Published

July 01, 2020

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Collective or Class Action Under the Representative Actions Directive (RAD)

A legal action for the protection of the collective interests of consumers under the EU Representation Actions Directive is brought by a “Qualified Entity” as a claimant party with standing on behalf of consumers aiming at an injunction measure or a redress measure, or both. 

Qualified Entity (QE)

Any non-governmental organization or public body representing consumers’ interests that has been formally designated by a Member State as qualified in accordance with the Directive. QEs have the rights and the obligations of a claimant party in a proceeding. 

EU Member States designate QEs for both “domestic” and “cross-border” actions. The distinction between domestic and cross-border actions depends only on the place of the QE designation and the place of the legal action.  

While the RAD imposes a set of strict “criteria” or qualification standards for QEs engaged in cross-border actions, it does not regulate criteria for QEs engaged in domestic actions. 

Domestic Representative Action

A domestic representative action (under the RAD) is brought by a QE in the Member State in which it is designated.  

Cross-border Representative Action

A cross-border action (under the RAD) is brought by a QE in a Member State other than that in which it is designated.  Any other cross-border elements, such as the place of residence of the represented consumers or the location of the defendant, are not considered in this distinction between domestic and cross-border actions. 

Opt-in Action

An action in which consumers must explicitly express their consent to be represented within a representative action.

Opt-out Action

An action in which consumers do not have to explicitly express their consent for them to be represented within a representative action.

Forum Shopping

The ability for claimants to select among various jurisdictions in bringing their claims, and to choose whichever forum they deem more favorable.

Punitive Damages

A monetary award granted for the purposes of sanctioning or deterring defendants, or rewarding claimants, rather than restoring consumers to their pre-infringement position.

Class Certification

A procedural process during which the court determines whether a collective action in the best possible mechanism for resolving the claims. 

Third Party Litigation Funding/Financing (TPLF)

Third party litigation funding is a commercial practice whereby third-party entities (e.g., hedge funds or sovereign wealth funds) invest in lawsuits for profit, typically in exchange for a percentage of any settlement or judgment. Learn more about TPLF here.

Contingency Fees

Fees based on the outcome of the case. The most common form is a ‘no-win, no-fee’ arrangement, in which a lawyer takes no fee (or a low fee) if the case is lost and is paid a share of any award if the case succeeds.

Cy Près

When it is difficult to identify those harmed, or when it is economically inefficient or logistically challenging to distribute damages directly to those harmed, these ‘excess,’ ‘unclaimed,’ or ‘undistributed’ damages are instead given to representatives, lawyers, funders, or even unrelated third parties.

EU Representative Actions Directive

The EU Representative (Collective) Actions Directive was officially adopted by the European Union in 2020. The Directive requires each Member State to establish a collective action system to allow consumers to sue for damages. While the Directive contains some safeguards to prevent abusive litigation, it does not go far enough, and clever profiteers could exploit its loopholes. 

Member States had two years to transpose the Directive, with a deadline of June 2023. So far, 17 Member States have finalized their national laws. The remaining national governments are still determining crucial features of their country’s redress system, such as how much control third party litigation funders will have over a claim and whether consumers will have the opportunity to consent to be part of a lawsuit.

This is an opportunity for policymakers to improve the Directive with much-needed safeguards for consumers and businesses. They should take heed of the advice given here and resist the siren calls of litigation entrepreneurs and speculators.

  • Nearly 82% of consumers
    feel it is imporatnt that collective action safeguards are made consistent across the EU.

12 Suggested Safeguards

The EU Representative Actions Directive mandates that Member States have a collective action system in place for consumers to seek redress for breaches of certain EU laws. However, the Directive leaves many of the implementation details up to the Member States’ discretion. 

Member States must find an appropriate balance between facilitating fair redress and safeguarding against opportunistic litigation. Member States should consider the following recommended safeguards as the minimum necessary for any collective consumer action, whether domestic or cross-border, and whether inspired by the Directive or in a pre-existing or subsequent regime. 

The following is a list of 12 suggested safeguards:

  1. ‘Domestic’ Qualified Entities should be subject to the same criteria as ‘cross-border’ QEs.
  2. ‘Grandfathered’ Qualified Entities should also comply with the Directive’s criteria.
  3. Member States should insist on opt-in mechanisms.
  4. A strong certification procedure should be put in place.
  5. Public information systems about representative actions should be closely supervised to ensure they are not used to force settlements from defendants.
  6. Contingency fees should be prohibited.
  7. Additional safeguards for TPLF should be considered.
  8. Parties to a collective action should be incentivized to settle.Punitive damages should be prohibited.
  9. Payments of ‘undistributed damages’ should be prohibited.
  10. Disclosure or discovery obligations should be proportionate to the needs of the case.
  11. Alternative Dispute Resolution (ADR) mechanisms should be at the heart of any domestic or cross-border regime to provide consumers with fair, simple, inexpensive, and speedy redress. 

