CONSULTATION ON COLLECTIVE REDRESS RESPONSE OF HOGAN LOVELLS INTERNATIONAL LLP (NOT FOR PUBLICATION) HOGAN LOVELLS INTERNATIONAL LLP

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1 CONSULTATION ON COLLECTIVE REDRESS RESPONSE OF HOGAN LOVELLS INTERNATIONAL LLP (NOT FOR PUBLICATION) HOGAN LOVELLS INTERNATIONAL LLP Hogan Lovells is a global law firm created to provide high quality advice to corporations, financial institutions and governmental entities across the full spectrum of their critical business and legal issues globally and locally. Bringing together the combined strengths of its predecessor firms, Lovells LLP and Hogan & Hartson, we have over 2,500 lawyers operating out of more than 40 offices in Europe, the US, Latin America, the Middle East and Asia. The breadth of Hogan Lovells practice across many jurisdictions, industries and legal areas gives it a unique overview of developments in systems of redress across the EU and elsewhere in the world. We are involved on a day to day basis in assisting our clients to resolve disputes commercially, through alternative dispute resolution (ADR) and through the courts. The first part of this response consists of our preliminary comments on the issues raised by the Consultation and, in particular, on the proposal that action on collective redress should be taken at EU level. This is followed by our responses to specific questions which should be read in the light of preliminary comments. PRELIMINARY VIEWS Questions of competence A major concern is that the question of legal basis for EU action on collective redress has not been addressed in any detail in the Consultation. This is a threshold consideration: the EU institutions must demonstrate, in accordance with Article 2 TFEU, that there is a basis in the EU Treaties for them to take action in this area. No real analysis of competence Although, as seems evident from the Consultation, the Commission wishes to take binding legislative action in this area, its competence to do so is not clear and needs to be considered in detail. This concern has previously been raised by the European Parliament in the context of the Commission's White Paper on damages actions for breach of the EU antitrust rules, in which the

2 - 2 - Parliament called on the Commission to undertake an examination of the possible legal bases for action and noted that: "the rapporteur...has doubts as to the Commission's competence for its proposals...whether, and to what extent, Articles 95 [Article 114 TFEU] or 65 [Article 81 TFEU] can be taken as the legal base are questions that still need to be examined in detail." 1 It does not appear, from the face of the Consultation, that this call has yet been heeded. In any event, the rapporteur's doubts are, in our view, well founded. Article 114 TFEU It might be argued that Article 114 TFEU could be used as a basis for taking action on collective redress at an EU level. However, as the European Court of Justice established in its ruling on the Tobacco Products Directive, if the Commission is to do so, the measure it adopts must genuinely have as its object the improvement of the conditions for the establishment and functioning of the internal market. Specifically, it must be demonstrated that a lack of a harmonised measure in this area results in obstacles to trade arising now or in the future. The Consultation foreshadows that this type of argument might be made: "uncertainty and perceived difficulty to access redress is one important factor undermining confidence and thus constitutes an obstacle to the development of cross-border electronic commerce." 2 However, this assertion is not supported by the evidence, which does not suggest that any barriers to trade in fact result from the existence of different national systems of redress. Crossborder commercial activity is thriving within the EU and the data does not support the contention that consumers are deterred from purchasing goods from other Member States because of a lack of a harmonised collective redress mechanism. Nor does it appear that businesses are deterred from entering particular markets on the basis of differences in the forms of collective redress available across the EU. Article 81 TFEU There are also fundamental problems with any attempt to rely on Article 81 TFEU, which is limited to developing judicial cooperation in cross-border matters. In our view, this would prevent the Commission from introducing measures that would affect Member States' internal collective redress mechanisms. Further, even if Article 81 TFEU could be relied upon to introduce a European collective redress mechanism for cross-border disputes, there remains the question of 1 2 European Parliament Report on the White Paper on damages actions for breach of the EC antitrust rules (2008/2154(INI), , at recital 5 and the Explanatory Statement. Consultation, paragraph 4.

