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The Collective Redress Directive- extending class actions for consumers

The Collective Redress Directive extends the availability of class actions and forms part of the European Commission’s 2018 “New Deal for Consumers” initiative aimed at strengthening enforcement of EU consumer law.

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The Collective Redress Directive extends the availability of class actions and forms part of the European Commission’s 2018 “New Deal for Consumers” initiative aimed at strengthening enforcement of EU consumer law.

Its intention is to address EU-wide infringements and to reform EU consumer rules in light of market developments. The Directive is a reflection of the changing landscape as a result of increasing globalisation and digitalisation of products and services, leaving a vast number of consumers vulnerable to unlawful harmful practices at any one time.

After two years of policy debate, in July this year, the European Parliament and Council reached final agreement on the text of the Collective Redress Directive. The Directive is due to come into force in or around 2023.   The Directive will allow consumers across the EU to bring class actions (“representative actions”) both for injunction and redress measures across a broad range of EU laws to the extent that they have provisions which protect the interests of consumers, ranging from data protection and financial services to tourism, food and cosmetic products.  So, the Directive’s scope and applicability is extensive.

The Directive will require all Member States to implement representative action mechanisms, at both the national and the EU level, with the level of consumer protection varying across Member States, within 24 months from the date of entry into force of the Directive.

This article looks at the key features of the Directive.

Only qualified entities can bring the representative actions

The Directive stipulates that a ‘qualified entity’ is an organisation or public body representing consumers’ interests and is designated as such by an EU Member State. Representative actions can be brought by qualified entities designated by the Member States (Article 4 of the Directive). Member States must ensure that the entities are eligible to be designated for the status of ‘qualified entity’ for the purposes of bringing domestic representative actions and/or cross border representative actions. Insofar as cross-border actions are concerned, and to be a designated qualified entity, the entity in question must comply with the following criteria set out in Article 4 of the Directive, in particular:

  • it is a legal person properly constituted and can demonstrate 12 months of public activity in the protection of consumer interests prior to its designation request;
  • it has a legitimate interest in protecting consumer interests;
  • it has a non-profit making character;
  • it is not subject to insolvency procedure or declared insolvent;
  • it is independent and not influenced by persons, other than consumers, who have economic interest in the bringing of any representative action, in particular by traders; and
  • it makes disclosures publicly demonstrating its compliance with the criteria in Article 4, as well as information about its sources of funding, its organisational, management and membership structure, and objectives and initiatives.

With respect to domestic actions, however, Member States can decide for themselves whether they wish for the above criteria to apply to the designation of qualified entities, otherwise they can establish their own criteria as long as the criteria are consistent with the Directive.

The Directive encourages mutual recognition of qualified entities by Member States (Article 4 b of Directive). As a result, (i)  a qualified entity from one Member State can bring a representative action before another; and (ii) a representative action may be brought in one Member State by several qualified entities from different Member States in situations where the harm affects or is likely to affect consumers from different Member States.

Injunction measures

The Directive also enables Member States to put in place injunction measures on a representative action basis. Injunction measures may consist of provisional or final measures aimed at ceasing or prohibiting a practice deemed to constitute an infringement (Article 5(a) 1 of the Directive).  Where a final measure is sought, the Directive suggests that this may consist of a measure to establish that the practice constitutes an infringement, as well as an obligation to publish the decision on the measure.

Importantly, the qualified entity does not need to prove actual loss or damage to individual consumers affected nor the intention or negligence on part of the trader, and unlike the case for redress measures (see below), individual consumers do not expressly have to opt-in for any action taken by the qualified entity in relation to injunction measures.

Before seeking an injunction, a qualified entity must attempt to achieve termination of the infringement in consultation with the trader (Article 5(3) of the Directive). If within two weeks of receiving the request for consultation, the trader does not stop the infringing behaviour, the qualified entity may bring a representative action for injunctive measures without further delay.

Redress measures

The types of redress measures contemplated by the Directive are remedies such as compensation, repair, replacement, price reduction, contract termination or reimbursement of the price paid.

The Directive gives Member States autonomy to establish rules on how and at which stage of the representative action individual consumers concerned may opt-in or opt-out of the representative action.  That said, the Directive introduces a different carve out for individual consumers who are not resident in the Member State of the court or administrative authority before which the representative action has been brought. In this situation, individual consumers must explicitly opt-in to be included and to be bound by the outcome of the action for the redress measures.

Article 5(b) of the Directive also deals with the principle that consumers should not be compensated more than once for the same cause of action, as well as directing Member States to enact rules on time limits for individual consumers to benefit from redress measures ( i.e. to claim compensation from a damages pot).

Injunction measures and redress measures can be sought in a single representative action or within a separate action.

Third party funding of legal costs

The Directive recognises the role third-party funding will play in representative actions, as it dedicates a separate article for this type of financial arrangement (Article 7 of the Directive).

The Directive puts in place checks and balances such as a prohibition from bringing a representative action against a defendant who is a competitor of the funder or against a defendant on whom the fund provider is dependent, as well as stipulating that courts or administrative authorities be given powers to take appropriate measures, such as requiring the qualified entity to be able to  refuse or change the relevant funding where there are justified concerns.

Conflicts of interests are to be avoided and so any economic interest in the bringing or outcome of the representative action for redress is not to divert the action from the protection of the collective interests of consumers. Another safeguard is the implementation of the “loser pays” principle as a shield against unmeritorious litigation, which means that the losing party will have to pay the successful party’s costs of the representative proceedings (Article 8a of the Directive).

Looking ahead

The Directive is a step in the right direction particularly for some Member States that have little or no representative action regimes in place for consumer redress.  Likely areas for increased representative actions are data privacy, consumer rights and competition.

The opt-in and opt-out provisions, as well as the checks and balances around funding arrangements, bear close resemblance to the collective actions regime in the UK. However, the UK regime is only concerned with competition law infringements.  It will be interesting to see the level of uptake on both a national and EU level, with some jurisdictions ahead of others in their practical and judicial experience (i.e. the UK and Netherlands).

Finally, the Directive is another litigation risk which consumer facing businesses must effectively manage given its extensive scope, both in terms of its applicability to EU laws  protecting  the interests of consumers, as well as the magnitude of any “class” of claimant consumers in cross-border representative actions.

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Gurpreet Chhokar

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gurpreet.chhokar@collyerbristow.com