Is the spectre of US-style class actions haunting Europe? ask Truiken Heydn, Chris Williamson and Liz Williams.

From the European perspective, US-style class actions are sometimes perceived as a means by which unmeritorious claims can be brought against "deep pocket" defendants, in most cases large corporations, with the purpose of blackmailing them into a settlement. The only true winners are known to be the plaintiffs' attorneys. While they receive a large cut of the settlement amount as fees, the individual amounts in damages which the plaintiffs receive are often minimal. With globalisation increasing, European companies are more likely to be drawn into US class actions.

However, US class actions are not the only exposure European companies may have to face. Since the early 1990s more and more European jurisdictions have enacted laws similar to US class actions that enable multiple plaintiffs to join forces to pursue claims that are too small to sue for individually. Although there are substantial differences between US and European legislation, which accommodate the European concern that collective suits must not enable abuse, the trend towards class actions will change the litigation landscape in Europe substantially.

Opening the door

On 1 November 2005, legislation came into force in Germany providing for a type of action which is entirely new to German civil procedural law and which has been likened to US class actions. The trigger was a series of actions brought by around 14,500 investors relating to alleged misstatements in the prospectus published as part of the IPO of Deutsche Telekom. The legislation, known as the "KapMuG" (Kapitalanlegermusterverfahrensgesetz), provides a framework whereby a court's decision on a sample case will be binding on similar cases. Even though the new act's scope of application is limited to the investment arena, it is expected to have considerable practical consequences.

Although parallels have been drawn with US class actions, there are key differences. In US securities class actions, notice of the action is sent directly to each shareholder listed in the class action certification order. All participants in the order are then automatically bound by the proceedings unless they opt out. By contrast, in Germany, notice of the action is publicised in the electronic Bundesanzeiger, which the financial press reviews and reports to the wider public. Each investor must then file its own claim in order to be included as part of the class. Initially, at least, payouts in securities class actions in Germany are also unlikely to be on the same scale as those in the US. However, as German investors become aware of the legislation and German lawyers become more familiar with using it, the KapMuG is likely to become a powerful litigation tool. The initial term of the KapMuG is limited to five years. After this time, it will be reviewed to decide whether its provisions should be extended to other areas of litigation.

Shifting sands in Europe

Germany is not alone in its moves to provide a legal framework for mass actions. In Spain in 2000, new civil procedure law was introduced which permits consumer associations to bring actions to protect consumer interests where they are alleged to have been damaged. The association bringing the action must be legally constituted and representative of the people affected. Actions currently being brought in Spain include those against telephone and internet companies for rounding up the cost of calls and for breach of data protection rules. A class action is also being contemplated in respect of the Prestige oil spill case in 2002. New legislation aimed at improving consumer protection through greater participation of regional public bodies is about to be introduced, and a publicity campaign is currently being developed to increase consumers' awareness of their rights under the law.

Similarly, Sweden introduced a Class Action Act in January 2003 which permits private individuals, lawyers or consumer organisations to initiate an action on behalf of a group. Any individual in the group can opt to become part of the action by notifying the court, and the court's decision binds everyone who has opted in.

In the Netherlands, a consumer association may initiate litigation to protect identical or similar interests of other consumers, provided the purpose of the association is to serve those interests. A new law, filed with the Dutch parliament on 2 February 2004 and presently under consideration, would allow a collective settlement for damages to be made binding on all members of a defined group in a specific class action. Provided the settlement meets certain specific requirements, it will bind the entire group, except for those who choose to opt out.

In the UK, Group Litigation Orders (GLOs), which were introduced in 2000, provide a framework for the case management of claims with common issues of fact or law and enable individuals with a common complaint to pool funds for a single litigation effort. Each claimant must still bring proceedings individually at the outset, but the Law Society will help put potential claimants in touch with other parties who may be interested in applying for a GLO. The relevant issues are then heard in one test case, with the judgment being binding on all claimants within the GLO unless the court orders otherwise. Since their introduction, 52 GLOs have been registered, relating primarily to child abuse and pharmaceutical litigation, but also including other claims, such as the litigation by Lloyds' Names against the UK Government.

In France, President Jacques Chirac is currently proposing new legislation that will enable consumer associations to bring collective actions against abusive practices in the marketplace. A taskforce was set up in April 2005 and draft legislation is expected. A French website, (similar to the notorious US and German ) has already been established by a group of French lawyers with the aim of gathering claimants for class actions and lists those companies against which litigation is being contemplated. At the time of going to print, the website has details of conventional mass actions against Vivendi Universal, various DVD manufacturers, and several mobile phone operators.

In Italy, a bill is currently being examined by the senate which would introduce a two-stage process in which consumer associations would first obtain a decision on liability, and individual consumers could then subsequently rely on that decision to seek damages for themselves in court.

These moves to enhance consumers' rights in Europe come, ironically, at a time when a raft of new legislation aimed at protecting businesses from frivolous lawsuits is being introduced in the US. On 20 October 2005 the House of Representatives passed two key bills in this area. The first bill protects gun manufacturers and dealers from lawsuits arising from the misuse of their weapons and the second, the so-called "cheeseburger bill", shields fast food companies from lawsuits filed by individuals for obesity and other health problems. While the second bill still has to be voted on in the Senate, the first has already been approved and will now be signed into law.

However, Europe is still some way from adopting the US class action model. Firstly, there are big differences between cost and fee regimes in the US and Europe. In the US, lawyers take a large cut, usually one third, of final awards through contingency fees which means they can afford to bring a range of speculative claims. Where contingency fees are permitted in Europe, they are generally capped, which reduces the lawyers' financial incentive to bring such a claim. Furthermore, in many European jurisdictions, for example the UK and Germany, the losing party must bear all the winner's reasonable legal costs.

Secondly, US jurisprudence can make it easier for litigants to prove liability in class actions. Coupled with this is the fact that in the US, damages in liability cases are usually decided by juries rather than judges, which increases the likelihood of awards being greater. In Europe, by contrast, the basic civil liability principle is that victims can only be compensated for the actual damages that they have personally suffered.

Thirdly, in the US, there is a greater emphasis on the use of private litigation to carry out what in Europe would be seen as a regulatory function.

Finally, while changes in the class action landscape of Europe are being made, they are at the national rather than the supra-national level, which would be the equivalent of federal legislation in the US. The key EU-level legislation in this area is the Product Liability Directive (the Directive) which was implemented into national law in the UK in 1998 but which does not provide a mechanism for class action litigation. Subsequent studies into the functioning of the Directive have shown a consensus that the Directive is working effectively and there are no other public plans to introduce specific class action legislation at an EU level. There is therefore a lack of legislative uniformity facing potential litigants.

Insurers and reinsurers will want to monitor carefully the impact of the new law in Germany. Reinsurers should certainly be aware of the shifting position in Europe and make necessary preparations to pre-empt the possible effects this may have on them.

- Truiken Heydn is a partner, Chris Williamson a trainee and Liz Williams a senior associate at Baker & McKenzie.