Global Class Actions Briefing: Major developments in European consumer protection laws: Product safety and consumer class actions in Europe

In the past fortnight, two major developments - the EU’s proposals for a revised EU General Product Safety Directive (the GPSD) and the EU’s deal for a Collective Redress Directive (the CRD) point the way to a future of heightened novel risk in Europe of collective redress or, as these claims are popularly known, “class actions”.

Following the creation of this pan-European system and given the global character of the class actions and litigation funding markets, there will be a need for enhanced risk assessment and increased global monitoring of litigation to provide a roadmap in Europe. As a result the key message for businesses operating in Europe is that it has never been more important to re-evaluate, enhance and implement strong operational resilience, enterprise risk management, governance and compliance systems as the first and best line of defence against funded mass litigation. This is particularly important in areas relating to product safety, data protection, food and beverage manufacturing, financial services, travel and leisure, environment and health and telecommunications.

Proposal for revision of the general product safety directive

As part of a package of consultations on four initiatives on EU consumer policy planned to be proposed in 2020 and 2021, the European Commission has issued an outline proposal for the review of the General Product Safety Directive (GPSD). The GPSD lays down the general framework for the safety regulation of non-food consumer products, other than pharmaceuticals, where there are no specific provisions of EU legislation having the same safety objective in respect of particular products.

In general, the proposal aims at updating the legislative framework to reflect challenges flowing from the introduction of new technologies and the growth of online sales, and aims to correct the weaknesses in the effectiveness of the systems for product recalls and market surveillance. The proposal also seeks to correct the inconsistent application of product safety rules for food-imitating products in different countries.

Territorial Scope

The initiative will be of significant interest to all companies which are established in or propose to continue offering and selling their products into the EU Single Market. There is little prospect of this initiative resulting in legislation which will require to be transposed into UK law before the end of the transition period following Brexit on 31 December this year, and the UK Government has so far indicated that it will not be asking for an extension to that period Accordingly the UK government is not likely to be obliged to give effect to the proposal in UK law. Nevertheless, it is possible that some of the envisaged changes may ultimately need to be adopted by the UK if the current negotiations with the EU were to result in a close trading relationship between the UK and the EU.

Policy Options

Apart from option zero (no new actions) which is unlikely to be favoured, the Commission envisages four basic alternative policy options.

The first and minimalist option, would be to seek to improve the implementation and enforcement of the existing legislation, mainly by the development of guidance and the provision of increased funding. The only new legislation envisaged under this option would be a revision of the Food-Imitating Products Directive.

Option two would involve a legal revision of the GPSD which would include:

• provisions on the application of the GPSD to risks posed by new technologies (excluding standalone software);
• making some provisions of the current voluntary Product Safety Pledge legally binding;
• provisions to enhance the effectiveness of product recalls;
• provisions ensuring alignment with harmonised market surveillance rules; and
• the integration of the rules of the Food-Imitating Products Directive into the provisions of the GPSD relating to risk assessment.

Option three would involve:

• the replacement of the GPSD by a Regulation;
• extending the definition of "product" to include standalone software;
• the extension of obligations on actors across the online supply chain;
• the establishment of mandatory requirements for product recalls and registrations;
• increased requirements for penalties and sanctions; and
• power for the Commission to arbitrate where Member States have diverging assessments of product safety risk.

This option would also consider the banning of the promotion and sale of all food-imitating products in the EU.

The final option would, in addition to the creation of a new General Product Safety Regulation, integrate within it the market surveillance provisions of the GPSD and the Regulation on Market Surveillance Compliance of Products, so that there would be one single set of rules applying both to harmonised and non-harmonised products.

The GPSD: Impacts on businesses

As may be expected, the provisional assessment of the economic, social and environmental impacts of the initiatives set out in the background document is favourable. However, this may underestimate the cost to businesses of some of the measures envisaged, particularly those related to mandatory requirements for product recalls. It is however difficult to form an assessment of the potential costs without significantly more detail than is currently contained in the Background document, and in particular a draft proposal. Do you agree? What would be your own preference in terms of the different policy options?

