ESBG (European Savings and Retail Banking Group)
Rue Marie-Thérèse, 11 - B-1000 Brussels
ESBG Transparency Register ID 8765978796-80
Published: 24 September 2018
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ESBG's members place great value on the wishes of their customers. As a consequence, consumer protection is of particular importance to ESBG. However, we believe that the issue of protection of collective interests of consumers is best handled at the Member State level. Many Member States have established efficient and well developed civil law systems which provide for representative actions fully in line with respective legal traditions.
For instance, in Austria there are two cases that may be described as 'representative action'; either several plaintiffs act jointly in a single action with their individual claims (subjective joinder of actions) or a single plaintiff integrates several claims assigned for collection pursuant to the Code of Civil Procedure (objective joinder of actions). The latter is also known as “Class action of Austrian character". Based on the opt-in principal, the system provides for the fundamental right to be heard and the fundamental right of disposition (the right to choose to be affected by the proceedings). Beyond that, it safeguards the principle of equality of arms. According to this principle, in a civil process no party may be discriminated compared to the other. Each party has to prove their claim on their own – a privilege of one party, e.g. regarding procedural costs, financing, court settlements or publications is absolutely illegal.
Comparable to Austria, Germany also provides a system of adequate consumer protection. Under the current German law, there is a well-functioning system of individual and collective redress. Legislative acts such as the German Statute Governing Representative Legal Actions based on capital markets disputes (Kapitalanleger-Musterverfahrensgesetz - KapMuG) and the law regarding injunctions for the protection of consumers' interests (Unterlassungsklagengesetz - UKlaG) provide a high standard of consumer protection. Furthermore, ombudsman proceedings and arbitration boards provide easy access to conflict resolution and have proven itself efficient over many years. For this reason, there seems to be no need to introduce new instruments into the German national legislative framework.
Thus, various Member States' legal systems already provide for adequate and effective instruments of redress. Beyond that they are undergoing ongoing improvements, e.g. Germany's “Musterfeststellungsklage" (coming into force on 1 November 2018). We therefore, recommend that EU intervention should not impair well-performing civil law procedures. As the Commission proposal suggests major modifications to the existing systems, this might trigger unintended consequences. Several provisions lead to the assessment that the potential for misusing the representative actions instrument is evident.
II. Mitigating the possibilities of misuse of representative actions
Narrow subject matter and scope (Art. 1 and 2 para. 1)
According to Art. 2 para 1, the proposal would also allow representative actions “[…] where infringements have ceased before the representative action has started or before the representative action has been concluded". Based on this, even if the unlawful practice had been discontinued for a long time, it would still be possible to bring representative actions. Consequently, although the plaintiff has no legal interest in legal protection anymore, a lengthy and possibly expensive process would have to be undertaken. Therefore, we would argue that it should be a mandatory prerequisite for bringing representative action that the effects of an infringement are still ongoing.
It is .against this background that the directive on representative actions requires clearly-defined and narrow legal limits which regulate the admissibility of legal action in order to prevent any possible abuse of law (see Art. 1 which highlights as a purpose of this directive that appropriate safeguards to avoid abusive litigation shall be ensured). Furthermore, ESBG is of the opinion that the final directive should also clearly state that a collective action can only be applied if the facts are identical. Moreover, it seems that it is unclear what the term “collective interests of consumers" means.
ESBG is of the opinion that a minimum number of consumers should be required to fit under this definition. Art. 3 of the proposed Directive defines “collective interests of consumers" as the interests of a number of consumers, but does not specify what that number must be. However, we believe that setting a minimum requirement would help improve consumer protection since the initiation of a collective action by a qualified entity without collective mandate could negatively affect other collective actions to be initiated in the future. Additionally, it would help consumers when choosing a qualified entity to represent them, as well as avoid future legal uncertainty and diversity in national interpretations. In addition to that, we would suggest that the definition should be further developed in Art. 3, clarifying what a collective interest is considered to be.
