Introduction

Abstract

Class actions have probably been the most successful export product of the American legal scholarship. While the US legal system does have quite a few peculiarities (such as deterrent punitive and treble damages, extensive pre-trial discovery, constitutionally entrenched jury trials), class actions stand out from these in terms of both intellectual impact and controversial reception. They fulfilled a determinative role, either as a source of inspiration or as a point of reference, in the appearance and evolution of EU collective actions. While a few decades ago collective actions were very rare outside the US and were considered esoteric, nowadays, they are part of the legal systems of Australia and several countries in the Americas (Canada and Latin America) and in Europe, and, even if they happened to reject them, all these systems considered the US class action as the Caballine Fountain and point of reference.

Class actions have probably been the most successful export product of the American legal scholarship.¹ While the US legal system does have quite a few peculiarities (such as deterrent punitive and treble damages, extensive pre-trial discovery, constitutionally entrenched jury trials), class actions stand out from these in terms of both intellectual impact and controversial reception. They fulfilled a determinative role, either as a source of inspiration or as a point of reference, in the appearance and evolution of EU collective actions. While a few decades ago collective actions were very rare outside the US and were considered esoteric, nowadays, they are part of the legal systems of Australia and several countries in the Americas (Canada² and Latin America³) and in Europe, and, even if they happened to reject them, all these systems considered the US class action⁴ as the Caballine Fountain and point of reference.

Interestingly, while the spread of collective actions has been remarkable, it has generated the same amount of criticism and fear in Europe⁵: albeit that the class action is certainly not the only legal transplant whose reception divides a legal community, it proved to be one of the most controversial. It is not an exaggeration to say that the US class action (as reshaped in 1966)⁶ was a “Copernican turn” in civil procedure: while normally the procedure is organized around the claim, in class actions claims are organized around the procedure. Due to this paradigm-shift, class actions interfere with one of the taboos of civil-law—representation without authorization (opt-out rule)⁷—and one of the central principles of societal organization: public policy should be done exclusively by the state and its enforcement cannot be privatized (no “private attorney general”).⁸

Not surprisingly, in Europe, few legal reforms have been subject to so much hesitation, scare-mongering and phobia of novel legal solutions as the introduction of collective actions.⁹ The entry into force of the Italian law of 2007 on collective proceedings was, due to professional protest, suspended for two years and, at the end of the day, a new act was adopted in 2009.¹⁰ In Hungary, the President of the Republic vetoed an act on collective actions adopted by the Hungarian parliament in 2010 (the act followed the opt-out principle).¹¹ In July 2009, the conversion of the opt-in scheme into an opt-out system was refused in England and Wales,¹² while recently the opt-out scheme was made available in competition matters, subject to the Competition Appeal Tribunal’s discretion.¹³

The EU “federal” regulation of collective actions has also featured a similar oscillation.¹⁴ In October 2009, the European Commission withdrew its proposal for an opt-out system¹⁵ and, after a public consultation carried out one and a half years later and the European Parliament’s rejection of the opt-out principle,¹⁶ it finally adopted a non-binding recommendation in 2013 championing the opt-in system and rejecting the most important elements of the US class action.¹⁷ Nonetheless, recently, a rather promising development appeared on the horizon of EU collective actions. In April 2018, the Commission proposed the adoption of a collective action scheme (termed “representative action”) in the field of consumer protection law.¹⁸ Although the proposed directive evades the dilemma of opt-in and opt-out through leaving the choice to Member States,¹⁹ it will have an unquestionable virtue: if enacted, it will make consumer collective actions uniformly available in all the Member States.

Both traditionalist conservatism and furious economic lobbying are claimed to have accounted for the foregoing developments. The coalition of these two elements often proved to be unsurmountable. It has not been exceptional to see progressive proposals elaborated in the scholarly laboratories torpedoed by intensive economic lobbying²⁰ and fail to get through the political filter. In some cases they were fully rejected (for example, in England and Wales in 2009,²¹ though, as noted above, recently the opt-out scheme was made available in competition law, subject to the Competition Appeal Tribunal’s discretion).²² In other cases, the initially progressive and effective proposal was emasculated, and the version that was finally adopted was deprived of all the virtues that could make the system workable and widespread (see Finland²³ and France).²⁴

This volume gives a transsystemic analysis of European collective actions and an overview of how Europe made class actions in its own image. It addresses collective actions’ reception, development and core features and gives a critical analysis of the European approach. This is done through analysing the pivotal regulatory questions from an economic and comparative perspective. Quantitative economic analysis is used to describe the decision-making process of the private actors of litigation (plaintiffs, group representatives and defendants): the actors are dealing with a production process, whose output is litigation, measured by possibly recovered losses.

The book’s structure is based on the following pillars.

First, the book gives a law and economics analysis of small claims, demonstrating the need for the introduction of collective actions to secure access to justice and showcasing the benefits of the opt-out scheme. It demonstrates that the central function of collective actions is to tackle the problem of organizational costs, through mitigating and handling the risks attached to them, thus making litigation a possibility in cases that otherwise would not get to court. It argues that the opt-out system tackles the problem of organizational costs in the most efficient manner. Although the group’s organizational costs can be reduced through different techniques (for instance, through easing adhesion) and, hence, an opt-in system may also be capable of reducing organizational costs through simplifying the organization of the group, the most cost-effective method is the opt-out system, which is capable of reducing the costs to the minimum (albeit certainly not to zero).