Whether or not you intend to respond to the consultation document yourselves, we would be interested to hear your reactions. We are considering submitting our own response as DLA Piper.

EU collective redress directive: European parliament and council of the EU negotiators reach a deal on the first EU-wide rules on collective redress

In parallel with the GPSD, on 22 June 2020, negotiators for the European Parliament and the Council of the European Union reached a political agreement on the text for the first EU-wide Collective Redress Directive (the CRD). The draft legislation forms part of the European Commission’s “New Deal for Consumers” and reflects concerns raised by recent mass harm scandals with significant cross-border implications. These new rules are designed to implement an effective and cost-efficient scheme for mass consumer claims to be pursued both domestically and at an EU-level in response to a violation of EU law. Finally, the CRD introduces some fundamental changes to European legal systems, including the introduction of common law-style “disclosure/discovery” for consumer claims in markets such as Germany, where “disclosure/discovery” is not a typical phase of legal proceedings.

A new scheme for representative “class” actions to be pursued by consumer groups and public bodies on behalf of consumers across the European Union

The key parameters of the revised text in relation to (a) the scope of the proposed scheme and (b) the mechanisms for collective redress are summarised below:¹

Claims for (a) redress (to obtain compensation for harm caused) and (b) injunctions (to halt unlawful practices) can only be pursued in response to a trader’s violation of EU law set out within Annex 1 of the CRD. Consumers will therefore be indirectly empowered to pursue redress for breach of EU law across a very wide range of sectors, including, (a) data protection, (b) financial services, (c) environment and health, (d) travel and tourism, (e) energy, (f) telecommunications and (g) aviation and rail; and (h) general consumer law.

Claims can only be only be pursued for consumer infringements occurring after implementation of the CRD which means there is no scope for retrospective claims arising out of previous high profile mass harm events (e.g. the Horsemeat scandal in 2013).

The scheme operates as an instrument for compliance as it provides consumers with an ancillary redress scheme to indirectly pursue traders for breach of EU law (a) in addition to and (b) without prejudice to their substantive rights under the violated EU law (e.g. consumers eligible to pursue a claim for compensation for breach of GDPR can opt to either (a) join an action for collective redress against a trader via the CRD; or (b) pursue a private law claim against that trader in the courts of their Member State under the GDPR itself). Member States are therefore required to ensure that individual consumers cannot make a “double recovery” by bringing both a private law claim in addition to participating in a collective action under the scheme.

“Qualified Entities” (consumer organisations or public bodies) are the only legal persons with standing to pursue collective actions for trader violations of EU law under the CRD (e.g. consumers cannot pursue an action directly under the CRD). The designation criteria for these organisations differs depending on whether the action is cross-border or domestic:

• Cross-border actions: qualified entities must comply with a set of harmonised criteria prescribed by the CRD such as (a) demonstrating 12 months’ activity in protecting consumers’ rights, (b) being a non-profit organisation and (c) ensuring that they are independent from any third parties whose commercial interests may be said to oppose the consumers’ rights.
• Domestic actions: Member States will determine the applicable criteria consistent with the objectives of the CRD, which could mirror the requirements for cross-border actions.

On litigation funding, the CRD does not prescribe rules for the funding of qualified entities by third parties save for:

Establishing the requirement for any funding to be “transparent” and reviewable by the courts or forum of the Member State in which the action is being pursued.

Expressly prohibiting qualified entities from seeking funding from third parties which are (a) financially dependent on the defendant to the claim (e.g. direct conflict of interest); or (b) financially dependent on a trader operating within the same sector as the defendant to the claim (e.g. financing by a market competitor).

Qualified entities will not necessarily need an express mandate from consumers to pursue an action as the CRD provides Member States with the autonomy to implement schemes on either (a) an “opt-out” or (b) an “opt-in” basis subject to two exceptions:

Any action for injunctive relief will be pursued on an “opt-out” basis and individual consumers will not be required to express their will to be represented by the qualified entity.Any cross-border action will require consumers not habitually residing within the Member State where the proceedings are brought to join on an “opt-in” basis (as further detailed below).

