Claimants’ Lawyers Are Looking to the EU for the Next Big Class Actions – Will Member States be Prepared?

01st Mar 2021

The ink is barely dry on the European Union’s new Directive on collective (class) actions – yet plaintiffs’ lawyers are already drawing up their next big cases. It’s now up to EU Member States to decide if they will put safeguards in place to protect consumers and businesses from predatory lawsuits.

The new Directive will allow collective actions on behalf of consumers across Europe for breaches of 66 EU consumer protection laws, including everything from tourism and financial services, to data protection.

A recent Politico article reported that consumer activists are looking at the EU Directive as a new tool to bring complaints against tech companies and win damages. European activist will be closely watching class actions against companies in the U.S. to bring copy-cat suits in Europe. Politico states that “cases against the likes of Apple and TikTok are being lined up.”

While consumers should be able to receive redress when they have suffered real and tangible harm or damage, class actions can be used by claimants’ lawyers and litigation funders to group consumers without their knowledge and over-inflate damages. The lawyers and funders then take a huge cut of any award or settlement.

Politico reports that “[t]ech companies and industry have feared that the directive will open up the pathway for predatory law firms to create class action hubs in countries such as the Netherlands.” This is a real concern and we understand that more than 10 U.S. claimants’ firms have already set up offices or joint ventures in the Netherlands.

The Politico article goes on to say that “the directive addressed those concerns by putting limits on who can bring cases forward and how these groups are funded.”

Unfortunately, this is where the article is somewhat misleading.

A key feature of the directive is that only “qualified entities” (QEs) can bring claims on behalf of consumers. The intention was for these organizations to be not-for-profit consumer groups with a genuine mission of helping consumers, and not entrepreneurial law firms like in the U.S.

The Directive includes stringent safeguards (“limits” as Politico calls them) for QEs bringing cross-border claims, including that the QE be not-for-profit, have a demonstrated interest in consumer protection, be able to pay its debts, and be independent from the influence of law firms and litigation funders.

Unfortunately, QEs bringing “domestic” cases do not have to meet ANY of these requirements.

While it might seem that domestic actions would only have national implications, that is not the case. A loophole exists in the Directive. As long as the QE is bringing the class action in the Member State where it is registered, then the class action will be considered “domestic” and safeguards will not apply. The QE will be free to include foreign defendants and foreign consumers in their claim, and still it will be considered domestic.

In addition to the harm to consumers, the lack of safeguards could result in “magnet” destinations for litigation that might not have much chance of success elsewhere. As Politico accurately points out, countries like the Netherlands, where there are low barriers to lawsuits, will become litigation hot spots.

The good news is that it’s not too late to fix this. EU Member States have two years to transpose the EU Directive into their national laws, and they can include more qualification criteria for QEs and other litigation safeguards.

ILR issued a set of guidelines on how the Directive can be implemented in the Member States to best minimize the risk of litigation excesses and abuse.

The recommendations include important safeguards such as:

  • “Domestic” QEs should be subject to the same criteria as “cross-border” QEs;
  • Member States should insist on opt-in mechanisms;
  • A certification procedure should be put in place;
  • Contingency fees should be prohibited;
  • Additional safeguards for third party litigation funding should be considered;
  • Punitive damages should be prohibited;
  • Payments of ‘undistributed damages’ should be prohibited; and
  • Alternative Dispute Resolution (ADR) mechanisms should be at the heart of any collective redress regime to provide consumers with redress.