The fragmentation of EU collective redress procedures and forum shopping is not the only concern. Another major issue is that by trying to avoid the type of perceived litigation abuse in the US, the Commission’s efforts are inadvertently stifling the development of effective EU collective redress measures. Some argue that the Commission’s regime is inconclusive, unconvincing and nothing more than a political compromise which is influenced by the European Parliament and by (industrial) lobbying pressure.71
There also appears to be a lack of motivation for end-consumers to seek a remedy, particularly if they have to seek redress in another Member State. For example, it may be argued that the recommended opt-in mechanism is a major hindrance. Under this
mechanism the claimant party includes only those who actively choose to be a part of the
67 C. Hodges, Collective redress in Europe: The new model, (2010) 29 C.J.Q. 370, 373. 68 Recommendation (supra n.43), para. 6.
69 Ibid., para. 3.1.
70 R. Gamble (supra n.44), 16. 71 Z. Juska, (supra n.39), 24.
39 represented group. The judgment is binding on those who opted-in while all others who have been harmed remain free to pursue compensation individually.
The Commission advocates the use of the opt-in regime for a number of reasons.72First, the procedure is compatible with the normative principle that a party should not be bound by acts of agents who have not been authorised to act on their behalf.73Secondly, consistent with the Commission’s aversion to US-style entrepreneurial litigation, the opt-out option is seen as prone to abuse. Finally, it is more compatible with the legal traditions that exist in many Member States that currently have some form of collective redress.74
However, the opt-in mechanism can be criticised for a number of reasons. First, it
discourages participation and access to justice, particularly where claimants are not able to make informed decisions on whether they wish to sue for compensation.75They may not
know the existence of the claim. The UK’s Response to the Consultation76(specifically on
private actions in competition law) stated:
‘It is very clear that the current system of collective redress does not work. Consumers are not currently getting redress for breaches of competition law. It appears unlikely that simply tinkering with the opt-in system would deliver the desired access to justice…and bodies such as the Law Society of England and Wales have said that an opt-out regime is essential if consumer cases are to be brought successfully.’77
72 Commission Communication (supra n.27), para 3.4. 73 Recommendation (supra n.43), para. 23.
74 R. Gamble, (supra n.44), 19. 75 Ibid.
76 Department for Business Innovation & Skills, Private actions in competition law: A consultation for
reform – government response, available at
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/70185/13-501-private-actions- in-competition-law-a-consultation-on-options-for-reform-government-response1.pdf (accessed 02.08.2016). 77 Ibid., 30.
40 Secondly, in an opt-in system, the ‘loser pays’ rule discourages anyone from volunteering as a representative plaintiff, because passive claimants may share in the gains but are not required to share in the losses.78
Thirdly, it erodes the elements of finality and diminishes the attractiveness of a settlement because those who have not been part of the proceedings are free to initiate actions or join another collective action later. In this sense a defendant has much less to gain from
settlement.
Fourthly, it is said that the opt-in provision lacks logic:
‘As to logic, how can it be thought that many thousands of consumers, each suffering the same loss or damage, can obtain access to justice and proper redress through an action in which each case has to opt-in?’79
The logic is particularly difficult to sustain where those who opt-in may suffer badly in the event the action is unsuccessful as a result of the loser pays rule. Professor Issacharoff has embellished Judge Posner’s remark that ‘only a lunatic or a fanatic sues for $30,’80by
stating that: ‘it would take a particularly fanatical lunatic to do so and assume the risk of millions of dollars in adverse costs judgment to boot.’81
In very simple terms, under the US system, a claimant will bring an action where the:
78 R. Gamble (supra n.44), 17.
79 G. Jones, Collective redress in the European Union: Reflections from a national judge, (2014) 41(3) Legal Issues of Economic Integration 289, 301.
80 Supra n.31.
81 S. Issacharoff, Litigation funding and the problems of agency cost in representative actions, (2014) 63 De Paul Law Review 561, 568.
41 [Probability of winning] x [number of claimants] x [damages from each claim] x [treble damages] x [25% (average fee)]
exceeds the total costs incurred in bringing the claim (costs of providing notice to claimants, costs of time spent on the case, costs of hiring experts, etc.).
This is based on research performed by Damien Geradin.82 In order to illustrate this
numerically, he makes assumptions:
1. The probability of winning the action is 80%; 2. There are 100,000 claimants;
3. The damage from each claim is $50;
4. The law firm would collect 25% of the amount recovered; and
5. The costs incurred in bringing the claims are expected to be $2,000,000.
Because 80% x 100,000 x $50 x 3 x 25% = $3,000,000 > $2,000,000, the claimant will likely bring this action.
The collective redress approach promoted in the Recommendation, however, dramatically impacts on the above equation, and thus incentives to bring actions, because the ‘opt-in’ mechanism will drastically reduce the amount of the possible award. In addition, because the ‘loser pays’ principle applies in the EU, the entity funding the action will have to factor into its calculations the risk of paying the costs of the defendants if the action goes to trial
82 D. Geradin, (supra n.52).
42 and is unsuccessful. Finally, given the strict conditions that apply to third party funding, the level of compensation that private funders will be able to obtain is not entirely clear. Thus, under the EU system, an entity will bring an action if the:
[Probability of winning] x [Number of claimants] x [Damages from each claim] x [25% (average fee)]
Exceeds the
[Costs incurred in bringing the claim + Costs of defendants] x [1- Probability of winning]
With the following assumptions made:
1. The number of claimants is lower due to the opt-in system, decreasing to 10,000; 2. The costs of bringing the action are estimated at $2,000,000; and
3. The costs of defending the claims are estimated at $3,000,000.
Due to 80% x 10,000 x $50 x 25% = $10,000 < $1,000,000 = [1-80%] x [$2,000,000 +
$3,000,000], there will be a great disincentive to bring an action.83
The Recommendation also fails to take into account any analysis of behavioural
economics. Assuming that the maximum participation by the alleged victims is a desirable social aim, opt-out provides the easiest access to court, ‘as parties need not do anything to join the proceedings and benefit from the group membership.’84 The question is, however,
83 Ibid., 1097.
84 A. Higgins and A.A.S Zuckerman, Class action in England? Efficacy, autonomy and proportionality
43 why this is so: why are people reluctant to opt-in to an opt-in class action, and reluctant to opt-out of an opt-out collective action. The answer derives, Alma M. Mozetic85 suggests, from behavioural economics, viz. the importance in the collective redress context of introducing default options into the choice set.86The empirical experience in the US confirms the analysis from behavioural economics. Opt-in will fail to attract widespread participation whereas in opt-out actions, Americans usually do nothing. Thus, in the US, less than 0.2 per cent in thousands of consumer cases from 1993 to 2003 opt-out.87
The relationship between the opt-in method and behavioural economics is further
complicated in pan-European cases. This is based on the current geographical restriction. Whilst there is only one EU economic market, the legal traditions of different states vary widely. In other words, there is no pan-European legal market. This is problematic for the following reason. The effectiveness and utility of an opt-in mechanism rest on a fair notice being given, usually through advertisement by counsel in the national media: newspapers, TV and so on. Yet, civil legal systems adopt a conservative attitude towards advertising legal service, which is an inevitable by-product of opting-in to a class action it represents.88