Member States will need to provide at least one representative action mechanism for injunctions and collective redress measures both (a) domestically and (b) at an EU-level.

One important control over abusive lawsuits is the introduction of an adverse costs regime, similar to what is already used in some jurisdictions such as Ireland and the UK. The CRD will introduce:

• the “loser pays” principle (which ensures that the defeated party pays the costs of the proceedings of the successful party). We anticipate the introduction of this principle will further encourage the use of after the event insurance to mitigate risk; and
• the ability for Member State courts or administrative authorities to dismiss manifestly unfounded cases at the earliest possible stage of the proceedings (in accordance with the relevant national law).

EU negotiations confirmed that the European Commission should also assess whether to establish a European Ombudsman for collective redress to deal with cross-border representative actions at an EU-level.

Most importantly, the agreed text contains three key changes to previous iterations of the CRD:

A “game changer” in Europe - introduction of “disclosure/discovery” stage

First, the CRD fundamentally alters the European landscape of mass consumer claims by implementing a “disclosure/discovery” procedure for such proceedings. Member States are required to provide qualified entities with the right to request further evidence (pursuant to an order from the court or administrative authority overseeing the dispute) in the control of either (a) the defendant or (b) a third party. This is a “game changer” because many Member States do not currently have disclosure/discovery proceedings similar to those required by the CRD.

No presumption of liability across EU

Second, the CRD no longer contains reference to the “rebuttable presumption of liability” whereby a finding by the courts of one Member State would lead to the presumption of liability in all other Member States. By contrast, the removal of this consumer friendly proposal is balanced by the fact that qualified entities are able to pursue representative actions without the need for prior establishment of a breach of EU law.

Harmonisation of domestic and cross-border claims

Third, the CRD confirms the adoption of a two-tier approach to collective redress given that (a) cross-border claims will be harmonised at an EU-level and require an “opt-in” mechanism for consumers not residing within the Member State in which the action is brought whereas (b) domestic actions will be determined by reference to each Member State. This solution balances the need for an effective collective redress scheme whilst affording Member States the autonomy to determine domestic schemes.

Where does the proposed CRD leave businesses operating in Europe?

Consumers and consumer groups are likely to welcome the draft CRD because it is intended to protect consumer interests. However its implications are clear: the majority of businesses operating within the EU will face significant class action litigation risk where consumers laws are harmed as a result of breach of legal duty in a protected sector.

Businesses should anticipate heightened class action activity across the EU when this legislation comes into force (although actionable cases under the scheme will not be imminent as a two year implementation period will follow the adoption of the CRD).² As we have seen in other areas such as claims relating to breaches of the GDPR, there will likely be a period before active litigation while potential claimants are required to originate claims, secure funding and then test cases are framed and mounted to establish the boundaries of the law. This delay is likely to be amplified by the restrictions on the types of claimants.

The timing of the CRD coincides with a wider trend of recent European Court of Justice decisions which indicate that the formerly strict rules on EU jurisdiction are increasingly flexible and facilitative of mass actions outside of a defendant’s home domicile. This is another reason why the CRD may have an important impact on companies operating in Europe.

Yet, even without the CRD, businesses should expect an increase in class actions as claimant law firms and third party litigation funders are not waiting idly for the introduction of these new rules. In the UK for instance, the wave of mass claims for breach of data privacy, consumer protection and mass employment claims and follow on damages claims for competition breaches is symptomatic of wider trends and not solely the fruit of new European legislation.

These trends are all the more pressing in the context of COVID-19 which is widely expected to generate significant class action activity across most industries within the EU and UK.

If you would like a confidential briefing regarding any of the matters set out in this briefing, please do not hesitate to contact us directly.

For more information, please contact DLA Piper’s Global Class Actions team at classactions@dlapiper.com.

¹ https://www.consilium.europa.eu/media/44766/st09223-en20.pdf [Accessed 6 July 2020]
² The final text of the Directive will need to be voted on by both the EU Parliament and the EU Council following which the Directive will be published in the Official Journal of the EU and come into force twenty days later. Member States will then have 24 months to transpose the Directive into their national laws, and an additional six months to apply it.