Conclusions

Abstract

The European history of collective actions started roughly three decades ago. While collective litigation proved to be one of the most successful export products of American legal scholarship, it has been very likely also one of the legal transplantations that generated the most heated debates. This process, not devoid of scare-mongering and legislative hesitation, has resulted in a landscape where 17 out of 28 Member States have adopted a special regime for collective actions. This evolution is crowned with the Commission’s recent proposal for a consumer collective action.

The European history of collective actions started roughly three decades ago. While collective litigation proved to be one of the most successful export products of American legal scholarship, it has been very likely also one of the legal transplantations that generated the most heated debates. This process, not devoid of scare-mongering and legislative hesitation, has resulted in a landscape where 17 out of 28 Member States have adopted a special regime for collective actions. This evolution is crowned with the Commission’s recent proposal for a consumer collective action.¹

Though US class actions have been a point of reference, collective litigation has been fundamentally reshaped during the European transplantation. Not surprisingly, this metamorphosis has been due to European law’s discrepant mental attitude and diverging regulatory environment.

First of all, in contrast with US law’s notion that private plaintiffs (both individual and collective) may function as a “private attorney general”, European collective actions have no public policy role but are confined to serving a purely compensatory function. In Europe, even the proponents of opt-out class actions tend to disallow its possible public policy function and to conceive its role purely as providing an effective remedy to group members.

Second, it has been evident that the operation of collective litigation, due to the absence of certain contextual doctrines, will differ sharply on the two sides of the Atlantic. In fact, the diverging regulatory environment (e.g. the absence of contingency fees, the American rule on attorney’s fees, punitive and treble damages in Europe) takes off the edge of the European criticism against the introduction of class actions, which is largely, if not fully, attributable to the above contextual concepts.

Third, due to the dissimilar regulatory environment, in Europe, collective litigation raises a good number of regulatory issues that simply do not emerge in the country of origin. Because of the American rule, the plaintiffs’ liability for legal costs is not an issue in the US, while it is a central question in Europe. Litigation finance is a crucial problem in Europe, contrary to the US, where various means of general application (such as contingency fees, super-compensatory damages, one-way costs shifting in certain fields) are available to incite and reward those who fund litigation and these are equally available in individual and collective actions.

Fourth, the taboo of party autonomy has had a profound impact on European systems, especially opt-out schemes. This entailed the emergence of the “only benefits” principle concerning collective proceedings’ effects on group members.

All these differences resulted in a system à l’européenne.

6.1 Collective Actions Are Needed in Europe to Ensure Access to Justice and Effectiveness of the Law

Small claims face hurdles that may prevent individual enforcement and lead to sub-optimal enforcement.² Collective litigation may make litigation possible also in cases where individual litigation would not be economically rational. Collective actions may entail cost-savings due to economies of scale and may tackle the problem of positive externalities. Through making the enforcement of small-value claims a reality, it ensures access to justice and effectiveness of the law. Nonetheless, collective litigation necessitates regulatory intervention, since, due to the high costs of group organization, it would not work spontaneously and, accordingly, the law has to tackle the problem of organizational costs so as to make the enforcement of these claims a reality.

The costs and risks may make litigation economically unreasonable even in well-founded cases (the expected costs may be higher than the expected value).

First, non-recoverable legal costs may deter litigation. Although in Europe legal costs are, in principle and with some restrictions, borne by the losing party, the winning party cannot shift the legal costs in full. The proof and documentation of the legal expenses may be difficult; the law may restrict the amount of the attorney’s fees that can be shifted onto the losing party; the claim’s enforcement may give rise to some practically unrecoverable expenses. Furthermore, certain expenses cannot be shifted onto the losing party (these costs are legally not shiftable). Examples are inconveniences related to litigation and the time the claimant spends on the claim. Obviously, such expenses may emerge in any matter, but in respect of small claims these costs are comparably much higher given the small pecuniary value involved.

Second, the costs of preliminary legal assessment may also dissuade the plaintiff. Although, theoretically, these may be regarded as shiftable expenses (as they emerge in relation to litigation), information shortage pertains to such situations. The preliminary legal assessment occurs at a stage where the claimant has no information about his chances, so he has to take into account that he may have to pay even if there is no reason to sue.

Third, in matters involving small claims, the value at stake is small and legal costs are, in comparison to the claim’s value, very high, hence, a relatively trivial probability of failure may make the balance of litigation negative. The higher the legal costs are in relation to the claim’s value, the better this risk crops out. As a matter of practice, litigation inevitably involves some risk and almost all claims have immanent hazards.

Collective actions have certain advantages that make the enforcement of small claims possible in cases where numerous persons are damaged by the same illegal act. Although damages are small for each individual (what may make litigation unreasonable), collective damages (the sum of various individuals’ damages) are high.

