Class actions are coming: Necessary to protect consumers in EU or an instrument of the commercialization of law destroying entrepreneurs?

12. 12. 2022
Class actions are coming: Necessary to protect consumers in EU or an instrument of the commercialization of law destroying entrepreneurs?

Until now, critical voices were dominant in the Czech Republic and Germany alike, effectively preventing any political decision to introduce class actions.

This legal tool does not yet exist in the Czech Republic, as the Collective Proceedings Act did not make it past its first reading during the last legislative term.  

Following complex political negotiations, the much debated Directive on representative actions has finally been approved. Member States are required to implement it by December 25, 2022. Related national legislation must become effective no later than June 25, 2023.

Following its initial refusal, the Czech Government is now preparing a bill that is described as minimalistic. No specific details have been published; however, it is already clear that the transposition deadline will not be met in the Czech Republic.

Under the European legislation, only qualified entities, such as consumer organizations, would be able to bring class (representative) actions.

Where qualified entities decide to bring cross-border class actions, they will be required to comply with harmonized criteria – i.e. they will need to document certain degree of stability and public activity and have a non-profit-making character. Domestic class actions would only have to meet criteria defined by the national legislation of the Member State concerned. A proposal presented in Germany suggests that class actions should only be reserved for consumer organizations and not, for example, law firms.

The Directive establishes the loser pays principle as one of the fundamental procedural guarantees for both parties to a class action, with the losing party’s obligation to reimburse related costs discouraging potential claimants from bringing frivolous claims, while promoting the recovery of justified collective claims. Therefore, this is in line with standard procedural rules. Another principle protecting against the abuse of representative actions is the preclusion of the so-called punitive damages, as applied by the common law.

The practical application of the new institute will very much depend on the relevant national legislation implementing the Directive. For example, the German legislation has been subject to heated political discussions, with the most controversy relating to the moment, by which consumers would be able to join class actions in accordance with the so-called opt-in mechanism – only active affected consumers  would be represented in the proceedings, whereas the business-friendly proposal only allows consumers to join class actions prior to the commencement of proceedings at first instance, when it is still impossible to estimate the outcome (in contrast to the US model, where consumers are represented automatically, if their rights were infringed – opt-out principle).

A compromise in Germany – a model declaratory judgment action, which, in response to “Dieselgate”, allowed a group of consumers to determine whether there has been an infringement and/or whether a right to claim financial compensation exists, as appropriate – did not result in what really matters, i.e. it failed to obtain appropriate compensation from a certain position of strength given by the number of applicants. A common litigation strategy is to achieve an out-of-court settlement, if an unfavorable outcome of legal proceedings is imminent. The terms and conditions of such settlements often include non-disclosure agreements (so called gag clause) that may prevent many others from being indemnified and ensure that the statute of limitations runs out for any other claims (the model declaratory judgment action suspends the limitation period).

 

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