Beijing - November 20131 COLLECTIVE REDRESS FOR EUROPE? Rainer Kulms Max Planck Institute of...

Beijing - November 2013 1

COLLECTIVE REDRESS FOR EUROPE?

Rainer KulmsMax Planck Institute of Comparative and International Private

Law [email protected]

I. Aggregate Litigation – The Cases and the ChallengeII. US Class Action Law and Some EconomicsIII. EU Comparative Survey (including Member States)IV. Whither European Collective Redress?V. Excursus I: HKG SAR Law Reform CommissionVI. Excursus II: Reorganisations/Trans-border Issues


Unfair Trading and Consumer Protection I

A Newspaper Ad Consumers may be protected from misleading newspaper ads

►Who has standing to sue? a competitor? a consumer ombudsman? an organisation of

consumer representatives?

►What is the purpose of the action Injunction?

Damages?

A Computer

for200 €

Reproduced computer has a value of 500 € !


Unfair Trading and Consumer Protection II

►Who has standing to sue? a competitor? a consumer ombudsman? an organisation of

consumer representatives?

►If defendant has to pay damages, disgorge profits, who is the recipient?

Government?

Consumer Organisations?

Consumers?

Unsolicited phone calls to consumers to sell financial

products

GG Gains from Unfair Competition Unfair Trading Law Antitrust Law


(Partial) Privatisation of German Telecom

Share pricesdown

17,000 Individual Investors file Complaints

German Telecom issues prospectusNo information on pending merger negotiations on VoicestreamProblematic valuation of property owned by German Telecom


The Lehman Bankruptcy – The Fallout (Private Investors)

SPV’sRisky Financial

Products(Securitisation of

Mortgages)

Individual Investors (500 out of 4100)

Damages

Lehman Brothers Holding Inc.Investment Banking

High-risk strategy (leverage)

City Bank Belgium

Collective RedressGovernment SuasionADR - ReorganisationGroup ProceedingsClass Action

Cross-border?


Collective Redress – Policy Options

►Why Collective Redress?▪Small damages make litigation illusory, ‘illegal gains’▪Efficient private enforcement of rights by individuals is

costly.▪efficient consumer protection through collective redress▪alternative dispute resolution is not mandatory▪cross-border problems

►Which Form of Collective Redress, if any?▪Conciliation Services?▪Court Proceedings (Consumer Groups, classes of individuals)▪Ombudsman▪Administrative Enforcement of Group Rights or Bundeling of Individual Rights

Injunctive/Com-pensatory

Relief?

Beijing - November 2013

The European Parliament

►Resolution of 2 February 2012: “Towards a Coherent European Approach to Collective Redress”-effective and efficient enforcement of rights-deficiencies of individual lawsuits (barriers for consumers:

litigation cost/asymmetric information)-cost risk and damages sustained

►Do not introduce US-style class action system Abuse►Procedural approach

Horizontal approach and safeguardsStanding (organizations) and Opt-inNo discovery, actual damage, the loser pays (no third-party funding)

ADR

2013 DraftRecommendation


US – Group and Aggregate Litigation I

►Consolidated or Coordinated Group Litigation

▪joinder

▪mass consolidation

▪multidistrict litigation

►Bankruptcy Proceedings – Reorganisation

▪cf. chapter 11 Bankruptcy Code and pre-packaged reorganisation plans

-private initiative/consensus-building among creditors

-creation of claim resolution or creditors’ trust

Trusts to adjudicate value of claims/manage assets (liability insurance proceeds or contributions by joint tortfeasors)


US – Group and Aggregate Litigation II

►Class Action Litigation ▪Civil Rights Beginnings▪Awards in individual cases too small to file suit▪mass accident (individual damages v. risk of defendant’s

insolvency

►FRCP 23▪attorney files a civil complaint in which a number of representative plaintiffs are individually named▪motion for certification as a class

Government-initiated suits

Regulation through Litigation

Private Attorney-General


US – Group and Aggregate Litigation III

►Numerosity ▪Class so numerous that joinder is impracticable

►Commonality▪questions of law or fact common to the class

►Typicality▪claims or defences are typical of the class

►Adequacy (Fair + adequate representation) (cf. Lead Plaintiff)▪control quality of representatives and attorneys

►Damage Cases▪predominance (questions of law and fact common to the members of the class predominate individual issues) ▪superiority (compare with other forms of litigation)

