Articles and comments on the possibility of class actions in Europe are now common, prompted in particular by the publication of a series of EU Commission policy documents, national proposals for procedural reform and the opening of European offices by U.S. claimant class action firms determined to exploit what they see as the increasingly fertile territory in Europe for U.S. class action style claims.

Over the last decade, a number of EU countries (see survey below) have introduced through domestic legislation different forms of collective redress procedures.  Some approximate to the U.S. class action process, others deviate significantly from it.  Some have been prompted by specific issues (such as misrepresentations to shareholders) and are confined to those issues, whilst others are more general in format.

Should European businesses be concerned?  Some see the developing proposals as a legitimate attempt to enhance access to justice, deter corporate malpractice and introduce an efficient administrative procedure for dealing with multi-claimant actions.  Who could object to these laudable aims?  The fact is that history presents a very clear example of the best intentions having unintended consequences.  DRI believes that European policy makers and legislators risk replicating the failure of policy makers in the US in the 1960s when they were reforming the US class action system by introducing what is now Rule 23.  They failed to foresee that they were creating the circumstances for the exponential growth of mass litigation, a risk-free litigation climate for claimants and an opportunity for claimant lawyers to initiate class actions with token claimants and extract vast sums of money from corporations regardless of the intrinsic merits of the claim.

EU Procedural Safeguards

Advocates of the proposed pan European and national procedures will retort that this analogy is entirely false, since it fails to take into account the wide spread existence in Europe of critical procedural restraints which will act as effective barriers to the worst excesses of the U.S. class action system.  They will say that in the EU:

We do not have the inscrutable and unreasoned decisions of juries on complex and technical liability issues, or the emotive responses of juries which lead to inflated damages.

We do not have punitive damages, the threat and scale of which in the U.S. often induces defendants to negotiate settlement regardless of the merits of the claim.

We do not (but see later) have contingency fees which allow claimant lawyers to recover excessive fees and which lead to “entrepreneurial lawyering” whereby lawyers initiate large scale actions by the use of a token claimant.

We usually have the basic principle of “loser pays”, a fundamental discouragement to weak claims, whereas in the U.S. litigation is largely a risk-free activity for claimants.

We have very limited, if any, apart from the UK, disclosure procedures, in contrast to the very broad disclosure rules in the U.S. which impose extraordinary costly disclosure burdens on defendant corporations leading, once again, in many cases to settlement irrespective of the claim’s merits.

The Evolving EU Policy

On 15 February 2007 The Economist ran no less than four articles about the possibility of U.S.-style class actions crossing the Atlantic.  A consistent theme in articles remarkable for their complacency was the protection afforded by these European procedural safeguards.  The articles were complacent because the safeguards are under attack and are threatened by the policy evolving within the EU Commission and national governments in Europe.

In December 2005, the European Commission published a Green Paper on Facilitating Private Damages Actions for Breach of Anti-Trust Rules. The Green Paper lamented the perceived obstacles to the effective private enforcement of anti-trust laws and proposed facilitating private damages claims for breaches of Community competition law. It raised the possibility of consumer associations having the right to initiate actions for “collective consumer redress” on behalf of unnamed consumers (class actions in all but name), a shifting or reversing of the burden of proof to redress the perceived asymmetry of power between claimants and defendant, a doubling of damages automatically or at the discretion of the court (punitive damages in all but name), the possibility that unsuccessful claimants will only pay costs if they act in a manifestly unreasonable manner (the practical abrogation of the loser pay rules) and a European wide obligation of disclosure. The Green Paper, if implemented, amounts to a substantial and ground-breaking undermining of crucial European procedural protections.

Since the publication of the Green Paper, it has been discussed in committee in the European Parliament and a White Paper on the subject is due from the Commission at the end of 2007. Whilst there are conflicting views as to the desirability of the measures contemplated, this is plainly not an issue which has been filed in an administrative drawer and forgotten. It is being pursued with vigor and an absence of the bureaucratic delay which is so often witnessed in Commission implementation.

The progress in formulating these legislative proposals is consistent with the Commission’s EU Consumer Policy Strategy 2007-20 paper, “Empowering consumers, enhancing their welfare, effectively protecting them,” published on 13 March 2007.  Discussing the issue of legal redress, the document states:

            “(The Commission) will also consider action on collective redress mechanisms for consumers both for infringements of consumer protection rules and for breaches of EU antitrust rules in line with the 2005 Green Paper on private damages actions."

