After its deliberate and widespread diesel deception came to light in 2015, German car giant Volkswagen agreed to pay half a million consumers in the United States around US$20,000 in compensation each. This happened less than 10 months after the company admitted to having wilfully cheated emissions tests.

Across the Atlantic, the legal repercussions of Volkswagen’s deception have been more modest and slow. Until now, of the 8.5 million duped consumers across Europe, only 260,000 consumers in Germany have received compensation, with Volkswagen agreeing to pay between €1,350 and €6,257 to these car owners in 2020, representing a settlement 8 times smaller per consumer than in the US. Proceedings are still pending in Belgium, Italy, Portugal, Spain, Austria, France, the Netherlands, Slovenia, Luxembourg and Switzerland.

The stark disparity in the emissions scandal’s legal fallout in the US and Europe stems from the varying legal frameworks for class actions in mass harm situations on both sides of the Atlantic. That will soon change, as December was the final deadline for EU countries to implement a directive that allows consumers across the bloc to join forces across borders and collective sue companies over infringements of EU consumer protection laws. The new framework also requires EU countries that do yet allow class actions to at least put one group litigation procedure in place.

In a press statement released when the law cleared one of the final steps in the EU legislative process, EU Justice Commissioner Věra Jourová explicitly pointed to the Dieselgate scandal as a reason the EU decided to take action.

“This gap in citizens’ access to justice must be filled, and cheating businesses deterred from violating consumer rights,” she said. “The new mechanism will ensure that European consumers can fully benefit from their rights and obtain compensation when they fall victim to illegal practices.”

The new directive makes possible EU-wide class actions for breaches of 66 different EU directives and regulations, from legislation related to medical devices to the EU’s seminal 2018 GDPR privacy law. It is not yet clear whether EU lawmakers will allow consumers to file compensation over breaches of a proposed new EU due diligence bill that holds companies accountable for human and environmental rights abuses in their supply chains.

Corporate justice NGOs have argued that the bill does not go far enough and that the scheme should have been expanded beyond consumers to victims of business misconduct more generally. This would have allowed victims to go to court in mass harm situations where a company violated environmental, privacy or anti-discrimination laws, or any other fundamental rights.

The new rules are nevertheless expected to result in marked increase of domestic and cross-border class actions in Europe in the areas of financial services, passenger rights, telecommunications, data privacy and antitrust. According to the umbrella European Consumer Organisation (BEUC), of the 27 EU countries, only five currently have a well-developed, functioning collective redress system – Belgium, Italy, Portugal, Spain and Sweden. [Editor’s note: The Netherlands has also had a well-functioning system since 2020, but the BEUC factsheet was created in 2018].

A limited, “landmark” step

The bill’s approval in late 2020 followed 30 years of campaigning by consumer rights organisations, who have welcomed it while also pointing to its limitations. As a directive, the new legislation functions as a menu of minimum options, with too much leeway for EU countries to make choices that are not in the interest of consumers in their implementation of the directive, says Ursula Pachl, BEUC deputy director general. But, she adds, “we should really see this as a glass half full, instead of a glass half empty”.

For a long time, she tells Equal Times, there has been a startlingly wide gap between European consumer protection rules – among the strictest in the world – and their actual enforcement. Describing enforcement as “the Achilles heel in the protection of consumers in Europe,” she described the new framework as a “landmark” step.

The regime has nevertheless also been criticised for only allowing consumer organisations and independent public bodies to bring actions on behalf of consumers, giving these organisations a litigation monopoly of sorts.

“Monopolies are seldom – if ever – a good idea. I am not sure why it would be a good idea here,” says Ianika Tzankova, a partner at Dutch law firm Birkway and professor of global dispute resolution and mass claims at Tilburg University in the Netherlands.

“My understanding is that consumer organisations lack resources, time, expertise and sometime also [a] wish [or] desire for own institutional policy reasons to get involved in compensatory actions. If they undertake action – great, but if they do not, then consumers do not want to be dependent on that.”

According to Tzankova, class actions also require a new mindset about the role of judges – pro-active, hands-on, managerial and supervising conflicts of interests. “Judges have been trained under the ‘old’ classic concepts where they are more passive. All of a sudden, they are required to develop a new mindset and skills without proper training in the new competences,” she said. “If they stick to ‘the old’ concepts, there is a danger that the new framework remains a dead letter.”

