Collective Actions 9781107021549, 1107021545

Table of contents :
Cover......Page 1
COLLECTIVE ACTIONS......Page 3
Title......Page 5
Copyright......Page 6
CONTENTS......Page 7
FIGURES......Page 19
TABLES......Page 21
CONTRIBUTORS......Page 23
PREFACE......Page 25
ACKNOWLEDGMENT......Page 27
ABBREVIATIONS......Page 29
PART I Setting the stage......Page 55
Introduction......Page 35
The Florence Project and access to justice......Page 37
From 'diffuse' to 'multilayer' interests......Page 42
The role of collective actions in the context of multilayer interests......Page 44
Structure of and contributions to this book......Page 46
Conclusion......Page 53
Introduction......Page 57
Multilayer interests......Page 58
Access to justice......Page 61
Redress tools......Page 65
Green Paper on Collective Consumer Redress......Page 72
The way(s) forward......Page 76
Conclusion......Page 88
Introduction......Page 91
The justice concepts envisioned by law enforcement......Page 94
Access to justice as redress for harm......Page 95
Harm determined by the protective scope of competition law......Page 97
The stakeholders in competition law infringements......Page 101
Multilayer interests among the stakeholders......Page 104
Tensions among the multilayer interests......Page 106
Collective actions in a competition law context......Page 107
Alleviating tension through joinder procedures or test cases......Page 109
Representative actions’ influence on tension among individual interests......Page 110
A tension too big for class actions......Page 112
Compensatory justice and the impediment of legal standing......Page 115
Competitors......Page 116
Direct purchasers......Page 117
Umbrella customers......Page 118
Deadweight loss customers......Page 119
Collective actions and compensatory justice......Page 120
What about deterrence?......Page 121
Hybrid enforcement mechanisms......Page 123
Conclusion......Page 125
Introduction......Page 127
The problem of enforcing directors’ duties......Page 128
Derivative actions in six countries......Page 130
The United States, Japan and France: more similarities than differences?......Page 131
The United Kingdom, China and Germany: do the new laws make a difference?......Page 135
Discussion: convergence and legal families......Page 139
Derivative actions in twenty-five countries......Page 140
Methodology and dataset......Page 141
The development of the law between 1995 and 2005......Page 143
Legal families, complements and substitutes......Page 145
Conclusion......Page 149
PART II Cross-continental perspectives on collective actions......Page 151
Introduction......Page 153
The issues of group litigation......Page 156
The Usuha case......Page 157
A common heritage?......Page 159
New groups: joint stock companies and kabunakama......Page 161
English joint stock companies......Page 162
Kabunakama......Page 164
The Tokugawa legal system......Page 168
The nature of the kabunakama......Page 171
Social and political context......Page 172
The difference......Page 173
Conclusion......Page 175
The private interest: access to justice for individual persons......Page 177
Reconciling individual and collective interests: access to justice for environmental organizations......Page 181
Aarhus convention......Page 182
Implementation acts......Page 183
Collective actions......Page 185
The 2004 environmental liability directive......Page 187
The public trust doctrine and claims for natural resource damage......Page 188
Citizen suits......Page 191
Class actions......Page 194
Comparison and conclusion......Page 195
Outlook: collective action in environmental torts......Page 198
PART III A need to enhance collective actions in Japan?......Page 201
Introduction – localization of the problem......Page 203
The actual state: the system for relief of consumer group damages......Page 205
Different types of collective claims......Page 207
The 'opt-out solution’......Page 208
The authorization for the representative plaintiff......Page 209
Individuality of claims......Page 210
The problem of money distribution......Page 211
Problematic points......Page 212
Problematic points......Page 213
Other problems – the structure surrounding qualified consumer organizations......Page 214
Conclusion......Page 215
Introduction......Page 218
Public enforcement record of cartel regulations......Page 219
Trends in public enforcement of cartel provisions......Page 220
Sanctions on cartels......Page 223
AMA Article 25 suits......Page 226
Injunction suits......Page 228
Why is the enforcement power concentrated in the JFTC and THC?......Page 229
Changes to the previous systems......Page 231
Analysis......Page 233
Comparison with EU modernization reform......Page 234
Finding of facts in cases decided by recommendation decisions......Page 235
Recommendation decisions......Page 236
Changes to the recommendation decision system in 2005 and their meaning for private enforcement......Page 238
Increase in cases concluded after hearing proceedings......Page 239
Are current damage awards by courts sufficient to recover damages?......Page 241
Amendment of Article 84 and its meaning for private enforcement......Page 243
Possible impacts of eliminating the JFTC hearing proceedings on private enforcements in Japan......Page 244
Elimination of Article 70–15 and its possible effects on private enforcement in Japan......Page 245
Impacts on the right to litigate......Page 246
Analysis......Page 248
Conclusion......Page 250
PART IV Collective enforcement of company and securities law......Page 253
Introduction......Page 255
Poor enforcement and the gap between promises of law and reality......Page 257
More litigation rights for shareholders – attempt by lawmakers to widen the way for shareholder access to justice......Page 260
Forgotten derivative suits in their origin country......Page 263
Driving forces in the emergence of derivative suits in East Asia countries......Page 265
Critical paucity of judges......Page 268
Court judgments are commonly unenforceable......Page 269
Disfavour of litigation by shareholders......Page 270
Small lawyer population......Page 272
Litigation costs poorly incentivize lawyers to initiate cases......Page 273
Litigation as hardship route to justice for shareholders......Page 275
Strong regulator......Page 276
Arbitrators......Page 277
Conclusion......Page 278
Introduction......Page 279
The development of an implied private cause of action under Rule 10b-5......Page 282
The Supreme Court and Rule 10b-5 class actions......Page 286
The Burger Court (1969-1986)......Page 288
An important exception......Page 292
The Rehnquist Court (1986-2005)75......Page 294
Congressional action......Page 296
The Roberts Court (2005-present)......Page 299
Conclusion......Page 304
PART V Indirect purchasers and collective actions......Page 307
Introduction......Page 309
Class certification in pre-CAFA indirect purchaser litigation......Page 313
Class certification in indirect purchaser litigation after CAFA......Page 316
The continuing failure of indirect purchaser suits......Page 327
Conclusion......Page 332
Introduction......Page 333
Relevance of Japans experience with indirect purchaser litigation......Page 334
Overview of the three oil cartel cases......Page 336
The kerosene cartel......Page 337
The consumers go to court......Page 339
The procedural mechanism: the Japanese class action......Page 340
A bitter settlement in the first Tokyo case......Page 342
Rejection by the Supreme Court in the two other cases......Page 343
Access to justice......Page 346
Direct purchasers do not sue......Page 347
Costly and inefficient: 'its' just not worth it’......Page 348
Attorneys’ fees for plaintiffs exceeded the potential recovery......Page 349
The total costs caused by the litigation exceeded the potential recovery......Page 350
Lengthy and complex......Page 352
Indirect purchaser litigation is unlikely to be effective with an opt-in mechanism and traditional rules on causation and damages......Page 355
Possible solutions......Page 357
First option: an opt-out class action......Page 358
Second option: no standing for indirect purchasers......Page 360
Annex: translation of the Supreme Court judgment in the Tsuruoka oil cartel case125......Page 361
1......Page 364
2......Page 365
3......Page 369
PART III: Conclusion......Page 371
PART VI Recent developments in and future perspectives on collective actions......Page 373
Introduction......Page 375
Structure and purpose of this chapter......Page 377
The Swedish Group Proceedings Act......Page 380
Group action at ARN......Page 384
KO as representative for individual consumers......Page 388
Evaluation of the Swedish Group Proceedings Act......Page 389
The Swedish View on the Green Paper on Collective Redress......Page 391
Collective redress on its way?......Page 393
Conclusion......Page 396
Introduction......Page 398
The path leading to Converium......Page 400
The international Converium settlement and the Dutch court ruling......Page 402
The Dutch courts’ arguments in favour of jurisdiction......Page 403
The obligation to pay and the applicability of Article 5(1)......Page 405
Forum Connexitatis......Page 408
Is a Forum clause the solution?......Page 410
Converium, the aftermath......Page 412
Access to justice......Page 413
Multilayer interests......Page 414
Conclusion......Page 416
Introduction......Page 419
Faltering attempts to use the representative rule......Page 421
A representative statutory action, under the Competition Act 1998, is of limited utility......Page 425
OFT-imposed fines do not lead to many subsequent private actions for compensation......Page 428
The 'missing' competition law cases in England......Page 430
The need for 'add-on' English classes to U.S. federal class actions for competition law infringements......Page 432
Important commentary by the President of the English Competition Appeal Tribunal......Page 433
The OFTs curtailed function......Page 434
Political admissions that there is a problem, both in England and in the EU......Page 435
The Civil Justice Councils recommendation and the Ministry of Justices response......Page 440
The certification hurdles for competition law collective actions......Page 441
Conclusion......Page 445
INDEX......Page 447

Citation preview

COLLECTIVE ACTIONS Enhancing access to justice and reconciling multilayer interests?

This volume of essays draws together research on different types of collective actions: group actions, representative actions, test case procedures, derivative actions, and class actions. The main focus is on how these actions can enhance access to justice and how to balance the interests of private actors in protecting their rights with the interests of society as a whole. Rather than focusing on collective actions only as a procedural device, the contributors to this book also examine how these mechanisms relate to their broader social context. Bringing together a wide range of scholarship from the areas of competition, consumer, environmental, company, and securities law, the book includes contributions from Asian, European, and North American scholars and therefore expands the scope of the traditional European and/or American debate. stefan wrbka is an associate professor of Consumer Law at the Graduate School of Law and International Education Center, Kyushu University. steven van uytsel is an associate professor of Competition Law and Natural Resources Law at the Faculty of Law, Kyushu University. mathias siems is a professor of Commercial Law at Durham University.

COLLECTIVE ACTIONS Enhancing access to justice and reconciling multilayer interests?

Edited by STEFAN WR BKA Kyushu University, Japan

STEVEN VAN UY TSEL Kyushu University, Japan

MATHIAS SIEMS Durham University, UK

cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, S˜ao Paulo, Delhi, Mexico City Cambridge University Press The Edinburgh Building, CB2 8RU, UK. Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9781107021549  C Cambridge University Press 2012

This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2012 Printed in the United States of America A catalog record for this publication is available from the British Library. Library of Congress Cataloging in Publication data Wrbka, Stefan, 1976– Collective actions : enhancing access to justice and reconciling multilayer interests? / Stefan Wrbka, Kyushu University, Japan, Steven Van Uytsel, Kyushu University, Japan, Mathias Siems, University of Durham. p. cm. Includes index. ISBN 978-1-107-02154-9 (hardback) 1. Class actions (Civil procedure) 2. Public interest law 3. Due process of law. 4. Justice, Administration of. I. Van Uytsel, Steven, 1974– II. Siems, Mathias M., 1974– III. Title. K2243.W73 2012 347 .053–dc23 2011052118 ISBN 978-1-107-02154-9 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate.

CONTENTS

Figures page xvii Tables xix Contributors xxi Preface xxiii Acknowledgments xxv Abbreviations xxvii 1

Access to justice and collective actions: ‘Florence‘ and beyond 1 stefan wrbka, steven van uytsel, and mathias m. siems

Introduction

1

The Florence Project and access to justice From ‘diffuse’ to ‘multilayer’ interests

3 8

The role of collective actions in the context of multilayer interests 10 Structure of and contributions to this book Conclusion

19

part i. Setting the stage 2

12

21

European consumer protection law: Quo vadis? – thoughts on the compensatory collective redress debate stefan wrbka

Introduction

23

Multilayer interests

24

v

23

vi

contents

Access to justice Redress tools

27 31

Green Paper on Collective Consumer Redress The way(s) forward Conclusion 3

38

42

54

Collective actions in a competition law context – reconciling multilayer interests to enhance access to justice? 57 steven van uytsel

Introduction

57

Access to justice and collective actions

60

The justice concepts envisioned by law enforcement Access to justice as redress for harm 61

Harm in a competition law context

60

63

Harm determined by the protective scope of competition law The stakeholders in competition law infringements 67

Relationships among the stakeholders

63

70

Multilayer interests among the stakeholders 70 Tensions among the multilayer interests 72

Collective actions in a competition law context

73

Reconciling tensions through collective actions

75

Alleviating tension through joinder procedures or test cases 75 Representative actions’ influence on tension among individual interests 76 A tension too big for class actions 78

The tension between individual interests and the public interest 81 Compensatory justice and the impediment of legal standing The stakeholders and legal standing 82 Competitors 82 Direct purchasers 83 Indirect purchasers 84 Umbrella customers 84

81

contents

vii

Deadweight loss customers 85 Creditors, shareholders, employees and suppliers Collective actions and compensatory justice 86 What about deterrence? 87

Hybrid enforcement mechanisms Conclusion 4

86

89

91

Private enforcement of directors’ duties: Derivative actions as a global phenomenon 93 mathias m. siems

Introduction

93

The problem of enforcing directors’ duties Derivative actions in six countries

94

96

The United States, Japan and France: more similarities than differences? 97 The United Kingdom, China and Germany: do the new laws make a difference? 101 Discussion: convergence and legal families 105

Derivative actions in twenty-five countries Methodology and dataset 107 The development of the law between 1995 and 2005 Legal families, complements and substitutes 111

Conclusion

106 109

115

part ii. Cross-continental perspectives on collective actions 117 5

From peasant to shareholder: Divergent paths of group litigation in Tokugawa Japan and England 119 sean mcginty

Introduction

119

Feudal origins: the cases of Martin and Usuha The issues of group litigation Martin’s case 123 The Usuha case 123 A common heritage? 125

122

122

viii

contents

New groups: joint stock companies and kabunakama English joint stock companies Kabunakama 130

Explaining the difference

127

128

134

The Tokugawa legal system 134 The nature of the kabunakama 137 Social and political context 138 The difference 139

Conclusion 6

141

Reconciling multilayer interests in environmental law: Access to justice in environmental matters in the European Union and the United States 143 monika hinteregger

Access to justice as a means to reconcile multilayer interests in the protection of the environment 143 The public interest: protection of the environment as a public duty 143 The private interest: access to justice for individual persons 143 Reconciling individual and collective interests: access to justice for environmental organizations 147

Collective actions in the environmental law of the European Union 148 The Aarhus convention and its implementation in EU law Aarhus convention 148 Implementation acts 149 Collective actions 151 The 2004 environmental liability directive 153

The availability of collective actions under U.S. law

148

154

The public trust doctrine and claims for natural resource damage 154 Citizen suits 157 Class actions 160

Comparison and conclusion

161

Outlook: collective action in environmental torts

164

contents

ix

part iii. A need to enhance collective actions in Japan? 7

167

Recent problems of group rights protection for consumers in Japan 169 kunihiro nakata

Introduction – localization of the problem

169

The actual state: the system for relief of consumer group damages 171 The debate about a group action system

173

Different types of collective claims 173 The ‘opt-out solution’ 174 The authorization for the representative plaintiff 175 The affected individual’s right to choose 176 Individuality of claims 176 The problem of money distribution 177 Payment for pain and suffering as a sanction 178 The opt-in solution 178 The basic structure of the opt-in solution 178 Problematic points 178 The two-step solution 179 The meaning of the basic type 179 Problematic points 179

The claim for skimming off unjust enrichment

180

Other problems – the structure surrounding qualified consumer organizations 180 Conclusion 8

181

Can collective actions be a solution to improve access to justice in Japan? Examination of measures to enhance the private enforcement of competition law in Japan 184 akinori uesugi

Introduction

184

Importance of private enforcement of competition law Evaluation of public enforcement in Japan 185 Public enforcement record of cartel regulations Trends in public enforcement of cartel provisions Amendment of the AMA in 1977 189

185 186

185

x

contents Sanctions on cartels 189 Evaluation of private enforcement in Japan 192 General picture of private enforcement in Japan AMA Article 25 suits 192 Article 709 civil code suits 194 Injunction suits 194

192

Concentration of enforcement power in the JFTC and THC 195 Why is the enforcement power concentrated in the JFTC and THC? 195 Gradually reduced concentration of enforcement powers Changes to the previous systems 197 Analysis 199 Comparison with EU modernization reform 200

197

Relationship between the JFTC’s fact finding and the court’s fact finding 201 Finding of facts in cases decided by recommendation decisions Recommendation decisions 202 Consent decisions 204 Changes to the recommendation decision system in 2005 and their meaning for private enforcement 204 Increase in cases concluded after hearing proceedings 205 Are current damage awards by courts sufficient to recover damages? 207 Amendment of Article 84 and its meaning for private enforcement 209 Possible impacts of eliminating the JFTC hearing proceedings on private enforcements in Japan 210 Elimination of Article 70–15 and its possible effects on private enforcement in Japan 211 The role of the JFTC in facilitating private damage suits 212 Impacts on the right to litigate 212

Measures to encourage private enforcement of competition law in Japan 214 Reasons for inactive private enforcement 214 Situation 214 Analysis 214 Introduction of representative suits by qualified associations via the excessive premium and misrepresentation act violations 216

Conclusion

216

201

contents

xi

part iv. Collective enforcement of company and securities law 219 9

Does more litigation mean more justice for shareholders? the case of derivative actions in Vietnam 221 quynh thuy quach

Introduction

221

Newly adopted litigation rights – more ways for oppressed shareholders to access Justice 223 Poor enforcement and the gap between promises of law and reality 223 More litigation rights for shareholders – attempt by lawmakers to widen the way for shareholder access to Justice 226

Derivative action – shareholders’ ‘weapon for others’ interests 229 Forgotten derivative suits in their origin country

229

Driving forces in the emergence of derivative suits in East Asia Countries 231 The case against more litigation in Vietnam

234

Insufficiencies of the court 234 Critical paucity of judges 234 Capacity of judges is insufficient 235 Court judgments are commonly unenforceable 235 Disfavour of litigation by shareholders 236 An immature legal profession and the hurdle of litigation costs Small lawyer population 238 Limited litigation skills 239 Litigation costs poorly incentivize lawyers to initiate cases

Policy implications

238

239

241

Litigation as hardship route to justice for shareholders 241 Less costly mechanisms as possible alternatives for litigation 242 Strong regulator 242 Arbitrators 243

Conclusion 10

244

The United States Supreme Court and implied private cause of actions under SEC Rule 10b-5: The politics of class actions 245 arthur r. pinto

xii

contents

Introduction

245

The development of an implied private cause of action under Rule 10b-5 248 The Supreme Court and Rule 10b-5 class actions

252

The Burger Court (1969–1986) 254 An important exception 258 The Rehnquist Court (1986–2005) 260 Congressional action 262 The Roberts Court (2005–present) 265

Conclusion

270

part v. Indirect purchasers and collective actions 11

273

Indirect purchaser suits under the class action fairness act: Reconciling multilayer interests in antitrust litigation 275 william h. page

Introduction

275

Class certification in pre-CAFA indirect purchaser litigation 279 Class certification in indirect purchaser litigation after CAFA 282 The continuing failure of indirect purchaser suits Conclusion 12

293

298

Collective actions by indirect purchasers: Lessons from the Japanese oil cartel cases 299 simon vande walle

Introduction

299

Relevance of Japan’s experience with indirect purchaser litigation 300 Overview of the three oil cartel cases

302

The kerosene cartel 303 The consumers go to court 305 The procedural mechanism: the Japanese class action

306

contents

xiii

A bitter settlement in the first Tokyo case 308 Rejection by the Supreme Court in the two other cases

The merits of indirect purchaser litigation Access to justice 312 Direct purchasers do not sue

309

312

313

The problems with indirect purchaser litigation

314

Costly and inefficient: ‘it’s just not worth it’ 314 Attorneys’ fees for plaintiffs exceeded the potential recovery The total costs caused by the litigation exceeded the potential recovery 316 Lengthy and complex 318

315

Implications for indirect purchaser litigation in the EU Indirect purchaser litigation is unlikely to be effective with an opt-in mechanism and traditional rules on causation and damages 321 Possible solutions 323 First option: an opt-out class action 324 Second option: no standing for indirect purchasers 326

Annex: translation of the Supreme Court Judgment in the Tsuruoka oil cartel case 327

part vi. Recent developments in and future perspectives on collective actions 13

339

Collective enforcement: European prospects in light of the Swedish experience 341 annina h. persson

Introduction

341

Structure and purpose of this chapter The Swedish group proceedings act

343 346

The National Board for consumer complaints Group action at ARN 350 KO as representative for individual consumers

350 354

Evaluation of the Swedish group proceedings act The Swedish view on the green paper on collective redress 357

355

321

xiv

contents

Collective redress on its way? Conclusion 14

359

362

Transnational class settlements: Lessons from Converium 364 benoˆıt allemeersch

Introduction

364

The Dutch class settlement

366

The path leading to Converium The Converium case

366

368

The international Converium settlement and the Dutch court ruling 368 The Dutch Courts’ arguments in favour of jurisdiction The obligation to pay and the applicability of Article 5(1) 371 Forum Connexitatis 374 Is a forum clause the solution? Converium, the aftermath

Access to justice

379

Multilayer interests Conclusion 15

376 378

380

382

The impetus for class actions reform in England arising from the competition law sector 385 rachael mulheron

Introduction

385

The impetus for class actions reform in the competition law sector from a judicial and litigant perspective 387 Faltering attempts to use the representative rule 387 A representative statutory action, under the Competition Act 1998, is of limited utility 391 OFT-imposed fines do not lead to many subsequent private actions for compensation 394 The ‘missing’ competition law cases in England 396

369

contents The need for ‘add-on’ English classes to U.S. federal class actions for competition law infringements 398 Important commentary by the President of the English Competition Appeal Tribunal 399

The impetus for class actions reform in the competition law sector: an examination of the governmental position 400 The OFT’s curtailed function 400 Political admissions that there is a problem, both in England and in the EU 401 The Civil Justice Council’s recommendation and the Ministry of Justice’s response 406

The certification hurdles for competition law collective actions 407 Conclusion Index

413

411

xv

FIGURES

12.1 Distribution chain 12.2 Comparison amount of claim and plaintiffs’ attorneys’ fees 12.3 Comparison amount of claim and total litigation costs

xvii

page 304 316 317

TABLES

4.1 4.2 4.3 4.4 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 9.1 9.2 11.1 11.2 15.1

Financial risk of shareholder filing a derivative action page 105 Availability of derivative actions (min 0; max 1) 110 English-speaking countries and the rest of the world 112 Correlation between derivative actions and other variables 113 The number of cartel cases dealt with by the JFTC 187 Enhancement of cartel regulation in Japan since FY1990 190 Total amount of surcharges ordered in each year since FY1990 191 Top ten companies in terms of the amount of surcharges 191 (as of December 2011) Win-loss records for plaintiffs in Article 25 suits 193 Injunction suits (Article 25 cases) 195 Hearing cases 206 Cases that went to hearing proceedings 207 Investor Protection Index of Vietnam compared with other countries 224 Statistics of members v. companies cases at Hanoi People Court, 237 2007–2009 Indirect purchaser class certification I 281 Indirect purchaser class certification II 285 Proposed certification criteria for the CPR 410

xix

CONTR IBUTORS

benoˆıt allemeersch, Professor at the Institute for Civil Procedure, Katholieke Universiteit Leuven, Belgium, and Counsel at Clifford Chance LLP, Brussels; LL.M. (Yale Law School), Mag. iur. (Katholieke Universiteit Leuven and Duke University School of Law), Dr. iur. (Katholieke Universiteit Leuven). monika hinteregger, Professor in the Department of Civil Law, Foreign and International Law, and President of the Senate, Karl-FranzensUniversit¨at Graz, Austria; Dr. iur. (Karl-Franzens-Universit¨at Graz). sean mcginty, LL.D. candidate, Kyushu University’s Graduate School of Law, Fukuoka, Japan; B.A. (Carleton University), LL.B. (University of Victoria), LL.M. (Kyushu University). rachael mulheron, Professor in the Department of Law, Queen Mary, University of London, UK; B.Com, LL.B. (Hons), LL.M. (Adv) (University of Queensland), D.Phil (Oxon). kunihiro nakata, Professor at the Law School of Ryukoku University, Kyoto, Japan; LL.M. (Ritsumeikan University). william h. page, Marshall M. Criser Eminent Scholar and Senior Associate Dean for Academic Affairs at the University of Florida Levin College of Law, USA; J.D. summa cum laude (University of New Mexico), LL.M. (University of Chicago). annina h. persson, Professor of Private and Commercial Law, Banking Law, International Trade and Insolvency Law at the School of Law, Psychology and Social Work, Oerebro University, Oerebro, Sweden; Ph.D. (University of Stockholm). xxi

xxii

contributors

arthur r. pinto, Professor of Law and co-director of the Dennis J. Block Center for the Study of International Business Law, Brooklyn Law School, New York, USA; B.A. (Colgate University) and J.D. (New York University). quynh thuy quach, Lecturer at the Judicial Academy, Ministry of Justice, Vietnam; LL.B. and LL.M. (Hanoi Law University), LL.D. (Kyushu University). mathias m. siems, Professor of Commercial Law, Durham Law School, Durham University, and Research Associate, Centre of Business Research, University of Cambridge, UK; LL.M. (Edinburgh), Dr. iur. (Munich). akinori uesugi, senior consultant working at Freshfields Bruckhaus Deringer, Tokyo, Japan, and visiting professor, Graduate School of International Corporate Strategy, Hitotsubashi University, Tokyo, Japan; LL.M. (Tokyo University), LL.M. (University of Pennsylvania). steven van uytsel, Associate Professor of International Economic Law at the Faculty of Law, Kyushu University, Japan; LL.B. and LL.M. (Antwerp University), LL.M. and LL.D. (Kyushu University). simon vande walle, Post-doctoral Fellow at Tokyo University, Japan; LL.B. and LL.M. (Katholieke Universiteit Leuven), LL.M. and LL.D. (Kyushu University), LL.M. (Georgetown University Law Center). stefan wrbka, Associate Professor at the Graduate School of Law and International Education Center, Kyushu University, Japan; LL.M. (Kyushu University), Mag. iur. and Dr. iur. (University of Vienna).

PREFACE

Cases involving a large number of potential claimants have long presented difficulties to legal systems designed to accommodate disputes primarily among a small number of parties. Deterred by factors such as the costs of potential court proceedings and the imbalance of power between parties, private actors often abstain from pursuing their rights. Potential defendants who have caused significant but dispersed harm may thus escape from sanctions or liability. As a result, multiple layers of interests, or ‘multilayer interests’, ranging from the interests of private actors in protecting their rights on the one hand to the interests of society as a whole in deterring socially detrimental behaviour on the other, may be left unsatisfied. To remedy this problem, various forms of collective actions have been developed. They range from group actions, in which individual actions are assembled into one procedure; to representative actions, in which an association sues on behalf of a multitude of claimants; to test case procedures, in which claimants sue in order to set a precedent for others. These various forms of collective actions aim to facilitate ‘access to justice’ for private actors, that is, the ability to enforce and protect one’s rights through a legal process. In addition to bundling a larger number of fragmented individual interests, they are seen as a mechanism to safeguard the common interests of specific groups of claimants and of society as a whole. Moreover, collective actions are not just a procedural tool but raise a number of political, social and economic issues, for instance, balancing of interests between weaker private actors and bigger players, coordination of collective actions with enforcement efforts by public agencies, cost issues and a possible subordination of the individual for the sake of larger or collective interests. There is intense debate among legal scholars and practitioners about whether collective actions can adequately safeguard and reconcile access

xxiii

xxiv

preface

to justice with multilayer interests. This book examines the issues of collective actions in their broader historical, social, economic and political contexts, cutting across several legal fields in a variety of countries in Europe, Asia and North America, and thus going beyond approaches previously taken.

ACKNOWLEDG MENTS

The editors of and the contributors to this book wish to thank all those who have made it possible. First of all, thanks to Toshiyuki Kono, the program director of the international degree programs in law at Kyushu University, who initiated the Kyushu University International Law Conference series six years ago and who gave us the chance to meet and present the contributions to this book in early 2011. We are very indebted to all those who so efficiently organized the 2011 Kyushu University International Law Conference during which the contributors to this book had lively cross-cultural and interdisciplinary discussions on the interlinking themes of collective actions, multilayer interests and access to justice. We would like to especially mention the Kyushu University law secretariat under the lead of Ai Nagao as well as Quynh Thuy Quach, Sean McGinty and Simon Vande Walle, members of the organizing committee and doctoral students of law at Kyushu University at the time of the conference. Many thanks also go to Cambridge University Press, especially to Kim Hughes, who has supported and accompanied this book project from day one. During the intense process of writing this book, we were supported by many persons who helped to bring this project to fruition. We especially would like to thank Adrienne Lipoma, Jeffrey Kurashige and Ren Yatsunami for their help with linguistic matters. We hope that this book will contribute to further discussions and developments of access to justice. Stefan Wrbka, Fukuoka, 2012 Steven Van Uytsel, Fukuoka, 2012 Mathias M. Siems, Durham, 2012

xxv

ABBREV IATIONS

AC ADR aff ’d AG AktG-E Ala. Cir. Ct. AMA AMC ARC ARN Art. Arts. Assn BA BCSC BERR BGBl BOD BOM BOS BP c. C.D. Cal. CAFA CanLII CAT CBR CEP

Appeal Cases (Law Reports) Alternative Dispute Resolution affirmed Aktiengesellschaft (joint stock company) Aktiengesetz-Entwurf (German Stock Corporation Act Draft) Alabama Circuit Court Japanese Antimonopoly Act Antitrust Modernization Commission American Radiolabeled Chemicals Allm¨anna reklamationsn¨amnden (Swedish National Board for Consumer Complaints) Article Articles Association British Airways Supreme Court of British Columbia Department for Business, Enterprise and Regulatory Reform Bundesgesetzblatt (German Federal Law Gazette) Board of Directors Board of Management Board of Shareholders British Petroleum clause Central District of California Class Action Fairness Act Canadian Legal Information Institute Competition Appeal Tribunal of the United Kingdom Centre for Business Research Committee on Environmental Policy (Economic Commission for Europe)

xxvii

xxviii CERCLA cf. CFR ch. CIF Cir. Civ CJC cl. CMLR Co. Corp. CP Rep CPR CWA D&O insurance D. Del. D. Md. D. Me. D.C. Super. Ct. D.D.C. D.N.J. DC DC Cir. Del. DG COMP DG SANCO Dnr Ju DOI DOJ Dr Ds E.D.N.Y. E.D. Pa. e.g. EC ECC-Net

abbreviations Comprehensive Environmental Response, Compensation, and Liability Act confer Code of Federal Regulations chapter Cost Insurance Freight Circuit Civil Division Civil Justice Council of England and Wales clause Common Market Law Review Company Corporation Civil Procedure Reports Civil Procedure Rules Clean Water Act Directors and Officers liability insurance District Court of Delaware District Court of Maryland District Court of Maine Superior Court of the District of Columbia District Court of Columbia District Court of New Jersey District of Columbia Court of Appeals for the District of Columbia Circuit Delaware Directorate-General for Competition (European Commission) Directorate-General for Health and Consumer Protection (European Commission) Justitiedepartementet Diarienummer (Registration Number of the Swedish Department of Justice) Department of the Interior Department of Justice Doctor Departementspromemoria (memorandum from the Swedish government) Eastern District of New York Eastern District of Pennsylvania exempli gratia (for example) European Community European Consumer Centre’s Network

abbreviations ECE ECHR ECJ ECR ed. Eds. EEA EEC EIA ELD et al. et seq. etc. EU EUR Eur.Ct.H.R. EWCA EWCA Civ EWHC F. Supp. F.R.D. Fed. Appx. Fed. R. Civ. P. Fla. App. FPT FSB FY GDP GNI GRL H. Ct. HL HM i.e. ibid. Inc. Ins. Int’l IPPC J. JFTC JOR

Economic Commission for Europe European Convention on Human Rights European Court of Justice European Court reports editor; edition editors European Economic Area European Economic Community Environmental Impact Assessment Environmental Liability Directive et alii; et aliae (and others) et sequens; et sequential et cetera European Union Euro European Court of Human Rights England and Wales Court of Appeal England and Wales Court of Appeal Civil Division High Court of England and Wales Federal Supplement Federal Rules Decisions Federal Appendix Federal Rules of Civil Procedure Florida Appeals Court Financing Promoting Technology Corp. Financial Services Bill Fiscal Year Gross Domestic Product Gross National Income Swedish Group Proceedings Act of 2002 High Court House of Lords His/Her Majesty id es (it is) ibidem Incorporated Insurance International Integrated Pollution Prevention and Control Judge; Justice Japan Fair Trade Commission Jurisprudence on Commercial Law

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xxx Jr. JRS K.K. Kan. Dist. Ct. KonTraG

L.Ed. L.J. L.JJ. LCD LLC LOE LPG Ltd M.D. Pa. Mass. Super. Ct. MDL Me. Super Ct. Cumberland Co. Mich. Cir. Ct. Minn. Dist. Ct. MITI MOJ n. N.D. N.D. Cal. N.D. Ill. N.D. Ind. N.W. N.Y. N.Y.S. NGO No. NOAA NPO OECD OFT OJ OPA OPEC

abbreviations Junior Vietnamese Judicial Reform Strategy Kabushiki Kaisha (Japanese stock corporation) District Court of Kansas Gesetz zur Kontrolle and Transparenz im Unternehmensbereich (German Corporate Sector Supervision and Transparency Act) Lawyers Edition Lord Justice of Appeal Lords Justice of Appeal Liquid Crystal Display Limited Liability Company Law on Enterprise Liquefied Petroleum Gas Limited Pennsylvania Middle District Court Massachusetts Superior Court Multidistrict Litigation Main Superior Court Cumberland County Michigan Circuit Court Minnesota District Court Japan’s Ministry of Industry and Trade Ministry of Justice Note Northern District Northern District Court of California Northern District Court of Illinois Northern District of Indiana North Western Reporter New York New York Supplement (Law Reports) non-governmental organization Number National Oceanic and Atmospheric Administration nonprofit organization Organisation for Economic Co-operation and Development Office of Fair Trading Official Journal Oil Pollution Act Organization of the Petroleum Exporting Countries

abbreviations p. para. paras. plc pp. pr. Prods. PSLRA PSPD Pt r. RB rev’d rev’d sub nom ROSC rr. s. S. Ct. S.D. Fla. S.D. Iowa S.D.N.Y. SA SARA SCC SCR SEA SEC sec. SFR SFS SI slip op. SME SOU SOX SPC SSC sub nom Sup. Ct. SWP TFEU THC

page paragraph paragraphs public limited company pages Preface Productions Private Securities Litigation Reform Act People’s Solidarity for Participatory Democracy part Rule Swedish Code of Judicial Procedure reversed reversed under the name Report on the Observance of Standards and Codes Rules section Supreme Court Southern District of Florida Southern District of Iowa Southern District of New York Soci´et´e Anonyme Superfund Amendments and Reauthorization Act Supreme Court of Canada Supreme Court Reports (Canada) Strategic Environmental Assessment U.S. Securities and Exchange Commission section Soci´et´e Franc¸aise de Radiot´el´ephonie Swedish Code of Statutes Statutory Instrument slip opinion small and medium-sized enterprise Swedish State Official Reports Sarbanes-Oxley Act People Supreme Court State Securities Committee sub nomine (under the name) Supreme Court Staff Working Paper Treaty on the Functioning of the EU Tokyo High Court

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xxxii U.S. U.S.C. U.S.C.A. U.S. Jud. Pan. Mult. Lit. UFC Que Choisir UK UMAG UN US$ USB v. VAT VP Vt. Vt. Super. Ct. WCAM WL WTO

abbreviations United States United States Code United States Code Annotated United States Judicial Panel on Multidistrict Litigation Union f´ed´erale des consommateurs United Kingdom Gesetz zur Unternehmensintegrit¨at und Modernisierung des Anfechtungsrechts United Nations United States Dollar Universal Serial Bus versus Value Added Tax Vice-President Vermont Vermont Superior Court Wet Collectieve Afwikkelingen Massaschade (Dutch Act on Collective Settlements of Mass Harm) Westlaw World Trade Organization

1 Access to justice and collective actions ‘Florence’ and beyond

stefan wrbka, steven van uytsel, and mathias m. siems

Introduction In modern societies, guaranteeing or enhancing access to justice is an important feature of legal systems. However, to support this ideal state, we must pose some questions regarding the meaning and relevance of this term: What exactly is meant by ‘access to justice’? Who shall enjoy it? And how can it be accomplished? These questions touch on various issues cutting across not only legal subjects, but different academic fields in general: In addition to law, access to justice is closely interlinked with the fields of economy, sociology and politics, just to name a few. The practical impact of the non-legal fields must not be underrated and – to a certain extent – will be borne in mind and reflected throughout this book. The main emphasis, however, will be put on current legal questions closely related to access to justice. The term ‘access to justice’ itself consists of two parts, ‘access’ and ‘justice’, which – when read together – can be seen as a kind of abbreviation. ‘Access’ often comes together with ‘equal’1 or ‘effective’.2 It embodies the older, more technical and procedural side of the overall concept: It is the question of enabling those in need to pursue their legal interests. ‘Justice’, on the other hand, has a more result-oriented meaning which should be reached through equal or effective access: The outcome of the procedure 1 E.g. M. Cappelletti and B. Garth, ‘Access to Justice: The Worldwide Movement to Make Rights More Effective – A General Report’ in M. Cappelletti and B. Garth (eds.), Access to Justice – A World Survey (Alphen aan den Rijn: Sijthoff and Noordhoff, 1978), p. 6. 2 E.g. Cappelletti and Garth, ‘General Report’, 8.

