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A collective effort: European class action (finally) on the way, or is it?

13 March 2023

On 27 January 2023, the European Commission launched infringement proceedings against no less than 24 Member States for failing to transpose the so-called EU Representative Action Directive or "RAD" (EU) 2020/1828 of 25 November 2020 by the deadline of 25 December 2022.

This, one might say, European mishap has once again given rise to a lively discussion on class actions in the legal profession. The idea is to introduce a class action "for the protection of the collective interests of consumers" in all Member States. The aim of the European legislator is now to have the Directive implemented at least by the original application deadline of 25 June 2023. 

In general, class actions are legal proceedings in which a group of individuals take action against an organisation or a company on the basis of the same or similar claims and violations of rights.  Although the term "class action" is mostly used in a general way, technically there are two different systems for enforcing collective interests: One, in a class action, the claimants join together and conduct the litigation together. Two, in a representative action, like the RAD-action, a model case is conducted with a model or representative claimant, the results of which then also apply to the other affected parties.

The main aim of class actions is to reduce the costs for the individual claimants and to increase the probability of a positive judgement. On the one hand, a larger number of claimants is likely to exert a certain psychological pressure on the deciding court. On the other hand, pooling of resources can also lead to better litigation for all claimants. From the perspective of politics and the judiciary, there is in any case also an interest in processing "waves of lawsuits" in a uniform and thus resource-saving manner and in efficiently ensuring uniform jurisdiction and thus legal certainty.

Forms of class actions are already established in the legal system of many countries in the world, for example in the Commonwealth Realm in the United Kingdom, Canada, India and Singapore, in Asia in Thailand or in Africa in Nigeria. Of course, one needs to mention the USA, which is a self-proclaimed pioneer in collective legal protection. It is to be expected that with the acceleration of globalisation, the rapid increase in consumption and the associated increase in the risk of collective harm, class action for sure will become more and more relevant.

Class actions in Europe

Despite the general trend towards class actions, there are still European jurisdictions that have so far resisted such mechanisms. Because of the RAD, Luxembourg, for example, will (have to) introduce class actions for the first time. In those Member States where consumer class actions were already provided for in a particular way, the transposition of the Directive may require only selective adjustments to the already existing national law. However, as national laws often differ fundamentally and are subject to very particular procedural principles, the individual transposition of the Directive may be significantly more complicated for other Member States.

The implementation of discovery mechanisms

One of the omnipresent topics of discussion in this context is Disclosure or Discovery. Discovery and disclosure mechanisms allow parties to a court case to exchange information and evidence. Article 18 of the RAD provides that, subject to national laws on confidentiality and principles of proportionality, either party may, if necessary, require the disclosure of evidence held by the other party or a third party. Although this applies to each of the parties, it cannot be denied that there might be a certain imbalance of power between the parties of consumer class actions, which has undoubtedly led to Article 18 being included in the Directive in this form for reasons of consumer protection. Discovery and Disclosure are mainly known from the US, which probably has the most liberal regulations in this respect and allows for comprehensive mutual discovery of evidence. In the UK and Nigeria, as well, discovery proceedings are an integral part of all civil proceedings. In South Africa they are mandatory by Supreme Court jurisprudence.

In many Member States, however, there is no discovery mechanism in civil proceedings. Instead, the national courts predominantly practice so-called party proceedings, which either do not provide for disclosure of evidence at all or only within certain (narrow) limits. In principle, it is up to each party to obtain and present the required evidence. In addition to fundamental concerns of confidentiality and proportionality, tactical considerations certainly speak against disclosure - at least from a lawyer's perspective.

The party who cannot prove the facts favourable to it loses. So why should the Danish or German lawyer hand over the decisive material to the opponent? It is therefore not surprising that some Member States, such as Germany but also Spain or Poland, interpret the reservation of Art. 18 of the Directive in their favour and refrain from introducing a comprehensive disclosure or discovery mechanism altogether. 

Third party funding

Another debatable issue in the context of the Directive is Third Party Funding. The Directive mentions third party funding almost as a matter of course, which has certainly made some Member States sweat on first glance. 
According to the Directive, the main condition for the participation of third-party funders is the safeguarding of collective interests.  Ultimately, however, it is up to the Member States to regulate the options for third party funding of a RAD-action.

Litigation funding is the financing of litigation by a third party provider (usually a specialised litigation funding company), which bears the costs of the litigation, i.e. in particular court and lawyers' fees. In return, the funder receives - if the outcome of the litigation is successful - a portion of the claims won from the lawsuit. Litigation funding is usually used by claimants who cannot or do not want to afford the costs of litigation. Like this, financially weak claimants gain access to a high-quality legal system through funding and are better able to defend their rights. For others, using litigation funding is simply part of due diligence or serves to limit the costs of their own legal department.

Litigation funding, again, is handled completely differently in national jurisdictions worldwide and is therefore a very complex issue in legal practice. In the Polish and Turkish legal systems, for example, litigation funding is not provided for at all, and in Nigeria it is even interdicted. In Germany and Singapore, litigation funding is allowed under certain circumstances, but the involvement of lawyers in litigation funding through contingency fees is in any way strictly prohibited. In India, the financing concept is still considered new, but is attracting so much interest that more and more law firms and companies are jumping on the bandwagon. Interestingly, in the USA, the original Third Party Funding trendsetter, the sources for litigation funding have become more conservative again in recent years.

As in the case of Discovery and Disclosure, it is not to be expected that many Member States will be inspired by the Directive's approach, but that each will continue to stick with its existing national regulations in regards to litigation funding. In practice, it is questionable anyway what motivation funders might have to finance an RAD-action, since as a rule the entire amount claimed will most likely be paid out to the consumers.

Outlook

Whether it is due to the lack of compatibility between national legal principles and the European rules, the fact that class actions are uncharted territory for some jurisdictions, or simply political indecisiveness that so many member states have missed the deadline one cannot say. 

The fact is that the RAD-action is bound to come soon and will either supplement the existing repertoire of class actions in national legal systems or offer a class action for the first time.

In conclusion, despite the introduction of an EU-class-action, no uniform system will be guaranteed and both the EU and international class-action-landscape may remain confusing.
 
To learn more about the EU Directive, its status of implementation across major EU cities, and how this may affect the litigation landscape, visit our EU Directive webpage or contact one of our Class Actions experts. 

Further Reading