Quinn Emanuel Urquhart & Sullivan, LLP

EU Representative Actions Directive – An Overview 

A representative action is one where an individual or entity sues as a representative of a group of individuals.  In the United States, class actions are by far the most common form of representative actions.  With its new Directive (EU) 2020/1828 Of The European Parliament And Of The Council of 25 November 2020 on representative actions for the protection of the collective interests of consumers (“Directive”) the European Union has reached another milestone in its attempt to ensure consumer protection.  The Directive, once it is implemented in the laws of the Member States, will enable consumer organizations, regulators and other “qualified entities” to commence representative actions on behalf of consumers.  Member States have until the end of 2022 to implement the Directive into their national laws.  Some Member States, such as Germany, which had only recently introduced its own representative action legislation, will have to adapt their regulations to the new European Union framework. 

The scope of the Directive is broad as it reflects recent developments in the area of consumer protection, especially with regard to digitalization and the consequential exposure of consumers to different markets.  Besides general consumer law, the Directive covers both domestic and cross-border rights with respect to data protection, financial services, travel and tourism, energy, and telecommunications.  Member States are granted the power to extend their respective national laws on collective consumer redress to further areas, not included in the scope of the Directive. 

One notable feature of the Directive is that actions can only be brought by “qualified entities.”  Qualified entities may either be designated to conduct cross-border representative actions under Article 6 (1) of the Directive or only to conduct representative actions within the Member State in which they reside.

Article 4 (3) of the Directive lists the criteria that must be met for an entity to be designated as qualified for cross-border representative actions.  A qualified entity must be a legal person properly constituted in accordance with national law of the Member State in which it resides.  It must be a nonprofit entity and show that it has been actively protecting consumer interests for at least 12 months.  Protecting consumer interests must be part of the entity’s statutory purpose, and it should only be influenced by consumers and not by anyone with an economic interest in representative actions, such as traders or hedge funds.  The EU Commission will publish a list of the qualified entities designated for cross-border representative actions by Member States.  

The Directive is less specific regarding the designation of qualified entities for purely domestic (i.e. non-cross-border) representative actions.  Member States need only ensure that the criteria used for designation are consistent with the Directive’s objectives.  Art. 4 (4) of the Directive.

All qualified entities must ensure their independence through established procedures and they must disclose their funding, both in general and with respect to the individual representative actions they bring.  One goal behind this structure is to make third-party funding of representative actions as difficult as possible.  Accordingly, the Directive imposes heavy restrictions on third-party funding of representative actions.  Under Article 10 (2) lit. a of the Directive, the qualified entity’s decisions may not be unduly influenced by third parties to the detriment of the collective interests of the affected consumers.  A representative action may not be funded by competitors of either the defendant or any entity which is dependent on the defendant under Article 10 (2) lit. b of the Directive.  In order for the court to assess this, a qualified entity must disclose the sources of its funds for each specific action it brings.  Art. 10 (3) of the Directive.  Under Article 10 (4) of the Directive, undue influence in third-party funding can ultimately lead to the qualified entity losing its legal standing to maintain an action.

The qualified entity leads the representative action independently of individual consumers.  While the qualified entity must show that its action is supported by a certain number of individual consumers (the exact number is left to the discretion of the Member States), individual consumers do not actively take part in the representative action. 

The Directive also left it to the Member States to decide how affected consumers may participate in or benefit from the outcome of the representative action.  This can either be done through an opt-in or an opt-out mechanism or a combination of the two, depending upon the “legal traditions” of the individual Member States.  The Directive also provides that the Member States may allow consumers to directly benefit from a redress measure after it is issued, without having previously participated in the representative action.  Depending on the implementation by the Member States, this may pose a serious risk for defendants as it might not be entirely clear who will benefit from a decision or a settlement of a representative action. 

Regarding the proceedings of the representative actions themselves, the Directive offers few details.  Qualified entities may seek injunctive measures as well as redress measures to benefit the affected consumers under Article 7 (4), (7) of the Directive.  Under Article 9 (1) of the Directive, a redress measure can be any remedy provided by the defendant, including monetary compensation.  The qualified entities will have the rights and obligations of a claimant party in the proceedings under Article 7 (6) of the Directive. 

Under certain conditions, the defendant as well as third parties may have to disclose evidence within their control to the qualified entity under Article 18 of the Directive and incur penalties if they do not comply under Article 19 (1).  Depending on the implementation, this could lead to significant procedural changes in Member States whose codes of procedure generally restricts the compelled provision of documents. 

Under Article 11 (1), the qualified entity and the defendant may settle a redress action, but the settlement must be approved by the court.  When ruling on a settlement, the court must consider the rights and interests of all concerned parties, in particular those of the affected consumers.  If a settlement is approved by the court, it is binding on all parties.  However, under Article 11 (4), Member States may provide affected consumers with the right to accept or refuse settlements.

The Directive introduces a loser-pays rule with regard to the costs of the proceedings.  Art. 12 (1) of the Directive.  However, Member States must ensure that these costs are not so excessive that they prevent qualified entities from bringing representative actions.  Art. 20.  Under Article 12 (2), (3) of the Directive, no consumer will bear the costs of a proceedings except for cases of an individual consumer’s intentional or negligent misconduct.  The unsuccessful party must also inform the affected consumers of the outcome of the representative action.  Art. 13 (2), (3) of the Directive.  

Finally, under Article 15 of the Directive, the ultimate decision issued by the court may be used in other actions as evidence of a violation. 

As noted above, the Member States have until the end of 2022 to pass legislation implementing the Directive.  In doing so, Member States will have considerable discretion in how to design or set up their collective redress systems.  However, the Directive now provides a common framework for such systems across the European Union. 

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