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Europe does not need an US-style 'class action' mechanism!

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 new rules could be included in the legal systems of the Member States without disrupting their legal traditions or any existing rules. Even more importantly, the document listed various important safeguards for avoiding an Australian- or US-style lawsuit market here in Europe (e.g. admissibility criteria [paragraph 8-9], the loser-pays-principle [13] or the opt-in mechanism [21-24]). Everyone was agreeing on how bad such a system would be for the European consumers and also recognized the policy initiatives by the Australian and US-government as well as several US 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 to punish 'misbehaving' companies. Without any expertise in civil procedure law, this 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 onward. 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 believed that they can simply ignore the whole Directive as their existing national systems are already fulfilling the new requirements. Most MEPs felt good in helping consumers and as this proposal is apparently doing that, they did not really scrutinize the text. Although both institutions managed to improve the Directive during the negotiations, they were overlooking certain key problems. What was missing until the end, was to take the experiences outside Europe into account and to perform 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, enabled 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 many legal researchers) were raising, remained in all those years the same. We are - on the one hand - of course in favor of better consumer protection and are recognizing that recent scandals have shown that there are indeed certain gaps. However, the Directive is - on the other hand - just not the right means to improve consumer protection. The new mechanism will eventually lead to even more legal uncertainty and disappointments. Since there are good alternatives (e.g. Scandinavian ombudsman system or Germany's publicly funded consumer organizations), the developments become even more incomprehensible.

In our talks with advocates of the Directive, most of them responded quite bluntly. Using private actors with commercial interests to help consumers, is indeed a bad idea. Everyone agrees on that point. 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 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 that again generates lots of additional taxes. Other countries like Malta or Cyprus might follow. The missing opt-in mechanism as well as overlaps with already existing legal frameworks will confront our courts with an enormous legal challenge.

  • Third party litigation funding: In the absence of public money, qualified entities can now use private funders to finance their lawsuits against businesses. The problem with that is that those actors have solely commercial interests, which they want to pursue at the expenses of consumers (as it can already be observed in Australia, the USA or in the UK). The hedge funds invest in lawsuits and after years of processing, the consumer will have paid them large 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 those actors were so much in favor of this Directive. It creates a whole new and very lucrative business model for them.

Find more information about this topic and the other risks that we see for the European consumers and the legal systems of the Member States in our Position Paper from late 2017.

AVoss - Collective redress
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