Client Alert

The EU Collective Redress Directive is Coming to Town

09 Dec 2020

After more than seven years, the EU Parliament formally endorsed the much-anticipated new directive on representative actions for the protection of the collective interests of consumers (the “Directive”). This was the final hurdle for the Directive to enter in force, and the two-year countdown for Member States to implement the Directive into national law will soon begin. The Directive represents a significant development in the availability of collective redress mechanisms (such as class action lawsuits) in the EU, and in-house counsel and compliance officers will want to watch closely how this develops given the increased prospect of facing collective action from consumers.

As we reported on 15 July 2020, the Directive was initially presented in April 2018 by the European Commission and is part of the European Commission’s “New Deal for Consumers.” The Directive was endorsed by the EU Parliament on November 24, 2020 and provides a harmonized model for representative action in all Member States, which is intended to guarantee consumers suitable protection against mass harm, while ensuring appropriate safeguards to avoid abusive lawsuits. The Directive requires Member States to put in place at least one effective procedural mechanism allowing qualified entities to bring representative actions to court for the purpose of injunction or redress, including a specific right for consumers to claim for injunctive measures and/or compensation.

The Directive will impose the following key changes on consumer redress in the EU:

  • Scope. The Directive will make it possible to bring collective claims for infringements of various areas of EU law, including in the fields of general consumer law, data protection (including the GDPR), financial services, travel and tourism, energy, telecommunications, environment, and health, as well as air and train passenger rights. However, there is also scope for the redress mechanism to be broadened in the future. As well as the specific laws set out in Annex 1, the Directive also covers provisions as transposed into national law that “harm or may harm the collective interests of consumers.
  • Qualified Entities. In order to protect against copious and frivolous lawsuits, representative actions in each Member State can only be brought by “qualified entities.” For domestic representative actions, the relevant Member State has some discretion as to the criteria to be designated as a qualified entity. However, for cross-border representative actions the qualified entity must:
    • Be a legal person that is constituted in accordance with the national law of the Member State and not be the subject of insolvency proceedings;
    • Have statutory purposes that demonstrate it has a legitimate interest in protecting consumer interests;
    • Be a non-profit-making character;
    • Be independent and not influenced by persons other than consumers (and, in particular, not influenced by traders who have an economic interest in any representative action being brought); and
    • Provide a statement that demonstrates that it complies with the criteria listed in the Directive and provide information about the sources of its funding, its organizational, management, and membership structure, its statutory purpose, and its activities.
  • Representative action. Member States must ensure that representative actions provided for by the Directive can be brought before their courts or administrative authorities. In particular, Member States must ensure that qualified entities are entitled to seek at least the following measures:
    • Injunctive measures. Member States shall ensure that injunctive measures are available both in the form of: (i) a provisional measure to cease the practice or prohibit the imminent carrying out of a practice pending determination of whether the practice is an infringement of law; or (ii) a final injunction stopping or preventing a practice where that practice has been found to constitute an infringement.
    • Redress measures. Such measures shall require a trader to provide affected consumers with remedies such as compensation, repair, replacement, price reduction, contract termination, or reimbursement of the price paid, as appropriate and as available under EU or national law.
  • Allocation of costs. The Directive adopts the “loser pays” principle in relation to the allocation of costs to help safeguard businesses against abusive lawsuits. Member States must ensure that the unsuccessful party in a representative action is required to pay the successful party’s costs of the proceedings (subject to the conditions and exceptions provided for in national law). However, individual consumers covered by a representative action for redress measures shall not be required to pay the costs of the proceedings, except in exceptional circumstances.
  • Funding. In contrast to U.S.-class actions, the Directive encourages transparency regarding the use of third-party funding (insofar as allowed in accordance with national law). The Directive also provides that funding cannot be made to qualified entities by third parties that have a conflicting interest from the consumers’ interests.
  • Opt-in/out. Representative action mechanisms will be opt-out or opt-in with Member States being given the discretion to decide on their approach for domestic claims. The EU’s steer is towards opt-in, whereby potentially affective consumers must actively decide to participate in a claim. However, Member States also have the option to implement on an opt-out basis, which is more akin to the U.S. class action system.

Next steps

The Directive will enter into force 20 days after its publication in the EU’s Official Journal. Member States will then have 24 months to transpose the Directive into national law (and an additional six months in which to implement it). The new rules will apply to representative actions brought on or after its date of application.

Attention will now turn to how Member States choose to exercise their discretion on the implementation of a local collective redress regime. This will be familiar to some Member States, where consumers can already launch collective action in courts, but may feel very alien to other Member States where the concept has not previously featured in its legal system; around half of the Member States currently do not currently have any mechanism in place for collective redress.

It is important to note that the Directive only provides a baseline for the collective redress opportunities to be implemented in Member States, and it will be interesting to see whether, in implementing the Directive into national law, Member States choose to go further than the Directive demands. Collective redress is a developing area of dispute resolution in Europe and has seen increased use in recent years – including cases in the English High Court against Google, British Airways, and EasyJet. (Given Brexit, the UK will not implement the Directive, but collective redress is becoming increasingly established in the UK financial services, consumer rights, and data protection fields.) Moreover, a number of Member States have recently introduced opt-out collective redress mechanisms for some claims (such as Germany in 2018 and the Netherlands as recently as 2020).

Conclusion

The adoption and forthcoming implementation of the Directive marks an important milestone towards the effective enforcement of consumer rights in the EU. Although the Directive does not go as far as introducing U.S.-style class actions to Europe, it does represent a significant shakeup of consumer rights and collective redress mechanisms. In particular, it makes bringing claims on behalf of large groups of consumers a much more viable prospect for consumer organizations. Organizations doing business in Europe should be aware of this and the increased prospect of facing collective action on behalf of consumers in EU Member States.

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