European Trends in Collective Litigation

Heiko Heppner - Clifford Chance

Burkhard Schneider - Clifford Chance

Fabian von Schlabrendorff - Clifford Chance

The divide between North American and European methods for mass litigation appears to be narrowing.

While the US has recently been trying to curb class actions through measures like the Class Action Fairness Act of 2005, European jurisdictions went in the opposite direction, apparently succumbing more and more to the allure of collective litigation. In 2005, Germany, for example, introduced the Capital Investors’ Model Proceeding Law (KapMuG) to deal with thousands of individual shareholder suits against Deutsche Telekom that threatened to clog a court’s docket for years to come. The German law may be owed to special circumstances; yet, it reflects a broader trend towards collective litigation in Europe.

At least 13 member states of the European Union have already introduced mechanisms of collective litigation. Bulgaria, for example, introduced opt-out class actions very similar to their US counterparts in 2008. Denmark introduced a new collective actions regime at the beginning of 2008. Moreover, already in 2005, the Netherlands created an opt-out class settlement mechanism for mass claims. Within the framework of the mechanism Shell settled a suit brought by shareholders who had initiated a US class action for allegedly misstating its proved oil reserves. The UK provides for the instrument of group litigation orders and is presently considering introducing opt-out class actions.

Several other member states of the European Union, including France, are currently contemplating introducing methods of collective litigation. But most importantly, perhaps inspired by the increasing presence of collective litigation procedures in member states, the European Commission has taken steps to introduce and harmonise methods of collective redress in selected areas of European law.

Collective litigation in Germany

The Capital Investors’ Model Proceeding Law, adopted in Germany in 2005, created a novel procedural device to adjudicate claims by large numbers of similarly situated individual investors alleging false, misleading or omitted information in capital markets. Thus, a special procedure for collective litigation has arrived in Germany.

The Model Proceeding Law permits common issues of fact or law in multiple individual securities actions to be bundled together. The law only applies to damages claims and certain claims for specific performance in connection with takeover offerings under the German Securities Acquisition and Takeover Act (WpÜG).

A model proceeding may be sought in any securities or investor action concerning public information. Mis-selling actions cannot be brought under the model proceeding scheme. The petitioner must demonstrate common questions of law or fact for parallel cases to be collectively adjudicated. If the petition is granted by the court, a public announcement is issued on an internet-based litigation register and the underlying action is automatically stayed. If nine further similar petitions are filed within four months, the first court will then decide on the common questions to be carved out and transfer the case to the Higher Regional Court for determination in a model proceeding. At this point, all other parallel actions are stayed. The Higher Regional Court then selects a lead petitioner. The lead petitioner and the defendant(s) are the only parties to the model proceeding. The other claimants are permitted to join the model proceeding as third-party petitioners only. The resulting decision is binding on all claimants in parallel cases. These claimants do not have the procedural option to withdraw from the model proceedings except by withdrawing their individual actions prior to the start of the model proceedings before the Higher Regional Court. The parties to the model proceeding may agree on a settlement as long as all parties agree.

This method to determine common questions aims to avoid duplication of work and costs, such as expert evidence. Once the common questions have been decided, the individual actions are resumed. Even where the common questions have been determined in the claimants’ favour in the model proceeding, the individual actions may fail for other reasons. The decision of the Higher Regional Court may be appealed to the German Federal Supreme Court.

European initiatives

Currently, there are three European initiatives for the introduction of procedural devices for collective litigation of mass claims. First, at the beginning of April 2008, the European Commission published a White Paper on damages actions for breach of the EC antitrust rules, promoting private actions for the enforcement of EU competition law. Then, in late November 2008, the Commission presented a Green Paper on consumer collective redress.

The White Paper on Damages Actions for Breach of the EC Antitrust Rules

The White Paper is aimed at mechanisms allowing aggregation of individual claims of victims of antitrust infringements. To this end, the Commission suggests two complementary mechanisms:

•representative actions brought by qualified bodies (such as consumer associations, state bodies and trade associations) on behalf of identified or identifiable victims; and

•an opt-in class action regime under which claimants could combine their individual claims for damages into a single action.

Neither of these would deprive claimants of their right to bring individual actions if they wished, although there would need to be some safeguards against victims being compensated more than once. It is not clear from the White Paper whether the representative actions were proposed to be opt-in or opt-out. A recent draft directive based on the White Paper, however, contains language that permits qualified entities to bring damages actions on behalf of merely identifiable claimants who may choose to opt out of the class.

Green Paper on Consumer Collective Redress

In the Green Paper, the Commission proposes four possible solutions to the issue of introducing collective proceedings for consumer redress at EU level and calls on the member states and other stakeholders to present their opinions and responses to the questions submitted by 3 July 2009. The Green Paper aims at strengthening consumer confidence in the member states’ legal systems to encourage shopping across borders. The Green Paper proposes the introduction of an effective (single) EU-wide mechanism for consumer redress. The most far-reaching proposal contemplates the introduction of a uniform judicial collective-redress procedure, considering opt-in and opt-out procedures.

Green Paper on the Review of Council Regulation No. 44/2001

In its Green Paper on the Review of Council Regulation No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, the Commission proposes, in light of the its ongoing work on collective litigation, to reflect whether specific jurisdiction and enforceability rules should be introduced for collective actions.

European Outlook

For better or for worse, Europe is on the move towards more collective litigation while the US is gingerly limiting its effects. Yet it remains to be seen whether the two systems will ever fully converge.