Qualified entities (Art. 4)
ESBG welcomes restricting the entitlement to bring representative actions to qualified entities. However, we believe that the criteria for these is too low.
a. Legitimate interest must be demonstrated and verifiable
In ESBG's opinion, the requirement for the qualified entity merely to have a legitimate interest in ensuring that provisions of EU law covered by this Directive are complied with (Art. 4(1) (b)) poses a problem. ESBG believes that this condition is open to abuse and does not represent an adequate corrective factor. It is evident that such an interest can be claimed on the surface, while economic interests are the actual controlling factors in the background. For example, this interest could simply be included in the formation documents when the qualified entity is constituted. By contrast, the decisive factor that such an interest actually exists should be demonstrated by the entity and should also actually be capable of being verified by a court.
ESBG takes the view that the interest of the entity should not just be to bring actions, and that the entity should not have been constituted just for this purpose. For this purpose, it would make sense to include stricter requirements for the membership structure, the minimum period of existence of the entity and the source of its funds. The rules on funds contained in Art. 7 of the Directive should also be included as a condition in Art. 4.
Additionally, we consider that only legally qualified entities (e.g. consumers and user's association that have a non-profit making character) should be trained and then entitled to lodge representative actions in defence of diffuse interests, when the injured parties are consumers and users unknown or difficult to determine. Accordingly, it should be avoided that, in any case, some Member States make it possible for individuals or non-qualified entities to file representative actions.
b. Non-profit making character does not protect against abuse
ESBG generally supports the idea that the qualified entity should be non-profit making. We believe however that by itself, the fact that an entity is non-profit making is not enough to prevent abuses. For instance, paying high salaries to governing body members or high fees to external consultants does not exclude the profit making character of an organisation. In any case, it is still entirely unclear how the non-profit making goal is supposed be demonstrated and how a court is supposed to verify this requirement. Pure-play “litigation entities" should not be recognised as qualified entities. In addition, ongoing checks should ensure that the requirements for qualified entities are met consistently and permanently. ESBG believes that this can only be ensured rationally if the shareholder or member structure has to be disclosed. Lawyers and litigation funders should be prohibited from being direct or indirect members of such entities, so as to prevent them from leveraging such institutions as “vehicles" for their profit-making activities. Moreover, it is necessary to include restrictive measures to avoid qualified entities to be controlled by intermediaries, for example, family members or entities interposed of lawyers and litigation funders.
ESBG's view is that this risk can be effectively countered by prohibiting qualified entities from using a litigation funder to fund legal actions. In the interests of transparency, qualified entities should be subjected to public reporting obligations. The consumer organisations and independent public bodies referred to in Art. 4 para. 3 should also fulfil these criteria for recognition as qualified entities.
Finally, ESBG believes that a court should not only have the right, but rather an obligation to examine whether the purpose of the qualified entity justifies its taking action in accordance with Art. 5 para. 1. The reason for this is that the court should examine in all such cases whether the direct relationship between the main objectives of the entity and the rights granted under EU law that are claimed to have been violated in respect of which the action is brought required by Art. 5 para. 1 actually exists. ESBG's view is that in fair proceedings, defendants should be able to defend themselves against an unjustified claimant as a “minimum right of defence". The review powers needed by the court should therefore be anchored in this paragraph.
c. No ad hoc entities
In the opinion of ESBG, no ad hoc entities as provided for by Art. 4 para. 2 should be admitted for a representative action. The reason is that this could circumvent some of the conditions required for “permanently" qualified entities. In our view, the interest of wishing to bring an ad hoc representative action is not sufficient to receive considerable relief from the requirements. Otherwise, this would open the floodgates for “by-pass vehicles". For example, law firms could join forces with litigation funders to generate an attractive business model by being appointed as an ad hoc entity. ESBG therefore urges deleting this paragraph without replacement.
d. Supervision of qualified entities
We are of the opinion that Member States should establish a supervisory system (e.g. through a Public Institution) to oversee on a regular basis whether or not qualified entities are complying with legal requirements. Otherwise in accordance with our preposition, they should be disqualified.
