Class actions: key issues in a rapidly developing market
Changes in the law and market conditions mean that class actions are on the rise across the European Unio…
Changes in the law and market conditions mean that class actions are on the rise across the European Union and United Kingdom, write Richard Hornshaw, Mark Dawkins, Jenny Arlington and Jay Jamooji from Akin Gump in London.
Class action, or aggregate litigation, is increasingly grabbing the headlines. There is no doubt that it presents both risks and opportunities for market participants. Wherever you sit in the capital structure, whether as a company, a lender or a shareholder, it is crucial to keep on top of the rapidly evolving landscape in the United Kingdom and the European Union.
This article sets out the key issues stakeholders should be aware of, in light of the most recent legal and regulatory changes and case-law.
THE DRIVERS BEHIND THE CLASS ACTIONS MOMENTUM IN THE UK AND THE EU
After years of intense activity in the area of aggregate litigation in the United States, real momentum is now developing in the UK and the EU. The surge in the number of existing and anticipated UK and EU class actions can be attributed to at least four key factors. First, class actions are attracting a considerable degree of legislative and judicial support.
On an EU level, the first pan-European legislation on class actions, the EU Collective Redress Directive, must be implemented into national law by each EU Member State by 25 December 2022. Courts have also become increasingly willing to approve collective action claims, including those with novel and expansive fact patterns. For example, in its judgment in Okpabi and others v Royal Dutch Shell, the UK Supreme Court held that the English court has jurisdiction to determine a collective action claim brought against an English-domiciled parent company and its Nigerian subsidiary seeking damages for alleged misconduct by the Nigerian subsidiary.
The claim was brought by a group of over 42,000 Nigerian farmers and fishermen seeking compensation of over 100 billion US dollars for environmental pollution from pipelines operated by the subsidiary. Second, the rise in so-called ‘opt-out’ collective action mechanisms in jurisdictions such as the Netherlands and the UK has materially affected the economics of class action claims, making them much more attractive to potential claimants and third-party litigation funders. Pursuant to an opt-out regime, affected individuals are automatically considered as class members unless they positively opt out of the class.
Conversely, the ‘opt-in’ regime requires claimants to choose to become part of the class, which can be cost- and time-intensive and ultimately mean that a critical mass of claimants cannot be brought on board. Third, there has been an increased focus around the world on areas which naturally lend themselves to collective redress, including environmental, social and governance issues (ESG), data privacy, antitrust, securities misselling, product liability and employee claims. For example, in the UK, the number of group securities claims being pursued has significantly increased over the last few years, in the aftermath of the high-profile claim brought by institutional and retail investors against the Royal Bank of Scotland (RBS) and its former directors in relation to alleged misleading statements at the time of RBS’s rights issue.
Recent examples have included claims against Tesco, one of the largest supermarkets in the UK, and against Lloyds Banking Group and its former directors relating to its acquisition of HBOS. Finally, there is no doubt that the parallel growth of the third-party litigation funding market is an important part of the story – there is now significant capital available to claimants who otherwise may not have been in a position to bring a claim.
DEVELOPMENTS IN THE UNITED KINGDOM
Although the UK introduced an opt-out class actions regime for competition damages claims in 2015, it took until August 2021 for the UK’s Competition Appeal Tribunal (CAT) to certify the first ever opt-out collective action. The GBP 14 billion claim (Merricks v Mastercard) was brought in the CAT by Walter Merricks, the former Chief Ombudsman of the Financial Ombudsman Service, as a proposed class representative for over 46 million consumers, being all UK residents aged 16 or over at any time between 1992 and 2008.
Merricks claimed that the class of consumers had suffered loss as a result of Mastercard‘s anti-competitive multilateral interchange fees. At first instance, the CAT refused to certify the claim. That decision was appealed through to the Supreme Court which, in December 2020, overturned the CAT’s original decision and, in doing so, confirmed that a mere difficulty in quantifying damages should not preclude certification.
The Supreme Court held that in collective action proceedings damages do not have to be apportioned so as to reflect every individual’s actual loss. Accordingly, the Supreme Court referred the matter back to the CAT, which subsequently approved the certification of the class. The case is now being substantively heard by the CAT.
The decision in Merricks v Mastercard has provided significant impetus to a range of other competition claims before the CAT, including a GBP600 million collective action claim against BT Group on behalf of approximately 2.3 million landline customers for alleged historic overcharging; a GBP 1 billion action against a number of investment banks, who are accused of rigging the global foreign exchange market; and two separate applications for opt-out collective proceedings brought by proposed classes of millions of rail passengers against two UK rail operators concerning the availability of certain rail fares. Significant steps have been taken to develop an opt-out class actions regime outside antitrust as well. The most significant test case in this regard was Lloyd v Google, in which consumer rights activist Richard Lloyd sought to bring a claim against Google, alleging a breach of its statutory data protection duties and seeking damages of around GBP 3 billion in total.
