In prior posts (for example, here), I have described the rise of collective investor actions outside of the U.S. as one of the most important current developments in the world of directors and officers liability. The rise of these collective investor suits is not happening in a vacuum; the growth in the number and size of these kinds of lawsuits is part of a larger upsurge in collective actions generally. According to a recent Report, collective redress actions represent a “growing business” in Europe, and the “volume and value of the cases being filed is on a steep upward curve.”
The Report, a detailed and interesting March 2017 publication by the U.S. Chamber of Commerce Institute of Legal Reform entitled “The Growth of Collective Redress in the EU: A Survey of Developments in 10 Member States” (here) takes an anxious and uneasy look at the changes in the collective action environment in Europe, and proposes several recommendations as ways for countries to avoid abuses that the report contends have arisen elsewhere. The Institute’s March 21, 2017 press release about the report can be found here.
There is a reason for the report’s timing, having to do with anticipated developments later this year involving a 2013 EU initiative. On June 11, 2013, the European Commission published a non-binding resolution, recommending that all EU Member States adapt their national systems to include a general system of collective redress. The Recommendation specified that by July 26, 2017 the Commission should gather information about the Member States’ collective redress experience and assess the Recommendation’s implementation. The Commission is to assess the Recommendation’s impact as well as whether further measures are needed. The Institute for Legal Reform’s March 2017 report is written with an eye to the Commission’s upcoming assessment, and in particular with respect to the Commission’s evaluation of whether changes are needed.
The somewhat odd appearance of a unit of the U.S. Chamber of Commerce providing information and making proposals about collective actions in Europe is explained somewhat by the Report’s approach, which is basically to suggest that the way things are developing in Europe could lead to trouble and that the adoption of certain safeguards could help avoid abuses that the Report contends have arisen in the U.S. and elsewhere.
The Report was written for the Institute by Ken Daly of the Brussels office of the Sidley Austin law firm, with the assistance of Jennifer Watts of that firm, with contributions with a number of other law firms from around Europe.
The Report’s Approach
The Report starts with some basic predispositions against class action litigation, at least as it has developed in the U.S., and to a lesser extent in Australia and Canada, based on the view that “mechanisms for the aggregation of lawsuits are prone to abuse.” The aggregation of claims may permit claimants to extract settlements that are “often unrelated to achieving justice in a case.” The main drivers of abuse are the third parties, such as law firms or litigation funders who “are likely to be the main beneficiaries of collective redress,” while claimants “receive little of nothing and the lawyers or investors are richly rewarded.” The Report notes that while the EU member states “do not have a tradition of significant abuse in their legal systems,” the adoption of collective redress mechanisms is “now generating the very same incentives that have led to mass abuse in other jurisdictions.”
With this backdrop, the Report then considers the development of collective redress mechanisms in Europe. The Report notes at the outset that, contrary to common perception that though collective redress is technically available in Europe but has not been taken up to a significant degree, “collective redress or ‘class action’ models are proliferating across the EU, with a significant majority of Member States now having at least one way for claimants to combine their claims and sue for damages.” The procedures that the various Member States have adopted are far from uniform.
In order to assess what the various countries are doing, the Report focuses on ten specific countries (France, U.K., Netherlands, Belgium, Germany, Austria, Spain, Poland, Italy and Bulgaria) that have large populations and significant collective redress activity. The Member States chose represent about 79% of the population and 82% of the GDP in Europe.
A chart on page 17 of the report provides statistical information about the number of collective action cases in each of the ten focus countries. The statistics show that while the numbers vary significantly between the countries, overall there has been a significant amount of collective action litigation in Europe.
In order to assess the development of collective actions in the ten focus countries, the authors look at six key features of the collective redress system: who may file a claim; compensation of representatives and other third parties (particularly third party litigation funders); the loser pays rule; the opt-in or opt-out mechanism; admissibility and certification procedures; and jurisdictional overreach and forum shopping.
The Report’s Recommendations
Based on this review of these features of the collective redress procedures in the focus countries, the Report concludes that “collective redress in the EU is developing so rapidly that insufficient attention is being paid to the risks presented,” which is “allowing relatively unsafeguarded mechanisms to develop.” In order to prevent the “lawsuit industry” from taking root, the report suggests a number of measures:
- Implementing stringent class certification standards, to insure that the claimant pursuing the claim represents the class and does not have conflicts;
- Preserving the traditional loser pays concept, so that it continues to provide the intended deterrent effect;
- Favor opt-in over opt-out mechanisms, to prevent classes from classes from being swollen by aggregation of claimants who may not even know their interests are being represented;
- Promoting strict standing requirements, particularly with respect to representative organizations;
- Restricting contingency fees and regulating their party funding for collective actions;
- Banning punitive damages;
- Curving jurisdictional overreach, of the kind that can lead to forum shopping.