3 - 3 - whether there would be any need for one. The proportion of collective disputes with a crossborder element are very low (ten percent only of the 326 collective redress cases documented in the decade up to ). More importantly, there are already in place very flexible and sophisticated mechanisms to assist consumers to pursue a claim in another Member State, facilitated by the European Consumer Centres, if they need to do so. In addition to identifying a particular legal basis, the Commission must also demonstrate that any proposed system of collective redress is in accordance with the principles of proportionality, subsidiarity and effectiveness. Our views on this question are set out in detail in our response to Question 4, but we note here that, given the pre-existence and continuing development of national measures in this area, it is difficult to see how these principles could be met if action is taken by the EU in this area. Taking all of the above concerns into account, it is surprising that a further consultation has been launched on the substantive issues surrounding the introduction of a European collective redress mechanism before a thorough investigation of the legal scope to do so has been completed. While an analysis of whether there is competence to act in this area is, of course, for the Commission and the other EU Institutions, in our view it would not only be more responsible, but also much more cost effective, to reach a conclusion on this question before proceeding further. Collective redress should not mean collective litigation At present, despite the acknowledgment in the Consultation that "'Collective redress' is a broad mechanism'" 4, the Consultation proceeds on the basis that litigation should be the foundation of any harmonised measure that might be introduced. This is reflected in the fact that, throughout the Consultation, questions are posed as to the relative merits of introducing harmonised rules on the availability of injunctive and/or compensatory relief. In fact, as national developments demonstrate, ADR and other non-litigation forms of redress are highly effective and should be prioritised. The evidence from across jurisdictions is that there is relatively little recourse to group litigation in obtaining collective redress, despite the fact that such mechanisms are widely available. The most effective and utilised forms of collective redress nationally are those operating outside of the court system, or at least which use recourse to the courts as a last resort or for endorsement purposes. This is telling and belies the assumptions made in this Consultation. 3 4 Civic Consulting and Oxford Economics: Evaluation of the effectiveness and efficiency of collective redress mechanisms in the European Union, 26 August 2008, page 44. Consultation, paragraph 7.

4 The need for action should not be assumed A fundamental concern is that the Consultation assumes that action on collective redress is required at EU level. We do not believe the evidence supports this assumption. There are many examples of flexible and effective systems of redress available in different Member Sates, with an emphasis on ADR and other non-litigation forms of collective redress, and often informed by the principle of restorative justice. As these systems have been developed in light of national legal, procedural, cultural and economic features, they are highly tailored to dealing with disputes quickly and effectively in the different Member States. Instead of introducing yet more measures, if the EU is to take any action in this area, it should work to increase awareness of national measures and to continue to support Member States in their development of them. RESPONSES TO THE CONSULTATION QUESTIONS We have given our responses to the specific questions posed in the Consultation below. Each of these responses should be read subject to our overriding view that there are real questions as to the EU Institutions' competence to act in this area, and no established need for action to be taken at EU level in any case. However, if the Commission were to proceed to develop a system of EU collective redress, we would suggest the considerations set out below should be taken into account. Question 1: What added value would the introduction of new mechanisms of collective redress (injunctive and/or compensatory) have for the enforcement of EU law? The assumption underlying this question is that the purpose of a European collective redress mechanism would be to enforce European law. We do not agree that this should be the case. In contrast to the position in the US, where private litigation is used as a means of public law enforcement, sophisticated and effective regulators undertake this function in Europe. This is recognised in the opening paragraphs of the Consultation. It must not be forgotten that the purpose of any collective redress mechanism must be to provide adequate compensation for a particular loss suffered by an identifiable claimant. This is in accordance with normative principles of common and civil law systems. While private legal action may deter future wrongdoing, that should not be its point. In fact, in many in cases in the EU, public regulators are already empowered to step in and ensure that restitution is made to wronged individuals if necessary. It is also of concern that this question assumes that collective redress must entail "injunctive and/or compensatory" relief. This implies that the courts should be the source of all forms of collective relief. The most effective and utilised forms of collective redress nationally are those