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should be ‘just’3 or at least be made on fair (i.e. unbiased) grounds. We can thus say that the concept of access to justice embodies the ideal that everybody, regardless of his or her capabilities, should have the chance to enjoy the protection and enforcement of his or her rights by the use of law and the legal system. This idea is reflected by procedural as well as substantive laws, and is often enshrined in human rights concepts.4 Pertinent constitutional provisions generally contain rather technical state obligations aimed at empowering individual citizens to bring cases to courts.5 The wording of such provisions can be quite simple, such as ‘[n]o person shall be denied the right of access to the courts’,6 but it can also include more substantive requests directed at the state, for example asking for legal aid to be provided to those who cannot afford to finance court proceedings.7 Legal aid can take the form of genuine financial assistance, but can also be accomplished by granting fee-free lawyer’s services, free services of an interpreter or ‘open-court-days’.8 Without a doubt, effective access to justice as a ‘new social right’9 stands for the smooth functioning of the legal system and plays an important role as a key feature of ‘the welfare state ideal’.10 Ensuring effective access to justice has been on the agenda not only of national governments,11 but also at an international level, as the examples of the ALI/UNIDROIT Principles of Transnational Civil Procedure,12 3 M. Cappelletti and B. Garth, ‘Foreword’ in M. Cappelletti and B. Garth (eds.), Access to Justice – Emerging Issues and Perspectives (Alphen aan den Rijn: Sijthoff and Noordhoff, 1979), p. ix. 4 For a general discussion, see F. Francioni (ed.), Access to Justice as a Human Right (Oxford University Press, 2007). 5 For a summary of the situation in Europe, see E. Storskrubb and J. Ziller, ‘Access to Justice in European Comparative Law’ in F. Francioni (ed.), Access to Justice as a Human Right, pp. 180–182. 6 Art. 32 of the Constitution of Japan. 7 See e.g. Art. 18 (2) of the Dutch Constitution: ‘Rules concerning the granting of legal aid to persons of limited means shall be laid down by Act of Parliament’. 8 See e.g. Arts. 63 to 73 Austrian Civil Procedure Act or Art. 29 Austrian Court Organization Law. 9 Cappelletti and Garth, ‘General Report’, 49. 10 Storskrubb and Ziller, ‘Access to Justice in European Comparative Law’, 179. 11 See e.g. in this book Annina H. Persson’s Chapter 13 ‘Collective Enforcement: European Prospects in Light of Swedish Experience’, Benoˆıt Allemeersch’s Chapter 14 ‘Transnational Class Settlements: Lessons from Converium’ or Kunihiro Nakata’s Chapter 7 ‘Recent Problems of Group Rights Protection for Consumers in Japan’. 12 American Law Institute, Principles of Transnational Civil Procedure (Cambridge University Press, 1995).

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the European ‘Legal Aid Directive’13 or the discussions within the international Academy of Comparative Law14 show. In all cases the central issue seems to be the same: Although legal systems try to protect various rights, there is often a gap between what legal systems are aiming at and the practical result. In other words, whereas there is little doubt about the importance of effective access to justice, there has traditionally been uncertainty about how to guarantee it effectively.

The Florence Project and access to justice One of the most important studies in the field of access to justice is the Florence Access-to-Justice Project (Florence Project) carried out under the leadership of Mauro Cappelletti at the European University Institute, Florence, in the 1970s. The Florence Project was a response to earlier research on issues concerning the quality of justice, or, as Cappelletti and Bryant Garth expressed it, ‘the minimum standards of judicial fairness’.15 It confirmed what had already been claimed for a long time: Present legal systems neither sufficiently nor effectively protect citizens’ rights and interests. Various obstacles to a sound system of access to justice can be detected, of which the cost issue might be considered one of the most serious and perhaps the oldest of these barriers. The Florence Project divides the efforts to improve access to justice into three different phases or ‘waves’. The first phase focuses on legal aid for the poor; the second aims at providing legal representation for ‘diffuse interests’; and the third takes a more comprehensive approach, which Cappelletti and Garth call the ‘access-to-justice approach’.16 The first wave is based on the general assumption that litigation is costly, and that the less financially strong individuals are, the less likely it is that affected citizens will pursue their interests and bring a case to court. Private parties usually bear a great portion of the litigation costs. They might have to pay attorneys’ fees and court costs. Not everybody can afford this. Deborah L. Rhode, for example, observes that in the United States, ‘about four-fifths of the civil legal needs of the poor, and two- to 13 Council Directive 2002/8/EC of 27 January 2003 to improve access to justice in crossborder disputes by establishing minimum common rules relating to legal aid for such disputes, OJ 2003 No. L26. 14 See U. Mattei, ‘Access to Justice: A Renewed Global Issue?’, Electronic Journal of Comparative Law, 11.3 (2007), available at www.ejcl.org/113/abs113–14.html. 15 M. Cappelletti and B. Garth, ‘Foreword’, pp. vii–viii. 16 Cappelletti and Garth, ‘General Report’, 21.

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three-fifths of the needs of middle-income individuals, remain unmet’.17 Francesco Francioni takes a similar line by saying that ‘access to justice can be used to describe the legal aid for the needy, in the absence of which judicial remedies would be available only to those who dispose of the financial resources necessary to meet the, often prohibitive, cost of lawyers and the administration of justice’.18 Affordability of court proceedings can be realized by different means. In addition to the proportionality cost schemes mainly used in some European countries19 and small claim procedures,20 the ‘Judicare’ system21 is one of the most widely used approaches and may be the oldest one to overcome the obstacle of high litigation costs. Developed in Western Europe, persons who fulfil – or rather, do not meet – certain financial criteria determined by statute have the right to free legal representation. In addition, although financial resources are important factors in the decision to bring a claim,22 and state support is without doubt important for fostering individuals’ access to justice, it was soon realized that financial hurdles go hand in hand with other non-financial impediments. Raising the awareness of those who are not familiar with the legal system so that they can recognize and understand their rights and possible recourses is one of these additional factors. Marc Galanter points out that those who know how to make use of the court system – he calls them

17 D. L. Rhode, Access to Justice (Oxford University Press, 2004), p. 3. Later in that book she suggests that ‘[t]hose who need but cannot realistically afford lawyers should have the opportunities for government-subsidized services’ indicating that limited financial resources of individuals still pose a major threat to the guarantee of access to justice – see Rhode, Access to Justice, p. 185. 18 F. Francioni, ‘The Rights of Access to Justice under Customary International Law’ in F. Francioni (ed.), Access to Justice as a Human Right, p. 1. 19 See e.g. C. Hodges, S. Vogenauer and M. Tulibacka, ‘The Oxford Study on Costs and Funding of Civil Litigation’ in C. Hodges, S. Vogenauer and M. Tulibacka (eds.), The Costs and Funding of Civil Litigation – A Comparative Perspective (Oxford: Hart Publishing, 2010), pp. 85–90. 20 For the European Union, see e.g. Regulation (EC) No 861/2007 of the European Parliament and of the Council of 11 July 2007 establishing a European small claims procedure, OJ 2007 No. L199. 21 Cappelletti and Garth, ‘General Report’, 24–28. 22 Still, more than thirty years after the launch of the Florence Project, some consider financial incapability to be the most important obstacle to an increased access to justice for individuals – see e.g. I. van den Meene and B. van Rooij, Access to Justice and Legal Empowerment – Making the Poor Central in Legal Development Co-operation (Leiden University Press, 2008), p. 6.

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‘repeat-players’23 – enjoy an enormous advantage over those who are not familiar with the judicial system (‘one-shotters’24 ). Galanter argues that isolated and infrequent contact with the judicial system will discourage persons from bringing a claim. On the other hand, persons with long-term experience would be much more likely to frequent the judicial system. The repeat-players’ ongoing contact with the judicial system allows them to better plan their litigation, spread litigation costs, build up information relationships with the decision-making institutions, spread the risks of litigation and develop strategies for future actions.25 The second wave covers access problems going beyond those of the poor and one-shotters. The Florence Project realized that a practical limitation of access to justice is not only because of a lack of financial resources or a lack of legal knowledge. The central message of the second wave is that generally more than just one person’s interests can be affected by legal wrongs. Cappelletti and Garth use the term ‘diffuse interests’ to describe the interests at stake and define them as ‘collective or fragmented interests, such as those in clean air or consumer protection’26 with ‘the basic problem . . . that either no one has a right to remedy the infringement of a collective interest or the stake of any one individual in remedying the infringement is too small to induce him or her to seek enforcement action’.27 The impediments for these kinds of interests are thus basically twofold: On the one hand, the monetary amount (if any) involved in an individual’s disputes might not reach a level where one would be willing to pursue his or her interests; and on the other, standing may become an issue. Regarding the first issue, to be effective, an aggregation of individual claims would be desirable. Such aggregation of claims would solve the problem of diffuseness; however, new issues would appear. Even if interested persons are allowed to organize themselves, the affected persons may still be too dispersed, show a lack of information or fail to agree on a strategy. The free-rider problem is another issue that may arise. When a person does 23 M. Galanter, ‘Why the “Haves” Come out Ahead: Speculations on the Limits of Legal Change’, Law and Society Review, 9 (1974), 95, reprinted (with corrections) in R. Cotterrell (ed.), Law and Society (Aldershot: Dartmouth, 1994), pp. 165–230; M. Galanter, ‘Afterword: Explaining Litigation’, Law and Society Review, 9 (1974), 347. 24 Galanter, ‘Afterword’, 347. 25 Galanter, ‘Afterword’, 347. 26 Cappelletti and Garth, ‘General Report’, 18. 27 Cappelletti and Garth, ‘General Report’, 18.

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not contribute to the lawsuit, but cannot be excluded from the benefits, the other interested persons may not be willing to aggregate their claims. In addition, time is an important negative factor in cases where only a comparatively small amount of money is involved, as the loss of time would outweigh the possible benefits of winning the case and thus would disincentivize individuals from pursuing or aggregating their claims. It just may not be economically reasonable to go to court, for example, when the costs of the formal court proceedings exceed the amount of the claim. Eva Storskrubb and Jacques Ziller refer to the triangle-shaped interplay among the outcome of a positive access to justice and the individual factors influencing the decision making of whether to sue as balancing ‘truth, time and cost’.28 Regarding the second issue, even if an individual had a personal interest in resolving an issue which is not of a ‘small amount’, there could be other, more technical obstacles preventing access to justice. Depending on the kind of legal dispute, individuals may simply not have the right to bring a case to court: They lack legal standing in those situations. In both scenarios, the problem is more or less the same: In such situations, affected individuals would be ‘un- or underrepresented’29 if the law did not provide for effective access to justice tools. Such collective and fragmented (i.e. diffuse) interests can be found in many different legal fields, of which four will be more closely dealt with in this book: competition, consumer, environmental and corporate law. At the centre of the second-wave discussion, one finds the search for the ‘adequate representative’30 of diffuse interests. In order to base solutions on a wider variety of legal mechanisms, Cappelletti and Garth make an important observation, which will be further elaborated by some contributors to this book: With reference to Abram Chayes they argue that safeguarding diffuse interests is also an ‘important public policy issue’.31 Public and diffuse interests (e.g. the interests of ‘the poor . . . consumers and environmentalists’32 ) are thus closely interlinked with each other. 28 Storskrubb and Ziller, ‘Access to Justice in European Comparative Law’, 193 with reference to A. A. S. Zuckerman, ‘Justice in Crisis: Comparative Dimensions of Civil Procedure’ in A. A. S. Zuckerman (ed.), Civil Justice in Crisis, Comparative Perspectives of Civil Procedure (Oxford University Press, 1999), pp. 46–47. 29 Cappelletti and Garth, ‘General Report’, 49. 30 Cappelletti and Garth, ‘General Report’, 36. 31 Cappelletti and Garth, ‘General Report’, 36, with reference to A. Chayes, ‘The Role of the Judge in Public Law Litigation’, Harvard Law Review, 89 (1976), 1281. 32 Cappelletti and Garth, ‘General Report’, 35.

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One way to satisfy the public interest in addressing diffuse interests is that the government itself, representing the public interest, takes action. In Cappelletti and Garth’s view, however, this ‘governmental approach’ has not shown any major positive results for individual or collective access to justice.33 They identify various reasons for the general passiveness of governments, with political pressure and an alleged lack of expertise being the most important factors.34 To overcome this standstill, they ask for more active involvement by private actors, either by taking a ‘private attorney general’35 or an ‘organizational private attorney general’ approach.36 Whereas the first concept refers to ‘individual private actions for the public or collective interest[s]’,37 the second approach puts the emphasis on organizing plaintiff groups, leading to sub-concepts such as class actions, public interest actions, public interest law firms or public counsels culminating in what Cappelletti and Garth call a ‘pluralistic (mixed) solution’.38 On the basis of the argument that none of the presented single approaches is perfect, they suggest mixing existing tools to meet the needs of diffuse interests.39 The third access to justice wave goes one step further, beyond the question of who should represent affected citizens at court. The emphasis is put on rethinking the judicial system itself to make substantive rights more effective.40 Various suggestions have been made within this framework. Litigation procedures have been reformed to introduce alternative procedures supplementing the normal litigation process. Small claim courts with special procedures are one of them. Alternative methods for dispute resolution (ADR), such as arbitration, mediation or conciliation, are another example. Economic incentives have been provided to encourage settlement outside of the courts. Specialized courts have been set up to deal with specific issues, such as tribunals for consumer complaints. No matter which wave one refers to, the key challenge to enhancing access to justice is rightly seen in installing ‘forums that will be so attractive 33 34 35 36 37 38 39 40

Cappelletti and Garth, ‘General Report’, 36–39. Cappelletti and Garth, ‘General Report’, 37. Cappelletti and Garth, ‘General Report’, 40. Cappelletti and Garth, ‘General Report’, 40–48. Cappelletti and Garth, ‘General Report’, 40. Cappelletti and Garth, ‘General Report’, 48. Cappelletti and Garth, ‘General Report’, 40–48. Cappelletti and Garth, ‘General Report’, 49–54.

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to individuals, not only economically but also physically and psychologically, that they will feel comfortable and confident in using them, despite the resources and sophistication of those they tend to oppose’.41 This is the ultimate goal that eventually must be reached.

From ‘diffuse’ to ‘multilayer’ interests In the course of the Florence Project, Cappelletti and Garth created the category of diffuse interests, which formed the key point of interest in the second access to justice wave. Diffuse interests were seen as their own category covering the un- or underrepresented interests of groups of people who – for whatever reason – lack access to justice. Interests of consumers and environmentalists have traditionally been considered as parade examples for this group of interests,42 thus expanding the research focus on access to justice beyond the older concept of the poor and middle-income individuals. According to the Florence Project, in general, ‘disputes have collective as well as individual repercussions.’43 Cappelletti and Garth go on by rightly noticing that for these two groups of interests, ‘collective [i.e. diffuse] and individual [interests or] dimensions can be addressed by different measures’.44 Without any doubt, differentiating between these two interest groups is important; however, we would like to mention a third group, which Cappelletti and Garth on some occasions45 include in the group of diffuse interests holders: the public. If one understands diffuse interests as collective or fragmented interests belonging to groups of people who are usually un- or underrepresented, but still directly affected by a dispute, public interests should be separately mentioned. Repercussions for the public itself can be manifold, but they principally show different and rather indirect effects compared to the classical understanding of diffuse interests: Negative results caused by a lack of access to justice for public

41 Cappelletti and Garth, ‘General Report’, 72. 42 M. Cappelletti and B. Garth, ‘Access to Justice and the Welfare State: An Introduction’ in M. Cappelletti (ed.), Access to Justice and the Welfare State (Alphen aan den Rijn: Sijthoff and Noordhoff, 1981), p. 11. 43 Cappelletti and Garth, ‘General Report’, 53; see also Cappelletti and Garth, ‘Access to Justice and the Welfare State: An Introduction’, 50, where they again differentiate between these two forms of potentially affected interests by referring to representation ‘either of individuals or of diffuse interests’. 44 Cappelletti and Garth, ‘General Report’, 53. 45 See e.g. Cappelletti and Garth, ‘General Report’, 49 and 67.

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interests normally do not emerge as directly or as fast as would be the case with diffuse interests – for example, product defects having an impact on a bigger group of consumers, short-term health issues of people living in the neighbourhood of a factory responsible for environmental accidents or shareholder interests impaired by stock price losses based on illegal company practices. In the case of public interests, it is more a matter of consequential damages showing results in the longer run, such as negative effects on national economies stemming from consumers’ distrust in certain products or the market as a whole, rising health care costs resulting from an increase in diseases caused by environmental accidents or the malfunction of court systems because of inappropriate legal mechanisms. It thus makes sense to consider public interests as a special, third form of potentially affected interests, adding an additional pillar to the overall discussion of access to justice. By dividing possibly affected interests into the three groups of individual, collective (or, as Cappelletti and Garth would call it, ‘diffuse’) and public interests, one can approach access to justice from three different angles. This is especially useful as different legal fields have traditionally chosen different ways of discussing how to improve access to justice. For example, whereas consumer and environmental law scholars have shifted the focus towards the direct protection of collective interests relatively early,46 in other areas, such as competition law in Europe, the focus has traditionally been on governmental enforcement, and collective interests were initially only indirectly protected by public enforcement. Direct protection of other groups with possibly affected interests became a target comparatively late.47 Still, in many cases, disputes affect all three categories of interests: individual, collective and public. One can also say that disputes can have different layers: Access to justice might be at stake for not just one layer of interests, but for two or even all three categories. This is why we believe it makes sense to refer to this situation as multilayer interests, standing for 46 See e.g. Storskrubb and Ziller, ‘Access to Justice in European Comparative Law’, 179; C. Redgwell, ‘Access to Environmental Justice’ in Francioni (ed.), Access to Justice as a Human Right, pp. 153–175; Cappelletti and Garth, ‘Access to Justice and the Welfare State: An Introduction’, 11. 47 See especially the Green Paper on damages actions for breach of the EC antitrust rules, 19 December 2005, COM(2005) 672 final and White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, COM(2008) 165 final which both discuss the issue of more direct involvement of affected private individual and/or collective interests.

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cases in which at least two, but usually all three, groups of interests (i.e. individual, collective and public) are affected.

The role of collective actions in the context of multilayer interests The discussions summarized and further intensified by the Florence Project have not lost their importance. On the contrary, even more than three decades later, many issues raised by the Florence Project remain unsolved, as heated access to justice discussions in various fields show.48 All three waves identified by the Florence Project have their place in the discussions, and it would not make sense to further elaborate by focusing only on one or two. No matter how one looks at it, traditional barriers such as the lack of individuals’ financial resources or legal knowledge, the issue of collective (i.e. diffuse) interests as well as the legal system itself have to be considered. Instead of dividing the discussion into the three waves of the Florence Project, we focus on the interests fundamentally affected by disputes that go beyond classical conflicts limited to two parties – that is, on the concept of multilayer interests as outlined earlier. When talking about multilayer interests and the enhancement of their access to justice, one inevitably has to deal with collective actions, as they are seen as a legal tool that can be used to improve access to justice. One of the most widely discussed forms of collective actions in this regard is the instrument of class actions. Bernard Murphy and Camille Cameron purport that ‘promoting access to justice is a central aim of the class action regime’.49 They go on by stating that ‘[i]t is intended to create power in numbers that would be non-existent if claims were pursued individually, and to provide a mechanism that ensures that a greater number of those claims can be litigated’.50 In a similar vein is the work of Rachael Mulheron.51 After noting that access to justice is the cornerstone of class proceedings, she continues her analysis by pointing out that the class action is a ‘remedy to those in the community who individually

48 See e.g the international discussions mentioned earlier in this chapter. 49 B. Murphy and C. Cameron, ‘Access to Justice and the Evolution of Class Action Litigation in Australia’, Melbourne University Law Review, 30 (2006), 399, 402. 50 Murphy and Cameron, ‘Access to Justice’, 403. 51 R. Mulheron, The Class Action in Common Law Legal Systems: A Comparative Perspective (Oxford: Hart Publishing, 2004), pp. 52–57.

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had uneconomically viable claims, but where overall, the total amount at issue was significant’.52 It also overcomes the costs of a proceeding by spreading them among numerous litigants, meaning that the class action benefits those claims that have disproportionate costs compared to the amount of individual claims.53 Mulheron also recognizes the ability of a class action to foster equality between the litigating parties and to contribute to a timely disposal of the case.54 However, as Cappelletti and Garth already argued in the 1970s,55 the existence of criticism against (especially U.S.-style) class actions cannot be denied, and will be reflected by some contributors in this book. In some countries and fields of law, class actions might be the most widely used form of collective redress.56 They are, however, not the only collective mechanism used for injunctive and/or compensatory relief. One can find various collective redress forms; some of them are available only in certain legal fields, and others are used in multiple fields: group actions, class actions, test and pilot cases, derivative actions, representative actions and skimming-off procedures. In addition to litigation mechanisms, we can find ADR tools, such as collective arbitration, mediation or conciliation, which could even take the form of online dispute resolution (ODR).57 Collective actions are not restricted to the legal nature of plaintiffs and, depending on the available tool, can be brought by a single claimant, who can be a private individual, a private legal entity or a public authority, as well as by a group of people. Underlying claims can either be aggregated into one total amount or just bound together via a single procedure. Also the enforceability of court decisions can differ: In cases where not all affected persons are listed as plaintiffs, it can be that only the formal plaintiff him- or herself can enforce a judgment or settlement, or that the affected group members can do so as well. Although the functioning of

52 53 54 55 56

Mulheron, Class Action, p. 52. Mulheron, Class Action, p. 53. Mulheron, Class Action, pp. 54–55. Cappelletti and Garth, ‘General Report’, 44–45. In this book the term ‘collective redress’ usually embodies the general idea of (collective) relief, while the term ‘collective actions’ refers to the specific legal tool to achieve this, the collective (litigation) mechanism itself. 57 See e.g. P. Cort´es, Online Dispute Resolution for Consumers in the European Union (New York: Routledge, 2011); J. H¨ornle, Cross-border Internet Dispute Resolution (Cambridge University Press, 2009).

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collective action instruments is diverse, the instruments are united by a common denominator: To some extent (at least theoretically) they all are used to satisfy the needs of multilayer interests. No matter which of these collective redress tools are used, the central questions remain the same: Theoretically speaking, those mechanisms should facilitate equal access to justice for multilayer interests, but to what extent and under what conditions is this really true?

Structure of and contributions to this book We felt that there was a need to contribute to the discussion on access to justice and its enhancement by taking a more holistic approach than what has been done in the past, as we discovered similar problems in our own research fields. Although the contributions so far have mostly come from the fields of public policy and ethics,58 civil procedure law59 or single substantive law areas (mostly limited to certain geographical regions),60 we tried to take a different approach by discussing current topics from among both different legal fields and different geographical regions, as 58 E.g. Rhode, Access to Justice; Francioni (ed.), Access to Justice as a Human Right; M. H. Redish, Wholesale Justice – Constitutional Democracy and the Problem of the Class Action Lawsuit (Stanford University Press, 2009). 59 E.g. Lord Woolf, Access to Justice – Final Report (London: The Stationery Office, 1996); A. A. S. Zuckerman and R. Cranston (eds.), Reform of Civil Procedure – Essays on ‘Access to Justice’ (Oxford University Press, 1995); D. R. Hensler et al., Class Action Dilemmas (Santa Monica: RAND, 2000); Mulheron, Class Action. 60 E.g. C. Hodges, The Reform of Class and Representative Actions in European Legal Systems: A New Framework for Collective Redress in Europe (Oxford: Hart Publishing, 2008); M. Casper et al. (eds.), Auf dem Weg zu einer europ¨aischen Sammelklage? (Munich: Sellier European Law Publishers, 2009); F. Cafaggi and H.-W. Micklitz (eds.), New Frontiers of Consumer Protection: The Interplay between Private and Public Enforcement (Antwerp: Intersentia, 2009); W. H. van Boom and M. Loos (eds.), Collective Enforcement of Consumer Law: Securing Compliance in Europe through Private Group Action and Public Authority Intervention (Groningen: Europa Law Publishing, 2007); C. E. F. Rickett and T. G. W. Telfer (eds.), International Perspectives on Consumers’ Access to Justice (Cambridge University Press, 2003); S. Deimann and B. Dyssli (eds.), Environmental Rights: Law, Litigation & Access to Justice: Law, Litigation and Access to Justice (London: Cameron May, 1995); A. Harding (ed.), Access to Environmental Justice: A Comparative Study (Leiden: Martinus Nijhoff, 2007); N. de Sadeleer, G. Roller and M. Dross, Access to Justice in Environmental Matters and the Role of NGOs: Empirical Findings and Legal Appraisal (Groningen: Europa Law Publishing, 2005); J. Ebbesson (ed.), Access to Justice in Environmental Matters in the EU (The Hague: Kluwer Law International, 2002). J. Steele and W. H. van Boom (eds.), Mass Justice (Cheltenham: Edward Elgar, 2011) covers more substantial fields than the previously mentioned books, but nevertheless does not include expertise on competition or company and securities law.

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we believe that such a cross-cutting approach, fusing expertise coming from various backgrounds, can further facilitate the research on access to justice in general. It is hoped that this book will provide insight into the research work that is currently being done in various academic fields and will ultimately result in what is widely wished for: a general enhancement of multilayer interests’ access to justice in modern societies. The contributions in this book are grouped into common themes and will either give an overview of what has been done so far in selected areas or discuss what will, shall or could be done in the future. We tried to pick topics from legal fields that currently aim at improving access to justice: consumer law, competition law, environmental law and company and securities law. As the starting point for the discussion within these fields is occasionally the same, the analysis in the different parts of the book will in some cases provide a cross-cutting selection of chapters, and in other cases will focus on more detailed, subject-specific questions. Part I will give a more general overview of what is done in some of these areas. Stefan Wrbka discusses current trends in the European consumer law debate. He starts by giving an insight into the meaning and significance of the three pillars of this book (collective actions, multilayer interests and access to justice) in the field of consumer law in general and then analyzes the 2008 Green Paper on Consumer Collective Redress and its follow-up materials in the context of these three pillars. On the basis of the arguments that different categories of potentially affected multilayer interests show different kinds of lack of access to justice, he asks for the introduction of a flexible and mixed mechanism that also needs to take opposing national approaches towards the protection of consumer interests into consideration. Instead of imposing a single (collective) mechanism, one should make use of the variety of existing tools and adapt them according to the needs of the affected interest groups. Steven Van Uytsel builds on the research of Cappelletti and Garth, who have posited that the effectiveness of collective actions may be jeopardized by several barriers. The question he raises is whether multilayer interests, as they can be identified in competition law, have a potential to be such a barrier. To provide an answer, Van Uytsel investigates how the most frequently used collective action mechanisms in competition law (joinder procedures, test cases, representative actions and class actions) advance access to justice for each layer of interests. On the basis of the fact that only a few of the collective action mechanisms are effective, the chapter concludes with whether more focus should be put on the hybridization of the enforcement of competition law.

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Mathias Siems concludes the first part by explaining access to justice in the context of derivative actions by addressing the private enforcement of directors’ duties. When company directors are in breach of their duties, it seems natural to give shareholders a judicial remedy as a means of access to justice. However, directors’ duties are owed to the company, not shareholders individually. Thus, in contrast to other forms of collective actions, the topic of this chapter is not just one of combining multiple claimants, but rather of whether individuals can sue for compensation on behalf of someone else (i.e., the company). Economically, of course, such derivative actions raise similar problems to the other actions discussed in this book, for instance, how to reconcile multiple or multilayer interests, how to deal with costs and fees and how to address the risks of both overand under-enforcement. In some legal systems, derivative actions have been in place for a long time, although only in a few countries – most notably the United States – have shareholders made frequent use of them. More recently, many other countries have also introduced or facilitated derivative actions. Still, there is considerable diversity around the world. In his chapter, Siems explores how the availability of derivative actions is related to other differences between countries, for instance, the common law/civil law divide, the ownership structure of firms, and other questions of shareholder protection and civil procedure. Part II deals with cross-continental perspectives on collective redress. Monika Hinteregger takes us to the field of environmental law where she analyzes the trends of multilayer interest protection in the United States as well as in the EU. Whereas the United States has a well-developed private litigation mechanism based on citizens’ suits and environmental class actions, and bases the protection of natural resources on the concept of the public trust doctrine, the EU takes a different approach and is more reluctant to provide individuals with rights in environmental law enforcement. However, in this regard Hinteregger also recognizes a recent shift of focus within the EU and its Member States to make certain concessions to groups of individuals, especially non-governmental organizations (NGOs): Whereas the Aarhus Convention61 has strengthened the position of NGOs in other areas, such as preventing damage to protected species and natural habitats, and water and land damage, the approach taken by the EU still heavily relies on public enforcement. 61 Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters, Aarhus, 21 April 1998, in force 30 October 2001, ECE/CEP/43.

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Sean McGinty looks at the issues of collective actions from a historical point of view. Although today we think of collective actions as a type of procedural exception to a general system of litigation by individual claimants, history shows us that legal systems have not always held this view of collective actions as an exception. In feudal societies, such as those which existed in thirteenth-century England and Tokugawa Japan, courts often heard cases brought by groups of litigants represented by one of their number in the same way that the courts heard cases brought by individuals. McGinty looks at the divergent paths of the early English and Tokugawa Japanese courts in the development of group litigation. Starting from similar beginnings where the concerns that animate today’s debate on collective actions were unknown, English law over the centuries began to distinguish such cases from those involving individuals, whereas the Tokugawa courts did not. Looking to a number of factors, and specifically the role of the types of groups in each society – joint stock companies in England and kabunakama in Tokugawa Japan – this chapter offers explanations for this divergence. In Part III we will be introduced to recent discussions of collective action mechanisms in Japan. Kunihiro Nakata covers the field of Japanese consumer law. He explains that Japan engages in similar debates as some European countries and the EU when it comes to improving access to justice. Although Japan knows collective actions as an injunctive tool, they are not utilizable as a compensatory remedy. The Japanese government has thus recently launched academic projects to evaluate collective redress tools in the context of consumer protection. A recently published study report favours a two-tiered solution, with a basic collective clarification of common facts at the first stage, followed by individual proceedings at the second stage. Nakata, however, argues that such an approach would not lead to the desired result, as because of financial and psychological obstacles, individual consumers are not inclined to launch proceedings, which is especially true in the case of Japan where traditionally relatively few cases reach the courts. He further argues that the most practically effective way to deter wrongdoers from acting unlawfully would be the introduction of an opt-out mechanism. In his opinion, conceptual and constitutional concerns regarding opt-out tools have to be dispelled for the sake of a sustainable consumer protection. Akinori Uesugi argues that Japan has for a long time focused on the public interests underlying competition law. Therefore, the enforcement mechanisms in the Japanese Antimonopoly Act (AMA) were centred on the Japan Fair Trade Commission and, to a lesser extent, the Tokyo

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High Court. As the Japanese government is in the process of revising its AMA to yield the factors that have been identified as hampering a good functioning public enforcement system, Uesugi purports that this should provide the chance to reform the private enforcement system. This claim is being made because the changes made to the public enforcement system indirectly facilitate the existing private enforcement system. Even though these steps towards enhanced access to justice for private parties may be applauded, Uesugi points out that it may still be too early for them to be effective. Japanese society is still ingrained with cultural and psychological barriers causing enterprises to shy away from private actions. As long as this remains the case, further innovations in the legislation, such as a detailed framework for several forms of collective actions, may only be moot. Part IV deals with current access to justice issues in the area of company and securities law. Quynh Thuy Quach discusses the case of derivative actions in Vietnam, while also addressing the limitations of litigation in transition economies more generally. In October 2010 the Vietnamese government enacted a decree allowing derivative actions. In principle, giving small shareholders a right to sue may be regarded as an improvement to access to justice. However, whether this emerging mechanism of shareholder protection is best suited for all disputes and for all institutional settings is not clear. In her chapter, Quach elaborates on these doubts in the Vietnamese context. It is argued that giving shareholders more rights to challenge corporate misconduct by no means guarantees more justice for them. Justice for oppressed shareholders may only be achieved if the litigation device in principle serves the best interests of shareholders and impediments to the litigation process are minimized. Derivative actions could be, and should be, the last resort of oppressed shareholders to combat errant managers, but this type of action may not be an effective device to satisfy aggrieved shareholders. With inherent limited resources, Vietnam should pay more attention to other reforms that have firmer foundations in the existing institutional environment and are less costly. Arthur Pinto’s chapter deals with class actions in the case of securities fraud. These actions can be a solution to the problem that individual investors often have insufficient claims to justify the costs associated with litigating their rights, and the government has insufficient resources to pursue all wrongdoing, and may have different priorities. Thus, private enforcement is a collective action mechanism that has often been

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viewed as a necessary supplement to government regulation and enforcement aimed at deterring violations of the law and compensating victims of securities fraud. Pinto describes how the U.S. Supreme Court initially viewed these class actions and the law more broadly based on the need for flexibility to promote the remedial purposes of the law in order to protect investors and the markets. Later, a political shift in society and on the Court reflecting concerns about litigation abuses and judicial activism and a more pro-business attitude moved the Court to narrow the reach of the law and these class actions. This history illustrates how the politics of class actions and shifting attitudes and concerns reflected in society influenced the Court’s decisions and development of the law. Part V discusses access to justice for indirect purchasers. William Page questions whether indirect purchaser litigation contributes positively to an effective enforcement of competition law. The question has regained importance in the United States since the introduction of the Class Action Fairness Act (CAFA), which permits federal courts to hear most competition law cases brought under state law. The undoubtedly positive effect of this change is a reduction of the direct costs of private enforcement, as it singled out the treatment of cases against the same defendant in different jurisdiction levels. Yet, Page’s review of the practice under CAFA shows that nothing has really changed for indirect purchasers as they still face difficulties in establishing a collectivity of identical individual interests. In the few cases that are successful in doing so, Page purports that their claim does not add to the deterrent effect of competition law since the indirect purchaser suits do not increase the amount of damages. If deterrence is the aim of law enforcement, this could, according to Page, simply be reached via direct purchaser class actions. These actions will be more successful, leading Page to claim that the access to justice for the multilayer interest is best served in this way. Simon Vande Walle investigates whether the public interest is being served by providing indirect purchasers the right to litigate as a collectivity, a question which is raging in the EU. This discussion seems to favour the implementation of a class action scheme similar as the one in place in Japan during the Oil Cartel Cases, which was an opt-in class action. Vande Walle points out that the indirect purchasers in these cases experienced extreme difficulties in demonstrating that they had sustained damages from the domestic cartel. As a result, the trials were long and complex. This in turn inflated the costs, making them even higher than the amount that

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was claimed for. Rational boundedness may prevent indirect purchasers from estimating these costs, so they proceed with trial. This may, as Vande Walle proves in the Oil Cartel cases, impose huge burdens on society without necessarily leading to corrective justice for the indirect purchasers. This negative experience with enhanced access to justice for indirect purchasers brings Vande Walle to conclude that the EU reforms should take a cautious stance towards the possibility of letting indirect purchasers act in a class action. The final section, Part VI, covers selected collective redress trends and experiences. Despite its long and strong history of consumer protection, it was not until 2003 that Sweden introduced a collective redress form aimed at the protection of multilayer consumer and environmental interests. Still, Sweden was among the first European countries to have taken such a step and thus is a popular example for others. Annina Persson explains the twofold mechanism Sweden has adopted, relying both on collective litigation as well as ADR. Whereas the second mechanism is used relatively often, collective litigation has not yet turned out to be a powerful tool. Considering itself an European pioneer, Sweden takes the official position that it might be too early for the introduction of a panEuropean compensatory collective redress tool, and casts doubt on the feasibility of a one-size-fits-all approach. Persson explains the rationale behind this and asks for increased judicial cooperation. Benoˆıt Allemeersch discusses the more recent landmark Converium case that could lead to a major realignment of the judicial landscape in the EU when it comes to matters involving multilayer interests. The innovative Dutch Act on Collective Settlements of Mass Harm has introduced a somehow-reversed class action allowing the Amsterdam Court of Appeal to declare a settlement, which was concluded by two or more parties prior to the court proceeding, to be binding on all affected persons, even if they have not been involved in the negotiation of the settlement at all. Although most cases so far – at least to some extent – have had a relatively strong connection to the Netherlands (i.e., the country where the case was litigated), the Dutch component in the Converium case was miniscule. The Amsterdam Court of Appeal (in first instance) has nevertheless accepted the claim, which could eventually make the Netherlands an easy, accessible place for universal multilayer interests jurisdiction. Allemeersch thoroughly and persuasively analyzes the judgment and comes to an interesting conclusion uninfluenced by the pressure from various affected interest groups.

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Rachael Mulheron observes that competition law is the area of law utmost suitable for collective actions. Indeed, in this area of the law, the value of an individual claim tends to be low and the loss is usually spread over many potential claimants. Nevertheless, the system for collective actions is only weakly developed in England. The lack of litigation for competition law infringements pictures reality best. The existing legislation institutes too many barriers for injured parties and their lawyers to successfully bring an action against a competition law infringer. However, neither the judiciary nor the government seems to object to further reform that would give better access to justice for the injured parties of a competition law infringement. With this conclusion, Mulheron continues to suggest how the legal framework should look like: an opt-out class action system tempered by a requirement for certification. The latter should prevent a floodgate of competition law class actions as it will screen the cases for unsuitable claims.

