Stefan Rützel, Stephan Wilske and Alexander Fritzsche of Gleiss Lutz look at collective redress mechanisms in Europe.
"Even where national law does not foresee special collective redress mechanisms or where they are not available for the particular case, litigants are exploring ways to bundle their claims."
Since 2004, when the EU introduced the decentralised enforcement of EU competition law with the enactment of Regulation 1/2004, civil actions have been increasingly viewed as a means to complement competition law enforcement and been actively promoted by the European Commission. This development was facilitated by several judgments of the European Court of Justice making it clear that anyone who sustains harm from competition law violations must be granted effective redress mechanisms under national law. For instance, in 2007 Germany substantially lowered the hurdles for victims of cartel behaviour to claim damages. Perhaps encouraged by this development, businesses have started to claim damages sustained from overcharges from cartel members and have sometimes even sued their business partners – something that only rarely happened in the past. To name a few examples, gas insulated switchgears, vitamins, rubber chemicals, elevators and escalators, cement, hydrogen peroxide and rail cartel members were or still are faced with demands or civil proceedings in various EU member states. So far, England, Germany and the Netherlands have emerged as litigation hotspots. Interestingly enough, a vying for the label of the best competition litigation forum for claimants in Europe seems to be evolving.
A major issue concerning competition litigation and one parameter in the endeavour to be the most “litigation-friendly” jurisdiction is how to deal with mass harm situations, ie, where many potential claimants have been harmed by the same unlawful behaviour. For example, only recently the German Federal Cartel Office uncovered an alleged cartel among potato wholesalers. Assuming that supermarkets passed on price increases to consumers, it will be virtually impossible for consumers to sue for the overcharge paid on their potato purchases over time since the costs associated with the lawsuit would be much higher than the actual harm suffered, not to mention the problems with proving their sustained damage. Therefore, the European Commission has advocated collective redress mechanisms as part of the efforts to foster competition litigation and has published Recommendations on common principles for injunctive and compensatory collective redress mechanisms in the member states (the Recommendation) in June 2013, which are analysed further below.
Collective redress mechanisms in the EU member states
Around 20 EU member states have introduced different forms of collective injunctive or collective compensatory redress mechanisms. However, many of these mechanisms are limited to particular areas of law (mainly consumer claims, securities litigation and competition law infringements), and do not entail strong incentives to wider application. Notably, in the 2013 amendment of the German Act against Restraints of Competition, only representative injunctive redress has been strengthened by granting standing to certain consumer and business associations.
However, in other European countries the situation may change considerably in the near future. Most recent examples of contemplated legislation are in the UK and France. The British government is currently discussing a far-reaching reform of competition litigation legislation. The proposed rules foresee, inter alia, the creation of an opt-out collective action for competition law claims on behalf of both businesses and consumers. The other main elements of the reforms are the strengthening of the role of the Competition Appeal Tribunal (CAT), including by implementing a fast-track procedure for claimants to seek redress aimed at small and medium-sized enterprises, and promoting alternative dispute resolution, including introducing an opt-out collective settlement regime in the CAT.
The French reform legislation, if enacted, will introduce representative actions to be brought exclusively by approved consumer associations in consumer and competition matters. The court decision would be published and members of the class can then come forward or opt out.
Even where national law does not foresee special collective redress mechanisms or where they are not available for the particular case, litigants are exploring ways to bundle their claims, for example by selling and assigning them to an entity which then sues in its own name and on its own account. Several of such actions against alleged cement, paraffin wax, hydrogen peroxide, and sodium chlorate cartel members are pending in the Netherlands, Germany and Finland.
European initiatives – The European Commission’s 2013 Recommendation
As noted above, the European Commission has been concerned with antitrust damages claims and collective redress for several years. It adopted a Green Paper on antitrust damages actions in 2005 and a White Paper in 2008, which included policy suggestions on competition-specific collective redress. Following the Green Paper on consumer collective redress of 2008 the Commission carried out a public consultation in 2011. In 2012 the European Parliament adopted a resolution calling for any proposal in the field of collective redress to take the form of a horizontal (ie, across different areas of law) framework including a common set of principles providing uniform access to justice via collective redress within the Union.
Perhaps taking account of ongoing controversy, the Commission’s 2013 proposal for a Directive on certain rules governing actions for damages under national law for competition law infringements does not contain rules on collective redress. Yet, at the same time the Commission published the Recommendation, which is not specific to a particular area of law, and made it clear that it views both the Directive and the Recommendation as a package, thus encouraging member states to transform both measures into national law once the Directive has been formally adopted.
With its Recommendation the Commission is aiming at nothing less than a European approach to collective redress which is capable of:
• effectively and efficiently resolving a large number of individual damages claims;
• delivering legally certain and fair outcomes within a reasonable time frame and respecting the rights of all parties involved; and
• providing for robust safeguards against abusive litigation and disincentivising speculative claims.
The Commission acknowledges that the sole aim of collective redress is compensation for harm suffered whereas deterrence and punishment is the objective of public enforcement measures. In contrast to the US, where compensatory relief and class actions are intended to at least partly substitute for public enforcement actions, collective redress in Europe shall (only) complement public enforcement.
