Europe is No Stranger to Litigation Abuse

30th Nov 2018

The European Commission is at a litigation tipping point. In April 2018, the Commission issued a proposal for a directive that would bring the worst parts of the U.S. class action system to Europe. The proposal goes further than the broadest form of class actions currently in existence in the EU by ignoring important safeguards the Commission outlined in its 2013 Recommendation on collective redress.

Critics of these safeguards say they are unnecessary; that European litigation systems face none of the problems of abuse that plague U.S. class actions.

But the facts show otherwise. Europe is no stranger to abusive group litigation. And as in the U.S., the formula for abuse is simple: lawyers get large payouts, outside funders get a cut, and consumers get little or nothing in return.

For example, many lawsuits against Volkswagen in Europe are being funded by hedge funds and litigation financing firms that team up with law firms. These groups stand to make as much as 40 percent of any settlement, leaving consumers with the leftovers. In contrast, compensation for Volkswagen consumers in the U.S. were not achieved from the class action. In this case, it came from a fund that was part of a package of penalties Volkswagen negotiated with the federal government. Consumers directly received over $7 billion in compensation, with an average of $18,000 per consumer. Had the matter been left to lawyers and funders in the U.S., litigation would have dragged on for years, with a much lower net benefit to consumers.

In the Netherlands, a claims foundation launched a collective case on behalf of almost 200,000 people against the Dutch lottery over alleged misrepresentations about the chances to win. Claimants had to pay a fee of €35 to the claims foundation, which spent the money on villas and luxury cars.

In the UK, a collective case seeking £14 billion against MasterCard over interchange fees was filed on behalf of 46 million consumers, each of which individually would recover a relatively small amount if the case were successful. When the funding agreement was disclosed, it became clear that the fewer the number of people who filed claims to be compensated, the more money the funder stood to make—between £135 million and £1 billion. This arrangement created a perverse incentive to keep consumers from getting compensated in order to line the pockets of the funder.

There will absolutely be more examples of lawyers and funders getting paid big money and consumers getting little-to-nothing if more EU Member States adopt a U.S.-style system. Just recently, there was a class action lawsuit in the U.S over HP Inkjet printers. Consumers were given an “e-credit” worth $2 to $6, while the lawyers received $1.5 million in fees.

The current EU proposal does very little to protect consumers from an abusive litigation system that offers them little to no benefit.

Even some of the few safeguards included in the proposal are too vague to be effective. One safeguard would ensure that only “not for profit” entities could bring claims in place of individual consumers, but it never defines what “not for profit” means. Further protections are needed to assure that these groups do not become mere vehicles for financially-interested litigation funders. In particular, law firms and funders should be barred from having a financial interest in, or control relationship with, “not for profit” groups.

Additionally, EU lawmakers should adopt an opt-in system, by which consumers must actively choose to participate in a claim. When actions are taken on behalf of consumers without their knowledge or consent, payments are more likely to compensate no one but the lawyers and funders, and can result in large undistributed awards.

Finally, third party funding agreements for lawsuits should be transparent and court-approved, and funders should be barred from controlling lawsuits. The Commission’s proposal fails to seriously address this growing problem, which places the interests of litigation hedge funds over the interests of consumers.

Requiring these and other commonsense safeguards will assure that collective actions are not vehicles for abuse and that they serve their intended purpose of compensating consumers. With abuses in collective action already evident in Europe, the Commission’s proposal presents an opportunity to minimize further problematic practices.