The merit of collective actions can be attributed to two virtues: economies of scale³ and tackling external economic effects (externalities). Joint litigation may entail economies of scale and is susceptible of doing away with the external economic effects individual litigation may cause. This is due to the fact that the enforcement of individual small claims may have significant common costs.⁴ Although it is true that this is a general advantage of joint litigation (that is, it may equally emerge in cases where the claims are not of small value), in case of small claims, the cost-savings are comparably higher than in case of huge claims.

In related matters, litigation costs are often not commensurable to the number of claimants, since certain expenses (testimonies, deliberation of liability and so on) emerge only once.⁵ A substantial part of the legal costs may be fixed costs, which emerge independently of the number of the claimants, while the rest may be made up of variable costs, which are affected by the number of claimants. If the loss is caused by the same wrong, there may be common (fixed) costs; and if these are significant in comparison to individual costs, collective actions may be cost-effective.

Individual litigation may entail positive external effects (externalities), conferring advantages on other class members they did not pay for. The difference between the expected costs and the expected value may be negative on individual level but positive on group (or social) level. Since the individual litigator does not benefit from the positive external economic effects enjoyed by other group members (that is, these benefits are not internalized), this may lead to sub-optimal litigation. Although one might argue that test cases can effectively substitute collective litigation, this is refuted by the fact that test cases may entail free-riding: non-active group members may free-ride on the efforts of the individual litigator who started the test case.

The reason why collective litigation does not occur, at least not on a large scale, spontaneously, notwithstanding the several traditional legal tools (joinder of parties,⁶ assignment of claims to an entity founded by group members)⁷ that may be used to organize the group, is the cost of group organization. These costs may be very high, in some cases even prohibitive,⁸ and traditional legal tools are not tailored to the needs of collective litigation, thus increasing the costs of group management.⁹

6.2 European Objections and Fears Against the Opt-Out System: Superego, Ego and Id

In the European scholarly discourse, resistance against US class actions has been predominantly dogmatic (constitutional doctrine of party autonomy) but, subconsciously, backed by the settled European thinking that the enforcement of public policy is the prerogative of the state and may not be privatized. Indeed, the “Copernican turn” of opt-out collective litigation interferes with the ontological principles of European civil procedure: while a civil action traditionally centers around the claim, in the US class action the claims center around the procedure.

European traditionalism has been often wrapped up in constitutional parlance, but the arguments against class actions’ constitutional conformity have found no reflection in the constitutional case-law. This suggests that while certain limits do apply, opt-out mechanisms are not outright unconstitutional and they may be constitutionally warranted in small value cases, which would very likely not be brought to court anyway.

The scholarship is replete with pieces supporting the introduction of the opt-out model in Europe. Disregarding the misconceived references to legal tradition and the phobia of foreign legal solutions, one can rarely find any analysis convincingly demonstrating that the introduction of the opt-out model in Europe would lead to a litigation boom, settlements forced out by black-mailing and abuses.

The alleged repercussions of opt-out collective litigation in the US would not occur when this regulatory mechanism is transplanted into a European environment. Legal rules do not operate in a vacuum but are part of a legal, social, cultural, and economic environment. US law contains a large set of institutions that catalyze the opt-out class action’s operation. In Europe, failing this catalyzing environment, the alleged excesses of the US practice are not to be expected. This conclusion is underpinned by the limited European empirical evidence concerning opt-out collective actions and by the examples of foreign legal systems that are comparable to the European regulatory environment and have adopted US-style class action schemes (Australia, Canada, Latin-American countries).

As demonstrated above, in class action cases group representatives have the very same black-mailing potential (if any) as the plaintiff in an individual action. The US litigation landscape is shaped by legal institutions like punitive and treble damages, the “American rule” on attorney’s fees, one-way-cost shifting in certain cases, contingency fees, entrepreneurial law firms and litigious attitudes. This regulatory and social environment, which is responsible for what many Europeans attribute to class actions, is completely missing in Europe.

6.3 Transatlantic Perspectives: Comparative Law Framing

The regulatory and social environments of collective actions differ considerably on the two sides of the Atlantic. Contrary to the US, “entrepreneurial lawyering” is virtually missing in Europe, contingency fees are either prohibited (or available with restrictions) or, even if legal, are normally not available in the market; active client-acquiring and lawyer advertisements are banned or heavily restricted in most EU Member States. The “American rule” and especially one-way cost-shifting, as provided by various American protective statutes, are unknown to European jurisdictions, which traditionally follow the two-way cost-shifting rule. Super-compensatory damages are not available in Europe, with some narrow and insignificant exceptions in a handful of common law jurisdictions. The generous US rules on pre-trial discovery have similarly no counter-part.