Conclusion This book seeks to highlight recent developments in access to justice in select and diverse fields of law throughout the world, to give some historical explanation and background and to take a look into the likely future of this debate. Collective actions have drawn a lot of attention. However, the approach has been fragmented to specific areas of the law. Only recently has there been an attempt in the EU to search for a coherent approach towards collective actions.62 It is also our intention with this book to transcend the debate on collective actions in a specific area of the law. The book includes perspectives on collective actions in consumer law, competition law, company law, securities law and environmental law. These various fields of law have been analyzed by using the concepts of access to justice and multilayer interests to reveal the benefits and shortcomings of collective actions. By then connecting this analysis to various geographical areas, the book explains that there is still ample room for improvement: We have not yet reached the ideal state. In this sense, timeless meaning can be given to what Cappelletti and Garth wrote more than thirty years ago: ‘[a]nd, if it is true that effective, not merely formal, 62 See Commission Staff Working Document Public Consultation: towards a coherent European approach to collective redress, 4 February 2011, SEC (2011) 173 final.

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equality before the law is the basic ideal of our epoch, the access-to-justice approach can only lead to a judicial product of far greater “beauty” – or better quality – than the we now have’.63 With rapt attention and great expectations we are looking forward to the next steps to come. May this book sow the seeds of future debate and help foster the discussion of access to justice.

63 Cappelletti and Garth, ‘General Report’, 124.

PAR T I Setting the stage

2 European consumer protection law: Quo vadis? Thoughts on the compensatory collective redress debate

stefan wrbka

Introduction On 11 November 2008, the European Commission presented its Green Paper on Consumer Collective Redress. This Green Paper and its followup materials try ‘to assess the current state of redress mechanisms . . . and to provide options to close any gaps to effective redress’1 ; they have taken the initially mere academic debate to an ‘official’ level and triggered controversial reactions from and among public bodies, scholars, practitioners, professionals,2 consumers and related interest groups. They touch upon various issues of current interest in relation to consumers and the protection of their interests; the materials deal inter alia with the nature of involved interests, access to justice for consumers and compensatory (collective) redress mechanisms. Closely related topics, such as the suitability of private and public enforcement of consumer rights,3 alternatives to U.S.-style class actions4 or parallels to and differences from 1 Green Paper on consumer collective redress, 27 November 2008, COM(2008) 794 final. 2 In the context of this chapter the terms professionals and businesses will be used interchangeably to address non-consumers, following the approach taken by the European Commission, e.g. in the Green Paper on the review of the consumer acquis, 8 February 2007, COM(2006) 744 final. In the academic literature one can also find other terms, such as enterprises or traders. 3 F. Cafaggi and H.-W. Micklitz (eds.), New Frontiers of Consumer Protection: The Interplay between Private and Public Enforcement (Antwerp: Intersentia, 2009); W. H. van Boom and M. Loos (eds.), Collective Enforcement of Consumer Law: Securing Compliance in Europe through Private Group Action and Public Authority Intervention (Groningen: Europa Law Publishing, 2007). 4 Although the European Commission courteously suspends its judgment on U.S. class actions in its Green Paper on consumer collective redress, Meglena Kuneva, the thenCommissioner for Consumer Protection reveals the Commission’s standpoint in her

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competition law enforcement,5 have been widely discussed. Although some of these issues naturally have to be taken into consideration when analyzing the ongoing debate and giving comments on what could or should be done in the future, this chapter will primarily cover the following categories: classification of involved interests, concepts of access to justice and the practicability of collective redress mechanisms in the field of European consumer protection law. It is hoped that this concentration will illuminate the issue of enhancing consumer redress from a different angle. The chapter will start by introducing three key points of interest (the concepts of multilayer interests, access to justice and redress tools) before outlining the ongoing elaborations at the EU-level. It will then continue with some remarks on the compensatory consumer collective redress debate and highlight some of the major issues at stake. I will conclude with some input on how to overcome potential obstacles in the reform debate by integrating the three focused concepts.

Multilayer interests When it comes to the question of interests involved in legal disputes in the field of consumer protection, it is logical that one thinks of individual interests in the first place: for the predominant part of litigation, consumer A will sue professional B in order to get his or her interests awarded. This simplest form of consumer law disputes does not differ from other traditional private law disputes. However, depending on the substance of the legal dispute and the number of people involved, in addition to individual interests one can find two more major interest groups: collective, joint or shared consumer interests (hereinafter collective interests), and public or speech at the Conference on Collective Redress held in Lisbon on 10 November 2007, by saying: ‘[t]o those who have come all the way to Lisbon to hear the words “class action”, let me be clear from the start: there will not be any. Not in Europe, not under my watch.’ See M. Kuneva, ‘Healthy Markets Need Effective Redress’ (Lisbon, 10 November 2007); see also J. Stuyck, ‘Public and Private Enforcement in Consumer Protection: General Comparison EU-USA’ in Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection, p. 81; Andr´e Janssen, ‘Auf dem Weg zu einer europ¨aischen Sammelklage?’ in M. Casper et al. (eds.), Auf dem Weg zu einer europ¨aischen Sammelklage? (Munich: Sellier European Law Publishers, 2009), p. 3, who argues that class actions are based on a ‘toxic cocktail’ of contingency fees, punitive damages and civil jury trials. 5 K. J. Cseres, ‘Enforcement of Collective Consumer Interests: A Competition Law Practice’ in van Boom and Loos (eds.), Collective Enforcement of Consumer Law, p. 125.

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general6 interests (hereinafter public interests).7 In modern consumerism such interests become more and more important and interlinked with each other and set consumer disputes to some extent apart from more traditional private law issues, such as neighbourhood claims or marital disputes. When it comes to collective interests, more than just a single consumer is affected, but they are not necessarily as closely linked to each other as in cases of compulsory joinders of parties. Persons involved in collective interest cases retain their own individual interests, but at the same time the interests are also shared among the affected consumers, because their claims have common backgrounds. A classic example for this would be mass food poisoning during a cruise trip.8 All injured people have their own individual interests in receiving appropriate compensation, but at the same time, factual and/or legal grounds for such a claim are shared by the victims, thus leading to some form of collective interest in rights enforcement.9 Another, more general example linking individual and collective interests is established by test cases, which are a popular tool used in some European states such as Austria or Germany to address issues of these two interest categories, as shown by the Leuven Study. In this study it is argued that test cases are a typical example of an individual mechanism that also serves as a redress tool for collective interests.10 In addition, the public can have its own interest in resolving consumer disputes: such interests can reach from boosting the national economy by strengthening consumers’ confidence to lowering health-care costs or the costs of the national court system, or increasing the efficiency of courts by 6 See e.g. H.-W. Micklitz et al. (eds.), Cases, Materials and Text on Consumer Law (Oxford: Hart Publishing, 2010), p. 523, where the term general interest is used instead of public interest. 7 See e.g. K. Thiere, Die Wahrung u¨ berindividueller Interessen im Zivilprozeß (Bielefeld: Ernst und Werner Gieseking, 1980). 8 For another example of interaction between individual and collective interests see e.g. H.-W. Micklitz, ‘Collective Private Enforcement of Consumer Law: The Key Questions’ in van Boom and Loos (eds.), Collective Enforcement of Consumer Law, p. 17. ´ 9 Marek Safjan, Łukasz Gorywoda and Agnieszka Janczuk argue that collective interests are more than ‘a sum of individual interests’ requiring ‘a particular practice or . . . breach’ to connect them – see M. Safjan et al., ‘Taking the Collective Interest of Consumers Seriously: A View from Poland’ in Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection, p. 187. 10 See J. Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress Other than Redress through Ordinary Judicial Proceedings’, Leuven University (2007), p. 276.

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lessening their burden.11 Although the concept of public interests could be understood as common interests without directly affecting individual interests per se,12 it does not necessarily exclude individual interests. On the contrary, individual interests can also be closely linked to public interests. The German Telekom case sets a good example: since 2001 more than 16,000 investors13 had overloaded the regional court in Frankfurt with claims against Deutsche Telekom AG, mainly based on similar arguments14 leading to a massive negative impact on the efficiency of that court15 (and the enactment of the Capital Markets Model Case Act or lex Telekom in 2005). The interplay between private individual and/or collective interests on the one hand and public interests on the other in the field of consumer law is also reflected in the ongoing collective redress debate at the EU level: DG Sanco followed the example set by DG Comp discussing the suitability of potential tools of compensatory redress mechanisms. Although the underlying ideas of these two areas differ – with competition law being primarily based on the central concept of public interest, whereas consumer law is more closely/directly related to individual interests – points of contact between both are evident as the growing and parallel focus on both areas shows when it comes to discussing redress tools.16 This also explains why numerous scholars have been elaborating and weighing pros and cons of private and public enforcement tools not only in relation to competition law enforcement, but also in the field of consumer law.17 11 P. Rott, ‘Kollektive Klagen von Verbraucherorganisationen in Deutschland’ in Casper et al. (eds.), Auf dem Weg zu einer europ¨aischen Sammelklage?, p. 259. 12 See G. Wagner, ‘Kollektiver Rechtsschutz – Regelungsbedarf bei Massen- und Streusch¨aden’ in Casper et al. (eds.), Auf dem Weg zu einer europ¨aischen Sammelklage?, pp. 50–51; T. Bourgoignie, ‘Characteristics of Consumer Law’, Journal of Consumer Policy, 14(1992), 293, 299, 311. 13 Note: Every investor had an individual interest in winning the case. 14 Note: Similar arguments connected the individual interests; thus, the investors also had a collective interest in winning the case. 15 Note: Increasing court efficiency clearly represents (also) a public interest; for details on the German Capital Markets Model Case Act see note 48. 16 See e.g. Cseres, ‘Enforcement of Collective Consumer Interests’, 131–132; C. Hodges, The Reform of Class and Representative Actions in European Legal Systems: A New Framework for Collective Redress in Europe (Oxford: Hart Publishing, 2008); E. Buttigieg, Competition Law: Safeguarding the Consumer Interest: A Comparative Analysis of US Antitrust Law and EC Competition Law (Alphen aan den Rijn: Kluwer Law International, 2009). 17 A collection of various approaches and viewpoints can be found in e.g. Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection.

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Luboˇs Tich´y and Jan Balarin describe the need to take account of all three interest layers in the compensatory collective consumer redress debate by saying that ‘[w]hether we like it or not, the consumer community is so significant in number and influence that consumers’ concerns infiltrate the public interest in the widest sense’.18 Or in other words: Consumer issues potentially affect all three groups of interest, making this field a model area of multilayer interests. Safeguarding one single interest layer could also benefit the other layers: For example by supporting the enforcement of individual interests, other affected persons as well as the public could profit, and vice versa. Roger Van den Bergh explains this interaction by concluding that ‘both private values and public values are served by consumer laws’.19 Having realized that the field of consumer protection law comprises various forms of interests, one should take a look at two more issues: First, what is the rationale of justice in the context of consumer law and the access to it? Second, how can access to justice be ensured, and what forms of redress mechanisms could be helpful?

Access to justice The term access to justice consists of two parts: access and justice. In its literal meaning, access stands for the chance to reach or accomplish something, whereas justice refers to fairness and reasonableness and embodies the concept that everybody’s rights are safeguarded. In a combined sense it traditionally represents the procedural ideal that everybody regardless of his financial, social or intellectual circumstances should be able to enforce his rights by suitable legal means. 18 See e.g. Safjan et al., ‘Taking the Collective Interest of Consumers Seriously’, 185, or L. Tich´y and J. Balarin, ‘Efficiency of the Protection of Collective Interests: Judicial and Administrative Enforcement in the Czech Republic’ in Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection, p. 223, who argue that ‘consumer interest is the public interest’, putting it into the context of the Directive 98/27/EC of the European Parliament and of the Council of 19 May 1998 on injunctions for the protection of consumers’ interests, OJ 1998 No. L166; or Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress’, 323 who stress that ‘collective actions for the protection of consumers’ collective interests are often considered to pursue matters of public interest’. 19 R. Van den Bergh, ‘Should Consumer Protection Law Be Publicly Enforced? An Economic Perspective on EC Regulation 2006/2004 and Its Implementation in the Consumer Protection Laws of the Member States’ in van Boom and Loos (eds.), Collective Enforcement of Consumer Law, p. 187.

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Although in many countries legal aid guarantees that financially weaker individuals can generally succeed in this endeavour, access to justice in the context of consumer protection has become one of the predominant issues in the current reform debate of consumer law, as it is linked to problems going beyond mere financial incapability to file a lawsuit. Under normal circumstances20 consumers face stronger contractual partners or at least financial, legal or psychological obstacles when problems with consumer products or services arise. Let us first take a look at how the concept of access to justice in the context of consumer protection has evolved at the EU level. Discussions regarding consumers’ access to justice started in the 1970s. In 1975, the Preliminary Programme of the European Economic Community for a Consumer Protection and Information Policy listed five objectives of community policy towards consumers. One of these objectives, the policy to secure ‘adequate facilities for advice, help and redress’,21 was closely linked to the concept of access to justice. It stated that ‘[c]onsumers should receive advice and help in respect of complaints and of injury or damage resulting from purchase or use of defective goods or unsatisfactory services’22 and that ‘[c]onsumers are also [note: to be understood as ‘should also be’] entitled to proper redress for such injury or damage by means of swift, effective and inexpensive procedures’.23 The next major step followed in 1993 with the European Commission’s Green Paper on access of consumers to justice and the settlement of consumer disputes in the single market24 and the 1996 follow-up Action Plan on consumer access to justice and the settlement of consumer disputes in the internal market,25 linking the concept of access to justice to the issue of settling consumer cross-border disputes. With the focus on small claim disputes,26 the 1993 Green Paper highlighted national in-court and out-of-court dispute resolution schemes applicable to consumer disputes 20 See note 39 for exceptions. 21 Preliminary programme of the European Economic Community of 25 April 1975 for a consumer protection and information policy, OJ 1975 No. C092. 22 Preliminary programme of the European Economic Community, p. 8. 23 Preliminary programme of the European Economic Community, p. 8. 24 Green Paper on access of consumers to justice and the settlement of consumer disputes in the single market, 16 November 1993, COM(93) 576 final. 25 Action Plan on consumer access to justice and the settlement of consumer disputes in the internal market, 14 February 1996, COM(96) 13 final. 26 Claims for a sum less than EUR 2,000 are now regulated by Regulation (EC) No 861/2007 of the European Parliament and of the Council of 11 July 2007 establishing a European small claims procedure, OJ 2007 No. L199.

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and concluded that various parallel efforts have to be made to improve consumers’ access to justice. These approaches included, inter alia, injunctive methods in cases of ‘unlawful transfrontier commercial practices’,27 the promotion of the ‘dialogue between consumers and professionals in regard to the settlement of consumer disputes’28 or the ‘creation of a follow-up mechanism of transfrontier complaints’.29 Some of these objectives have led to the introduction of new consumer protection tools at the EU-level such as the 199830 (now 200931 ) Injunctions Directive, the 2004 Regulation on Consumer Protection Cooperation,32 the 2007 Small Claims Regulation33 or the 1999 European Consumer Complaint Form. The first two of these four instruments are considered to be the leading mechanisms specifically drafted for the protection of consumer interests. The long-term goal of these efforts at the EU-level is the strengthening of the Internal Market as reaffirmed in the current debate on collective consumer redress.34 To understand the current debate at the EU-level one also has to understand that the main point of interest shifted with respect to possible tools: in the mid-1990s the EU put its focus on ensuring current and future compliance with legal standards by the introduction of injunctive mechanisms in the field of consumer law. One decade later, however, the debate at the EU-level reached its (so far) last stage: It was believed that consumers needed some kind of more direct protection. It was generally understood that injunctions serve an important role in establishing compliance in 27 Action Plan on consumer access to justice and the settlement of consumer disputes in the internal market, p. 86. 28 Action Plan on consumer access to justice and the settlement of consumer disputes in the internal market, p. 86. 29 Action Plan on consumer access to justice and the settlement of consumer disputes in the internal market, p. 86. 30 Directive 98/27/EC of the European Parliament and of the Council of 19 May 1998 on injunctions for the protection of consumers’ interests, OJ 1998 No. L166. 31 Directive 2009/22/EC of the European Parliament and of the Council of 23 April 2009 on injunctions for the protection of consumers’ interests, OJ 2009 L110, which codifies Directive 98/27/EC without putting forward major substantial changes. 32 Regulation (EC) No 2006/2004 of the European Parliament and of the Council of 27 October 2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws, OJ 2004 No. L364. 33 See note 26. 34 Green Paper on consumer collective redress, recital 2, where it is argued that this goal should be accomplished by increasing the consumers’ confidence in trans-border shopping. For a critical comment on connecting enhancing international litigation with consumers’ confidence in cross-border shopping see e.g. Wagner, ‘Kollektiver Rechtsschutz’, 44–46.

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the future, but this alone would not lead to a balance between consumers and professionals. What is additionally needed is a mechanism to guarantee consumer compensation: The current discussions focus primarily on compensatory damage redress tools. When compared to other areas of law in which the concept of access to justice is used, access to justice in the field of consumer protection law differs mainly in two respects. Usually, access to justice is understood as a tool to help the financially weak pursue their rights: The ones in need get free legal support or are freed from paying the court costs and attorneys’ fees necessary to bring claims or to defend their interests when accused or sued. To be awarded financial aid, people have to prove that they cannot afford a lawyer, which they demonstrate usually by submitting a summary of personal assets. Although this aspect is also important in the field of consumer law, two other factors have to be taken into consideration. First, in the cases of low- and lowest-value claims, access barriers do not only or at least do not predominantly include monetary factors in the aforementioned sense. In such cases it is not so much a question of financial inability, but rather a mix of financial profitability and a psychological threshold that keeps the individual from pursuing his or her rights. In most cases, the expected amount of compensation will not outweigh the time, money and effort to be put into filing low-value claims. The reasons consumers do not file high(er)-value claims are more closely interlinked with financial (i.e. cost) issues. High costs in connection with the predominant loser-pays principle and the uncertain outcome of a possible lawsuit will deter consumers from pursuing their interests. In addition, also in cases of such high- and higher-value claims one can detect non-financial reasons for not going to court: usually it takes a comparatively long time for lawsuits to be decided/settled. Besides, and as the above-mentioned Telekom case shows, the parallel filing of cases can lead to a near standstill of the judiciary, and consumers who have not yet filed an action might choose not to pursue their interests any further. Second and in addition to these peculiarities, there can be further negative consequences in the long run. Less prosecution by individual consumers or groups of consumers means a preservation of the status quo. Professionals have no need to change their attitudes and to improve their goods or services. Thus the public could become subject to qualitatively minor products and a potential non-compliance of businesses with legal standards. Injunctive proceedings as provided for in the Member States

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can lead to certain improvements, but do not solve the problem. Illicit gains might outweigh the consequences of injunctions.35 The deterrent role of present (injunctive) litigation schemes thus becomes negligible. One should also note that access to justice in the field of consumer law is not necessarily accomplished only by enabling individuals to pursue their rights at court, as the concept of access to justice goes one step further: It is not the increased number of court cases which indicates an improved access to justice, but rather a change of behaviour on the side of the professionals to act in compliance with legal standards while simultaneously satisfying the consumers’ demands. Although temporarily the number of cases might increase, in the long run it is rather the deterrent function of the collective redress mechanism which plays an important role. Or as Fabrizio Cafaggi and Hans-Werner Micklitz put it: ‘the best laws are those that ensure a higher level of safety and lower levels of litigation’.36 It is this final target which should be reached by effective access to justice. A useful redress system is of utmost importance to achieve this, and one reason for the ongoing debates. Together with an effective set of substantive law rules it could accomplish this enhanced concept of access to justice.

Redress tools Most legal tools used in the field of consumer protection fall into the category of substantive law, which forms the biggest portion of the consumer acquis;37 only some are of a procedural and/or general 35 For related arguments in the Austrian debate see e.g. the contributions in M. Reiffenstein and B. Pirker-H¨ormann (eds.), Defizite kollektiver Rechtsdurchsetzung (Vienna: Verlag ¨ Osterreich, 2009); for arguments in the German debate see e.g. the contributions in C. Meller-Hannich (ed.), Kollektiver Rechtsschutz im Zivilprozess (Baden-Baden: Nomos Verlagsgesellschaft, 2008). 36 F. Cafaggi and H.-W. Micklitz, ‘Administrative and Judicial Enforcement in Consumer Protection: The Way Forward’ in Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection, p. 443. 37 The EU consumer law acquis is the major legal body of consumer protections rules at the EU level. Under this umbrella one can find the following eight directives: Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises, OJ 1985 No. L372; Council Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours, OJ 1990 No. L158; Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ 1993 No. L95; Directive 94/47/EC of the European Parliament and the Council of 26 October 1994 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase of the right to use immovable properties on a time-share basis,

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nature.38 However, although a sound consumer protection system requires well-conceived and strong (substantive) consumer rights, it should be noted that even the ‘best’ substantive rights cannot benefit the consumer if their enforcement is not reasonable or possible. Reasons for insufficient enforcement can be manifold, reaching from financial obstacles to psychological barriers, from social customs to a lack of knowledge of substantive and procedural rights. These issues all interact with the questions of access to justice and proper enforcement tools. Over the last decades the EU has introduced several tools to strengthen the legal position of consumers, who generally, but not necessarily,39 face a stronger counterpart: professionals. As two underlying ideas have now been outlined (multilayer interests and access to justice), it is time to take a closer look at the third and connecting pillar – the umbrella of redress tools. Initially, the focus was placed on the interests of individual consumers or collective injunctive relief. Recently, however, the focus has shifted towards compensatory collective redress forms. The complexity and diversity of redress tools is remarkable: When taking a closer look at the increasing number of

OJ 1994 No. L280; Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts, OJ 1997 No. L144; Directive 98/6/EC of the European Parliament and of the Council of 16 February 1998 on consumer protection in the indication of the prices of products offered to consumers, OJ 1998 No. L80; Directive 98/27/EC; Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees, OJ 1999 No. L171; for all see Green Paper on the review of the consumer acquis, p. 33; H. Schulte-N¨olke and L. Tich´y (eds.), Perspectives for European Consumer Law: Towards a Directive on Consumer Rights and Beyond (Munich: Sellier European Law Publishers, 2010); H. Schulte-N¨olke et al. (eds.), EC Consumer Law Compendium: The Consumer Acquis and Its Transposition in the Member States (Munich: Sellier European Law Publishers, 2008); Proposal for a Directive of the European Parliament and of the Council on consumer rights, 8 October 2008, COM(2008) 614 final. 38 E.g. Directive 98/27/EC and Directive 2009/22/EC, the European Consumer Complaint Form, Regulation (EC) No 2006/2004 or Regulation (EC) No 861/2007. 39 Just consider the example of an attorney buying – for private use purposes – a TV set at a small, inexperienced start-up shop. In this case the consumer should be considered ‘stronger’ than his professional counterpart when it comes to the question of legal knowledge – for some comments on the standardized classification of ‘consumers’ see e.g. P. B¨ulow and M. Artz, Verbraucherprivatrecht, 2nd ed. (Heidelberg: H¨uthig Jehle Rehm, 2008), p. 20. Although it is legitimate to question whether such a (legally) experienced consumer should be protected in the same way as ‘normal’ consumers, one can doubt whether legal knowledge necessarily changes the imbalance of powers in cases of e.g. stubbornness of professionals when claims are raised by consumers.

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contributions to the current debate one might face problems when it comes to the classification of the existing tools. Unproblematic is the concept of individual litigation, which can be described as a procedural tool by which one individual pursues his or her interests by suing another individual; in the case of active consumer law disputes,40 a consumer sues a professional. Here, although collective and public interests can be touched upon, the claimant will primarily try to assert his or her own individual interests. In most cases this redress form will not be the initial step taken by the respective consumer, but will follow softer approaches, such as direct complaints or negotiation attempts. Only if these approaches are not fruitful might consumers take further action. Negotiations between consumers and professionals are well understood redress forms, but currently other, in many cases more sophisticated forms of compensatory collective consumer redress enter the stage, forms that all embody the two ideas of multilayer interests and access to justice, but all to a different extent. The difficulty with these redress tools is that there is no single set of definitions or classifications. The European discussion inconsistently41 uses terms such as collective actions, group actions, collective redress, class actions, test cases, representative actions, pilot cases or management tools when it comes to litigation; some of these forms are also used for ADR tools in the field of consumer protection. To make the situation even more complicated, in the Member States there are currently many different national supraindividual legal redress tools in use for claiming compensatory consumer damages.42 While the 1998 Injunctions Directive introduced a common procedure for private and/or public bodies to seek a transboundary injunction in cases of infringement of listed collective consumer interests already more than ten years ago, the development in the area of compensatory collective 40 The term active consumer disputes shall refer to disputes in which a consumer proceeds against a professional. The opposite form, a professional suing a consumer would thus be called passive consumer disputes. 41 Hodges, Reform of Class and Representative Actions, p. 3. 42 For a listing of various national collective redress tools summarizing the status of 2008 see e.g. Hodges, Reform of Class and Representative Actions, pp. 10–13, Table 1 (‘National Laws for Collective Consumer Protection’); or Civic Consulting and Oxford Economics, ‘Evaluation of the Effectiveness and Efficiency of Collective Redress Mechanisms in the European Union – Final Report Part I: Main Report’, (2007), p. 111, Table 10 (‘States with CR Mechanisms’); more recent information on the status quo of compensatory collective redress mechanisms in the EU can be found at ec.europa.eu/consumers/redress cons/adr en.htm#MS fiches.

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consumer redress on both levels (the EU-level and the level of most Member States) is of rather recent origin. This is one reason a fragmentation of national rules (still) exists and why the European Commission is currently deliberating various means of how to support consumers in a transboundary context. Without a common understanding of the different national constructs, it is impossible to follow the discussions. Narrower classifications cover cases of collective litigation proceedings and do not include ADR tools. Sometimes the focus is put on the initiators of the proceedings; in other cases the line is drawn with respect to the beneficiaries of the proceedings. Depending on the context, one and the same author may use different classifications. For example, Klaus Viitanen uses different approaches on several occasions to describe and categorize collective redress tools. He distinguishes among three categories placing the emphasis on the type of claimant: between private actions launched by private individuals, organisation actions brought by a (private) organisation such as consumer associations and public actions initiated by public authorities.43 On another occasion he distinguishes between two main categories and concentrates on the procedural position of affected consumers: In non-representative group actions the damaged consumers themselves are parties to the proceedings, whereas in representative group actions there would be an intermediary [note: in the form of a private or public body] acting as claimant.44 Non-representative actions would thus cover private (individual) actions, representative actions those actions which he calls organisation actions and public actions in the first case. One of the most widely used classifications combines these categorizations to distinguish among three main groups of collective redress tools: group actions, representative actions, and test cases.45 Unfortunately, this classification is also used inconsistently, revealing the floating borderlines. It is commonly agreed that the first two of these groups, group actions and representative actions, both comprise multiple claims. Under the pillar of group actions as used in the classification scheme of Civic’s 43 K. Viitanen, ‘Nordic Experience on Group Action for Compensation’ in Casper et al. (eds.), Auf dem Weg zu einer europ¨aischen Sammelklage?, p. 219. 44 K. Viitanen, ‘Finland’, The ANNALS of the American Academy of Political and Social Science, 622 (2009), 209, 210; Hodges, Reform of Class and Representative Actions, p. 2. 45 See e.g. Civic Consulting and Oxford Economics, ‘Evaluation of the Effectiveness and Efficiency of Collective Redress Mechanisms’, 6–7; Cafaggi and Micklitz, ‘Administrative and Judicial Enforcement in Consumer Protection’, 414; or Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress’, 261–262.

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Evaluation Study,46 numerous claims are either grouped together into one single procedure brought by a group of consumers or by a single claimant, who can be a private individual, a private body or a public authority with direct effect for all group members. The separation line to be drawn between group actions and representative actions as used in Civic’s Evaluation Study is to be found in the enforceability of judgments or settlements. In the case of representative actions, it is the representative (acting on behalf of consumers or on his or her own behalf), not the redress-seeking consumer, who can enforce the judicial title, whereas in the case of group actions the group members can enforce their rights separately. The Dutch group settlement model would thus fall under the category of group actions (as used in Civic’s Evaluation Study); the Leuven Study qualifies it rather as a form of representative action.47 For the purpose of this chapter the dividing line should follow the classification model of Civic’s Evaluation Study. The third major group of collective redress tools, test cases, takes a position somewhere in between the first two collective redress mechanisms on the one hand and individual litigation on the other. In cases where there is more than one affected consumer, only a single case is chosen to be brought to court, while the others decide to wait and see what the outcome of the test case will be.48 Major reasons for choosing this approach might be seen in its cost-efficiency or better economy of 46 Civic Consulting and Oxford Economics, ‘Evaluation of the Effectiveness and Efficiency of Collective Redress Mechanisms’, 6–7. 47 Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress’, 261. ` ‘The Reform of Directive 98/27/EC’ in 48 In this sense somehow confusing C. Poncibo, Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection, p. 285 who subsumes the German Kapitalanleger-Musterverfahrensgesetz (KapMuG; Capital Markets Model Case Act to use the terminology of the German Federal Ministry of Justice – see www.bmj.bund.de/files/-/1056/EnglishInfoKapMuG.pdf), under the pillar of test cases. However, one should note that KapMuG cases can also classified as group cases. Although the common feature of the KapMuG and test cases in a narrow sense is that in both cases single claims are decided, the main difference lies in the binding power of the lead cases under the rules of the KapMuG: In contrast to normal test cases, KapMuG ‘test cases’ have full binding power with regard to common factual and legal questions of the lead case and the suspended cases. In order to avoid confusion, one could treat such cases as a special group action tool; definitions such as ‘case-management tools’ are used in this context (see e.g. Civic Consulting and Oxford Economics, ‘Evaluation of the Effectiveness and Efficiency of Collective Redress Mechanisms’, 18, 28). For details on the KapMuG see e.g. F. Reuschle, ‘Das Kapitalanleger-Musterverfahrensgesetz – Eine erste Bestandsaufnahme aus der Sicht der Praxis’ in Casper et al. (eds.), Auf dem Weg zu einer europ¨aischen Sammelklage?, p. 277 or F. Bergmeister, Kapitalanleger-Musterverfahrensgesetz (KapMuG):

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proceedings as pursuing only a single claim comes cheaper than merging all possible claims to file a suit (or multiple suits). The major weakness of test cases lies however in the usually49 missing legal effects in relation to cases that are similar to the test case and that wait for the test case to be decided.50 This is especially problematic in cases where the sued professional is not willing to waive his or her limitation defence regarding parallel cases that are not brought to court. Even if the outcome of the test case could practically ‘persuade’ the losing professional party to come to agreements with consumers in parallel cases, consumers would not have a realistic chance to be compensated if their claims will be barred by statute by the time the test case is decided, as the respective professional would not have to fear any consequences in such cases.51 Some scholars detach certain forms of collective redress from these three categories. U.S.-style class actions, actually falling under the broader concept of group actions, are a popular example of such a special redress tool.52 These class actions are analyzed separately mainly because their distinct features shall be stressed in order to juxtapose them in opposition to the European concept(s) of group action, which try to steer clear of punitive damage actions, civil jury trials, contingency fees, pre-trial discovery or opt-out mechanisms. One more tool which should be mentioned separately is the German skimming-off procedure (Gewinnabsch¨opfung). Despite its shortcomings53 this ‘nice colourful paper tiger’54 – if amended – is considered

49

50

51

52

53 54

Bestandsaufnahme und Reformempfehlung aus der Perspektive von Recht und Praxis der US-amerikanischen Securities Class Action (T¨ubingen: Mohr Siebeck, 2009). For Greece as the exception see e.g. E. Alexandridou and M. Karypidou, ‘Country Report Greece’, (2008), p. 18, available at http://ec.europa.eu/consumers/redress cons/ gr-country-report-final.pdf. Even in cases where there is a ‘factual binding effect’, such a practice will not be of much use in transboundary collective cases in which different national substantive laws are applicable, as the judicial conclusion made in the test case might not be suitable under the substantive law rules of a different country – see also A. Stadler, ‘Die grenz¨uberschreitende Durchsetzbarkeit von Sammelklagen’ in Casper et al. (eds.), Auf dem Weg zu einer europ¨aischen Sammelklage?, p. 155. One way to overcome this problem could be the introduction of a compulsory interruption of the running of time for the purpose of limitation applicable in cases similar to the test cases. Determining whether or not cases are similar could fall under the cognizance of the court in subsequent proceedings. See e.g. Cafaggi and Micklitz, ‘Administrative and Judicial Enforcement in Consumer Protection’, 411, 414; or Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress’, 261. For details see section ‘The Way(s) Forward’. Micklitz, ‘Collective Private Enforcement of Consumer Law: The Key Questions’, 18.

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to be a useful tool in cases of lower- and lowest-value claims.55 The rationale behind the skimming-off procedure is that a private and/or public body sues in cases in which the total amount at stake is high, but individual claims are too small for the affected consumers to make it feasible to pursue. If one follows the debate on consumer collective redress tools at the EU level, one will further notice that in the last few years an increasing number of scholars have tried to find an answer to the question of which is better: ‘private enforcement’ or ‘public enforcement’.56 One should be careful when trying to understand the discussion to define these terms in the context of consumer protection. Most of the related discussion does not deal with questions of private enforcement in the meaning of applying private law rules via litigation versus public enforcement understood as enforcing public law rules through administrative proceedings, an issue which is of increasing interest rather in the field of competition law enforcement.57 When it comes to compensatory consumer relief, the basis for claims can be twofold: To use the language of the two Rome Regulations, claims can either be based on ‘contractual obligations’58 or ‘non-contractual obligations’.59 Both have their roots in private law concepts: private autonomy in the first and ‘tort/delict, unjust enrichment, negotiorum gestio or culpa in contrahendo’60 in the second case. Consequently, traditional consumer redress should use private law mechanisms. In relation to compensatory damage of consumers and their recovery, the main issue is thus rather to be seen in the question of ‘who shall be the claimant – a private body, such as consumer associations, or a public authority?’ In the field of compensatory consumer redress, ‘public enforcement’ should therefore not stand for administrative proceedings in the meaning of continental ¨ 55 A. Stadler, B¨undelung von Interessen im Zivilprozess: Uberlegungen zur Einf¨uhrung von Verbands- und Gruppenklagen im deutschen Recht (Heidelberg: C. F. M¨uller, 2004), pp. 15–17, 29. 56 Representative examples for this debate are Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection or van Boom and Loos (eds.), Collective Enforcement of Consumer Law. 57 See e.g. A. Klauser, ‘“Private Enforcement” von EU-Kartellrecht’, ecolex, 16 (2005), 87, 88 or G. E. Kodek, ‘M¨oglichkeiten zur gesetzlichen Regelung von Massenverfahren im Zivilprozess’, ecolex, 16 (2005), 751, 752. 58 Art. 1 of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations, OJ 2008 No. L177. 59 Art. 1 of Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations, OJ 2007 No. L199. 60 Art. 2(1) of Regulation (EC) No 864/2007.

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European law traditions. It should rather be understood in a way that the plaintiffs do not need to be private parties, but could also be public authorities. When one understands the terms in this way, the main legal difference between private and public enforcement in the area of consumer protection can be seen in the legal nature of the consumer rights protectionists. It should not be forgotten that litigation, individual and collective, is only the last resort in consumer disputes. The Leuven Study exemplifies various means of consumer redress methods by using the dispute resolution continuum model,61 which comprises the major potential redress methods, both on an individual level as well as a collective level. This study as well as comparable subsequent studies62 show there are a number of alternatives to individual and collective court proceedings, with negotiation, mediation and arbitration being the most prominent examples. Although it cannot be denied that these ADR mechanisms have their advantages, it is widely believed that they are not suitable tools for individuals in cases of low- and lowest-value damages, as one of the major obstacles to individual pursuit of actions, spending too much time for getting too little in return, cannot be cleared.63

Green Paper on Collective Consumer Redress The European Commission’s Green Paper on Collective Consumer Redress is an important ‘official’ step in the European discussion of compensatory consumer redress, which can be traced back to two origins, an internal one and an external one. Internally, or in other words coming from within the consumer protection movement, compensatory collective consumer redress issues originated in the early 1990s, when the Euroguichet Network, with the main emphasis on consumer redress information, was launched. In order to enhance the redress procedure itself, the Network for the extra-judicial settlement of consumer disputes (European Extra-Judicial Network or 61 Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress’, 5–9. 62 E.g. Civic Consulting and Oxford Economics, ‘Evaluation of the Effectiveness and Efficiency of Collective Redress Mechanisms’, 6–7; Civic Consulting, ‘Study Regarding the Problems Faced by Consumers in Obtaining Redress for Infringements of Consumer Protection Legislation – Final Report Part I: Main Report’, (2008). 63 E.g. Civic Consulting and Oxford Economics, ‘Evaluation of the Effectiveness and Efficiency of Collective Redress Mechanisms’, 98.