The case was brought on an opt-out basis on behalf of around four million iPhone users, relying on the representative action regime, which essentially allows a person to bring a claim on behalf of a class of individuals who have the same interest. Whilst the Court of Appeal ruled in Lloyd’s favour in 2019, on 10 November 2021 the Supreme Court ruled in favour of Google. Lloyd had argued that the class members’ loss was the ‘loss of control’ of their personal data.
However, the Supreme Court held that did not meet the test under the applicable legislation, which required a claimant to show he had suffered material damage such as financial loss or mental distress. The judgment did, however, leave open the possibility of the representative claim structure being used as an opt-out mechanism in certain circumstances. It remains to be seen the extent to which the various pending claims which have used the same procedural structure are discontinued, or amended in light of this freshly issued Supreme Court decision.
DEVELOPMENTS ACROSS THE EUROPEAN UNION
The Directive has three key features.
First, under the Directive, claims must be brought by a qualified entity on behalf of consumers; and the Directive contains provisions to ensure that individual consumers should not bear any costs of the proceedings other than in exceptional circumstances. If a qualified entity loses the claim and is ordered to pay the successful party’s costs, it will not generally be able to seek reimbursement from individuals. However, the Directive contains provisions designed to ensure that qualified entities are not discouraged from pursuing a claim for costs reasons.
Member States are obliged to provide a framework of structural support to ensure this, possibly by limiting court fees, granting public funding to qualified entities or through third-party funding (see next point). Second, the Directive allows third-party funding, provided that qualifying entities ensure that there are no conflicts of interests. It will be interesting to see how jurisdictions such as Ireland, which currently does not support the use of litigation funding, will satisfy this requirement of the Directive.
Third, cross-border representative actions are encouraged under the Directive. Qualifying entities may bring claims in their own country’s courts or in the courts of another Member State, and qualifying entities from different Member States may join together in a cross-border action to sue a defendant in one court, as a way of saving costs and resources. This is intended in part to address the increased number of parallel class action claims being brought against the same defendant in multiple jurisdictions.
Well known examples of such claims include the Diesel-gate scandal against various car manufacturers for the alleged manipulation of emission figures. Collective action proceedings on the basis of the Diesel-gate allegations are being brought across Europe, including in the UK, Germany, France, Spain and the Netherlands. Other multi-jurisdictional claims include the Trucks cartel proceedings arising out of the European Commission’s finding that certain European truck manufacturers had engaged in collusive arrangements on pricing; and the Oracle and Salesforce data protection class actions in the UK and the Netherlands seeking compensation of over EUR 15 billion for alleged misuse of personal data.
Whilst the deadline for implementing the Directive is the end of 2022, some Member States are already ahead of the curve. The Netherlands, for example, has had a fully functional procedural class actions framework since January 2020, which bears resemblance to the US lead plaintiff and opt-out mechanisms. Over 30 actions have been filed under the new legislation so far.
Further, there are signs that the Dutch courts are prepared to exercise an expansive jurisdiction. Probably the highest profile example is the decision of The Hague District Court in May 2021 that Royal Dutch Shell had breached its duty of care to certain non-governmental organizations and Dutch residents by not adequately reducing its CO2 emissions. Notwithstanding that the company was not found to be in breach of any of its statutory obligations, it was ordered to reduce its worldwide CO2 emissions by 45% by 2030.
Elsewhere in the EU, the Directive is set to create a flurry of legislative activity, as Member States adapt their existing regimes, or create new class action frameworks. For instance, in France a draft bill largely aligned with the Directive was passed in September 2020. The bill is expected to end the existing sector-based approach and introduce a general regime for class actions to be brought, widening the type of association permitted to bring such claims and allowing for punitive damages.
The impact of these aggregate litigation developments is important for almost all market participants.
Investors whose portfolio includes securities in public companies may need to decide whether to participate in a class action and, if so, on what terms. Third-party litigation funders, consumer organisations and affected individuals should keep abreast of developments in order to take advantage of the creative and fast paced changes in practice. Companies which are at risk of being the target of class action proceedings, and investors in such companies, should aim to understand the expansive landscape of these actions in order to mitigate their risk.
Further updates on this topic will certainly be forthcoming. Akin Gump’s London office works with leading firms in selected European jurisdictions on issues relating to collective proceedings. We would like to thank those partner firms for their assistance.
Partner Richard Hornshaw leads Akin Gump’s London disputes team and the firm’s international disputes group. He acts for a range of financial institutions on high-value, complex and cross-border disputes, focused on finance and securities law matters, including in the context of collective actions. Partner Mark Dawkins advises clients in ‘survival-of-the-company’ disputes, as well as those with serious reputational risk.
He handles complex cross-border litigation, civil fraud cases, investor and funds litigation and disputes related to financial restructuring. Counsel Jenny Arlington represents a wide range of clients in high-value, top-end complex international disputes, both in litigation and arbitrations. She advises on technology disputes and cybersecurity, privacy and data protection and AI/machine learning matters.
Associate Jay Jamooji’s practice focuses on commercial litigation, international arbitration, civil fraud and insolvency disputes, with specialisms in the technology, finance, class action, cyber security and AI sectors.
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