e. No regionally limited entities
In the opinion of ESBG, the Directive should regulate only qualified entities at national level, and therefore avoid extending it to entities that limit their representation to consumers from specific regions. This is because the aim of the Directive is to protect the collective interests of consumers, not to support the creation of new entities per se. If entities that only protect consumers from one region, but not others, are considered as qualified, this may result in inadequate protection for other consumers. As a consequence of that, we would suggest adding a fourth criterion to those listed in article 4(1), stating that “(d) it has to be able to represent consumers at national level".
Providing proof of risk (see Art. 5 para. 2 on representative actions for the protection of the collective interests of consumers)
In addition to Art. 2 which stresses that the representative actions can also be brought before court where infringements have ceased, the proposal even suggests that qualified entities are entitled to bring representative actions where an infringing practice is imminent but has not yet taken effect.
We have second thoughts about the legitimate interest in legal protection in these instances. However, if such an ex-ante possibility to bring action is to be allowed, it should be limited to instances where the qualified entity can provide proof of the risk of serious harm by an imminent infringement while also providing a clear proof of a concrete threat to the consumers' assets.
Representative actions (Art. 5)
a. Interim injunctions
ESBG opposes interim injunctions (“injunction orders as interim measures") under Art. 5 para. 2(a) that seek injunctive relief if they cannot also be currently obtained under the existing national law of the Member State. In addition, the claimant should be required to present prima facie evidence of a concrete danger as a condition for a claim. Moreover, the current wording only refers to “stopping the practice".
However, it should be undisputed that this can only mean prohibited practices that have been established as such by a court. The reference in Art. 5 para. 2(b) “that the practice constitutes an infringement" is missing in point (a) and should be inserted accordingly.
b. Actions for injunctive relief
If the claim concerns the same behaviour of the company (to do something or cease doing it), it must be ensured that the company is not confronted with a large number of similar claims. For this purpose, a final decision should render any further decision on the same fact pattern inadmissible. It should be ensured that – if the aim of the actions is identical – only the first action will be continued and all other actions will be inadmissible. The reason is that if the “protection of the collective interests of consumers" is a precondition for a claim, this interest is acknowledged through the first claim; equally, as a collective interest, it cannot be split up. There are arguments in favour of embedding this legislative purpose in Art. 5 para. 2 of the Directive.
c. Mandate of individual consumers
According to Art. 5 para. 2, in order to seek injunction orders, qualified entities shall not have to obtain the mandate of the individual consumers concerned or provide proof of actual loss or damage on the part of the consumers concerned of intention or negligence on the part of the trader. In our opinion introducing this possibility would be contrary to the legal security and the procedural principles in some Member States because it is necessary to hold a legal representation by mandate given by the holder of the legal right and prove the causal link between the damage caused and harmful conduct. Moreover, it would lead to an increase in the court's workload that would adversely affect consumers, companies and the economy of the European Union.
Furthermore, it is necessary that qualified entities have the mandate of the persons that they are representing in order to guarantee the principle of res judicata. Without this requirement, consumers could initiate collective and individual actions on the same facts.
Mandatory opt-in (see Art. 6 para. 1 and 3(a) on redress measures)
It is in itself problematic to propose representative actions in order to enforce benefit-in-kind claims on traders (“…repair, replacement, price reduction, contract termination…"), as such claims are always very specific to the individual case. However, it is even more problematic that the proposal leaves the decision whether or not the mandate of a consumer is to be required up to national discretion. We believe that full harmonisation is needed in this particular area and that the individual consumer's mandate should be mandatory (opt-in).
ESBG is of the view that a representative action that is brought without a mandate from the consumer concerned violates the principle of party disposition protected by fundamental rights. This states that a civil law dispute before a court is determined by the parties as a matter of principle. An opt-out procedure runs counter to this principle.
