EU representative actions

The “New Deal for Consumers” initiative is becoming more tangible - the EU representative action procedure is coming. The Council of the EU agreed on 30 June to a draft Directive based on a compromise between the European Parliament and the Member States. The parties have stressed that they not only want to strengthen the enforcement of consumer rights, but also want to protect companies from misuse by the new instrument. This poses the question: to what extent will German law change at all in light of the already existing German test case lawsuits? And: should companies now expect an increased wave of lawsuits and a litigation industry?

The draft Directive provides the Member States with guidelines on how to regulate representative actions. A procedure must be set up to ensure consumers can favour from injunctions and redress. Through injunctions, companies can be made to cease and desist unlawful practices - as is already the case with actions for injunctions under German law, however these are restricted in their scope of application. More interesting are the remedies where a “benefit” or performance can be attained directly. As examples, the draft Directive specifically refers to compensation, repair, replacement, price reduction, contract termination and reimbursement of the price paid.

The Directive is also broadly based in terms of content. In addition to general consumer protection, it will also be possible to bring EU representative actions specifically in the areas of financial services, energy, telecommunications, travel and tourism, air and rail passenger rights and environment and health. Data protection is also explicitly mentioned as the potential  subject matter of an action.

Consumers will not be able to assert their rights in EU representative actions themselves or by instructing a (large) law firm of their choice. They will be exclusively represented by specially qualified consumer protection organisations, hence why this instrument is referred to as “representative action”. There must be at least one such organisation in each Member State. The requirements for the consumer protection organisation must conform to the objectives of the Directive, however, the Member States can use the conditions, which the Directive itself defines for cross-border cases, to orientate themselves. Accordingly, the consumer protection organisation must have been actively representing consumer interests for at least twelve months, it must be a non-profit organisation and must operate independently of any economic interests that may conflict with consumer interests. These requirements are similar to those in the test case lawsuits that have already been introduced as an instrument under German law, which are also representative actions that can only be brought by qualified organisations.

Unlike an EU regulation, such as the General Data Protection Regulation (GDPR), an EU directive does not constitute directly applicable law, but must rather be implemented by the Member States through national laws. They can save themselves the trouble if the provisions of the directive already exist under their national laws. In the course of the wave of lawsuits brought in connection with the diesel subject, German legislation has already introduced test case lawsuits. Like the EU, the German legislators wanted to provide consumers with an efficient means of protection on the one hand but also prevent a litigation industry on the other.

It is, however, questionable whether the German test case lawsuit corresponds to the EU representative action. One of the main differences is immediately apparent: the EU representative action is a procedure which ends with an injunction or a remedy. As described above, the remedy is tangible compensation. It is therefore not simply a matter of identifying abstract infringements which then, for example, lead to a change in the company's general terms and conditions or which make subsequent individual proceedings easier. Rather, the consumers concerned will in the end - if they win - receive concrete compensation. The German test case lawsuit is different: it merely determines whether a certain legal or factual prerequisite for the existence or non-existence of a claim exists (Section 606 (1) sentence 1 German Code of Civil Procedure (ZPO)), resulting in binding findings for subsequent individual proceedings. A court will then in the event of a dispute decide on the claim itself and, for example, also the damages in further proceedings; however, it will be bound by the findings of the test case lawsuit. In this respect, the EU representative action goes far beyond the German test case lawsuit.

The EU representative action also goes further than any other types of existing collective legal enforcement procedures in Germany, for example, the right for consumer protection organisations to take action against data protection violations. Up to now, they have mainly only been able to enforce obligations to cease and desist or remove certain business practices, i.e. to protect consumers on a general level. The EU representative action could make this more concrete. For example, the GDPR makes it possible to claim damages which up to now have not been frequently used, but which could theoretically be enforced collectively through an EU representative action procedure.

However, a wave of lawsuits is unlikely; there is no need to panic - as was the case two years ago when the GDPR was introduced. This is because most companies have already dealt with their data protection, as supervisory authorities are now also exercising stricter controls and imposing higher administrative fines. And even if, in individual cases, a consumer protection organisation advocates a stricter interpretation of the data protection regulations than the supervisory authorities, the Directive provides for protection against misuse.

In the USA, large and small law firms often advertise their services to assist with consumer protection infringements in television commercials and on billboards. They assume the risk of litigation and in return receive a share in the event of a victory in court or a favourable settlement. As was seen in the glyphosate case against Monsanto-Bayer, this can sometimes amount to several billion dollars. However, two particularly belligerent lawyers who had represented claimants in the glyphosate dispute against Monsanto-Bayer have now been convicted by a court in Virginia. They had blackmailed a pesticides supplier by threatening to involve them in the proceedings.

The Directive wants to avoid creating a litigation industry based on the US model. It provides various rules to protect companies from misuse by the new instrument. For example, the aforementioned non-profit orientation of the litigating consumer protection organisation will have a moderating effect. In addition, administrations and courts may dismiss manifestly unsubstantiated cases at an early stage. Above all, the unsuccessful party must pay the costs of the proceedings. This financial risk will deter consumer protection organisations from taking frivolous legal action.

The ordinary legislative procedure has not yet been completed. The Council of the EU has agreed on the text of the Directive, but it has not yet been formally established. The European Parliament must then also give its consent. However, as the draft Directive is based on a compromise between the European Parliament and the Member States which has already been confirmed by the EU Council and the Committee on Legal Affairs of the European Parliament, the further procedure is probably only a formality. Once the Directive has come into force, national legislators have two years to adapt their legislation and a further six months until it has to be applied. It remains to be seen whether the German legislators will deem that the requirements have already been met in the German test case lawsuits, whether they it will amend it or introduce a completely new instrument.

From the consumer's perspective, the EU representative action procedure is likely to go beyond the level of protection offered by the German test case lawsuit. However, due to the institutional restrictions of non-profit consumer protection organisations, the dismissal of manifestly unsubstantiated cases and, above all, the risk of legal costs, neither a wave of lawsuits nor a litigation industry need be feared. By way of comparison: the test case lawsuit procedure has existed in Germany since the end of 2018, but the public register of the German Federal Office of Justice only contains eight proceedings to date. Moreover, the sued companies may even benefit to a certain extent from a stronger collective redress by consumers. For example, litigation costs could be reduced if cases are bundled together and consumers do not initiate numerous individual legal lawsuits in parallel or downstream, which could then add up to the feared wave of lawsuits. In the currently particularly relevant area of data protection, representative actions and supervisory authorities already exist so no one will be pulling the rug from under anyone’s feet with the introduction of this EU representative action instrument, it will merely make the already thin ice a bit thinner. And it will certainly take at least another year or two before changes are made. So to all the parties involved: don’t panic!