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EEJ-Net) was established in 2001, which focused on cross-border ADR cases. Both finally merged into the European Consumer Centres Network (ECC-Net) in 2005. Under its auspices and in order to strengthen the Internal Market, various discussions were led, which resulted in the creation of the EU Consumer Policy Strategy 2007–2013.64 This Consumer Policy Strategy considered the current situation of collective consumer redress to be one of ‘[t]he obstacles to a fully-fledged retail internal market’65 and stressed that the European Commission ‘will also consider action on collective redress mechanisms for consumers both for infringements of consumer protection rules and for breaches of EU anti-trust rules in line with its 2005 Green Paper on private damages actions’.66 It was in this strategy paper that the internal root was linked to its external counterpart – the debate in the area of EU competition law and its 2005 Green Paper on Damages Actions for Breach of the EC Antitrust Rules,67 which in the meantime has been superseded by the European Commission’s White Paper on Damages Actions for Breach of the EC Antitrust Rules.68 These two developments paved the way for further discussions of what could ultimately result in a major reform of consumer law enforcement at the EU level: the possible introduction of a comprehensive pan-European collective consumer redress mechanism in cases of cross-border compensatory damages. In June 2007 the European Commission convened the ‘brainstorming event on collective [note: consumer] redress’ in Leuven.69 In her opening keynote speech and with reference to the EU Consumer Policy Strategy 2007–2013, the then-European Commissioner for Consumer Protection

64 Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee – EU Consumer Policy strategy 2007–2013 – Empowering consumers, enhancing their welfare, effectively protecting them, 13 March 2007, COM(2007) 99 final. 65 Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, p. 5. 66 Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, p. 11. 67 Green Paper on damages actions for breach of the EC antitrust rules, 19 December 2005, COM(2005) 672 final. 68 White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, COM(2008) 165 final. 69 The selection of Leuven was not a surprise as it had been the Katholieke Universiteit Leuven under the lead of Stuyck who had presented a detailed analysis of collective consumer redress mechanisms earlier that year.

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Meglena Kuneva presented the Commission’s plans to elaborate the current situation and possible changes. A few events70 and studies71 later, DG Sanco presented the Green Paper on Collective Consumer Redress (hereinafter, Green Paper) in late 2008. The Green Paper introduces basically four options aiming at facilitating consumer redress in cases of multiple damages without differentiating between different categories of such damages.72 The four options set forth by DG Sanco range from taking no further action [note: for the time being] (option 1) and improving inter-Member-State cooperation (option 2) to mixing existing tools (option 3) and the introducing of judicial collective redress mechanisms (option 4). The options introduced by the Commission cannot conceal several shortcomings: In addition to not differentiating between different kinds of multiple damages, the options are neither concrete (e.g. option 2 asking for ‘cooperation’ but not discussing procedural prerequisites for doing so) nor thoroughly defined (e.g. option 3 with its melting pot of ADR tools, small claim procedures, the 2004 Consumer Protection Cooperation Regulation, awareness-raising and in-house complaint-handling schemes). Rather than introducing four substantive models the options seem to be a collection of incoherent ideas. Still, and despite the fact that the Green Paper does not explicitly call it the main preference, the long-term aim of the Commission is obvious: By the introduction of judicial compensatory collective consumer redress tools, it is hoped that ‘a procedure would ensure that every consumer throughout the EU would be able to obtain adequate redress in mass cases through representative actions, group actions or test cases’.73 Some stakeholders, especially business representatives, have argued that there is no evidence for a need to improve the situation. According to them there are no obvious signs the status quo tools are insufficient.74 70 ‘Portuguese Presidency Conference on Collective Redress’ (Lisbon, 9 and 10 November 2007); ‘Stakeholder Workshops on Consumer Collective Redress’ (Brussels, 21 and 29 May, 6 June 2008). 71 Civic Consulting and Oxford Economics, ‘Evaluation of the Effectiveness and Efficiency of Collective Redress Mechanisms’ and Civic Consulting, ‘Study Regarding the Problems Faced by Consumers in Obtaining Redress’. 72 In this chapter ‘multiple damages’ shall stand for cases in which more than just one individual is potentially affected. 73 Green Paper on consumer collective redress, recital 48. 74 For a summary of stakeholders’ comments on the Green Paper on Consumer Collective Redress see Consumer Policy Evaluation Consortium, ‘Assessment of the Economic and Social Impact of the Policy Options to Empower Consumers to Obtain Adequate Redress’

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However, from the viewpoint of a sound access to justice as outlined before, this optimistic view is unfortunately not accurate and cannot be upheld. Several Eurobarometer surveys carried out since 2002 have provided data supporting the Commission’s assumption that consumers ask for the introduction of additional tools. Eurobarometer studies related to the ‘views on business-to-consumer cross-border trade’,75 ‘European Union citizens and access to justice’,76 ‘consumer protection in the Internal Market’77 and ‘attitudes towards cross-border sales and consumer protection’78 all reveal some form of consumer distrust in the settlement of consumer disputes. Not only the Eurobarometer surveys, but also pertinent studies carried out over the last few years make clear that there is ample room for improvement in the field of consumer redress.79 This leads to several questions of which two are of special interest: Can the introduction of collective redress mechanisms be of any help, and which form(s) should such tools take? One rather technical, but nevertheless important issue one must not ignore in the ongoing debate is the question of the legal competence of the EU with regard to a possible introduction of compensatory collective consumer redress tools. Unlike EU competition law with its supportive framework of Articles 101 and 102 TFEU (former Articles 81 and 82 TEC), the field of consumer protection law lacks clear legal grounds for extensive rules. Without going too much into detail it can be said that there is no consensus regarding the competence issue. Currently, the predominant position is twofold and follows the examples of recent procedural rules at the EU level: The majority of commentators basically affirm EU competences, mainly based on Articles 81, 114 or 169(2)(b) TFEU (former 65, 95 and 153(3)(b) TEC), but at the same time limit

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(2009); detailed stakeholders’ comments are available at http://ec.europa.eu/consumers/ redress cons/response GP collective redress en.htm. European Opinion Research Group and EOS Gallup Europe, ‘Views on Business-toConsumer Cross-Border Trade, Standard Eurobarometer 57.2 and Flash Eurobarometer 128’ (2002). European Opinion Research Group, ‘European Union Citizens and Access to Justice, Special Eurobarometer 195’ (2004). TNS Opinion and Social, ‘Consumer Protection in the Internal Market, Special Eurobarometer 252’ (2006). The Gallup Organization Hungary, ‘Attitudes towards Cross-Border Sales and Consumer Protection, Flash Eurobarometer 282’ (2010). See for example Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress’; Civic Consulting and Oxford Economics, ‘Evaluation of the Effectiveness and Efficiency of Collective Redress Mechanisms’ or Civic Consulting, ‘Study Regarding the Problems Faced by Consumers in Obtaining Redress’.

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the competences to cross-border cases. This view can be followed, but it also leads to some practical problems including the unequal treatment of international and purely national cases, or problems of demarcation between and determination of such cases. It will be interesting to see how these issues would be solved.

The way(s) forward Although the Green Paper and its follow-up materials have met with a divided response from the involved interest groups, they triggered an important and overdue discussion at the EU level. However, some questions remain, such as: Are any of the four proposed options suitable? Is there anything which is not covered by the materials, but which has to be taken into consideration when discussing compensatory collective consumer redress? Or broadly speaking, what can be done to improve the situation for consumers – and in the long run also for the economy? No matter how one looks at it, effective consumer redress is a centrepiece in this debate, be it for its possible deterrence effect, be it for strengthening consumers’ trust and increasing consumer satisfaction or be it for safeguarding individual claims. Yet, it must not be forgotten that effective consumer redress in the form of individual or collective litigation is only the last resort and not the ultimate goal in the field of consumer protection. Such redress rather functions as a mechanism which should protect consumer interests and at the same time guarantee legal compliance and the willingness of professionals to cooperate without overburdening them. Numerous scholars have rightly pointed out that the Green Paper forgets to differentiate between two big groups of consumer damages reaching beyond mere individual interests. A differentiation could be important in the current debate as the nature of a dispute can have an impact on the solution presented for enhancing consumer protection. The first group comprises low- and lowest-value damages (Bagatellsch¨aden), which – when occurring in multiple cases – are often referred to as ‘scattered damages’ (Streusch¨aden).80 The rationale for not pursuing

80 It is difficult to draw a clear line between those small and smallest amount claims and higher claims; Stadler and Micklitz, for example, set the upper limit of scattered damages at EUR 25 per affected consumer – see Stadler, B¨undelung von Interessen im Zivilprozess, p. 13; in Germany upper limits ranging from EUR 25 to EUR 200 are being discussed – see A. Stadler, ‘Erfahrungen mit den Gewinnabsch¨opfungsanspr¨uchen im

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such individual claims is obvious: Usually the possible gain is not worth the effort, let alone the time to be put into preparing and filing an action. Not many consumers would spend hours on pursuing individual claims amounting only to a couple of Euros each. It is therefore often said that consumers have a rational disinterest (rationales Desinteresse)81 or show a rational apathy (rationale Apathie)82 in pursuing valid low- and lowest-value scattered damage claims. Some of those claims do not even reach a stage beyond initial consumer complaints, leaving the wrongdoers undeterred and enjoying their profits.83 The second group, traditionally simply referred to as ‘mass damages’ (Massensch¨aden), consists of cases in which relatively high(er) amounts are at stake. Taking the EU-wide predominant loser-pays principle and the uncertain outcome of possible court proceedings into consideration, the reluctance of consumers to file an action is understandable, especially in cases in which there is no financial backup in the form of legal insurance, support by companies specialized in third-party litigation financing or legal aid provided by the state. On the other hand, if consumers nevertheless file mass damage actions, parallel proceedings can impair the efficiency of the judicature, as the German Telekom case shows. In cases of mass damages it is therefore not predominantly or not only a question of how to increase the number of court proceedings, but rather a question of how to simplify the procedure. Both groups, scattered damages and mass damages, deserve special attention, but are in many cases, including the Green Paper, unfortunately treated in the same way. Differentiating between these two groups also shows some linkage to the question of whose interests are primarily affected – an issue that eventually might have an impact on choosing the proper redress form. Usually, the higher the individual amounts at stake are, the higher the individual frustration when there is no individual compensation. It makes a difference, if the number of damaged consumers in a case in which the total compensatory damage amounts deutschen Wettbewerbs- und Kartellrecht’ in Reiffenstein and Pirker-H¨ormann (eds.), Defizite kollektiver Rechtsdurchsetzung, p. 107. The threshold certainly varies from one Member State to another, the average household income likely being an important factor. 81 Janssen, ‘Auf dem Weg zu einer europ¨aischen Sammelklage?’, 5. 82 Wagner, ‘Kollektiver Rechtsschutz’, 53; Van den Bergh, ‘Should Consumer Protection Law Be Publicly Enforced?’, 183. 83 For some practical examples from Austria see P. Kolba, ‘“Friedrich M¨uller” und Co – Praxisbeispiele zu Streusch¨aden’ in Reiffenstein and Pirker-H¨ormann (eds.), Defizite kollektiver Rechtsdurchsetzung, p. 13.

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to EUR 1,000,000 is 100 or 100,000. In other words: the subjective, individual interest in recovering EUR 10,000 [note: mass damages] can be assumed to be stronger than in recovering EUR 10 [note: scattered damages]. In the first case individual and collective interests are stronger than in the second case, whereas in the latter case public interests prevail. Still, no one would deny that in such a case of low- and lowest-value scattered damages, individual and collective interests are also involved. However, they might not only, or not predominantly, be of a financial nature, but also have something in common with non-compensatory cases that are usually tackled by the Injunctions Directive: To strengthen consumers’ trust, it is important that similar cases do not happen again or – at least – that professionals are encouraged to comply with legal standards. It is believed that the comprehensive introduction of compensatory collective redress mechanisms could eventually complement the deterrent system founded by injunctive tools, which alone have not been able to lead to a major improvement.84 What is it then that needs to be considered when talking about enhancing consumer satisfaction and improving the enforcement of consumers’ rights? As discussed earlier in this chapter, the ultimate goal of a stronger consumer protection regime should be effective access to justice, not (only) in its rather procedural meaning, but also in its result-oriented substantive meaning: correcting the assumed imbalance of powers between consumers and professionals and achieving legal compliance of professionals. This, however, should not result in a reversion of powers: A considerable number of (mainly European) scholars fear that one-to-one copies of U.S.-style class actions, be it at a national or the EU level, could have some negative effects, not only for consumers, but also for professionals (‘blackmail settlements’85 ). What is needed as a last resort is an effective system of checks and balances that can work as a safety net, but at the same time does not smash the professional-consumer relationship. Consumer redress, be it individual or collective, can take different forms ranging from softer mechanisms, such as direct complaints and negotiations, to harder ones, with the hardest one being litigation. In the past, various studies have assessed the suitability and practicability

84 See Reiffenstein and Pirker-H¨ormann (eds.), Defizite kollektiver Rechtsdurchsetzung for some arguments on national levels. 85 Hodges, Reform of Class and Representative Actions, p. 132; see also R. Van den Bergh and S. Keske, ‘Rechts¨okonomische Aspekte der Sammelklage’ in Casper et al. (eds.), Auf dem Weg zu einer europ¨aischen Sammelklage?, p. 31.

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of potential redress tools with regard to consumer protection. Results have shown that consumers’ reluctance to get involved in (individual) redress proceedings grows as the redress mechanism becomes harder.86 This is especially true in cases in which the individual amounts at stake are comparatively low.87 The problem with softer tools, however, is that they do not necessarily lead to a consumer-satisfactory result. If they did in every single case, there would not be any need for the ongoing discussions. There is thus obviously the need for a safeguarding mechanism in the form of harder collective redress tools, even if it would not be the first, but last practical choice in cases where softer approaches do not lead to a satisfactory result. We can generally distinguish between two approaches when discussing the possible introduction of EU-wide compensatory collective consumer redress mechanisms. One possible way is to take a more harmonized approach by asking the Member States to install the same type of collective plaintiff, that is, either a private body or a public authority, or both (in addition to or instead of groups of individual consumers).88 The other option would be to leave it to the Member States to decide which type of plaintiff they would like to mandate. In this case each Member State can determine which plaintiff form the most appropriate one would be, either based on its own experience or following examples set by others.89

86 The latest pertinent Eurobarometer survey shows that 46.4 percent of consumers refrained from taking further actions after unsuccessful complaints, while only 3.3 percent took the matter to court; see Gallup Organization Hungary, ‘Attitudes towards Cross-Border Sales and Consumer Protection’, 102. 87 See e.g. Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress’, 204 with further references; the reluctance to file low-value claims eventually led to the adoption of Regulation (EC) No 861/2007. 88 This harmonized approach is for example used by Regulation (EC) No 2006/2004 which asks for installing a ‘competent authority’, which can be ‘any public authority established either at national, regional or local level with specific responsibilities to enforce the laws that protect consumers’ interests’ – see Art. 3(c) of Regulation (EC) No 2006/2004. 89 This approach is taken for example by Directive 98/27/EC which gives the Member States the right to decide between public and private plaintiffs; see Art. 3 of Directive 98/27/EC: ‘For the purposes of this Directive, a “qualified entity” means any body or organisation which, being properly constituted according to the law of a Member State, has a legitimate interest in ensuring that the provisions referred to in Article 1 are complied with, in particular: (a) one or more independent public bodies, specifically responsible for protecting the interests referred to in Article 1, in Member States in which such bodies exist and/or (b) organisations whose purpose is to protect the interests referred to in Article 1, in accordance with the criteria laid down by their national law.’.

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One of the arguments against full harmonization is that there is no ‘best’ concept existing at the national level; no model has proven to be flawless or has turned out to be the by far most successful and satisfactory one yet. There are several reasons for this. One is that Member States have introduced compensatory collective redress tools rather recently and no representative evaluation can be made yet. Another reason is to be found in the legal tradition of Member States. A model that works well in one Member State does not necessarily also have to work well in every other Member State. Some Member States have traditionally been focusing on enforcement by private bodies, others on enforcement by public authorities. Some are reconsidering their choices, but neither concept has disappeared from the scene. It is legitimate to ask whether a choice has to be made at the EU level. For the time being, it would be more feasible and promising to leave the choice to the Member States and to ask for periodic national assessment reports. Rather than choosing a single model applicable for all crossborder consumer mass disputes, which might only work in a limited number of Member States, it makes more sense to adapt a flexible system: (in cases where not already available) Member States could be asked to introduce a compensatory collective redress mechanism open for international participation. When making a decision for one (or both) plaintiff forms, Member States should be bound by three decisive factors: procedural effectiveness, competence (to be understood as legal knowledge) and commitment of the plaintiff. Two important questions arise in this context: the issues of the legal structure of the compensatory collective redress mechanism and plaintiff funding. In other words, the first issue is related to the question of which legal model(s) to choose from among the ones already existing at the national level (or whether a totally new system should be introduced). The second issue refers to the question of how collective plaintiffs can financially survive. To begin with the first issue, it is generally agreed that the introduction of collective trans-border consumer redress mechanisms must not lead to abuse. At the same time plaintiffs’ legal knowledge and experience is of the same importance. It can be assumed that specialized bodies, private or alternatively/additionally public bodies, fulfil these requirements the best – either directly as plaintiffs or as advisory bodies. Because of their constant involvement in consumer disputes, such bodies have the potential to develop a strong protective regime. National examples support this

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view, although it must be said that not all Member States have an efficient structure in place (yet).90 Several safeguards could be installed to guarantee effective, non-abusive consumer support: First, the loser-pays principle, which is not uncommonly blamed for holding back consumers from pursuing their interests by litigation,91 has an important anti-abusive character and could lead to a more detailed screening and risk assessment procedure by the respective plaintiff body. In order to avoid unpromising actions, an in-house assessment procedure would eliminate hopeless or invalid cases. Second, national accreditation procedures or seals of quality for potential plaintiff bodies could guarantee that they meet the quality standards necessary for assisting consumers. Third, courts could also play the role of assessors, screening claims that pass the in-house assessments and eliminating unpromising or at least abusive claims in shortened proceedings. One also has to discuss the suitability of collective redress mechanisms. The above-outlined difference in affected layers of interest involved in scattered damages on the one hand and mass damages on the other could ask for and justify a different treatment of scattered damages and mass damages. Especially in the case of scattered damages, it is important to stress that compensatory and deterrence effects are greater the higher the total amount at stake is. This requires that as many individual low- and lowestvalue scattered damage claims as possible be grouped together. However, the practical problem with such claims is that they tend to remain individually unpursued due to the rational disinterest of the affected consumers. Thus, the smaller the individual amounts at stake are, the less effective are opt-in concepts (not only in the form of collective, but also representative actions). Opt-out mechanisms are believed to show better results in such situations.92 Some commentators believe that the introduction of opt-out forms for redress of scattered damages would infringe Article 6 90 Austrian and German consumer associations are considered to be comparatively successful examples, whereas the ‘new’ Member States have only little to no experience with private institutions; for the latter see A. Bakardjieva Engelbrekt, ‘Public and Private Enforcement of Consumer Law in Central and Eastern Europe’ in Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection, pp. 119–123. 91 See e.g. Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress’, 318–319. 92 Stuyck et al., ‘An Analysis and Evaluation of Alternative Means of Consumer Redress’, 290.

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ECHR (European Convention on Human Rights).93 However, the jurisdiction of the European Court of Human Rights does not support this view. Judgments in cases such as Lithgow and Others v. United Kingdom94 or Wendenburg and Others v. Germany95 show that it is not an absolute requirement that every single affected individual be heard before the court. Commentators such as Georg Kodek96 or Astrid Stadler97 share this opinion: On exceptional cases where consumers benefit from combining their individual interests under the umbrella of a bigger claim, forms of opt-out (or even mandatory representation) would be permissible and in line with Article 6 ECHR. Introducing representative (or even group) actions with private bodies and/or public authorities as plaintiffs on the basis of an opt-out mechanism should therefore be worth considering. In combination with the before-mentioned anti-abusive safeguards, effective legal action could be guaranteed. In addition, limiting the standing to sue to private bodies and public authorities and excluding individual or groups of consumers could be helpful to prevent ‘fake group [note: or representative] action[s]’98 when using an opt-out mechanism. A possible alternative, which is based on a similar idea – covering as many scattered damages as possible – is to be found in the German skimming-off procedure. Originating from the field of unfair competition, it allows consumer associations to sue for an aggregate amount of damages. However, in order to be considered as a serious option, several defects of this procedure should be corrected. Two major obstacles to well-functioning skimming-off procedures can be found in the missing incentive for plaintiffs and the requirement of intent on behalf of the defendant. As winnings are passed on to the state, consumer associations have to carry the cost risk without getting anything in return. In addition, 93 Art. 6 ECHR reads: ‘In the determination of his civil rights and obligations [ . . . ], everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law’. 94 Lithgow and Others v. United Kingdom (1986) 8 EHRR 329. 95 Wendenburg and Others v. Germany (2003) Eur.Ct.H.R. 71630/01. 96 G. E. Kodek, ‘Collective Redress in Austria’, The ANNALS of the American Academy of Political and Social Science, 622 (2009), 86, 89. 97 A. Stadler, ‘Group Actions as a Remedy to Enforce Consumer Interests’ in Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection, pp. 317, 325. 98 Willem van Boom and Marco Loos define such actions as claims ‘instigated with insufficient funding or incompetent and inadequate legal representation with the hidden purpose of failing the claim, thus freeing the tortfeasor from otherwise successful individual claims’ – see W. van Boom and M. Loos, ‘Effective Enforcement of Consumer Law in Europe: Private, Public, and Collective Mechanisms’ in van Boom and Loos (eds.), Collective Enforcement of Consumer Law, p. 242.

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negligently caused scattered damages are not covered, as the skimming-off procedure can only be used for intentionally caused damages.99 When it comes to handling mass damage cases, that is cases of higher individual damage, one must consider that the underlying problems are somehow different from scattered damages. As outlined before, one can distinguish between two different kinds of concern: First, and also in the case of mass damages, there can be an individual reluctance to file an action, although the individual interest in being compensated is greater the higher the amount at stake is. One of the main reasons individuals have for not pursuing a high-value claim is, in contrast to scattered damages where a claim would not pay off, the financial risks inherent in the loserpays principle.100 In those European countries in which attorneys’ fees and court costs are regulated by statute, the total costs usually rise together with the value of the matter in dispute.101 However, the cost increase is neither progressive nor proportional, but degressive: the higher the amount at stake, the lower the cost increase. This is one of the reasons the consumers’ individual cost risk in collective redress mechanisms is usually lower than in individual actions.102 Second, and because individuals are (despite the cost risk) more willing to pursue higher-value claims (than lower- and lowest-value claims), parallel actions can severely impair court efficiency; the German Telekom case is a good example. Both concerns show that also in the case of mass damages, there is a need for compensatory collective redress enhancement. There are, however, good reasons for choosing a different redress solution when it comes to mass damages. First, using opt-out tools also in cases of higher- value individual damages could be in contradiction of Article 6 ECHR. Second, rather than focusing on increasing the number of complaining consumers, one should aim at making litigation more efficient. It can be assumed that a well-working 99 See Stadler, ‘Erfahrungen mit den Gewinnabsch¨opfungsanspr¨uchen’, 105–112 for more details. 100 Note: These financial risks exist for every individual case, irrespective of whether it results from low- and lowest-value scattered cases or mass cases, or whether it is any other individual claim. 101 For an international comparison of legal costs of court proceedings see C. Hodges, S. Vogenauer and M. Tulibacka (eds.), The Costs and Funding of Civil Litigation – A Comparative Perspective (Oxford: Hart Publishing, 2010). 102 For a cost example from Germany see Rott, ‘Kollektive Klagen’, 265. Other possible cost savings in the course of collective actions include the joint usability of expert witnesses’ opinions or joint taking of evidence – see A. Stadler, ‘Rechtspolitischer Ausblick zum kollektiven Rechtsschutz’ in Meller-Hannich (ed.), Kollektiver Rechtsschutz im Zivilprozess, p. 114.

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collective mechanism will automatically attract consumers, as – unlike in the case with scattered damages – rational disinterest does not play a key role in the case of mass damages. Because of different national experiences and legal backgrounds, also in the case of compensatory collective mass damage redress it should be left to the Member States to decide which specific type(s) to install. Options range from opt-in collective actions to test cases. Opt-in actions have the big advantage of minimizing the cost risk by grouping similar claims into one proceeding. At the same time, concentrating such claims can ease the administrative burden for courts, as they do not have to decide each and every case from scratch. Opt-in-based collective redress mechanisms are currently the most widely used compensatory collective redress mechanism in Europe and are the basis for some recently implemented or pending national drafts.103 All three big collective plaintiff forms are used throughout Europe: private bodies, public authorities and groups of individuals; however all three are used to a different extent.104 As the risk of the before-mentioned fake actions is lower in the case of opt-in tools, no objections can be raised against actively involving individual or groups of consumers as plaintiffs in mass damage claims. At the borderline between individual and collective actions, enhanced test cases could also be of help in mass damage cases. The underlying rational of test cases is similar to the aforementioned opt-in cases: resembling cases could be decided more easily and at the same time minimize the overall cost risks and avoid an overloading of the judicature. However, although test cases are a popular tool in some Member States, they also show several shortcomings. In addition to the lack of legal effects on parallel cases,105 the issue of prescription for awaiting cases 103 For the case of Italy see e.g. E. Silvestri, ‘Italy’, The ANNALS of the American Academy of Political and Social Science, 622 (2009), 138, 145–146 or G. Origoni and D. Vecchi, ‘Italy’ in I. Dodds-Smith and A. Brown (eds.), Class and Group Actions 2010 (London: Global Legal Group, 2009), p. 97; for Austria see e.g. Kodek, ‘Collective Redress in Austria’, 89–93. 104 Whereas the first two plaintiff models do not substantially differ much from the mechanisms proposed for scattered damages, the third one raises some issues going beyond the purpose of this chapter. On several occasions it has been discussed how to choose the lead plaintiff: Shall the court decide, or shall the first individual’s initiative be decisive? In any event, supervision by either private bodies or public authorities that specialize in mass consumer damages could prove beneficial to an effective pursuit. 105 For the exception of Greece see Alexandridou and Karypidou, ‘Country Report Greece’, 18.

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should be mentioned. Prerequisites need to be created to save claims from becoming time-barred. Statutory suspension of the time limitation period for similar claims could be an option. Some national concepts try to deal with these issues, including the German Capital Markets Model Case Act, which is an attempt to enhance the effectiveness of the judicature in similar cases by connecting opt-in aspects with test case tools. As for the second issue, the issue of funding, some commentators doubt that private bodies could do a proper job because they have only limited financial resources,106 a situation that is also complicated by the loser-pays principle and the inherent financial risk of losing cases. According to this view, this is one of the reasons that only public authorities should be entitled to launch proceedings. The concerns regarding the financial power of private bodies are in some cases justified, but the situation is not as hopeless as it might seem. Different tools could be of help when it comes to the question of funding: In some countries, especially in Germany and Austria, public funding of consumer interest bodies is strong. Both countries have a comparatively well-working private-law-body system in place. Other countries could follow this lead. There are also alternatives to state support: first, (mandatory) legal insurance (e.g. as an accreditation requirement for private bodies) could cover cases of potential losses (and the resulting obligation to bear court costs and attorneys’ fees). Second, and somewhat related, is the support offered by third-party litigation financing companies, which is recently enjoying greater popularity. Third, private bodies could introduce membership fees (if they have not done so already). Fourth, and also worth considering is the partial or full allocation of potential wins to cover (administrative) plaintiffs costs. Whereas the first three options can apply in both cases (scattered as well as mass damages), the fourth option, in order to invalidate Article 6 ECHR concerns, should be limited to low- and lowest-value scattered damage cases in which consumers usually tend not to pursue their individual cases by themselves. This fourth option could be an important funding source for qualified private bodies to pursue scattered damage claims. Representative actions with private bodies or skimming-off tools might be worth considering in this case, as judgments would be directly enforceable by the plaintiff bodies; existing incentive problems (e.g. in the 106 E.g. D. R. Hensler, ‘The Globalization of Class Actions: An Overview’, The ANNALS of the American Academy of Political and Social Science, 622 (2009), 7, 23; Hodges, Reform of Class and Representative Actions, p. 3.

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case of the German skimming-off procedure where the proceeds of any successful claim fall to the state) could be overcome. Affected consumers should however not be deprived of their chance to pursue their individual interests separately by opting-out. In addition to the issues of general legal structure and funding, one must not forget that there are also several other issues which need special attention especially when discussing the possible introduction of crossborder compensatory collective consumer redress. Such questions include language barriers, jurisdiction issues (especially in cases of representative actions) and issues more closely related to the substance of the claims (e.g. fragmentation of limitation periods or minimum versus maximum harmonization of substantive law rules). A delicate issue which needs to be dealt with in the context of transborder collective consumer redress is jurisdiction. Several practical problems may arise in relation to the protective regime of the Brussels I Regulation.107 Articles 15 to 17 of the Brussels I Regulation aim at facilitating consumer litigation by introducing a choice of forum for consumers: In addition to suing in the courts of the Member State in which the professional is located, in several contractual damage cases consumers may also sue in their home country.108 It can be assumed that plaintiffs are more willing to take the short way and launch a proceeding in their home country, especially in cases where the alternative would be to sue in a Member State whose language the consumer seeking damages does not understand. No problem exists where all such consumers live in the same Member State, as all could benefit from the choice of forum in that Member State. The situation does however look different in cases where the consumers reside in different Member States. Even if it were possible to participate in a group proceeding in a third Member State (note: neither the one where the defendant resides nor the consumer’s home

107 Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, OJ 2001 No. L12. 108 Art. 16(1) of Council Regulation (EC) No 44/2001; it should also not be forgotten that non-contractual damage cases do not fall under the special regime of Arts. 15 to 17 of Council Regulation (EC) No 44/2001. Here the consumer’s only alternative is to sue ‘in the courts for the place where the harmful event occurred or may occur’ (Art. 5(3) of Council Regulation (EC) No 44/2001). In the long run and in order to improve the consumers’ access to justice, concentrating all consumer matters regardless of their nature under the umbrella of Arts. 15 to 17 of Council Regulation (EC) No 44/2001 might be worth considering.

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country),109 it remains doubtful whether the advantage of participating in such a proceeding necessarily outweighs the disadvantage of losing the national jurisdiction. One way around this situation could be the introduction of a closer cooperation of designated national plaintiff bodies via an information exchange network, for example by expanding the services of the ECC-Net. In addition, one further shortcoming which should not be underestimated in cases of trans-border conflicts is linked to collective redress tools taken by private or public bodies in favour of consumers. The ECJ has ruled that the consumer-friendly jurisdiction of the Brussels Regime is only applicable in the case where consumers suffering damages bring suit themselves. In the landmark Shearson Lehmann Hutton decision the ECJ denied the plaintiff, a company to which the consumer’s claim was assigned, the advantageous jurisdiction of suing in the plaintiff ’s home country.110 Consequently, in such cases representative bodies cannot sue in the courts of their own jurisdiction, which might lead to a further (at least) psychological advantage for the sued professional. Although in the Shearson Lehmann Hutton case the Advocate General made the general statement that the special consumer jurisdiction can be used ‘only by a consumer in relation to a contract which he himself concluded’,111 the matter should be reconsidered in special circumstances where the reason 109 As for contractual damages, the consumer can either sue in the country where the defendant resides (general rule) or (if the conditions are fulfilled) alternatively in his or her own country; Council Regulation (EC) No 44/2001 does not provide for cases of international active joinders of parties or other forms of multiple plaintiffs – in contrast to cases of passive joinders of parties, which are covered by Art. 6(1) of Council Regulation (EC) No 44/2001; see R. Geimer and R. A. Sch¨utze, Europ¨aisches Zivilverfahrensrecht, 3rd ed. (Munich: Beck, 2010), A 1 – Art. 6 EuGVVO recital 14. However, for an interesting exception recently created by the Amsterdam Court of Appeal in some international cases with regard to the Dutch Wet collectieve afwikkeling massaschade (Act on the Settlement of Mass Claims) see e.g. R. Polak and R. Hermans, ‘International Class Action Settlements in the Netherlands After the Morrison and Ahold Decisions’ in Global Legal Group Ltd (ed.), Class & Group Actions 2011 (London: Global Legal Group, 2010), p. 7 (‘Shell case’; Court of Appeal Amsterdam 29 May 2009, LJN BI5744, JOR 2009, 197) or in this book Benoˆıt Allemeersch’s Chapter 14, ‘Transnational Class Settlements: Lessons from Converium’ on the more recent ‘Converium case’ (Amsterdam Court of Appeal, 12 November 2010, LJN BO3908). 110 Case C-89/91, Shearson Lehmann Hutton Inc. v. TVB Treuhandgesellschaft f¨ur Verm¨ogensverwaltung und Beteiligungen mbH [1993] ECR I-139; Case C-167/00, Verein f¨ur Konsumenteninformation v. Karl Heinz Henkel [2002] ECR I-08111. 111 Opinion of the Advocate-General in Case C-89/91, Shearson Lehmann Hutton Inc. v. TVB Treuhandgesellschaft f¨ur Verm¨ogensverwaltung und Beteiligungen mbH [1993] ECR I-139, at para. 28.

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for bringing an action is enhancing consumers’ access to justice. Similar concerns are raised by Stadler,112 Peter Rott113 and Jonathan Hill.114 There is no persuasive argument against such a move forward. If this cannot be done by the judicature, then the legislator is required to amend the consumer protection regime under the Brussels I Regulation.

Conclusion Enhancing consumers’ access to justice has been an issue of major interest in the EU and its Member States for some decades now. Compensatory collective redress in trans-border cases as one form of better access to justice has, however, become central in this debate comparatively late with the adoption of the Green Paper on Consumer Collective Redress in 2008. The discussions do not only comprise individual and collective interests, but also public interests such as increasing court efficiency or strengthening the Internal Market. Studies show that there is ample scope for improving consumers’ trust in redress. At the same time one has to bear in mind that the national developments in the field of compensatory collective consumer redress are of relatively recent origin. It is only in the last decade that many Member States have revised or introduced collective compensatory consumer redress mechanisms, e.g. Sweden in 2003, the Netherlands in 2005, Finland and Greece in 2007, Denmark in 2008 and Italy in 2009. Some Member States, e.g. Belgium, France and Austria, are currently elaborating new options. Others, especially most of the new Member States, still do not have any compensatory collective consumer redress mechanism in place. Thus, at this moment it is impossible to base the pan-European debate on comprehensive scientific data. Still, it can be noted that the national legislators are quite productive, not least because of the international debate. Although the pan-European discussion is important, one should listen to voices that are recently being raised by several scholars; when discussing a possible introduction of compensatory collective redress tools at the EU level, one should take account of several special features which are an obstacle to a fully harmonized single-tier solution at that level. 112 Stadler, ‘Die grenz¨uberschreitende Durchsetzbarkeit von Sammelklagen’, 158. 113 P. Rott, ‘Cross-Border Collective Damage Actions in the EU’ in Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection, p. 383. 114 J. Hill, Cross-border Consumer Contracts (Oxford University Press, 2008), p. 98.

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First, one should distinguish between different categories of consumer claims with low- and lowest-value scattered damages and highand higher-value mass damages being the two poles. To deal with them successfully, two parallel regimes could be installed; Denmark with its two-tier system is a recent example.115 To bypass the rational disinterest problem of scattered damages, opt-out-based tools or skimming-off mechanisms could be an option. As mass damages are interlinked with other issues, of which court efficiency is one of the most striking, opt-instyle collective actions and modified test case procedures are among the tools that should be considered. Second, several different collective plaintiff forms are currently used; enforcement by private bodies and public authorities can both be found. Some Member States, such as Austria and Germany, rely more strongly on the help of private bodies; others, such as the Nordic countries, favour enforcement by public authorities. Forcing either group to abandon its protective regime cannot be in the consumers’ best interest. It should be left to the Member States to decide which form to use. Third and closely linked to the first two issues are various auxiliary questions, especially related to funding or anti-abusive mechanisms. The issue of funding of private bodies can be approached by various means, including state support, legal insurance, third-party litigation financing companies, membership fees or (in scattered damage cases) allocation of potential winnings to plaintiff bodies. Also anti-abusive tools cover a variety of solution approaches, such as the loser-pays principle forcing the plaintiff to apply a more detailed screening and risk assessment procedure, national accreditation procedures and seals of quality for potential plaintiff bodies or court admission procedures for filed claims. Finally, the possible introduction of a pan-European compensatory collective consumer redress tool would bring up some international questions. One would have to deal with jurisdiction issues (especially in cases of representative actions), language matters, substantive law fragmentation, possible (maximum) harmonization and the consequences of such harmonization for individual consumer interests. Does maximum harmonization of substantive law necessarily lead to a better overall access to

115 Geraint Howells calls the Danish system ‘interesting as it attacks the mischief of the need to provide an incentive to litigate in these classes of cases [note: i.e. low- and lowestvalue scattered cases]’; see G. Howells, ‘Collective Consumer Redress Reform – Will It Be a Paper Tiger?’ in Cafaggi and Micklitz (eds.), New Frontiers of Consumer Protection, p. 337.

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justice, especially for consumers from Member States with comparatively strong consumer protection legislation? In any event, the European Commission should not make a hasty decision. The step taken with the adoption of the Green Paper was the right one, as it also promoted national projects. The current fragmentation of national approaches in the field of compensatory collective consumer redress could eventually turn out to be positive; national regimes act as a kind of proving ground, which in the end would allow for a more detailed and comprehensive effectiveness study. For the time being, the role of the EU should be an encouraging one: Instead of imposing a half-hearted model on the Member States, the discussions should first support national policy- and lawmakers in introducing and/or enhancing national systems. In addition, consumers need to be better informed about their options. Without broad and strong national foundations a pan-European system would not work.