Therefore, the possibility of pan-European collective procedures will not be confined to the subject matter of the anti-trust Green Paper but will extend more broadly to general “consumer protection”. When introducing the consumer strategy to the European Parliament on 13 March 2007 the new EU Consumer Affairs Commissioner, Meglena Kuneva said:

            “If consumers are to have sufficient confidence in shopping outside their own Member State and take advantage of the internal market, they need assurance that if things go wrong they have effective mechanisms to seek redress."

Contingency Fees

The availability of funding for legitimate legal actions is an important aspect of any system of justice. In the United Kingdom, we have seen the effective elimination of state-funded legal aid for most product liability and personal injury litigation and the passing of the risk of litigation to lawyers under Conditional Fee Arrangements (CFAs), with the quid pro quo of a “success fee” of up to 100% of the claimant lawyer’s base costs coupled with an insurance policy designed to meet the defendants’ costs in the event of an unsuccessful claim. CFAs can work for routine matters but the huge cost risks in complex litigation, such as pharmaceutical cases, and the lack of success of such cases in the past, makes the arrangement unworkable in difficult mass tort claims. Contingency fees, with the abolition of the loser pays rule, provide a possible solution. Contingency fees would certainly not work in most European litigation on an individual case basis because the damages are too small to support the costs in bringing an action (and indeed in some jurisdictions are prohibited by the governing bodies for lawyers) but they could work in the context of collective actions where the aggregated damages, coupled with the economies of scale that such actions should ideally benefit from, make contingency fees entirely feasible.

Symptomatic of the funding difficulties in the UK is the concerted effort by a number of UK claimant law firms to seek redress in the U.S. and resist the inevitable forum non conveniens application by the defendants, with the argument that the UK affords notional redress but not practical redress for costly and difficult mass tort cases such as pharmaceutical litigation. That argument was unsuccessful in 2006 in the Vioxx litigation but was successful in the judgment of 25 July 2006 in the case of Lake v. Bayer Corporation. In the latter case, the U.S. court found that the funding difficulties in the UK were so formidable an obstacle to the claimants obtaining justice that there was no effective remedy, and the court rejected the defendants’ forum non conveniens motion. Most informed U.S. commentators consider that the outcome of the Vioxx case is, in principle, the correct outcome. If that proves to be the case the pressure from the claimant lobby for contingency fees will increase.

The absence of contingency fees in Europe is invoked as an important bulwark against U.S. litigation excesses. The Economist, in its series of articles in February 2007, cited this feature in its sanguinary response to U.S. class actions (“Accepting the ambulance chasers” and “If you can’t beat them, join them”). Leading claimant attorneys in the UK have advocated contingency fees for some time and the UK’s Better Regulation Task Force report of October 2004 raised the possibility of their introduction.

On 4 August 2006, the Italian Parliament passed the Bersani Decree, article 2 of which abolishes minimum legal fees and the prohibition of private agreements between lawyers and clients. The text is vague and lacking in detail but, in principle, and this is a widely held view in Italian legal circles, there is nothing now to prevent contingency fees in Italy although the loser pays rule still applies.

A more startling breach of the rule against contingency fees was the judgment of the Federal Constitutional Court in Germany on 7 March 2007 that the prohibition on contingency fees is unconstitutional and must be repealed legislatively. The court considered that the main argument against the prohibition was that it unduly restricted access to justice. The German legislature will now have to change the law by June 2008. The court did not instruct the legislature how the law should be changed but put forward a number of possibilities: a limited approach, allowing “no win/less fee” arrangements in limited circumstances or a complete liberalisation allowing “no win no fee” arrangements with traditional U.S.-style contingency fees calculated as a percentage of the damages.

With these legislative and judicial examples of the acceptance of the principle of contingency fees in European litigation, together with the continuing and mounting pressure to address funding issues by introducing some form of contingency fee arrangement, the previous prohibition on and resistance to such arrangements have been seriously undermined. The trend is obvious.

Private or Interest Group Litigation v. Regulatory Control

Coupled with the progress to some form of pan-European collective procedure is an emerging policy of relying for the implementation of regulatory control on the quasi-sub-contracting, delegating or franchising the regulatory function to private or interest group litigation.

In the United States, there is a well recognised phenomenon of regulation being effected by large scale litigation. Litigation involving asbestos, guns, tobacco and other products has been used to remedy perceived regulatory lacunae. In Europe, the common perception is of a more systematic system of formal regulation. However, the regulatory impulse in Europe is in retreat. The establishment of the UK’s Better Regulation Task Force and government statements on the need to reduce regulation are examples of this trend. In the face of political pressure to ease the regulatory burden arising from the pressures on business and the central and local financial cost of maintaining an effective regulatory regime, the concept of delegating the regulatory responsibility to designated consumer bodies or, more dangerously, the entrepreneurial claimant bar seems a superficially attractive solution: it alleviates the financial burden whilst the reforms are couched in a bland and superficially attractive assertion of protecting and enhancing consumer rights.