Notice requirement/Opt-out

Punitive Damages


US – Group and Aggregate Litigation IV

►Mandatory Classes – Class actions (Mass tort cases)

▪separate actions create risk of inconsistent or varying adjudications

▪impairment of non-parties to protect their interest

►no statutory duty to observe notice requirement


Class Actions – Settlements I

►Proposed Settlements (+ fees): Mandatory Judicial Review ▪Assessment of claims and defences▪Focus on value distributed to classPotential unfairness

Coupons (marketability issues et al.)Negative optionsCy près (‘fluid recovery’)Restriction on claims/reversion of unclaimed

funds to defendantCollusionInjunctive Relief


Class Actions –Settlements II►Settlement Class Actions: Judicial Review

▪fairness and notice issues▪conditional settlements

►Private Mass Tort Settlements▪global settlement offer: contract between counsels on behalf of either party▪offer is made to ‘eligible’ plaintiffs only▪a requisite percentage of must opt in, those who refuse are not bound▪settlement awards based detailed scheme administered by claims resolution facilities▪transparency – availability to the public

► Reorganisations in Bankruptcy (11 USC § 524 (g) (2))

75% quorum


The Economics of Class Action Litigation

►Social Benefits: Consolidate individual claims into one actionClasses with positive-expected value litigants▪saving litigation cost through economies of scale▪attenuates externalisation of costsLevel playing-field between plaintiffs and defendantClasses with negative-expected value litigants▪frivolous claims, wrong suffered is small, but policing a wrong

►Social Costs of Class Action LitigationLitigation CostsAgency CostsAdverse Selection and opt-outsBlackmail settlements/Settlement Class Actions

Entrepreneurial activities by attorneys

Class Action Fairness Act 2005

Lead plaintiff


European Collective Redress – The Status Quo

►Consumer Protection IDirective 98/27/EC on injunctions for the protection of

consumers’ (collective) interestsApplies irrespective of private international law-injunctive relief (cessation and prohibition of infringements)-publication of judicial market failure-where applicable: defendant shall pay into the public purse

or any beneficiary designated by courtQualified entities may bring action (cf. intra-community

infringements)▪infringement of consumers’ rights: market distortion▪civil justice system of member states: petty claims ADR?



►Consumer Protection II:Regulation (EC) 2006/2004 on cooperation between national

authorities for the enforcement of consumer protection laws

-cross-border enforcement challenge-crucial role of consumer organisations in protecting

consumer interests, including settlement of disputes-exchange of information and request for enforcement

measuresRegulation (EC) 861/2007 establishing a European Small

Claims Procedure▪Class actions/test case procedures▪distribution of sums finally awarded

Funding



►Competition I:ECJ jurisprudenceCourage v. Crehan (C-453/99) [2001] (lease contract with a ‘beer tie’“actions for damages before national courts:… an important contribution to the maintenance of competition in the Community”Manfredi (C-295-298/04) [2004] (premium increase compulsory civil liability insurance)Treaty: no particular measure of damages or even use of punitive damages as a tool for strengthening deterrence

►Regulatory Message?public enforcement to be supplemented by private action?representative claims brought by consumer organisations?OR opt-in-class actions brought by victims themselves?


European Collective Redress – Draft Directive

►Competition II:European Commission Draft Directive on Antitrust Damages

Actions (June 2013)optimising the public and private enforcement of competition law

►Easier access to evidence (court order for access to documents)/Limitation periods

►Decisions of national competition authorities will constitute full proof

►Full compensation for actual loss suffered and profits►Passing-on (Rebuttable presumption)►Rebuttable presumption that cartels cause harm►Participants in infringement should be responsible for their

contribution


EU Comparative Survey I: England and Wales

►Sector-wise Approach:

▪specific consumer legislation implementing EU law (injunctive relief)

▪enforcement rests with public authorities

▪Competition Law: Consumer body may make super-complaint to the Office of Fair Trading which decides.

▪Individual damages claim before the Competition Appeal Tribunal (OFT or EU Commission must establish breach.) or by representative action (consumer consent!)

►Group Litigation Order (1999): managing multiple similar claims giving rise to common or related issues of fact or law

normal cost rules apply – opt-in


EU Comparative Survey I: England and Wales ctd.