To find out more, look at our 12 Recommendations for the Implementation of the EU Directive on Representative Actions.

Product Liability Directive

The Product Liability Directive (PLD) is the foundation of the EU product liability regime. It was adopted nearly 40 years ago and during that time has provided a largely effective compensation mechanism for those who suffer damage caused by defective products in the EU.
 
Maintaining a fair balance of interests between consumers and producers has been viewed as the main objective of the PLD since the day of its adoption. Unfortunately, when the European Commission set out to revise the PLD to consider new technologies, like AI and digital services, they ended up proposing a full upheaval of the product liability regime. This new regime will place a substantial liability burden on companies, hampering their ability to innovate and disincentivizing manufacturing in Europe.  
 
As currently drafted, the revised PLD allows for non-material damages for data loss and psychological harm, which are notoriously challenging to quantify. It also expands disclosure or discovery rules without essential safeguards. It also reverses the traditional burden of proof and does away with the monetary threshold on claims that, until this point, have effectively prevented an overabundance of small claims that could clog courts and disproportionately affect small and medium-sized enterprises (SMEs) that do not have the resources to cover expensive legal fees.  
 
The EU is planning that the revised PLD will be included in the scope of the EU’s Representative Actions Directive (RAD), meaning that it will be possible to bring national or even cross-border class action claims for alleged defective products. It is likely there will be a significant uptick in product liability litigation across the EU. Businesses could be discouraged from investing in new technologies or bringing these technologies to the EU.  
  
When implementing the revised PLD, Member States will have to consider very carefully their national policies and procedures on product liability and not leave the door open for abusive litigation that will hamper innovation while providing little if any benefit to consumers. The revised PLD should strike a fair balance between the needs of consumers and producers.  

UK Litigation Landscape

Over the past decade, plaintiffs’ lawyers and litigation funders have imported some of the worst practices of the U.S. lawsuit system in the UK. The UK litigation landscape has seen an alarming rise in class or group actions against businesses. 

According to UK advocacy group Fair Civil Justice, a predatory litigation culture harms consumers, employers, and Great Britain. Litigation is extremely expensive for all parties. Consumers pay for their lawyers via deductions to their settlements and damages awards, even under “no-win/no-fee” arrangements. The only beneficiaries are the lawyers and litigation funders. 

The growth in class actions can be attributed in part to the exponential growth of TPLF in the UK. Financiers are increasingly investing in “opt-out” class action style lawsuits, which target large companies like tech and others. Opt-out class actions are a type of lawsuit in which an individual can be included as a plaintiff without their knowledge and must proactively “opt-out” of the larger class action lawsuit. One UK class action, which was the biggest “opt-out” style lawsuit, was brought on behalf of 46 million British consumers (more than half of the UK population) in a case against a credit card company. 

Third Party Litigation Funding is a Growing Threat

TPLF allows private financiers, like hedge funds, private equity firms, endowments, and even sovereign wealth funds, to sign confidential deals with law firms or claimants’ representatives to fund lawsuits in exchange for a share of any settlement or award. Funders prioritize their bottom-line interests over the interests of the claimants and can arrange to be paid first and take a disproportionate share of any award, leaving claimants who suffered harm with little or no redress.

TPLF is growing exponentially around the world, with some estimating the global litigation market to be worth anywhere from €40 billion to €80 billion. The European Parliamentary Research Service reports that the TPLF industry grew by 40% in the EU between 2009 and 2019, and is projected to grow even faster this decade, potentially doubling in size over the next five years. According to research, eighty-three percent of EU consumers support the introduction of safeguards to ensure cases funded by TPLF operate in consumers’ best interests.

On 13 September 2022, the European Parliament adopted a legislative own-initiative (INL) report, or resolution, on responsible private funding of litigation, known as the Voss report. The Parliament resolution, which was adopted by an overwhelming majority (80%) calls on the European Commission to propose a TPLF directive, which would put in place fair and proportionate regulation of TPLF in the EU. The report’s oversight measures for litigation funders include: 

  • Licensing by an independent supervisory authority in the Member States.
  • Capital adequacy requirements.
  • An obligation to pay adverse costs (loser pays rule).
  • A duty to act in the best interests of claimants.
  • A requirement to inform the court and defendant of the existence of funding behind a claim and the identity of the funder.
  • Disclosure and review of the complete and unredacted copy of the funding agreement by the court or administrative authorities.
  • Assessment of the funders’ fees by courts or supervisory authorities to determine if their share of any award is fair and proportionate (no more than 40% of the award can go to funders, and claimants must be paid first).
  • No undue funder control over the proceedings, both formally through contractual agreements and informally through threats to withdraw funding.
  • A prohibition on withdrawing funding without the claimant’s informed consent.
  • Strong safeguards against conflicts of interest.

The European Commission and Member States should propose fair and proportionate regulations in line with those to which all other financial industries adhere. Consumer and public confidence in funders will only increase with transparency and government oversight. 

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