EUROPE

Are Class Actions Coming to Europe?

Are class actions coming to Europe?

Are class actions coming to Europe? Under the name of 'collective actions' they're here already, say observers.

The prospect that class actions may soon arrive in Europe from the United States has raised anxieties of a further litigation boom, as was highlighted by research published recently by Lloyd’s and the RAND Institute for Civil Justice Europe.

Europe has seen a rise in consumer and investor activism, and an increasing willingness by legislators to allow people to pursue mass grievances through the courts has opened the door to more legal claims.

“Are class actions coming to Europe? Under the name of ‘collective actions’ they’re here already,” Malcolm Carlisle, managing director of the European Justice Forum (EJF) says.

Several countries, including Sweden and the Netherlands, have provisions for class action-style litigation, while several others, including France and Italy, are mulling proposals for systems of their own.

The European Commission is also considering whether to recommend class actions for those affected by offences such as price-fixing.

Class actions uncontroversial

Class actions are, in themselves, uncontroversial. The ability to group together large numbers of claims relating to a single issue or company provides an efficient and cost-effective way of settling an issue that would otherwise threaten to clog up the courts for years.

They also provide an opportunity for redress for individuals who cannot afford to bring a claim themselves.

Class actions offer “an effective means of access to justice on behalf of the collective body of victims,” Michael Hausfeld, of leading US litigation law firm Hausfeld LLP says.

But in the United States, where they have been a feature of the legal landscape for decades, class actions have been hailed by some, but blamed by others for fuelling a multi-billion dollar litigation industry.

Critics have described the class action process in the United States as a ‘toxic cocktail’, in which several elements combine to make litigation risky to defend for companies. As a result, many choose to settle class actions, paying out millions of dollars, even if they have little merit, it is argued.

Litigation worry

“If US-style class actions came to Europe they could transform the litigation landscape,” Guy Pendell, a partner in the Dispute Resolution Group at law firm CMS Cameron McKenna says.

“The good news is that it isn’t looking very likely at the moment, because several of the elements that exist in the US to make class actions the ‘toxic cocktail’ simply don’t exist in the UK and Europe. There are not jury trials for that kind of action, there are not contingency fees, there are no punitive damages,” Pendell says.

But others fear that even if a European class action process were not a carbon copy of the costly American system, their introduction would inevitably lead to a rise in litigation.

“There are a lot of people in Europe who think that the American system is a ‘toxic cocktail’ of ingredients, all of which need to be present,” says the EJF’s Carlisle. “They pick off different ingredients of the US system and say we either don’t have that in Europe or we won’t introduce it.

“But you are left with the point that litigation is expensive – and class action litigation is particularly expensive. Who is going to provide that money?

“The only people likely to be willing to do so are law firms or litigation funding firms who will agree to fund the cost of litigation in return for a share of the damages,” Carlisle says. “That strong financial incentive to provide funding is the core of the US system.”

The rise of professional investors willing to bankroll court cases (see Third Party Litigation Funding, 29 Jan) eases the main risk faced by potential litigants in Europe – that they may lose and would be faced with a hefty bill for their opponent’s legal expenses. That is likely to encourage more court claims, argue opponents.

A different way

The EJF is lobbying governments for a civil justice system that seeks to avoid litigation.

Europe’s regulators, ombudsmen and other public authorities, who cover most areas of consumer commerce and whose task is to take action when there is a breach of regulation, have the opportunity to use their influence to encourage the wrongdoer to make voluntary restitution to third parties, it says.

If they do so, the company should earn a lighter sanction from the regulator.

But Hausfeld says none of the firms found guilty of cartel behaviour by the European Commission that he has dealt with have volunteered to compensate their victims. “Their response was that if you want me to pay then make me. That was supposedly the negotiating culture.”

Hausfeld also argues it is not a regulator’s role to wring cash from firms to repay those left out of pocket by price fixing or anticompetitive behaviour.

“If someone steals from you and you know who it was and how much was taken, you deserve to have it back. That is not a government’s function, it’s a function of civil law.”

Recession worries

The fact that a number of countries are considering introducing class actions at a time when a global economic recession is biting deep, poses an unwanted extra headache to business, Carlisle says.

“I’m worried by the relatively easy assumption within government that the US system is an option and they can control it. I simply don’t believe that will be the case,” Carlisle says.

But other companies are often victims of price-fixing as much as consumers, Hausfeld points out. Enabling them to bring collective claims for redress may offer them a lifeline in the bleak economic climate.

“Companies who were reluctant before to pursue claims through litigation probably now find that adding to their net profitability by recovering that which was unlawfully taken is not only a good but a necessary business decision,” Hausfeld says.

“Class actions are not necessarily appropriate for all circumstances. Nor should they be used to ‘extort’ money from companies that have not committed any wrongs. But they provide a legitimate means of providing mass access to justice where there has been a mass wrong,” Hausfeld says.

What Should Companies Do?

As the legal landscape across Europe changes, companies should take steps to protect themselves as part of their risk management strategies.

Businesses should consider the patchwork of legal procedures that are in place in different parts of Europe and their potential exposure in each nation in which they operate. A suit in Bulgaria, which has a full US-style class action system, would have different consequences than one in the Netherlands, for example.

“Companies who are potentially faced with these actions should think about what insurance cover they have in place in the event that, God forbid, the juggernaut heads their way,” Maxine Cupitt, a partner in Cameron McKenna’s Dispute Resolution Group says.

Firms should decide whether they have sufficient product liability insurance to cover claims from a number of countries, some of which could be eye-wateringly high.
They would also be wise to look again at the level of their D&O insurance, to ensure they have adequate cover for lengthy price-fixing investigations that could result in large fines and a resulting class action.

At a time when shell-shocked shareholders are looking for reasons for the steep losses in their portfolios, businesses should also look again at their investor relations.

“Companies should look very carefully at how they pass information to shareholders. In the US a lot of the cases arise from the allegation that information was not disclosed to shareholders soon enough,” John Batch, senior vice president in the FINPRO practice at Marsh says.
 

Practice Areas: Antitrust / Competition, Consumer Protection