Collective Redress - Commission's Consultation on Benchmarks
Brussels, 11 March 2008
The Key Messages:
The International Association of Legal Expenses Insurers (RIAD) shares the European Commission’s view that there are disadvantages which deter the enforcement of individual rights and render procedures ineffective and extremely costly. This is in particular true with regard to collective actions (we use this phrase as a neutral way of describing any form of collective legal action by or on behalf of a group of claimants) and even more so in a cross-border context. Legal protection insurers are, however, neither convinced that existing shortcomings can be solved with the introduction of a European collective redress instrument nor that collective actions are necessarily the proper means to safeguard access to justice.
From RIAD’s point of view obstacles rather persist because Member States do not provide sufficient procedural rules which can deal effectively with collective redress and since national legislations do not accommodate mechanisms which factor consumers from other Member States into their judicial systems (for example the Danish Ombudsman). Consequently, the initial step should be to promote the compatibility of the applicable rules and convince Member States to implement mechanisms which open their judicial systems to consumers EU-wide. The installation of a multilingual European register of pending collective actions could supplement and support the efforts of Members States since it could help claimants and judges to identify and bundle cases.
Legal protection insurers are also conscious of the fact that the issue of civil and procedural law remains within the solemn responsibility of Member States. Competency of the EU in this field is limited to improving and simplifying cross-border cooperation as well as eliminating obstacles to the good functioning in civil matters having cross-border implications. The potential consequence that a European instrument would only apply to cross-border cases would neither be in the interest of consumers nor would it contribute to the good functioning of the judicial systems. Moreover, the questions of the amount (Benchmark 4) and of preventive effects of damages (Benchmark 5) are a core issue of civil and punitive law laying within the competence of Member States.
RIAD Members would welcome the opportunity to discuss their experiences and possible solutions further with the European Commission and other stakeholders.
I. About RIAD
RIAD is the International Association of Legal Expenses Insurance and represents some 60 legal protection insurance companies from 18 countries. Its Members carry on the business of legal protection insurance as an independent enterprise, have delegated the settlement of claims or are engaged in providing services in the field of the legal protection insurance and adhere to the Association’s Code of Conduct. RIAD’s primary corporate purpose is the promotion of its Members’ interests and the endorsement of conditions that guarantee an increasing presence of the industry within an environment of fair competition.
Legal protection insurance is a particular financial service product whose prospects go beyond a traditional insurance product (i.e. the transfer of risks): according to the legal protection insurance directive the product not only consists in undertaking to bear the costs of legal proceedings but also in providing the services directly linked to the insurance cover.
Thus, legal protection insurers actively provide legal services such as giving advice, defending or representing the insured person in civil, criminal, administrative or other proceedings or in respect of any claim made against him. Consequently, legal protection insurers facilitate access to law and justice and can help developing consumers’ confidence in enabling policyholders to exercise and enforce their legal rights. Since the Commission asks stakeholders and interested parties for support in order to decide whether, and if so, to which extent, an initiative on collective redress is required at EU level RIAD happily responds to the Commission’s request.
II. Introductory Remarks
The initial question should be if the creation of a European scheme for collective redress actually addresses existing problems, thus, if a European instrument is an adequate and proportionate way of responding to alleged consumer detriments. From RIAD’s point of view there is presently a substantial lack of empirical data to prove that a collective redress mechanism is necessary to deal with consumer detriment and that the creation of such a scheme would have any positive effects for the Single Market respectively and that its non-existence would lead to distortions of competition. RIAD Members also wonder if the European Union has the competence for introducing a collective redress scheme and on which legal basis such an instrument would be based. In any case, the existence of a legal basis and the compliance with its prerequisites must be ascertained before taking any further steps and therefore legal protection insurers are anxious about the outcome of the two studies which the Commission has launched.
