EU Council suggests fundamental changes to proposal for Directive on representative actions

In April 2018, the European Commission launched its New Deal for Consumers, aimed at strengthening the enforcement of consumer law throughout the European Union. Part of this legislative programme was a proposal for a Directive on representative actions for the protection of the collective interests of consumers. The Commission's proposal required each Member State to implement a mechanism for representative actions, i.e. EU-style class actions. This mechanism must allow qualified entities to claim injunctive relief and redress (damages) for infringements of EU consumer protection laws before national courts or administrative authorities. If introduced, this would be a significant development for certain Member States, since not all Member States provide for national collective redress mechanisms.

On 28 November 2019, the Council of the European Union adopted its common position on the Commission’s proposal for a Directive on representative actions for the protection of collective interests of consumers. The Council’s common position includes numerous amendments to the original Commission proposal, the result of lengthy negotiations between the Member States over the past eight months. Although the Commission’s common position still contains an obligation for each Member State to introduce a mechanism for representative actions, it also aims to fundamentally amend the Commission’s proposal. Most notably, it leaves room for each Member State to set its own criteria for determining the standing of claim organisations in ‘domestic’ actions. The Council’s text proposal is also very different from the text adopted by the European Parliament in March 2019, which contained 108 amendments (see our earlier blog and journal article). The next step in the legislative process will probably be what is termed a trilogue, during which the Commission, European Parliament and Council will together try to reach consensus on a final text of the Proposal. This blog takes you through the highlights of the Council’s common position.

First, the Council position diverges from the positions of the Parliament and Commission on an important structural issue: it introduces a distinction between domestic and cross-border representative actions. A representative action is domestic, if it is initiated “by a qualified entity in the Member State in which the qualified entity is designated”, and cross-border if it is initiated “by a qualified entity in a Member State other than that in which the qualified entity is designated”. The significance of this distinction is visible in, for example, the criteria that the proposal sets for the designation of qualified representative entities in the various Member States. While the Council’s text proposal sets strict criteria for allowing qualified entities to initiate a cross-border action, it leaves it entirely up to individual Member States to decide on designation criteria for domestic actions. The Council’s position does not require a particular link between the qualified entity and the Member State in which the representative action is pursued, e.g. with regard to where the entity is established, the residency of the affected consumers or the place where the damage occurred.

Below, we highlight the implications of this distinction and some further important aspects of the Council’s text proposal:

• Member States are required to designate an entity as a qualified entity for cross-border representative actions if an entity meets the criteria stipulated in article 4a(3) of the Council’s text proposal. These criteria cover areas such as transparency, governance and financing.
  • The designation criteria in the Council’s common position for cross-border actions are more stringent than the criteria proposed by the Commission. The designation criteria adopted by the European Parliament were also more stringent, but differ from the Council’s position.
  • The Council’s common position allows Member States to designate entities on an ad-hoc basis for a particular domestic representative action, but not for cross-border representative actions.
  • We believe the Council’s proposal could create an incentive for representative entities to seek designation (on an ad-hoc basis) for domestic representative actions in those Member States where designation criteria for domestic representative actions are less strict than (i) those of other Member States or (ii) the Council’s designation criteria for cross-border representative actions. Potentially, this could lead to an increase in domestic representative actions in Member States with the most lenient designation criteria – provided that the courts of those Member States have jurisdiction.
• Like in the Commission’s proposal, Member States must designate qualified entities for cross-border actions in advance if they meet certain criteria. Interestingly, the Council’s common position seems to leave more room for courts in other Member States to review whether the qualified entity meets certain designation criteria in case of “justified concerns”, for example with regard to third party litigation funding (the EP’s text proposal already showed a tendency in favor of allowing courts to review certain designation criteria). On top of that, the Council’s proposal also leaves more room for Member States to introduce national admissibility criteria (e.g. relating to “the required degree of similarity of individual claims”). The only limits to the national admissibility criteria are that they should apply to both domestic and cross-border representative actions and “should not hamper the effective functioning of representative actions as set out by this Directive”.
• Like the European Parliament’s text proposal, the Council’s common position leaves it up to Member States to choose between an opt-in or an opt-out mechanism for representative actions. However, the text proposal solely allows opt-out mechanisms that include only consumers who are habitually resident in the Member State in which the representative action is initiated.
• The obligation on the Member States to assist qualified entities is less strict in the Council’s common position than the one included in the Commission’s proposal. Instead of taking “the necessary measures to ensure that procedural costs related to representative actions do not constitute financial obstacles”, as the Commission’s proposal prescribes, Member States must take “measures aiming to ensure that procedural costs related to representative actions do not become insurmountable obstacles”. The preamble in the Council’s text proposal explains that Member States may decide to provide financial assistance to qualified entities; however, the Directive contains no obligations in this respect.
• The preamble in the Council’s text proposal notes that Member States should introduce rules aimed at coordinating representative actions and other legal actions which seek to protect consumers’ interests. The Council’s text proposal requires that consumers who are represented in a representative action for collective redress cannot be represented in another representative action or individual action relating to the same facts and the same defendant. Similarly, the European Parliament had introduced an obligation for Member States to ensure that no other representative action is initiated regarding the same practice and parties.
• Finally, as we mentioned in our earlier blog, based on the European Parliament’s text proposal it was somewhat unclear whether the Directive would require Member States to change existing or future national collective redress mechanisms. Article 1(2) of the Council’s common position now reads: “This Directive shall not prevent Member States from adopting or maintaining in force procedural means for the protection of the collective interests of consumers at [the] national level. However, Member States shall ensure that at least one representative action mechanism complies with this Directive.” The preamble further clarifies that “if there are mechanisms in place at [the] national level in addition to the mechanism required by this Directive, the qualified entity could choose which mechanism to use”. Therefore, implementation of the Council’s text proposal would not necessarily have to lead to changes to national mechanisms of collective redress that are currently in place. It is yet to be seen which mechanism claim organisations will prefer in which Member State.

With the adoption of a common position by the Council, the Directive is one step closer to being enacted. However, the Council’s common position differs greatly from the Commission and European Parliament text proposals. Importantly, the Council’s text proposal is a compromise between Member States that hold very different views on the Directive, driven by a Finnish presidency keen on obtaining results in this domain. After the adoption of the European Parliament’s text proposal in March 2019, elections took place. The trilogue will therefore take place with new members of both the European Parliament and the Commission. In January 2020, Croatia will take over the presidency of the Council. In light of these circumstances, it remains to be seen whether and how soon the Commission, Council and Parliament will be able to reach a consensus. It seems likely that there is still a long way to go before the Directive becomes reality.