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International Practice: Overview/Comparison of U.S & E.U. Judicial Class Action Structures (Web)

Here is the first of a series on class actions and ADR in the European Union by former CPR intern Katharina Diel, who is an LLM student at Columbia University Law School in New York.  We’ll post the second part in mid-June.

As the class action mechanism is almost a uniquely U.S. procedural device, the United States by default is the broadly acknowledged forerunner in this field.

Nevertheless, the procedure actually has its roots in English equity jurisprudence.

Currently, the benefits of class actions in arbitration are in question. The U.S. Supreme Court limited class arbitration this term when it ruled in Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., No. 08-1198 (April 27, 2010)(CPR website coverage here) that class arbitration may not be imposed on parties who have not agreed to it, because of the fundamental differences regarding cost and efficiency between class-action and bilateral arbitration.

Next term, the Court will hear a case from the Ninth U.S. Circuit Court of Appeals challenging the enforceability of class-action waivers in consumer cellphone contracts, AT&T Mobility v. Concepcion, No. 09-893.  Results in that case, and the decision this term in the still-to-come case of Rent-A-Center, West Inc. v. Jackson, No. 09-497, could effectively end the use of class arbitration.

Yet with class actions gaining broader European appeal, it is of particular interest to the arbitration community to turn the spotlight onto the development of class actions in its cradle country, the United Kingdom, and in the other European Union member states, as well as analyze the viability and future continued emergence of this procedural device, including its incorporation into ADR.

Since the European Parliament and Council’s 1998 issuance of the "European Directive on Injunctions for the Protection of Consumers' Interests" 98/27/EC (available here), the development pace of class action mechanisms in the European member states has stepped up enormously.

The directive required all member countries to implement certain forms of group litigation by the end of 2000, which resulted in various approaches. These different approaches offer a rich source for comparative studies, which may help to strengthen the U.S. class action system's advantages, and offer alternative approaches for its deficiencies.

Before the directive, the European member states observed the U.S. class action system with both suspicion and admiration.

The most criticized features of the U.S. class action are the self-appointment of class representatives; the procedure by which one is a class member unless he or she affirmatively “opts out”; the vague standards for determining whether there is adequate cohesiveness between class members; the potential risks of depriving people of an individualized determination of their dispute; the role of lawyers, given the strong incentives for attorney’s fees and entrepreneurial litigation; the possibility of unfair or collusive settlement; and other abusive class action practices. Some of these issues may be fixable by reform efforts.

On the other hand, the fundamental advantages of the U.S. system usually outweigh these concerns. When claims of many individuals arise from the defendant’s same basic conduct, the traditional single-party adjudication model often isn’t economically adequate or efficient.

Besides avoiding a waste of judicial resources and the disproportionate cost of individual litigation in minimal damage cases, the class-action mechanism also serves the interest of finality and consistency due to the fact that instead of numerous separate trials of a similar case, all claims are resolved by a single case binding on all class members.

The European class-action approach differs significantly, particularly with in regard to class representation, group cohesion, and options for refusal of class membership.  The EU Directive provides that rights of actions would be assigned to “qualified entities” in the form of independent public bodies (e.g., administrative agencies) or organizations (e.g., consumer associations).

This form of group representation requires advance determination of the right to serve as a representative entity, in contrast to the U.S. “self-selective” method. The underlying philosophy is a stronger reliance on public institutions to vindicate the public interest, as compared to “private attorneys general” or plaintiffs’ attorneys bringing public-interest litigation for monetary gain.

England and Germany serve as the examples below, as they are considered to be paradigms for European common and civil law countries, respectively.

In 2000, England’s procedural rules were fundamentally reformed, and it now accommodates most multiparty litigation under the “Group Litigation Order (GLO)” classification, which establishes a “group register” in which individual claims may be entered.  See Civil Procedure Rules 1998, Pt. 19, Sec. III, (avaiable here), and Practice Direction 19B; also see GLO listings (available here). The litigation only binds registered claims.

A notable example of group litigation orders was in managing the Royal Liverpool Children's Hospital “organ scandal” case, in which hundreds of parents filed suit against a hospital after it was discovered that the hospital had been secretly retaining the body parts of stillborn or deceased children.

The GLO is a shift away from the older and still available “Representative Parties” model, which permits the court to enforce a judgment on people who were not parties to the suit but who were sufficiently represented by “parties with the same interest.” Pt. 19 (II).

