Overview of the Representative Actions Directive

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Introduction

On 4 December 2020 the Directive on Representative Actions (“RA Directive”) was published in the Official Journal of the European Union (text available here). 

The RA Directive is a key element of the “New Deal for Consumers” initiative that the European Commission launched in April 2018, with the intention of strengthening and modernising consumer protection across the EU. 

The RA Directive sets out minimum standards for procedural rules in Member States (“MSs”) for collective redress and injunctions for consumers.  MSs are required to adjust their domestic procedural law to the extent that they do not currently meet those minimum standards.  They have 24 months to adjust domestic law as required, then a further 6 months to bring such amendments in to force.  As the RA Directive sets forth minimum standards and as most MSs are currently non-compliant with at least some aspects of the minimum requirements, in the coming few years we can expect not only mandated changes to domestic law but also debate within many MSs on whether their procedural law should go beyond the minimum standards.  Put differently, the requirement for MSs to review and adjust their procedures for collective redress could be a significant impetus for change across a number of European countries. 

This document summarises the key features of the RA Directive.

Pursuant to the RA Directive, Qualified Entities (“QEs”) will have standing to bring claims on behalf of consumers.  The RA Directive distinguishes between claims brought in a MS where a QE is designated (a “domestic representative action”) and those brought by a QE in a MS where it is not domiciled (a “cross-border representative action”).  QEs must meet additional criteria to bring the latter type of claims.  However, as is explained further below, it is questionable whether those safeguards will be effective. 

It is worth noting two other important features of the RA Directive at this stage.  First, the directive applies only to claims brought on behalf of consumers; it does not facilitate claims on behalf of legal persons.  Second, the procedural mechanisms set out in the directive are only available for claims brought for breaches of instruments appended to the directive (i.e., the procedures are not available for all types of claim). The instruments appended to the directive cover a wide range of harmonised areas, including data protection, financial services, travel and tourism, telecommunications and environment.

1. Opt-in vs opt-out

Whether a collective redress mechanism operates on an opt-in or an opt-out basis is arguably the most significant feature of its risk profile to potential defendants.  Opt-in systems require persons to elect to participate in the class.  In contrast, opt-out systems automatically include persons within the specified class, unless they choose otherwise.  Opt-out mechanisms are therefore particularly effective in aggregating claims where individual losses are low, but where the overall claim value may be significant.

The RA Directive grants each MS discretion on whether they should introduce an opt-in or an opt-out system, but they must implement an opt-in procedure at minimum.  This can be contrasted with the Commission’s original draft of the directive which required each MS to introduce an opt-out mechanism in certain circumstances.  Potential defendants will be relieved to see that this text has not survived to the final version of the directive.  Further positive news for defendants is that where a MS chooses to introduce an opt-out system, only consumers habitually resident in that state can be automatically included in the class; persons resident elsewhere must proactively opt-in. 1  The position for injunctive relief is different in that a QE may seek an injunction without the mandate/participation of consumers. 2

2. Adverse costs rules

Adverse costs rules are very helpful in deterring unmeritorious claims. These rules are the norm in Europe, albeit some countries operate statutory caps on the recoverable cost quantum. The RA Directive maintains the principle of cost shifting will be retained per local law which is reassuring for prospective defendants.

3. Certification stage

Many collective redress mechanisms have a “certification stage” whereby a court will dismiss claims which fall short of the requisite certification standard.

Unfortunately, the RA Directive has little to say on this topic.  The operative provisions simply state that the courts will assess the admissibility requirements of a representative action in accordance with national law and the provisions laid down by the RA Directive. 3  Thus, it is up to the individual MSs to set and apply their own conditions.  

Whilst not strictly a certification process, the directive states that MSs may dismiss “manifestly unfounded” cases at the earliest possible stage. 4 An early opportunity for summary disposal is welcome, although “manifestly unfounded” is a high threshold.

4. Destination of unclaimed sums

The destination of unclaimed sums is an important issue for defendants, particularly in opt-out mechanisms.  In principle, all opt-out systems ultimately become opt-in in that members of the class must engage with the distribution process following trial or settlement in order to receive their share of the damages.  Many factors influence the rate of participation; there are reports of very low participation rates in consumer claims, potentially as low as 1 per cent.

The destination of unclaimed funds should be less of an issue for opt-in mechanisms.  By their nature the affected consumers have identified themselves, making meaningful distribution far easier than for an opt-out claim.  Once again, the RA Directive gives MSs full discretion on the destination of unclaimed sums.

5. Punitive/exemplary damages

The recitals to the RA Directive state that, to prevent the misuse of representative actions, punitive damages should be avoided: “This Directive should not make it possible to impose punitive damages on the infringing trader, in accordance with national law.” 5  This is a welcome provision and is in keeping with European traditions of awarding damages on a compensatory basis.

6. Standing

As noted in the introduction, claims are brought by QEs on behalf of consumers.

The requirements for a QE bringing “domestic representative proceedings” are somewhat vague.  The RA Directive merely requires that MSs must ensure that the criteria for the QEs “are consistent with the objectives” of the Directive.

To be approved as a qualified entity for cross-border proceedings, organisations must, among other criteria, prove at least 12 months of actual public activity in the protection of consumer interests, demonstrate their non-profit status and ensure independence of persons, other than consumers, who have an economic interest in the class action. Once admitted by a MS, QEs will enjoy mutual recognition, allowing them to operate throughout the EU.

MSs have discretion to extend these more stringent qualifying criteria to QEs bringing domestic representative actions but these should not preclude the “effective and efficient functioning” of claims. 

Where MSs do not introduce more specific requirements for QEs bringing domestic representative actions, there is arguably a lacuna for cross-border domestic representative actions.  It appears that a special purpose QE may be set up in the MS where the claim will be filed, therefore making the claim a domestic representative action and avoiding the more onerous requirements for cross-border representative actions. 

7. Role of litigation funders

The RA Directive provides that insofar as litigation funding is permitted by domestic law, conflicts of interest should be prevented and that funders should “not divert the action from the protection of the collective interests of consumers.” 6  Thus, the directive imposes restrictions on the degree of control which a funder has over the conduct of a dispute even if there was no pre-existing restriction in domestic law.

8. Effects of final decisions

A final decision on the existence of an infringement can be used as evidence by both parties in the context of any other actions seeking redress “against the same trader for the same infringement”. 7

Comment

Countries that cap awards of adverse costs should consider whether those caps are appropriate for class actions.  Adverse costs rules serve an important check on unmeritorious claims, but that effect is dampened where the ratio of costs on risk to damages is very low.  Class actions frequently seek large sums of damages, and so it is therefore questionable whether it is appropriate to cap awards of adverse costs.

More generally, the RA Directive will have greatest impact in: MSs that presently do not have workable collective proceedings mechanism, as they will be forced to meet the minimum standards set forth in the directive; and in countries that decide to implement procedures that go beyond the minimum standards.  The main good-news story for potential defendants is that the RA Directive does not mandate opt-out procedures for damages claims. 

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