Firms fear US-style class action

Companies are quaking in their boots at the prospect of US-style class-action culture arriving in Europe.

Meglena Kuneva, the European commissioner for consumer protection, first announced plans to set up a ‘collective redress’ system in March. Since then, companies have been warning of the dangers of a system allowing ‘fat-cat’ lawyers to exploit ‘powerless’ citizens to hold companies to ransom.

The warnings are now being stepped up in anticipation of next year’s proposals, despite Kuneva’s claims that any EU system allowing consumers to unite across borders in bringing companies to heel would not replicate the excesses of the US system. "I do not have in mind the United States type of class action. This is not a John Grisham story," she said in March, referring to the American author of The King of Torts.

In his 2003 novel, Grisham targeted the rapacious lawyers that round up complainants to scare companies into early settlement, raking fat profits for themselves in no-win, no-fee arrangements while leaving the complainants with peanuts. Even more worrying for companies than the devious ways of manipulative lawyers are US juries that seek to bring down perceived corporate oppressors with astronomical damages.

Beyond all the scare stories, however, is a clear need for mechanisms allowing European individuals and small businesses to come together across borders to bring actions. The ability to spread costs and risks would greatly improve opportunities for consumers to seek redress for widespread wrongdoings. Collective mechanisms would also act as a powerful deterrent to board complacency.

Kuneva will this weekend (10-11 November) set out her stall at a conference in Lisbon. "She will send a strong political signal that collective action is an idea she is not going to let go of," said a spokesperson. "You want low-cost, speedy redress. The debate is on how that can be achieved properly. It will require a huge amount of analysis. She will set out a range of benchmarks and criteria that any redress system would have to meet." A range of stakeholders, including consumer organisations, business representatives, academics and lawyers, will participate. A communication is expected in the second half of 2008.

The Equitable Life scandal, in which around a million policyholders in the UK, Ireland and Germany were left in the lurch after the insurance firm nearly collapsed in 2000, best exemplifies the need for an EU solution. With no means of joining forces to press charges, policyholders were ping-ponged between national authorities. "There we had the phenomenon of thousands of consumers not being able to do anything effective, being sent from one regional authority to another," says Liberal MEP Diana Wallis, who reported on the case for the European Parliament.

The EU system would not have to replicate the US version, Wallis insists. "The adversarial system in the US leads to all sorts of tactical distortions," she says. "I would be concerned if we ended up with American class action. We may come up with a totally different way of solving the problem. One solution is a public inquiry model, where public authorities decide on compensation, not the adversarial system in the US."

The spectre of shareholder litigation is a particularly scary prospect for big companies. They fear reparations such as the $1.1 billion settlement Dutch retailer Ahold was ordered to pay in a 2005 shareholders’ class action stemming from a 2003 accounting scandal.

Other EU companies have felt the wrath of US complainants. Currently, Italian food firm Parmalat is being targeted by US investors that bought shares in the company between 1999 and 2003, the year it collapsed after a $4bn hole was discovered in its accounts. EU giants Deutsche Telekom, BP, British Airways and Lufthansa have also been touched by the long arm of US law.

Carlos Almaraz, a senior policy adviser at BusinessEurope, the employers’ association, says that companies would prefer the EU to steer clear of the kind of ‘judicial solutions’ that exist in the US. So-called alternate dispute resolution mechanisms, where neutral parties mediate or arbitrate in conflicts are preferred.

"We are trying to put some rationality in the debate," Almaraz says. "There is a lot of emotion there. We are not against the debate. We are, of course, for collective redress. But, we are concerned about focusing on the wrong solutions, focusing on judicial actions as the main way to protect the consumer interest," he adds.

"We are calling for more promotion of alternative dispute resolution. We want to provide a culture where parties sit together and try to find an agreement. Everybody wants to avoid court."

Collective redress

The Portuguese presidency has made the development of an EU system for collective redress one of its main priorities.

Portugal is one of the 13 member states that already have systems in place. Group actions in the UK, for example, have been legal since 2000. A law introduced two years ago in the Netherlands allow plaintiffs to pursue claims on behalf of groups.

Germany has a similar system for securities actions. According to a study commissioned by Kuneva this year, France, Germany, Italy, Sweden, Austria and the Netherlands have recently adopted or are about to adopt legislative reform making collective actions possible.

But the existence of individual member state solutions in no way compensates for the lack of an EU framework. "What we need to do is to ill the gaping hole in Europe’s legal architecture," says MEP Diana Wallis. "If all the member states have something different, it becomes anti-competitive and difficult for the consumer to navigate."

Companies are quaking in their boots at the prospect of US-style class-action culture arriving in Europe.