The continuing rise of Consumer Litigation in the EU: a deep dive into current trends - Trend 1: Consumer Class Actions

In Part One we consider the growth in consumer class actions.

Trend 1 - The growth in consumer class actions

Why are they growing?

The EU wants to ensure that consumers have effective legal rights and remedies against large businesses and to equalise the playing field between consumers and these businesses irrespective of their size and financial strength. In order to do this a collective redress system needed to be created because the legislation on collective actions varies across EU Member States.

Prior to the Introduction of the Representative Actions Directive, companies which reside in States with more well-developed class action regimes are much more likely to find themselves on the receiving end of a mass claim. This is well demonstrated on our Current Collective Action Landscape Map.

EU states with sophisticated consumer class action systems

The Netherlands provides an interesting example of how this works in practice. In 2020 the Netherlands introduced a new Act, the Settlement of Mass Damages in Collective Action (WAMCA) which enables civil courts to impose compensation on sued parties in collective action cases. The Netherlands has had a class action procedure since 1994 but victims were made to seek damages before the civil court individually, where the burden of proof was on their part. This also created pressure on the judicial system, which was overwhelmed with individual cases. A new regime was later introduced in 2005, namely the Collective Settlement of Mass Damages Act (WCAM). Settlements could now be declared universally binding for all victims, regardless of if they participated in the settlement or not (Dutch Civil Code, Article 7:908). Still, there was neither a collective compensation scheme nor a relief of pressure on the judicial system. Fifteen years later, both goals were realised through the introduction of the WAMCA.

The 2020 Act allows for damages to be awarded collectively and directly. Furthermore, it provides for an opt-in mechanism for foreign claimants (i.e., potential claimants need to actively sign up to take part), but an opt-out mechanism for Dutch class action members (i.e., nobody needs to sign up, everybody who meets the criteria of the claim is entitled to join the action). The WAMCA also includes a series of admissibility requirements which must be met by the representative bodies to qualify for a class action.

This regime has made Dutch class actions very attractive, especially to litigation funders, and has brought a lot of mass consumer claims in various, previously unfunded, sectors to the Dutch courts. Since 2020, more than 70 new cases have been registered at the Amsterdam Court of Appeal and include landmark claims such as those brought on behalf of children against TikTok for privacy and data protection violations, claims against Google and X (Twitter), and ongoing cases with Meta, Apple, and, Oracle and Salesforce. Further, cases have also been brought before the Dutch courts in relation to non-material damage. For example, a foundation fighting for female rights issued a claim for damages for defective breast implants – including the distress and harm the implants have caused (Rechtbank Amsterdam, 5 April 2023, Dagvaarding Stichting Bureau Clara Wichmann).

Portugal has had the same legal regime for class actions since 1995, however it seems as though claimants have only discovered it in recent years. Since 2016, starting with a Dieselgate-claim against Volkswagen, Portugal has seen a stream of consumer class actions. A notable example is the 2021 lawsuit filed by the Portuguese consumer association DECO against Meta (Facebook) for infringements of data protection rules. As a reaction to the Cambridge Analytica scandal in 2018, DECO together with Euroconsumers began a judicial process against Meta, asking for compensation of 200 euros per year for each Portuguese Facebook user. DECO and Euroconsumers alleged that Meta failed to adequately inform users and obtain consent before sharing their personal data with other entities. Between March and April of 2021, DECO and Euroconsumers withdrew the action from the Court after reaching a settlement with Meta, where the tech company committed itself to a three-year programme aimed at improving the digital life of Portuguese users (As indicated by press releases by both DECOProteste and Euroconsumers).

On the other hand, there are much less developed regimes in the EU, and therefore safer havens for businesses, where the risk of facing mass consumer claims has been relatively low to date. These jurisdictions include Italy, France, Germany, Sweden, Czech Republic, Finland, Slovakia, Croatia, and Ireland. However, this will undoubtedly change with the introduction of the Representative Actions Directive (RAD).