No punitive damages (see Art. 6 para. 3(b) on redress directed to a public purpose)
The paragraph refers to de minimis cases where no significant redress can be allocated to individual consumers. In such cases, the trader's redress shall be directed to a public purpose. Yet, such a procedure would lead to "punitive damages", which were rightly not provided for in, for example, neither in the Austrian nor the German legal system and which would have no relation to the unlawfulness of the practice being pursued. It has to be taken into account that the objective of the process is to repair the damage caused to consumers, not imposing penalties which have to be regulated in other fields.
In addition, in the cases referred to in Art. 6 para. (3)(b), the proposed Directive does not rule out the possibility that an aggrieved consumer might also assert a claim for damages in addition to the scattered losses claimed by the qualified entity. This would be contrary to the prohibition of double jeopardy.
The discovery process
Art. 13 allows the court or administrative authority overseeing the representative action, at the request of the qualified entity that brought the representative action, to order the defending trader to provide evidence relevant for the case that lies in its control. According to the Commission's explanations, this provision is designed to ensure a minimum level of effective access to the information needed by qualified entities to prove their claim.
ESBG cannot agree with the Commission's proposal for such a “discovery" process that is similar to the pre-trial discovery practice that exists in the USA. ESBG considers this instrument to be extremely open to abuse because it allows the party to overwhelm its opponent with expensive discovery measures. It is therefore also used in US class action lawsuits to wear down the opponent and force an unfair settlement.
Such an instrument disproportionately disadvantages the defendant company, and it is not compatible with the fair conduct of legal proceedings. Such a discovery process also runs counter to European legal traditions. Extensive requests for information without specified applications should not only be classified as inadmissible discovery and hence a violation of applicable procedural law, they also violate European data protection law and professional secrecy. Merely designating the category of evidence is on no account sufficient, as this would jeopardise the protection of proprietary information. At the very least, the Directive should set out that sensitive passages of documents can be rendered illegible.
Moreover, the right to present evidence is in turn granted only to the qualified entity. The draft Directive does not extend this right to the company. In ESBG's opinion, this contradicts the principle of equality of opportunity in civil proceedings, under which both parties must have an equal procedural opportunity to be heard and give evidence. ESBG believes that the provisions governing evidence in Art. 13 should not be formulated as a “one-way street" and hence not just unilaterally at the expense of one party.
ESBG believes that representative actions should be within the competence of courts. Therefore, we do not agree with the proposal of Art. 5 para. 1 which provides for the possibility of administrative authorities being competent for such procedures.
The proposed directive gives Member States the opportunity to regulate that the approval of a settlement by a court could be requested (Art. 8 para. 1). However, if a trader reaches an agreement on a settlement with a non-profit qualified entity, one can assume that the interests of consumers are seriously taken into consideration. Consequently, a court's approval does not provide an added value. Moreover, it will often be difficult to persuade courts to grant this approval, as this would entail extensive responsibilities of the court (i.e. liability for acts of public authorities).
According to the explanations on Art. 7 of the draft Directive, qualified entities should be fully transparent regarding the source of funding of their activity in general and regarding the funds supporting a specific representative action (page 15 of the draft Directive). This is intended to enable courts to assess whether there is a conflict of interest. It is also intended to avoid the risk of abusive litigation between competitors and to ensure that the funding third party is sufficiently liquid in the event of the failure of the action.
a. Transparency of funds must be safeguarded
As stated above, a key condition for a qualified entity should be that it has to disclose its membership structure and the source of its funds. However, it is difficult to see the rationale as to why this obligation should apply to qualified entities in the case of redress measures under Art. 6 para. 1 but not in the case of interim injunctions or injunction orders establishing an infringement in accordance with Art. 5 para. 2(a) and (b). A requirement should be inserted at this point that harmonises the measures.
