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Article

Consumer Collective Redress: Opening Pandora's Box?

14 August 2008
International Law Office

European Commission

The action of the commission in this field is twofold. For the last few years the Directorate General for Health and Consumer Protection has been researching the status and effectiveness of group actions for damages in the European Union. At the same time, the Directorate General for Competition has been examining the effectiveness of consumer collective redress for antitrust infringements in the context of its proposal to reinforce damages actions for breaches of EU antitrust law. Collective actions form part of the proposed measures in this regard.

The Directorate General for Health and Consumer Protection
In 2007 the Directorate General for Health and Consumer Protection commissioned a number of specific studies and undertook consultations on collective redress.(1) Preliminary conclusions alerted the commission to the fact that the rights of EU consumers are not being adequately protected, especially when these rights rely on low-value or scattered claims. More specifically, the costs and the long duration of litigation significantly limit the prospects of consumers seeking compensation before the courts for any harm that they have suffered. In addition, cross-border disputes often stand no chance before national courts because of the differences in national regimes.(2)

To deal with the weaknesses of the current redress mechanisms, the consumer protection directorate identified the indispensable elements of an effective and efficient redress system. These elements, known as the ‘10 benchmarks’, comprise a list of measures that should shape the modern regimes of collective redress in the European Union. The 10 benchmarks provide as follows:(3)

"1. The mechanism should enable consumers to obtain satisfactory redress in cases which they could not otherwise adequately pursue on an individual basis;
2. It should be possible to finance the actions in a way that allows either the consumers themselves to proceed with a collective action, or to be effectively represented by a third party. Plaintiffs' costs for bringing an action should not be disproportionate to the amount in dispute;
3. The costs of proceedings for defendants should not be disproportionate to the amount in dispute. On the one hand, this would ensure that defendants will not be unreasonably burdened. On the other hand, defendants should not for instance artificially and unreasonably increase their legal costs. Consumers would therefore not be deterred from bringing an action in member states which apply the ‘loser-pays’ principle;
4. The compensation to be provided by traders/service providers against whom actions have been successfully brought should be at least equal to the harm caused by the incriminated conduct, but should not be excessive as for instance to amount to punitive damages;
5. One outcome should be the reduction of future harm to all consumers. Therefore a preventive effect for potential future wrongful conduct by traders or service providers concerned is desirable - for instance by skimming off the profit gained from the incriminated conduct;
6. The introduction of unmeritorious claims should be discouraged;
7. Sufficient opportunity for adequate out-of-court settlement should be foreseen;
8. The information networking preparing and managing possible collective redress actions should allow for effective 'bundling' of individual actions;
9. The length of proceedings leading to the solution of the problem in question should be reasonable for the parties; and
10. Collective redress actions should aim at distributing the proceeds in an appropriate manner among plaintiffs, their representatives and possibly other related entities.
"

The benchmarks were presented for public consultation earlier this year. They were followed by workshops with consumer organizations, the industry and legal practitioners.(4) In these workshops, substantive and technical issues on collective redress of specific interest to each of the three groups were discussed.

In Autumn 2008 the consumer protection directorate is expected to publish a final report consolidating the results of its ongoing studies on collective redress, namely the evaluation study, which assesses the effectiveness and efficiency of existing collective redress mechanisms. It will also publish a problems study which analyses the main problems associated with redress for mass claims and their impact on consumers.

At this point it is not entirely clear what form of action will follow the process. The official position of the consumer protection directorate is to publish a communication by the end of 2008 that will summarize the options available to consumers when seeking collective redress. There is a certain degree of speculation that at a later stage the initiative could also lead to a legislative proposal, but this has not been officially confirmed.

The Directorate General for Competition
Collective redress as an effective means of consumer compensation has been examined in parallel by the Directorate General for Competition, in the context of its ongoing initiative to introduce a specific regime for private actions for damages for EU antitrust infringements. In April 2008 the commission published a white paper in this respect, which was presented for public consultation. The responses to this public consultation have not yet been published.

The competition directorate envisages two possibilities for introducing collective actions: (i) representative actions, brought by qualified entities, which would be officially designated or certified on an ad hoc basis by a member state; or (ii) opt-in collective actions, whereby victims of an antitrust infringement can expressly decide to group their individual claims into a single action.(5)

The competition directorate appears confident that these recommendations offer a middle way between the low number of collective actions in the European Union, indicating insufficient consumer protection, and the negative effects of excessive litigation. The directorate has stressed that is important for all member states to achieve the same objective and to offer the possibility of effective damages actions to all consumers. EU legislation would be the best means to achieve this purpose.(6) The white paper will be succeeded by a specific EU legislative proposal.(7) The measure on collective actions will be included in this proposal.

