Will Europe’s RAD set off a wave of class actions?
The introduction of the Representative Action Directive in Europe has been heralded as opening the door for a greater range of class actions, making it easier for consumers to pursue collective proceedings. What will the directive mean for the legal profession in Europe — and for the companies it represents?
The introduction of the Representative Action Directive in Europe has been heralded as opening the door for a greater range of class actions, making it easier for consumers to pursue collective proceedings.
It marks a shift for the region, which has had far fewer aggregate actions than the US, but it equally points to new litigation exposure for companies.
Under the directive, passed in December 2020, European Union member states were given 24 months to develop national laws, which means 2022 is crunch time for legislators.
EU states must put in place a mechanism allowing ‘qualified entities’ to bring representative actions on behalf of consumers for injunctive relief and/or compensation.
Qualified entities must provide evidence of at least twelve months of public activity protecting consumers’ interests and demonstrate they act independently from those with an economic interest in bringing any action.
Prior to the directive, European law provides only for representative actions to stop or prohibit infringements of EU consumer law, but not for collective redress.
Additionally, consumers had to each prove the infringement anew, even if one court had already found for another consumer.
Will legal actions take off? That may be as much a culture question as a legal one, says Lindsey Clegg, Partner with Baker Tilly network firm Freeths, a company that has watched group actions evolve over two decades in the United Kingdom.
The Netherlands is so far the only EU member to have put the directive into action.
The highest profile case under the new system has been brought by a Dutch parents’ group, claiming TikTok is putting children at risk and collecting too much data. The group represents more than 64,000 parents from the Netherlands and the rest of the EU and is seeking €1.4 billion.
Marco Giordano, a legal associate at Baker Tilly Italy, says the RAD mechanism enables consumers to fight back, creating an instrument to tackle cartels and abuses of power.
“But for companies, they are facing more questions than ever before,” he says.
‘Important shift in legal framework’
In Italy, the Representative Action Directive is expected to change the legal culture of the nation.
Few class actions have been brought before the courts since their current system was introduced in 2010, and even fewer have succeeded. Just 1% of all European class actions originated in Italy between 2016 and 2020.
Italian legislators are discussing the Directive and it is not yet clear whether Italy will modify existing laws to harmonise with the EU directive or enact new legislation for implementing the directive.
“In Italy, the previous system was intricate and class actions were poorly applied, processes were very complicated, there were double procedures.”
– Marco Giordano
Regardless of which way legislation goes, Mr Giordano says it will be an important shift in the legal framework.
“This directive from the EU will harmonise member states,” he says.
“In Italy, the previous system was intricate and class actions were poorly applied, processes were very complicated, there were double procedures.
“The directive is interesting from a legal perspective, for both consumers and from a business point of view. The EU has been behind the US in its class action mechanisms, the US is far more advanced.”
Fabiana Caroli, a lawyer with Baker Tilly Italy specialising in consumer protection and commercial law, says many of her clients are in the food and beverage business. She believes this sector is likely to be exposed to claims.
“They have many factors to deal with – labelling, quality control, origin rules,” she says.
“The EU strictly regulates the food and beverage sector. Labelling is a particular problem area, with nutrition and quantities and origin rules.”
“If you miss one, the company is not compliant. If something is untrue on the label, it can be enough to force the company to stop selling and they can lose a lot of money.”
“Companies in this sector need to assemble their legal teams to value actions against them and decide whether it is better to press ahead and defend, or to settle them.”
Checks and balances to prevent abuse
The introduction of qualified entities (QE), associations involved in consumer protection activities as the bodies competent to bring such actions, are an important feature of the new directive.
Member states can define a QE for domestic disputes, but in cross-border actions, QEs must have been involved in consumer protection as a non-profit-organisation for at least twelve months prior.
QEs must also find the funds to pursue an action – funds that cannot come from anyone who has an interest in the claim, or a conflict, such as being a competitor.
“A judge acts like a filter and will perform a preliminary check on damages claims, and check that they have the funds to bring the claim.”
– Fabiana Caroli
“This is to prevent abuse of the system and setting off a flood of claims,” Ms Caroli says.