5 - 5 - operating outside of the court system, or at least which use recourse to the courts as a last resort or for endorsement purposes. Question 2: Should private collective redress be independent of, complementary to, or subsidiary to enforcement by public bodies? Is there a need for coordination between private collective redress and public enforcement? If yes, how can this coordination be achieved? In your view, are there examples in the Member States or in third countries that you consider particularly instructive for any possible EU initiative? We refer to our comments in response to Question 1 and reiterate the importance of preserving the European position that public law should be enforced by public bodies rather than by private action. We do not see any need for formal coordination between private systems of redress and public law enforcement. In our view, the voluntary and non-litigation forms of collective redress that Member States have already established ensure that a distinction is maintained between private action and public enforcement. Responsible businesses will of course respond to justified private action by reviewing their practices to ensure that wrongdoing does not recur, but this should be seen as a beneficial by-product rather than the objective of private redress. Question 3: Should the EU strengthen the role of national public bodies and/or private representative organisations in the enforcement of EU law? If so, how and in which areas should this be done? The current powers of both national public bodies and private representative organisations are sufficient to ensure that EU law is enforced and individuals are compensated for breaches of it. EU regulators and authorities already have very well established powers to deal with infringements of EU law and the evidence shows that they will act where there is a need to do so, for example in the fields of product safety and competition law. The current availability of a range of regulatory bodies, each with responsibility and expertise for a particular area of law enforcement is, in our view, much better than a "one size fits all" system of collective redress would be. There is also a significant risk in enhancing the powers of representative organisations. Were they to be given greater standing to intervene in private legal action, strict safeguards would have to be put in place to ensure that any action taken is genuinely in the interests of private consumers, rather than as a means of generating profit or publicity. Those types of safeguards are outlined in our responses to Questions 20 and 22.

6 - 6 - Question 4: What in your opinion is required for an action at European level on collective redress (injunctive or and/or compensatory) to conform with the principles of EU law, e.g., those of subsidiarity, proportionality and effectiveness? Would your answer vary depending on the area in which action is taken? We find it difficult to see how any harmonised action in this area would be in accordance with the principles of subsidiarity, proportionality or effectiveness. This is because Member States are clearly able to develop and implement their own systems of collective redress to take account of particular national needs. Given that effective means of redress are already available in many Member States (and are being considered in others), it would not seem proportionate to generate the costs and upheaval of imposing a "one size fits all" harmonised measure. This is particularly the case because, for a harmonised measure to be workable, significant investment would be required to put in place the types of safeguards outlined in our response to Question 20. Question 5: Would it be sufficient to extend the scope of the existing EU rules on collective injunctive relief to other areas; or would it be appropriate to introduce mechanisms of collective compensatory redress at EU level? We fail to see how changes to the existing European rules on injunctions is relevant to the issue of EU collective redress but as regards compensatory relief, further action by EU institutions is not necessary, or in fact desired by Member States. The Evaluation Survey commissioned by DG SANCO noted thirteen Member States have already introduced group collective action mechanisms, 5 although they are not heavily utilised by claimants, despite the fact that these mechanisms are widely available. The Survey noted that only 326 group action cases were actually documented in those Member States in the decade to The UK experience is a striking illustration of this: although Group Litigation Orders ("GLOs") have been available there since May 2000, by 21 April 2008, there had been only 64 GLO claims. 6 Further, in July 2009, the UK Government expressly rejected a national proposal to introduce a generic class action rule, stating that it believed that "a sector based approach to the introduction of collective action rights is likely to produce a better outcome overall and to be more achievable." 7 These examples illustrate that fact that further action by EU institutions is not necessary, or in fact desired by Member States. Instead of introducing yet more measures, if the EU is to take any action in this area, it should work to increase awareness of national measures and to continue to support Member States in their development of them Civic Consulting and Oxford Economics: Evaluation of the effectiveness and efficiency of collective redress mechanisms in the European Union, 26 August 2008, page 4. See Group Actions and Litigation Funding, A Horrocks, I Turnbull and C Evans, contributed to Practical Company Law. Ministry of Justice: The Government's Response to the Civil Justice Council's Report, "Improving Access to Justice through Collective Actions" (July 2009), page 5.

7 - 7 - Question 6: Would possible EU action require a legally binding approach or a non-binding approach (such as a set of good practices guidance)? How do you see the respective benefits or risks of each approach? Would your answer vary depending on the area in which action is taken? We refer to our preliminary comments regarding the question of the EU Institutions' competence to introduce a binding legal measure in this area. We have serious doubts as to whether they do have the power to do so. We suggest that the better course of action would be for the EU institutions to invest in increasing consumers' and businesses' knowledge of the different types of collective redress available in the Member States. The EU could also play a valuable role in facilitating national Governments' and authorities' learning from the experiences of other Member States, or between sectors across the EU. In this way, examples of good practice could be shared, while at the same time allowing for national cultural, economic and legal differences. Question 7: Do you agree that any possible EU initiative on collective redress (injunctive and/or compensatory) should comply with a set of common principles established at EU level? What should these principles be? To which principle would you attach special significance? If an EU system of collective redress is to be developed, we reiterate that litigation should not be the cornerstone of it; rather it should be used as a means of certifying the outcome of ADR or other alternative forms of collective redress and/or as a refuge of last resort, for example in order to enforce the decision of a regulator or Ombudsman. In terms of the "principles" that any EU measure should take into account, we would suggest that the considerations listed below (and the need for the safeguards listed in our response to Question 20) are taken into account: Collective redress mechanisms should not be used as a means of public law enforcement. This task properly lies with public regulators and authorities. The emphasis should be on non-litigation forms of collective redress. Recourse to these systems should be mandatory before involving the courts. The parties should be able to consent to the use of any particular form of collective redress as this makes it more likely that they will accept the ultimate outcome. Wherever possible, collective redress mechanisms should be developed by sector to ensure that the matter is handled with the appropriate expertise. Good examples include the Ombudsmen systems used in the UK and other northern European countries and the

