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European Parliament approves draft Directive on Consumer Class Actions

Newsletter 10/2019
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On 26 March 2019, the European Parliament approved rules allowing groups of consumers harmed by illegal practices to launch collective actions and seek compensation. The so-called Representative Action Directive had been proposed by the European Commission on 11 April 2018 and was subsequently amended and approved by the European Parliament.

Mr. Geoffroy Didier (EPP, FR), rapporteur of the Legal Affairs Committee of the European Parliament, said:

The Dieselgate scandal was a turning point for Europe. We must urgently act to protect consumers. Today’s vote was a major step and a first victory for them.

The rules will only benefit consumers who, in order to initiate a class action, need to be represented by a Qualified Representative Entity (“QRE”) which must be a not-for-profit organization. Whereas funding will be allowed in principle, funders will not be able to influence the action (including settlement decisions). Lawyers representing the QRE will not be authorised to work on contingency fees. Finally, consumers cannot be awarded punitive damages.

Member States can impose rules requiring consumers to entrust the QRE with a mandate in order to benefit from its actions (opt-in system). However, Member States are obliged to require an explicit opt-in from consumers living outside the Member State where the collective redress action is initiated.

The current proposal raises two major issues.

  1. Whether these rules will effectively provide enough incentives for consumers, lawyers and funders to initiate collective actions. Individual consumer losses are typically small in nature. If class actions can only be brought on the basis of an opt-in system (which seems to be left to the discretion of each individual Member State), bringing an economically viable action will require the grouping of very large numbers of consumers, which can be difficult or prohibitively costly.
  2. If the QRE cannot seek to make a profit, this will likely influence its funding options, especially if lawyers are not allowed to work on the basis of contingency fees.

The fear of over-incentivising ‘ambulance chasing’ lawyers has clearly influenced the proposed EU consumer class action regime. The resulting piece of legislation may be of little practical use to consumers seeking compensation. Perhaps a few more significant scandals like Dieselgate will drive the EU’s legislators to create a truly efficient consumer protection tool.

The text is now back with the European Commission which can further amend it.

The Directive will become law once the European Council and the European Parliament reach an agreement on the European Commission’s proposal.

 

Erik Bomans

Written on October 2, 2019 by

Erik Bomans

Executive Board member & Managing Partner of Deminor Recovery Services. Responsible as managing partner for day-to-day management of Deminor Recovery Services.

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