UK regulators have expressed publicly that they see merit in harnessing litigation to the regulatory armoury. The Chairman of the Office of Fair Trading in the UK, Philip Collins has said:

              “There’s a lot that can be learned from the American (litigation) system."

Recognising that the loser pays rule would inhibit UK-style collective procedures, Mr Collins has said that his agency may lobby for a revision of the rule to encourage more consumer litigation.

The recently launched innovative proceedings brought by the UK’s Consumers’ Association against JJB Sports plc on behalf of approximately 130 individual consumers, under section 47(b) of the Competition Act 1998, is illustrative of how such delegation could work. It must be recognised, however, that this action is in addition to the fine imposed by the Competition Appeal Tribunal (CAT), on 19 May 2005, of £6.7 million, as a result of an action brought by the Office of Fair Trading.

The action arises from the finding by the CAT of price-fixing of replica England and Manchester United football kits. The Consumers’ Association is seeking compensatory damages in respect of each shirt bought by a consumer and, in addition, exemplary (or punitive) damages of 25% of the relevant turnover of JJB or such other sum as the CAT considers appropriate.

Many commentators assert that restricting the power to bring such collective actions to designated consumer bodies will prevent spurious claims and other forms of abuse. One flaw in this argument is that the integrity of consumer bodies is not maintained in all European jurisdictions. In Spain, it is possible for consumer associations to be established by claimant lawyers and then to be used as the vehicle for bringing proceedings under the class action procedure enshrined in the 2001 Spanish Civil Procedure.

Further, the introduction of new collective procedures is likely to create changes in European litigation culture and raise public expectations that they will deliver to consumers material benefits. Any early success that these procedures achieve will be used to create greater public awareness and the greater use of the mechanisms. On the other hand, there is the likely outcome that new collective arrangements, because of the continued existence, to some extent at least, of the critical European litigation restraints, will disappoint. That will lead inevitably to concerted calls for legislative changes, including relaxing or removing the designated body monopoly on collective litigation, which will remove or ameliorate the effect of the restraints and deliver the enhanced access to justice and easier attainment of justice that the reforms are said to be designed to produce. The outcome is likely to be the gradual erosion of existing and proposed procedural safeguards.

That Europe is becoming a potentially attractive forum for U.S. claimant class lawyers is illustrated by the observations of Michael Hausfeld in October 2005 prior to attending a roundtable discussion in London on class actions in Europe. He was described as the head of a unique international network of like-minded lawyers and he described his task as:

              “.. .a crusade to export America’s legal system around the world”. Apropos the various aggregated claims initiatives being introduced in Europe, he opined:

              “.. .the future in Europe for both law and society is good."

The U.S. claimant bar is noted for its entrepreneurial spirit and Mr. Hausfeld and his partners in Cohen, Milstein, Hausfeld and Toll have backed their assessment of the opportunities in Europe with their own cash. In January, 2007, they opened a London office with a reported complement of ten lawyers to specialise in securities, environmental and employment law. This initiative will surely be followed by other claimant law firms and it is a clear indication that seasoned U.S. class action lawyers recognise that Europe is emerging as a litigation ground conducive to U.S. mass tort techniques and is beginning to develop the procedural framework to justify a significant investment in establishing legal practices specialising in collective actions.

The State of Play in Europe

Below is an account of the various forms of collective procedure in the EU up-to-date.

France

French law allows notably for an “action in joint representation” which permits groups of claimants to bring a single action but each claimant must particularise his or her claim which is evaluated separately. Claimants can only be represented on a collective basis by one of 18 certified associations. The association bringing the action must receive written mandates from consumers before initiating the action, which often prove to be an insurmountable hurdle, especially since the association cannot advertise on the initiation of the lawsuit by way of public notice or advertising.

In January 2005, President Chirac proposed introducing a form of class actions to strengthen consumer rights. This announcement had an ironic counterpart in that it coincided almost exactly with President Bush signing the Class Actions Fairness Act in February 2005.

A draft government class action bill was adopted by the French Government in November 2006.  It was limited in scope, providing that only certified consumer associations could bring a class action for non performance or defective performance of contractual obligations. Environmental, pharmaceutical, securities, employment and competition claims were understood to be excluded from the proposed procedure. The bill, therefore, represented a very modest proposal indeed.