In this context, we consider that a qualified entity should not be financed by firms of lawyers or other business organizations related to the practice of law in order to avoid law fraud. In particular, ESBG is of the opinion that foundations or associations constituted or owned mostly by law firms should be banned from lodging representative actions.
b. Apportionment of costs if the action fails is indispensable as a corrective
A positive proposal is the requirement for the entity to demonstrate in accordance with sentence 2 of Art. 7 para. 1 that it has sufficient financial resources to bear the costs should the action fail. However, it would make more sense if this requirement were to be inserted in Art. 4 para. 1 for the designation as a qualified entity. In ESBG's opinion, this condition should be met when the action is brought and not just “at an early stage of the action" (Art. 7 para. 1 as currently worded). It should be possible to verify the evidence of sufficient financial resources at all times during the procedure.
c. Litigation funding should not be permitted
With regard to Art. 7 para. 2, ESBG is of the opinion that a qualified entity should not be permitted to use the services of a litigation funder to fund legal actions. On the other hand, if an action is to be funded by a third party, it must be ensured that the third-party funder does not influence decisions of the qualified entity with regard to the representative action. In addition, we believe that the third-party funder should be prohibited (i) from investing directly or indirectly in the qualified entity and (ii) supporting it in any way other than through a funding commitment.
d. Assessment necessary in the case of third-party funding
With regard to Art. 7 para. 3, it should be ensured that the courts are not only “empowered" to assess the circumstances referred to in paragraph 2, but are also “obliged" to assess the funding conditions. It should be necessary in this context to submit the necessary evidence. To the extent that the Commission's objective is to make representative actions “fully transparent", this should be achieved through stricter requirements for the obligation to provide evidence.
In our opinion, understanding final decisions in a Member State or in another Member State as irrefutable proof or assigning to them a probative effect could result in a lack of true objectivity in judgments due to the extensive casuistry that derives from this kind of procedures when they take place in different economic sectors. Moreover, from ESBG´s point of view this principle challenges the role of the court in some of the member states.
Namely, the proposal establishes an immediate link between public and private law sanctions, which is unfamiliar in some jurisdictions. It implies a significant change in both private and procedural law in these Member States. A decision by an administrative body in these Member States regarding a breach of consumer law is governed by public law under the current regime. The decision on compensation due to the breach of law, on the other hand, is governed by private law. Claims for compensation are usually handled by courts. Both the material law and the procedures of execution differ significantly. In the latter decision, the court must make its own interpretation of the relevant law, although the decision in most cases will be heavily influenced by the administrative body's decision. Hence, the evidence rule of Art. 10 challenges the independence of the court's rulings.
Enforcement of consumer law by consumer authorities shall protect the consumer community collectively and not a specific agreement with individual consumers. If a decision by an administrative body (such as the national consumer authority) solely should constitute the legal basis for compensation, the procedures for decisions made by the administrative body must also be adapted accordingly. A clear consequence would be that the national administrative procedural rules must comprise all civil procedural safe guards regarding calling of evidence, contradiction, depositions etc. However, it has to be taken into account that no administrative procedure can establish a binding effect on judicial proceedings.
Contrary to the corresponding evidence rules in Competition Directive 2014/104 / EU - which the proposal obviously is inspired by - the scope of the evidence rules in Art. 10 is not restricted to cross-border issues affecting trade in the EU. The above mentioned effect of the proposal implies that it could be questioned whether it is in line with the principle of subsidiarity.
Additionally, a potential valuation error may occur because not all judgments end up being included in accepted jurisprudence, whereas judgements are usually delivered by individual and not collegial courts. Due to this, the judgements sometimes differ greatly from established judicial doctrine or deal with matters which have not yet been addressed. This could completely run counter to the expectations of a judicial decision, mostly in matters of consumers' complaints against abusive clauses.
The detailed explanations of the specific provisions of the proposal suggest that consumers harmed by an infringement shall be given a reasonable opportunity to bring redress action either within the representative actions brought on their behalf or in individual actions. Beyond that, the proposal foresees that such actions brought individually by consumers shall be available through expedient and simplified procedures.