3 Collective actions in a competition law context – reconciling multilayer interests to enhance access to justice? steven van uytsel

Introduction Collective actions contribute to access to justice. This has been explained by referring to their capacity to ‘“provide a real remedy” to those in the community who individually have uneconomically viable claims, but where overall, the total amount at issue was significant’.1 When individuals who share an interest are unified, collective actions will make it easier for them to recover the losses from damage sustained. Bringing together these individuals allows for sharing ‘the huge burden of complicated law suits’, for which various costs may have to be made. These costs will be disproportionate to the damages received by any individual alone, but not to the damages received by the pool of individuals. A similar reasoning has been introduced in the White Paper on Damages Actions for Breach of the EC Antitrust Rules (White Paper),2 a document in which the European Commission has taken the initiative to introduce several forms of collective action, more specifically on representative actions and opt-in collective actions. Besides aiming at strengthening the enforcement of European competition law, the Commission stated that collective actions would make ‘it easier for consumers and firms that have suffered damage from an infringement of competition law to recover their losses from the infringer.’3 1 See R. Mulheron, The Class Action in Common Law Legal Systems: A Comparative Perspective (Oxford: Hart Publishing, 2004), p. 52. 2 White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, COM(2008) 165 final. 3 Green Paper on damages actions for breach of the EC antitrust rules, 19 December 2005, COM(2005) 672 final. Some of the works have already been based on the Green Paper. See e.g. J. Basedow (ed.), Private Enforcement of EC Competition Law (Alphen aan den Rijn:

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The White Paper contains a couple of bold statements. In the objectives part, the White Paper indicates that a change of the enforcement regime should result in providing access to effective redress mechanisms for all victims of infringements of EC competition law in order to fully compensate them for the harm they suffered.4 A few paragraphs down, a similar message is given, although it is couched in slightly more cautious terms. The White Paper addresses, in principle, all categories of victims.5 In doing so, the White Paper clearly is in line with the findings of the Court of Justice in Manfredi that ‘any individual’ who has suffered harm caused by an antitrust infringement must be allowed to claim damages before national courts.6 The White Paper does not, except for mentioning indirect purchasers, specify who the victims of competition law infringements are.7 Without a mapping out of who these victims are, the statement of the European Union remains empty. Rather than some general suggestions as to how to increase private enforcement, the White Paper might have indicated what particular legal changes would have been necessary for each particular category of victim in order to provide better access to justice for all. This chapter is not going to make a comprehensive attempt at this project. Rather, this chapter will review the main types of victims of competition law and analyze to what extent collective actions contribute to providing access to justice for each of these victims. It will be argued in this chapter that access to justice is not easy to achieve. This approach is far from original. Already Mauro Cappelletti and Bryan Garth have indicated that collective actions may remedy the economic disincentives to seek enforcement, as various other barriers may prevent the organization of the aggregation of small interests.8 The

4 5 6

7 8

Kluwer Law International, 2007); G. Cumming, B. Spitz and R. Janal, Civil Procedure Used for Enforcement of EC Competition Law by the English, French and German Civil Courts (Alphen aan den Rijn: Kluwer Law International, 2007). White Paper on damages actions for breach of the EC antitrust rules, para. 1.2. White Paper on damages actions for breach of the EC antitrust rules, para. 1.2. Joined Cases C-295/04 to C-298/04, Manfredi v. Lloyd Adriatico Assicurazioni, [2006] ECR I-6619, at para. 61 (‘any individual can claim compensation for the harm suffered where there is a causal relationship between that harm and an agreement or practice prohibited under Article 81 EC’). White Paper on damages actions for breach of the EC antitrust rules, para. 2.1. See M. Cappelletti and B. Garth, ‘Access to Justice: The Worldwide Movement to Make Rights More Effective – A General Report’ in M. Cappelletti and B. Garth (eds.), Access to Justice – A World Survey (Alphen aan den Rijn: Sijthoff and Noordhoff, 1978), p. 35.

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barriers they describe are linked to procedural impediments, dispersed interests, information asymmetries or simply differences in opinion on the common strategy.9 These authors further point out that a collision of interests may create a free-rider problem, which can exacerbate the organizational problem of collective actions. Individuals may refrain from vindicating their rights if they realize that too many others will benefit from the legal action without taking part in it.10 Yet, this chapter will attempt to add to the research on barriers complicating the effectiveness of collective actions. The existence of multilayer interests, often internally fragmented into differentiated interests that are affected by a competition law infringement, will be identified as possible other barriers. In order to further analyze this rather cryptic statement, several issues need to be clarified. Each person showing an interest in a competition law infringement has to be identified. The existence of multiple stakeholders will require a categorization of their interests in order to conclude whether ‘just’ diffuse interests or different interests exist. The existence of different interests will necessitate an investigation on whether collective actions can overcome these differences. Without such reconciliation, full enhancement of access to justice may not be realized. Of course, making this statement requires an understanding of the concept of access to justice. These issues will be structured as follows in this chapter. The first section will briefly engage with the access to justice debate in order to formulate the understanding of this concept throughout this chapter. Central to this understanding will be harm. Through the concept of harm, the second section will then investigate the stakeholders affected by competition law infringement. Once the stakeholders are identified, the third section will continue to map out how these stakeholders relate to each other. It goes without saying that this mapping out will require a look at the interests that are at stake in case competition law infringement occurs and a determination whether tensions exist among these interests. The fourth section will deal with the major issue of whether collective actions are designed to deal with these tensions. Before concluding, the fifth section will reach some ideas on how the tensions may be more efficiently approached other than with collective actions.

9 Capelletti and Garth, ‘Access to Justice’. 10 Capelletti and Garth, ‘Access to Justice’.

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Access to justice and collective actions The justice concepts envisioned by law enforcement Three principles drive law enforcement: corrective justice, proportional justice and deterrence.11 These principles can also be found in the framework of competition law. Competition law regimes will strive for corrective justice if the focus is being placed on compensating for the harm that has occurred because of competition law infringements.12 Proportional justice can be found in competition law regimes that regard sanctions appropriate for achieving deterrence as contradictory to their notions of adequate punishment.13 Competition law regimes will focus on deterrence if they impose sanctions sufficiently high to make it unprofitable to engage in competition law infringement.14 Roger Van den Bergh and Peter Camesasca point out that these principles may be inconsistent with each other.15 They note, for example, that deterrence may require the imposition of extremely high fines that cannot be borne by the competition law infringer. In such cases, competition law should provide for alternative sanctions, such as imprisonment of the company directors who decided to violate the competition law. This insight may conflict with proportional justice, especially in jurisdictions that perceive jail sentences for company directors as too harsh. Within these jurisdictions only fines may be considered as appropriate sanctions. It is quite possible that these fines will be too low to have any deterrent effect on potential infringers. The various principles can also show tensions.16 Because of the focus on compensation for the harm caused by competition law infringement, corrective justice may be focusing only on the profits generated through infringement and the harm caused to society. The amount that 11 R. Van den Bergh and P. Camesasca, European Competition Law and Economics: A Comparative Perspective, 2nd ed. (London: Sweet and Maxwell, 2006), p. 311; Deterrence and corrective justice are also mentioned by several other authors: S. E. Keske, Group Litigation in European Competition Law: A Law and Economics Perspective (Antwerp: Intersentia, 2010), p. 58; P. Lewisch, ‘Enforcement of Antitrust Law: The Way from Criminal Individual Punishment to Semi-Penal Sanctions in Austria’ in K. J. Cseres, M. P. Schinkel and F. O. W. Vogelaar (eds.), Criminalization of Competition Law Enforcement: Economic and Legal Implications for the EU Member States (Cheltenham: Edward Elgar, 2006), p. 291. 12 See Van den Bergh and Camesasca, European Competition Law, p. 311. 13 See Van den Bergh and Camesasca, European Competition Law, p. 311. 14 See Van den Bergh and Camesasca, European Competition Law, p. 311. 15 See Van den Bergh and Camesasca, European Competition Law, p. 311. 16 See Van den Bergh and Camesasca, European Competition Law, p. 311.

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corrective justice envisages is likely to be lower than the amount necessary for achieving deterrence. Deterrence also requires taking the probability of detection into consideration. Only a high probability of detection will bring the amount of the sanction for deterrence into the neighbourhood of the amount that is sufficient for corrective justice. Low detection probability, to the contrary, will require a sanction in an amount much higher than what corrective justice envisages. Inconsistencies and tensions among the principles underlying law enforcement require policy makers to make choices. Policy makers have to express to what extent the non-economic principles of proportional and corrective justice trade off with the principle of deterrence.17 The decisions taken will have an impact on different elements, such as the type of sanction, the severity of the sanction and the resources to be spent on enforcement. Proportional justice will have, among others, a downward effect on the severity of the sanctions and a limitative effect on the range of sanctions among which the policy makers will choose or bring in qualitative criteria to distinguish the sanctions on the basis of the seriousness of the infringement. The principle of corrective justice will refocus the sanctions on the harm the infringement has caused. In doing so, corrective justice links with the debate on access to justice.

Access to justice as redress for harm The claim that corrective justice intersects with the debate on access to justice implies a settled content for the latter. However, according to David Trubek, this is problematic.18 He contends that access to justice has unsettled content. This assertion is based on Trubek’s perception that access to justice has grown within a particular cultural framework. Two implications follow this perception. Challenges to that cultural framework will render obsolete at least a part of the ‘original rhetorical power’19 of access to justice. The absence of that cultural framework would imply that access to justice automatically would have a different rhetoric from the start. It may even be that there is no need to introduce the rhetoric of access to justice.20 Presuming that this perception is correct, any general 17 See Van den Bergh and Camesasca, European Competition Law, p. 311. 18 See D. M. Trubek, ‘Critical Moments in Access to Justice Theory: The Quest for the Empowered Self’ in A. C. Hutchinson (ed.), Access to Civil Justice (Toronto: Carswell, 1990), pp. 106–111. 19 Trubek, ‘Critical Moments’, 106. 20 See Trubek, ‘Critical Moments’, 107–109.

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discussion on access to justice is impossible. At the end, what has been access to justice in one particular cultural framework may not be suitable for another cultural framework. Having drawn this picture, Trubek claims that access to justice made sense in the United States where ‘liberal legalism’ had been the prominent legal culture for decades. The result of this legal culture was that each person was seen as an empowered self, meaning that a person is a ‘fully constituted unit that is capable of choice’. Within this context, law was not meant to contribute to the formation of the empowered self, but to prevent others, the state included, from jeopardizing the actions of the empowered self. ‘Rights’, so says Trubek, ‘do this’.21 Rights create an entitlement, a sphere in which a person can act autonomously. Others should not interfere in this autonomous sphere. One’s autonomous sphere is sufficiently protected against interferences by giving one a right to defend oneself. The attribution of a right is perceived as a guarantee for the empowerment of the self. No affirmative action from the state is deemed necessary to further guarantee the empowerment.22 Even though Trubek sees access to justice as a way to redeem legal liberalism in the United States, the debates on access to justice have extended far beyond this. ‘After all’, as Trubek himself stipulates, ‘[the one] who did the most to stimulate theoretical work on access to justice’23 was a European scholar. Indeed, Cappelletti, one of Europe’s leading proceduralists, engaged in a research project called the Florence Access-toJustice Project.24 In doing so, he laid many of the theoretical foundations of the access-to-justice debate. Cappelletti’s starting point for this debate is that persons are bestowed with rights and obligations.25 Where one person has a right, someone else will have an obligation. If this someone else does not respect his obligations, the person may see his rights infringed on. In order to enjoy his rights, the person will want to make use of the system that has been developed to protect his rights. Making use of the legal system can be difficult or even impossible. Legal, economic, social or psychological obstacles

21 Trubek, ‘Critical Moments’, 112. 22 Trubek, ‘Critical Moments’, 112; A similar remark is being made by Cappelletti and Garth, ‘General Report’, 7–8. 23 Trubek, ‘Critical Moments’, 111. 24 Cappelletti and Garth, ‘General Report’. 25 See Cappelletti and Garth, ‘General Report’, 7.

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may prevent the individual from seeking respect for his right.26 Several efforts have been undertaken to overcome these impediments to accessing justice. No matter the phase of the access to justice movement, the aim seems to be identical. Instruments or institutions should be created to address the difficulties of persons who seek redress for harm. This is also the thrust in more recent literature discussing, for example, access to justice and class actions.27 Rachael Mulheron even indicates that access to justice has often been preferred above the concept of judicial economy.28 If we transfer this reasoning to the field of competition law, it would imply that persons suffering harm from a competition law infringement should be able to address this issue in court.

Harm in a competition law context Harm determined by the protective scope of competition law Giorgio Monti stipulates that an action for damages based on competition law is an action resulting from a breach of a statutory duty.29 He points out that therefore the protective scope of the competition law has to be scrutinized. Unlike Mark-Oliver Mackenrodt, who agrees that it is important for the private enforcement of competition law that the harm incurred by persons be linked to competition law infringement and so with the much disputed goals of competition law,30 Monti links the 26 Cappelletti and Garth, ‘General Report’, 8 (describing that the right to access has been described by these scholars as one of the most important new individual and social rights because the possession of rights is meaningless without mechanisms for their effective vindication. Access to justice, they further claim, is the most basic human right, as this will guarantee the rights that we all have.). 27 See e.g. Mulheron, Class Action, pp. 52–57; B. Murphy and C. Cameron, ‘Access to Justice and the Evolution of Class Action Litigation in Australia’, Melbourne University Law Review, 30 (2006), 399, 402. For further discussion, see in this book S. Wrbka, S. Van Uytsel and M. M. Siems’s Chapter 1, ‘Access to Justice and Collective Actions: Florence and Beyond’, the section The Role of Collective Actions in the Context of Multilayer Interests. 28 See Mulheron, Class Action, p. 57. One should note that the access-to-justice debate seems not to offer any compelling criteria to address one way or another. If access to the judicial institutions is an aim as such, even inefficient proceedings would be welcomed, as long as they address the problems of persons who suffer harm. 29 See G. Monti, EC Competition Law (Oxford University Press, 2007), p. 425. 30 See M.-O. Mackenrodt, ‘Private Incentives, Optimal Deterrence and Damage Claims for Abuses of Dominant Positions – The Interaction between the Economic Review of the Prohibition of Abuses of Dominant Positions and Private Enforcement’ in M.-O. Mackenrodt, B. Conde Gallego, and S. Enchelmaier (eds.), Abuse of Dominant Position: New Interpretation, New Enforcement Mechanisms? (Berlin: Springer, 2008), p. 168.

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protective scope to the purposes of private enforcement of law. In doing so, he creates circular reasoning that brings him back to his protective scope. Monti offers two different possible ways of doing this by looking at the dual function of private litigation. This dual function is the protection of the plaintiff and the deterrence of further anticompetitive behaviour.31 He further specifies that the former requires the exploration of which classes of persons are protected by competition law, whereas the latter demands an investigation into which private claim results in the prevention of further anticompetitive behaviour.32 The classes of persons identified by Monti on the basis of his research of European competition law are the consumers and the competitors.33 The consumers are legitimate private litigants because they will face ‘increased prices and reduced diversity of supply’,34 which Monti classifies as consumer welfare. Competitors legitimize their role as private litigants because competition law protects them from exclusionary practices, be it from a dominant firm or as a result of vertical agreements. It is further stipulated that in exclusionary cases the competitors are better placed to protect the less affected, those being consumers and potential entrants.35 As consumers and competitors are the only two classes of persons that are within his protective scope of competition law, Monti notes that the European Court of Justice purports that ‘any individual can claim compensation for the harm suffered where there is a causal relationship between the harm and an agreement of practice under Article [101 TFEU]’.36 At the same time, he adds that the ECJ’s stance is an ‘unreasonably wide basis upon which to ground liability’.37 Opening up private litigation towards ‘any individual’ will, according to Monti, open floodgates. Even employees of the companies that are victims of boycotts will be able to start proceedings against the companies that organize the boycotts.38 31 32 33 34 35 36

See Monti, EC Competition Law, p. 425. See Monti, EC Competition Law, p. 425. See Monti, EC Competition Law, pp. 425–426. Monti, EC Competition Law, p. 425. See Monti, EC Competition Law, p. 426. Joined Cases C-295/04 to C-298/04, Manfredi v. Lloyd Adriatico Assicurazioni, [2006] ECR I-6619, at para. 61; See Monti, EC Competition Law, p. 426. 37 See Monti, EC Competition Law, p. 426. 38 See Monti, EC Competition Law, p. 426.

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The explanation following the example of the employees does in no way entail a rejection of the possibility of having other persons as legitimate private enforcers. Indeed, Monti recognizes that, besides consumers and competitors, distributors could also be private enforcers in the framework of vertical agreements.39 However, he notes that this would only be possible when the respective competition law aims at protecting the weaker party within an anticompetitive agreement. Hence, besides consumer welfare, competition law should also be concerned with safeguarding economic freedom.40 Deterrence, as the other function of private litigation, requires that any person who has suffered harm due to competition law infringement should be able to bring an action against the infringers. An important limitation is that the lawsuit needs to directly or indirectly have an impact on the infringers, and that is to deter them.41 In this respect, the earliermentioned employees could be effective private enforcers of competition law. An employee may be able to deter cartel members that are boycotting her employer’s firm by suing for the injury the latter has sustained.42 Yet, Monti objects to a broadening of the legitimate private plaintiffs via the deterrence function of private enforcement. Several reasons are given to justify the rejections,43 of which the protective scope of the competition law is one of the most persuasive. The protective scope is indirectly referred to by stating that vertical distribution agreements aim to protect the competitor44 and that these agreements are in general among the least harmful.45 Monti’s conclusion is important in different ways. Relevant to mention here is that it reveals that whatever method is taken, the identification of legitimate private enforcers is determined by the protective scope of 39 40 41 42 43

See Monti, EC Competition Law, p. 427. See Monti, EC Competition Law, p. 428. See Monti, EC Competition Law, p. 428. See Monti, EC Competition Law p. 429. Monti builds up his counter-arguments by referring to the Courage case. Based on this case, he concludes that there was a lack of deterrence, because the defendant was in permanent contact with the enforcement authorities to prevent an infringement. The secretive nature of competition law infringing agreements that has been invoked as a reason to justify as many enforcers as possible does not apply to the case discussed. These reasons are case specific and may be different in other cases. A further reason that is given relates to the possibility of suing the distributor. 44 See Monti, EC Competition Law, pp. 429–430. 45 See Monti, EC Competition Law, p. 430.

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competition law. The protective scope of competition law then should determine who can be harmed by an infringement. In order to answer the question of what the protective scope is, a return to Mackenrodt’s starting point may be preferable. The protective scope depends on the reasons for which a competition law has been adopted. As Mackenrodt indicates, there is a ‘lively debate on the various goals’.46 However, he does not pay much more attention to these goals, except for stating that the individual harm may correlate with the competition law harm.47 It is only the latter that should be protected by the competition law and thus eventually give rise to a private complaint. Such a vague statement may be missing the point. There has indeed been a lot discussed and written about the goals of competition law, yet a generally accepted agreement on these goals has not been reached. Monti describes this continued ‘battle for the soul of antitrust’48 as a battle that has been fought vigorously in academic journals but also in the courts. In some leading Supreme Court cases the clashes between plaintiff and defendant have often included eminent economists and law professors representing either side depending on their views of the purposes of competition law. The controversies have been no less poignant in Europe: one author who observed the workings of the European Commission reported that ‘fighting over competition policy was . . . endemic’.49

Enquiring into the reasons competition law should be adopted is like entering a snake pit. Nothing has been more controversial in the past couple of decades than trying to define what competition law stands for. By looking at the competition laws in various countries, Monti takes the safe approach by arguing that competition law is the product not only of legislative texts and judicial decisions, but also of the political and economical factors that have given direction to the competition policy at a given time.50 Robert Bork preceded this opinion when he opined that ‘[a]ntitrust policy cannot be made rational until we are able to give a firm answer to one question: What is the point of the law – what are its goals? Everything 46 47 48 49 50

See Mackenrodt, ‘Private Incentives’, 169. See Mackenrodt, ‘Private Incentives’, 169. E. M. Fox, ‘The Battle for the Soul of Antitrust’, California Law Review, 75 (1987), 917. Monti, EC Competition Law, p. 2. See Monti, EC Competition Law, pp. 3–5.

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else follows from the answer we give’.51 Whereas Monti had multiple goals in mind,52 Bork had only one: consumer welfare.53 Bork may be correct if the discussion is on what competition law ought to be. A person attempting to understand competition law as it is, however, will side with Monti’s conclusion. Indeed, as has been written by Monti: [I]t is impossible to identify the ‘soul’ of competition law; the most that can be done is to show that there are different, equally legitimate opinions as to what competition law should achieve. Moreover, within each country, the purposes of competition law can change over time, even without an amendment to the legislative texts. This is possible because of the opentextured nature of most antitrust legislation, which allows for considerable variety in interpretation.54

The divergent views on what constitutes the content of competition law has its impact on what a competition law infringement is and thus indirectly on the harm caused by such infringement. This implies that the legitimate enforcers can vary with changes in the protective scope. Inherent to this reasoning is that several stakeholders can be harmed by competition law infringement.

The stakeholders in competition law infringements Consumers are often identified as the core stakeholder in competition law. Eugene Buttigieg writes, in his preface to the book Competition Law: Safeguarding Consumer Interests, that ‘[i]t is a common assumption that competition law by maintaining competitive markets automatically maximizes consumer welfare and consumer satisfaction’.55 Further in his book, he emphasizes that the ‘one objective . . . that should never be lost sight of nor diminish in prominence and that should be common to all national and regional systems so as possibly to serve as the cornerstone of a future global competition law is that of consumer welfare’.56 51 R. H. Bork, The Antitrust Paradox: A Policy at War with Itself (New York: The Free Press, 1978), p. 50. 52 See Monti, EC Competition Law, pp. 3–4. 53 See Bork, The Antitrust Paradox, p. 48. 54 Monti, EC Competition Law, p. 3. 55 E. Buttigieg, Competition Law: Safeguarding the Consumer Interest: A Comparative Analysis of US Antitrust Law and EC Competition Law (Alphen aan den Rijn: Kluwer Law International, 2009), preface. 56 Buttigieg, Competition Law, p. 1.

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The strong emphasis on the consumer is also found elsewhere. John Vickers claims that ‘[c]ompetition is increasingly being recognised as a core consumer issue . . . [C]ompetition policy and consumer interests should, and indeed, must be seen as inextricably linked and interdependent.’57 Bork, in his quest for an answer to what should guide competition law, framed his responses in terms of consumer welfare.58 Due to the strong emphasis on the consumer in recent literature, and especially in law and economics literature, it is safe to presume that consumers are important stakeholders in competition law infringement. It is indeed in their interest that competition law should strive for lower prices, better quality or a broader product range. Terry Calvani indicates that the consumer may be the person who is directly paying the overcharge to the infringer.59 In this case, the consumer will be the direct purchaser. The direct purchaser will cease to be a consumer and switch to being a customer when there is a whole distribution chain between the purchaser and the final consumer. Each purchaser subsequent to the direct purchaser will be called an indirect purchaser, regardless of whether the product underwent any change or not. Whether all will be negatively impacted by competition law will depend on the direct purchaser’s price setting. The direct purchaser can, wholly or partially, pass on the overcharge.60 The consumers or customers affected by competition law infringement are not necessarily the ones who directly buy from the infringers. It may well be that they turn to the products of the competitors of the infringers. These competitors may have raised the price of their products as a response to the increase of the general price level in the market. This non-cooperative response will bring higher profit margins to the competitors but affect the consumers or customers negatively. These affected 57 J. Vickers, ‘Healthy Competition and Its Consumers Wins’, Consumer Policy Review, 12 (2002), 142. 58 See Bork, The Antitrust Paradox, p. 50. 59 T. Calvani, ‘Cartel Penalties and Damages in Ireland: Criminalization and the Case for Custodial Sentences’ in Cseres, Schinkel and Vogelaar (eds.), Criminalization of Competition Law Enforcement, p. 277. The categorization that Calvani makes is between unidentifiable victims (injury due to misallocation of resources), primary victims (those who did not buy at the anticompetitive price), secondary victims (those who bought at the anticompetitive price) and tertiary victims (others, such as suppliers or employees). This categorization has been adopted by Roger Van den Bergh and Peter Camesasca. See Van den Bergh and Camesasca, European Competition Law, p. 321. 60 Mackenrodt, ‘Private Incentives’, 174.

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consumers and customers are categorized as umbrella customers.61 This terminology also indicates that the purchasers from the competitors are not necessarily the final consumers. Unlike the umbrella customers, who still participate in the market process, some consumers or customers may opt to abstain from buying the product. The supra-competitive prices made these consumers forgo the benefits they could have received from products they actually value. In the words of Mackenrodt, these customers ‘are deprived of the utility which they would have derived from using the product’.62 The welfare loss created is called the deadweight loss. Hence, the naming of this category of stakeholders is deadweight loss customers.63 Despite their central position, consumers or customers are certainly not the only ones suffering harm. Depending on the form that the competition law infringement takes, other persons may be affected as well. Boycotts, whether organized in a horizontal agreement, a vertical agreement or as a unilateral conduct, may inflict harm on competitors. So will predatory pricing strategies, tying or other exclusionary practices. The harm will usually present itself as a loss of market share.64 A worsened position in the market has a great potential to negatively affect the stakeholders in a particular competitor. Less demand means less production, because of which suppliers see their demand decreased.65 A large number of employees may become redundant if less has to be produced. Employees in the sales force or the research and development divisions could also be affected as there will be less revenue.66 Reports of a decline of the market share will most likely also affect the price of the shares, and thus affect the shareholders.67 Less revenue may also jeopardize the ability to pay back creditors.68 The above-mentioned stakeholders in a competition law infringement may seem to be far-fetched, but this is not the case. A glance at the private enforcement practice, be it mainly U.S. practice, indicates that many of 61 62 63 64 65 66 67 68

See Mackenrodt, ‘Private Incentives’, 181. Mackenrodt, ‘Private Incentives’, 182. Mackenrodt, ‘Private Incentives’, 182. See D. A. Crane, The Institutional Structure of Antitrust Enforcement (Oxford University Press, 2011), p. 171. See Crane, The Institutional Structure, p. 171. See Crane, The Institutional Structure, p. 171. See Crane, The Institutional Structure, p. 171. See Crane, The Institutional Structure, p. 171.

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these stakeholders, if not all, have made attempts to act as enforcers of the competition laws in their respective jurisdiction. However, this is not to say that all of these actions were successful.69

Relationships among the stakeholders Multilayer interests among the stakeholders A consumer who paid too much for a product subject to cartelization has an individual interest in compensation. If the product is a so-called repeat good, the consumer’s individual interest will also extend to termination of the illegal activity. However, that good will likely not have been bought by only one individual; other consumers may have joined in the purchase of the overpriced product. This will bring these individual interests together into a collectivity of identical individual interests. Hence, another layer of interests, namely collective interests, can be identified. As we have described above, not all the individual interests are alike. The distinction between direct and indirect purchasers has shown that a customer excessively charged for a product will not necessarily bear the consequences. He may pass the overcharge to his customers, partially or wholly. The partial passing on of the overcharge will create an interest in the competition law infringement in proportion to what he has not passed on. This proportion may not be identical to the one that he has passed on. These potential differences will prevent the coming into existence of a collectivity of identical individual interests among the direct purchaser and the indirect purchasers. The full passing on of the overcharge will make the monetary interest in the competition law infringement obsolete. However, the price setting of the direct purchaser will be affected by passing on the overcharge, because the total sales volume of the direct purchaser may be negatively impaired. Indirectly, an interest in the competition law infringement exists, but its nature is different than the one of the indirect purchasers. In addition, in this case direct purchasers and indirect purchasers will not share identical individual interests. Furthermore, even within the group of direct purchasers, differences may exist. Some may have passed on the overcharge, others may have done so partially or still others may have borne the overcharge themselves. Even 69 W. H. Page, Proving Antitrust Damages: Legal and Economic Issues (Chicago: American Bar Association, 1996), p. 25.

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though each of the direct purchasers may have an interest, it is highly likely that none of the individual interests are identical. Hence, a collectivity of individual interests will be hard to establish. For similar reasons this collectivity will also be difficult for the group of indirect purchasers. Some of them will not have paid anything. Others will have paid proportionally more than some of the other indirect purchasers. The interest umbrella customers have in competition law infringement is again of a different nature. These customers shift to products of competing enterprises. Not all umbrella customers will buy products from the same competitor, which means the individual interests among them will be differentiated. These already internally differentiated interests will also not be identical to the interests of direct or indirect purchasers. Indeed, the umbrella customers will not have bought directly or indirectly from the infringer. Therefore, a collectivity of identical individual interests among umbrella customers or between these customers and direct or indirect purchasers will be difficult to establish. Deadweight loss customers show some differences with the abovementioned customers. Because they abstain from buying, this category automatically has an interest collective to all of them. However, the interest that these customers have, either individually or collectively, does not correspond to any of the interests described above. All customers described above have made a purchase, whereas this group of customers has forgone the enjoyment of the benefits of the product. This is yet another example of how this category of customers cannot form a collectivity of identical individual interests with other customers. Collective interests are difficult to establish, especially when the interests involved are from different stakeholders. Nevertheless, despite the absence of collective interests, all the stakeholders may have a common interest. The common interest underlying most of the stakeholders is the receipt of compensation for the harm done to them. Because of the differences in the compensation, it should be clear that the common interest will not necessarily lead to a collective interest. It follows that individual and common interests can exist next to each other. Preceding and, eventually, coexisting with the individual, collective and common interests are the benefits for all stakeholders, and in fact for society, of the non-occurrence of competition law infringement. In society, there is a general interest that markets function correctly. This interest is here referred to as public interest. This interest exists even before a competition law infringement occurs, thus distinguishing it from the previously mentioned interests. Even when a competition law infringement occurs,

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there is a public interest that this infringement disappears. The fact that new interests arise does not mean that the public interest diminishes. Further, the actual or potential pursuit of the individual interests may contribute to the achievement of the public interest. On the other hand, pursuing the public interest may also lessen the need for recovery and thus the pursuit of individual interests.

Tensions among the multilayer interests Common to the individual and collective interests in competition law infringement is the factor of compensation. What prevents individual interests from becoming a collective interest in the competition law infringement is the damage sustained. Indeed, the amount of damage may differ among the stakeholders. This can be explained by a differentiated passing on of the overcharge from the direct purchasers to the indirect purchasers. Another reason may be that some customers divert their purchases to different competitors and buy substitutes. Still another reason may be that some customers completely abstain from purchasing the product. The tension among the individual interests is one that may ultimately prevent the establishment of an overarching collective interest of all the stakeholders involved in a competition law infringement. Nevertheless, the same category of stakeholders may be able to organize as a collectivity. However, tension at the individual level will also exist at the collective level. Each of these collective interests will exist next to each other. The only way to group the individual and collective levels of interests is in their pursuit of compensation. Hence, the only way to alleviate the tension among the individual and collective interests is a mechanism that can facilitate obtaining compensation. Regardless of the tension that exists among the individual interests, a more important tension is unfolding among the multilayer interests. Whereas the individual, collective and common interests all focus on compensation for the harm, the public interests aims at preventing the competition law infringement from occurring. This dichotomy seems to be a duplication of the one existing between the principles of law enforcement. Hence, the tensions and inconsistencies existing between compensatory justice and deterrence may be transposed to the friction between the multilayer interests. Whether to advance compensatory justice (the individual, collective and common interests) – or deterrence (the public interests) has been

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described as a political choice. There seems to be a consensus in the literature that deterrence can best be served through public enforcement because of superior investigation powers, more appropriate sanctions or a better understanding of the content of competition law. However, private enforcement may serve both deterrence and compensatory justice. For deterrence, there is a need for legal mechanisms that incentivize private parties to invest in legal actions. Compensatory justice requires much more. Not only is there a need for incentives to revert to court, all victims need to find their way to court. The question is whether collective actions can bridge this gap.

Collective actions in a competition law context Various collective actions have been devised and employed in the competition law context. The joinder procedure, also referred to as joint actions, bundles (either on a voluntary basis or by an order of the court) lawsuits filed by individuals against the same defendant.70 Essential for the bundling is that the suit be directed against the same defendant and the facts to be decided are common to all individual claims.71 At the basis of a joinder procedure lie individual claims. These individual claims remain intact even after they are bundled. Hence, each individual plaintiff remains master over her part of the claim. Each plaintiff can decide her ‘legal representative, settle with the defendant or withdraw the claim’.72 However, once the claims are bundled, the plaintiffs can coordinate their efforts and decide to be represented by the same lawyer or association.73 A variant of the joinder procedure is the test case.74 In this process that still starts from many individually filed suits, one is selected to provide guidelines for the multitude of similar or equivalent cases. It is therefore necessary that the case selected has issues in common to all individual claims decided on.75 It is a two-party litigation, but the interests of the whole group are involved. In many jurisdictions, these cases lack a formal legal basis: They rest on an agreement between the defendant and the group of respective plaintiffs. The question is thus to what extent the case 70 71 72 73 74 75

See Keske, Group Litigation, p. 40. See Keske, Group Litigation, p. 40. Keske, Group Litigation, p. 40. See Keske, Group Litigation, p. 40. See Keske, Group Litigation, p. 41. See Keske, Group Litigation, p. 41.

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outcome should bind the other courts. It will rather often be a ground for the parties to settle the case outside the court.76 Whereas in the joinder procedure and the test case, the individual victims are the main actors and initiators of the different suits, this task of initiating a suit can also be given to an association, such as a consumer association or a trade association.77 In these representative actions, the associations are endowed with selected rights to act on behalf of a group. Hence, the individual victims are not part of the action. The absence of the individual victims from the actions has meant that the actions brought by an association are usually linked with injunctions or ceaseand-desist orders. Even if the individual victims are not part of the action, the application for an injunction or a cease-and-desist order will benefit all the natural and legal persons harmed by the illegal activity. Without further individual actions, the illegal activity will cease.78 A representative action aiming at compensation for damages brings more questions than answers. Therefore, several scholars have opined that legislators should be extremely careful in introducing this kind of collective action.79 These actions should be limited to cases where there is no other action being brought by any natural or legal person. But even in such a case, an effective public enforcement authority may still render the need for representative actions redundant. Rather than asking for damages, associations could try to deprive violators of the unlawfully gained profit, the so-called skimming off actions.80 The main objective would no longer be compensation, but deterrence and prevention. Unlike the representative action where the victims are not part of the action, a class action, sometimes called a group action, has been instigated to bring persons together who may have a claim for damages against the same defendant.81 The class action is supposed to set the parameters of the claim to determine which of these persons will have to be notified of 76 See Keske, Group Litigation, p. 41. 77 See Keske, Group Litigation, pp. 41–42. 78 A. Stadler, ‘Collective Action as an Efficient Means for the Enforcement of European Competition Law’ in Basedow (ed.), Private Enforcement of EC Competition Law, p. 204. 79 See Stadler, ‘Collective Action,’ 205; F. Garcia Cachafeiro, ‘The Role of Consumer Associations in the Enforcement of Article 82 EC’ in Mackenrodt, Conde Gallego and Enchelmaier (eds.), Abuse of Dominant Position, pp. 199–203 (using representative actions for damages involve several issues to be settled regarding the amount of damages, the distribution of damages awarded and the participation of the individual victims). 80 Stadler, ‘Collective Action’, 206–209. 81 See Stadler, ‘Collective Action’, 209.

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the suit and thus have a choice to opt for being a member of the class suit or not. The outcome of the action will then be binding for all the persons who have chosen to be bound.82

Reconciling tensions through collective actions Alleviating tension through joinder procedures or test cases The tension that exists among the individual interests of the stakeholders in competition law infringement is that these interests are not identical. This difference can also be transposed to the collective interests, if they can be established. Nevertheless, all these different stakeholders, on the individual or collective level, have an interest in obtaining compensation. Hence, several actions may be brought against a competition law infringer. The occurrence of several actions against the same defendant may trigger the application of a joinder procedure or a test case. Both collective actions presuppose that the persons affected by the infringement have already taken actions against the infringer. The case has already been filed in court. This procedure does not in itself provide any aid in overcoming possible obstacles in taking a case to court. The positive aspect related to these forms of collective actions is that they may reduce the costs of evidence and thus make it economically more attractive to sue. The joinder procedure will lead to a single judgment. Nevertheless, the joinder procedure is a complex mass litigation for the court. Each of the claims needs to be treated separately, and the awards must be made individually. In this sense, the joinder procedure can transcend the tension among the individual and collective interests. The joinder procedure or a test case serves the individual interests and collective interests of the various stakeholders through the common interest of obtaining compensation. This form of collective action does not care about whether differences exist among the interests as long as they originate from the same infringement. The joinder procedure will also not help the administration of the court. A test case may reduce the administrative burden of the court; it shifts the burden to the parties involved as on the basis of the outcome of the test case they will have to contract on how to settle their damages. 82 See Mulheron, Class Action, p. 322.

