Must-know: The new EU collective action

In November 2020, the EU adopted a directive on representative actions for the protection of collective interests of consumers (the "Directive"), which aims to "ensure that at Union and national level at least one effective and efficient procedural mechanism for representative actions for injunctive measures and for redress measures is available to consumers […]". EU Member States were due to transpose the Directive by 25 December 2022.

The Directive envisions that "Qualified Entities" ("QEs") (e.g. a non-profit organisation protecting the interests of consumers) may request "injunctive" and/or "redress" measures for infringements of EU consumer law. Injunctive measures include provisional and final orders to cease an infringement of EU consumer law and may be granted without any actual loss being sustained by consumers. Redress measures encompass a broad assortment of remedies such as compensation, price reduction or contract termination. QEs may issue local and cross-border representative actions in other Member States. QEs from different Member States may also join forces and sue a defendant in one specific domestic court.

In many jurisdictions, the possibility to request compensation in a collective proceeding is new. But the significance of the impact of this change depends on domestic laws, chiefly because EU Member States enjoy considerable discretion in relation to three key elements of the new collective action regime. Knowing how they exercise this discretion is therefore key to strategic planning for potential defendants and QEs alike.

Three "must-know" points

The first "must-know" point is whether a Member State allows collective actions on an opt-in or opt-out basis. Opt-in means that consumers must express their wish to be represented by a QE in a collective action, while opt-out means that consumers are automatically represented by a QE and need to take active steps to express their wish not to be part of a collective action. Naturally, the opt-in approach limits the effects of collective actions and more appropriately balances the interests of consumers and companies.

The second "must-know" point concerns how similar individual claims must be in order to be brought on a collective basis. This commonality requirement defines the requisite nexus of factual or legal issues between individual claims and therefore draws the outer limits of collective proceedings. The approach Member States choose determines how often and how easily the collective action regime can be used. Liberal rules requiring that the claims of class members arise from broadly similar circumstances will invite more collective actions (e.g. the question may simply be whether consumers entered into a specific type of contract in a specific period of time). Stricter commonality rules requiring a higher degree of commonality (e.g. that the common issues predominate over individual issues) will protect defendants more effectively against vexatious collective actions.

The third "must-know" point pertains to the suitability requirement. This requirement questions if a collective action is an appropriate instrument for a fair and efficient resolution of the collective issues. To give two illustrative examples:

One: not every breach of consumer law is capable of collective assessment. The nature of the infringement matters. For instance, the unfairness of a contract term is determined by reference to the individual circumstances attending the conclusion of a contract. While a collective claim concerning foreign currency clauses concluded in a specific period of time may satisfy the commonality criterion, it would normally fail at the suitability stage, because representations as to the risks of foreign currency clauses will have been made on different occasions, in different conversations, by different people, using different words. Individual issues such as "who said what, when and to whom" are all incapable of being assessed collectively. In contrast, if a clause violates mandatory rules applying irrespective of individual circumstances (e.g. a clause excluding liability for gross negligence), a claim is suitable for a collective determination.

Two: the characteristics of the harm matter. For instance, if phone users suffer damages because a search engine technology secretly tracks their internet activity, damages cannot be awarded on a collective basis, because the amount of compensation recoverable by any class member would depend on a variety of circumstances particular to each individual (e.g. the frequency of internet activities). On the other hand, a collective claim asserting that the class members acquired the same product with the same defect which reduced its value by the same amount would be suitable for a collective assessment.

In brief, regardless of whether a collective action regime is based on the opt-in or opt-out principle, suitability is a key criterion. Ultimately its goal is to preserve the due process rights of the defendants and to protect them against limitless collective actions.

authors: Sebastian Lukic, Martin Ebner