The Situation: Negotiators for the European Parliament and the Council of the European Union (the "Council") have reached an agreement on new European rules on collective consumer action. The Council has thus published a proposal for a "Class Actions" Directive (the "Directive").
The Issue: The European Union ("EU") has been seeking to strengthen consumer rights vis-à-vis companies in "mass harm" situations by creating a collective representative action at the European level. This important Europe-wide harmonization will shape the future of national and cross-border consumer litigation.
Looking Ahead: The European Parliament will soon decide whether to approve the Council's draft Directive. Then, Member States will have 24 months from the entry into force of the adopted Directive to implement it into national law, as well as six additional months to begin applying its provisions.
The EU has been seeking to strengthen consumer rights vis-à-vis companies, especially in "mass harm" situations with cross-border implications.
After two years of policy debate, the Council has now published a proposal for the Directive on representative actions for the protection of the collective interests of consumers, setting out the agreement reached between the European Parliament and the Council (made up of representatives from each Member State at a ministerial level).
EU negotiators agreed on the main features of the future legal framework for representative action throughout the EU.
The Directive is a step toward bringing "class actions" to the EU, as part of the larger "New Deal for Consumers" that the European Commission launched in April 2018 to boost consumer protection in the EU. The Directive is intended to harmonize consumer rights across EU Member States and to facilitate consumer remedies through collective representation. The Directive would replace and modernize the 2009 EU directive so it addresses the current issues in enforcement of consumer law by increasing the available options for EU citizens. This results in increased litigation risk for consumer-facing industries, both consumer brand manufacturers and service providers.
The Directive will require all Member States to implement class action mechanisms, at both the national and the EU levels, whereas only 19 out of 27 currently have some form of legal remedy to victims of mass harm.
Creation of Qualified Entities
Under the Directive, Member States shall ensure that qualified entities can bring domestic and cross-border representative actions on behalf of groups of consumers (Article 4 of the Directive). A qualified entity is an organization or a public body that represents consumer interests and is designated as such by an EU Member State.
The Directive distinguishes qualified entities entitled to bring domestic actions from those entitled to bring cross-border actions.
With respect to cross-border actions, to be a qualified entity, the organization or public body must comply with the criteria listed in Article 4 of the Directive. In particular, the entity must demonstrate to its Member State: (i) 12 months of activity in protecting consumer interests; (ii) that it has a legitimate interest in protecting consumer interests; (iii) that it is a nonprofit entity; and (iv) that it is independent and not influenced by persons, other than consumers, who have an economic interest in the bringing of any representative action, in particular by traders.
With respect to domestic actions, the above-mentioned criteria are nonbinding, and each Member State may choose different standards as long as they are consistent with the objectives of the Directive.
The Directive also contemplates improved cooperation between EU Member States, allowing a qualified entity from a Member State to bring a representative action before the courts or administrative authorities of another (Article 4b of the Directive).
Claims for Injunction and Redress Measures
Qualified entities are entitled to seek at least two types of measures: injunction measures and redress measures (Article 5 of the Directive).
First, injunction measures may consist of provisional or definitive measures to cease or prohibit a practice deemed to constitute an infringement. A claim for such measures does not require proof of an actual loss or damage by individual consumers nor of the intention or negligence on the part of the trader.
Second, redress measures may include claims for compensation, repair, replacement, price reduction, contract termination or reimbursement of the price paid according to what is regarded as appropriate and available under the EU and national law.
The Directive covers many fields such as financial services, telecommunications, data protection, energy, travel and tourism, in addition to general consumer law. In the previous draft of the Directive, adopted by the Parliament at first reading, health and environment were also mentioned, but those fields have disappeared in the new draft proposed by the Council on June 30, 2020 (Recital 6 of the Directive).
Avoiding Risks of Abusive Litigation
The Directive implements the "loser pays" principle as a shield against abusive litigation. This rule seeks to force the losing party to pay the successful party's costs of the proceedings (Article 8a of the Directive).
Another safeguard is embodied in the possibility granted to courts or administrative authorities to dismiss manifestly unfounded cases at the earliest stage of the proceeding, pursuant to national law (Recital 13ca of the Directive).
While negotiating the Directive, various actors proposed the creation of a European Ombudsman for collective redress in cross-border actions at the EU level. The European Commission has been asked to assess the appropriateness of this proposal and to prepare a report on the matter (Recital 41a of the Directive).
On the basis of this agreed text, the Council will adopt its position at first reading. Then, the European Parliament will have to decide whether to approve the Council's position.
Subsequently, Member States will have 24 months from the entry into force of the adopted Directive to implement it into national law, as well as an additional six months to start applying these provisions.
Two Key Takeaways
- Consumer-facing businesses, both regarding consumer products as well as services, will have to manage increased pan-European litigation risk.
- Injunctive remedies may impact business models across the EU.
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