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Representative actions’ influence on tension among individual interests Representative actions are characterized by the fact that the claimant himself is not the one who has suffered harm. The claimant is a consumer association that has been bestowed with the right to bring an action in court or report to the enforcement authorities. Traditionally, these representative actions aimed at stopping illegal behaviour or having fines imposed. All stakeholders mentioned above will benefit from such an action.83 The situation is more complicated if these representative actions seek damages. This purpose of representative actions requires a very careful drafting of the legislation regarding what happens with the individual claims if an association brings an action, which association should have standing and who will be the beneficiaries of any damages awarded.84 Only the last issue is of importance, as the first issue only deals with stakeholders that need to have standing from the beginning, and the second issue relates to whether the association needs to have been recognized by the government prior to the infringement. The compensation issue obviously relates to the composition of the represented group, especially when the compensation needs to be distributed among the victims represented in the claim. Unlike in class actions (which will be discussed below), the compositions of the represented group is not determined by any of the opt-in or opt-out models.85 Hence the claimant is going to have to identify all potential stakeholders that sustained harm from the illegal conduct. The literature seems to be unified on the fact that these stakeholders have to link directly with a competition law infringement, and therefore only discusses the identification of the consumers.86 This seems to be further confirmed by the fact that the victims called on may have to provide evidence of the damages they suffered. Shareholders, employees 83 See Keske, Group Litigation, pp. 41–42. 84 See Garcia Cachafeiro, ‘The Role of Consumer Associations’, 193. 85 See Garcia Cachafeiro, ‘The Role of Consumer Associations’, 196 (the different models address the composition of the group: opt-out and opt-in systems. The opt-out model implies that the relevant stakeholder accepts the claim unless he responds negatively to the notice that has been sent to him. A failure to act means that the relevant stakeholder is included. Opt-in, to the contrary, requires the relevant stakeholder to manifest her intention to join the association’s claim. The absence of these models explains why individual actions are still possible even though a claim is being made by an association). 86 See Stadler, ‘Collective Action’, 205; Garcia Cachafeiro, ‘The Role of Consumer Associations’, 200–201.

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and suppliers may have difficulty in proving the cause of their damage to be the competition law infringement. The limitation of the represented group to consumers is not necessarily negative. Many of the consumers mentioned have no standing in many jurisdictions. Therefore, this form of collective action may indirectly provide them access to justice. Fernando Garcia Cachafeiro indicated that it has become much easier than before to share purchasing information over a long period of time.87 He stated that the ‘identification of victims has improved nowadays as a result of the use of modern technologies. Most undertakings have electronic data bases that preserve information about clients for long periods of time. Moreover, the advent of the Internet permits the information contained in databases located in disperse geographical areas to be shared.’88 No matter how good the databases have become, there will always be a class of consumers that is left out. This will be the customers that decide, due to the higher prices, not to purchase the product. None of the existing databases will contain information on potential purchasers.89 Another problem with this collective action is that not all customers are necessarily being treated as equal. This will be the case where the claimant can only identify some of the customers but is still able to get full compensation from the infringer. Hence, the customers that are being paid take advantage of the customers that did not answer the claim because of their lack of knowledge of the claim.90 All stakeholders will nevertheless indirectly enjoy the result of the payment of full compensation, even though it is only being distributed to some of the customers, as this compensation will most likely deter future wrongdoing.91 A similar result will be reached if damages are collected by the association and for whatsoever reason are not distributed. Scholars point out that other benefits can be enjoyed if the fund can be used in the interest of the victims. Of course, this will require some form of control. Another solution offered, benefiting the whole society and thus all stakeholders in the antitrust infringement as well, is that the compensation is transferred to a public agency.92 87 88 89 90 91 92

See Garcia Cachafeiro, ‘The Role of Consumer Associations’, 200. Garcia Cachafeiro, ‘The Role of Consumer Associations’, 200. See Garcia Cachafeiro, ‘The Role of Consumer Associations’, 200–201. See Garcia Cachafeiro, ‘The Role of Consumer Associations’, 203. See Garcia Cachafeiro, ‘The Role of Consumer Associations’, 201–203. See Garcia Cachafeiro, ‘The Role of Consumer Associations’, 203.

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A tension too big for class actions An important element of the class action is the composition of the class itself. This composition occurs in two stages. At first, the class has to be defined. Once the class has been defined, the victims of the infringement have either to express their desire to be part of the class or indicate that they do not want to be part of it. The former is known as the opt-in model, whereas the latter is referred to as the opt-out model. Depending on the model chosen, as Mulheron points out, it will be possible to identify the precise number and identity of the class members of the action at the moment of the commencement of the action.93 The actual definition of the class starts with the finding of a commonality among the claims of individual plaintiffs. It has been indicated that the common issue will most likely not be a problem in cases focusing on an overcharge resulting from a cartel. It will be much more difficult to find a common issue if the claim for damages is based on lost profits. In these circumstances, the damages can differ substantially. Various market circumstances may be affecting the loss of profits, or it may even be the plaintiff’s own behaviour. The commonality will be the basis for the further definition of the class. There is a discussion in the literature on whether the class needs to be defined in an objective or a subjective way.94 The objective definition of the class would usually aim at identifying all persons who have been dealing with the defendant. This approach allows for determining who has a potential claim without having to look for who is eventually going to succeed in his claim. The merits of the case have no role to play in this approach towards the definition of the class. Very often, the objective definition will end up with an overinclusion of people. Persons who have not suffered any harm may be included in these classes if they have, for example, dealt with the defendant. It has therefore been suggested, and also been put into practice in some jurisdictions, that the objective definition should be supplemented with subjective elements. These subjective elements can restrict the class to those who have suffered loss or incorporate a sense of causal link between the infringement and the harm.95 Yet, this often requires a determination of the merits before a class can be ascertained, shifting this purely

93 See Mulheron, Class Action, p. 322. 94 See Mulheron, Class Action, pp. 323–333. 95 See Mulheron, Class Action, p. 335.

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procedural matter into a substantive law matter. The composition of the class will be of utmost importance in determining whether this kind of collective action can contribute to access to justice for the stakeholders that have been identified above. In order of importance, the commonality and the actual definition of the class need to be discussed. For the formation of the class action, there is a need for a common issue in law or in fact. The loss of profits may be what could bind plaintiffs together. Among the stakeholders that may sustain a loss of profits can be the competitor, the supplier, the shareholder and the employee. However, as has been indicated above, each of their losses may have a different dimension. The time aspect may be different. Different market forces may have been at play. The loss may even be attributable to the putative plaintiff herself. Besides these restraints, a class action demands the presence of more than one person who shares this commonality. This may be a problem in particular for the competitor and the supplier. The dichotomy about the appropriate definition of the class does not have as such a meaning for assessing the access to justice for any of the stakeholders. The objective definition may, at first, seem to be more beneficial than the subjective one. However, as has been indicated in the literature, the objective definition may lead to an over-inclusive class. The class may be comprised of persons with and without harm or with and without causation related to the infringement. What happens in practice is that many of these class proceedings fail to receive certification. The subjective class definition may overcome the difficulty in obtaining certification, and the subjective criteria may prevent an over-inclusive class from being formed. These subjective criteria do not in any way have to mean that there is a preliminary hearing on the merits of the case to establish the class. Mulheron indicates that ‘the framing of a class definition which includes subjective elements is not considered to give rise to any preliminary requirements assessment by the court simply by virtue of the fact that class members may be defined by reference to loss and damage, reliance, or other subjective characteristics’.96 Direct purchasers with only small economic incentive to bring individual actions will find an ideal instrument in the collective action. These customers can aggregate their claims into a single action. However, when establishing their action, these customers need to be aware that they should take their respective country’s rules and practices regarding the

96 Mulheron, Class Action, p. 332.

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definition of the class into consideration to avoid situations where their class will not be certified. The importance that the class definition has on the certification of a class of direct purchasers will definitely also extend to indirect purchasers. Indeed, the jurisdictions that have allowed indirect purchaser class actions seem to struggle with certification, a process in which an assessment is made regarding the ability of the legal system to deal with the case. Hence, in order to be successful, a class of indirect purchasers must be composed so that it can pass the certification test. However, according to William Page, this is nearly impossible. He points out that ‘only a small subset of all indirect purchasers of fixed products would satisfy the requirements for class certification’.97 On an individual level, indirect purchasers face difficulties in finding access to justice because many jurisdictions prevent these customers from filing lawsuits. In other words, they are not granted standing. Yet even though indirect purchasers lack standing on an individual basis, in several jurisdictions indirect purchasers have brought class actions, be it on a different jurisdictional level within that jurisdiction. This shows that granting standing is often a political choice. In the abstract, deadweight loss can be estimated in the aggregate.98 Hence, the class action may be a suitable instrument for this stakeholder. However, there are several elements that should be taken into consideration and which may turn the class action into an unworkable instrument for the deadweight loss customers. Whereas a class is usually made of people who have bought the product that was subject to a price increase, the deadweight loss customers are comprised of the persons who decided not to purchase the product. Anonymity will be one of the reasons that will make it complicated for these customers to compose a class. Another reason links with the common issue question. Both elements contribute to the composition of the class.99 In searching for a common issue, Christopher Leslie points out, the deadweight loss purchasers have many difficulties.100 Not all deadweight loss customers will have suffered the same kind of damages. There will 97 W. H. Page, ‘The Limits of State Indirect Purchaser Suits: Class Certification in the Shadow of Illinois Brick’, Antitrust Law Journal, 67 (1999), 1, 5. 98 See C. R. Leslie, ‘Antitrust Damages and Deadweight Loss’, Antitrust Bulletin, 51 (2006), 521, 527. 99 See Leslie, ‘Antitrust Damages and Deadweight Loss’, 558–559. 100 See Leslie, ‘Antitrust Damages and Deadweight Loss’, 559.

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be deadweight loss customers that have not bought the product as they have been unwilling to pay a heightened price. Others may have bought a substitute. Still others may have turned to the second-hand market. It may also be that some simply did not find the product. Further, the class will be hard to limit and thus difficult to define. It is important that the class definition aims at identifying these customers and not attracting persons who see the possible awarding of damages as profitable.101 Umbrella customers may face similar problems as the deadweight loss customers in forming a class. Not all umbrella customers will have bought the products from the same competitor. Some of them may have paid more; others may not have incurred any price increase. Among the customers that have incurred a price increase, there will be customers who paid more because of the economic circumstances of their suppliers. The class has thus to be defined so as to bar any of the umbrella customers that have not incurred any harm due to the competition law infringement.

The tension between individual interests and the public interest Compensatory justice and the impediment of legal standing Harm has been indicated as one factor used to determine who could be a legitimate private enforcer of competition law. From a competition law point of view, it has been concluded that only the harm that is protected by the competition law should legitimize persons to bring suit. Because of the extensive debates on what the protective scope of competition law is – decades of discussions have not brought any end to the debate102 – it may vary from jurisdiction to jurisdiction as to who could be seen as a legitimate private enforcer. Therefore, the various stakeholders that can have an interest in competition law infringement have been identified. Whether or not these stakeholders are identified as legitimate private enforcers, procedural rules further impose requirements on them in order to sue in court. This implies that when a person does not fulfil these requirements, but is nevertheless suffering a kind of harm, that person will not be entitled to sue for damages.103 Hence, a distinction needs to be 101 See Leslie, ‘Antitrust Damages and Deadweight Loss’, 559. 102 See e.g. Monti, EC Competition Law, pp. 1–6. 103 See Mackenrodt, ‘Private Incentives’, 169; Stadler, ‘Collective Action’, 198–199.

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made between the ‘actual adverse effect of an antitrust infringement’104 and ‘the plaintiff’s right to sue in court’.105 The right to sue in court, commonly referred to as standing, is largely debated as it ‘involves a policy question on who should be allowed to act as an effective private antitrust enforcer’.106 Several factors are taken into account in the decision on whether an injured person has standing. For granting standing, the directness of the harm, the potential for duplicative recovery and the existence of more direct plaintiffs are among the factors that are to be considered.107 To put it into the words of Mackenrodt, ‘[g]ranting standing involves a trade-off between the costs that are caused by proceedings which might eventually not be successful on the one hand, and the prospect that the proceedings will actually lead to a compensation of the plaintiff and thereby contribute to the private enforcement of the competition laws on the other hand’.108

The stakeholders and legal standing Competitors Competitors have been qualified as legitimate enforcers of competition law. As has been indicated by Monti, competition law may protect competitors.109 They may face harm in the sense of being excluded from the competitive process, which is the ultimate goal competition law seeks to protect. Jurisdictions, in general, do not deny competitors the right to pursue their interests in the harm caused by competition law infringement.110 In principle, the jurisdictions will only grant access to the courts if the damage suffered correlates with an infringement. In other words, the cause of the damage needs be abusive conduct rather than the result of healthy but aggressive competition. In the latter case, a competitor may also sustain damage in the form of lost market share, but these damages would not be compensable. 104 105 106 107

Mackenrodt, ‘Private Incentives’, 169. Mackenrodt, ‘Private Incentives’, 169. Mackenrodt, ‘Private Incentives’, 169. The factors of standing have been categorized in different tests. See C. A. Jones, Private Enforcement of Antitrust Law in the EU, UK and USA (Oxford University Press, 1999), pp. 160–172 (mentioning the direct injury test, the target area test, the zone of interests test, the factual matrix test and the multifactor test). 108 Mackenrodt, ‘Private Incentives’, 169–170. 109 Monti, EC Competition Law, p. 426. 110 See e.g. Mackenrodt, ‘Private Incentives’, 169; Stadler, ‘Collective Action’, 200.

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Any action following harm can only be motivated by a loss of market share and not by a ‘public harm’ underlying competition law. Hence, even though competitors are granted standing, their incentive to use competition law is driven by personal harm rather than by harm to the competitive process.111 This may eventually lead to a risk of overdeterrence.112

Direct purchasers The customers who buy their products directly from the defendant who has engaged in competition law infringement are commonly referred to as direct purchasers. Direct purchasers have legal standing in most jurisdictions.113 The policy behind allowing the direct purchaser standing is simple: Direct purchasers are customers directly dealing with the defendant and are thus either paying supra-competitive prices, receiving a reduction in choice or experiencing lesser quality of products. In other words, they see their wealth transferred to the producer. This wealth transfer, which usually equals the overcharge, gives the direct purchaser a strong incentive to act as a private enforcer.114 The incentive to serve as a private enforcer will depend on whether the direct purchaser keeps all the damages for herself.115 This may be questioned in cases in which the direct purchaser was not the final customer. The direct purchaser may have sold the product to others, either directly or incorporated in her own products. In selling these products, the whole overcharge or a part of the overcharge may have been passed on to her customers. If the defendant is allowed to invoke this passing on of the overcharge as a defence, the direct purchaser will only be able to recoup a part of the overcharge.116 The opposite will be true if the passing-on defence cannot be invoked.

111 See Monti, EC Competition Law, pp. 430–431. 112 Over-deterrence may occur when competitors are present as private plaintiffs. As these private plaintiffs are driven by the prospect of collecting damages, they may engage in costly litigation if they perceive harm. It is ultimately the court that decides whether the harm is the result of a competition law infringement, but all these unfolding claims exert a deterrent effect on the market participants (litigation risk, risk of reputational damage and risk of litigation cost). See Mackenrodt, ‘Private Incentives’, 185. 113 See Mackenrodt, ‘Private Incentives’, 172. 114 See Mackenrodt, ‘Private Incentives’, 172. 115 See Mackenrodt, ‘Private Incentives’, 173. 116 See Mackenrodt, ‘Private Incentives’, 173.

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Indirect purchasers The distribution chain does not usually stop at the level of direct purchasers. Wholesalers, retailers and, eventually, consumers may have bought the product from a direct purchaser. The direct purchasers may therefore not have negatively reacted to the limitation of their choice, or as it may occur in other cases, to the price increase of their suppliers. Hence, the real harm occurs not at the level of the direct purchasers, but at that of the indirect purchasers. The wealth transfer has been passed down the supply chain. The indirect purchasers have not always had access to the courts, even if they are the ones that have been harmed by the competition law infringement.117 The denial of standing may be justified by several reasons. It is incredibly cumbersome to calculate the part of the infringement that the direct purchaser has passed on to the indirect purchaser.118 This will be further complicated depending on the length of the supply chain. The longer the supply chain is, the greater the chance that the part each indirect customer plays may be relatively small, so that even when these customers are given the option to bring a suit, they will take no action against the infringer.119 Besides, giving standing to indirect purchasers may create the possibility of duplicative recovery.120 It is also said that indirect purchasers do not add to deterrence. The issue with indirect purchasers is that this class of customers does not increase the size of the damages claim. Rather, allowing these customers standing brings in the problem of apportionment. In other words, it has to be established how the damage award will be divided.121 Umbrella customers Another group of customers affected may be the umbrella customers. These customers do not suffer from competition law infringement directly. However, they may be paying a higher price to the competitors of the infringer(s).122 The monopolistic price setting will induce persons to look for alternatives. These alternatives may be found with manufacturers of similar products. The increased demand for products and the already 117 118 119 120 121 122

See Jones, Private Enforcement, pp. 177–180 and 193–198. See Mackenrodt, ‘Private Incentives’, 174. See Mackenrodt, ‘Private Incentives’, 174. See Mackenrodt, ‘Private Incentives’, 174. See Mackenrodt, ‘Private Incentives’, 174. See J. M. Lave, ‘Umbrella Standing: The Tradeoff between Plaintiff Suit and Speculative Claims’, Antitrust Bulletin, 48 (2003), 223, 224, n. 2.

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higher price of the competitors may result in a non-cooperative response by the market. This means that the competitors of the infringers notice an increase in price and demand in the market, which incentivizes them to raise their prices as well in order to earn higher profits.123 This class of customers is often perceived as unsuitable private enforcers.124 The problem the umbrella customers face is establishing a proximate causal link between the infringement and the damage. It will be difficult for these customers to indicate that the price increase of the competitors is substantially caused by the infringement of the defendants and not by any other economic circumstances.125 Another difficulty these customers have is that they cannot recover damages from their direct sellers. These sellers have indeed not cooperated in the anticompetitive behaviour or behaved abusively.

Deadweight loss customers Whereas the umbrella customers still purchase products, be it from the competitor of the infringer, the deadweight loss customers completely abstain from buying products. These customers are potential direct customers, but due to the supra-competitive prices, they decide not to buy anything. In the words of Mackenrodt, these customers ‘are deprived of the utility which they would have derived from using the product’.126 The welfare loss created is called the deadweight loss, and this should be avoided. Deadweight loss has been recognized as a problem caused by monopolization and cartelization. However, the deadweight losses are not present in any of the competition laws. Leslie notes that ‘the plaintiff has no burden to prove such harm in any given case: the presence of deadweight loss is not an element of liability. It is generally not explicitly discussed in the case law. More importantly, deadweight loss plays no meaningful role in antitrust damages.’127 Shortly summarized, deadweight loss customers are usually denied standing. The reason that courts have not been keen on actions based on deadweight loss, and hence claims brought by non-purchasers, has been the focus of the damages calculation on the overcharge. Damages have been

123 124 125 126 127

See Mackenrodt, ‘Private Incentives’, 181. See Mackenrodt, ‘Private Incentives’, 181. See Lave, ‘Umbrella Standing’, 234. Mackenrodt, ‘Private Incentives’, 182. Leslie, ‘Antitrust Damages’, 527.

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calculated on the basis of the difference between what the customers actually paid and what they would have paid without any infringement.128 This exclusive reliance on the overcharge makes it difficult to prove and qualify the damages sustained by deadweight loss customers.129

Creditors, shareholders, employees and suppliers The stakeholders discussed above are directly related to competition law infringement. When legal persons are affected by this infringement, the stakeholders in the legal person, such as creditors, shareholders, employees and suppliers, may sustain harm as well. Indirectly, these stakeholders are affected if the market is not operating according to the normal principles of competition law. These stakeholders will usually be denied standing because of their remote relationship to the infringer.130 Collective actions and compensatory justice Among the collective actions discussed, the joinder procedure offers the least added value in terms of access to justice for the stakeholders in a competition law infringement. Indeed, each stakeholder needs to have individual access to the court in order to apply this form of collective action. This will be problematic for indirect purchasers in many jurisdiction, umbrella and deadweight loss customers, shareholders, suppliers and employees. Only competitors and direct purchasers will be able to fully enjoy the positive elements for this type of collective actions, such as sharing the costs for evidence. Representative actions that focus on compensation for the harm sustained will face several problems, such as the identification of the injured parties and their harm. However, the increased availability of documentation regarding sales facilitates identification. Direct purchasers and indirect purchasers will benefit the most. Deadweight loss customers have the problem that because no data exists on them, they are not able to be compensated. The umbrella customers, the shareholders, the suppliers and the employees most likely face the problem that they cannot prove that the harm to them is directly caused by competition law infringement. Again, the effect on the amelioration of access to justice is extremely limited. 128 See Leslie, ‘Antitrust Damages’, 527. 129 See Mackenrodt, ‘Private Incentives’, 182. 130 See Page, Proving Antitrust Damages, pp. 23–25; Mackenrodt, ‘Private Incentives’, 186.

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In addition the class action offers few improvements related to access to justice for many of the stakeholders in a competition law infringement. Competitors will usually be excluded because their claims can be finalized on an individual basis. Indirect purchasers may have the possibility of taking part in a class action. However, their claims are seldom successful as they are not able to get their class certified. The difficulties that many of the stakeholders of a competition law infringement face on the individual level extend to the level of collective actions. Only the competitors, the direct purchasers and, to a lesser extent, the indirect purchasers have any benefit in terms of access to justice by the creation of collective actions.

What about deterrence? The concept of legal standing prevents collective actions from being effective in providing a more extended access to justice. Because of this concept, individuals sustaining damage may not be regarded as legal victims. The opposite side of the coin is that legal victims able to claim damages are not always the ones who have actual damage. In this way, collective actions cannot function as a conciliatory mechanism between the differentiated individual interests. This does not, however, make the collective actions redundant in reconciling the multilayer interests. Collective actions aim at overcoming the burden of scattered and lowvalue damages. By aggregating the claims, it is hoped that more individuals would take up their chance to seek redress for the harm they sustained. An argument can be made that such an increase in enforcement activity will contribute to the deterrent effect of competition law. Indeed, even though it is accepted that public enforcement is better placed to achieve deterrence,131 private enforcement can supplement this public enforcement.132 This will be especially true in cases where the public enforcement authorities are not able to deal with all attention-worthy cases and where private parties have a better access to information.133 131 See e.g. Van den Bergh and Camesasca, European Competition Law, pp. 330–331; W. P. J. Wils, Principles of European Antitrust Enforcement (Oxford: Hart Publishing, 2006), pp. 118–122. 132 A. P. Komninos, EC Private Antitrust Enforcement: Decentralised Application of EC Competition Law by National Courts (Oxford: Hart Publishing, 2008), p. 9, n. 36; Contra: W. P. J. Wils, Efficiency and Justice in European Antitrust Enforcement (Oxford: Hart Publishing, 2008), p. 188; Wils, Principles, pp. 122–123. 133 Van den Bergh and Camesasca, European Competition Law, p. 332.

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Deterrence thus requires a system that increases the possibility of being caught and the threat of even higher sanctions. Hence, the conceptualization of the collective actions has to be focused on those categories of stakeholders that will most likely proceed with a claim in court, and the claim has to be substantive. According to the research of Daniel Crane, it is not only important that the stakeholders will most likely proceed, but also that the proceedings in court are swiftly dealt with. Any delay in the court proceedings, or the possibility thereof, will have an impact on the decision making in a firm.134 ‘The time lag should be paired with the fact that the managers who put into place anticompetitive schemes are increasingly unlikely to be around to internalize their effects at judgment day’135 is the conclusion Crane draws. The stakeholders most likely to act are those who will sustain damage due to a competition law infringement. Only for these stakeholders will the private interest run parallel to the public interest. Nevertheless, not all of these stakeholders will be able to bring a proceeding in court. Some, such as the umbrella customers, the employees, the suppliers, the creditors and, in some jurisdictions, the indirect purchasers, are not regarded as appropriate enforcers. These stakeholders are denied legal standing due to their ‘remote relationship to the infringer which leads to high procedural complexities and makes it difficult to prove the infringement and to quantify the damage’.136 Other stakeholders, such as the deadweight loss customers, are difficult to identify.137 A similar problem will exist for the damage that stakeholders have incurred due to the decrease in innovation, as the products have never reached the market.138 Competitors and direct purchasers remain as the stakeholders with the main power of exercising deterrence. An often- heard remark regarding competitors is that they are even able to institute proceedings when they have incurred damages in the form of lost market share that are not really attributable to a competition law infringement. Even though unfounded damage claims are rejected by the courts if they cannot find an infringement, the fact that market participants ‘face a higher risk of being drawn into costly litigation’139 often causes the competitor as private enforcer to lead to over-deterrence.140 134 135 136 137 138 139 140

See Crane, The Institutional Structure, pp. 175–182. Crane, The Institutional Structure, p. 177. Mackenrodt, ‘Private Incentives’, 188. See Mackenrodt, ‘Private Incentives’, 188. See Crane, The Institutional Structure, pp. 172–175. Mackenrodt, ‘Private Incentives’, 185. Mackenrodt, ‘Private Incentives’, 185.

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Whether the direct purchaser can exert deterrence depends on whether there is a possibility to raise the passing-on defence. A passing-on defence will substantially reduce the amount of money the direct purchaser can obtain from litigating a competition law infringement. When the direct purchaser knows that the costs of expensive litigation are not able to be recouped, he will refrain from acting. However, in the absence of a passing-on defence, the direct purchaser will have an incentive to act. Even though he has not sustained damage, the direct purchaser will be regarded as the legal victim. Therefore, he will be able to recover all the damages caused by the competition law infringement, of which none has to be given to other stakeholders, such as the indirect purchasers. Even if an institutional framework for swift court proceedings is in place, it is very unlikely that any of the collective actions are particularly important for achieving the above-mentioned deterrent effect. Collective actions are instituted to create claim aggregation. This is especially helpful when the claims are dispersed and are of low-value. Compared to any of the other stakeholders, competitors and direct purchasers are ‘relatively fewer in number and have more concentrated injury’.141 Taking into consideration that claim aggregation will seldom occur, the conclusion to be drawn is that in these circumstances the joinder procedure will be the main facilitator for access to justice. The deterrent effect that may be created is not only important for the competitors and the direct purchasers: The other stakeholders will indirectly enjoy the benefits. Increased deterrence will indeed result in fewer infringements; accordingly, the other stakeholders’ need for different legal instruments providing access to justice will diminish.

Hybrid enforcement mechanisms The impossibility of several stakeholders finding redress in court either on an individual or a collective basis makes it questionable whether private enforcement is desirable. Indeed, the stakeholders that have no access whatsoever to the court system need to rely on the other stakeholder(s) to ameliorate their position. In situations where the stakeholder interests coincide with each other, the stakeholders that are not able to go to court may free-ride on the efforts of the stakeholders with access to justice. However, if the interests do not coincide, the stakeholders barred

141 See Crane, The Institutional Structure, p. 209.

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from court proceedings will have no possibility of seeing their interests protected. If collective actions cannot contribute to the facilitation of access to justice for all the stakeholders in competition law infringement, how should the interests of these stakeholders be guaranteed? The answer is far from obvious. Lave has developed a reasoning to provide umbrella customers standing,142 and Leslie has set forth some ideas to provide the deadweight loss customers access to justice.143 The solution for umbrella customers would be to grant them standing144 and for deadweight loss customers to allow the state attorney general to sue (a parens patriae suit) on behalf of the natural persons.145 Yet both ideas are only proposals, and the latter one is jurisdiction specific. No jurisdiction has put these proposals into practice.146 Even though the parens patriae suit enables damages to be recovered and hence fulfils the compensatory goal that is clearly underlying the private enforcement, the state attorney general is a state authority. She belongs to the public branch of the enforcement of law. Therefore, this solution should spark the idea of relying on public enforcement of competition law in general. The institution of the parens patriae suit may, at the end, not be available in other jurisdictions. Public enforcement is, as Cappelletti and Garth indicate, the earliest response towards providing legal security for the kind of interests described above.147 Even though the debate does recognize that public enforcement has its flaws, such as the possibility that enforcement authorities will be captured by private interest groups contrary to the interests that the law aims to protect, these scholars do not reject the necessity of public enforcement.148 In what has been suggested to be the mixed or pluralistic solution, the access to justice debate recognizes the difficulty of representing diffuse, and by extension multilayer, interests. The mixed or pluralistic solution entails that the main premise of the access-to-justice debate is the absolute priority for collective private actions towards diffuse or multilayer interests. Private persons should 142 143 144 145 146 147 148

See Lave, ‘Umbrella Standing’, 249–257. See Leslie, ‘Antitrust Damages’, 559–565. See Lave, ‘Umbrella Standing’, 257. See Leslie, ‘Antitrust Damages’, 559–565. See Leslie, ‘Antitrust Damages’, 560. See Cappelletti and Garth, ‘General Report’, 36. See Cappelletti and Garth, ‘General Report’, 48.

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be enabled to vindicate their own rights. Support of public enforcement institutions should be offered when the private persons face difficulties in organizing themselves.149 The state institutions could, as has been indicated by Leslie,150 take different formats.151 However, this conceptualization again indicates that the access-to-justice debate puts too much emphasis on creating access infrastructure without necessarily putting forward criteria for making this infrastructure effective.

Conclusion Collective actions have been favoured for their ability to provide remedies for scattered and low-value claims. The possibility of aggregating these claims should incentivize harmed individuals to go to court. However, just the inception of collective actions is not enough to guarantee their effectiveness in practice. Several other barriers have been identified as possible obstacles. This chapter has added to this literature by indicating that, when the harm is spread over various stakeholders, affecting interests at different layers, collective actions will not be beneficial for all stakeholders. That competition law harm is spread over various stakeholders has been analyzed through looking at the protective scope of competition law. In doing so, the competitor, the direct and indirect purchaser, the umbrella and deadweight loss customer, the employee, the supplier, the creditor and the shareholder have been identified as possible stakeholders. They all share an interest in receiving compensation or in the non-occurrence of the infringement; the former being their common interest, the latter the public interest. However, the individual interest will differ among the different stakeholders because the harm they sustain is likely to be different. Because of these differences, the composition of a collective interest is difficult. Indeed, it requires the existence of similar individual interests. These differences also mean that class actions have little power to address the interests spread over multiple layers and will only be helpful in facilitating the access to justice of stakeholders with similar individual interests. Joinder actions and representative actions, because of their more generalized characteristics, have the possibility of serving interests beyond 149 See Cappelletti and Garth, ‘General Report’, 48. 150 See Leslie, ‘Antitrust Damages’, 559. 151 See Cappelletti and Garth, ‘General Report’, 48.

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one level of interests. Representative actions for injunctions will serve all stakeholders’ interests by preventing the continuation of infringement. Both the joinder action and the representative action for damages may contribute, each in their own way, to the deterrent effect of competition law. Indirectly, they will also lessen the need for stakeholders to seek redress in court.

4 Private enforcement of directors’ duties Derivative actions as a global phenomenon

mathias m. siems *

Introduction When company directors are in breach of their duties, it seems natural to give shareholders a judicial remedy as a means of access to justice. However, directors’ duties are owed to the company, not shareholders individually. Thus, in contrast to other forms of collective actions, the topic of this chapter is not just one of combining multiple claimants, but rather of whether individuals can sue for compensation on behalf of someone else (i.e., the company). Economically, of course, such derivative actions raise similar problems to the other actions discussed in this book, for instance, how to reconcile multiple interests, how to deal with costs and fees and how to address the risks of both over- and under-enforcement. In some legal systems, derivative actions have been in place for a long time, although only in few countries – most notably the United States – have shareholders frequently made use of them. More recently, many other legal systems have also introduced or facilitated derivative actions. Still, there is considerable diversity around the world. In this chapter I explore how the availability of derivative actions is related to other differences between countries, for instance, the common law/civil law divide, the ownership structure of firms and other questions of shareholder protection and civil procedure. The structure is as follows: The first section below explains why legal systems may differ in the way directors’ duties are enforced and which reasons are typically given as explanations for these differences. The comparative analysis of the following parts is based * I thank Martin Gelter, Ewan McGaughey, Arad Reisberg and the participants of the Law & Finance Workshop at University College London and the 6th Annual Kyushu University Law Conference for helpful comments. The usual disclaimer applies.

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on two different methods. The second section provides a conventional comparison of U.S., U.K., French, German, Chinese and Japanese law. I identify recent changes in company law and whether these changes have led to an increase in claims. I also address the relevance of procedural and cost rules. The third section uses an innovative quantitative (‘leximetric’) approach in order to compare the rules on derivative actions in twentyfive legal systems.1 It is based on data collected by a project at the Centre for Business Research of the University of Cambridge. I use that dataset to show whether there are significant differences between common law and civil law countries in the availability of derivative actions. I also examine whether the availability of such actions is correlated with other legal and economic data.

The problem of enforcing directors’ duties At the outset, it is important to clarify that this chapter is not interested in direct shareholder actions. Such actions are available when shareholders assert their own rights, for instance, participatory and information rights.2 By contrast, it is not self-evident whether and to what extent actions by shareholders on behalf of the company against directors’ misconduct should be allowed. The main argument in favour of such actions is that it mitigates the principal-agent problem between shareholders and directors.3 Because shareholders are typically not involved in the management of the company, there is the apparent danger that directors put their own interests ahead of the interests of the shareholders and the company as a whole. Thus, it seems plausible to give shareholders the right to file suit on behalf of the company, and by doing so, become the company’s ‘watchdog’.4 1 As far as there are differences between public companies (joint stock companies) and private limited liability companies, this chapter is only interested in public companies. 2 See also Organisation for Economic Co-operation and Development (OECD), ‘Principles of Corporate Governance 2004’, no. III pr.: ‘The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.’ 3 See e.g. A. Reisberg, Derivative Actions and Corporate Governance: Theory and Operation (Oxford University Press, 2007), pp. 20–24. 4 See also J. Hill, ‘Visions and Revisions of the Shareholder’, American Journal of Comparative Law, 48 (2000), 39, 59 (‘The Shareholder as Cerberus’). The current chapter is not interested in so-called multiple derivative actions where a shareholder of a parent company files a claim on behalf of a subsidiary.

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The counterview may assert that these actions do not constitute an effective means of discipline. First, they may easily take on disruptive qualities and therefore be regarded from the shareholder majority’s point of view as undesirable and from the public’s as inefficient.5 Secondly, for effective oversight it is not sufficient merely to regulate the admissibility of these suits. For instance, it matters also whether or not shareholders have access to the necessary information for an action, procedural and cost provisions have deterrent effects and legal cultural factors stand in the way of taking action. Thirdly, review of business decisions is subject to the objection that it is not the courts’ job to replace entrepreneurial discretion with their own and ‘second-guess corporate decision-making’.6 It might instead be more efficient for, say, mandatory law, internal monitoring mechanisms, external supervisory measures, active investors or efficient takeover markets to make litigation unnecessary. It is therefore no surprise that legal systems differ in the availability of derivative actions. A frequent assumption is that these actions are more pronounced in common law than in civil law countries.7 Three explanations are offered. First, it is said that in common law countries, in particular the United States, there is a ‘general cultural orientation towards judicial dispute resolution’,8 whereas in other countries informal protection plays a larger part (‘order without law’ versus ‘order with law’9 ). With respect to Asian legal systems, it is further stressed that the individualistic system of shareholder actions ill accords with the unwritten collectivist traditions.10 Secondly, with respect to company law, a distinction is drawn between different forms of shareholder protection: judicial ex post protection in the United States is seen as compensation for the greater permissiveness of state company law compared to the company 5 For a summary of the objections against derivative actions see Reisberg, Derivative Actions and Corporate Governance, pp. 47–50; see also Reisberg, Derivative Actions and Corporate Governance, p. 80 (‘can a shareholder adequately represent the company?’). 6 B. Cheffins, Company Law: Theory, Structure, and Operation (Oxford University Press, 1997), p. 314. 7 G. Hertig, ‘Western European’s Corporate Governance Dilemma’ in T. Baums, K. Hopt and N. Horn (eds.), Corporations, Capital Markets and Business in the Law (Liber Amicorum Buxbaum) (London: Kluwer Law International, 2000), p. 280. 8 L. A. Cunningham, ‘Commonalities and Prescriptions in the Vertical Dimension of Global Corporate Governance’, Cornell Law Review, 84 (1999), 1133, 1186. 9 B. Großfeld, Rechtsvergleichung (Wiesbaden: Westdeutscher Verlag, 2001), p. 32. 10 For a summary of such claims see M. Siems, Convergence in Shareholder Law (Cambridge University Press, 2008), pp. 258–262. See also D. W. Puchniak, H. Baum and M. Ewing-Chow, The Derivative Action in Asia: A Comparative and Functional Approach (Cambridge University Press, forthcoming).

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law of other countries. By contrast, in civil law countries mandatory law and ex ante control are said to play a bigger part.11 Thirdly, differences in securities law, in particular transparency requirements, and differences in firm ownership structures may matter. Derivative actions are typical for informed shareholders of public companies with dispersed shareholder ownership because otherwise management errors may either be not sufficiently transparent or may already be sanctioned informally through the influence of blockholders. This may also point to the common law/civil law distinction as it is claimed that investor protection by way of securities law is better in common law than in civil law countries, explaining the higher dispersion of shareholder ownership in the former countries.12 The following will show to what extent these explanations may account for differences (if any) between common law and civil law countries. It will also be illustrated whether recent changes to the laws on derivative actions have led to some convergence of the positive law.

