Legal framework for European representative action adopted

On 24 November 2020, the European Parliament adopted the Directive to introduce a European representative action. The European Commission had submitted the corresponding proposal for a Directive on representative actions for the protection of the collective interests of consumers and repealing Directive 2009/22/EC in the context of its New Deal for Consumers more than two years ago. The Federal Republic of Germany abstained in the vote in the European Council.

In core issues regarding the form of the new representative action, the Directive grants the Member States leeway to adequately take national legal traditions into account. Thus, the Directive establishes for the Member States a binding framework for representative actions without prescribing in detail how the actions are to be tailored throughout Europe. This means that, along with the other Member States, Germany must now introduce a representative action for performance within the next two years, i.e. by the end of 2022. This action must also have a significantly broader scope than that of the model declaratory action (section 606 German Code of Civil Procedure – CCP) introduced in November 2018. This will likely enliven the discussion on collective redress in Germany for the next two years. The main points that will certainly be discussed in the coming legislative process are outlined below in a short overview of the essential provisions of the new Directive (for a comprehensive overview, see Schläfke/Lühmann, PHi 2020, 164 – only available in German).

1. Applicability in numerous areas of law relevant for consumers

The new representative action covers not only general consumers’ rights but also infringements in areas such as data protection, financial services, travel and tourism, energy, telecommunication, environment, health and air and rail travel (Art. 2(1) in conjunction with Annex I Directive). The Member States are also given the option to expand the scope of applicability of the collective action beyond the 66 legal acts provided in the Directive (Recital 18 Directive). This means that the German legislator would be free to align the scope of applicability with the scope of the model declaratory action, which applies to all claims or legal relationships.

Like the model declaratory action, the European representative action is also intended to be an instrument for asserting consumers’ rights. If the German legislator does not go beyond the scope of the Directive, companies cannot avail themselves of the action.

2. Aim and relationship to other instruments of collective redress

A core aspect of the Directive is the Member States’ obligation to go beyond the Directive 2009/22/EC and facilitate not only representative actions directed towards injunctive measures (see Art. 8 Directive) but also representative actions seeking redress in the form of compensation, repair, replacement, price reduction, contract termination or reimbursement of the price paid (Art. 9(1) Directive). The form of redress must entitle consumers to benefit from the remedies provided by that redress measure without the need to bring a separate action (Art. 9(6) Directive). As far as German law is concerned, the new European representative action goes beyond current collective actions which only allow a declaration or injunctive relief. In terms of the assertion of collective rights, this is a significant development in Germany.

However, redress measures are only possible if the particular form of redress is available under Union or national law (Art. 9(1) Directive). Thus, according to currently applicable substantive law, in the event of a representative action for damages, the principle remains that causality as well as the amount of compensation sought must be determined for every single claim asserted. There is hence no obligation to adjust the substantive law.

In Art. 1(2) and Recital 11, the Directive expressly clarifies that the Member States are free to adopt or retain in force procedural means for the protection of the collective interests of consumers. Consequently, model declaratory actions under section 606 CCP and actions brought according to the German Capital Markets Model Case Act (Kapitalanleger-Musterverfahrensgesetz – Model Case Act) remain possible. It would seem desirable that German legislators take the opportunity while implementing the Directive to evaluate all existing collective redress instruments (in particular actions under the German Injunctions Act (UKlaG) and model declaratory actions) and to coordinate them, which would probably best be done in an Act  on Collective Actions.

3. Qualified entities’ authority to bring an action and necessity of a consumer mandate

As is the case with injunctive actions under Directive 2009/22/EC and model declaratory actions under section 606(1) CCP, representative actions under the new Directive can only be brought by qualified entities that represent the consumers’ interests (Art. 4(1) and (6) Directive). These entities can only bring representative actions if they have previously been designated for this purpose. The Member States must take measures that ensure that the costs of the proceedings related to representative actions do not prevent qualified entities from bringing such actions (Art. 20 Directive). Such measures may include public financing as well as a cap on court costs as already provided for model declaratory actions in section 48(1) sentence 2 German Court Costs Act (Gerichtskostengesetz).

As was the case under Directive 2009/22/EC, qualified entities can bring injunctive representative actions (Art. 8 Directive) regardless of whether consumers explicitly or tacitly express their wish to be represented in that representative action. This means that no consumer mandate is necessary.

In contrast, the Directive has differentiated rules for representative actions seeking redress measures (Art. 9 Directive). In regard to consumers who are habitually resident in the Member State of the court before which a representative action has been brought, Member States can decide whether to require consumers to express their wish to be represented by the qualified entity (opt-in mechanism) or their wish not be represented (opt-out mechanism) (Art. 9(2), Recital 43 Directive). In contrast, an opt-in mechanism is obligatory for consumers who are not habitually resident in the forum state (Art. 9(3) Directive). This means that the opt-in mechanism chosen for good reason by the German legislator when introducing model declaratory actions (which requires an active decision on the part of the consumer) remains permissible.

4. Provisions to avoid abusive litigation

For a long time, there was no consensus among the stakeholders involved about provisions that aim at avoiding abusive litigation. The drafts of the European Commission, the European Parliament and the European Council varied particularly in this respect.

a) Differentiated requirements for qualified entities

At the initiative of the European Council, in contrast to previous drafts, the Directive no longer contains uniform rules on the requirements that qualified entities must fulfil in order to be designated. On the contrary, a differentiation is to be made according to whether the entity intends to bring domestic representative actions, i.e. representative actions in the Member State in which they are designated (Art. 3 no. 6 Directive), or cross-border representative actions, i.e. representative actions in a Member State in which the entity has not been designated (Art. 3 no. 7 and Art. 6 Directive).

