The origins of the class action can be traced to the English chancery courts—perhaps even to King Edward II’s adjudication of a dispute concerning the rights of Channel Islanders in 1309. The class action as we know it today, however, emerged in the United States in the mid-20th century and has mutated far beyond anything that would have been recognizable to chancery courts of even a century ago. In recent decades, the U.S.-style class action has begun to spread not only to other common law jurisdictions but also to the civil law countries of Europe and elsewhere. Earlier this summer, the European Union published the text of a proposed directive on “representative actions for the protection of the collective interests of consumers” (the “Directive”). Consumer law is defined broadly to include “data protection, financial services, travel and tourism, energy, telecommunications, environment and health, as well as air and train passenger rights, in addition to general consumer law.” While the class action procedure envisioned by the E.U. directive is more limited in scope than Federal Rule of Civil Procedure 23 and state law analogues, the Directive (once it is formally approved and implemented) is expected to significantly expand the availability of the class action mechanism in Europe, particularly in cross-border litigation.
Historically, the civil law countries of Europe have been resistant to the class action, in large part because the civil law tradition “feels aversion to private litigation’s having a public policy role (or even side-effect) and considers the latter to be the exclusive prerogative of the state.” (Indeed, U.S.-style class actions are often justified as a form of privatized law enforcement). Yet, the E.U. Directive potentially mitigates that concern by drawing upon a tradition that is less foreign to continental Europe—corporatism. Call it civil procedural inculturation. This is accomplished through the Directive’s rule that consumer class actions may only be brought by “Qualified Entities”—not individual consumers. Qualified Entities are organizations (such as consumer organizations) specifically designated by member states for the purpose of bringing class actions. To be eligible for designation as a Qualified Entity for cross-border class actions, an entity must be a non-profit organization with 12 months of actual public activity in the protection of consumer interests, must have “a legitimate interest in protecting consumer interests,” must be independent of any persons (other than consumers) with a financial interest in class action litigation, and must make public disclosures of its source of funding and other information. (The Directive also authorizes member states to designate public bodies as Qualified Entities, without needing to satisfy these requirements.) It should be noted that the Directive did not invent the Qualified Entity concept. It already exists in the domestic class action laws of France and Germany and other countries, and a prior E.U. directive permits Qualified Entities to bring collective injunctive actions (as opposed to damages class actions). The E.U.’s list of Qualified Entities authorized to bring injunctive actions can be found here.
The Qualified Entity requirement contrasts starkly with U.S. class action procedure. The U.S. class action—at least the Rule 23(b)(3) damages class action—is primarily a lawyer-driven (and lawyer-enriching) aggregation mechanism. It does little to vindicate the interests of a “class,” if the term is understood to mean a cohesive group or constituency within society. Notably, Federal Rule of Civil Procedure 23 never defines the word “class.” While the rule implicitly requires that a class be capable of definition, there is no requirement that the class have any stability, coherence, or conscious existence. Far from being a “corporation” in the corporatist sense, a class can be any group of persons, even (or especially) groups that are defined solely by the ephemeral claims asserted in the litigation. In contrast, the Directive requires a 12-month track record for Qualified Entities in cross-border class actions and discourages the designation of Qualified Entities on an ad hoc basis in domestic class actions.
U.S. damages class actions are nominally brought by individual plaintiffs (called class representatives), but in practice they are typically initiated and controlled by lawyers who are motivated by the bounty of contingency legal fees, which usually amount to around one third of the total class recovery. In contrast, European law generally does not permit contingency fees. Moreover, the U.S. (unlike Europe) does not have a “loser pays” rule, so U.S. plaintiffs’ lawyers do not face a downside risk beyond their own out-of-pocket costs. While U.S. plaintiffs’ lawyers technically must take direction from the class representative, the class representative rarely has a significant incentive (financial or otherwise) to care about the litigation. Moreover, with some exceptions the plaintiffs’ lawyers and the class representatives in damages class actions are generally more interested in enhancing their recovery in a particular litigation, rather than achieving enduring industry-wide improvements.
Of course, plaintiffs’ lawyers are not left entirely to their own devices. U.S. class action rules require courts to exercise a heightened degree of supervision in the class action context. For example, the court must ensure that the class is “adequately represented” by the class representative and counsel. See Fed. R. Civ. P. 23(a)(4), (g). But this inquiry does not have a horizon beyond the specific litigation—there is no required evaluation of whether the lawyers or the class representative adequately represent the class’s interests broadly speaking. The court must also scrutinize settlements to ensure that some class members are not treated better than others and to make sure that the plaintiff’s counsel is not colluding with the defendant to the detriment of the class. See Fed. R. Civ. P. 23(e). But the court is not required to determine whether the settlement is in the broader non-litigation interests of the class or the public at large. Notwithstanding the extraordinary nature of the class action remedy, and its potential to have far-reaching implications for society writ large, U.S. civil procedure lacks safeguards designed to orient this highly consequential private litigation toward the common good.
A Qualified Entity requirement would address many of the problems with U.S. class action practice. First, non-profit Qualified Entities would more likely be motivated primarily by a desire to right wrongs, rather than a profit motive. Qualified Entities would bring litigation against bad conduct even in instances where the aggregate damages award is unlikely to be high. At the same time, Qualified Entities (unlike U.S. plaintiffs’ lawyers) would lack incentives to bring frivolous actions in the hope of achieving a quick nuisance-value settlement. Second, Qualified Entities would be committed to advancing the long-term interests of the groups they represent. Their solicitude for the class would not begin with the filing of the complaint and end once the settlement and fee award were approved. Instead, they would think strategically about the best way to advance the interests of their constituents in the future, while also taking into account the group’s interests in non-litigation matters. (In the U.S., this holistic, strategic thinking is already common among non-profit legal organizations that routinely bring pro bono class actions, especially Rule 23(b)(2) injunctive class actions). Third, Qualified Entities would have a public juridical existence that would extend beyond any given litigation. They would be regulated by the state and would be required to make certain disclosures to the public. The privilege of being permitted to initiate class-wide litigation would come with corresponding duties to the public. In addition, thanks to their preexisting organizational infrastructure, Qualified Entities would have the means and motivation to seek and receive input from the constituent members of the class. This would greatly improve the current U.S. system in which the class representative (usually an individual litigant) and class counsel are expected to decide what is best for an absent class without the benefit of such organizational infrastructure. Finally, a Qualified Entity requirement would transform the class action from a form of indirect privatized law enforcement into a quasi-public corporatist mechanism that is more directly and efficiently oriented toward the common good. Rather than relying on an invisible-hand mechanism in which contingency fees are supposed to incentivize lawyers to enforce the law, the Qualified Entities would seek to achieve that aim directly. It is true that introducing a Qualified Entity requirement would almost certainly mean fewer class actions. Yet the state could (and should) exercise its own civil and criminal enforcement powers in instances where there are significant violations of law that are not being addressed by Qualified Entities.
Amidst the deluge of commentary about what the E.U. can learn from U.S. class actions, the E.U. Directive’s Qualified Entity rule provides an opportunity for cross-pollination. It remains to be seen, of course, how the Qualified Entity rule will operate in practice. I defer to the judgment and experience of E.U. lawyers on whether the rule truly advances the corporatist ideals I have attributed to it. Regardless, at the conceptual level, the Qualified Entity rule should serve as an inspiration and catalyst for concrete reforms in the U.S. aimed at transforming class actions into a form of corporatist group representation.
Yves Casertano
