procedure law, the Unit abandoned the 2013 recommendation and instead came up with a complete new approach, presented in April 2018 as COM(2018)0184. While this whole course of events would have been unthinkable in the former 'technical' Commissions, much has changed with the 'politicized' Commission from 2014 onwards. Especially at the top level, officials are nowadays regarding themselves more as policymakers than as technocrats, allowing them to justify their proposals more with emotions than with facts.
A foreseeable end
Even though the Commission's proposal came along without any genuine safeguards and was - to say it politely - legally ambiguous in most articles, MEPs and Member States reacted rather positive. Until the end of the political trialogue in mid-2020, the majority of council members believed that they can simply ignore the whole directive as their existing national systems would already fulfil the new requirements. Most MEPs felt good in helping consumers and as this proposal is apparently doing that, they did not really scrutinized the text. Although both institutions managed to slightly improve the directive during the negotiations, they were constantly ignoring its main problems. What was missing until the end, was taking the experiences outside Europe into account and performing an in-depth analysis of the effects on our legal systems. This week on Wednesday, the Parliament gave the directive its final approval and thus, allowed it to enter into force in a few weeks.
What are we criticizing?
The points of criticism that we and the CDU/CSU-delegation (backed by a united business sector and most researchers) were raising, remained the same in all those years. We are - on the one hand - of course in favor of better consumer protection and recognize that recent scandals have shown that there are indeed legal gaps. However, the directive is - on the other hand - just not the right means for improving consumer protection. It will eventually lead to even more legal uncertainty and disappointment of consumers. Since there are good alternatives (e.g. Scandinavian ombudsman or Germany's publicly funded consumer organizations), the whole story becomes even more depressing.
In talks with advocates of the directive, most of them responded quite bluntly. Using private actors with commercial interests for helping consumers, is simply a bad idea. However, since most Member States are unwilling to invest money in an Ombudsman system or in other state-run approaches, the directive was the only chance to "do" something. Choosing a bad option just because the better ones are - apparently - not feasible right now, is however a really bad policy choice in our opinion. Especially, when it comes along with huge collateral damage. Two points stand out for us:
Forum shopping: the Directive establishes a fragmented Single Market, in which each Member State has its own rules on collective redress. The Netherlands are already using minimum safeguards for attracting as many law firms and funders as possible, in the hope of creating a European hub for class action, generating lots of taxes. Other countries like Malta or Cyprus will follow. The missing opt-in system as well as overlaps with already existing frameworks will confront our courts with an enormous challenge.
Third party litigation founding: in the absence of public money, qualified entities can now use private funders to finance their lawsuits against (big) businesses. The problem with this is that those actors have solely commercial interests, which they want to pursue at the expenses of consumers (as it can be observed in Australia or in the UK). They invest in lawsuits and after years of processing, the consumer will have paid them administrative fees for nothing or will only receive a tiny fraction of the awarded damages. This business model is only good for the law firm, the funder and the qualified entity, which is why they were so much in favor of this directive. It gives them a whole new and very lucrative business model.
Find more information about this topic and the other risks that we see for the consumers and the European legal system in our Position Paper from late 2017.