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One Step Closer to Class Actions

One Step Closer to Class Actions

Czech Republic
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A European Parliament press release from the 22nd of June about agreement on the revised text of the directive on representative actions has raised hopes for the swift finalization of legislation on class actions (“representative actions” in European jargon) on an EU level. The directive, which is part of the new concept of consumer protection – the so-called New Deal for Consumers – was introduced more than two years ago, but due to the strong response to the first motion and the fact that bringing about European class actions is overall a tricky process, it is only this year that some significant progress has finally been made.

This is also an important step for the Czech Republic. The Chamber of Deputies is discussing the Czech bill regarding class proceedings, which aims to transpose the European regulation into the Czech milieu. The concept of class actions has long been criticized by many, both in the Czech Republic and the European Union. Current progress on the EU level could however lend support to Czech advocates of the bill.  

The rocky road to agreement

The main concept of class actions is definitely good – to resolve situations where a consumer would otherwise refrain from a claim rather than bring an action to court for a small claim. However, when all the consumers involved join together, the claim may amount to such a sum that it might put the existence of some businesses in danger. The mere threat of a class action thus has a strong effect, and the related media pressure on businesses could be too extreme. Even though the case may end successfully for the defendant, the effects of negative media attention might be almost impossible to reverse or compensate. Class action suits may thus easily become a means of purposefully harming businesses. This is no idle threat, vexatious Czech insolvency petitions have already shown what problems might be brought about by badly structured legal instruments.

The directive aims to create a balanced model of class actions for consumers from all member states. That is a revolutionary idea in itself, and when passing the draft of the directive, it showed that the risks of class actions need to be taken into consideration, and that merely protecting consumers is not enough. The recently concluded draft directive should be a compromise between these two perspectives: according to the co-author of the draft Geoffroy Didier, the representatives of the EU attempted to find a balance between the legitimate protection of consumers’ interests and, at the same time, the need for legal assurance for businesses.

Revising the draft directive

The responsibility for filing a class action on behalf of a group of consumers under the directive rests with the “qualified subject”. Each member state will have to appoint at least one entity that, as a qualified subject, will be authorized to negotiate on behalf of consumers on the issue of cross-border class actions. The member state will impose conditions for a consumer organization to qualify, and it should be expected that the ability to bring class actions will remain in the hands of trustworthy consumer organizations only.

To add weight to the responsibility for bringing the action, the directive implements a new rule that the costs of the proceedings must be covered by the losing party. Such a model in the case of a final demand is not foreign to Czech legislation, however, and given that the costs sought by the court are usually low, this change will not serve as a significant deterrent in our circumstances.

The biggest amendment to the regulation will most probably be the certification of actions: that is, a preliminary proceeding in which it will be determined whether a class action is admissible before the action itself is initiated. If the action does not prove admissible at the certification stage, the action will not reach the proceedings stage itself in which a decision on the merits of the case is discussed.

It will be left to member states to decide how those certification stages will function. It also needs to be said that during the preparation of the Czech class actions bill, the certification stage was subject to extensive criticism, particularly because it is claimed that if the certification has to be discussed before the courts, it might overload the judicial system. The ministry has also not yet clearly answered the question whether it is possible to distinguish if the action is vexatious or groundless at the certification stage at all. We presume that this stage will leave room for many variations and believe that leaving the regulation of the certification proceedings in the hands of member states goes against the idea of a directive that aims to unify the conditions for consumers to access class actions.

Even after the revision of the draft directive, it is still valid that on the EU level, class actions should be applied to cases involving the violation of consumer rights in the sphere of data protection, financial services, in actions concerning the tourism and power industry, telecommunications, environment, health or the rights of people travelling by plane or train. If the European Parliament and the Council of the European Union pass the directive as a single entity, member states will then have two years to transpose the directive and six more months to apply the rules.

By Michal Nulicek, Partner, and Jaroslav Heyduk, Of Counsel, Rowan Legal

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