United we stand

Earlier this spring the British consumer group Which? surprised corporate Europe by suing a sporting goods retailer on behalf of consumers who were overcharged for soccer jerseys several years ago.

The retailer, JJB Sports, had long since paid a fine for joining a cartel that fixed the price of soccer jerseys in 2000 and 2001. But those fines were paid to the government, and Which? wanted payment for individual consumers. So it became the first to sue under a 2002 law that allows lawsuits on behalf of consumers hurt by cartels.

‘We want to teach these companies a lesson,’ says online editor Malcolm Coles. ‘Which? has new legal powers, and we will come after you.’

The lawsuit marks the latest example of the emergence of US-style consumer justice cases in European courts. While there are still major differences – the UK lawsuit was filed by a representative group rather than a collection of named individuals, and class members must actively opt in to receive benefits – legal experts see a clear trend towards US-style class action litigation.

‘There has been a definite shift in most jurisdictions in Europe to give plaintiffs access to the courts as a group,’ says John Heaps, head of litigation and dispute management at UK law firm Eversheds. ‘The fact that plaintiffs can club together and run claims that they could not pursue individually for financial reasons means that corporates have to take these changes very seriously indeed.’

Most of the shift has taken place at the national level, although there are also moves at the EU level to allow more class action litigation.

European countries that have recently adopted some form of class action legislation include the UK, Spain, Portugal, the Netherlands, Denmark, Sweden, Finland and Norway. Germany has sector specific legislation in place (for example, in environmental cases) allowing group lawsuits, and it also permits aggrieved investors to share in the costs of sample proceedings in cases that arise from transactions in capital markets.

Meanwhile, France, Italy, Ireland and Poland are considering new class action mechanisms.

‘That is a big number,’ comments Christopher Hodges, head of a research project on civil justice systems at Oxford University, referring to the roster of countries that either have or are developing class action mechanisms. ‘There is a lot going on.’

Building a united platform

With that as backdrop, corporate Europe received a jolt this spring from European Consumer Affairs Commissioner Meglena Kuneva. She announced on March 13 the start of work on a measure to allow individuals and groups from different EU member states to launch collective lawsuits.

‘If consumers are to have sufficient confidence in shopping outside their own member state to take advantage of the internal market, they need assurance that if things go wrong they have effective mechanisms to seek redress,’ she said.

The initiative is now in the comment-gathering stage, with concrete proposals expected in 2008. ‘I would expect this to lead to some form of pan-European system that would allow claims to be brought on behalf of consumers on a cross-border basis,’ says Heaps.

‘It’s one thing to face a threat from group actions in a domestic jurisdiction, and it is quite another matter to have to face a series of claims on a pan-European basis,’ Heaps adds. ‘The cross-border aspect adds a completely new dimension.’

Separately, the European Commission is considering allowing groups of plaintiffs to pursue damage claims against cartels, and has raised the prospect that such consumer redress could also include punitive damages.

The Commission’s proposal is contained in a ‘Green Paper’ issued for comment in late 2005. It is expected to be formalized into a ‘White Paper’ proposal by 2008.

‘Cartels can have a major effect on consumers,’ notes Jonathan Sinclair, a competition lawyer and head of commercial litigation at Eversheds. ‘That is where there is encouragement from national and EU-level authorities for class actions to develop.’

Do cultural differences provide safeguards?

Although national and EU legislation is moving toward US-style class actions, there are significant differences between the US and Europe in legal practices and in the funding of lawsuits. These differences are expected to protect Europe from the wave of litigation that pushes the annual cost of the US tort system to about $240 billion.

For one thing, Europe is far from allowing funding via contingency fees, a practice that makes litigation virtually risk-free for plaintiffs. Indeed, in most European jurisdictions the losing party pays the winner’s legal costs, a provision intended to prevent frivolous lawsuits.

Moreover, punitive damages are the exception in European lawsuits, making the sums to be won in a collective suit far less interesting than they are in the US. In Europe, too, individuals must actively opt in to a class – an administratively cumbersome procedure – whereas in the US individuals in similar circumstances are automatically included unless they specifically opt out.

On top of that, European lawyers are not allowed to advertise, making the spectacle of ‘ambulance chasers’ unknown. European legal systems do not provide for jury awards in consumer and other group litigation; awards are decided instead by experienced judges. Moreover, discovery procedures are relatively limited in Europe, which reduces the cost and nuisance value of lawsuits for corporate defendants.

Does all this mean that US-style class actions are safely removed from Europe? Not at all, says Hodges. He notes that there are changes underway in litigation funding systems in several European jurisdictions.

For example, he says, Italy introduced contingency fees in 2006. The German constitutional court decided in December 2006 that a ban on contingency fees is unconstitutional. Proposed legislation permitting contingency fees in some form in Germany is expected in 2008.