►Financial Services Bill 2009:

▪Collective proceedings:

opt-out basis for domestic class members

opt-in for foreign class members

▪2010: Consumer Redress Schemes (FSA)

▪compromise with creditors or shareholders (75% of the creditors/or class thereof)

▪court approval

▪Creditor will lose rights if no claim or objection is raised within deadline

▪jurisdiction if 56% of the creditors are located in the UK

Preclusive effects?

Schemes of Arrangement (s. 895 Companies Act 2006)


EU Comparative Survey II: The Netherlands

►Collective Action (Dutch Civil Code)Association or foundation representing a group of persons having a similar interest (a market for special purpose organisations)Injunctive relief, NO DAMAGES

►Collective Settlements under the WCAM (insurance industry)▪Out-of-court settlement entered into by one or more representative organisations acting for the interest of the injured group to settle mass tort claims▪joint request by representative organisation and alleged responsible party▪notification to known parties for hearing


EU Comparative Survey II: The Netherlands ctd. et al.

▪ Amsterdam Court of Appeal will approve or reject, but cannot modify sua sponte the terms of the settlement.

▪If Court approves settlement, settlement will be binding on group of affected persons unless opt-out is exercised within specified period.

►Representative Actions▪Action for the financial reparation of consumer collective interest▪Joint representative actions

►2007 Law on New Collective Action for Damages (Consumer)

France

Italy


EU Comparative Survey III: Germany

►Collective LitigationAssociation or interest group complaint (Verbandsklage)

injunctive relief against deceptive trading (cf. skimming-off actions) and unfair standard terms

Capital Markets Model Case Act (cf. Telecom Case)

►model plaintiff (potential claimants may join)►other plaintiffs with cases pending before trial courtSuspension order : Model plaintiff, model defendant + interested parties (may intervene). Decision handed down by appeals court will be binding on parties summoned.

REFORM: Court-approved binding settlement, but cf. opt-out, not binding on ‘silent claimholders’.

FINANCIAL INCENTIVES for attorneys are weak.

Tort + contract-based claims: false information/capital markets


EU Comparative Survey IV: Scandinavian Developments

►Denmark: Class actions▪common claim and Danish venue for all claims▪court is venue for one of the claims▪ class action mechanism most appropriate for handling the dispute (filtering mechanism)▪members of the class can be identified▪opt-in mechanism ►Only public authority as class representative can opt-out (e.g. Consumer Ombudsman) ►Court will approve settlement unless discriminatory against some class members or otherwise unfair

►Swedish Group Proceedings Act: private actions, public actions (Consumer Ombudsman/Environmental Agency), representative actions (consumer law and environmental law)


Whither Collective Redress? – The European Commission

►Communication: “Towards a Coherent European Horizontal Framework for Collective Redress” (2013):

-better access to justice and stronger enforcement

-but consider risk of abusive litigation (US experiences/

contingent fees/punitive damages)

-procedural economy (incl. claims for damages)

-deterrence and punishment by public authorities

►Common Principles:

▪collective actions for damages: courts to decide on admissibility of concrete action early

▪legal standing: representative entities/NOT FOR PROFIT and individuals (ad hoc certification)


European Collective Redress – THE ISSUES

▪opt-in approach (insolvency considerations)▪information to potential claimants▪public/private enforcement (conflict and follow-up issues)▪funding (legal insurance/no contingency fees/third-party funding?)

►The Recommendation-stop illegal practices + compensation for mass harm-representative action (incl. ad hoc coalitions)-courts check admissibility-loser pays principle-speed up procedures for injunctions

Private International Law Issues

Mediation?

Distributions of damage payments


The Lehman Bankruptcy – The Fallout in HKG SAR

Cayman Islands-Incorporated SPV

(no HK SFC Authorisation)MINIBONDS

Lehman-structured products(guaranteed by Lehman NYC

as counterparty)

HKB Banksdistribute

21,674 individual investorscomplain to HKMA

SFC and HKMA: alternative dispute settlement and admini-strative suasion (agreements with 16 distributing banks)▪repurchase contracts from eligible customers▪others: rescind and pay compensation (age differentiation)

SFC-regulated Lehman products


A Class Action Proposal for Hong Kong SAR – The Issues I►HKG Law Reform Commission

▪promoting access to justice, facilitating access to justice and promoting judicial efficiency▪benefits to plaintiffs and defendants

►Current HKG law on representative proceedingssame interest test – common ingredient test (consumer/public/interest/securities cases)

