Important policy shifts are sometimes buried deep in the weeds of academic and technocratic reports. Just some weeks ago, the European Commission published a new study of Third Party Litigation Funding – the growing business of funds and investors that sponsor collective litigation against firms. For a good while now, new policy initiatives have encouraged the development of such litigation. The General Data Protection Regulation and the new Product Liability Directive, for instance, have both opened the doors to more group claims. The GDPR alone has spurred a rapid increase in mass claims filed at European courts.
So far, few have bothered to investigate these new developments in Europe. Most people will associate collective litigation with US tort law and perhaps think of Erin Brockovich, the consumer advocate and activist whose work was turned into a blockbuster movie starring Julia Roberts. Others will point to the wilder aspects of the US legal system, with its absurdly high injury claims and a cottage industry of people like Robert F Kennedy Jr that have amassed fortunes by mixing courts and politics in campaigns for mass claims. Third-party litigation funders can help people to get access to justice but the blending of law with politics and finance can also make a mockery of justice.
So what is the situation like in Europe? Recently, colleagues and I tried to figure this out – but with limited success. Yes, we could certainly find cases of collective action – 373, to be precise – and we discovered there has been an acceleration in the number of cases from 2019 onwards. We could also observe certain patterns. Netherlands is, by far, the country with the highest number of cases, followed by Germany, Poland, and France. In recent years, courts in Slovenia and Portugal have emerged as common destinations for collective litigation. Traditional consumer protection remains the biggest cause for these cases, but financial services and data protection have grown a lot alongside product liability claims and ESG.
But we could not see much deeper into this landscape. Few public sources shed light on how cases had been constructed or resolved. Unless you could get hold of lawyers or clerks who were willing to speak to the actual claims – and few were – it was nearly impossible to build a better knowledge of important data like claim values and awards in settlements, let alone the costs to claimants, defendants, and courts. Worse, there was hardly any transparency at all on whether outside investors had financed the claims and, if so, who they were and what share of the award they got.
We got some clues from court documents and newspapers. Take the case against Mastercard and how its merchant fees had been passed on to consumers. The origin of the mass claim was in a decades-old ruling by the European Court of Justice and it recently reached its conclusion in a UK tribunal. The value of the initial claim against Mastercard was north of EUR 15 billion, but the parties settled at about EUR 230 million. However, claimants had been funded by an outside investor who didn’t like the settlement – and who, reportedly, started arbitration with the lead claimant for having settled for too little.
It’s an extreme case, also because the award hardly delivered anything for the claimants (a bit more than EUR 10 each) after costs for lawyers and investors had been counted. But it points to the conflict of interests between claimants and outside financial investors, and the need to have much more transparency on this industry. The analysis by the European Commission could not add any deeper knowledge. Like us, the consortium of scholars behind the study ended up surveying involved parties who naturally have opposing views depending on what side they represent. But what if many collective litigations look like the Mastercard case, awarding insignificant sums to claimants and much more to lawyers and investors? What if the secrecy surrounding third-party funders means that a company could be faced with mass claims ultimately financed by its main competitor or even a foreign government? Shouldn’t there be rules about transparency and aligned interests?
These questions should be addressed by Brussels because of the intimate link between new EU regulations and more private enforcement in courts. Unlike the US, most countries in the EU have a tradition of public enforcement in which regulatory authorities oversee compliance and make penalty decisions. For instance, systems of Ombuds Bodies exist to address concerns about product injury. But when regulations change to encourage private enforcement, that is when collective litigation grows. The European system of regulation already spurs high compliance costs that weaken competitiveness. Adding a US-like system of mass litigation on top of public enforcement costs would lead to very high costs of regulation.
The economic impact of collective litigation in the US has been estimated at USD 530 billion annually. Fortunately, Europe is still very far from reaching such levels. But if only one tenth of that economic impact would materialise in the EU, it would have serious consequences for business costs, company valuations, and European competitiveness. The global market for litigation investment is expected to quadruple in the next 12 years and already we find many cases in the EU that are direct copies of previous cases in the US. Some US states are already putting the brakes on by introducing new transparency laws that force disclosure on investors that are funding mass claims. Europe should do the same.