Funding collective redress

Going to court and going to court as a group across borders even more so is costly. In the Netherlands for instance, large, high-profile and protracted mass claims can easily carry a €4-million price tag, according to Tzankova.

It is why Alexia Pato, a visiting professor at the University of Girona in Spain who authored a book about collective redress systems across the EU, does not think the new mechanism will be a “gamechanger”. “The most problematic thing regarding collective redress is funding,” she tells Equal Times. “Perhaps what we need is not a directive which tells you how to structure collective redress. Perhaps what we need is money.”

That may soon change as more third-party litigation funders, many of them US players have set up shop in Europe recently. Third-party litigation funding is the practice of letting financial parties such as investment and hedge funds finance costly lawsuits through confidential deals with lawyers in return for a cut of any winnings.

Third-party litigation funding already represents a €40-80 billion industry in Europe, with more than 100 litigation funders currently operating across the bloc. Though the sector is expected to reach annual growth of 8 per cent in the next five years, it remains largely unregulated.

The Netherlands, one of the countries with the most developed class action rules, in particular has seen an influx of both litigation funders and law firms specialised in class actions since it overhauled its three-decades-old collective redress system in 2020.

Proponents say that such external, commercially driven funding is key in mass harm situations as it increases access to justice for consumers unable to fund their own claims and transfers the risk of the uncertain outcome of the dispute to the litigation funder.

But according to business lobbies like Business Europe and AmCham Europe, such profit-motivated third parties can raise conflicts of interests, result in problematic and frivolous claims, as well as putting undue pressure on claimants and defendants. “We don’t want to ban third-party litigation funding,” says Pedro Oliveira, Business Europe’s director for legal affairs. “But it’s the way this funding is channelled and by whom,” he tells Equal Times. “There is clearly something lacking on the side of the licencing of these funders, the governance and monitoring. There is need [for] the component of an authority that looks into how they operate and is able to sanction if they are not fulfilling the rules.”

The new directive includes a number of safeguards aimed at preventing US-style, abusive litigation, where law firms have been accused of contriving cases with the sole goal of generating legal fees, without any meaningful benefits for the complainants they are defending. Unlike in the US, only consumer and non-profit groups will be able to launch class actions under the European system. The party that loses the legal proceedings in a class action will moreover have to foot the bill, the idea being that this will encourage law firms and funders to only proceed with truly meritorious claims. This has led the environmental NGO ClientEarth to describe it as the “most restrictive of all EU collective redress mechanisms in existence”.

But Oliveira points out that the strict limits EU lawmakers placed on which organisations – so-called representative entities – are allowed to launch cross-border class actions do not apply to national players.

“For domestic [cases], this is totally left to the freedom of member states,” he says. Pointing out that domestic organisations are also allowed to bring cross-border cases under the new framework, he says: “If the criteria at national level [are] too lenient, then anybody can create a representative entity, anybody. A competitor can create a representative entity.”

European lawmakers have also voiced concerns around third-party litigation funding, common in class action situations but also used in arbitration, insolvency proceedings and anti-trust claims. In July, the European Parliament adopted a report calling on the Commission to regulate third-party litigation funding, warning that the lack of regulation has allowed some funders to abandon complainants during the litigation process and to demand a “disproportionate” portion of the awards. To address these concerns, the MEPs called for the introduction of minimum standards for litigation funders that would apply across the EU as well as calling for an independent authorisation system for litigation funders.

A spokesperson for the European Commission did not respond to a request for comment.

Anouk Rosielle, an Amsterdam-based partner at the law firm Dentons, said that some EU countries already regulate third-party litigation funding at the national level, which she said creates transparency on funding arrangements and the role of the funder. “In my experience, access to funding can lead to access to justice, and – if carefully regulated – can be beneficial to the development of best practices in class actions,” she said in an email to Equal Times. “Abusive claims cannot be prevented altogether, but the directive fosters the notion that only pre-vetted and longstanding group representatives can bring claims, such as consumer organizations with a track record,” she says, adding that this mitigated the risk of frivolous claims, along with a number of other procedural safeguards.