Derivative actions in six countries This part examines the laws on derivate actions of the United States, the United Kingdom, France, Germany, Japan and China.13 One may expect commonalities between the two common law countries, the two 11 See Cunningham, ‘Commonalities and Prescriptions’, 1183; B. Großfeld, ‘Management and Control of Marketable Share Companies’ in A. Conard and D. Vagts (eds.), International Encyclopedia of Comparative Law (T¨ubingen: Mohr Siebeck, 2006), ch. 4, paras. 4–256, 4–298, 4–331 et seq. 12 R. La Porta, F. Lopez-de-Silanes and A. Shleifer, ‘What Works in Securities Laws?’, Journal of Finance, 61 (2006), 1. For a critique see M. Siems, ‘What Does Not Work in Comparing Securities Laws: A Critique on La Porta et al.’s Methodology’, International Company and Commercial Law Review, 16 (2005), 300. 13 This section draws on Siems, Convergence in Shareholder Law, pp. 212–218. For similar comparisons see X. Li, Comparative Study of Shareholders Derivative Actions: England, the United States, Germany and China (Deventer: Kluwer Law International, 2007); D. Latella, ‘Shareholder Derivative Suits: A Comparative Analysis and the Implication of the European Shareholders’ Rights Directive’, European Company and Financial Law Review, 6 (2009), 307; C. A. Paul, ‘Derivative Actions under English and German Corporate Law – Shareholder Participation between the Tension Filled Areas of Corporate Governance and Malicious Shareholder Interference’, European Company and Financial Law Review, 7 (2010), 81; K. A. Goehre, ‘Is the Demand Requirement Obsolete? How the United Kingdom Modernized Its Shareholder Derivative Procedure and What the United States Can Learn from It’, Wisconsin International Law Journal, 28 (2010), 140; M. Vutt, ‘Shareholder’s Derivative Claim – Does Estonian Company Law Require Modernisation?’, Juridica, 2 (2008), 76; J. Kirkbride, S. Letza and C. Smallman, ‘Minority Shareholders and Corporate Governance: Reflections on the Derivative Action in the UK, the USA and in China’, International Journal of Law and Management, 51 (2009), 206; M. Siems, ‘Welche

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continental European civil law countries and the two Asian civil law countries. However, the following will show that this is not the case; rather, we can distinguish between the groups of the U.S., Japan and French law on the one hand, and the U.K., Chinese and German law on the other. The first three countries have allowed derivative actions for decades, whereas the latter three have only a few years ago cautiously introduced laws on derivative actions.

The United States, Japan and France: more similarities than differences? In the United States, it is in principle possible for a shareholder to assert claims of the company against directors by way of a derivative action.14 Relatively frequent use is made of this15 particularly because lawyers promote these suits and shareholders run hardly any risk. In the United States, lawyers can agree on contingent fees and thus expect considerable gains if successful. Moreover, the cost provisions for the litigating shareholder are favourable. The starting point is the ‘American rule’, according to which each party pays its own attorneys’ fees independently of the outcome of the trial. If the shareholder wins the suit, this would of course mean being burdened with his or her own costs. Yet often a claim for reimbursement against the company is possible. According to the ‘common fund theory’, it is allowable for the shareholder’s costs to be reimbursed from the compensation for damages that the company had secured through the action. Today it is additionally provided that in the event of lawsuits substantially benefiting the company, the successful shareholder’s costs are borne by the company. If he or she loses, under the American rule the shareholder does not have to pay the other side’s attorneys’ fees. However, in rare cases there is a ‘fee shift’ where the action was commenced or maintained without reasonable cause or for an improper purpose.16 Moreover, a shareholder who has agreed to contingent fees runs no risk, to the extent that in the event of failure no attorneys’ fees arise. In view of these factors that favour litigation, the danger of abusive lawsuits presents itself. This danger is today countered by a number of Auswirkung hat das neue Verfolgungsrecht der Aktion¨arsminderheit? – Eine rechtsvergleichende Folgenanalyse des § 148 AktG-E’, Zeitschrift f¨ur Vergleichende Rechtswissenschaft, 104 (2005), 376. 14 For details see e.g. J. D. Cox and T. Lee Hazen, Corporations, 3rd ed. (New York: Aspen, 2010), § 15. 15 For a comparison with the U.K. see J. Armour, B. Black, B. Cheffins, and R. Nolan, ‘Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States’, Journal of Empirical Legal Studies, 6 (2009), 687–722. 16 See e.g. Model Business Corporation Act, § 7.46(1) and (2).

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measures that have made the importance of derivative actions tend to decline.17 From the outset, this is furthered by the preconditions for derivative actions.18 It is necessary for the shareholder to have been the uninterrupted owner of the share since the damage occurred, for possible remedies within the company to have been exhausted (demand requirement)19 and in some states, if the shareholder holds less than 5 percent of the shares, to have posted a bond. Furthermore, there are special measures protecting against ‘strike suits’. Settlements and voluntary discontinuances of actions often require court assent,20 and duties of loyalty placed on shareholders and the possibilities of releases from liability, or of D&O insurance covering these suits, are aimed at keeping extortion attempts from being successful. Japanese company law has since 1950 contained a derivative action based on the U.S. model: Shareholders who have held shares for at least six months can, after a request to the company and if necessary lodging security, themselves assert claims for damages to the company.21 Despite the basic similarity with U.S. law,22 the number of suits in Japan has historically been small. The reasons often adduced were related to the legal-cultural, sociological and economic aspects of the country. The Japanese mentality was said to attach more importance to social harmony than to a sense of rights.23 Additionally, actions were said to be undesirable in the business sphere because the dominance of the banks and of

17 See J. A. Rosenthal in ‘Symposium: The Next Century of Corporate Law’ (annotated transcript), Delaware Journal of Corporation Law, 25 (2002), 1, 62–64. 18 On what follows see Model Business Corporation Act, §§ 7.40–7.47; Federal Rule of Civil Procedure 23.1. Similar Court of Chancery of the State Delaware, Rule 23.1. 19 In particular, with respect to special litigation committees see Auerbach v. Bennett 47 N.Y.2d 619, 393 N.W.2d 994, 419 N.Y.S.2d 920 (1979) (N.Y. Court of Appeals); different Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981) (court will use own business judgement), but also Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (Zapata Corp. v. Maldonado only applicable for demand-unnecessary cases). 20 See e.g. Model Business Corporation Act, § 7.45. ˆ Law No. 86/2005, § 847. 21 Now this is Corporation Act (kaisha ho), 22 For a general comparison see K. Utsumi, ‘The Business Judgment Rule and Shareholder Derivative Suits in Japan: A Comparison with Those in the United States’, New York International Law Review, 14 (2001), 129. See also M. D. West, ‘Why Shareholders Sue: The Evidence from Japan’, Journal of Legal Studies, 30 (2001), 351, 353 (on class actions) and 355 (on costs and fees). 23 E.g. C. LaChance, ‘Nature v. Nurture: Evolution, Path Dependence and Corporate Governance’, Arizona Journal of International and Comparative Law, 18 (2001), 279, 296. See also J. O. Haley, ‘The Myth of the Reluctant Litigant’, Journal of Japanese Studies, 4 (1978), 359; M. Dean, Japanese Legal System, 2nd ed. (London: Cavendish, 2002), pp. 3, 356.

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groups of firms made oversight through derivative actions institutionally incompatible with the concepts of Japanese economic life.24 These explanations have, however, lost persuasiveness in the light of developments in the last two decades. Since 1993 when court fees were reduced and a regulation on reimbursement of attorneys’ fees was introduced, the number of derivative actions has risen sharply.25 However, one should still be wary of a simplistic causality view. Apart from this amendment, the globalization of companies and investments led to a partial de facto approximation to the U.S. system.26 As in the United States, from the management standpoint the problem of abuse of the derivative action is now increasingly presenting itself. In 2001 the possibility of a remedy within the firm was extended from thirty to sixty days, and it became easier for settlements to be approved in the course of the proceedings.27 Additionally, the increase in derivative actions in particular was used to argue that liability limits ought to be set for directors.28 A similar tendency can also be seen in some parts of the 2005 reform because it excludes a derivative action if it is unfair or damaging to the company or if the requirement that a demand be made on the company before filing has

24 Cf. M. Hayakawa, ‘Shareholders in Japan: Attitudes, Conduct, Legal Rights, and their Enforcement’ in H. Baum (ed.), Japan: Economic Success and Legal System (Berlin: de Gruyter, 1997), p. 247; E. Takahashi and J. Rudo, ‘Missbrauch von Aktion¨arsrechten in Japan und Deutschland’ in W. M¨uller-Freienfels and H. Stoll (eds.), Recht in Japan, Volume 12 (Baden-Baden: Nomos, 2000), p. 75. 25 See M. D. West, ‘The Puzzling Divergence of Corporate Law: Evidence and Explanations from Japan and the United States’, University of Pennsylvania Law Review, 149 (2001), 527, 579–580; B. E. Aronson, ‘Reconsidering the Importance of Law in Japanese Corporate Governance: Evidence from the Daiwa Bank Shareholder Derivative Case’, Cornell International Law Journal, 36 (2003), 11; L. Nottage, ‘Japanese Corporate Governance at a Crossroads: Variation in Varieties of Capitalism?’, North Carolina Journal of International Law and Commercial Regulation, 27 (2001), 255, 275; O. Kliesow, Aktion¨arsrechte und Aktion¨arsklage in Japan (T¨ubingen: Mohr Siebeck, 2001), p. 172. For an alternative explanation see D. W. Puchniak and M. Nakahigashi, ‘Japan’s Love for Derivative Actions: Revisiting Irrationality as a Rational Explanation for Shareholder Litigation’, unpublished paper presented at the 6th Annual Kyushu University Law Conference 2011. 26 See Siems, Convergence in Shareholder Law, pp. 285–290. The remaining differences are discussed in J. Buchanan and S. Deakin, ‘Japan’s Paradoxical Response to the New “Global Standard” in Corporate Governance’, Journal of Japanese Law, 27 (2009), 59–84. See also D. H. Whittaker and S. Deakin (eds.), Corporate Governance and Managerial Reform in Japan (Oxford University Press, 2009). 27 Now this is Corporation Act, § 847 and § 850. 28 Corporation Act, §§ 425–427. See also E. Takahashi and M. Shimizu, ‘The Future of Japanese Corporate Governance: The 2005 Reform’, Zeitschrift f¨ur Japanisches Recht, 19 (2005), 35, 54–56.

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not been fulfilled’.29 However, there is also an important provision which aims at an enhancement of shareholder rights: in contrast to a number of court decisions,30 it has been clarified that shareholders do not lose their standing to sue if, due to mergers or other re-organizations, they become shareholders of another company.31 French law has since the mid-nineteenth century allowed a derivative action.32 Both the simplified representation provisions for an action by several shareholders33 and the subsidiarity in relation to an action by the whole board34 make it clear that in France it is the oversight function, not entitlement for members to sue, that is to the fore. In reality, the derivative action has to date played hardly any role. This is because of questions of not just the burden of proof but also and especially cost issues.35 It is particularly the costs borne by the shareholder that are problematic, because, akin to the ‘American rule’, in French commercial courts parties always have to pay their own costs. As the shareholder who loses a suit has no claim for reimbursement against the company, the shareholder is left burdened with his or her own lawyers’ fees. This risk might be reduced by contingent fees. An agreement to that effect continues to be inadmissible in France, however, after it failed to be approved in the Marini Report.36 In practice, therefore, a favourable alternative for shareholders is often to assert a claim for compensation for damages against members of the board through a so-called action civile in connection with criminal proceedings.37 Overall, it can be said that the United States, Japan and France have in common the allowance of derivative actions by each and every shareholder. Restrictions have been a frequent matter of debate in the United 29 Corporation Act, § 847 n. 1 and 4. See also H. Odo, ‘Derivative Actions in Japan: A System of Public Censure?’ in S. Grundmann et al. (eds.), Festschrift f¨ur Klaus J. Hopt (Berlin: De Gruyter, 2010), pp. 3213–3232. 30 See E. Takahashi and T. Sakamoto, ‘Japanese Corporate Law: Important Cases in 2003 and 2004’, Zeitschrift f¨ur Japanisches Recht, 20 (2005), 241, 248–252. 31 Corporation Act, § 851. 32 Today this is Code de Commerce, Art. L. 225–252. 33 As a rule 5 percent, D´ecret no 67–236 sur les soci´et´es comerciales, Art. 200. 34 See P. Merle, Droit commercial, Soci´et´es commerciales, 13th ed. (Paris: Dalloz, 2009), para. 409. 35 B. Grelon, ‘Shareholders’ Lawsuits against the Management of a Company and Its Shareholders under French Law’, European Company and Financial Law Review, 6 (2009), 205, 212–213. 36 P. Marini, La modernisation du droit des soci´et´es. Rapport au premier ministre (Paris: La Documentation Franc¸aise, 1996), p. 96. 37 Code de Procedure Penale, arts. 2 to 2–21. See also Merle, Droit commercial, para. 416.

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States and Japan, whereas French company law appears to be more favourable. However, in all three countries we also have to consider the impact of procedural rules, in particular on lawyers’ fees and on apportionment of costs. These topics are also relevant in the other three countries.

The United Kingdom, China and Germany: do the new laws make a difference? Until recently, the United Kingdom did not have codified rules on derivative actions. Although in some instances derivative actions were allowed, in practice it had usually not been possible for a shareholder to bring an action on behalf of the company. This was the position of the 1843 decision in Foss v. Harbottle, and exceptions to this principle have been very limited.38 Thus, in 2003 Paul Davies still complained about the ‘primitive state of our version of derivative actions and the appalling cost of litigation’.39 Then, however, the Companies Act 2006 introduced a codified version of a general derivative claim.40 What role these claims will play remains to be seen.41 The courts probably have a significant discretion to allow them. As shareholders have to apply for permission to continue a derivative claim, in its decisions the courts can, for instance, take into account whether the claim is against the interest of the company, whether the claimant acts in good faith and whether the company has decided not to pursue the claim.42 Moreover, the use of the derivative claim will depend on its relationship to the unfair prejudice remedy which does not require court authorization.43 38 Foss v. Harbottle (1843) 2 Hare 461 (House of Lords). For the exceptions see Reisberg, Derivative Actions and Corporate Governance, pp. 90–102. 39 P. Davies, Gower and Davies’ Principles of Modern Company Law, 7th ed. (London: Sweet & Maxwell, 2003), p. 467. 40 Companies Act 2006, ss. 260–269. 41 For the first cases see D. Gibbs, ‘Has the Statutory Derivative Claim Fulfilled Its Objectives?: A Prima Facie Case and the Mandatory Bar: Part 1’, Company Lawyer, 32 (2011), 41; A. Keay and J. Loughrey, ‘Derivative Proceedings in a Brave New World for Company Management and Shareholders’, Journal of Business Law, 3 (2010), 151; A. Reisberg, ‘Shadows of the Past and Back to the Future: Part 11 of the UK Companies Act 2006 (in)action’, European Company and Financial Law Review, 6 (2009), 219. See also M. Almadani, ‘Derivative Actions: Does the Companies Act 2006 Offer a Way Forward?’, Company Lawyer, 30 (2009), 131. 42 For details see Companies Act 2006, s. 263. 43 Companies Act 1980, s. 75, then Companies Act 1985, s. 459, and now Companies Act 2006, s. 994. On the interrelationship between the derivative action and the

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For the cost question, in the United Kingdom, as in most of the other countries,44 the loser has to pay the winner’s costs (‘English rule’). Thus by contrast with the United States, what is problematic is especially the risk the shareholder runs on loss of the suit. In this case, alongside his or her own costs and the court fees, the shareholder also has to bear the opponent’s lawyers’ fees. However, there has been some easing in this area. On the one hand, this concerns the shareholder’s own costs. Although contingent fees based on the award made by the court are still inadmissible, conditional fee arrangements have gradually been allowed.45 On the other, following the Court of Appeal’s ruling in Wallersteiner v. Moir (No. 2) and the Civil Procedure Rules 1998, it can be possible for the shareholder to be due a claim for reimbursement against the company if the action was ex ante regarded as reasonable (called an ‘indemnity order’).46 In China the Companies Act 1993 had a vague general provision about shareholder suits.47 However, the sphere of this provision was disputed, and thus it was only characterized as ‘a cryptic and potentially powerful way to protect shareholders’.48 Ten years later, however, the High Courts of Shanghai and Jiangsu promulgated rules explicitly allowing derivative actions. Soon after, the Companies Act 2005 introduced a general provision on derivative actions, supplemented by guidelines of the Supreme People’s Court.49 It is now clear that shareholders who hold at least

44

45

46 47 48

49

unfair prejudice remedy see also Reisberg, Derivative Actions and Corporate Governance, pp. 274–298. See J. D. Cox and R. S. Thomas, ‘Common Challenges Facing Shareholder Suits in Europe and the United States’, European Company and Financial Law Review, 6 (2009), 348, 354– ´ R. Oquendo, ‘Breaking on Through to the Other Side: Understanding Continental 355; A. European Corporate Governance’, University of Pennsylvania Journal of International Economic Law, 22 (2001), 975, 1014–1015. For the discussion see A. Reisberg, ‘Derivative Actions and the Funding Problem: The Way Forward’, Journal of Business Law (2006), 445. Further changes may be on the way following Lord Justice Jackson, Review of Civil Litigation Costs: Final Report, December 2009. See Wallersteiner v. Moir (No. 2) [1975] 1 All ER 849 (Court of Appeal); Civil Procedure Rules 1998, s. 19.9E (previously s. 19.9(7)). Companies Act 1993, § 111. L. S. Liu, ‘Chinese Characteristics Compared: A Legal and Policy Perspective of Corporate Finance and Governance in Taiwan and China’, (2008), p. 11, available at http://ssrn. com/abstract=273174. For the discussion see J. Deng, ‘Building an Investor-Friendly Shareholder Derivative Lawsuit System in China’, Harvard International Law Journal, 46 (2005), 347, 356–357; X. Huang, ‘Derivative Actions in China: Law and Practice’, Cambridge Student Law Review, 6 (2010), 246, 249, 252. Companies Act 2005, § 152; Supreme People’s Court, Provisions on Several Issues Concerning the Application of the Company Law, Art. 4.

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1 percent of the shares can file a derivative action. As in the United States, there are contemporary ownership and demand requirements. Furthermore, there needs to be a showing that an irreparable loss will occur if legal proceedings are not initiated immediately. Given these limits, one may doubt whether this derivative action will become important in practice. In addition, a number of obstacles not related to company law may be put forward. First, it is sometimes said that because of Confucianism, Chinese people are traditionally reluctant to go to court to resolve their disputes.50 However, at least in matters of business law things may be changing, as evidenced by the growing number of private lawsuits following allegations of securities fraud.51 Secondly, according to rules of civil procedure, shareholders have to pay filing fees which are calculated according to the amount in dispute. As derivative actions may involve high sums, this is seen as a significant discouragement to bringing these actions.52 Thirdly, if a shareholder loses, he or she has to bear the legal costs of the action.53 In the literature it is therefore suggested that U.S.-style contingent fees or a U.K.-style indemnity order needs to be introduced in order to make the new derivative action work in practice.54 In German law too, the general derivative action is a relatively new phenomenon. Until recently, there were only a few provisions in the law on groups of companies that had allowed a shareholder to sue the company.55 Moreover, a minority shareholder was given the possibility of enforcing an internal compulsion procedure to bring an action against members of

50 F. Ma, ‘The Deficiencies of Derivative Actions in China’, Company Lawyer, 32 (2010), 150, 155 (‘it is sometimes emphasized that Chinese legal culture is not based on individual rights and their implementation, and that Chinese courts do not work properly’). For further discussion see M. Siems, ‘Die epistemologischen Grundlagen des chinesischen Vertragsrechts im Rechtsvergleich’, Hanse Law Review, 5 (2009), 1–17. 51 See Siems, Convergence in Shareholder Law, p. 197. 52 F. X. Hong and S. H. Goo, ‘Derivative Actions in China: Problems and Prospects’, Journal of Business Law, 4 (2009), 376, 392; Z. Zhang, ‘Making Shareholder Derivative Actions Happen in China: How Should Lawsuits Be Funded?’, Hong Kong Law Journal, 38 (2008), 523, 560. 53 H. Huang, ‘The Statutory Derivative Action in China: Critical Analysis and Recommendations for Reform’, Berkley Business Law Journal, 4 (2007), 227, 248; Ma, ‘The Deficiencies of Derivative Actions in China’, 154 (but not the lawyers’ fees of the prevailing party). 54 For the former: Huang, ‘The Statutory Derivative Action in China’, 249; Zhang, ‘Making Shareholder Derivative Actions Happen in China’, 544. For the latter: Ma, ‘The Deficiencies of Derivative Actions in China’, 155; F. Meng: ‘Funding Derivative Actions in China: Lessons from Wallersteiner v. Moir (No. 2) for the Court’. Company Lawyer, 31 (2010), 29. 55 Aktiengesetz §§ 309(4), 310(4); 317(4), 318(4).

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the management board.56 This changed with the 2005 reform of German company law.57 Although a general meeting resolution can still compel the supervisory board to assert a claim against the management board,58 additionally a shareholder with a 1 percent share of the registered capital or a stock exchange value of €100,000 may bring an action in its own name. However, the law provides for judicial preliminary proceedings to prevent abusive exercise of this right. The court is to admit an action only if the shareholder has previously called on the company to file suit, damages appear to have arisen from dishonesty or gross breach of law and there are no preponderant reasons against it as regard to company welfare.59 If the application for admission is unsuccessful, the shareholder must bear the costs. If instead the action is admitted but then dismissed, the shareholder is in principle entitled to a claim for reimbursement of costs.60 Traditionally, contingent fees have not been allowed in Germany. In 2008 this was only changed for the case in which the client would not be able to pursue a claim unless he or she entered into a contingent fee arrangement.61 Overall, we can note that the reforms of the years 2005–2006 have introduced or codified derivative actions in the United Kingdom, China and Germany. However, it is not yet clear whether this can really be regarded as a breakthrough: In the United Kingdom there are uncertainties on how often these claims will be allowed, and China and Germany are the only two out of the six countries that require a minimum shareholder ownership, usually of at least 1 percent.62 Moreover, even if a shareholder manages to exceed this threshold, it is doubtful whether he or she may

56 This was initially introduced in 1884 and made easier by the Gesetz zur Kontrolle and Transparenz im Unternehmensbereich (KonTraG) of 27 April 1998, BGBl. I 786; see Aktiengesetz § 147(1) and (3) (in the version before the changes of 2005). 57 Gesetz zur Unternehmensintegrit¨at and Modernisierung des Anfechtungsrechts (UMAG) of 22 September 2005, BGBl. I 2802. 58 Aktiengesetz § 147(1). 59 For details see Aktiengesetz § 147a. 60 Aktiengesetz § 147a(6). 61 Rechtsanwaltsverg¨utungsgesetz § 4a and Bundesrechtsanwaltsordnung § 49b(2)(s.1) as amended by Gesetz zur Neuregelung des Verbots der Vereinbarung von Erfolgshonoraren of 12 June 2008, BGBl. I S. 1000. 62 See also K. Grechenig and M. Sekyra, ‘No Derivative Shareholder Suits in Europe: A Model of Percentage Limits and Collusion’, International Review of Law and Economics, 31 (2011), 16, who address the problem of such percentage limits from a law and economics perspective.

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Table 4.1. Financial risk of shareholder filing a derivative action (1) ‘English rule’

(2) ‘American rule’

(a) Contingent fee

other party’s costs of losing shareholder

own costs of winning shareholder

(b) No contingent fee

all costs of losing shareholder

own costs of winning or losing shareholder

want to file such a claim: If it is unsuccessful, the shareholder may bear its full costs, but if it is successful, he or she would benefit only indirectly.63

Discussion: convergence and legal families Some legal convergence emerges because, on the one hand, in the countries where shareholders hitherto could not, or only restrictedly, pursue violation of directors’ duties through the courts there have been extensions of this ability, whereas on the other hand countries that allowed derivative actions more generously have had to recognize that shareholders may abuse this right. This does not deny that there are many differences in detail, for instance, on the various requirements to file derivative actions (e.g. provision of security, internal supervision and quorum). The discussion has also shown that it is crucial to consider the provisions on lawyers’ fees and on apportionment of costs. Table 4.1 outlines the different financial risks that a shareholder faces depending on the English and American cost rule, and the availability of contingent fees. Because shareholders do not directly benefit from a derivative action, legal systems have to find a mechanism to deal with their risks. Feasible solutions have been found in the United Kingdom and the United States. In the United Kingdom, which follows the model (1)(b), the availability of the indemnity order can help the losing shareholder, and in the United States, which follows the counter-model (2)(a), the common fund theory helps the shareholder who wins a derivative action. The initial differences as well as the recent reforms do not confirm deep differences between common law and civil law countries. Traditionally, the codified derivative action has been in place in the United States and in 63 This means that there is a collective action problem in the variant of the free rider effect. See generally M. Olsen, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge: Harvard University Press, 1965).

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France, whereas the United Kingdom and Germany have been latecomers. The development of the law is also a good example of legal transplants: U.S. law has been a driving force for other legal systems, first Japan, and in the last few years the United Kingdom, China and Germany, although none of these countries has simply copied the U.S. model. The previous part contemplated whether differences between civil and common law countries in the availability of derivative actions may be explained by general differences in propensity to use litigation, differences between ex ante and ex post forms of shareholder protection and differences in capital markets and shareholder ownership structure.64 Because this part has not confirmed a legal family effect, it is also doubtful whether differences in the law on derivative action can be explained by these three factors. Of course, in practice the comparatively frequent use of derivative actions in the United States may not only be a result of the favourable cost and fee rules but may also be driven by a positive attitude towards litigation, fewer means of shareholders to monitor management ex ante and a competitive capital market. It may also be argued that the lower frequency of private enforcement of company law in the United Kingdom65 may not have been unexpected because not only common law and civil law countries but also the United States and the United Kingdom differ in questions of corporate governance and legal culture.66

Derivative actions in twenty-five countries The results of the previous part may be regarded as a bit anecdotal as they only dealt with derivative actions in six countries. The following extends the comparative analysis to twenty-five countries. Moreover, the methodology changes as this part is based on a quantitative approach that measures the development of law over time (leximetrics). 64 See text accompanying notes 7–12. 65 See Armour, Black, Cheffins, and Nolan, ‘Private Enforcement of Corporate Law’. 66 For the former see e.g. C. M. Bruner, ‘Power and Purpose in the “Anglo-American” Corporation’, Virginia Journal of International Law, 50 (2010), 579; R. V. Aguilera, C. A. Williams, J. M. Conley and D. E. Rupp, ‘Corporate Governance and Social Responsibility: A Comparative Analysis of the UK and the US’, Corporate Governance: An International Review, 14 (2006), 147; S. Toms and M. Wright, ‘Divergence and Convergence within Anglo-American Corporate Governance Systems: Evidence from the US and UK, 1950–2000’, Business History, 46 (2005), 267. For the latter see e.g. H. P. Glenn, Legal Traditions of the World, 2nd ed. (Oxford University Press, 2004), p. 248; P. S. Atiyah and R. S. Summers, Form and Substance in Anglo-American Law (Oxford University Press, 1987).

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Methodology and dataset Leximetrics refers to every quantitative measurement of legal rules.67 This requires a mechanism that translates the complexity of the legal world into numbers, such as ‘0’ and ‘1’, and intermediate or aggregate scores. In this chapter I use a dataset collected by the Centre for Business Research (CBR) of the University of Cambridge. The CBR dataset comprises of data from twenty-five countries over eleven years (1995–2005). The data collection was based on an index of ten variables in relation to the protection of shareholders against management and majority shareholders. Earlier articles describe the coding methodology of the CBR index in detail.68 Variable seven of the index addresses the law on derivative actions. It is defined as follows: ‘Private enforcement of directors’ duties (derivative suit):69 Equals 0 if this is typically excluded (e.g. because of strict subsidiarity requirement; hurdle which is at least 20 percent); equals 0.5 if there are some restrictions (e.g. certain percentage of share capital;70 demand requirement); equals 1 if private enforcement of directors’ duties is readily possible.’71 It is clear that such a definition cannot cover all the legal complexities relevant for derivative actions. For instance, one has to consider that 67 P. Lele and M. Siems, ‘Shareholder Protection: A Leximetric Approach’, Journal of Corporate Law Studies, 7 (2007), 17, 18. The term leximetrics was first used in R. D. Cooter and T. Ginsburg, ‘Leximetrics: Why the Same Laws Are Longer in Some Countries than Others’ (2003), available at http://ssrn.com/abstract=456520. 68 J. Armour, S. Deakin, P. Sarkar, A. Singh and M. Siems, ‘Shareholder Protection and Stock Market Development: A Test of the Legal Origins Hypothesis’, Journal of Empirical Legal Studies, 6 (2009), 343, 353–356; J. Armour, S. Deakin, V. Mollica, and M. Siems, ‘Law and Financial Development: What We Are Learning from Time-Series Evidence’, BYU Law Review, (2009), 1435, 1456–1461; M. Siems, ‘Shareholder Protection Around the World (“Leximetric II”)’, Delaware Journal of Corporate Law, 33 (2008), 111, 116–121. See also Lele and Siems, ‘Shareholder Protection’, 25–30; J. Armour, S. Deakin, P. Lele and M. Siems, ‘How Do Legal Rules Evolve? Evidence from a Cross-Country Comparison of Shareholder, Creditor, and Worker Protection’, American Journal of Comparative Law, 57 (2009), 579, 599–604. 69 Further explanation: ‘Variables 7 and 8 only concern the law. We did not consider here the efficiency of courts in general while coding these variables.’ 70 Further explanation: ‘We have also given intermediate scores, e.g. 0.75 for a 1% hurdle, 0.25 for a 10 or 15% hurdle. A 5% hurdle led to the score 0.5.’ 71 In addition, further intermediate scores are allowed. The general coding guidelines state: ‘Please use binary as well as non-binary numbers for coding where appropriate. The descriptions of most of the variables in Part 2 illustrate the use of non-binary coding, however, even where the description of the variable does not mention it specifically, please give intermediate scores where absolutely necessary.’

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courts do not work in a quick and efficient way in all countries,72 and it is also crucial how costs are allocated and whether legal systems allow contingent fees.73 Still, the CBR variable is valuable because it enables us to measure the core question of to what extent derivative actions are allowed in different jurisdictions. It is also submitted that this variable is preferable to the so-called ‘Ease of Shareholder Suits Index’ employed by the World Bank’s Doing Business Report.74 The index of the World Bank is based on six variables which address the following topics: (1) specific documents available to plaintiff during trial; (2) right of plaintiff to examine the defendant and witnesses during trial; (3) right of plaintiff to obtain documents from defendant without identifying each document specifically; (4) right to ask for appointment of government inspector to investigate alleged selfdealing transaction of directors; (5) right to inspect documents related to such a self-dealing transaction; and (6) comparison between standard of proof for civil and criminal cases.75 This list of variables is rather odd. The value of variable (6) depends on the burden of proof that countries apply in criminal cases. Thus, it is possible that two countries will score differently although they have exactly the same burden of proof in civil suits. It is therefore not clear why this variable tells us anything about the ease of derivative actions. Variables (4) and (5) are the only variables that relate specifically to questions of company law. Curiously, however, these variables do not address the question of whether and under which conditions shareholders can file derivative actions. Thus, the scores of these two variables are meaningless if a legal system does not allow derivative claims at all or if a shareholder does not fulfil the requirements of the legal system in question. Finally, variables

72 For empirical data see note 96. 73 See text accompanying notes 13–66. See also C. Hodges, S. Vogenauer and M. Tulibacka (eds.), The Costs and Funding of Civil Litigation – A Comparative Perspective (Oxford: Hart Publishing, 2010). 74 The entire report is available at www.doingbusiness.org. For critical comments see B. Arru˜nada, ‘Pitfalls to Avoid When Measuring Institutions: Is Doing Business Damaging Business?’, Journal of Comparative Economics, 35 (2007), 729; C. M´enard and B. du Marais, ‘Can We Rank Legal Systems According to Their Economic Efficiency’ in P. Nobel (ed.), New Frontiers of Law and Economics (Zurich: Schulthess, 2006), pp. 7–26; M. Siems and S. Deakin, ‘Comparative Law and Finance: Past, Present and Future Research’, Journal of Institutional and Theoretical Economics, 166 (2010), 120, 121–126; M. Siems, ‘Statistische Rechtsvergleichung’, Rabels Zeitschrift f¨ur ausl¨andisches und internationales Privatrecht, 72 (2008), 354, 365–368. 75 See www.doingbusiness.org/MethodologySurveys/ProtectingInvestors.aspx.

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(1) through (3) aim to measure questions of the law on evidence, namely, how easily the plaintiff can get information from the defendant. Again, it can be objected that these variables are meaningless if a shareholder cannot file a claim. Moreover, the variables do not take into consideration that judges and parties have fundamentally different roles in different legal systems. Traditionally, in common law countries the judge is passive, and it is for the parties and their counsel to take the lead in questions of evidence, whereas in civil law countries judges have more powers.76 The three variables are evidently based on the traditional common law model. However, it is not at all clear that this model is preferable. In the early 1990s U.S. academics debated whether it may not be more efficient to shift to a continental system with a more active judge,77 and in England and Wales the Civil Procedure Rules 1998 have indeed given judges more powers in order to speed up procedures.78 It is not within the scope of this chapter to decide which model is preferable; however, it should be evident that an index aimed for all legal systems of the world cannot simply be based on the peculiarities of the U.S. model of civil procedure.79

The development of the law between 1995 and 2005 Table 4.2 shows the availability of derivative actions in twenty-five countries between 1995 and 2005. Explanations and references to the relevant provisions of law are available online.80 The U.K. score requires a brief clarification. In the previous part it was said that a general derivative action was only introduced with the Companies Act 2006. Thus, it may 76 Of course, in reality, many legal systems are mixtures between these two models. See C. H. van Rhee and R. Verkerk, ‘Civil Procedure’ in J. M. Smits (ed.), Elgar Encyclopedia of Comparative Law (Cheltenham: Edward Elgar, 2006), pp. 126, 130. See also the contributions in J. Walker and O. G. Chase (eds.), Common Law, Civil Law and the Future of Categories (Markham: LexisNexis Canada, 2010). 77 See e.g. E. C. Stiefel and J. R. Maxeiner, ‘Civil Justice Reform in the United States – Opportunity for Learning From “Civilized” European Procedure Instead of Continued Isolation?’, American Journal of Comparative Law, 42 (1994), 147. 78 See e.g. K. M. Vorrasi, ‘England’s Reform to Alleviate the Problems of Civil Process: A Comparison of Judicial Case Management in England and the United States’, Journal of Legislation, 30 (2003–2004), 361. 79 Such a bias has also been found in other studies related to the Doing Business Report. See Lele and Siems, ‘Shareholder Protection’, 20. 80 M. Siems, P. Lele, P. Iglesias-Rodriguez, V. Mollica, T. Klauberg, S. Heidenhain, N. Cankar, J. Hamilton, G. Schnyder and P. Akman, ‘CBR Shareholder Protection Index – 25 countries’, (2009), available at www.cbr.cam.ac.uk/research/programme2/project2–20output .htm.

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Table 4.2. Availability of derivative actions (min 0; max 1) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Canada France Malaysia S. Africa Switzerland Japan US Argentina Brazil India Spain U.K. Germany China Czech Rep. Sweden Turkey Russia Italy Chile Latvia Mexico Netherlands Pakistan Slovenia Average Stand. dev.

1 1 1 1 1 0.75 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.25 0.25 0.25 0 0 0 0 0 0 0 0 0.4 0.38

1 1 1 1 1 0.75 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.25 0.25 0.25 0.75 0 0 0 0 0 0 0 0.43 0.37

1 1 1 1 1 0.75 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.25 0.25 0.25 0.75 0 0 0 0 0 0 0 0.43 0.37

1 1 1 1 1 0.75 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.25 0.25 0.25 0.75 0.5 0 0 0 0 0 0 0.45 0.36

1 1 1 1 1 0.75 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.25 0.25 0.75 0.5 0 0 0 0 0 0 0.46 0.36

1 1 1 1 1 0.75 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.25 0.25 0.75 0.5 0.5 0 0 0 0 0 0.48 0.35

1 1 1 1 1 0.75 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.75 0.5 0.5 0.5 0.25 0 0 0 0.53 0.31

1 1 1 1 1 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.75 0.5 0.5 0.5 0.25 0 0 0 0.52 0.31

1 1 1 1 1 0.5 0.75 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.75 0.5 0.5 0.5 0.25 0 0 0 0.53 0.31

1 1 1 1 1 0.5 0.75 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.25 0.25 0.75 0.5 0.5 0.5 0.25 0 0 0 0.53 0.31

1 1 1 1 1 0.5 0.75 0.5 0.5 0.5 0.5 0.5 0.75 0.5 0.5 0.25 0.25 0.75 0.5 0.5 0.5 0.25 0 0 0 0.54 0.31

appear surprising that in Table 4.2 the United Kingdom already scored 0.5 between 1995 and 2005. The explanation is that the CBR project adopted a functional perspective which treated the unfair prejudice remedy, introduced in 1980 and strengthened in 1989,81 as analogous to a derivative action. In contrast, the rare exceptions to the principle of 81 Companies Act 1980, s. 75, then Companies Act 1985, s. 459, and now Companies Act 2006, s. 994. On the interrelationship between the derivative action and the unfair prejudice remedy see also Reisberg, Derivative Actions and Corporate Governance, pp. 274–298.