Representative Actions Directive

Laws on consumer class actions across EU Member States have been augmented with the recent implementation of this new legislation. Having entered into force on 24 December 2020, the Representative Actions Directive introduced a framework to harmonise class action regimes by creating 27 new regimes, one per Member State, although as a directive States have some discretion as to how it is implemented. The RAD contains minimum requirements. It only requires the domestic implementation of an opt-in mechanism although individual jurisdictions may choose to further introduce opt-out mechanisms. Under the Directive, so-called "Qualified Entities" (QEs) may bring a collective action on behalf of groups of claimants harmed by unlawful practices which breach specific EU laws. An organisation may be designated as a QE by its respective State authorities, and it must comply with standards of transparency, independence, non-profit motive, and consumer interests (Representative Actions Directive (EU) 2020/1828, Article 4(3)). Notably, representative actions brought by QEs may be both domestic, in the respective Member State where the QE is designated, as well as cross-border, in another Member State outside of the one where the QE is designated (Directive (EU) 2020/1828, Article 4(2)). The most significant impact of the Directive is that it allows claimant groups to seek injunctive measures but also redress measures, namely remedies. This makes it much more effective for a consumer across the EU to obtain compensation, whereas before this was not possible in many Member States.

As a Directive the RAD will have varying effects across Member States. This is primarily because, as mentioned above, some States already have well-developed class action regimes and others are underdeveloped. Nevertheless, as a general trend, the Directive will encourage more class actions in the years to come, considering it provides the first EU wide harmonised framework for class actions, it improves the access to compensation and due process for consumers, and establishes safeguards against exploitative litigation.

In Germany for example, we have seen a recent growth in the number of cases based on its current declaratory regime. However, the RAD implementation will go far beyond the minimum requirements. The new German rules on representative actions apply to all claims made by consumers against traders. For example, it includes claims for compensation due to antitrust damages or general tort claims. Furthermore, small companies (with less than 50 employees or less than 10 million annual sales or annual balance) may join the representative action. Overall, what this will mean for businesses is to have proper risk management and awareness of the development of ongoing and coming actions in the EU.

Conversely the regime in the Netherlands already complied with the minimum requirements imposed by the RAD and so its formal implementation is not required. At the time of writing the RAD has been implemented by Germany, Hungary, Ireland, Italy and Slovakia.

To visualise the progress of the Directive’s implementation across Member States, you can consult our Implementation Tracker.

Can we expect to see a continued growth?

Taking the RAD and recent case-law into account, consumer class actions are very likely to keep growing. Notably, considering the previously mentioned differences across Member States and how these differences will further impact the implementation by individual States of the RAD, there is a potential future risk of forum shopping. We will see certain jurisdictions with opt-out regimes, and these will incentivise the funding market for sectors in that respective State to develop relatively quicker. Courts of that State will likely be more lenient in how they award damages in consumer cases, and this will potentially proliferate the funding of markets and forum shopping.

Rise of Third Party Litigation Funding

Specifically, we will continue to see an increase in the use of Third-Party Litigation Funding within the EU, which is something the European Parliament has recently urged the Commission to regulate (European Parliament Resolution, 13 September 2022, A9-0218/2022). The Parliament recognises third-party litigation funding of consumer class actions does bring its advantages; however, it finds that there are risks of litigation funders acting mainly in their own financial interests rather than the interests of the consumers, and this may have an undue effect over the representative organisation participating in the proceedings. In fact, research by the European Parliamentary Research Service has shown that litigation funders in some European countries demand a disproportionate share of 20 to 50 percent of the proceeds at the cost of the victims (EPRS Study (2021): Responsible private funding of litigation). Thus, the Parliament has urged to regulate the risks promptly by way of introducing a new licensing system and curtailing the maximum proportion of total compensation which can be allocated to the litigation funder. This plan has received mixed responses. Some funders are worried that that a uniform regulation will be inappropriate and might interfere with basic market principles. Others have called attention to funding being inherently interlinked with the landscape of mass claims and that it alleviates legal costs, which are often seen as a significant barrier to justice. Ultimately, the concern is that by overly regulating third-party funding, it will make the process of class actions slower, less efficient, and less accessible. Nevertheless, the proposed transparency standards are widely appreciated in that they will have an important impact on the consumer litigation market, safeguarding consumer interests and fairness in the litigation landscape.

With thanks to Giorgia Loredan for help in putting this article together