Collective redress is now a reality in the EU; does it affect Legal Finance?

Collective redress or collective litigation is a legal proceeding where multiple claimants with similar o related claims group together to pursue legal actions against the same defendant or defendants. This common figure known as the “class action” under US Law was not an option under certain EU jurisdictions, until just recently.

A new Directive —approved by the European Parliament on November 24—, allowing Collective redress in the European Union is going to change the litigation landscape.

The new legislation lays a foundation for representative action in all member states, guaranteeing better protection to consumers against domestic and cross-border “mass harm”, while ensuring safeguards against abusive lawsuits by using the “loser pays principle”. The aim of all these rules, as the European Parliament said, is “to improve the functioning of the internal market by stopping illegal practices and facilitating access to justice for consumers“.(1)

What are the main points of the new Directive?

-Every member state must have a legal procedure for collective redress for consumers, allowing for effective and efficient representative actions at the national and cross-border level.

-Qualified entities: The European class action model allows only qualified entities to represent groups of consumers and bring lawsuits to court, instead of law firms. At the domestic level, member states will establish the criteria to designate qualified entities, but when it comes to cross-border representative actions, qualified entities would be those with a non-profit character, with a legitimate interest in protecting consumer interests, and with independence from third parties who have economic interests in the bringing of a representative action.

-Cross-border and domestic cases: The Legislation introduces a distinction between domestic and cross-border representative actions. In order to bring cross-border actions to court, qualified entities will have to comply with the same criteria across the EU. They will have to prove that they have a certain degree of stability and be able to demonstrate their public activity, and that they are a non-profit organization. For domestic actions, entities will have to fulfil the criteria set out in national laws. (PR)

-The “loser pays principle: It is a safeguard against abusive lawsuits. The principle ensures that the defeated party pays the costs of the proceedings of the successful party.

-The scope of the law: The Directive is broad and collective actions can be brought against traders for alleged violations in several areas, such as data protection, financial services, travel and tourism, energy, telecommunications, environment and health, air and train passenger rights, and general consumer law.

-The door is open to establish a European Ombudsman for collective redress.

-Deadlines: Member states have two years to transpose it into domestic law, and six additional months to apply it.

What does this mean for Litigation Funders?

According to Carolina Bayo, Senior Director & Head of Legal Assets at Stonward, “[a]rticle 10 of the Directive sets the criteria for the funding of representative actions for redress measures, directing parties to ensure they comply with the provisions of national law in the relevant EU jurisdiction or jurisdictions (in the case of cross-border actions). The Directive makes a very good point in ensuring control of the litigation remains in the hands of qualified entities, including settlement discussions, and that any conflict of interest be avoided when a third party funds a qualified entity. It is also important to underscore how external funders can support meritorious claims in their access to justice by also providing much needed external capital to qualified entities, in line with the spirit of Article 20 of the Directive.

As far as the Directive states, the new set of rules won’t affect the Legal Finance landscape. Third Party Funders provide access to capital when there is a meritorious claim but lack of financial resources to pursue it.

Litigation Funders only support claimants with meritorious claims, therefore they won’t be encouraging abusive lawsuits. Even less so, when the principle of “the loser pays all” is in place.

This Directive is a huge landmark in Europe and will contribute to make justice available to all, just as Legal Finance works to do.

(1) https://www.europarl.europa.eu/news/en/press-room/20201120IPR92116/eu-consumers-will-soon-be-able-to-defend-their-rights-collectively