In Germany, so far only a handful of cases have led to model proceedings. Collective litigation remains relatively rare. Thus, the mere introduction of collective litigation has not completely changed the litigation landscape. German collective litigation remains a far cry from US-style class actions. Yet, the absence of US-style litigation should come as no surprise because the model procedure originally was intended to solve a specific problem: a Frankfurt trial court had been inundated with thousands of shareholder suits in a well-known case against Deutsche Telekom, threatening to clog up the court’s docket for years. Hence, the law was primarily intended to be an efficient and cost-effective way of dealing with an existing flood of cases. Whether and how well it actually works, remains to be seen and there are claimants in other cases who try to make use of it.

Unlike the US class action, the German model procedure is not aimed at adjudicating claims that would not have been brought otherwise. It does not seek to facilitate negative value claims, that is, claims that individuals find too burdensome to pursue. In other words, the German way of aggregating claims offers some of the efficiencies of US class action while it does not offer the same incentives. First, the German model proceedings do not afford the lead plaintiff the bargaining power that a US lead plaintiff enjoys. The model proceeding is a representative action limited to the presentation of issues to the court and only on behalf of suits that other claimants actively decided to file. The German model procedure acts like an opt-in procedure but without vesting the lead plaintiff with the power to settle the case on behalf of all other plaintiffs. Hence, German-led plaintiffs lack the bargaining power that leads to so many settlements of US class actions.

Second, the model law’s cost regime still requires advance payment of court fees and the statutory scheme for lawyer compensation is inadequate. Moreover, the German “loser pays” rule on costs remains intact, offering contingency fee arrangements only under very limited circumstances. To some extent, plaintiff lawyers cooperate with litigation funders in order to offer de facto contingency fee schemes that help them promote their services. Third, no punitive damages are available to offset the risk associated with the “loser pays” rule on costs. Thus, at the moment, it seems unlikely that German collective litigation will become as important as the US class action.

Nevertheless, plaintiffs’ attorneys are monitoring the German litigation register closely and are ready to take advantage of any free ride another plaintiff’s model proceeding might offer. Thus, the model proceeding is likely to become more important. Even more model proceedings are to be expected if the model procedure should be extended beyond the area of securities law. Yet the levels of collective litigation seen in the US are unlikely to develop out of the model procedure as enacted. Considerable input from outside would be required to bring collective litigation in Germany even close to the importance of US class actions.

Such input might be on its way from the European Union. For this reason the Commission’s proposals for collective litigation in consumer and competition law immediately stirred up plenty of public controversy. Many fear that the introduction of collective litigation procedures would inevitably be accompanied by side effects of US-style class litigation such as a litigation industry fuelled by an aggressive plaintiffs’ bar. However, much will depend on the model of collective litigation that will be enacted. The German example proves that not all kinds of collective litigation will lead onto a slippery slope towards US-style class litigation. Yet the German example also shows that not all models of collective litigation offer sufficient incentives for claimants to bring suits they otherwise would not have brought.

Unlike the German legislature, the Commission is less concerned about dealing efficiently with claims already on the docket. The Commission aims at empowering consumers and victims of anti-competitive behaviour to successfully claim damages. Individual actions for the collection of damages already exist. Yet, in the Commission’s view, individual actions are used too infrequently because they are not attractive enough for potential litigants. Therefore, the Commission aims at increasing litigation by providing a collective procedure that will give more incentives to bring actions. The Commission’s rationale is thus very similar to the rationale behind US class actions that were introduced to make “negative value” claims viable objects of litigation. Negative value claims are those that cost claimants more to pursue than they stand to gain in litigation. To provide sufficient incentives, the European model may have to move dangerously close to the US model of collective litigation and certainly much closer than, for example, Germany has done so far.

The issue will be whether any European version of collective litigation would be able to generate the benefits of aggregation without incurring the costs of US-style class actions. US class actions rely on a unique mix of ingredients that make them such powerful tools. First, lead plaintiffs may bring an action on behalf of a class of similarly situated plaintiffs who do not have to be individually identified and who have to opt out of the class action if they do not want to be bound. Hence, lead plaintiffs generally enjoy a considerable amount of leverage for settlement negotiations. Second, US law provides for punitive and treble damages that offer incentives for lead plaintiffs to take on the role of a “private attorney general”. Third, the availability of contingency fee arrangements and the US rule on costs, under which every party bears its own costs, make it virtually risk free for plaintiffs to commence a class action. Fourth, civil juries in the US introduce an additional element of uncertainty into predictions of the results of legal proceedings. Fifth, the US civil procedure offers extensive discovery tools that may be so burdensome that they are a sufficient reason by themselves to settle a class action.

European legislation certainly would not replicate all of these features of US class actions. Yet contingency fees, for example, have been permitted in some European jurisdictions, including Italy and Germany. Moreover, Germany has enacted a rule permitting limited discovery and granting courts some discretion to shift the burden of pleading and the burden of proof onto the defendant. Thus, many of the ingredients of the US class action already exist, albeit to perhaps a lesser degree, in European jurisdictions. Therefore, if Europe were to replicate the opt-out system and lower the costs of litigation, it cannot be ruled out that Europe, in time, will narrow the divide between European and US methods of collective litigation. Such developments will cause further concerns regarding document retention and data storage policies, as well as national legal privilege regimes. At any rate, businesses will have to monitor the developments closely to be prepared for increasing risks of collective litigation in Europe.

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