►class actions for consumer cases►filtering device/certification►opt-out + judicial discretion►representative plaintiff to bear

adverse costs/financial support►judicial discretion

Deterrence/Risks

▪certification▪opt-in/opt-out▪cut-off date▪notification▪sub-groups/lead cases▪flexibility

ADR


A Class Action Proposal for Hong Kong SAR – The Issues II

►class actions with parties from other jurisdictions (forum shopping, duplication and res judicata effects)

▪no rigid exclusionary rule

►opt-in rule as default position

►foreign plaintiffs to declare that judgment or settlement is final and conclusive resolution of their claim

►forum non conveniens-rule to apply

Funding▪No conditional fee agreements▪Litigation funding companies ▪Legal aid schemes (class action fund/Consumer LegalAction Fund

Class action website

DoJ – HKG SARJanuary 2013:

working group is established


Reorganisations in Bankruptcy (US)

▪reorganisation to allow debtor continue in business▪degree of showing inferior to mandatory, limited-fund class

action▪trust arrangements (including present and future demands)▪75% of the claimants of whose claims are to addressed must

accept▪’channelling injunction’

Pre-packaged Reorganisations

Reorganisations in Bankruptcy (11 USC § 524 (g) (2))

Bankruptcy Mediation


Rodenstock GmbH Goes to the UK (Reorganisation)

Rodenstock

▪German headquarters▪Production in Europe and Thailand▪Distribution globally: subsidiaries

Group turnover: € 365.5mGmbH turnover: € 258.3m

Outstanding seniorDebt of

€ 305,3mEnglish law applicable

►Significant relationship with seven UK customers►Deteriorating financial position, leading to breach of covenants►Restructuring would avoid German insolvency►Rejection of Application would trigger insolvency


US Class Actions and their Exterritorial Reach

HomeSide Lending(mortgage servicing)

National Australia Bank Ltd.(ordinary shares not traded in

the US)Buys

2001: National has to write down the value of HomeSideassets National‘s share prices fall

Petitioners bought shares prior to the write-downs, arguingsecurities fraud under US law before a US court

▪transactional test (transactions in securities listed on domesticexchanges and domestic transactions in other securities OR wrongful conduct occurs in the US or wrongful conduct has effects in the US


Trans-border Issues I

►US proceedings▪securities class actions on behalf of US and non-US shareholders▪two securities actions filed by European institutional investorsclaims by non-US investors dismissed, settlement $ 82.85m

►Dutch proceedings filed by the Dutch Shell Reserves Compensation Foundation and other institutions for a binding declaration of a settlement of $ 352.6m (non-US shareholders) (‘mfn clause’/release all claims against Shell)

Shell Petroleum (shareholders alleging fraudulent restatementof oil and gas reserves)

Royal Dutch Petroleum NV (Dutch)Shell Transport and Trading Co. Ltd. (UK)


Transnational Issues II

► US: S.D.N.Y. denies jurisdiction over foreign class members

►Dutch representative organisations for domestic and foreignshareholders attacking false statements-3% percent of shareholders established in the Netherlands, but evidence of cooperation with foreign organisations-settlement approved with lower compensation payments than in the US + 20% of settlement sum for attorneys’ fees

The Netherlands – Amsterdam Court of Appeal Swiss Converium/ZFS: Converium Shares sold at SWX/NYSE


Transnational Issues III

▪compromise with creditors or shareholders (75% of the creditors or class thereof)

▪court approval

▪Creditor will lose rights if no claim or objection is raised within deadline

▪jurisdiction if 56% of the creditors are located in the UK

UK Schemes of Arrangement (s. 895 Companies Act 2006)

Spanish and German Companies


Cross-Border Insolvencies – The Lehman Protocols

►Adherence without formal signature is possible

►Statement of intentions and guidelines for cooperation (communication)

►Asset preservation (notification mechanism)

►Inter-company claims (methodology, cf. derivative contracts)

Lehman ProceedingsLBHI (US) and subsidiaries

75 proceedings in 16 jurisdictions

Initial signatories:US debtors and representatives of proceedings in Germany, HKSAR, Singapore+ Australia

Cross-border insolvency protocol

ISDA Lehman CDS Protocol

Beijing - November 20131 COLLECTIVE REDRESS FOR EUROPE? Rainer Kulms Max Planck Institute of...

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