In its Art. 4(3), the Directive only contains detailed requirements that must be fulfilled in order to be designated for cross-border representative actions (of which there have not been a significant number in actual practice). If a Member State has designated an entity on this basis and has included it in the corresponding list (Art. 5 Directive), the courts of the other Member States must accept the designation in principle. The only option for the courts is to initiate a review process and to examine in each individual case whether the statutory purpose of the qualified entity justifies its taking action in a specific case (Art. 6(3) Directive).

     For domestic representative actions, Member States must establish suitable criteria that are consistent with the objectives of the Directive and that can be identical to the requirements for cross-border representative actions (Art. 4(4) Directive). This constitutes another area in which the Member States are given leeway, which might result in a situation where the requirements for designating a qualified entity vary significantly across the EU. There is no reason for German legislators not to apply the criteria that are already provided in German law(see section 4 Injunctions Act and section 606 CCP).

b) Unsuccessful party’s obligation to bear costs and exclusion of punitive damages

Another important instrument for preventing abusive litigation is the principle that, in an unsuccessful representative action for redress measures, the qualified entity must bear the costs of the defendant according to the conditions and exceptions found in national law (Art. 12(1), Recital 38 Directive). To protect companies, imposing punitive damages using a representative action for redress measures is also to be excluded (Recitals 10 and 42 Directive).

c) Early dismissal of manifestly unfounded cases

Member States must also ensure that manifestly unfounded representative actions can be dismissed at the earliest possible stage of the proceedings in accordance with national law (Art. 7(7) Directive). This provision, that can be traced back to the European Parliament’s proposal, is intended to mitigate to the fullest extent possible the costs and the unjustified damage to the reputation of the defendant and to accelerate representative actions and strengthen consumer protection.

d) Funding of representative actions for redress measures

The Directive leaves it to each Member State’s national law to decide whether third parties are permitted to fund representative actions for redress measures (Art. 10(1) Directive). If and to the extent that third-party funding is permitted, it must be ensured that conflicts of interests are prevented and that the representative action is not “diverted away” from the protection of the collective interests of consumers (Art. 10(2) Directive).

5. Impact of representative actions on limitation periods

According to Art. 16 Directive, applicable limitation periods must be suspended or interrupted by a pending representative action. This means that, contrary to the current German legal situation, in representative actions for injunctive measures, limitation periods are suspended irrespective of a consumer mandate. The result of this is that legal certainty will be deferred significantly. In the case of representative actions for redress measures, the German legislator could achieve legal certainty by means of an opt-in mechanism which would link the suspension of the limitation period to an express declaration by the consumer as is now the case (section 204(1) no. 1a German Civil Code).

6. Redress settlements

In its Recital 53, the Directive explicitly expresses the objective that collective settlements aimed at providing redress to consumers be encouraged in representative actions for redress measures. In accordance with this objective, the qualified entities and the company may jointly propose a settlement to the court. The court is also permitted to invite the parties to reach a settlement (Art. 11 Abs. 1 Directive).

In accordance with the standard international approach which is also stipulated in section 611 CCP and section 18 Model Case Act, settlements submitted by the parties are subject to the scrutiny of the court (Art. 11(2) Directive). The court is to assess whether a settlement is contrary to mandatory provisions of national law or includes conditions which cannot be enforced. Member States may lay down rules to allow the court to refuse to approve a settlement on the grounds that the settlement is unfair. This is tantamount to the requirement of adequacy already provided by German law in section 611 CCP and section 18 Model Case Act.

7. Evidence

According to the Directive, evidence is essential to establishing whether a representative action is well founded (Recital 68 Directive).  Consequently, that the Directive has its own provision on disclosure of evidence in Art. 18.

According to Art. 18, Member States are to ensure that, where a qualified entity has provided reasonably available evidence sufficient to support a representative action, and has indicated that additional evidence lies in the control of the defendant or a third party, if requested by that qualified entity, the court is able to order that such evidence be disclosed by the defendant or the third party in accordance with national procedural law (Art. 18 sentence 1 Directive). In the interest of procedural equality of arms, the court must have comparable authority to issue such orders for the benefit of the defendant (Art. 18 sentence 2 Directive).

Particularly in the light of Recital 68 Directive, it is not completely clear what specific requirements Art. 18 Directive contains. In this recital it is stated that the qualified entity must have a “right” to disclosure. It would seem preferable to understand this wording, which is not included in Art. 18 Directive itself, to mean that the Member States need not create substantive or procedural rights that do not already exist in their national law. This interpretation is supported by the clarification in Recital 68 Directive that a decision is to be made regarding the need, scope and proportionality of orders to disclose evidence in accordance with national procedural law. It is also supported by the fact that this approach avoids frictions with the provisions on burden of proof that are already anchored in many provisions of German substantive law.

8. Next steps

The Directive enters into force on the twentieth day following that of its publication in the Official Journal of the European Union. (Art. 25 Directive). Thereafter, the Member States have 24 months to transpose the Directive into national law and another six months to apply them (Art. 24 Directive). Thus, the representative action can be expected to be introduced in Germany by the end of 2022 and enter into force by mid-2023.

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Noerr has been a trailblazer in defending against collective and representative actions. To this end, Noerr has established a specialised team which regularly advises clients on defence against capital investor model cases, actions for model declaratory actions and representative actions as well as defence against claims asserted by structured claim vehicles and in collective proceedings. For example, Noerr has successfully defended clients against the first model declaratory action and a €600 million action in a follow-on claim concerning the truck cartel.