These differences have twofold consequences. First, the operation and impact of European collective actions differ considerable from their American ancestor due to the absence of the above pro-plaintiff incentives. Second, European legislators have to address quite a few regulatory issues that do not emerge in the US.

Both theoretical analysis and empirical data clearly suggest that the purported negative repercussions of opt-out collective litigation (US class action) would not emerge if this regulatory mechanism is introduced in Europe. The theoretical arguments and the brief account of empirical evidence suggest that, whereas the relatively short time that has elapsed since the wide-spread appearance of these mechanisms (both opt-in and opt-out systems) in Europe does not enable us to predict the long-run consequences, it is safe to say that opt-out collective proceedings would trigger no litigation boom in Europe. This conclusion is underpinned also by the empirical experiments of Australia and Canada, which have a regulatory environment different from the US in some of the relevant aspects.

The transplantation of collective actions into a European legal and social environment raises an array of novel regulatory questions.

European legal systems lack the counterparts of US legal institutions that facilite litigation through the provision of financial incentives (one-way cost-shifting, contingency fees and punitive damages), making litigation finance a crucial regulatory issue. Unfortunately, European collective action laws have failed to settle or even address this problem: while they ruled out the American institutions that stimulate class actions, they failed to replace these with appropriate substitutes. Arguably, European collective actions have little chance to become effective and self-sustaining, if, one way or another, appropriate financial incentives or funding are not provided for to ensure that the group representative gets compensated (receives a premium) for running financial risks in the interest of the group. Economically speaking, the group representative’s expected income and expected costs cannot be equilibrated in the absence of an appropriate risk premium or non-profit-oriented (public) funding and, hence, he may be incited to espouse the group members’ claims if he is compensated for the risks he runs when engaging in collective litigation.

The effectiveness and widespread use of collective litigation and the potential for abuse and adverse effects are inversely proportionate 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 enforcement 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.

While in US class actions group representatives, due to the American rule, are not responsible for the defendant’s attorney’s fees even if the class action fails, in Europe the principle of two-way cost-shifting prevails, raising the regulatory question of allocation both in opt-in and opt-out systems. It is generally accepted that the opt-out scheme’s constitutionality may be preserved only if group members are freed from all liability and the group representative runs the full risk as to legal costs. This makes the “only benefits” principle, which prevails in opt-out systems, a peculiar element of the European collective action’s architecture. The strongest argument for “representation without authorization” and against the allegation that opt-out collective actions encroach on party autonomy is that only benefits may accrue to group members, so it would be redundant to require express authorization. Hence, these systems were worked out in a way that group members run no risk as to legal costs; some of them also provide that group members are covered by the final judgment’s res judicata effects only if they expressly accept it or if that is in their interest.

European collective actions are not meant to have a public policy role and their function is limited to ensuring a compensatory remedy for group members. As the concept of “private attorney general” is completely alien to European legal systems and the general attitude is that financial incentives may give an unacceptable stimulus, for-profit entities’ aptness to serve the public interest is normally received with doubt. This explains why in Europe standing has been often limited to public entities and non-profit organizations.

6.4 European Models of Collective Actions: A Transsystemic Overview

Interestingly and counter-intuitively, 10 out of the 17 EU Member States that have adopted collective litigation schemes created systems based fully or partially on the opt-out principle (Belgium, Bulgaria, Denmark, France, Greece, Hungary, Portugal, Slovenia, Spain and the United Kingdom) and only 7 of them stuck to the opt-in principle (Finland, Germany, Italy, Lithuania, Malta, Poland and Sweden). Accordingly, while it is true that opt-out collective litigation is not available in the vast majority of the Member States, those countries which decided to create a special regime allowed representation without authorization in general or in given sectors.

Though a few countries have regimes of general scope, most European collective litigation systems have a limited ambit (such as consumer matters), reflecting the notion that collective actions should be limited to cases where they are highly needed. Some systems have used “leapfrogging” to extend the scheme to further sectors demonstrating the precautious approach of European legal systems as to collective litigation.

European collective litigation is normally subject to more stringent requirements than US class actions. The pre-conditions of collective litigation normally embrace those of US class action (numerousity, commonality, typicality and adequate representation) but quite a few systems go beyond these requiring that collective litigation be expedient or superior to individual litigation and that the group be definable and group members identifiable by means of the group definition (especially in case the opt-out scheme is used).

The heroes of European collective litigation are governmental and non-governmental not-for-profit organizations (such as administrative agencies, the attorney general and consumer protection NGOs). Although standing is not reserved solely for them (in fact, in several Member States their standing operates in parallel to that of group members and only a few systems limit standing exclusively to public entities and non-profit organizations), they are expected to be the authors of collective actions (as law-firms are in the US). There is a clear tendency to reserve “hard cases”, which are difficult to manage and present a higher risk of abuse, for public entities and recognized civil organizations. According to European thinking, governmental and non-governmental not-for-profit organizations are assumed to be more attentive to the public interest than for-profit enterprises.