8 - 8 - Dutch ADR system which is structured around 49 Business Sector Boards under the supervision of a Dispute Resolution Committee. This approach is effective because the need to maintain consumer confidence in businesses is a highly effective and constructive means of preventing future violations of the law. Any redress sought should relate to specific losses sustained by identifiable claimants. Those claimants should be put in no better a position by the redress received than they would have been had their rights not been infringed - there should be no role for punitive damages. The merits of a claim should be verified by an independent party at an earliest possible stage. The US experience is informative: once classes are certified in the US, in nine out of ten cases settlement will follow in order to minimise the costs risks for defendants. In contrast, EU regulators and Ombudsmen provide a valuable function at national level in identifying unmeritorious claims early on. The Danish Ombudsman estimates that around 30% of claims presented to it do not proceed for lack of a legal cause of action. Similarly, around 40% of claims presented to the UK Financial Services Ombudsman are rejected. This has a dual benefit of protecting businesses from vexatious actions and of ensuring that, where redress is deserved, resources can be concentrated on providing it speedily. In addition to ensuring that the merits of the claim are assessed, it is also important that the claim's suitability for collective determination is also decided at an early stage. Question 8: As cited above, a number of Member States have adopted initiatives in the area of collective redress. Could the experience gained so far by the Member States contribute to formulating a European set of principles? We agree that there are many initiatives in this area that have been adopted by Member Sates. However, rather than seeking to use these as a basis for formulating an EU system of collective redress, our conclusion from the experiences of the Member States is that the best course of action for the EU institutions would be to support the continued development of national collective redress mechanisms and refrain from taking action in this area at an EU level. The main reason why the systems of redress already operating in Members States are so effective is because these have been developed in light of national legal, procedural, cultural and economic features. This has resulted in national systems of redress which rely heavily on nonlitigation forms of dispute resolution. These provide all the benefits that are desirable in ensuring collective redress is obtained where merited in that: they are low cost in comparison with the cost of litigation;

9 - 9 - redress is obtained, but only where deserved; both businesses' and consumers' rights are protected by an independent third party with sufficient expertise and no economic interest in any particular outcome; disputes are dealt with quickly; and business has, in many cases, been fully engaged in the development of such systems and has an interest in them operating smoothly and effectively. This is as true of disputes with a cross-border element as it is of purely domestic complaints. As noted in our introductory comments on the question of competence, research has shown that a very small number of collective actions brought had a cross-border element. In contrast, many cross-border claims are dealt with efficiently through existing national non-litigation systems of redress, facilitated by the European Consumer Centres Network ("EEC NET"), which handles over 60,000 cross-border consumer cases each year. Question 9: Are there specific features of any possible EU initiative that, in your opinion, are necessary to ensure effective access to justice while taking due account of EU legal tradition and the legal orders of the 27 Member States? One of the main features that would be necessary in any proposed action at EU level is that it would operate effectively in all Member States whilst at the same time taking account of the diversity of their legal and procedural systems. We doubt this is possible and do not think that a "one size fits all" approach is in the interests of consumers or businesses. In our view, any attempt to harmonise national procedural rules would be misguided because they are so fundamentally different and entrenched: for example, the approach to discovery of documents and use of experts. Another difficulty is that the national procedural rules are constantly developing. For example, in England and Wales the Government has proposed wideranging and fundamental changes to the current rules on litigation funding following the report of Lord Justice Jackson. Those proposals have been carefully considered in the context of the English civil litigation system as a whole with the aim of preserving an overall balance of interests.

