1. Beijing - November 20131 COLLECTIVE REDRESS FOR EUROPE? Rainer Kulms Max Planck Institute of Comparative and International Private Law kulms@mpipriv.de I.Aggregate Litigation – The Cases and the Challenge II.US Class Action Law and Some Economics III.EU Comparative Survey (including Member States) IV.Whither European Collective Redress? V.Excursus I: HKG SAR Law Reform Commission VI.Excursus II: Reorganisations/Trans-border Issues

2. Beijing - November 20132 Unfair Trading and Consumer Protection I A Newspaper Ad Consumers may be protected from misleading newspaper ads ►Who has standing to sue?  a competitor?  a consumer ombudsman?  an organisation of consumer representatives? ►What is the purpose of the actionInjunction? Damages? A Computer for 200 € Reproduced computer has a value of 500 € !

3. Beijing - November 20133 Unfair Trading and Consumer Protection II ►Who has standing to sue?  a competitor?  a consumer ombudsman?  an organisation of consumer representatives? ►If defendant has to pay damages, disgorge profits, who is the recipient? Government? Consumer Organisations? Consumers? Unsolicited phone calls to consumers to sell financial products GGGains from Unfair Competition Unfair Trading Law Antitrust Law

4. Beijing - November 20134 (Partial) Privatisation of German Telecom Share prices down 17,000 Individual Investors file Complaints German Telecom issues prospectus No information on pending merger negotiations on Voicestream Problematic valuation of property owned by German Telecom

5. Beijing - November 20135 The Lehman Bankruptcy – The Fallout (Private Investors) SPV’s Risky Financial Products (Securitisation of Mortgages) Individual Investors (500 out of 4100) Damages Lehman Brothers Holding Inc. Investment Banking High-risk strategy (leverage) City Bank Belgium Collective Redress Government Suasion ADR - Reorganisation Group Proceedings Class Action Cross-border?

6. Beijing - November 20136 Collective Redress – Policy Options ►Why Collective Redress? ▪Small damages make litigation illusory, ‘illegal gains’ ▪Efficient private enforcement of rights by individuals is costly. ▪efficient consumer protection through collective redress ▪alternative dispute resolution is not mandatory ▪cross-border problems ►Which Form of Collective Redress, if any? ▪ Conciliation Services? ▪ Court Proceedings (Consumer Groups, classes of individuals) ▪ Ombudsman ▪ Administrative Enforcement of Group Rights or Bundeling of Individual Rights Injunctive/Com- pensatory Relief?

7. Beijing - November 2013 The European Parliament ►Resolution of 2 February 2012: “Towards a Coherent European Approach to Collective Redress” -effective and efficient enforcement of rights -deficiencies of individual lawsuits (barriers for consumers: litigation cost/asymmetric information) -cost risk and damages sustained ►Do not introduce US-style class action system Abuse ►Procedural approach Horizontal approach and safeguards Standing (organizations) and Opt-in No discovery, actual damage, the loser pays (no third-party funding) ADR 2013 Draft Recommendation

8. Beijing - November 20138 US – Group and Aggregate Litigation I ►Consolidated or Coordinated Group Litigation ▪ joinder ▪ mass consolidation ▪ multidistrict litigation ►Bankruptcy Proceedings – Reorganisation ▪cf. chapter 11 Bankruptcy Code and pre-packaged reorganisation plans -private initiative/consensus-building among creditors -creation of claim resolution or creditors’ trust Trusts to adjudicate value of claims/manage assets (liability insurance proceeds or contributions by joint tortfeasors)

9. Beijing - November 20139 US – Group and Aggregate Litigation II ►Class Action Litigation ▪ Civil Rights Beginnings ▪ Awards in individual cases too small to file suit ▪ mass accident (individual damages v. risk of defendant’s insolvency ►FRCP 23 ▪attorney files a civil complaint in which a number of representative plaintiffs are individually named ▪motion for certification as a class Government-initiated suits Regulation through Litigation Private Attorney-General

10. Beijing - November 201310 US – Group and Aggregate Litigation III ►Numerosity ▪ Class so numerous that joinder is impracticable ►Commonality ▪ questions of law or fact common to the class ►Typicality ▪claims or defences are typical of the class ►Adequacy (Fair + adequate representation) (cf. Lead Plaintiff) ▪control quality of representatives and attorneys ►Damage Cases ▪predominance (questions of law and fact common to the members of the class predominate individual issues) ▪superiority (compare with other forms of litigation) Notice requirement/Opt-out Punitive Damages