The Report also includes a separate set of specific proposals regarding third-party litigation funding, noting that “third party litigation funding and collective actions are a combination that gives rise to the potential for abuse” because “they work together to create enormous leverage against a defendant regardless of whether a claim has merit.” The Report notes that though third party litigation funding is “a prominent feature of the litigation landscape in several member states, none of the focus countries has any mandatory mechanisms for regulating litigation funding. The Report’s specific proposals with regard to litigation funding are as follows:
- Implement mandatory licensing of funders through a government agency;
- Requiring capital adequacy to ensure the funders have sufficient funding to discharge their liabilities;
- Ensuring that claimants and not funders control the management of the case;
- Requiring that funders act in the best interests of their claimants
- Banning law firms from owning funders and vice-versa;
- Imposing costs liability on a joint and several basis;
- Requiring transparency through mandate disclosure of litigation funding;
- Placing limits on recovery.
The report concludes the assertion that there is “growing evidence that the desire to encourage collective redress is leading to the lowering of safeguards even before systems have had the opportunity to mature.” As a result, collective redress is “becoming a speculative investment opportunity for third parties and representatives,” which represents a “clear warning that abusing litigation is arriving” and therefore the adoption of safeguards “is urgently required.”
The Report is well-written and exhaustively researched (there are six pages of footnotes at the end of the document). The Summary Table at the end of the report tabulating the specific features of the collective redress systems in each of the ten focus countries by itself makes this the Report worth getting ahold of.
The Report makes a number of interesting points about current trends with which I agree. For example, the Report notes that in some countries where the take up of collective actions has lagged, legislatures have been quick to modify the collective action regimes in ways that broaden the availability of the procedures and often increase the types of cases for which the procedures can be used. Indeed, I noted this very thing myself in a recent post in which I reviewed the evolution of class action procedures in France.
I also agree that the willingness of the courts in some countries to interpret their jurisdictional reach very broadly has led to what certainly does look at lot like forum shopping. For example, the willingness of courts in the Netherlands to have their settlement judgments apply on a world-wide basis has attracted promoters (often litigation funding firms or U.S. plaintiffs’ law firms) to try to pursue in the Netherlands claims that seemingly have little to do with that country. Recent examples of this phenomenon are the initiatives launched in the Netherlands on behalf of Petrobras investors and on behalf of Volkswagen investors.
These kinds of developments certainly do raise concerns. More generally, I agree with the proposition that class action litigation can be abused. The rash of class action merger objection lawsuits in the U.S. provide an unfortunate example of the way that the financial incentives for the plaintiffs’ lawyers lead to excessive litigation that imposes unnecessary costs on the system and the litigants, while providing little reward for anyone except the lawyers.
That said, I think the dangers of class action litigation can also be overstated. I think it is important to note that collective action mechanisms have developed in some countries not because of, say, EU recommendations, but rather to address specific problems.
For example, the KapMuG procedures in Germany were developed in order to address the problems presented by the massive numbers of claimants asserting claims against Deutsche Telecom. This fact, which to me seems highly relevant when thinking about the social value of collective action litigation, is not mentioned in the Report. I think this omission and others like it are significant; it overlooks that there are certain kinds of legal problems for which collective mechanisms are the best (and sometimes arguably the only) procedural solution.
I also am not as persuaded as the Report’s author that opt-in mechanisms are clearly preferable to opt-out mechanisms. Indeed, there may be times when the prospective defendants themselves might well prefer an opt-out approach, simply because it ensures that all (or almost all of the claims) will be addressed and resolved in a single proceeding. Yes, combining all of the claimants’ means that cases will be larger, but that could still be a more efficient way to resolve cases.
I also have an objection about the sample cases discussed toward the end of the document. Among the examples cited are the recent massive settlements in the RBS and Fortis cases. The RBS settlement is discussed in detail here and the Fortis settlement is discussed here. The Report emphasizes the size of these settlements and makes a point of highlighting the involvement of U.S. plaintiffs’ lawyers in the proceedings (Horrors!). But the Report omits consideration of the possible merits of these cases or of whether there is any better way that the aggrieved parties might have received compensation. In an April 2017 article in Metropolitan Corporate Counsel about the Report, author David Hechler makes much the same point. I think the case could be made that these two settlements represent examples of the kinds of legal problems for which collective action mechanisms provide efficient solutions.
I have one other observation about the evolution of collective action mechanisms outside the U.S. It is in fact a point that I have previously made on this blog, and it is a point based on personal experience. I have been fortunate in the past several years to be able to travel around the world to participate in industry and legal events focused on D&O liability. Sometimes I am the only American in the room. I have grown quite accustomed to hearing the U.S. legal system – and in particular the U.S. class action litigation system – being vilified at these kinds of events, much the way the Report’s author vilified U.S. class actions. The one thing that everyone is sure of is that they don’t want their system to become like that of the U.S. But over the years, a funny thing has happened. That is that over time, many countries have adopted procedures that have some of the characteristics of the U.S. system. To be sure, no country has adopted all of the features of the U.S. system. But what has happened is that many countries have found that legal problems are arising for which collective redress procedures are the best solution. I think it is an important point to be made, one that is missing from the Report, which is that in complex modern societies legal problems arise that can only be dealt with efficiently by these kind of collective procedures. Simply put, there is a very good case that can be made that collective redress mechanisms can be an important part of judicial administration in modern societies and economies.
All of that said, the Report itself is timely and interesting and worth reading at length and in full. It will be interesting to watch the process as the EU completes its assessment later this year of its 2013 recommendation, and in particular it will be interesting to see what further recommendations emerge at the end of the process.