10 Question 10: Are you aware of specific good practices in the area of collective redress in one or more Member States that could serve as an inspiration from which the EU/other Member States could learn? Please explain why you consider these practices as particular [sic] valuable. Are there on the other hand national practices that have posed problems and how have/could these problems be overcome? Whilst noting our serious reservations about any EU collective redress measure, we would point to the examples of "good practices" in our response to Question 7 and to the elements of any collective redress system that should be avoided, as highlighted in our response to Question 20. Question 11: In your view, what would be the defining features of an efficient and effective system of collective redress? Are there specific features that need to be present if the collective redress mechanism would be open for SMEs? We refer to our response to Question 9. Question 12: How can effective redress be obtained, while avoiding lengthy and costly litigation? We refer to our comments in response to Question 8, with particular emphasis on the need to ensure that litigation remains a last resort in any system of collective redress. Clearly, the ultimate sanction of seeking the intervention of the courts should not be ruled out: this is necessary for the protection of all parties. However, as experience of national collective redress systems demonstrates, in most cases this can be avoided, and cost and time savings made accordingly. We reiterate that, in our view, national governments and authorities are best placed to develop these mechanisms because they have the greatest understanding of what particular systems are required in their jurisdiction, and how best (culturally and legally) these can be implemented. Question 13: How, when and by whom should victims of EU law infringements be informed about the possibilities to bring a collective (injunctive and/or compensatory) claim or to join an existing lawsuit? What would be the most efficient means to make sure that a maximum of victims are informed, in particular when victims are domiciled in several Member States? As matters currently stand, potential claimants are able to access national collective redress mechanisms. The Commission is already supporting consumers' understanding of how redress can be sought in other Member States through EEC NET. There may well be scope for the development of further initiatives to deal with non-consumer disputes.

11 There is a danger that if national mechanisms are replaced by a generic, "one size fits all" European system, both consumers and businesses will be less well informed (at least in the short term) than they currently are about the availability of collective redress mechanisms because they will have to familiarise themselves with a totally new system. A far more practical and costeffective approach would be to increase investment in supporting consumers' and businesses' awareness of their rights and responsibilities under EU law and of national collective redress mechanisms. Question 14: How the efficient representation of victims could be best achieved, in particular in cross-border situations? How could cooperation between different representative entities be facilitated, in particular in cross-border cases? As with so many of the questions in this Consultation, this question assumes that an EU collective redress mechanism is required, and that it should be litigation-based. The evidence does not support these assumptions. In fact, research shows that such an approach would be counterproductive in both domestic and cross-border cases. The evidence is that national collective redress mechanisms already in place are addressing the needs of consumers and businesses. Moreover, the vast majority of collective actions brought do not involve a cross-border element and in any event, where access to systems of redress in other Member States is required, this is facilitated by organisations such as EEC NET and FIN-NET (which links up 50 ADR systems operating in the financial services industry across the EU). One of the great advantages of the hundreds of non-litigation national collective redress mechanisms in place across the EU is that they do not require claimants to have formal legal representation. They are administered by impartial third parties, including regulators, Ombudsmen and trade associations, which have no economic interest in any redress that might be awarded. This avoids the costs and disadvantages associated with litigation: for example, procedural requirements as to evidence; the difficulty in selecting a mutually convenient forum; the lack of control of the parties over the rules applicable to the proceedings. Question 15: Apart from a judicial mechanism, which other incentives would be necessary to promote recourse to ADR in situations of multiple claims? As noted above in our response to Question 5, the evidence is that ADR and other non-litigation systems of collective redress are used far more extensively than court-based collective redress procedures, despite the fact that these are widely available. The main reason for this is that non-litigation forms of collective redress are usually far more suitable than litigation for resolving the types of claim that are most suitably brought by large groups of claimants together (ie claims where precisely the same cause of action has arisen,

