Following Uncle Sam

On Tuesday 13 March the Commissioner for Consumer Protection, Meglena Kuneva, announced the European Union's Consumer Strategy 2007-2013 and referred to the topical issue of class actions. She stated: "I do not have in mind the United States type of class action. This is not a John Grisham story. We have another, European, narrative, and this is much more related to collective redress."

A class action is a mechanism for numerous plaintiffs, with a common issue, to pursue their claims in a single action. US class actions are famous for direct advertising and even mailing; contingency fees; civil trial with juries; discovery and pre-trial witness depositions; the fact the losing party does not pay the winner's costs; and punitive damages.

So should Europe be alarmed? Since their introduction in the US in 1938, class actions have grown exponentially. Shareholder settlements have risen by 37% in the past year alone. In 2006 there were four multi-billion dollar shareholder settlements and the average shareholder class action was $86.7m (£44.1m). The effect is obvious, as rates for directors' and officers' liability insurance in the US are six times higher than in Europe.

The European approach has traditionally been very different to the US. But are times changing and will people in Europe soon be able to obtain the same rights of action as their US counterparts?

The European experience

In England and Wales the mechanism for class actions is the Group Litigation Order. Since 2001 there have been 59 registered, including 15 on abuse in care homes, seven on nuisance and seven on tax, but they are notoriously difficult to register. For example, in March last year the GLO was ruled inappropriate to seek redress for the mis-selling of investments by financial advisers, and the victims of the Buncefield oil depot blast have also been unsuccessful. But the GLO is not the only route available, as proved by the 2005 Railtrack shareholder action against the UK government for allowing Railtrack's insolvency. Fifty thousand shareholders stumped up a total of £3m of their own money to fund legal costs but the claim failed. While the UK has the basic mechanisms in place, the courts ensure that the rules are strictly adhered to.

France has toyed with class actions since January 2005. A draft bill for 'group actions' was submitted in November 2006 by French finance Minister Thierry Breton as part of a new Consumer Protection Law, now on hold until after the presidential elections later this year. Both the Socialist Party and the Gaullist-Liberal UMP party have announced intentions to proceed if elected, but it remains to be seen whether its current popularity will fade.

Germany is a strong contender for the European model with its 'KapMug' allowing for the testing together of common issues of fact or law in securities claims. In the US the shareholder class action against Deutsche Telecom settled for $120m while the 15,000 German claimant shareholders had no such redress. The 'Model Law' was introduced as a result of the uproar that ensued. Since then there have only been eight registered cases and, with no similar remedy for civil law proceedings and none proposed, Germany is falling behind the latest class action fashion.

Italy, on the other hand, is witnessing an explosion of political interest in class actions. Since July 2006 nine class action bills have been proposed by parliamentarians reacting to the huge monetary losses of investors from the Cirio and Parmalat bond scandals. Although the new bills restrict 'standing to sue' to consumer associations only, there are more radical proposals in the pipeline. Since January Italy has lifted the ban on contingency fees and mooted the concept of punitive damages. And consumers' associations are currently gathering the evidence to file a claim against major oil companies for more than EUR4.4bn (£3bn) in damages for petrol price-fixing as soon as these bills become law. Italy is the one to watch.

The Netherlands is currently Europe's closest representative of the 'class action', with the 2005 Act on Collective Settlement of Mass Damages, introduced for 'mass disaster accidents'. Its representative actions are famously successful too. In January the Franco-Belgian bank, Dexia, agreed to pay EUR400m in compensation to Dutch customers after Dutch investor associations sued for alleged mis-selling of investment products. Holland is well respected by the Commission for its systems of collective redress.

Spain is by far the most liberal in its support for contingency fees and the advertising of actions in the media, but the Spanish approach lacks the consistency to be a model for reform. Spanish investors are the recent victims of a possible massive 'postage stamp' fraud carried out by unregulated investment companies. Their cause has been taken up by the National Institute for Consumption with such vigour that it could well shape Spain's approach to future actions, but there is no legislation on the horizon.

Finally, in Ireland the Department of Defence is lamenting the lack of multi-party procedure. The total spent on Army deafness claims brought by individuals exceeds EUR280m, with EUR185m spent on awards or settlements and EUR94m on legal costs - and it is still ongoing. In the 19th century, Ireland was scornful of the English approach, with the Irish Judge, Sir James Mathew (1830-1908), commenting: "In England, justice is open to all - like the Ritz Hotel." Now Ireland's Law Reform Commission sees the English GLO as the model answer, though Ireland is yet to reform.

US comparisons

EU jurisdictions have far to go before US-style class actions take hold. Of the countries cited above, none have the unpredictability of juries for civil matters or punitive damages - although Italy is considering the latter, and only Spain and Ireland have advocated contingency fees - although Italy has become a recent convert. Furthermore, only the UK has extensive discovery, although the Netherlands has adopted a specific discovery approach, and no EU countries have pre-trial depositions. Most prohibit client soliciting - although Italian lawyers can now advertise their contingency fee approach - and all except the Netherlands operate the opt-in approach.

Ms Kuneva is advocating a new legal basis for consumers across Europe to join forces in actions through the 27-country single market. She believes that such a proposal will boost the confidence of consumers across borders.

An EU directive imposing mechanisms for consumer class action rights across the EU will come as a shock to many members. As the above examples illustrate, the class action processes in the larger EU states are either non-existent or relatively undeveloped compared to the US. The challenge for Ms Kuneva will be to balance giving large groups of consumers the right to obtain redress, while ensuring this does not lead to an explosion in unnecessary and speculative actions that are only likely to benefit the lawyers.

David Webster is head of Eversheds' European insurance group. He was assisted by solicitor Georgina Lake and Eversheds' offices in Paris, Milan, Munich, Madrid and Dublin.