As I have previously noted on this blog (most recently here), one of the most significant recent developments in the D&O claims arena has been the global rise of collective investor actions. One factor in this development in Europe has been the non-binding 2013 Collective Redress Recommendation, in which the European Commission recommended that each of the EU’s 28 member states adopt collective redress mechanisms. Many of the member states have now adopted some form of collective redress but the approaches the various states have taken are not uniform.
In an October 24, 2017 publication entitled “Collective Redress Tourism: Preventing Forum Shopping in the EU” (here), the U.S. Chamber of Commerce Institute for Legal Forum asks whether the diversity of procedures adopted, and in particular the diversity of safeguards the member states have put in place, along with litigants’ relative freedom to choose between jurisdictions, has led to potentially detrimental forum shopping. The publication raises a number of interesting questions, which I discuss below.
Background
As I discussed in a prior post, most EU member states have, pursuant to the European Commission recommendation, adopted some form of collective redress mechanism. As the Institute for Legal Reform’s report notes however, the forms of action adopted involved “vastly different features and are subject to very different safeguards or protections.” Among the variations is the availability of third-party litigation funding; the adoption of opt-in or opt-out regimes, or both; the availability of discovery; and different rules for certification and costs. The report notes further that while EU rules exist to address the question of how courts in the member states should divide and share jurisdiction in cases that have effects in more than one country, there “are no rules at all specific to the allocation of jurisdiction in class actions scenarios.”
Preventing Abuses?
The report acknowledges that the European Commission recommendation did not involve a proscribed system of collective action; rather the recommendation recommended that each member state should introduce collective redress according to its own model and legal system. The recommendation did propose that the member states should adhere to certain features and safeguards, in order, the report states to “limit the incidence of abuse and prevent the growth of frivolous and vexatious litigation that has been so damaging in other jurisdictions, such as the U.S. and Australia.”
Among the abuses the report notes are, for example, the involvement of third-party litigation funders, who, the report states, “are likely to be the main beneficiaries of collective actions,” which “can give rise to situations in which the claimants receive little of nothing and third parties are richly rewarded.” The report also notes that the ability of representatives to proceed on behalf of massed groups of claimants “empowers the representative to threaten a defendant with catastrophic loss” – a form of unequal bargaining power that can be used to extract “what respected jurists call ‘blackmail settlements’ from defendants.”
Diversity of Systems and Safeguards
Despite these risks and the consequent need for safeguards, not all Member States have adopted safeguards to prevent against these abuses, according to the report. Some Member States have adopted “far more ‘open’ systems of collective redress than others and are increasingly becoming magnet jurisdictions for claimants.” The examples the report cites are the U.K.’s adoption of an opt-out class system and the system in the Netherlands allowing “ad-hoc litigation vehicles or foundations” to proceed as representative of large numbers of claimants, often with little nexus to the Netherlands.
The concern involved, the report asserts, is that where, as is currently the case in Europe, it is relatively easy for claimants to move to a jurisdiction of choice, there is “little to prevent such claims from gravitating to jurisdictions where such safeguards will not apply or they will apply less stringently.” The current rules, the report notes, may “create considerable uncertainty for defendants who, in cases of a large class, may not be able to foresee in what jurisdictions they will be sued.” The report adds that consumers’ interests may also be undermined; for example, in opt-out collective actions, affected consumers could have their rights determined in the courts of another member state without their knowledge of consent.
Forum Shopping?
In support of the assertion that claimants will tend to choose the jurisdiction with “the lowest thresholds and fewest safeguards,” the report cites as examples the purportedly “global” collective investor actions that have been filed in the Netherlands on behalf of BP investors in connection with the Gulf oil spill; on behalf of Volkswagen investors in connection with the Dieselgate scandal (refer here); and in connection with the Petrobras scandal. The driving forces behind these initiatives are U.S. plaintiffs’ law firms and third-party litigation funding firms. These firms, the report states have made a “calculated decision to bring these cases to the Dutch courts, citing, among other things, the Dutch courts’ willingness to assume jurisdiction on a global basis.”
The report goes further to suggest that this state of affairs may lead to a competition between jurisdictions, in which member states adopt mechanisms to avoid “losing out” on the perceived economic opportunities associated with major litigation. The report cites as an example the proposal in The Netherlands to create a “Netherlands Commercial Court” which will offer English language proceedings in front of a specialized court. The dynamic, the report suggests, could create a “race for the bottom,” in which the jurisdiction with the fewest safeguards will attract the most “abusive litigation,” adding the assertion that jurisdictions that have “no reluctance to grant very generous damage awards may become draw jurisdictions.”
Proposed Solutions
In order to address these concerns, the report suggests some “proposed solutions,” to reduce the incentives for claimants to forum shop. Among other things, the report suggests adjustment to existing rules (the Brussels Regulation) on cross-border litigation and jurisdiction specifically to address collective redress actions. Among other things, the report suggests introducing a new rule in mass claim situations giving jurisdiction to the court where the majority of injured claimants are domiciled; to use the jurisdiction of the place of the defendant’s domicile; or to create a special judicial panel for cross-border collective action with the Court of Justice of European Union.
The report further proposes the adoption of a standard similar to that enunciated by the U.S. Supreme Court in the Morrison v. National Australia Bank case, the effect of which, as characterized by the report, was to “end the tendency to try to include the harm suffered by foreign (non-U.S.) plaintiffs in the their U.S. claims.” Such a rule, the report suggests, “would at least already prevent claimants from asking EU courts to assert jurisdiction over parties domiciled outside the EU.”