11. Beijing - November 201311 US – Group and Aggregate Litigation IV ►Mandatory Classes – Class actions (Mass tort cases) ▪separate actions create risk of inconsistent or varying adjudications ▪impairment of non-parties to protect their interest ►no statutory duty to observe notice requirement

12. Beijing - November 201312 Class Actions – Settlements I ►Proposed Settlements (+ fees): Mandatory Judicial Review ▪Assessment of claims and defences ▪Focus on value distributed to class Potential unfairness Coupons (marketability issues et al.) Negative options Cy près (‘fluid recovery’) Restriction on claims/reversion of unclaimed funds to defendant Collusion Injunctive Relief

13. Beijing - November 201313 Class Actions –Settlements II ►Settlement Class Actions: Judicial Review ▪fairness and notice issues ▪conditional settlements ►Private Mass Tort Settlements ▪global settlement offer: contract between counsels on behalf of either party ▪offer is made to ‘eligible’ plaintiffs only ▪a requisite percentage of must opt in, those who refuse are not bound ▪settlement awards based detailed scheme administered by claims resolution facilities ▪transparency – availability to the public ► Reorganisations in Bankruptcy (11 USC § 524 (g) (2)) 75% quorum

14. Beijing - November 201314 The Economics of Class Action Litigation ►Social Benefits: Consolidate individual claims into one action Classes with positive-expected value litigants ▪ saving litigation cost through economies of scale ▪ attenuates externalisation of costs Level playing-field between plaintiffs and defendant Classes with negative-expected value litigants ▪ frivolous claims, wrong suffered is small, but policing a wrong ►Social Costs of Class Action Litigation Litigation Costs Agency Costs Adverse Selection and opt-outs Blackmail settlements/Settlement Class Actions Entrepreneurial activities by attorneys Class Action Fairness Act 2005 Lead plaintiff

15. Beijing - November 201315 European Collective Redress – The Status Quo ►Consumer Protection I Directive 98/27/EC on injunctions for the protection of consumers’ (collective) interests Applies irrespective of private international law -injunctive relief (cessation and prohibition of infringements) -publication of judicial market failure -where applicable: defendant shall pay into the public purse or any beneficiary designated by court Qualified entities may bring action (cf. intra-community infringements) ▪infringement of consumers’ rights: market distortion ▪civil justice system of member states: petty claims ADR?

16. Beijing - November 201316 European Collective Redress – The Status Quo ►Consumer Protection II: Regulation (EC) 2006/2004 on cooperation between national authorities for the enforcement of consumer protection laws -cross-border enforcement challenge -crucial role of consumer organisations in protecting consumer interests, including settlement of disputes -exchange of information and request for enforcement measures Regulation (EC) 861/2007 establishing a European Small Claims Procedure ▪Class actions/test case procedures ▪distribution of sums finally awarded Funding

17. Beijing - November 201317 European Collective Redress – The Status Quo ►Competition I: ECJ jurisprudence Courage v. Crehan (C-453/99) [2001] (lease contract with a ‘beer tie’ “actions for damages before national courts:… an important contribution to the maintenance of competition in the Community” Manfredi (C-295-298/04) [2004] (premium increase compulsory civil liability insurance) Treaty: no particular measure of damages or even use of punitive damages as a tool for strengthening deterrence ►Regulatory Message? public enforcement to be supplemented by private action? representative claims brought by consumer organisations? OR opt-in-class actions brought by victims themselves?

18. Beijing - November 201318 European Collective Redress – Draft Directive ►Competition II: European Commission Draft Directive on Antitrust Damages Actions (June 2013) optimising the public and private enforcement of competition law ►Easier access to evidence (court order for access to documents)/Limitation periods ►Decisions of national competition authorities will constitute full proof ►Full compensation for actual loss suffered and profits ►Passing-on (Rebuttable presumption) ►Rebuttable presumption that cartels cause harm ►Participants in infringement should be responsible for their contribution

19. Beijing - November 201319 EU Comparative Survey I: England and Wales ►Sector-wise Approach: ▪ specific consumer legislation implementing EU law (injunctive relief) ▪ enforcement rests with public authorities ▪ Competition Law: Consumer body may make super- complaint to the Office of Fair Trading which decides. ▪ Individual damages claim before the Competition Appeal Tribunal (OFT or EU Commission must establish breach.) or by representative action (consumer consent!) ►Group Litigation Order (1999): managing multiple similar claims giving rise to common or related issues of fact or law normal cost rules apply – opt-in

