Law firms excluded from EU consumer class actions

The European Commission has published a draft directive that opens the door to class action litigation in Ireland by consumers against corporates.

Experts warn that this brings an increased litigation risk for industry sectors subject to EU regulations, such as data protection, financial services, travel and tourism, energy, telecoms and environment.

The draft directive considerably strengthens EU consumer rights and enforcement, already among the toughest in the world.

The move will allow qualified non-profit and properly-constituted entities, such as the Competition and Consumer Protection Commission, to launch actions on behalf of customers, and introduce stronger sanctions linked to an erring company’s annual turnover.

However, the move specifically excludes law firms from taking class actions and is distinctly different to US-style counterparts.

“Representative actions will not be open to law firms, but only to entities such as consumer organisations that are non-profit and fulfil strict eligibility criteria, monitored by a public authority,” the European Commission says.

It believes that these ‘safeguards’ will ensure European consumers can fully benefit from their rights and obtain compensation, while avoiding the risk of abusive or unmerited litigation.

Remedies

Individual remedies can now be claimed by consumers affected by unfair commercial practices, such as aggressive or misleading marketing. This protection currently varies across the EU.

Widespread infringements that affect consumers in several EU Member States will attract a maximum fine of 4 % of the trader's annual turnover. Member states are free to introduce higher maximum fines.

Transparency

The directive also extends consumer online protection, with more transparency and clear flagging of those traders who have paid to appear in search results.

And online marketplaces will have to inform consumers about the main parameters determining the ranking of search results.

The right to cancel a contract within 14 days, without penalty, is now extended to ‘free’ digital services where consumers ‘pay’ by providing their personal data.

This, typically, will apply to cloud -storage services, social media and email accounts.

The directive also prohibits ‘dual-quality’ practices, whereby products are marketed as identical across several EU countries, even if their composition or characteristics are significantly different. These misleading commercial practices will now be explicitly banned.

Globalised world

Consumer Commissioner Věra Jourová said that, in a globalised world, big companies have a huge advantage over consumers, and the odds need to be levelled.

“Representative actions, in the European way, will bring more fairness to consumers, not more business for law firms,” she said.

“Consumer authorities will finally get teeth to punish the cheaters. It cannot be cheap to cheat," she said.

Misleading advertising

Under the new regime, consumers harmed by illegal commercial practices, such as misleading advertising by car companies, can now seek compensation, replacement or repair.

A Matheson briefing points out that, unlike some other European member states, there is currently no legislative framework, or formal procedure, to facilitate class actions or collective redress in Ireland.

“While multi-party litigation can take place before the Irish courts, this is usually dealt with by way of either one of the parties or the court itself choosing a test case, which then serves as a pathfinder for other similar cases,” the law firm says.

The absence of a structure for multi-party actions was criticised in 2005 by the Law Reform Commission, but the subject is currently being looked at in the context of a broader review of the administration of civil justice in Ireland.

Ad hoc litigation

Matheson believes that it is possible that ad hoc litigation vehicles or organisations could be created as ‘qualified entities’. As such, the proposal does potentially raise a possibility of abusive or vexatious litigation, it says.

‘Qualified entities’ would require funding from third parties, but in order to minimise the risk of abusive practices, such as the funding of collective actions by competitors, the draft directive proposes that the qualified entity declares at an early stage of the claim the source of its funds, Matheson points out.

If funded by a third party, the draft directive states that the funder may not (a) influence decisions of the qualified entity, or (b) provide financing against a defendant who is a competitor of the fund provider.

'Novel departure'

“If passed into law, this aspect of the draft directive would also represent a particularly novel departure from the current position under Irish law, which prohibits the funding of litigation by third parties who have no legitimate interest in the dispute,” Matheson points ou