Moreover, in the debate some stakeholders point at the importance of collective redress as a private enforcement mechanism. Yet, RIAD Members are not convinced that private enforcement is always the ideal tool for taking action against wrong-doers who might harm consumers’ interests: while it can complement the supervising functions of public authorities to a certain extent it must not defer the responsibility of scrutiny from the public hand to individuals as private attorney generals. This concept might be inherent especially to the US system but is neither legally nor culturally imbedded in any of the European Member States. In fact, there are obvious reasons why private enforcement works for the USA but has not been established in Europe: while European national authorities in general have implemented effective procedures and sanctions which allow them to hold companies accountable for breaches of the laws the US system has traditionally left the responsibility of defending their rights to its citizens. Naturally, this has led to diverging traditions and mechanisms for the enforcement of the laws. Therefore, it should be assured that the introduction of a private enforcement mechanism into European systems which operate on completely different foundations does not jeopardise the balance and well functioning of the existing apparatus.
This being said, RIAD’s Members agree, however, with the European Commission’s fundamental conclusion that there are detriments which deter the enforcement of individual rights and render procedures ineffective and extremely costly in particular when it comes to collective actions and especially in cross-border cases. Since procedural rules normally do not provide mechanisms which allow the bundling and pursuit of these kinds of cases effectively proceedings are often long and costs for claimants, defendants, taxpayers and sometimes legal protection insurers are often rather high.
However, instead of starting by discussing benchmarks of a potential European instrument the focus should be on the essentials, i.e. to identify tangible problems which consumers actually face when pursuing legitimate claims and try to solve them. The goal should be to assure that Member States put in place more effective, efficient and less costly mechanisms and procedures, thus improving access to law for consumers. The creation of a European instrument would produce countless procedural and practical setbacks which would render proceedings and structures even more complex, e.g. which court would have jurisdiction and how could the jurisdiction be determined without infringing consumers’ rights to go to court in the country of their habitual residence? These and many other questions would need to be answered. Therefore, a European instrument should only be a last resort and its content would have to be restricted to the absolute minimum.
III. Important Parameters
The parameters of a collective redress instrument – either national or European - are dictated by the problems which they seek to solve and should facilitate consumers’ access to law. Therefore, RIAD concentrates on issues which directly concern legal protection insurers and implicitly refers to some of the benchmarks which the European Commission’s services have identified.
1. The Admissibility of an Action (Benchmarks 1 and 6)
A prerequisite is that collective redress should give consumers satisfactory redress in cases which they could not otherwise adequately pursue on an individual basis (1st of the Commission’s benchmarks) while there must be a control mechanism to ensure that the judicial systems are not overburdened and costs of the legal system do not sky-rocket. Therefore, collective actions should only be admitted if they could not better be handled individually and unmeritorious claims must be filtered out (6th of the Commission’s benchmarks).
Costs of the proceedings and the size of the individual claims (proportionality test) play a key role in this context: a collective action should be denied if the claims could be pursued more cost efficiently through individual legal actions (cost-efficiency-test). For this evaluation all potential costs must be taken into account, e.g. lawyers’ and courts’ fees, costs for expert witnesses and expert’s reports, administrative costs for conducting the case etc. It is, however, difficult to quantify costs and fix a sum or ratio which seems justified to pursue a certain claim since this appraisal depends on individual preferences and financial capacities. Moreover, if a judicial system employs collective redress as an instrument of private enforcement it is more likely that high costs will be tolerated even if they are disproportionate to the actual claim. If, however, the predominant target is to provide consumers with adequate means to recover their damages the more important and the more likely it is that claimants will assess costs prudently and decide against pursuing a claim if the costs involved are excessive compared to the claim.
Furthermore, the judge who has to decide about the admissibility of an action must take into account the availability of other legal remedies, e.g. the European Small Claims Procedure, which provide equally efficient and maybe less costly means of pursuing a claim. Subsequently, if a judge comes to the conclusion that the use of a collective action does not stand the cost-efficiency-test and that there are other means available to pursue the claim he must rule that the action is not admissible and that claimants use individual remedies to collect their damages.