20. Beijing - November 201320 EU Comparative Survey I: England and Wales ctd. ►Financial Services Bill 2009: ▪ Collective proceedings: opt-out basis for domestic class members opt-in for foreign class members ▪ 2010: Consumer Redress Schemes (FSA) ▪compromise with creditors or shareholders (75% of the creditors/or class thereof) ▪ court approval ▪ Creditor will lose rights if no claim or objection is raised within deadline ▪ jurisdiction if 56% of the creditors are located in the UK Preclusive effects? Schemes of Arrangement (s. 895 Companies Act 2006)

21. Beijing - November 201321 EU Comparative Survey II: The Netherlands ►Collective Action (Dutch Civil Code) Association or foundation representing a group of persons having a similar interest (a market for special purpose organisations) Injunctive relief, NO DAMAGES ►Collective Settlements under the WCAM (insurance industry) ▪ Out-of-court settlement entered into by one or more representative organisations acting for the interest of the injured group to settle mass tort claims ▪joint request by representative organisation and alleged responsible party ▪ notification to known parties for hearing

22. Beijing - November 201322 EU Comparative Survey II: The Netherlands ctd. et al. ▪ Amsterdam Court of Appeal will approve or reject, but cannot modify sua sponte the terms of the settlement. ▪ If Court approves settlement, settlement will be binding on group of affected persons unless opt-out is exercised within specified period. ► Representative Actions ▪ Action for the financial reparation of consumer collective interest ▪ Joint representative actions ► 2007 Law on New Collective Action for Damages (Consumer) France Italy

23. Beijing - November 201323 EU Comparative Survey III: Germany ►Collective Litigation Association or interest group complaint (Verbandsklage) injunctive relief against deceptive trading (cf. skimming-off actions) and unfair standard terms Capital Markets Model Case Act (cf. Telecom Case) ►model plaintiff (potential claimants may join) ►other plaintiffs with cases pending before trial court Suspension order : Model plaintiff, model defendant + interested parties (may intervene). Decision handed down by appeals court will be binding on parties summoned. REFORM: Court-approved binding settlement, but cf. opt-out, not binding on ‘silent claimholders’. FINANCIAL INCENTIVES for attorneys are weak. Tort + contract-based claims: false information/capital markets

24. Beijing - November 201324 EU Comparative Survey IV: Scandinavian Developments ►Denmark: Class actions ▪ common claim and Danish venue for all claims ▪ court is venue for one of the claims ▪ class action mechanism most appropriate for handling the dispute (filtering mechanism) ▪ members of the class can be identified ▪ opt-in mechanism ►Only public authority as class representative can opt-out (e.g. Consumer Ombudsman) ►Court will approve settlement unless discriminatory against some class members or otherwise unfair ►Swedish Group Proceedings Act: private actions, public actions (Consumer Ombudsman/Environmental Agency), representative actions (consumer law and environmental law)

25. Beijing - November 201325 Whither Collective Redress? – The European Commission ►Communication: “Towards a Coherent European Horizontal Framework for Collective Redress” (2013): -better access to justice and stronger enforcement -but consider risk of abusive litigation (US experiences/ contingent fees/punitive damages) -procedural economy (incl. claims for damages) -deterrence and punishment by public authorities ►Common Principles: ▪collective actions for damages: courts to decide on admissibility of concrete action early ▪legal standing: representative entities/NOT FOR PROFIT and individuals (ad hoc certification)

26. Beijing - November 201326 European Collective Redress – THE ISSUES ▪opt-in approach (insolvency considerations) ▪information to potential claimants ▪public/private enforcement (conflict and follow-up issues) ▪funding (legal insurance/no contingency fees/third-party funding?) ►The Recommendation -stop illegal practices + compensation for mass harm -representative action (incl. ad hoc coalitions) -courts check admissibility -loser pays principle -speed up procedures for injunctions Private International Law Issues Mediation? Distributions of damage payments

27. Beijing - November 201327 The Lehman Bankruptcy – The Fallout in HKG SAR Cayman Islands- Incorporated SPV (no HK SFC Authorisation) MINIBONDS Lehman-structured products (guaranteed by Lehman NYC as counterparty) HKB Banks distribute 21,674 individual investors complain to HKMA SFC and HKMA: alternative dispute settlement and admini- strative suasion (agreements with 16 distributing banks) ▪repurchase contracts from eligible customers ▪others: rescind and pay compensation (age differentiation) SFC-regulated Lehman products