“There are also safeguards on any actions. A judge acts like a filter and will perform a preliminary check on damages claims, and check that they have the funds to bring the claim.”
“Funders cannot have an interest either in the claim itself, or in the parties involved.”
Lindsey Clegg, Partner with Baker Tilly network firm Freeths, says determining how actions can be funded will be critical for consumer groups.
“Group actions are expensive and often require significant funding to pursue to redress,” she says.
“One option is through the consumers themselves, via subscriptions from group members (although the directive only contemplates payment by consumers of a modest entry fee).
“Another might be public or charitable funding made available to the QE. The Directive may also prompt a closer look at the use of professional, third-party funders.
“Countries where there has been little exposure to class actions historically are going to have to address these kinds of questions about how such actions may be funded.”
Influences on class actions in UK
The United Kingdom, no longer in the EU, is still an important stakeholder in the directive and a well-informed observer, having watched group actions evolve over two decades.
“The opportunity to bring group actions in the UK is becoming increasingly popular, due to a number of factors.”
– Angelique Richardson
Several forms of collective proceedings are available in England and Wales: group litigation orders, an opt-in collective procedure where the claims of a number of claimants contain common issues, introduced in 1999, and representative actions, where a named claimant acts on behalf of a group of people with the same interest, together with a form of opt-out action available only in certain competition claims.
Angelique Richardson, an Associate at Freeths, says GLOs are becoming more common in the UK, thanks partly to a growing American influence.
“The opportunity to bring group actions in the UK is becoming increasingly popular, due to a number of factors,” she says.
“For example, there is prominent American influence in the market – more American firms are coming across the pond to London and these firms are able to build books of clients extremely quickly.
“There is (and has always been) a spotlight on access to justice in the UK, the growth of third-party litigation funding, as well as the transformation of litigation technology, all of which are essential and important components of group litigation.”
With the American influence, there has also been an increase in the advertising and publicity devoted to building a claimant group, including through social media and commercial radio and newspaper advertisements, which makes them much larger, says Ms Clegg.
Will the RAD unleash a wave of lawsuits?
In 2021, class action settlements in the US soared to US$3.62 billion, up from US$1.58bn a year earlier and US$1.34bn in 2019.
Large scale group claims have been on the rise in Europe even before the directive – the number of class actions filed increased by over 120% between 2018 and 2020.
There will no doubt continue to be more class actions as a result of the RAD, but Ms Clegg says culture will also be a factor in whether a flood of claims appears.
“How it is perceived by the public, whether it is seen in a positive or negative light, will be a factor in how many actions eventuate and the likely take up, and value, of those claims.”
– Lindsey Clegg
“How it is perceived by the public, whether it is seen in a positive or negative light, will be a factor in how many actions eventuate and the likely take up, and value, of those claims,” she says.
“Heavily advertised group actions can be perceived negatively as an opportunistic attempt to obtain a pay out but, conversely, the championing of consumer rights or other wider interests against ‘big business’ may be seen as a good thing.
“That’s probably a culture question more than a legal question. The fact that these claims must be brought by QEs should help to address concerns around unmeritorious, opportunistic actions.”
Those supporting the bringing of such claims will also need to look in the mirror and ask hard questions.
“In England and Wales, a sophisticated litigation funding industry has developed, but that did need to overcome concerns about ‘champerty and maintenance’, the common law rules which protected the purity of justice by prohibiting third parties from supporting, funding and/or benefiting from the claims of others.
“The approach of the English courts has softened, with only those arrangements where there is an element of impropriety, such as wanton intermeddling, disproportionate control or profit, likely to offend the prohibition.”
“Some protections are in place: the directive requires QEs to be fully transparent about the source of funding and, if third party funders are involved, they should not unduly influence the proceedings (including discussions about settlement), nor will they be permitted to become involved in claims against their competitors. Where justified doubts arise, the Directive provides a regime for examination and challenge.
“The use of litigation funding and insurance packages are not uncommon in England and Wales, but for those EU jurisdictions where there is not already a culture of funding litigation and group actions some thought will need to go into these will work in practice.”