"Collective Action between Regulatory Goals and Individual Claimant's Rights"
(This interview appeared in SAFE Newsletter Q4 2017)
In this interview, Brigitte Haar, Professor of Law at Goethe University Frankfurt and a member of the SAFE Scientific Board, gives an overview of the recent legal developments concerning collective redress mechanisms in Europe. Brigitte Haar holds the Chair for Private Law, German, European and International Business Law, Law and Finance, and Comparative Law at Goethe University since 2004 and has held visiting positions at Yale Law School, Penn Law School, Columbia Law School and Vanderbilt Law School. Her main research interests are comparative corporate governance, financial market regulation, competition law and policy, and law and finance.
In a new research paper (Haar, 2017) you compare different collective redress mechanisms across Europe, one being the German Capital Investors’ Test Cases Act (Kapitalanleger-Musterverfahrensgesetz, KapMuG), that were partly introduced as a response to the EU Commission recommendation on common principles for injunctive and compensatory collective redress mechanisms. What was the objective of this development?
According to the EU regulatory concept, collective redress is targeted towards an effective enforcement of the underlying regulatory goals, supplementing public enforcement. In this sense, collective redress can be regarded as a means to improve consumers’ material rights. In the last two decades, the European Commission tried to move forward from a sectoral to a coherent approach. It started with the directive on misleading advertising, went on to the field of antitrust and ended now with the encouragement of EU member states to provide relief for private plaintiffs across different sectors for violations of competition, consumer protection, environmental and other laws on a collective basis.
The German Capital Investors’ Test Cases Act was introduced at a quite early stage of this development. What experiences have been made so far?
The initial cause for this law was the Telekom-case that occupied several courts in the last decade and a half: Thousands of lawsuits filed by individual investors congested the courts. These investors claimed damages for alleged misrepresentations by Telekom in its prospectus related to real estate valuation at the time of its third initial public offering in 2000, leading to declining stock prices thereafter. This case, just as the more recent example of the VW case, nicely illustrates three possible objectives of collective redress: Firstly, there is an enforcement deficit with respect to a specific regulation that may be compensated by a collective action. This was the case here where the infringement of the prospectus liability provisions by Telekom had not been penalized. A second objective is to compensate the individual plaintiffs for their monetary damages. At the same time, such a liability for damages may produce a deterrent effect, thus achieving a third overall objective of collective redress.
A common concern against collective redress is that it entails the danger of procedural abuse. How do different European mechanisms address this problem?
Most of them ensure a certain judicial control over the proceedings in order to prevent an overuse of this instrument – in the worst case in an entrepreneurial and profit-oriented way which can sometimes be observed in the United States. In France, for example, only a limited number of consumer organizations have been granted the right to file a class action lawsuit. In Belgium, a judge has to decide on which organizations are allowed to file such an action. In Germany, the legislator tried to eliminate abuses through certain procedural particularities in the KapMuG (see Haar, 2014). For example, the test case decision by the higher regional court is binding for the individual lawsuits whose proceedings with parallel underlying fact patterns have been stayed.
The instrument of collective redress sometimes leads to changes in regulation – which entails the concern that this might be the main objective of an action in the first place. Is this concern legitimate?
This is certainly overgeneralizing things. A possible example could be the occasional situation in the U.S. where litigation has forced companies to accept negotiated regulatory policies such as in the Master Settlement Agreement of 1998 on smoking-related medical costs that resulted in huge payments of the tobacco industry and a ban on cigarette advertising. This was criticized by some (e.g. Viscusi 2002) because, according to them, the locus of establishing tax policy and of regulating advertising was shifted from the legislator to the parties to the litigation.
Do you think we will face a similar development in Europe?
The situation in Europe differs from the U.S. where the beginning of the regulatory role of collective action can be attributed to ineffective regulation. In the EU, consumer regulation is relatively far-reaching, which may even be the reason underlying the relatively lax version of collective action in place in general. However, given the above-mentioned access restrictions in some countries, there is a certain risk that some interest groups will end up in a position to file actions that, in the end, produce some regulatory effect. This is particularly the case in France. In Germany, similar conditions may evolve given the ongoing discussion about group proceedings, which has lately been pushed by the Green Party against the background of the VW case. This proposal also aims to put certain interest groups in the position to file claims on behalf of consumers.
Is it an advantage for consumers with small claims to bundle their cases?
This is not so clear. Of course, if they join an action that has already been filed, they can rely on the support structure of this action which saves them a lot of time. On the other hand, they are part of a mass litigation and subject to the ensuing delays. It is left to the judgment of the courts to decide whether to stay an individual lawsuit with a view to a pending test case.
Would you call the German legislation a success from a consumer protection perspective?
As a result of the Telekom case, the KapMuG was amended in order to resolve some inefficiencies. For example, the first version did not provide for an opt-out settlement procedure that usually results in a decision binding for everyone affected who did not opt out. In an opt-in mechanism, in contrast, claimants must choose to join the action to become a member of the class. As the complexity of the Telekom case showed, largely self-driven proceedings in the hands of the higher regional court with neither an opt-in nor an opt-out mechanism come with certain risks and adverse effects. In the interests of the constitutional rights of the individual investors I would always call for a differentiating answer and not pursue the opt-out mechanism in all cases. However, in my view, the opt-out mechanism may be preferable to settle scattered low-value damages because it may overcome the rational apathy problem better than the opt-in version of collective proceedings. Also, the opt-out mechanism could play an important role in collective settlement proceedings that encourage the parties to work on a mediatory solution outside the court. Ideally, this offers the parties the opportunity to arrive at a win-win solution, which is binding for those who do not choose to opt out. At the end of the day this could produce the optimal result for everyone involved. Therefore, the provision on the opt-out settlement in the KapMuG of 2012 is pointing in the right direction.