12 where the circumstances of such claims do not differ materially, and where the individual loss is so low that the case would not be worth pursuing as a stand-alone claim). These systems are particularly attractive because they are often sector-specific so are entirely geared to dealing with breaches of particular laws and are handled by regulators and/or authorities with real expertise. In many cases, regulators will of their own initiative take action to promote restorative justice, so it is not necessary for groups of claimants to organise themselves and pursue an alleged wrongdoer. Question 16: Should an attempt to resolve a dispute via collective consensual dispute resolution be a mandatory step in connection with a collective court case for compensation? Whilst noting our serious reservations about any EU collective redress measure, if action is to be taken at EU level on collective redress, it should be mandatory for the parties to choose and participate in a non-litigation form of collective redress before taking action in the courts (see our response to Question 7). Question 17: How can the fairness of the outcome of a collective consensual dispute resolution best be guaranteed? Should the courts exercise such fairness control? In our view, rather than introducing an entirely new and generic EU form of collective redress, the efforts of the EU institutions would be better spent assisting Member States to learn from best practices in other jurisdictions. The EU should also, without taking further legislative action, continue to monitor the development of national collective redress systems in order to ensure that justice is achieved consistently across jurisdictions. The success of current national non-litigation mechanisms of collective redress is largely due to the involvement of an independent third party to assess the claims and, if necessary, ensure that redress is delivered. There is no evidence that such forms of collective redress are inherently less fair than court-based systems. While the courts should act as the ultimate arbiters of any dispute, experience of national nonlitigation forms of collective redress indicates that the decisions reached through them are generally accepted as fair and equitable by all parties. In the case of ADR-based systems, this is helped by the parties' agreement to enter into ADR voluntarily.

13 Question 18: Should it be possible to make the outcome of a collective consensual dispute resolution binding on the participating parties also in cases which are currently not covered by Directive 2008/52/EC on certain aspects of mediation in civil and commercial matters? Where the parties choose to participate in a voluntary (ie non-litigation) form of collective redress, they should be free to choose whether the outcome will be binding or non-binding. The benefit of many of the currently available national forms of collective redress is that the parties can choose what is most suitable in the context of the particular dispute. Access to the courts should, in any case, remain available so that the parties can either obtain judicial endorsement of the agreement they have reached or, if necessary, seek judicial determination of their dispute where agreement cannot be reached. Question 19: Are there any other issues with regard to collective consensual dispute resolution that need to be ensured for effective access to justice? No. Question 20: How could the legitimate interests of all parties adequately be safeguarded in (injunctive and/or compensatory) collective redress actions? Which safeguards existing in Member States or in third countries do you consider as particularly successful in limiting abusive litigation? We have given examples above of national systems of collective redress that already incorporate good safeguards, such as the use of an independent third party to make an initial merits assessment of any claims put forward and to adjudicate disputes. We believe that the US class action litigation system in particular exemplifies how a lack of appropriate safeguards may lead to abusive practices. Whilst noting our serious reservations about any EU collective redress measure, if action is to be taken at EU level on collective redress, we think that the following safeguards should be integral to any EU system of redress: Non-litigation forms of collective redress should be prioritised and be a mandatory first step in the progression of any claim. Investment should be focused on making these systems as cost effective and speedy as possible so that the need for complex and expensive litigation is reduced.

14 Any communications by representative lawyers and organisations should be regulated to ensure that they are impartial and do not misrepresent costs or prospects of success. Opt-in forms of collective redress only should be permitted. Whatever form of collective redress is used, the claimant group should only consist of those who have chosen to be a part of it. The economic interests of claimant representatives should be closely regulated so that they are only permitted to recover their reasonable costs and fees, rather than a share of any award made to the claimants. A US study on this issue found that fee and expense awards can account for up to 47% of benefits distributed to claimants. 8 It is therefore vital that, if redress is awarded, it should be for the benefit of claimants and not their representatives. The use in particular of US style "contingency fees", whereby the plaintiff lawyer receives a proportion of the damages awarded to his client, should be avoided. In the event that the use of any type of contingency fee is permitted, we strongly urge that the use of such arrangements is heavily regulated: for example, the imposition of a cap on the percentage of the claimant's damages that may be taken in respect of such fees (this is particularly important in personal injury claims where damages for the cost of the claimant's future care have been awarded). We believe that great care must be taken to ensure that any introduction of contingency fees does not encourage vexatious and unmeritorious class actions. Any proposal to permit contingency fees in the context of a harmonised EU collective action system should be examined as part of the whole mechanism. 9 Lawyers, representative entities and claims handlers should owe direct responsibilities to claimants to keep them informed of the progress of the matter and seek their consent to every step taken in seeking redress. This is critical in order to avoid the problems that have arisen in the US in large class actions. In those situations, inevitably the lawyer/client relationship is compromised and, as a result, the claim can be pursued unchecked so that the attorney's economic interests overshadow those of individual claimants. It should be integral to any EU system of collective redress that certain claims will not be suitable for collective assessment, particularly those where questions of liability will 8 Pace et al., Insurance Class Actions in the United States of America (RAND Institute for Civil Justice, 2007), taken from a summary by C Hodges on Class Actions in the USA annexed to the European Justice Forum's response to DG SANCO's 2009 Consultation on Collective Redress, page Our comments in this regard are informed by the recent review of civil litigation funding in England and Wales, which was conducted by Lord Justice Jackson and resulted in recent UK Government proposals on civil litigation funding. While these proposals do allow the use of contingency fees, it must be noted that this is only one element of a holistic package of measures designed to make significant changes to the rules on costs in England and Wales in respect of both individual and collective claims. Importantly, the aim of the UK Government's proposals is to preserve the balance of interests between claimants and defendants, ensuring access to justice on the one hand while preventing a situation where defendants are pressured into settling undeserving claims due to the costs risks they face. As such, important restrictions on the use of contingency fees are proposed in England and Wales: such fees will be capped at 25% in personal injury claims, as will lawyer success fees.