In addition, there are calls for introduction of contingency fees in the UK, where lawyers already have a conditional fee agreement that rewards them for winning a case. ‘Taken together, the changes in legislation and in the funding system make the European litigation scene look quite explosive, and indeed American,’ Hodges says.

Companies call for restraint

US-based multinationals have taken notice of the changes. ‘The lawyers in Europe who report to me think the European system for class actions will evolve, but slowly,’ says Tom Sager, vice president of litigation for DuPont.

Companies are managing the increased litigation risks in various ways. Some 25 multinationals, including Pfizer, Philip Morris, Microsoft, Johnson & Johnson, and General Motors, have formed the European Justice Forum (EJF) to act as a lobby group. It says that Europe should simplify its judicial processes, and conduct cost-benefit analyses before changing the way the civil justice system functions.

The EJF also argues that individual state practices that have proven their value over time ‘should be taken into account’ and that governments should limit contingency-fee arrangements and keep the ‘loser pays’ principle. ‘It shouldn’t be the trial lawyers who are the primary beneficiaries,’ says EJF chairman Malcolm Carlisle.

Victor Schwartz, an attorney in Washington, DC with Shook, Hardy & Bacon and chairman of the firm’s public policy group, says that lobbying should focus on clearly defining the types of claims that qualify for class action status.

‘The facts in common must outweigh the facts not in common,’ he explains. ‘So, for example, a hotel fire or a plane crash might be a suitable basis for a class action lawsuit, while a drug case like the one involving Vioxx is not suitable because each case has different fact patterns.’

In addition, class action legislation should set stringent standards for inclusion in a class, Schwarz says. ‘The idea is to prevent a class of phantom victims, where only the lead plaintiff has been injured – as opposed to a case, for example, [that] alleges misleading advertising [even though] many class members never saw the ad.’

Cutting them off at the pass

Beyond lobbying for more restrictive enabling legislation, companies are taking a variety of protective steps to minimize their risks, lawyers say.

‘Where potential claims arise, even if they are relatively small claims, companies are trying to identify the wider potential for trouble,’ says Sinclair. ‘Often the most difficult stage for class actions is the early stage, so the best way for companies to nip them in the bud is to get onto them very early. That could mean settling on confidential terms, or it could mean making a wider early offer to claimants who might otherwise band together.’

‘The first thing companies should do is understand the laws and the changes taking place,’ counsels Heaps.

Companies should also avoid giving plaintiffs more access to information than they would otherwise have, he adds. ‘Plaintiffs seeking information that would help them in a particular jurisdiction that has stringent privacy rules may go to another jurisdiction with less stringent rules to get that information. Once a plaintiff has the documents, he can use them elsewhere. There is a lot to be said for making sure that documents are contained within the jurisdiction to which they relate.’

Companies should manage their data carefully so that they can prove their products have been through the most rigorous testing procedures and otherwise comply with local and European laws, Heaps advises. Should a problem arise with a product, the company should have a strong crisis management plan in place.

In addition, companies should ensure that subsidiaries are seen as operating autonomously. This protects the parent company in case of a claim against a subsidiary. Heaps points to a class action case claiming asbestosis brought by 3,000 miners against the South African subsidiary of Cape, a UK company.

Due to funding problems in South Africa, the claimants sued the parent company instead. ‘The closer the control by the parent company, the more likely the type of claim made in the Cape case would be,’ Heaps says.

Finally, companies should look carefully at their insurance policies, to ensure they are covered for contractual claims by distributors (for example, alleging a product failed to meet specifications) as well as for tort claims of product liability.

Overpaid and over here

To capitalize on the changes in European legislation governing class action lawsuits and litigation funding, several US law firms have set up European offices or established partnerships with European firms. In some cases, the firms are seeking European plaintiffs to join existing US class actions, particularly in securities cases.

The new arrival that garnered the most attention is the firm Cohen Milstein Hausfeld & Toll, which opened offices in London in early 2007.

Another large US plaintiffs’ firm, Lerach Coughlin Stoia Geller Rudman & Robbins, has assembled an international clientele, including major pension funds, and offers advice on pursuing securities cases.  Meanwhile, US-based Schiffrin & Barroway reached a cooperation agreement with Winheller Attorneys of Frankfurt in late 2006. And Labaton Sucharow & Rudolf formed an alliance with the TILP Group of Germany in 2006.

Despite the legislative changes and the appearance of US plaintiffs’ attorneys in Europe, lawyers say the US and European systems are unlikely to converge entirely.

‘There is a real fear of importing American-style litigation into Europe,’  says Heaps. ‘Strenuous efforts will be made to ensure that consumer protection legislation that allows class actions will not lead to adoption of some of the worst features of US class actions.’