It is important for the smooth running of the judicial system that unmeritorious claims are efficiently excluded. Here legal protection insurers can function as a filter since they do not encourage their clients to take a case to court if it is doomed to fail. On the contrary, legal protection insurers are often the first contact for consumers, they scrutinise a potential claim and advise their clients how to proceed. If it is obvious that a case is without any merits the insurer will advice accordingly and thus keep the case out of the judicial system.
Moreover, the rules of recovery of costs are a decisive incentive or disincentive for the introduction of a collective action. The losing party pays principle has been a very effective tool in this respect: it discourages weak cases and encourages early settlement. If claimants know that they are liable for the costs they are forced to weigh their chances of winning before they introduce an action. Therefore, consumers would be discouraged to take cases to court which are not sound and do not have a fair chance of succeeding. On the other hand, if a case has good prospects and the consumer has a legal protection insurance policy the insurer can provide him with the necessary funds if the defendant has substantially greater financial resources and intends to defeat the consumer by outspending.
2. Costs and Funding of Collective Actions (Benchmarks 2, 3 and 8)
In case collective action is the only remedy available for pursuing a claim consumers are denied access to law if they cannot afford the costs for pursuing their claims and funding is not available. Consequently, claimants must be able to finance their actions (2nd of the Commission’s benchmarks) and incentives must stimulate the parties involved to keep the costs of collective redress reasonably low (3rd of the Commission’s benchmarks).
While it is evident that the introduction of an action always incurs some costs (e.g. court fees, lawyers’ remuneration, costs for expert opinions etc.) the specifics of collective redress procedures bear the risk that certain costs are inflated and thus burden claimants and defendants with disproportionate expenditures. Since legal protection insurers might have to reimburse these costs they have an immediate interest in keeping them low:
- Representation: lawyers’ fees and remuneration for representatives are the largest financial risks for claimants and defendants. In principle there are two ways of controlling these costs: 1) introducing fixed rates and 2) limiting the number of lawyers/ representatives assigned to a collective action. For meeting the interests of claimants and defendants alike it is necessary to combine both measures especially if the losing-party-pays-principle applies. Apart from limiting fees and the number of lawyers, it is also important to stimulate lawyers and judges to pool cases in order to pave the way for cost-effective synergies.
Fixed rates or at least a margin for lawyers’ and representatives’ fees allow the loosing party to calculate and predict the costs of proceedings which it might have to reimburse. However, the rules for the reimbursement of costs are implemented in the national judicial systems and are the domain of Member States.
There are different means of keeping the number of lawyers in check. One possibility is the involvement of legal protection insurers: if an insurer makes out identical claims of its policy holders it is possible, for instance, to channel and manage those cases in-house. Another option would be that the legal protection insurer assigns the cases to a selected lawyer or representative who presents all claimants who choose to opt-in. However, it is also important to mention that there are usually several insurers involved in each action which means that each insurer will have different panel lawyers and pay scales but which could also mean that an action can be funded through a number of different legal protection insurers. Tools for keeping costs and the number of lawyers low are in particular important in Member States where legal protection insurers are legally confined to the compensation of costs and are not permitted to assist or advise their policy holders (e.g. Germany). Most importantly, in these countries only an opt-in instrument is feasible for the well-functioning of legal protection insurance since this permits the insurer a preliminary scrutiny of the potentials of a case and to calculate the risks. If the system works on an opt-out basis legal protection insurers do not have any means of preliminary scrutiny and would have to pay lawyers’ fees for each policy holder who is involved irrespective if he decides to remain part of the action or if he opts-out. Moreover, limiting the number of lawyers is also an important issue for the defendant who might have to reimburse the fees of an unpredictable number of lawyers if he loses the case.
Encouraging lawyers to bundle cases can be achieved by increasing their fees when they take on a collective action while, at the same time, it must be ascertained that the fees stay in proportion to the claim. Again, this is an issue of national law which is left to the discretion of Member States.
