Litigation
Changes in EU Legal Landscape Offer Leadership Opportunity for In-House Counsel
As a result of the implementation of the EU Representative Actions Directive (“RAD”) and the arrival of plaintiff lawyers and profit-seeking litigation funders in Europe, class actions in both the EU and the UK are now taking off. At the same time, several legislative acts that aim to protect consumers are impacting the legal environment for companies doing business in Europe.
These changes offer corporate in-house counsel a golden opportunity to embellish their credentials as critical business partners in the boardroom and on corporate leadership teams. By moving beyond a narrow transactional role and scanning the legal landscape for potential legal exposure, assessing those risks and providing pragmatic strategies to mitigate them, in-house counsel can bring significant added value to C-suite meetings.
A selection of the main EU developments and their possible consequences are briefly reviewed below:
Class actions. RAD ensures that a class action regime is available in every Member State of the EU. The deadline for implementing RAD already passed in June 2023 but a few of the Member States, including Spain and France, still need to adopt national laws to do so. The Directive empowers “qualified entities” to bring collective actions and seek damages on behalf of groups of beneficiaries harmed by unlawful practices that breach a wide range of EU laws, including consumer protection and product liability laws.
Even prior to the implementation of RAD, the number of class actions in the EU has been growing steadily. As shown by CMS’s recent Class Action Report, over 130 mass claims were filed in Europe in 2023, a rise of almost 100% since 2019[1]. The following factors have driven the growth:
- Increased examination of all aspects of corporate behaviour and the broadening of stakeholder audiences that are willing to launch legal action;
- Assertive enforcement by regulatory authorities that lead to follow-on class actions;
- More active and creative tactics by claimant lawyers and willingness of courts to accept novel claims;
- Use of technology, including social media, to seek potential claimants to bring claims;
- Digital business models and ongoing digitisation across all sectors that create new risks for class actions in relation to the use and protection of vast customer data sets; and last but not least,
- Rapid growth in third-party litigation funding (TPLF) by which financial firms invest money to bring lawsuits in exchange for a percentage of the settlement or judgment if the case is successful.
The Product Liability (“PLD”) and proposed AI Liability (“AILD”) Directives where producers’ main concerns include:
- Expansion of scope of damage to include immaterial harms such as ‘medically recognised harm to psychological health’ and ‘loss or corruption of data’;
- Introduction of vague and subjective criteria in the test for defectiveness;
- Possibility of reversal of burden of proof in certain loosely-defined situations;
- Far-reaching proposals for disclosure of pre-trial evidence and introduction of presumptions in favour of the claimant with a weakening of the protections for sensitive documents, privileged communications and other rights of defense;
- Removal of minimum thresholds for bringing a claim;
- Additional complexity and confusion with other regimes such as Product Safety regulations and possible usurping of role of Regulatory Authorities in the safety field.
The recently adopted Corporate Sustainability Due Diligence Directive (“CS3D”) where industry’s main concerns include:
- Very broad scope of companies’ responsibility over what is termed the ‘value chain’ that includes both upstream and downstream business partners;
- Lack of alignment with existing human rights and environmental due diligence frameworks such as OECD and ILO Guidelines and other EU reporting requirements;
- Overly formalized rules and lack of risk-based or flexible approach for companies to use in their due diligence;
- Possible liability for damages caused even by an indirect partner;
- Need for significant investments by companies in extra resources, funding and capabilities to implement the new measures and ensure compliance.
CS3D has recently been adopted by the EU. PLD is due to be adopted before the end of 2024. At the time of writing, the AILD proposal is under review by the European Parliament. However, it is already clear that the legal framework within which companies operate in the EU is becoming more complex and the burden and level of regulatory and legal risk are increasing. Companies are facing more claims, the claims are getting larger and the risk of predatory or vexatious litigation is increasing too. These developments require highly sophisticated, expensive and carefully managed defense strategies to be developed by in-house legal teams.
In the context of heightened concern about the attractiveness and competitiveness of the EU as a place for doing business, it is critical that in-house counsel engage with their public affairs colleagues to provide constructive input on EU legislative proposals. The current situation represents an ideal opportunity for in-house counsel to enhance their position as strategic business partners as they are uniquely qualified to identify and interpret the complex legal changes, to highlight those concerns to senior business leaders and to mitigate the risks by introducing pragmatic and tailored solutions at their organisations.
This discussion will continue as an interactive panel session at ECLA’s upcoming General Counsel Forum Europe conference, taking place on 7-8 October in Berlin. We welcome corporate lawyers across Europe to join and give their own input on both class actions and the relevant legislation presented on a supranational level.
[1] https://cms.law/en/bel/publication/cms-european-class-action-report-2024