24/04/2018

European-style class action as a response to Dieselgate scandal: a major business risk to come?

The European Union has finally taken action to empower all EU consumers to sue companies in collective actions following mass infringements of EU laws. It comes as a consequence of a series of consumer scandals like the Dieselgate, contaminated baby milk and brutal flight cancellations affecting thousands of European consumers in 2017.

The Commission has set an ambitious timetable to agree the proposed legislative changes by the next European elections in May 2019.  Discussions will now start in the European Parliament and European Council.

As announced in previous articles (here and here), the European Commission has now published its New Deal for Consumers as a package, including proposals for two new Directives and a communication of the European Commission for background information. Affecting a broad range of sectors, these proposals have the potential to generate important consequences for businesses in terms of consumer liabilities.

One Directive sets out the scheme for a legislative European model of collective redress. The second proposes to strengthen cooperation between national consumer protection authorities to tackle cross-border infringements and introduce significant fines based on corporate turnover. 

FERMA is considering the texts and will comment to the Commission on the risk management issues involved. FERMA’s view remains that out of court negotiated settlements are best for both consumers and companies. Litigation should be a last resort. We will remind the Commission of the importance of proportionality between the nature of the offence and the harm caused. We also believe that punitive damages should not be allowed in order to limit the impact on the liability insurance market.

The most immediately important element for businesses in the New Deal for Consumers is the proposal for the Directive on Collective Redress that would require every Member State to have at least one mechanism for collective action by consumers.

The draft Directive goes further than the current Commission Recommendation on collective redress (2013), provides for a representative action mechanism and has a large scope. It covers all infringements of EU law affecting a large number of consumers, notably in sectors such as financial services, energy, telecommunications, health and the environment. EU laws like Solvency II and the General Data Protection Regulation (GDPR) are included, as mentioned in the Annex.

There are safeguards intended to prevent US-type excesses and frivolous and expensive claims, but they are limited. One safeguard, for example, is to restrict the ability to bring representative actions to qualified entities, i.e. not-for-profit organisations with a legitimate interest in initiating action for the affected area of EU law. These NGOs will need to be transparent about their source of funding to prevent conflicts of interests or abuses, and Member States or the Commission will be able to raise concerns about the validity of a qualified entity recognised as such in other Member States.

However, of concern to business, the proposal remains silent about other important safeguards that were present in the 2013 EU Recommendation on Collective Redress, which will therefore be a matter for each Member State jurisdiction to decide. These include:

  • The ban on contingency fees for law firms

  • The prohibition of punitive damages

  • The “opt-in” framework where the group of claimants would need to be clearly identified based on “express consent”

  • The “loser pays” principle where the winning party can recover their costs from the losing party

  • Suspense of limitation periods while an attempt to settle is pursued.

The second draft Directive is a proposal to strengthen cooperation between public enforcers –i.e. the national consumer protection authorities - to tackle cross-border infringements of consumer protection laws. Nowadays, consumer protection fines vary from one EU country to another. In Italy, Volkswagen was fined €5 million and €450.000 in the Netherlands in the context of the Dieselgate. The new proposal gives national authorities the power to impose fines of up to 4 % of turnover in each Member State for very widespread and cross-border infringements, and the possibility to go higher if needed.

Industry associations in Brussels are critical about the Commission’s proposals, saying that it could open the legal floodgates to US style litigation.

Much is still left to the Member States in the proposals and at this stage, it is still uncertain how they will achieve the desired access to justice for consumers without making the compliance risk unacceptable to business.