Last but not least, the most effective incentive for judges would be if joining cases led to real synergies and advantages. Presently, many judges hesitate to bundle claims since they face severe problems due to the involvement of different funders, the large number of cases they would have to deal with at the same time, the complexity of producing evidence, unsolved procedural issues and, finally, the long duration of such actions. An additional reason is that collective actions often count as a single case while actually several cases are treated simultaneously. Therefore, judges might be reluctant to join cases for statistical reasons.
- Notification and collection of putative claimants (8th of the Commission’s Benchmarks): costs for notifying can be substantial, are even more elevated if a collective action has a cross-border implication and extensive research is necessary to identify putative claimants. Keeping in mind the potential European dimension of a collective action the only feasible way to notify is by electronic means either via certain media or by introducing a public register of collective redress actions which potential claimants would have to check and subsequently decide if they want to opt-in. An example for such a register exists in the UK: http://www.hmcourts-service.gov.uk/cms/150.htm. Additionally, judges could be obliged to check the register and refer relevant cases to the responsible court. Moreover, if legal protection insurers identify similarities between the claims of their policy holders they are able to pool claims and encourage courts to combine cases and edit only one judgement.
3. Out-of-Court Settlements and Length of Proceedings (Benchmarks 7 and 9)
Alternative dispute resolutions (ADR) are key for controlling the costs and effectively reduce the length of proceedings. Legal protection insurers are therefore very much in favour of out-of-court settlements, and have, actually, to the great contentment of their clients, been settling a large number of cases amicably. As a matter of fact, some Member States have discovered mediation as an efficient way to settle disputes with their citizens especially when a large number of people are involved (e.g. public plan-approval procedures). Out-of-court settlements could be promoted if procedural rules oblige parties to make an attempt to settle their disputes amicably before a collective action is taken up for trial. On the other hand, if ADR is supposed to be attractive it is essential that none of the parties involved suffer a detriment from settling the case by means of ADR: the effect of the settlement must be binding for all parties (e.g. by acknowledgement of the court), there must be mechanisms in place which allow cases to be treated fairly, quickly and efficiently, lawyers and representatives must be remunerated, claimants must be able to withdraw from an ADR and/ or object to a settlement.
A reasonable length of proceedings is in everybody’s interest and is a fundamental right but is certainly one of the major challenges in the context of collective actions. The involvement of numerous plaintiffs and the right of each claimant to be heard, the necessary production of evidence for each case and the collection and bundling of putative claimants are only some of the reasons why collective actions are particular and procedures tend to be lengthy. Consequently, any attempt to reduce the duration of proceedings to a reasonable time span must depart from these corner stones and should make procedures lean and manageable; that a European instrument fulfils these requirements and achieves these objectives is even more unlikely. Looking at the national level, RIAD Members consider that requesting consumers to opt-in to a collective action would at least rid the procedure of the excruciating process of collecting putative claimants. Moreover, dividing the procedure into a declaratory and an affirmative stage could accelerate proceedings since it would separate the legal appreciation and the fact finding stage from the substantiation and allocation of the individual damage. Again, Member States would have to implement and execute this according to their national judicial systems.
 E.g. the Austrian case "Sparkasse Salzburg": at the outset a test case in behalf of 32 investors, who claimed their investment damages against Sparkasse Salzburg, was brought to court. In the end because Sparkasse Salzburg refused to give a waiver on time limitation thousands of investors had to file their actions in time and attorney fees accrued in the then connected civil proceeding to € 400.000 per day. The case was finally settled out of economic reasons by a compromise after 12 days in court.
 Directive 87/344/EEC of 22 June 1987 on the coordination of laws, regulations and administrative provisions relating to legal expenses insurance (OJ L 185/77 of 04/07/1987)
 Regulation (EC) No 861/2007 of 11 July 2007 establishing a European Small Claims Procedure (OJ L 199/1 of 31/07/2007)
 Provided that the law of the respective Member States admits legal protection insurance to the market of legal services
 The fact that some claimants have the backing of legal protection insurers or other kind of funders sets them apart from other claimants who might be more reluctant to pursue certain judicial instruments (e.g. expert opinions) if they lack the financial backing.