The directorate will assess the input of the public consultation and will then determine the precise form of its legislative action.

Concerns

Irrespective of the action that the commission eventually takes on this matter, several groups of stakeholders in the European Union are concerned that it will lead to the amendment of national legislation and will eventually encourage unnecessary litigation. They fear that the initiative will inevitably create a slippery slope towards undesirable class action excesses. The mere fact that the commission declares that it will not encourage the negative effects of foreign class action systems does not comfort these critics. Those jurisdictions where such undesirable effects have been observed did not predict their occurrence when designing their respective systems.

Some of the specific remarks made in this respect include that the commission seems keen to allow the relaxation of the ‘loser pays’ principle, which in itself would encourage unmeritorious claims.

Further, it is not clear how the commission intends to calculate the award of damages. It is generally agreed that damages should not be punitive, but from the wording of the proposal it is not clear what they should amount to. The competition directorate intends to develop a specific framework on the quantification of damages, but it would be specific to antitrust infringements. It is not clear to what extent this framework could or would be used for the calculation of damages caused by other EU law infringements.

In addition, the standing requirement to bring a collective action should be precise and should not amount to a system of opt-out actions. The commission has unequivocally stated that it does not support an opt-out system. However, in its proposals it introduces a rather loose definition of ‘victims’. This would render more difficult the assessment of the harm suffered by the individual claimants, as well as the award of damages to victims.

The commission’s decision to take specific action on collective redress in the European Union has been characterized as premature. Collective redress systems have been implemented in some member states according to the respective national litigation cultures, but they are still developing. More time is needed to assess the efficiency of these national systems. In addition, it is believed that existing means of out-of-court dispute resolution, such as arbitration and settlements, are not sufficiently developed or exploited at EU level. Some believe that these mechanisms should be exploited more in the European Union, as they could help consumers. The commission claims that in order to be effective, out-of-court settlements for collective claims must be supported by a real prospect of a collective action, in case the infringer does not provide its victims with a fair resolution. The existing prospects of litigation, however, would be a sufficient countervailing factor to encourage out-of-court dispute resolution.

In any event, it is expected that the new EU framework on collective actions will increase the exposure of manufacturers and retailers to financial claims by consumers. The damage caused by distributing defective products is usually small and dispersed among a large pool of consumers. However, although the award of damages per consumer may be nominal, adding up the potential claims could give rise to a significant total loss for the manufacturer. Therefore, even if none of the concerns and fears expressed in relation to collective redress initiatives in the European Union materialize, litigation is expected to increase, rendering the already challenging environment in which manufacturers and retailers are doing business in the European Union even tougher.

Stakeholders’ views on the commission’s initiatives on collective redress will be published on the commission’s website soon. The commission appears to have led a constructive dialogue with stakeholders so far. The next steps are crucial for the future of litigation in the European Union. If collective redress is to be imposed, it should be a means only to the effective protection of consumers and not an end in itself.

For further information on this topic please contact Margarita Peristeraki at Mayer Brown International LLP by telephone (+32 2 502 5517) or by fax (+32 2 502 5421) or by email (mperisteraki@mayerbrown.com).

Endnotes

(1) The studies relating to collective redress include:

  • the study on alternative means of consumer redress other than redress through ordinary judicial proceedings;
  • an evaluation study; and
  • a problems study.

The latter two studies are still ongoing. The commission is expected to publish a draft final report on these two studies in Autumn 2008. The commission organized the Leuven event of June 29 2007 and the Lisbon conference of November 9 2007 to November 10 2007, both specific to collective redress.

(2) See remarks by Director General for Health and Consumer Protection Robert Madelein on collective redress, November 9 2007, presented at the Lisbon conference.

(3) The 10 benchmarks can be found on the website of the Directorate General for Health and Consumer Protection at ec.europa.eu/consumers/redress_cons/collective_redress_en.htm.

(4) The workshop with consumer organizations was held on May 20 2008, the workshop with the industry representatives was held on May 29 2008 and the workshop with legal practitioners was held on June 9 2008.

(5) White Paper on Damages Actions for Breach of the EU antitrust rules, COM(2008) 165, April 2 2008 White Paper, Section 2.1, page 4.

(6) Commission Staff Working Paper accompanying the White Paper on Damages Actions for Breach of EU Antitrust rules, paras 319 and following.

(7) On July 23 2008 the Directorate General for Competition launched a tender for the preparation of a study on the quantification of the harm suffered by victims of competition law infringements.

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