Second, the book addresses and refutes the major arguments and fears against the opt-out system (constitutional inconformity, European traditionalism, exaggerated practical difficulties and the fear of a litigation boom and legal blackmailing potential), inquiring whether these are genuine scruples or pretexts veiling a deeper aversion against class actions. This chapter examines the problem of “representation without authorization” and demonstrates that this is not incompatible either with national constitutional requirements or with European legal traditions. It shows that a collective action system based on the opt-out principle is feasible and would cause no litigation boom and would create no blackmailing potential. It argues that the headspring of Europe’s instinctive resistance against American class actions and the subconscious reason why it is so difficult to reconcile the “Copernican turn” of class actions with European traditionalism are the taboo of party autonomy and the state’s entrenched prerogative to enforce the public interest.

Third, the book gives an account of the differences between the US and European framework and demonstrates how the disparate regulatory environments entail diverging effects and why and how the European legal and social environment raises regulatory issues that do not emerge on the other side of the Atlantic. The collective action is a genuine legal transplant in Europe whose comparative analysis has to extend to a large array of framing legal institutions (e.g. contingency fees, American rule of attorney’s fees, punitive and treble damages), which need to be addressed to delimit class actions from the operation of unrelated legal doctrines. Furthermore, as a conception fully alien to traditional civil-law thinking, in Europe collective actions raise various questions that do not emerge on the other side of the Atlantic.

This chapter gives an outline of the legal and cultural context of European collective action mechanisms and explains in what this context differs from the environment of US class actions. It demonstrates, through a law and economics comparison between US and European collective actions, that the criticism against the US opt-out class action is not valid if it is applied in Europe. The volume demonstrates that the overgrowths of the US class action are not entailed by the class action itself but rather by the cultural and regulatory environment it operates in; it is the contextual concepts and rules of US law that catalyse the operation of class actions (“American rule” of attorney’s fees, punitive damages etc.). It is argued, on the basis of theoretical and empirical considerations, that the overgrowths of the US class action do not come up if this regulatory pattern is applied in Europe.

It is also argued that the effectiveness and widespread use of collective litigation and the potential for abuse and adverse effects are inversely proportional to each other. On the one hand, economically speaking, the group representative’s expected income and expected costs cannot be equilibrated in the absence of an appropriate risk premium. On the other hand, such a risk premium would move the European regulatory environment from its current position towards US law. The European legislator or legislators need to find the point of equilibrium where the marginal benefit of effective litigation equals the marginal cost of abuse and adverse effects. Alternatively, they may refuse to provide a risk premium to the group representative; empirical evidence shows that, mainly due to non-economic considerations, collective litigation may also be workable in the absence of a risk-premium, albeit on a low-key level.

Fourth, the volume gives a transsystemic presentation of the European national schemes along the key issues of collective actions: purview (sectoral or general), standing, opt-in and opt-out principle, pre-requisites of collective action, status of group members (whether they are considered parties or non-parties affected by the litigation), legal costs (cost shifting and members’ liability) and funding, res judicata effects and enforcement. Collective action legislation is relatively widespread in Europe and plentiful Member States, as well as the European Commission have introduced group proceedings. This chapter demonstrates how Europe’s legal tradition shaped the reception of collective actions, showing how European legal systems struggled with accommodating the idea of class action with European legal thinking. It also demonstrates the creative efforts certain European countries made to reconcile representation without authorization (the opt-out rule) with the taboo of party autonomy and the notion that the enforcement of public policy cannot be privatized.

Fifth, in the conclusions, the volume gives an analytical summary and critical evaluation of the emerging European collective action model and submits proposals for the advancement of access to justice and effectiveness of law through collective redress.

This volume examines the collective enforcement of claims for monetary recovery; European mechanisms for non-monetary remedies (such as declaratory judgments, injunctions) fall out of this volume’s focus. Accordingly, it deals only with procedures where plaintiffs enforce pecuniary claims. Procedures where a representative plaintiff may seek merely a declaratory judgment or an injunction without having the possibility to claim monetary redress—a pattern that has been available in Europe long since—are not covered.²⁵ In the same vein, procedural mechanisms where individual actions are coordinated after they have been launched, as well as collective settlement mechanisms, do not come under the focus of the analysis, because, as explained below, they do not advance the collective enforcement of claims. Notably, in the first case (see, for instance, the German Capital Markets Model Case Act) claims are brought individually and then coordinated, implying that the mechanism does not facilitate access to justice through a collective vehicle but coordinates claims that were susceptible of being brought on an individual basis; in the second case, the mechanism cannot be used to enforce the claim but to handle mass cases where the defendant is willing to concede liability. Similarly, for reasons explained below, the use of traditional joinder of parties for handling collective matters, though addressed, does not come under the focus of this book.

In this volume, the term “opt-out system” means that group representatives may institute a collective action without any explicit authorization from the members of the group, who, in turn, may (or may not) leave the group through an express declaration (opt-out). Those who are given notice but do not opt out expressly are considered to be assenting to the procedure. The term “US class action” will be used as the rough equivalent of the opt-out system. The term “opt-in system” means that group representatives may act only on behalf of those group members who explicitly authorized them to do so, i.e. who opted in.

In this volume, “collective action” will be used as a general term referring to group litigation mechanisms at large, while the term class action will refer to the US system. For the sake of simplicity, the economic calculations are based on the assumption that the decision-maker is risk-neutral and use the concept of expected value instead of expected utility. Furthermore, for the sake of simplicity, calculations occasionally assume that in Europe legal costs can be shifted in full to the losing party, disregarding legal and practical hurdles; likewise, they will proceed from the proposition that the plaintiff almost never has a 100% chance to win a case.