15 depend on an assessment of the particular circumstances of any claim. particularly true of product liability and mis-selling claims.) (This is The principles outlined in our response to Question 7 should also be taken into account to ensure that appropriate safeguards are implemented. Please see also our response to Question 21 as regards liability for costs and our response to Question 22 regarding the right to bring collective redress actions. Question 21: Should the "loser pays" principle apply to (injunctive and/or compensatory) collective actions in the EU? Are there circumstances which in your view would justify exceptions to this principle? If so, should those exceptions rigorously be circumscribed by law or should they be left to case-by-case assessment by the courts, possibly within the framework of a general legal provision? If EU action is to be taken in this area, we think that it is of fundamental importance that the "loser pays" rule on costs is preserved. 10 This is to ensure that claimants and their representatives are incentivised to incur costs proportionately and to explore the possibility of resolving the claim at an early stage. The rule also helps ensure that unmeritorious claims are not pursued. Consistent with our comments above that the courts should remain the final arbiters of any claim, even if it is handled through a non-litigation system of collective redress, we think that the courts should retain overall discretion as regards costs. This is a feature of most national litigation systems already. This will ensure that the courts are able, if necessary, to make final determination of the actual amount of costs to be paid in applying the loser pays rule. 11 Question 22: Who should be allowed to bring a collective redress action? Should the right to bring a collective redress action be reserved for certain entities? If so, what are the criteria to be fulfilled by such entities? Please mention if your reply varies depending on the kind of collective redress mechanism and on the kind of victims (e.g. consumers or SMEs). Many of the national collective redress systems currently in place are structured so that it is not necessary for groups of claimants to be formally represented. This is one of the key advantages of non-litigation-based systems. In contrast, where action is taken through the courts, it is unavoidable that claimants need to be represented, with the danger that the representatives' financial or other interests can be prioritised over those of the claimants In England and Wales, the government has recently suggested that an exception to the loser pays rule should be permitted in favour of claimants in personal injury claims. However, it should be noted that such "Qualified One Way Costs Shifting" is part of a comprehensive package of measures that aims to preserve the balance of interests between claimants and defendants. As such, our overall position remains that, in respect of a harmonised collective redress mechanism, the loser pays rule remains the best way of ensuring fairness between the parties. For example, in England and Wales, the Courts may assess costs on the "standard" or "indemnity" bases, depending on the conduct of both parties in pursuing the litigation.

16 We think that if a claim is to be made by a representative entity rather than claimants themselves, the representative should be duly accredited and regulated. Where representative bodies are used, their standing and accreditation should be recognised by the national Government, wherever possible through sectoral authorities. There should also be rules concerning how they may communicate with those they represent (all of whom should have consented to be part of the action, ie have "opted in") and how they are to be funded. Representative organisations should also have to declare to claimants and defendants whether they have any financial interest in the proceedings and, if so, the nature of it. Question 23: What role should be given to the judge in collective redress proceedings? Where representative entities are entitled to bring a claim, should these entities be recognised as representative entities by a competent government body or should this issue be left to a case by case assessment by the courts? We repeat also our responses to Questions 7 and 12 in particular, in emphasising that nonlitigation forms of collective redress should be the focus of any action in this area. The courts should play an important role in endorsing and, if necessary, enforcing agreements reached through such systems. The courts should also remain available to make final determination of disputes in the event that agreement cannot be reached, although the evidence from Member States is that this is rarely necessary. Having said that, if an EU court based collective redress system is to be introduced, it will be very important that an assessment of the merits of a case, and its suitability for collective determination, is carried out by the courts at an early stage so that excessive time and money is not devoted to misdirected claims. Courts should also proactively manage cases so that claims that depend on an assessment on the individual circumstances of each claimant's case are not allowed to proceed collectively. We refer to our comments in answer to Question 22 as regards the need to accredit and regulate representative bodies which bring collective action claims. Question 24: Which other safeguards should be incorporated in any possible European initiative on collective redress? We refer to our responses to Questions 7 and 20 for our views on the principles and safeguards that must inform any EU action in this area.