Although in opt-in systems group members expressly join the action, contrary to the group representative, they are formally not parties to the procedure. They are bound by the final judgment but in most systems, instead of them, it is the group representative who is liable for the prevailing defendant’s legal costs.

As noted above, due to doctrinal and constitutional reasons, European opt-out collective action legislation has been impregnated by the “only benefits” principle: the encroachment on party autonomy is justified by the fact that only benefits accrue to group members. European systems have been struggling remarkably with the implementation of this principle, producing innovative and idiosyncratic solutions. First, it is evident that in opt-out proceedings group members may not be liable for legal costs and the group representative should carry this burden. Second, it has been argued that party autonomy is restricted also if the individual group member is bound by an unfavorable judgment. Hence, in some European systems, the res judicata effect is limping in relation to group members. For instance, in France, group members are bound by the judgment only if they expressly accept the compensation. In Hungary, it is dubious if in opt-out proceedings available in competition and consumer protection matters the judgment’s res judicata effects extend to group members. In Portugal, if the court decides for the defendant due to lack of evidence, the judgment will not be binding on group members; furthermore, as a general rule, if justified, the court may exempt group members of the judgment’s res judicata effects.

Interestingly, although, as a matter of practice, this appears to be of crucial importance for the success of collective actions, in most systems, collective awards come under individual enforcement and only a handful of the Member States have made provisions for collective enforcement.

The above modelling is crowned with the recent European proposal for a consumer collective action. In April 2018, the Commission proposed the adoption of a “representative action” in the field of consumer protection law.¹⁰ The proposed directive is virtually based on the above common principles based on the common core of the existing European mechanisms. Given that one third of the Member States has no collective action scheme at all, it is a significant virtue of the proposed directive that, if adopted, it will make consumer collective actions available in each and every Member State. On the other hand, at the present stage of the legislative process,¹¹ as a simple codification of the “collective action traditions common to the Member States”, it is supposed to entail no landslide conceptual reform: it has a sectoral approach (consumer protection), rigorous pre-conditions, confers standing on qualified representative entities, maintains the “loser pays rule”, rules out financial incentives, such as contingency fees and punitive damages and, last but not least, evades the dilemma of opt-in and opt-out through leaving the choice to Member States.¹²

6.5 Closing Thoughts: “Small Money, Small Football, Big Money, Big Football”

Ferenc Puskás, Hungarian Footballer, Captain of the Golden Team.

The debate in Europe on “whether to opt out or not to opt out” has become fairly repetitious. Although this is a truly important issue, it seems to be outdated in a certain sense and is losing weight in the online age where group members can simply “click in”. The success of collective actions hinges on funding,¹³ including the question of risk premium. An opt-out system does lessen the group’s organizational costs significantly and makes collective actions possible in cases where such costs proved to be prohibitive. However, collective actions cannot be truly effective without appropriate funding. This does not mean that no cases would be brought to court; this means that the practical success of collective actions would not be as considerable as it should be. This is underpinned by both economic analysis and experience: in Europe, there are (relatively) successful opt-in and unsuccessful opt-out systems. Without slighting the relevance of the opt-out-opt-in controversy, it seems that, as a matter of fact, the pivotal question of collective actions is funding. It is not a co-incidence (that is, not a mere correlation but causation) that the world’s most successful collective action mechanism provides for appropriate funding in the form of a variety of legal institutions (for example, punitive damages, treble damages, one-way cost shifting).

However, it has to be stressed that the need for a risk premium is certainly not an argument against the introduction of an opt-out system, especially, because the group representative may espouse the collective proceedings also for non-economic reasons. Collective actions can work without a risk-premium but their intensity will be lower than it could be.

As noted above, the enforcement of collective claims, like the enforcement of individual claims, hinges on costs and financing. However, it is an important difference between individual and collective actions that, in the latter case, there are considerable organizational costs, which, in certain matters, may prove to be prohibitive. Furthermore, due to the involvement of a third party (group representative),¹⁴ financing may become more complicated. Group representatives are expected to take over the group’s case and to invest in the business of someone else, without having a clear prospect of reward. Even if reasonable expenses are remunerated (compensating the representative for the cost he incurs in the interest of group members), group representatives will be disinclined to undertake the burden of group representation, unless they are secured a risk premium or receive public funding. While European legal systems reject those legal institutions of US law that afford a risk premium to group representatives and that make the US class action operational, they fail to suggest alternative measures that could handle this problem. Nonetheless, one way or another (through a risk premium or public funding) group representatives have to be funded. At the end of the day, someone has to pay the piper ….