Europe, beware: U.S.-style class action lawsuits — known here as collective action — could be coming to your country, thanks to a recent proposal from the European Commission. Without critical consumer safeguards, the proposal could turn the EU into the global hub for abusive litigation that is just as bad as, or even worse than, the U.S. system.
In the U.S., class actions often produce the following results: Trial lawyers get paid large fees, litigation financiers get a cut, and consumers get next to nothing.
In fact, a study by the U.S. Consumer Financial Protection Bureau found that only 13 percent of U.S. class actions result in a payout for the consumers. Even then, the average award is around $32, or about €27, while the average award for the plaintiffs lawyers is $1 million, or almost €860,000.
This is not a system Europe should emulate.
Indeed, a newly released five-nation survey from the U.S. Chamber Institute for Legal Reform found that only 13 percent of EU consumers support the Commissions proposal as written, while nearly 70 percent want safeguards in place before the Commission mandates collective actions.
Of the few safeguards that did make it into the proposal, one of the most important safeguards misses the mark.
The EU proposal falls well short of those expectations. Indeed, in cases where the individual damages are small, consumers will receive nothing. The money will instead go to an unrelated consumer interest group, and will not be distributed to any claimants. So lawyers, litigation financiers and third-party groups will get big paydays, but EU consumers will get either little money or no money at all.
The proposal also allows lawsuits to be filed on behalf of consumers — without their knowledge or consent. In some cases, consumers would not be allowed to “opt-out,” meaning they are forced to be part of the lawsuit, even if they do not want to be. But 77 percent of EU consumers surveyed want a safeguard that ensures they can opt in or out of lawsuits.
The new proposal is a turnaround from the safeguards the Commission included in its 2013 recommendation on collective actions.
The safeguards in the recommendation were sensible, balancing the rights of consumers to halt illegal practices and obtain compensation against the need to ensure that defendant companies rights were also protected. They were important, not just for defendants, but also for consumers. Unfortunately, the proposal as currently written fails to achieve this.
Several U.S. law firms have set up claims foundations to represent Dutch consumers in lawsuits against Volkswagen | Peter Steffen/AFP via Getty Images
Of the few safeguards that did make it into the proposal, one of the most important safeguards misses the mark. It dictates that groups filing lawsuits should be “not for profit” yet doesnt offer clear guidelines as to what constitutes “not for profit.” An entity could be not for profit and still pay out millions of euros to its lawyers and litigation funders.
This scenario has already played out in the Netherlands, where several U.S. law firms have set up claims foundations to represent Dutch consumers in lawsuits against Volkswagen. Putting a safeguard in place could make sure that only legitimate consumer interest groups can initiate cases, not trial lawyers — something 65 percent of EU consumers want.
The proposal also fails to seriously address a growing and troubling trend that is being imported to Europe from Australia: third party litigation funding. This lets independent financial firms invest in class or collective action cases in return for a portion of the lawsuit proceeds.
There are not enough meaningful safeguards in the proposal to regulate this practice. For instance, the survey found that 78 percent of EU consumers want a safeguard that ensures a duty of care so funders act in the best interest of consumers; yet this safeguard is not included in the proposal.
Rushing out the Commissions proposal without safeguards is like throwing gasoline on a fire that is already burning. Indeed, class-action lawsuits are already available to Europeans consumers. After the Commission fined European truck manufacturers for price fixing, the U.S. law firm Hausfeld filed cases on behalf of more than 150,000 vehicle buyers in the U.K and Germany. It plans to follow up with proceedings representing the owners of nearly 200,000 trucks in the Netherlands.
If the Commissions new proposal were to become law, it would import some of the worst parts of the U.S. class action system.
Following the Commissions ruling that Google engaged in anti-competitive behavior with its Android mobile operating system, the law firm is considering filing claims on behalf of “consumers whose choice of mobile apps and services would have been restricted as a result of Googles alleged abuse.”
While these cases will certainly bring huge paydays for the plaintiffs attorneys and the funders who finance the cases, their value to European consumers is much less certain.
What is clear, however, is that if the Commissions new proposal were to become law, it would import some of the worst parts of the U.S. class action system without including safeguards for consumers that, just a few years ago, the Commission identified as necessary to protect them.
The European Parliament and Council should take the results of this survey seriously and reject this flawed proposal.
Lisa A. Rickard is the president of the U.S. Chamber Institute for Legal Reform.