All consumer-facing industries will be affected by the Representative Actions Directive1 (the "Directive"), with sectors such as finance, technology and health at risk of increased litigation by consumers acting collectively. These will in many cases be the same businesses that are already under the spotlight in what is a more and more regulated market, such as financial services companies and on-line traders. This is likely to result in an increase in claims involving financial services, data protection, energy, telecommunications, product liability, food, the environment, travel and tourism and unfair terms in consumer contracts.
The European Commission has for many years been critical of the disharmonised patchwork of collective redress mechanisms available to consumers among EU Member States, particularly following 'mass harm' situations. At present consumers in certain Member States have the ability to seek redress on a collective basis, whilst this is unavailable to consumers in other Member States. The Directive will introduce the first European-wide collective redress mechanism.
With the UK's exit from the European Union, Ireland could serve as an attractive venue for taking such collective claims. However, the absence of litigation funding in Ireland, unless adequately addressed, could make it less likely that trans-European cases will be litigated here.
Furthermore, there is a significant level of discretion left to Member States in relation to how to implement certain aspects of the Directive. This means there may not be an entirely level playing field when it comes to representative actions for the protection of the collective interests of consumers across EU Member States. It remains to be seen how far the Irish legislature is prepared to go in facilitating such actions. The result may lead to some Member States being seen as more attractive places to litigate such actions.
Current status of the Directive
On 24 November 2020, the EU Parliament formally approved the Directive. It entered into force on 24 December 2020 and Member States have 24 months to transpose it into their national laws and an additional 6 months in which to implement it – ie 25 June 2023 at the latest.
A public consultation on the transposition of the Directive into Irish law was opened on 15 March 2021 and is open for submissions until Friday 7 May 2021.
Purpose of the Directive
The Directive's key objective is to create a level playing field across the EU by ensuring that representative actions aimed at the protection of the collective interests of consumers are available in all Member States, whilst providing appropriate safeguards to avoid abusive litigation.
To achieve this, the Directive requires that there must be at least one representative action procedure for injunction and redress measure available to consumers in all Member States. However, Member States are granted discretion as to how to implement procedural mechanisms in order to give effect to the Directive's aims.
Current status of class actions in Ireland
Ireland is in the minority of EU Member States in not having a compensatory collective redress procedure. There is currently no comprehensive provisions in Irish court rules for tackling class claims in a uniform and consistent manner. Instead, a range of procedural options are available to allow claims involving multiple parties to be litigated as private actions. These include: (i) joining additional parties to an individual claim, (ii) representative actions, (iii) consolidation and co-ordinated hearings of separate actions and (iv) test cases.
The Review of the Administration of Civil Justice Report published in December 2020 recommended the introduction of a new and more comprehensive multi-party action procedure to accommodate mass claims.
Who may bring a representative action?
A representative action may only be brought by a "qualified entity".
A qualified entity in a cross-border representative action must demonstrate 12 months of public activity in protecting consumers' interests and must have a non-profit character. In addition, the qualified entity must be independent from third parties who might have an economic interest in the outcome of the case and, in particular, from market operators.
The designation criteria for qualified entities in domestic actions have been left to the discretion of each EU Member State. These are likely to be very similar to, if not the same as, those for cross-border actions. In Ireland, it is likely that consumer organisations, such as the Competition and Consumer Protection Commission, will be designated as a qualified entity which will seek redress on behalf of aggrieved consumers. How this will play out, in practice, remains to be seen.
Qualified entities will be empowered and financially supported to launch actions on behalf of consumers both domestically and in cross-border cases.
The Directive implements a requirement for reciprocal recognition of qualified entities across EU Member States so that where there is a cross-border infringement, several qualified entities from various Member States can, acting jointly or acting as a single qualified entity, bring an action to protect the collective interests of the consumers of Member States.
Jurisdiction and forum shopping
By laying down only certain minimum requirements, the Directive leaves Member States a wide discretion as to how they might implement the Directive in national legislation. Certain Member States may therefore be inclined to implement the Directive in the most consumer-friendly way possible in order to make their own jurisdiction a more attractive forum in which to litigate these issues.
Qualified entities are not obliged to file lawsuits in the Member State that has authorised them as such. Rather, they can also bring cross-border actions, provided that the other Member State has jurisdiction over the action filed. In this respect, the Directive provides for a wide range of options. Jurisdiction can be established not only in the Member State in which the defendant company has its registered office, but also in any Member State in which it has a branch. Furthermore, the Member State in which the consumer concerned is domiciled also qualifies as a suitable venue.
