European Class Action Trends

Is this an unwelcome US import?

Originally published in the February 2008 issue

Whilst hedge funds take investment decisions constantly they sometimes choose to act as activist shareholders and in doing so they have to consider a number of factors. In this article we discuss and explain one of those which is the availability or lack of effective collective dispute resolution mechanisms in the jurisdiction in which the target company has its seat or a presence and whether the company concerned pro-actively addresses (collective) litigation risks. This level of risk is often complex to analyse as the collective redress landscape is rapidly changing across Europe.

Class action-type litigation or collective redress mechanisms, to use a more politically acceptable term, are now reaching Europe and have become a hotly debated topic in most of the EU member states. As an example of some of the most recent developments in a few member states, on 1 January 2008 a new law on class actions, including an opt out-regime for small claims, came into force in Denmark, while the Italian Parliament passed a class action law at the end of last year. The new provisions will come into force in June 2008.

Last November, the UK Office of Fair Trading came up with recommendations aimed at facilitating the enforcement of competition law via representative actions on behalf of consumers and businesses. Whether or not by coincidence, it was announced recently that a collective settlement with JJB Sports plc has been reached in the ‘football shirt case’.

For the first time ever, consumers in the UK will be able to recover damages from a company found guilty of participating in a cartel: depending on the circumstances, anyone who bought certain England and Manchester United football shirts from JJB Sports during particular periods in 2000 and 2001 (and can prove it) will be able to receive a payment ranging from £5 to £20.

“Meanwhile, American plaintiff law firms…are setting up shop in Europe or are reaching out to European firms to set up alliances”

Some view this settlement as a milestone in the development of a UK-brand representative action. It is in any case pivotal in highlighting issues that require attention by legislatures and regulators. At the same time, the Civil Justice Council is studying the need to reform the collective redress system in England and Wales, more specifically whether an opt-out regime should be introduced. The study was completed in January 2008 and their recommendation will be published shortly.

The new Italian legislation establishes some form of court-approved (opt in) collective settlement procedure but its scope is so limited that it remains to be seen whether it will play any meaningful role in the resolution of mass disputes and offering parties finality.

Last but not least, in the Netherlands, the Ministry of Justice is currently evaluating the need for improvements in the Dutch Collective Settlement Act introduced in 2005 and which provides for court-approved collective settlements using an opt-out mechanism which in many ways is similar to that of US class action settlements. Two mass claims have been successfully settled on a collective level by using this new act, one in the field of pharmaceuticals (DES) and one in the field of financial products for retail investors. A collective settlement in a securities case relating to the Shell reserves re-categorisation is currently pending before the Amsterdam Court of Appeal and is likely to have groundbreaking cross border implications.

Whilst some jurisdictions have some form of collective mechanisms for dispute resolution, others are still very much clinging to the traditional bilateral model of litigation: one man, one action. In that respect, Europe still provides a very mixed picture, as Table 1 shows.

Collective redress has become a hot issue not only within individual member states but also in Brussels where the EU Commissioners for Competition and for Consumer and Health, Neelie Kroes and Meglena Kuneva, are ‘collectively’ laying plans to empower consumer organisations and other interest groups to collectively enforce the rights they can derive from antitrust and consumer laws. Many of these have their origins in European regulations or directives.

Although the Commission is still studying the necessity and desirability of an EU-wide initiative in this regard, there are clear signs that concrete steps towards some form of collective redressmechanism will be taken in 2008. Although it is as yet unclear which measure(s) will be used and in what legal guise – regulation, directive or the publication of ‘best practices’ – one thing is quite certain and that is what will not be introduced – a mere copy of the US class action model.

During a conference hosted by the Portuguese presidency of the EU in November last year in Lisbon, there was an absolute consensus among delegates from a wide range of constituencies – politics, consumers, businesses, academia and legal services – that this model is simply not what Europe wants or needs. Indeed EU Consumer Commissioner Kuneva said she had “no plans to introduce US style class action legislation in Europe. Let me be clear from the start,” she said. “There will not be any. Not in Europe, not under my watch.”

However many business groups have been warning that the development of pan-European class action legislation could have negative consequences for the growth of European businesses and the EU economy. That being said, there is a contrary view and indeed, clear indications that collective dispute resolution in whatever form or guise is widely perceived to be a necessary tool for European consumers and businesses to effectively enforce their rights in the courts against companies that infringe competition and consumer laws, especially in situations in which an individual would be rationally disinterested to do so simply because the potential benefits of pursuing a claim do not outweigh the costs and risks involved.

In the arena of shareholder’s rights, litigation increasingly seems to have become another tool in the box. For example, in the Netherlands, the VEB, a Dutch association for retail investors has been very active in the Dutch courts over the past decade pursuing the rights of shareholders in matters relating to corporate governance, prospectus liability and market conduct by financial institutions.

More recently, institutional investors such as pension funds and hedge funds are increasingly playing a more active role in monitoring and engaging companies in whose securities they invest. For some, acting as lead plaintiff in securities class action already has become the pursuit of diplomacy by other means.

Against this background, it is perhaps not surprising that a survey of more than 240 company executives and lawyers conducted in September 2007 by the Economist Intelligence Unit showed that they expect class action litigation to increase in the near future. According to the survey, some companies have taken steps to cut down potential litigation risks, including developing customer-complaint monitoring systems (38%), updating safety-rules training (36%), seeking the settlement of potentially costly claims (33%) and making sure that insurance policies cover for example class actions (29%).

Meanwhile, American plaintiff law firms, perceiving Europe as a new hunting ground, are setting up shop in Europe or are reaching out to European firms to set up alliances.

Recent history shows that the various legal mechanisms available in the Netherlands, be it for group actions in the civil courts or enquiry proceedings before the Enterprise Chamber, have proven to be effective tools for investor and consumer organisations to strengthen their position, both in the courts and at the negotiation table. For defendants, the recent legislation enabling collective settlements on an opt-out basis has already proven to be a valuable tool to resolve mass litigation issues, whereas for investor and consumer organisations a collective settlement provides their members with an efficient and effective result.

How will all these initiatives and developments affect the hedge fund sector? On the one hand, European companies that fail to pro-actively address the litigation risks may very well prove to present a higherinvestment risk than they used to have. On the other hand, more effective mechanisms for shareholders to collectively pursue their rights in an effective way is obviously an opportunity, especially in situations in which a ‘free ride’ on actions commenced by other shareholders or representative organisations is available, thus benefiting from recoveries, improved corporate governance and performance which such actions may produce.

It is difficult to judge whether European class actions developments will lead to increased class action litigation and if so, whether this is positive or negative for the hedge fund sector. Given the disparate European landscape it is worth considering the availability or lack of effective collective dispute resolution mechanisms in the company’s base when making an investment decision.

Given that this particular corporate landscape is particularly fast moving, funds will do well to closely monitor developments both in Brussels and individual member states.