With regard to this aspect, the English system is similar to the U.S. mechanism. In contrast, the GLO model remains unique under the common law countries by providing the possibility for parties to “opt in” rather than to “opt out” of an established class. In consequence, the English method of addressing multiple party claims may be of interest for eventual modifications of the U.S. class action system.

Among the civil law countries, Germany is of special interest in view of its enactment of a law relevant to class actions. The “Act on the Initiation of Model Case Proceedings in respect of Investors at Capital Markets,” of Nov. 1, 2005 (available here or in German, here), aimed to compensate for the lack of provisions on mass litigation in the German Code of Civil Procedure.

The need for such provisions became obvious when about 16,000 small investors filed individual claims against Deutsche Telekom AG, alleging that the company had concealed significant risks in its stock exchange prospectus.

As the act is meant as an experiment to test collective claims enforcement, it will remain effective for a five-year test period, expiring later this year, unless the legislature expressly decides to extend its term.  If the act is successful, it is likely that collective claim mechanisms might be extended to other relevant areas, such as antitrust law or product liability.

A particularly remarkable aspect of the German law is that its model case rulings of the higher courts only have a binding effect for the “opted in” plaintiffs on a particular point of law, namely the defendants' liability, with the rest of the disputed issues left to the suspended trial court  proceedings to administer in each individual case.

This creation of a cost-efficient, transparent and public procedure that simultaneously maintains due regard for the individual circumstances could likewise serve as an example for a future U.S. class action system reform.

 Besides the above exemplary countries, there is a range of other EU member states that already have proceedings which are similar to class action.  Others have found a remedy by introducing compromises, such as legal action taken by associations.

 Nevertheless, most of the EU members do not have available such instruments yet. Thus, the forerunners in the field of collective action in Europe deserve special attention, as they are possible role models for future development.

In addition to Germany and the United Kingdom, these countries have current class action laws:

  • Austria, which features a consolidation of investor claims in one action, who assign their claim to the VKI--Association for Consumer Protection, which conducts the proceedings under Austrian Code of Civil Procedure Sec. 227;
  • France, where consumer or investor claims for individual losses are filed by recognized associations with an opt-in principle, See French Consumer Act Art. L 422-1 and French Monetary and Finance Act L 452-2;
  • Italy, where class actions are now individually pursuable for violation of rights of consumers or users originating from mass contracts, product liability, torts, unfair commercial practices, and unfair competition acts.  See Italian Consumer Act Art. 140 bis.  See also Riccardo Buizza, “Follow-Up: Amended Italy Class Action Law, and a New ADR Law, Finally (Appear) Ready,” 27 Alternatives 187 (December 2009)(available with CPR membership or by subscription here).
  • The  Netherlands, where the procedure of collective settlement enables legally binding group settlement with the opt-out principle between the damaging party and a foundation or association with full legal capacity representing the injured parties’ interest.  Dutch Civil Code, 3rd Book, Art. 305a and 305b, available here.
  • Portugal, where a mass class action with the opt-out principle may be instituted by an injured party or an association.. Portuguese Class Action Law 83/95, at Art. 15, in Portuguese;
  • Spain, where consumer associations and groups of injured parties have a right to claim collective damages in court with opt-out principle. Spanish Code of Civil Procedure, Law 1/2000 of 7 January, Art. 6, 7, in Spanish here;
  • Sweden, where group action permits private individuals or an association to bring an action for a defined “class” with the opt-in principle.  Swedish Act on Group Action SFS 2002:599, in English or in Swedish.

In order to increase the benefit of these procedural mechanisms in the different member states, the next step should be to implement a uniform system across the European Union. This would help to decrease the cost incurred in bringing class action suits as well as to unify the diversified markets of the member states.

As the E.U. is aware of this need, the European Commission presently is working on a study to introduce European class action, similar to the U.S. class action. See Study Leuven, Final Report dd. 17.1.2007, discussed at Peter Mattil and Vanessa Desoutter, “Class Action in Europe: Comparative Law and EC Law Considerations,” Butterworths J. of Int'l Banking and Financial Law, Fn. 1 (October 2008 )(available here).

 It remains to be seen whether the Commission’s proposal will succeed in reducing the striking differences in the substantive and procedural law of its members to a common denominator.

–By Katharina Diel

This article was edited by Russ Bleemer, Alternatives editor, and David Perechocky, CPR Intern.