17 Question 25: How could funding for collective redress actions (injunctive and/or compensatory) be arranged in an appropriate manner, in particular in view of the need to avoid abusive litigation? We repeat our comments in response to Question 20 regarding contingency fees and the importance that intermediaries' economic interests are not prioritised at the expense of either claimants or defendants. One of the most important reasons for our view that non-litigation forms of collective redress should be prioritised is that they are much more cost-effective than pursuing claims through the courts. For SMEs in particular, current national systems of collective redress, such as those administered by Ombudsmen or trade associations, are very effective in providing redress while preserving the possibility of future commercial relationships. The costs risk for SMEs is much reduced in these circumstances. Question 26: Are non-public solutions of financing (such as third party funding or legal costs insurance) conceivable which would ensure the right balance between guaranteeing access to justice and avoiding any abuse of procedure? We repeat our comments in response to Questions 7, 12 and 14 regarding the need to focus on non-litigation forms of redress in order to minimise the costs burden on all parties. We do not believe that third party funding is suitable in the context of collective actions because the risk that the funder's economic interests would take priority over those of the claimants. In the event that third party funding is permitted in any harmonised measure, the activities of such funders should be very closely regulated. Question 27: Should representative entities bringing collective redress actions be able to recover the costs of proceedings, including their administrative costs, from the losing party? Alternatively, are there other means to cover the costs of representative entities? We agree that a successful party, including a representative entity, should be able to recover their direct legal costs only. Other administrative costs and costs of running the representative entity generally should not be recoverable; otherwise, the entities may be unjustifiably incentivised to pursue claims for their own benefit. However, such costs should be subject to a test of reasonableness and proportionality and must be directly related to the actual costs of bringing the claim. As a last resort, access to the courts should be available for final assessment and judgment on the quantum of such costs.

18 Question 28: Are there any further issues regarding funding of collective redress that should be considered to ensure effective access to justice? No. Question 29: Are there to your knowledge examples of specific cross-border problems in the practical application of the jurisdiction, recognition or enforcement of judgments? What consequences did these problems have and what counter-strategies were ultimately found? In our view, the current rules on recognition and enforcement of judgments are functioning adequately, with no particular cross-border issues evident. Question 30: Are special rules on jurisdiction, recognition, enforcement of judgments and/or applicable law required with regard to collective redress to ensure effective enforcement of EU law across the EU? We do not see the need for any particular rules in this area. Question 31: Do you see a need for any other special rules with regard to collective redress in cross-border situations, for example for collective consensual dispute resolution or for infringements of EU legislation by online providers for goods and services? We do not see the need for any particular rules in this area. Question 32: Are there any common principles that should be added by the EU? We refer to the points we have made in response to Questions 7 and 20. Question 33: Should the Commission's work on compensatory collective redress be extended to other areas of EU law besides competition and consumer protection? If so, to which ones? Are there specificities of these areas that would need to be taken into account? No. As we said at the outset, our overriding view is that there are real questions as to the EU institutions' competence to act in this area, and that in any case, there is no established need for action to be taken at EU level.

19 Question 34: Should any possible EU initiative on collective redress be of general scope, or would it be more appropriate to consider initiatives in specific policy fields? We repeat our response to Question 33 and note that one of the particular advantages of existing national systems is that they are, in many cases, sector and/or industry specific. This ensures that claims can be treated appropriately and expeditiously. We do not see how any EU collective redress system would be able to operate at such a level of specificity. Hogan Lovells International LLP 4 May 2011 John Meltzer Partner Dispute Resolution (Product Liability) john.meltzer@hoganlovells.com Neil Mirchandani Partner Dispute Resolution (Financial Institutions) neil.mirchandani@hoganlovells.com Nicholas Heaton Partner Dispute Resolution (Competition) nicholas.heaton@hoganlovells.com Heather Gagen Associate Dispute Resolution (Product Liability) heather.gagen@hoganlovells.com