However, the proposal remains unclear as to when the consumer has to make this decision between individual or representative action and, consequently, when a corresponding mandate has to be given. On the one hand, the proposal stipulates a Member State's option on whether or not a mandate from the individual consumer is required for a collective action.
On the other hand, without considering which option a Member State will have chosen, some cases are precluded a priori from the requirement that an explicit mandate from the consumer is necessary in order to bring a representative action.
The lack of an explicit mandate raises further questions, e.g.:
Conclusion: In order to clarify these questions, it is of utmost importance that a harmed consumer takes an explicit decision by either giving a mandate (opt-in) to a qualified entity for bringing a representative action or for opting in favour of an individual action. Without the mandatory requirement to opt-in, the rationale for the entire proposal must be called into question. Without an opt-in requirement, no rational consumer would participate in a representative action. The harmed consumer could take advantage from redress measures without giving his mandate and, in addition, after an infringement has been irrefutably established by a final decision, bring individual actions - with 100% chance of success. Beyond that, the suspension of the limitation period according to Art. 11 would open the floodgates towards this “cascade actions".
Only on the basis of an explicit mandate, in general, a litigation industry can be avoided and, in particular, the infringing trader can fulfil his duties (e.g. notifying all consumers concerned individually) and the harmed consumer is made aware that he waives his fundamental right to be heard individually before a court. Therefore, it is imperative that a clear mandate (opt-in) has to be provided by the harmed consumer.
The limitation period is based on the principle of legal certainty guaranteed by the legal systems of Member States. Therefore, we consider that the suspension of the limitation period and specific assumptions should be determined more precisely to avoid problems that could arise from different representative actions against the same company and the same claim.
In some legal systems, the current text could lead problems of lis pendens between procedures, the consequences of which would be negative for procedural economy.
In accordance with Art.15 para. 2, the cost related to inform consumers concerned about the ongoing representative action may be recovered from the trader if the action is successful. In our opinion the capacity to recover the related cost from the trader is disproportionate and unjustified. This would be an additional economic burden for traders since they would have to incur expenses to provide this information while qualified entities could benefit from limited court or administrative fees as well as access to legal aid and public funding (Art. 15 para. 1).
Art. 16 sets out the rules governing cross-border representative actions. It is designed to ensure the
mutual recognition of the legal standing of qualified entities in one Member State in seeking representative action in another Member State. Moreover, it enables qualified entities from different Member States to act jointly within a single representative action.
In the ESBG's opinion, it must still be possible to dispute the qualified entity's right to take action. It must be ensured that the defendant trader can adequately defend itself against a spuriously intervening claimant. Such a defence is no longer possible if courts and administrative authorities are forced to accept an entry in a register as a right to take action. At the very least, however, the trader must be given the opportunity to seek a review from the authority responsible for including the qualified entity in the register. Art. 16 para. 4 should set out that it must also be possible for the defendant trader to apply for a review.
Ultimately, a qualified entity should not only be able, but should also be obliged, to bring a joint action
for the same infringement only before a single court. Otherwise there is a risk of obtaining diverging decisions. ESBG believes that such a “legal fragmentation" should be counteracted.
ESBG represents the locally focused European banking sector, helping savings and retail banks in 20 European countries strengthen their unique approach that focuses on providing service to local communities and boosting SMEs. An advocate for a proportionate approach to banking rules, ESBG unites at EU level some 1,000 banks, which together employ 780,000 people driven to innovate at 56,000 outlets. ESBG members have total assets of €6.2 trillion, provide €500 billion in SME loans, and serve 150 million Europeans seeking retail banking services. ESBG members are committed to further unleash the promise of sustainable, responsible 21st century banking.
European Savings and Retail Banking Group – aisbl
Rue Marie-Thérèse, 11 ￭ B-1000 Brussels ￭ Tel: +32 2 211 11 11 ￭ Fax : +32 2 211 11 99
Info@wsbi-esbg.org ￭ www.wsbi-esbg.org
Published by ESBG.