A significant number of amendments were filed and the difficulties of dealing with those amendments resulted in the withdrawal of the bill from the legislative agenda until further notice. It remains to be seen whether the new government has the political will to proceed with the legislation either as already proposed, or amended.  It is perhaps telling that Mr Luc Chatel, who submitted his own bill on the introduction of class actions to the Assemblée Nationale (House of Representatives) in April 2006, and strongly supports their introduction, has been appointed Secretary of State to the Ministry of Economy, Finance and Employment for consumer and tourism matters.  Whilst the earlier draft bill does not present a major threat to corporations and businesses operating in France, it is unlikely to be the end of the story. Its limited scope will inevitably provoke future demands for enlargement of its provisions and, if measures of this limited kind are deemed appropriate and necessary, the momentum of the consumer protection lobby generally in Europe may well undermine political resistance to measures broadening the scope of the class action procedure.

Germany

There are two relatively recent collective procedures in Germany. The Act on the Initiation of Model Case Proceedings in the Capital I (III) Markets took effect on the 1 November 2005. The Act is narrow in scope, applying only to claims related to the capital market. There is an opt-in process, the “loser pays” rule applies and whilst we noted in the previous edition that contingency fees were not allowed, a form of contingency fee will be allowed following the legislative measure which must be introduced by June 2008 (see European Litigation Restraints). A similarly restricted measure was also introduced on 1 November 2005, the Shareholder Class Action Act. This applies to shareholders claiming compensation for false, misleading or omitted information. If there are at least 10 individual lawsuits the actions can be joined as a collective procedure. There is an opt-in process and the loser pays rule applies.

Italy

There are currently two draft bills before the Italian Parliament concerning class actions, draft bills number 679 and 1491 Whilst the text of each bill is different, they are broadly similar and propose preliminary mediation to formal litigation, generic awards from which the amount of compensation to be paid to each individual consumer is determined by criteria established by the court, with a further mediation following the generic award and individual action should mediation fail or there are objections to the mediated agreement.

Bill 1495 covers claims in tort, as well as contract, whereas bill 679 is restricted to contract.

Spain

A Spanish class actions regime was established as part of the new Civil Procedure Act passed in 2000.  The following are the main features of the regime:

Lack of preliminary certification: The class action regime does not set out any preliminary process similar to U.S. Federal Rule 23 requiring the court to determine whether the class action criteria (commonality, numerosity, typicality and adequacy of representation) have been satisfied.  Procedural defenses which challenge the appropriateness of the class action process must be filed with the defense on the merits.

Standing: The Civil Procedure Act limits the right to start a class action to consumer associations.

Res judicata: The Civil Procedure Act states that the judgment issued in a class action will be binding on all members of a class.

No opt-out: The Act does not establish any opt-out process.

Consumer Associations: The Act requires that consumer associations must be representative of the class to file an action.  On 29 December 2006, the Spanish Parliament enacted a law which limits the right to file this type of collective claim to consumer associations that (a) are registered at the Central Government Registry of Consumer Associations and (b) are part of the National Committee of Consumers and Users.

Commonality as a pre-requisite of class actions and of Spanish Law: The Act does not expressly acquire commonality as a prerequisite of class action.  It only states generally that class actions may be filed when a damaging action has affected several consumers.  The reference to a sole damaging action may suggest a need for commonality as a fundamental prerequisite of class actions.  Commonality may be challenged by the defendants by means of a procedural motion of misjoinder of actions.

To date, very few class actions have been filed in Spain and usually they refer to contract cases where a consumer association seeks the nullification of contractual clauses in standard contracts.

Sweden

Sweden also has a class action process based on an opt-in arrangement. Only class members who have given written notification to the court within a specified period are allowed to participate in the proceedings. Members of the class in Sweden do not become parties to the proceedings and they are not required to participate actively, but the court’s judgment is binding upon them. In general, passive class members will have no obligation to compensate a successful defendant for any legal costs, the loser pays principle applying.

There are three types of action allowed under the legislation.

            (I) Private Class Actions - any person may initiate an action provided that person is part of the class;

            (II) Organisational Class Actions - certain organisations (consumer and labour ones) may initiate actions without having a claim of their own. Generally these claims must concern disputes between consumers and the providers of goods in services; and

            (III) Public Class Actions - an authority appointed by the government may bring an action where the public interest requires. The purpose is to create a court precedent for guidance for the public and industry.