Discussion
The report is very interesting and the solutions proposed certainly represent worthwhile recommendations as possible ways to ensure that collective actions in EU member countries proceed in a rational and efficient manner. Overall the report is thoughtful and interesting and merits reading at length and in full.
There are a number of important considerations that I think should also be taken into account in consideration and discussion of these ideas and proposals.
The first has to do with the European Commission’s collective action recommendation itself. It is not expressly mentioned in the report, but I think it is very important to keep in mind that the purpose of the European Commission’s 2013 recommendation encouraging the adoption of collective redress actions was to “ensure effective access to justice” so that “citizens and companies can enforce the rights granted to them under EU law where these have been infringed.” These principles behind the collective redress initiative are important, and I think these principles should be kept in mind both as the current state of affairs is assessed and as proposed changes are considered.
There is another consideration that I think should also be kept in mind, and that has to do with the fact in the 21st century, the global economy is complex, which in turn means that claims and claims processes necessarily will be complex, in many instances. Consumer products affect thousands or even millions of consumers. Company misconduct can affect thousands of investors, in multiple jurisdictions. The existence of collective redress mechanisms may be an arguably is a necessary consequence of the complex global economy in which we live.
Yet another consideration that I think also is relevant is the fact that the very way the European Commission recommendation was set up made it inevitable that there would be significant variation in approaches to collective investor actions across the member states. This approach and the flexibility for the member states to adopt different approaches by definition meant that different jurisdictions would approach the issue differently, and that there would be a variety of procedures put in place; this in turn meant that jurisdictions would adopt different models, at different speeds, offering different alternatives. In other words, it is little wonder that some jurisdictions might have adopted models that, for example, facilitate greater access for claimants.
From my perspective, there is nothing that suggests that merely because a jurisdiction provides more attractive procedures for claimants that abuse is the inevitable result. By the same token, from my perspective, merely because plaintiffs’ attorneys are involved or third-party litigation funders are involved does not mean that abuse is the inevitable result. Here, my perspective is significantly affected by what I have seen with respect to institutional investor claimants. The law firms and funding firms are representing sophisticated institutional investors that are both well-informed about their interests and well-informed about the choices they have made. They are expressly and knowingly choosing to have these firms represent their interests because they are aggrieved and are seeking these firms to represent their interests and recover damages on their behalf. Indeed, to suggest that the mere involvement of these law firms and funding firms constitutes some form of abuse is very dismissive of the active and involved role that the well-informed institutional investors play in this process.
For the same reason, the fact that investors are seeking to resort to the courts of the Netherlands or even the U.K. is not tantamount to abuse or to a race for the bottom. It may simply mean that these jurisdictions have done a better job creating mechanisms that allow aggrieved parties to recoup their losses, not that a race to the bottom is underway.
To be sure, I have the same concerns that the report expresses about some of the lawsuits that claimants recently have attempted to launch in the Netherlands (referring here to the actions recently filed in The Netherlands involving BP, VW, and Petrobras.) There is nothing that says that merely because these cases have been filed that these cases are going to go anywhere. To the contrary, the early evidence is that these cases are going nowhere; for example, one of the cases the report specifically mentioned, the BP Gulf oil spill case, has in fact been dismissed by the Netherlands courts on jurisdictional grounds (about which refer here).
It is important to note that the Netherlands courts have proven to be nobody’s pushover; at the report itself notes, the Amsterdam Court in fact rejected the proposed settlement of the massive $1.3 billion Ageas/Fortis case because of concerns about the proposed payout plan. Merely because claimants have found the Netherlands an attractive place to their claims does not mean that the judiciary in that country is lax or that something contrary to the interests of justice will take place there. And an important question that needs to be asked is whether the claimants would have an equally adequate alternative forum available if the Netherlands were not available to them?
One particular aspect of the threatened race to the bottom that the report cites is the proposal that the Netherlands create a specialized commercial court where disputes will be heard in English. The report tries to suggest that this is some kind of jurisdictional pandering or something like that. I couldn’t disagree more. I happen to think this is a brilliant idea, the equivalent of what the state of Delaware in the U.S. has done by creating its specialized Courts of Chancery, with a dedicated and highly skilled judiciary. The Delaware Chancery Court is the forum of choice in the United States for defendants. The creation of a specialized commercial court in which potential language concerns are addressed seems to me like the kind of innovation that ought to be encouraged and welcomed, not disparaged as evidence of a jurisdictional race to the bottom.
All of that said, I agree with the report’s fundamental premise that more needs to be done to coordinate collective redress litigation across borders in Europe. The reports proposals are interesting and worth serious discussion. My hope is that as these and similar ideas are considered that sight is not lost of the original idea behind the collective redress mechanism recommendation, which was to ensure effective access to justice and to ensure that citizens and consumers have access to mechanisms to seek redress of their grievances. It would be a poor outcome indeed if as a result of efforts to reconcile these cross-border and jurisdictional issues that aggrieved claimants wind up without adequate or appropriate procedural alternatives to ensure that they can seek and obtain redress. In that regard, it is critically important to keep in mind that what has been driving the growth of collective investor actions around the world has been a series of corporate scandals that have resulted in large number of aggrieved investors who want – and now expect – redress. Proposed reforms to address jurisdictional concerns, if they are to be valid, must also take these considerations into account.