28. Beijing - November 201328 A Class Action Proposal for Hong Kong SAR – The Issues I ►HKG Law Reform Commission ▪promoting access to justice, facilitating access to justice and promoting judicial efficiency ▪benefits to plaintiffs and defendants ►Current HKG law on representative proceedings same interest test – common ingredient test (consumer/public/interest/securities cases) ►class actions for consumer cases ►filtering device/certification ►opt-out + judicial discretion ►representative plaintiff to bear adverse costs/financial support ►judicial discretion Deterrence/Risks ▪certification ▪opt-in/opt-out ▪cut-off date ▪notification ▪sub-groups/lead cases ▪flexibility ADR

29. Beijing - November 201329 A Class Action Proposal for Hong Kong SAR – The Issues II ►class actions with parties from other jurisdictions (forum shopping, duplication and res judicata effects) ▪no rigid exclusionary rule ►opt-in rule as default position ►foreign plaintiffs to declare that judgment or settlement is final and conclusive resolution of their claim ►forum non conveniens-rule to apply Funding ▪No conditional fee agreements ▪Litigation funding companies ▪Legal aid schemes (class action fund/Consumer Legal Action Fund Class action website DoJ – HKG SAR January 2013: working group is established

30. Beijing - November 201330 Reorganisations in Bankruptcy (US) ▪reorganisation to allow debtor continue in business ▪degree of showing inferior to mandatory, limited-fund class action ▪trust arrangements (including present and future demands) ▪75% of the claimants of whose claims are to addressed must accept ▪’channelling injunction’ Pre-packaged Reorganisations Reorganisations in Bankruptcy (11 USC § 524 (g) (2)) Bankruptcy Mediation

31. Beijing - November 201331 Rodenstock GmbH Goes to the UK (Reorganisation) Rodenstock ▪German headquarters ▪Production in Europe and Thailand ▪Distribution globally: subsidiaries Group turnover: € 365.5m GmbH turnover: € 258.3m Outstanding senior Debt of € 305,3m English law applicable ►Significant relationship with seven UK customers ►Deteriorating financial position, leading to breach of covenants ►Restructuring would avoid German insolvency ►Rejection of Application would trigger insolvency

32. Beijing - November 201332 US Class Actions and their Exterritorial Reach HomeSide Lending (mortgage servicing) National Australia Bank Ltd. (ordinary shares not traded in the US) Buys 2001: National has to write down the value of HomeSide assets National‘s share prices fall Petitioners bought shares prior to the write-downs, arguing securities fraud under US law before a US court ▪transactional test (transactions in securities listed on domestic exchanges and domestic transactions in other securities OR wrongful conduct occurs in the US or wrongful conduct has effects in the US

33. Beijing - November 201333 Trans-border Issues I ►US proceedings ▪securities class actions on behalf of US and non-US shareholders ▪two securities actions filed by European institutional investors claims by non-US investors dismissed, settlement $ 82.85m ►Dutch proceedings filed by the Dutch Shell Reserves Compensation Foundation and other institutions for a binding declaration of a settlement of $ 352.6m (non-US shareholders) (‘mfn clause’/release all claims against Shell) Shell Petroleum (shareholders alleging fraudulent restatement of oil and gas reserves) Royal Dutch Petroleum NV (Dutch) Shell Transport and Trading Co. Ltd. (UK)

34. Beijing - November 201334 Transnational Issues II ► US: S.D.N.Y. denies jurisdiction over foreign class members ►Dutch representative organisations for domestic and foreign shareholders attacking false statements -3% percent of shareholders established in the Netherlands, but evidence of cooperation with foreign organisations -settlement approved with lower compensation payments than in the US + 20% of settlement sum for attorneys’ fees The Netherlands – Amsterdam Court of Appeal Swiss Converium/ZFS: Converium Shares sold at SWX/NYSE

35. Beijing - November 201335 Transnational Issues III ▪ compromise with creditors or shareholders (75% of the creditors or class thereof) ▪ court approval ▪ Creditor will lose rights if no claim or objection is raised within deadline ▪ jurisdiction if 56% of the creditors are located in the UK UK Schemes of Arrangement (s. 895 Companies Act 2006) Spanish and German Companies

36. Beijing - November 201336 Cross-Border Insolvencies – The Lehman Protocols ►Adherence without formal signature is possible ►Statement of intentions and guidelines for cooperation (communication) ►Asset preservation (notification mechanism) ►Inter-company claims (methodology, cf. derivative contracts) Lehman Proceedings LBHI (US) and subsidiaries 75 proceedings in 16 jurisdictions Initial signatories: US debtors and representatives of proceedings in Germany, HK SAR, Singapore + Australia Cross-border insolvency protocol ISDA Lehman CDS Protocol