The Swedish model is an interesting combination of the features of class, group and representative actions and goes furthest in providing a comprehensive frame of full collective procedures in Europe.

The Netherlands

The Regulation on Competence of Certain Legal Persons to Bring a Legal Action for the Protection of Other Person’s Interest 1994, imbued corporations, associations with full legal capacity and public bodies with the right to bring a legal action to protect the interests of others. The act does not allow such organisations who claim compensation for third parties and excludes injury claims.

The Act on the Collective Statement of Mass Claims came into force on 16 July 2005. The act provides for collective settlement of mass damage claims and the possibility of binding individuals to the collective award. Under the act, the court has the power to certify a settlement agreement between defendants and an organisation representing the interests of the injured claimants. Once certified, the agreement is binding on all class members unless they have exercised the opt-out provision within three months of the publication of the court’s decision.

United Kingdom

England and Wales

England and Wales has had a formal group action procedure since the Civil Procedure Rules 1998.  The regime is different from U.S. class actions in that claims managed under a “Group Litigation Order” remain individual actions.  The rules allow for the co-ordination of the procedural aspects of multiple claims and are designed to achieve the efficient administration and economic disposal of cases involving a group of identified claimants where there are common issues of fact and law. The court may use various strategies to manage the proceedings, including the trial of “lead” or “test” cases that are representative of the group of claims or the determination of issues of fact and law common to most or all of the cases. Although the outcome of such lead cases or preliminary issues may not determine the rest of the group claims, the judgments given invariably simplify the litigation by allowing the parties to compromise any remaining claims or bring further proceedings with a view to clarifying any remaining issues.

Various consultation papers have been published in recent years concerning the possibility of introducing a specific representative action process for claims involving consumers. The latest consultation paper was published in July 2006, “Representative actions in consumer protection legislation." The Department of Trade and Industry’s (DTI) proposals limit the introduction of representative actions to consumer protection legislation and are not as broad as the generic proposal of the 2001 consultation paper.

It is proposed that actions may be brought by approved consumer bodies on behalf of named individuals who have sustained loss and wish to pursue a claim for damages, repair or replacement of faulty goods. The permission of the court would be required before a case can proceed.

Ireland

Irish law provides for representative action which arise when numerous persons have the same interest.  In such circumstances, one or more person may sue on behalf of all interested parties.  However, the interpretation of the procedure over time has limited its utility.  In particular, damages are not a remedy in representative actions.  The remedies are limited to injunctive or declaratory relief.  The same interest requirement has also been very strictly interpreted.  In addition, although the decision of the Court will bind every interested party who cannot show a special case for exemption, only the parties to the proceedings can actually benefit directly from the court’s order.

As a result, multi-party litigation in Ireland has historically been managed not through the representative action procedure but through test cases.  This is not expressly provided for in the Court Rules but tends to arise by express agreement or simply as a matter of timing.  A test plaintiff acts on his own behalf and whilst the outcome does not bind either the plaintiff or the defendant in other cases, findings in the test plaintiff cases are frequently applied by analogy to subsequent cases.

The Law Reform Commission in Ireland produced a report on multi-party litigation in September 2005.  The recommendations of this report have not been made law so far, and it was not particularly warmly received by the Minister for Justice at the time of its release.  The main elements of the Law Reform Commission report are as follows:

Judicial certification should be a pre-requisite to a multi-party action.

Plaintiffs must opt in (as opposed to opt out) to the multi-party action.

There should be no requirement to show strict commonality of issues (although common issues must arise) or that common issues predominate over individual issues.

The certifying court should exercise its discretion on the degree and scope of commonality in individual cases and on whether the multi-party procedure is appropriate, fair and efficient in the circumstances.

The outcome should be binding on all.

As regards costs, individual issues should be dealt with at the cost of the individual.  Generic issues should be shared equally by constituent members.  However the liability of losing plaintiffs to the defendant for costs should be joint and several, subject to variation by court order.

Conclusion

The developments that have occurred in the last 12 months not only add substance to fears for the future of European litigation but show that policy makers, regulators, legislatures and some judicial bodies are prepared to advocate and introduce piecemeal and potentially co-ordinated collective procedures and abrogate or undermine the traditional European protections against an aggressive and damaging litigation culture.  The plain danger is that these myriad developments will coalesce in an unstoppable movement to develop a pan-European U.S.-style class action process with its attendant excesses.

Paul Llewellyn

Partner

Reed Smith Richards Butler LLP

Trigen House

Central Boulevard

Blythe Valley Park

Solihull