Litigation funding and mitigating against risk of abusive actions
The Directive recognises that in order to issue proceedings and meet any adverse costs orders 'qualified entities' will require funding from third parties. This aspect of the draft Directive represents a particularly novel departure from the current position under Irish law which prohibits the funding of litigation by third parties who have no legitimate interest in the dispute.
In order to minimise the risk of abusive practices, the Directive restricts the use of third party funding (where such funding is allowed in accordance with national law). It requires the qualified entity to declare at an early stage of the claim the source of its funds. Furthermore, the funder may not influence decisions of the qualified entity nor may the funding come from a competitor of the defendant.
In a further effort to mitigate against the risk of abusive practices, the Directive expressly prohibits financial incentives such as contingency fees and punitive damages. Furthermore, Member States have the freedom to set out rules to allow their courts or administrative bodies to dismiss manifestly unfounded cases.
It is anticipated that the Directive will help to drive change in the law in relation to litigation funding in Ireland, which is something that was also recommended in the Review of the Administration of Civil Justice Report published in December 2020.
ADR and settlements
Interestingly, the Directive encourages the use of alternative dispute resolution, which is to be welcomed and is in line with recent Irish legislative developments in this regard, such as the Mediation Act, 2017.
The recitals call out the fact that collective settlements aimed at providing redress to consumers that have suffered harm should be encouraged and that the court or administrative authority should be able to invite parties to enter into negotiations aimed at reaching a settlement on the redress to be provided to the consumers. Similarly, Article 8(4) of the Directive encourages Member States to impose an obligation on qualified entities to enter into "consultations" with the trader to procure cessation of the infringement in advance of bringing an action for an injunctive measure. Article 11 of the Directive provides that parties or the court or an administrative authority can initiate settlement negotiations.
The defeated party in any action must pay the costs of the proceedings borne by the successful party (unlike the position in the US where parties generally bear their own costs), which should act as an incentive to both sides to enter settlement talks. Individual consumers will not bear the legal costs of the proceedings save where, if provided for by the law of the Member State, the consumer deliberately or negligently caused unnecessary costs.
A court-approved settlement is binding on all parties and this removes the possibility for consumers to accept or refuse the terms of a settlement entered into by the qualified entity. This is advantageous to businesses who wish to resolve a dispute quickly in a discrete and cost-efficient manner.
Areas of autonomy for implementation into national law
The Directive grants Member States a significant amount of discretion as to how to implement the representative action system under their national laws. For example, each Member State can decide:
- whether to provide for an 'opt-in' or 'opt-out' mechanism, or a combination of both which allows the consumer to decide whether or not to be represented by the qualified entity in an action and whether or not to benefit from the outcomes of that action;
- whether the representative action can be brought in judicial or administrative proceedings, or both, depending on the area of law at issue or the relevant economic sector;
- the required degree of similarity of individual claims and the minimum number of consumers impacted by an action in order to be admitted as a litigant in a representative action;
- whether courts and authorities may reject proposed settlements on the grounds that they are unfair. It is also left to the discretion of the Member States whether the relevant consumers may refuse to be bound by the settlement;
- the body responsible for the dissemination of information to consumers about an ongoing representative action (this is vital as it enables concerned consumers to express their will to be represented by the qualified entity or not);
- whether qualified entities may seek injunction and redress measures within a single representative action or within separate representative actions;
- the level of penalties and fines imposed on infringing traders (as long as they are effective, proportionate and dissuasive). The Directive suggests that penalties such as conditional fines, periodical payments or penalty payments would be effective enforcement tools.
Interplay with the General Data Protection Regulation
An interesting question arises as to what role the Directive will play for organisations that hold personal data. The answer will depend to some extent on how the Directive is implemented into national law.
Article 80 of the General Data Protection Regulation (the "GDPR") and the Directive are broadly complementary pieces of EU legislation. Given they overlap, it may be tempting for Member States to try to implement a uniform approach to both. However, there are certain differences between them which means this is not straightforward.
Member States may therefore decide to maintain two parallel collective redress schemes, reflecting the varying features of each. However, this too would pose challenges and bring added complexity to the legal regime for addressing consumer grievances.
Either way, it is clear that the Directive will broaden out and increase the exposure of organisations who handle personal data to collective action claims grounded in EU data protection laws by exposing them to a broader array of collective actions, spanning a greater number of issues and jurisdictions.
- Although the Directive does not go so far as to introduce a US style class action regime in Europe, it nevertheless represents a significant departure for consumer rights and collective redress mechanisms, especially in Ireland.
- Implementation of the Directive will once more shine a light on the issue of litigation funding in Ireland.
- Businesses should be aware of and be ready to deal with a likely increase in consumer litigation following the coming into force of the Directive, particularly for industry sectors which are subject to EU regulation.
1. Directive (EU) 2020/1828
Originally published 05/05/2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.