The Recommendation covers mass harm situations and both injunctive and compensatory collective redress. The main cornerstones are:
• punitive damages should be prohibited;
• the loser has to pay the legal costs of the winner;
• in representative actions the entities representing a multitude of claimants shall have a non-profit making character and be officially designated in advance or ad hoc;
• cases in which the conditions for collective actions are not met or which are unfounded shall be discontinued at the earliest possible stage of litigation;
• the claimant party shall be formed on the basis of express consent of the harmed persons (opt-in principle);
• alternative dispute resolution should be encouraged at any stage of the proceedings based on the consent of the parties, and settlements shall be verified by a competent court;
• lawyers’ remuneration shall not create incentives for unnecessary litigation (this does not in principle exclude contingency fees for lawyers, but such fee arrangement would need to be subject to regulation); and
• third-party funding of legal proceedings shall be subject to restrictions. There shall be no conflict of interest between the claimant(s) and the third party. The latter must not have influence on procedural decisions, including settlements, charge excessive interest on the funds, or, absent regulation by public authorities, be compensated based on the compensation awarded.
Outlook for collective redress in cartel cases following the Commission’s Recommendation
Will the Commission’s Recommendation substantially influence competition litigation in Europe? First of all, it has to borne in mind that the Recommendation is not binding upon the member states, many of which have already and some only recently chosen to implement some form of collective redress mechanism applicable to competition litigation. such member states may not find it appropriate to change their national law only shortly after the adoption of functionally equivalent or even farther reaching rules without having had the chance to evaluate their efficacy.
Balancing public and private enforcement
A major issue to be dealt with is the relationship between private collective redress actions and public enforcement. Public competition law enforcement in Europe has been very successful during the last five to 10 years mainly due to two factors. Those are skyrocketing fines and the adoption of leniency programmes through which undertakings can reduce or even avoid fines by cooperating with competition authorities. It is clear that rules would have to be adopted ensuring that collective actions do not interfere with ongoing administrative or criminal proceedings. Apart from that, one could hold the view that an increased risk of damages ensuing from the introduction of intrusive collective redress mechanisms could have repercussions on whether or not undertakings decide to apply for leniency in the first place. Since uncovering cartels without cooperation of the perpetrators is very difficult, this would not only weaken public enforcement but also the rights of injured parties because recent experience shows that virtually all cartel damages actions are follow-on actions (ie, following public enforcement measures). The right balance could partly be struck by retroactively adapting the fines in order to take account of the compensation paid to injured parties. In order not to put leniency programmes at risk, the proposed Directive contains rules providing that claimants cannot use materials to substantiate their claims that were voluntarily produced by leniency applicants to competition authorities.
Risk of abuse of collective redress mechanisms
The principles laid down in the Recommendation represent an approach balancing the efficient enforcement of rights by injured parties and the prevention of abuse for unmeritorious claims to force settlements. The main drivers of the US class action “litigation culture”, which is perceived by businesses as prone to abuse, are the availability of punitive damages, contingency fees for lawyers, pretrial discovery, and the fact that the lead claimant can leverage the bargaining power for the whole class (opt-out model) while there are limited financial risks associated with advancing unmeritorious class action claims (ie, no “loser pays costs” principle). Due to these factors tipping the scales towards the claimant’s side, some say that businesses are forced into settlements even in cases they would very likely win in court.
Most of these elements are not contained in the Commission’s Recommendation and the proposed Directive. The latter foresees limited disclosure obligations by court order for either party to competition litigation. Such rules are aimed at avoiding overly broad and costly disclosure obligations that could create undue burdens for the parties involved and risks of abuses. Yet, the Directive leaves much of the balancing exercise to the member states and ultimately to the judge.
The “loser pays costs” and opt-in principles also help to ensure that only those class actions are filed for which this collective redress mechanism is best suited. In particular, in opt-in proceedings defendants have no incentive to settle cases too early because this would only settle limited portions of the potential overall harm and encourage parties not having opted in to sue afterwards. On the other hand, opt-out proceedings have two advantages. First, opt-out proceedings give more certainty to the defendant, since the judgment would not bind only those who opted out. Second, they facilitate access to justice in cases where individual damage is so small that some of the potential claimants would not opt in to the proceedings. The representative action model as currently debated in France seems to be a useful tool to deal in particular with marginal damage to many consumers because it allows them to join in after the judgment is handed down, at a stage when no risk and cost is involved.
The way forward
It is likely that the discussion about collective redress in competition cases will not so much be determined by the Recommendation but rather by the legal reforms in some member states which may impact the handling of cross-border claims. The proposed British bill, together with pre-existing rules, comprise some elements that – depending on the details of their implementation – could pave the way for a more aggressive European “litigation culture”. Among those elements are the opt-out principle, the existence of disclosure rules and a relatively lenient approach to alternative fee arrangements. Although contingency fees are prohibited, under conditional fee arrangements a party’s counsel can double its already significant “normal” fees. Such arrangement can help to fund litigation. It is widely expected that the implementation of the reform would most certainly increase the number of competition cases to be brought in the UK. Together with a lenient approach to establishing jurisdiction at the seat of an English subsidiary of the alleged competition law infringer as “anchor defendant” the reform could potentially cause a certain concentration of cases, although other jurisdictions (most notably Germany) might offer a less costly and more expeditious litigation system. This might, for different reasons, compel reactions by other member states.
The Commission intends to assess the implementation of the Recommendation on the basis of practical experience after four years in order to decide whether further measures are advisable. However, it seems that the ongoing reforms of national legislation towards the introduction or strengthening of collective redress, some of which go way beyond the Recommendation, make it improbable that rules on collective redress become aligned through EU legislative measures in the medium term. This would only be conceivable if various national laws lead to manifest imbalances and render inefficient results such as are observable in the US style “litigation culture”.