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Foss v. Harbottle 82 were not regarded as sufficient to grant the United Kingdom any score for the time before 1980.83 Table 4.2 invites a number of observations. First, there is a clear general trend. The average score has risen from 0.4 to 0.54 because five countries have introduced derivative actions and four countries have made them more easily available. This is in line with other results of the CBR project, which show that shareholder protection improved since the early 1990s.84 The only exception is Japan, whose score dropped from 0.75 to 0.5, reflecting the recent change noted in the previous part.85 Secondly, Table 4.2 also shows convergence in the law of derivative actions. The standard deviation of the twenty five countries has fallen from 0.38 to 0.31. This too confirms results of the CBR project concerning shareholder protection more generally.86 It also reflects the influence of U.S. law on other systems, as shown in the previous part.87 Thirdly, the individual figures make it clear that there is still considerable diversity in the availability of derivative actions. In particular, three countries still have a zero score, and only five countries a perfect score of 1. The ‘zero-countries’ are from different continents and legal families, so it does not appear obvious why these countries lag behind. This leads to the general question of how to explain the differences between the twenty-five legal systems.

Legal families, complements and substitutes Table 4.3 displays how the law on derivative actions has developed in the seven countries that have English as at least one of their official 82 Foss v. Harbottle (1843) 2 Hare 461 (House of Lords). For the exceptions see Reisberg, Derivative Actions and Corporate Governance, pp. 90–102. 83 See that data in M. Siems and P. Lele, ‘CBR Shareholder Protection Index for the UK, the US, Germany, France, and India’ (2007), available at www.cbr.cam.ac.uk/research/ programme2/project2–20output.htm. 84 See Armour, Deakin, Sarkar, Singh and Siems, ‘Shareholder Protection and Stock Market Development’, 353–356; Armour, Deakin, Mollica and Siems, ‘Law and Financial Development’, 1456–1461; Siems, ‘Shareholder Protection around the World’, 116–1121. See also Lele and Siems, ‘Shareholder Protection’, 25–30; Armour, Deakin, Lele and Siems, ‘How Do Legal Rules Evolve?’, 599–604. 85 See text accompanying note 27. 86 See Armour, Deakin, Sarkar, Singh and Siems, ‘Shareholder Protection and Stock Market Development’, 353–356; Armour, Deakin, Mollica and Siems, ‘Law and Financial Development’, 1456–1461; Siems, ‘Shareholder Protection around the World’, 116–121. See also Lele and Siems, ‘Shareholder Protection’, 25–30; Armour, Deakin, Lele and Siems, ‘How Do Legal Rules Evolve?’, 599–604. 87 See text accompanying notes 13–66.

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Table 4.3. English-speaking countries and the rest of the world English-speaking countries

Rest of the world

Year

Mean

Standard deviation

Mean

Standard deviation

Difference of means

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Change 1995–2005

0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.68 0.68 0.68 +0.04

0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.37 0.37 0.37 −0.01

0.31 0.35 0.35 0.38 0.39 0.42 0.49 0.47 0.47 0.47 0.49 +0.18

0.34 0.34 0.34 0.33 0.33 0.32 0.28 0.27 0.27 0.27 0.28 −0.06

0.34* 0.30 0.30 0.27 0.25 0.23 0.16 0.17 0.21 0.21 0.19 −0.15

Tests of differences: *, ** and *** indicate whether we can reject the null hypothesis that the means are equal at a 10 percent, 5 percent and 1 percent significance level (two-sided test).

languages (Canada, India, Malaysia, Pakistan, South Africa, United Kingdom, United States) and the remaining eighteen countries. This responds to the question about differences between the civil law and common law countries. As in reality most legal systems are hybrids, there is no nonarbitrary way to establish precisely which legal family all countries of the world belong to.88 Thus, following the approach of previous papers,89 ‘language’ is used as a proxy because only English-speaking countries are typically part of the common law legal family. It can be seen that the average value of the English-speaking countries is constantly higher than the one of the rest of the world. However, this value is decreasing, and only in 1995 is the difference of means statistically significant. Interestingly, the standard deviation of the English-speaking 88 For a detailed discussion, see M. Siems, ‘Legal Origins: Reconciling Law & Finance and Comparative Law’, McGill Law Journal, 52 (2007), 55, 62–70. 89 Siems, ‘Legal Origins’, 72–81; M. Schouten and M. Siems, ‘The Evolution of Ownership Disclosure Rules across Countries’, Journal of Corporate Law Studies, 33 (2010), 451; M. Siems, ‘The Web of Creditor and Shareholder Protection: A Comparative Legal Network Analysis’, Arizona Journal of International and Comparative Law, 27 (2010), 747.

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Table 4.4. Correlation between derivative actions and other variables Variable

Correlation coefficient

Other forms of shareholder protection 1. Nine remaining CBR variables 1995a 2. Nine remaining CBR variables 2005b Ownership structure 3. Widely held firms 1995c 4. Widely held firms 2002d Other variables 5. Stock market capitalisation 2005e 6. Rule of law 2005f a

b

c

d

e

f

0.63 0.24 0.42 −0.08 0.25 0.45

See Siems, Lele, Iglesias-Rodriguez, Mollica, Klauberg, Heidenhain, Cankar, Hamilton, Schnyder and Akman, ‘CBR Shareholder Protection Index’. Siems, Lele, Iglesias-Rodriguez, Mollica, Klauberg, Heidenhain, Cankar, Hamilton, Schnyder and Akman, ‘CBR Shareholder Protection Index’. Source: R. La Porta, F. Lopez-de-Silanes and A. Shleifer, ‘Corporate Ownership around the World’ Journal of Finance, 54 (1998), 471 (variable on widely held ownership large publicly traded firms: 20 percent cut-off point; data for 1995). Source: R. M. Stulz, ‘The Limits of Financial Globalization’, Journal of Finance, 60 (2005), 1595, 1617 (variable on percentage of widely held firms). Source: World Bank’s World Development Indicators, available at www. worldbank.org/data (stock market capitalization as percentage of GDP). Source: World Bank Data, available at www.info.worldbank.org/governance/wgi/ index.asp: the ‘rule of law’ index measures ‘the extent to which agents have confidence in and abide by the rules of society, in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence.’

countries is on average even slightly higher than the standard deviation of all twenty-five countries (0.37 to 0.38 in contrast to 0.31 to 0.38 in Table 4.2). This confirms the fact that common law countries do not have a uniform model of derivative actions, as demonstrated by the differences between UK and U.S. law.90 Table 4.4 addresses the relationship between the availability of derivative actions and other legal and economic variables. The first two correlations show that there is a positive relationship between the availability of derivative actions and other forms of shareholder protection. Thus, 90 See text accompanying notes 13–66.

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in contrast to one of the assumptions about the common law/civil law divide,91 derivative actions are not a substitute for otherwise-lacking forms of shareholder protection. Rather it is the case that different forms of shareholder protection complement each other. Still, it may be surprising that the correlation coefficient dropped from 0.63 to 0.24. When the data is examined more closely, it can be seen that the eight countries that in 1995 had a score of 0 (see Table 4.2) account for this phenomenon: the five countries that introduced a derivative action improved their values of this variable considerably, whereas the values of the other nine variables only rose slightly, and the three remaining countries that did not introduce a derivative action but improved other forms of shareholder protection. It therefore appears to be the case that in times of frequent law reforms countries are selective in their choice of legal transplants, making it difficult to identify clear models of corporate governance based on particular types of shareholder protection.92 The next two correlations display an even more striking transformation. In 1995 there was a clear positive relationship between the availability of derivative actions and dispersion of shareholder ownership. This confirms the assumption that there is a linkage between the more dispersed shareholder ownership and the more developed private enforcement mechanism in common law countries.93 However, this changed in or before 2002: Non-common law countries introduced derivative claims or made them easier (see Tables 4.2 and 4.3) with the result that the association between ownership structure and availability of derivative actions disappeared. Still, the fifth correlation shows that there is a positive relationship between the availability of derivative actions and stock market capitalization. It is not a surprise that the strength of shareholder protection and economic prosperity are positively correlated: The question is, however, whether this relationship is really causal as there are likely to be mutual interdependencies.94 The sixth correlation is also no surprise. It was to be expected that a country that cares about the private enforcement of 91 See text accompanying notes 7–12. 92 Similar Siems, Convergence in Shareholder Law, p. 224 (division into legal families not helpful in shareholder law). 93 See text accompanying notes 7–12. Of course, many other factors may also play a role. For a detailed analysis of the U.K. development see B. Cheffins, Corporate Ownership and Control: British Business Transformed (Oxford University Press, 2008). 94 For the problem of endogeneity in law and finance research, see Armour, Deakin, Sarkar, Singh and Siems, ‘Shareholder Protection’, 346–347, 368–369 and 375–376.

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directors’ duties is also keen on having well-run courts, thus, the positive correlation of 0.45.

Conclusion The foregoing analysis has shown that today the common law/civil law divide does not account for the differences and similarities in the law of derivative actions across the countries examined in this chapter. The quantitative analysis only found a legal family effect in 1995 that could be linked to differences in the ownership structure of firms. In contrast, the other two explanatory hypotheses could not be confirmed: Cultural characteristics have not stopped countries such as Japan or China from incorporating rules on derivative actions into their company laws. It was also not found that legal systems use derivative actions as an ex-post substitute for other forms of shareholder protection; rather, different forms of shareholder protection can be regarded as complements. The general trend is that countries have introduced derivative actions or lowered the requirements for accessing these actions. Thus, legal systems have been gradually converging and shareholder protection has been improving. However, the question remains of whether these new, or updated, company law provisions on derivative actions are sufficient.95 In addition to these rules, shareholders (or their lawyers) need incentives to file such actions. The United States seems to have found such an incentive and risk assessment mechanism in allowing contingent fees.96 Yet, the usefulness of the U.S. approach is not beyond doubt because, according to some studies, derivative actions especially favour the lawyers involved but are at their base less important for shareholders.97 Thus, despite the frequency of legal transplants, it is not the case that, across the world, there is now just one model which all countries should follow – rather, the discussion will continue.

95 In other words, whether the legal transplant really ‘works’. For sceptical views see P. Giudici, ‘Representative Litigation in Italian Capital Markets: Italian Derivative Suits and (if ever) Securities Class Actions’, European Company and Financial Law Review, 6 (2009), 246; see also in this book Quynh Thuy Quach’s Chapter 9, ‘Does More Litigation Mean More Justice for Shareholders? The Case of Derivative Actions in Vietnam’. 96 See text accompanying notes 14–16. 97 R. Romano, ‘The Shareholder Suit: Litigation without Foundation?’, Journal of Law, Economics and Organizations, 7 (1991), 55; S. M. Grossman, ‘Commentary: The Social Meaning of Shareholder Suits’, Brooklyn Law Review, 65 (1999), 47. For a similar result concerning Japan in the 1990s see West, ‘Why Shareholders Sue’, 357–382.

PAR T II Cross-continental perspectives on collective actions

5 From peasant to shareholder Divergent paths of group litigation in Tokugawa Japan and England

sean m cginty

Introduction Today we think of legal systems as being fundamentally designed to deal with disputes between individuals. Litigation by groups – what we generally refer to as ‘collective actions’ – is seen as an exception, and as an exception it requires justification and rules that reflect the justification. Many of these rules and justifications relate to the question of how collective actions can be used to increase access to justice while at the same time balancing the multiple interests at stake in such litigation. Historically, however, this has not always been the case. If one pulls on the string of legal history long enough, in countries as far apart geographically and culturally as Japan and England, one eventually comes to a point where group litigation1 was not an exception to a general system of litigation by individuals. Rather, such litigation by groups was part of the everyday business of the courts and not treated as a procedurally distinct body of cases. Not being exceptions, they required no justifications and no special set of rules. The relationship of such litigation to the questions of multilayer interests and access to justice that so interest scholars today were never raised. Somewhere along the line, of course, this all changed. The development of group litigation in the courts of Tokugawa Japan2 and pre-nineteenth-century England provides for an interesting comparative study. The legal systems of both developed bodies of substantive 1 For the purposes of this chapter I adopt Yeazell’s broad definition of group litigation as ‘lawsuits by and against numbers of individuals seen as a collective entity’. S. C. Yeazell, From Medieval Group Litigation to the Modern Class Action (New Haven: Yale University Press, 1987), p. 3. 2 The Tokugawa or ‘Edo’ era runs roughly from 1600 to 1868.

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and procedural law in much the same way – through case law decisions produced by a professional judiciary.3 John Wigmore in his A Panorama of the World’s Legal Systems noted that Tokugawa law and the English common law were unique among the world’s major legal systems in this respect.4 Not only did the two systems develop substantive law in a similar way, but the Tokugawa and early English courts also adopted a similar approach to group litigation when faced with cases brought by or against feudal groupings such as villages or parishes. In short, their approach was to treat these cases no differently from other cases involving individual litigants.5 In the case of England, Stephen C. Yeazell6 has suggested that a turning point from this feudal approach to group litigation, or lack thereof, to the beginnings of the modern form of group litigation (class actions, derivative actions, representative actions and so on) can be partly found in the development of new groups that arose out of economic and social developments that occurred as England moved out of the feudal era. The feudal villages and parishes of the thirteenth century gave way over time to the joint stock companies and friendly associations of the seventeenth and eighteenth centuries. These new types of groups had fundamentally different features that necessitated a fundamentally new approach to the issues of group litigation. This new approach would eventually centre on the unifying concept of a shared ‘interest’ that tied the members of the group together, a concept that would enable English courts to enhance access to justice by reducing the barriers to group litigation that had been posed by the necessary parties rule.7 Tokugawa Japan, however, provides a different story. Starting from similar beginnings – a feudal society with a legal system that accepted suits

3 The doctrine of stare decisis in the common law did not become a binding rule until relatively late in English history, possibly as late as the early nineteenth century. Reliance on precedent and the notion that a considered judicial opinion settled the law, however, dates from much earlier. See J. H. Baker, An Introduction to English Legal History (London: Buttersworth LexisNexis, 2002), pp. 197–200. 4 J. H. Wigmore, A Panorama of the World’s Legal Systems (Washington, D.C.: Washington Law Book Company, 1936), p. 504. 5 In England, Yeazell notes ‘[t]hose earliest cases of group litigation proceeded as if nothing need be said about the appearance of the men of a village or the lesser folk of a town as litigants: the case noted the identity of the group only as it would note the identity of any party and passed on.’ See Yeazell, Medieval Group Litigation, p. 175. 6 Yeazell, Medieval Group Litigation. 7 On the obstacles to group litigation posed by the necessary parties rule in English legal history, see Yeazell, Medieval Group Litigation, pp. 15–16.

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brought by and against groups – Tokugawa Japan also saw the rise of new groups as economic and social changes during the great peace of the Edo era changed the old order. Unlike England, though, the rise of these new groups produced no turning point in the way the Tokugawa justice system dealt with group litigation. The modern notion of group litigation – with its emphasis on defining the group in terms of a shared ‘interest’ among its members – would not come to Japan until after the collapse of the Tokugawa regime and the later introduction of modern legal codes based on European, primarily German, models. The basic aim of this chapter is to examine why this difference in legal development occurred. Or, to put it another way, to suggest reasons why the Tokugawa legal system failed to develop a modern approach to group litigation whereas the English system did. It may be asked why such a study is worthwhile in today’s world. The Tokugawa legal system has long been extinct and the rules of modern group litigation in the U.K. were codified back in the nineteenth century and have lain dormant for much of the time since.8 The answer may lie in Alan Watson’s observation that a study of the history of legal systems or rules is indispensable to understanding how and why such rules and systems differ.9 As today’s normative research on the questions of how collective actions can be tailored to increase access to justice while balancing multiple interests in society progresses, the underlying comparative law question persists of why the modes of collective action in legal systems across the world continue to differ. The theory of path dependence so well developed in the economics literature suggests that the answer to this question lies in the past. The story of how early English courts and the Tokugawa legal system developed in this area can reveal lessons not limited strictly to those systems, but also lessons on how systems with certain shared aspects of their legal system (such as the production of rules by a professional judiciary) in similar social contexts can nonetheless develop legal rules in radically different ways. In examining this question, this chapter proceeds as follows. The first section begins the story by looking at two cases from the feudal courts of England and Japan which demonstrate the similar starting points in the development of group litigation in each. The next section looks at how the development of a new group in society, the joint stock company, 8 On the difficulties concerning the English Representative rule, see generally in this book Rachael Mulheron’s Chapter 15 ‘The Impetus for Class Actions Reform in England Arising from the Competition Law Sector’. 9 A. Watson, Legal Transplants (Athens: University of Georgia Press, 1974), pp. 6–7.

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contributed to the turn towards a modern conception of group litigation in England, on the one hand, whereas the development of a somewhat different group, the kabunakama, in Tokugawa Japan did not. The last section analyzes different possible explanations for why this divergence occurred.

Feudal origins: the cases of Martin and Usuha The issues of group litigation At the start, it may be useful here to recall what some of the issues related to group litigation in its modern context are. If we understand the notion of ‘group litigation’ to generally be ‘lawsuits by and against numbers of individuals seen as a collective entity’,10 then a few obvious questions arise.11 The first issue concerns the identity of the group itself and its membership. How do we define the group? What mechanism do we use to determine its membership? Do we require individuals to opt-in or opt-out? Do we recognize the rights of groups to litigate via representatives in some substantive areas of law although not in others? The second issue concerns representation. Who represents the group? How are these individuals chosen, and how do we assure that they act in a manner consistent with the interests of the group? How do the representatives, once determined, initiate and conduct the action both with relation to the court and with other members of the group? Underlying these specific questions, of which one can undoubtedly think of many more, are overarching principles such as party autonomy, access to justice, economic and judicial efficiency and so on that must be taken into consideration when constructing rules to govern such litigation. With these general issues in mind, we may turn from our complex modern society to the much simpler feudal order that once governed the lives of potential litigants. The troubled relationships between feudal villagers and the religious authorities charged with seeing to their spiritual well-being provide an illustrative, if somewhat unlikely, place to begin a discussion on the historical development of group litigation in Japan and England. This is not to suggest that such relationships were the only, or indeed the main, source of group-litigated disputes in their time. But they 10 Yeazell, Medieval Group Litigation, p. 3. 11 Some of these questions, as they relate to modern class action regimes, are discussed in R. Mulheron, The Class Action in Common Law Legal Systems: A Comparative Perspective (Oxford: Hart Publishing, 2004), pp. 47–66.

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do provide us with two remarkably similar cases in terms of their facts, the interests at stake and the approach – or lack thereof – of the courts involved regarding the questions of group litigation.

Martin’s case The first of the cases we will consider, chronologically speaking, is the first recorded case of group litigation of any sort in the common law world. In the year 1199 the rector of a parish in Nuthamstead, Master Martin, brought suit against his parishioners in the court of the Archbishop of Canterbury.12 The dispute had to do with burial fees that Martin was customarily entitled to from the parishioners. These fees were a substantial source of income to the parish church, but the parishioners took issue with their obligation to trudge ‘three miles to Barkway carrying their dead for burials, while the rector insisted that he was entitled to fees for the burying’.13 The parishioners also, in what seems to resemble a form of counter-claim, argued that they were entitled to have a mass performed on a daily basis, which would have imposed significant costs on Martin’s church. The result of the case is unrecorded, but as Yeazell notes at its heart it simply involved a question of ‘who owed what to whom’.14

The Usuha case The second case15 occurs nearly six hundred years and several thousand miles distant from Martin’s case. The year 1791 found the villagers of Usuha in the province of Totomi (modern Shizuoka prefecture) in a similarly strained relationship vis-`a-vis their equivalent of Martin: a man named Suzuki who was the son of the deity master of the nearby Oguni shrine, which sat on a wooded hillside next to the village. This dispute, as with many others between shrines and villagers in the Tokugawa period, 12 Martin, Rector of Barkway v. Parishioners of Nuthamstead (1199). The facts of the case are drawn from Yeazell, Medieval Group Litigation, pp. 38–39 and 47–49. 13 Yeazell, Medieval Group Litigation, p. 48. 14 Yeazell, Medieval Group Litigation, p. 48. 15 ‘Lawsuit about Trees on a Shrine-land, between Suzuki Buzen, Deity-master, of Miyashiro Village, Totomi Kuni, with One Other Person, and Modayu of Usuha Village, of the Same Province, with Three Other Persons’ in J. H. Wigmore (ed.), Law and Justice in Tokugawa Japan, Part VI-F Property: Legal Precedents (Tokyo: The Japan Foundation, 1980), pp. 46–55.

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had to do with the cryptomeria and cypress trees that surrounded the shrine.16 The record in this case allows for the recreation of a somewhat more complete narrative of the facts of the dispute than in Martin’s case. Two years earlier while inspecting the precincts of the shrine, Suzuki came to find that more than forty of its trees had been cut down and taken away. Investigation led him to the home of one Modayu, the village headman17 in Usuha who was discovered to have taken the trees and was now offering the wood for sale. Suzuki complained to the domain (han) authorities and, as the han’s officials conducted an inspection of the land, a mediator came forward to arrange a settlement of the dispute. This mediation resulted in an agreement in which Modayu returned the unsold wood while being allowed to keep the proceeds of that which he had already sold. It was agreed that the land on which the remaining cryptomeria and cypress trees stood fell within the precincts of the shrine. As was standard practice with mediation at the time, an instrument carrying the seals of Modayu and other interested parties was executed to that effect, and the dispute seemed to have been settled. Regrettably, however, this was not to be the case. Not long after the settlement was reached, the shrine was severely damaged and required financial resources for repair. Suzuki had twenty-four of the remaining trees in the shrine precincts felled with the intention of selling the surplus lumber, branches and leaves to raise funds for the repairs. He had a list of the materials made up and circulated in a number of nearby villages. The villagers of Usuha were opposed to this action. The mountain on which the shrine and its precincts sat was located in their village. They paid tax on the land on which those trees were located so as to enjoy its benefits. Suzuki, they claimed, had no right to cut down trees on their land without asking permission and, what is more, certainly had no right to sell the fruits of that land to another village. Were the shrine’s deity

16 See also ‘Judgment on a Dispute about the Felling of Standing Trees, between the Buddhist Temple Hoto-ji, of Yamagata, Murayama Kori, Dewa Kuni, and Kawarako Village of the Same District’ in J. H. Wigmore (ed.) Law and Justice in Tokugawa Japan, Part VI-E Property: Legal Precedents (Tokyo: The Japan Foundation, 1980), pp. 108–174. 17 The primary role of a village headman in Tokugawa Japan was to ensure that the village paid its tax (in rice or kind). The headman had other roles, however, such as authorizing complaints to the han authorities, and the headman would also often be a representative of the village in court proceedings. See generally H. Ooms, Tokugawa Village Practice: Class, Status, Power, Law (Berkeley: University of California Press, 1996); D. F. Henderson, Conciliation and Japanese Law: Tokugawa and Modern (University of Tokyo Press, 1968).

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master to be allowed to do so, over time the forest would be denuded to the prejudice of the villagers of Usuha. Firm believers in the notion of self-help, the incensed villagers seized and impounded the lumber at issue before Suzuki could carry out his planned sale. The headman Modayu, whose own felling of lumber on the same land had caused the earlier dispute, seems to have been at the centre of this action. Protests by Suzuki fell on deaf ears: The villagers would not return the lumber. An impasse was reached. From here it was not long before recourse to the judicial machinery of Tokugawa Japan was made.

A common heritage? On a superficial level, these two cases have some remarkable similarities. They both involve disputes between local religious leaders and villagers whose spiritual needs they serviced. In both cases the groups of villagers were the ‘defendants’ in the case, although both raised something akin to counter-claims. If we look at the cases in terms of the group interests at stake and how the court dealt with the fact that these cases involved groups, the similarities persist. Whereas the Usuha case dealt with property rights and Martin’s dealt with what a modern lawyer might consider a form of contract law (although it would not have been thought of as such at the time), the group interests are quite similar. The issue of where they were obliged to bury their dead affected all the residents of Nuthamstead just as the issue of protecting their hillsides from deforestation affected all residents of Usuha. At their heart, both were cases to determine ‘who owed what to whom’, with at least one ‘party’ being a group. Despite the fact that the substance of both cases dealt with group interests, in neither case did the courts indicate that they viewed this as a distinguishing factor. In Martin’s case the parishioners were represented by four of their number on behalf of the rest. These four were selected simply by virtue of the fact that they were the ones Martin chose to name as defendants to represent the rest. In the Usuha case it was the village headman Modayu, on behalf of three persons, and Rihei, the farmers’ representative of Usuha on the one side, against Suzuki and one Suzumura Orie as the representative of a hereditary priest of the shrine, and thirtynine other persons on the other. Nowhere in either decision is there any indication that the courts ever considered whether the presence of these litigants as representatives of larger group interests – and the various issues outlined above that go with it – presented any sort of problem. The

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degree to which this was not considered an issue is particularly evident in Martin’s case, where the opposing party was allowed, without apparent objection, to name the individuals who would act as representatives of his adversary. The fact that the courts did not address the ‘group issues’ does not of course mean that they went entirely unaddressed. To a certain extent this can be explained by the differing political and philosophical mindsets of the judges at the respective times. The political notion of representation and representative government did not develop until well after the medieval period in England18 and not at all in Tokugawa Japan, where the neo-Confucian philosophy of the judiciary would have made concerns about such things as increasing access to justice or protecting the autonomy of individuals largely alien.19 Yeazell also suggests that in England the lack of specialized rules for handling group cases at this early stage in legal development derives in part from the fact that society itself had already provided many of the answers. The groups involved did not come into existence merely for the purpose of litigation as with modern class actions, but existed as recognized preexisting units of feudal society with an already fixed membership and identity. The problem of organizing the group – and all the questions that entailed – was therefore not an issue. Moreover, as the groups had been originally called into existence by superiors on the social ladder, there was nothing particularly controversial about the court recognizing these groups for the purposes of litigation. If one takes the analysis somewhat further – not just focusing on the role society plays but on the rational incentives of the individuals who make up the group – this also makes sense. Modern group litigation involves large numbers of actors who are for the most part unknown to each other. This creates potential agency problems between the representative and the represented that demand rules and procedures if they are to be resolved. In smaller groups within a community where all members know each other, the group itself can provide rules and modes of redress which can overcome these concerns. A look at the cases from Tokugawa Japan provides some support for this view. Villages such as Usuha were a defined unit within the feudal hierarchy with a defined membership and strict rules prohibiting movement 18 See generally Yeazell, Medieval Group Litigation, ch. 7. 19 On the relationship between neo-Confucianism and the Tokugawa legal system see generally Henderson, Conciliation and Japanese Law, pp. 37–44.

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into or out of the group.20 Population registers which recorded the details of every resident were kept up to date.21 The headman, who often served as a representative of the village in litigation, also had a predefined role in the village that included a quasi-judicial function in resolving disputes among villagers.22 The two cases reviewed here could possibly not be described as typical, but at the same time neither were they extraordinary. English courts – in particular the Chancery – continued to hear similar cases involving parishes and villages for centuries after Martin’s case.23 In Tokugawa courts, cases involving villages were the norm rather than the exception.24 This could in part be explained by the fact that disputes among individual villagers (who made up the majority of the population) were handled at the village level rather than through formal legal channels in the han or Shogunal courts. It can also be explained by the official discouragement of suits in the formal court system and preference for conciliation (choutei), which will be further discussed in the final section. Despite these similarities, significant differences existed which would affect the differing developments of each. These differences will be discussed in the Conclusion section below. In the following section we look at the emergence of new groups in seventeenth-century England and Tokugawa Japan and their implications on group litigation in each.

New groups: joint stock companies and kabunakama Over time, developments outside of the legal system in England would force courts to develop a new approach to group litigation that distinguished such cases from those involving individual litigants. In Tokugawa Japan, similar changes did not bring about a similar change in the approach to group litigation. This section looks at two new groups that economic and social changes brought about as each country moved away 20 On villages in Tokugawa Japan see generally D. F. Henderson, Village ‘Contracts’ in Tokugawa Japan (Seattle: University of Washington Press, 1975), pp. 7–11, and Ooms, Tokugawa Village Practice. 21 Ooms, Tokugawa Village Practice, p. 13. 22 See generally Henderson, Conciliation and Japanese Law. 23 Yeazell, Medieval Group Litigation, pp. 130–131. 24 The types of cases which Tokugawa courts gave priority to (see discussion in the final section on divergence below) often involved boundary disputes, water rights and other rights which had a group nature to them as in the Usuha case. See generally the cases assembled in J. H. Wigmore (ed.), Law and Justice in Tokugawa Japan (Tokyo: Kokusai Bunka Shinkokai, 1969).

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from its feudal, agrarian social structure to one with a more developed economy: the joint stock company and the kabunakama.

English joint stock companies Prior to 1688, incorporation in England had been available only on the grant of a royal charter. By 1500 towns and boroughs were increasingly seeking incorporation by such charters, and by 1600, outside of the Chancery, litigation involving unincorporated villages or parishes such as in Martin’s case had all but disappeared.25 Incorporation – which provided a useful bright-line rule for recognizing the standing of entities to appear in court – came to be seen as a prerequisite for group litigation. In the business world early trade monopolies such as the Hudson Bay and East India Companies were granted such charters and eventually developed the use of joint stock for individual ventures in which members of the company could invest and receive a proportional return on profits.26 After 1688, royal charters were no longer required for incorporation, but it still required an act of Parliament. Free incorporation would not come about until the nineteenth century. There was a boom in the formation of joint stock companies beginning in 1688, in both incorporated and unincorporated forms.27 The purpose of the unincorporated joint stock companies at this time was to amass capital from a large number of shareholders. These shareholders would not actively participate in the management of the venture and could freely trade their shares without having to gain the permission of other shareholders. After the passage of the Bubble Act in 1720, which banned the formation of unincorporated joint stock companies, similar forms of association continued to operate under the guise of partnerships.28 Yeazell sees in the joint stock company, along with the friendly associations that arose at roughly the same time, a group which played a significant role in altering the traditional approach to group litigation in English courts.29 Viewed as a form of a litigative entity, the joint stock 25 Yeazell, Medieval Group Litigation, pp. 104–105. 26 P. Lipton, ‘The Evolution of the Joint Stock Company to 1800: A Study of Institutional Change’, (2009), p. 13, available at http://papers.ssrn.com/sol3/papers.cfm?abstract id= 1413502. 27 Lipton, ‘The Evolution of the Joint Stock Company’, 16. 28 Lipton, ‘The Evolution of the Joint Stock Company’, 16; on the limited effect of the Bubble Act on joint stock companies see generally R. Harris, ‘The Bubble Act: Its Passage and Its Effects on Business Organization’, The Journal of Economic History, 54 (1994), 610. 29 Yeazell, Medieval Group Litigation, ch. 6.

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company was fundamentally different from the parishes and villages of earlier centuries. Shareholders came together for a limited purpose – to share in the risks and profits of a particular business venture. The shareholders, unlike members in feudal villages, did not necessarily know each other, and membership could change as shareholders exchanged their shares. The ‘group’ that the company represented could be ended on agreement among the members. In short, the group was ephemeral in nature (though it had the potential to exist indefinitely), and its membership was tied together by much weaker bonds than feudal villages had been. At the same time, agency problems created disputes among members of the joint stock companies. The separation of ownership from management created the risk of moral hazard, and complaints from shareholders as to how the company (and their investment) was being run naturally arose from time to time. The shareholders could of course remove managers who performed poorly, but could the new management sue the former managers on behalf of the company? Or for that matter could they sue any third parties on behalf of the shareholders? When cases in which this type of question was raised reached the courts, they posed a problem. Such joint stock companies were not incorporated by charter, and thus were not legal entities such as incorporated townships or boroughs. The nature of their membership as noted above also made them distinct from feudal village cases, which at any rate were no longer occurring by the time joint stock company disputes arrived on the scene. These were not pre-existing units of a feudal hierarchy, but privately arranged groups with very little cohesion other than the fact that all members owned shares in the company. English courts were finally faced with the need to address the questions of modern group litigation, some of which were discussed at the beginning of this section. Such efforts would ultimately rest on the notion of a group tied together by an ‘interest’. Yeazell, drawing on eighteenth- and early nineteenthcentury case law involving unincorporated joint stock companies, notes that the issue of ‘collective litigation’ eventually became a ‘perennial threshold issue: whenever an unincorporated collectivity sought to sue, the court had to decide whether, all things considered, it was appropriate to permit it to do so’.30 When actual authorization from all the shareholders for the company, via its management, to sue in their names was lacking, the courts began to accept such cases on the basis that the shareholders all had a common interest at stake in the litigation. The 30 Yeazell, Medieval Group Litigation, p. 186.

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process was substantially impeded by hostility towards joint stock companies following the South Seas Bubble, but by the nineteenth century legislation would ultimately codify the ability of a joint stock company’s management to sue on behalf of the company without the explicit consent or joinder of all the shareholders.31

Kabunakama At roughly the same time that joint stock companies were booming in England, vast economic changes were afoot in Japan as well that also led to the development of new forms of business organization. The great peace introduced by the establishment of the Tokugawa government (bakufu) led to an expansion of population and economic output that was greatly advanced by the time the regime collapsed in the nineteenth century. The general situation is described by Michael Smitka: In 1720 . . . farm productivity was high enough to support an urban network as large as that found anywhere in Europe outside of the Netherlands. During the course of the seventeenth century the new capital of Edo grew from a fishing village into the world’s largest city, with a population of over one million and a vibrant urban culture. . . . by the early 1800s, the majority of the output of the more prosperous regions was industrial in character.32

As was the case in England in the seventeenth century, economic growth and social change during the Tokugawa period also brought with it a new type of group that was organized for the purposes of engaging in commercial activity: the kabunakama. The kabunakama has been defined rather broadly as ‘a group composed of members who have a kabu.’33 A ‘kabu’ was a license issued by government authorities to engage in a certain business.34 In relation to the group, a kabu could be understood as a ‘share’,35 though unlike a share 31 Yeazell, Medieval Group Litigation, pp. 194–195. 32 M. Smitka (ed.), The Japanese Economy in the Tokugawa Era, 1600–1868 (New York: Galrand Publishing, 1998), p. 7. 33 T. Okazaki, ‘The Role of Merchant Coalition in Pre-modern Japanese Economic Development: An Historical Institutional Analysis’, Explorations in Economic History, 42 (2005), 188. 34 Obazaki, ‘The Role of Merchant Coalition in Pre-Modern Japanese Economic Development’. 35 The Chinese character for kabu () is the same used to describe a share in the modern joint stock corporation (kabushiki kaisha).

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in a joint stock company, kabu could not be freely traded without the approval of the other members.36 Ownership was hereditary, and where bankruptcy or the lack of an heir created a situation where another party would acquire the kabu, the other members had final authority to accept or reject the new owner.37 Where the group’s members did not have official recognition, and thus did not have kabu, the group was referred to simply as nakama.38 The kabunakama was the successor to an earlier form of business organization, the za, which were a type of guild organized at the local level and licensed by local lords or by religious authorities.39 The za were abolished by Toyotomi Hideyoshi in the late sixteenth century, from which point merchants began to conduct business independent of local authorities. Hideyoshi also banned the meetings (yoriai) and collaboration (moshiawase) of merchant groups, a policy that would be continued by the early Tokugawa bakufu until the late seventeenth century when it began granting licenses to merchants and recognizing the nakama in certain areas of trade, giving rise eventually to the recognized kabunakama.40 From that point the bakufu began to use kabunakama as a means of controlling prices and distribution in certain markets.41 Kabunakama and nakama existed in specific lines of business and specific geographical locations and would control their markets in a monopolistic fashion. They held regular yoriai for decision making and each had a manager (gyouji) as an executive.42 Tetsuji Okazaki likens these organs to the general meeting of shareholders and president of a modern business corporation.43 The gyouji would act as representative of the group in its external relations and could be chosen by the membership 36 Sales of kabu did occur, however, with permission of the other members. T. Okazaki, Edo no Shijo Keizai (Tokyo: Kodansha, 1999), p. 86 provides some examples of kabu prices. 37 C. D. Sheldon, The Rise of the Merchant Class in Tokugawa Japan, 1600–1868: An Introductory Survey (New York: J. J. Augustin, 1958), p. 52. 38 Sheldon, The Rise of the Merchant Class in Tokugawa Japan, 1600–1868, p. 55. 39 Okazaki, Edo no Shijo Keizai, pp. 88–89. 40 Okazaki, Edo no Shijo Keizai, p. 90. Official recognition of nakama seems to date to a proclamation in 1684 to the effect that merchants who dismissed one of their clerks would have to notify the other members of their nakama of this fact. 41 Okazaki, Edo no Shijo Keizai, p. 6. 42 There were no standard rules about when meetings could be held. The Sansho Senichi Ton’ya Nakama, for example, held its meetings three times a month, while another nakama in Osaka held meetings only on the second and eighth months of the year. Okazaki, Edo no Shijo Keizai, p. 87. 43 Okazaki, Edo no Shijo Keizai, p. 87.

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via various methods.44 Charles Sheldon notes that there was a strong trend towards using the group for the purpose of providing protection to its members – against official hostility from the authorities to merchant activities and against new entrants into their markets.45 The size varied, with the average kabunakama in the later Tokugawa period having thirtyone members.46 Larger units of business organization also existed, with individual kabunakama forming into larger leagues such as the Higaki Kaisen Tsumi Ton’ya Nakama in Edo47 and family-based enterprises such as Mitsui having multiple branch family members acquiring kabu and entering into kabunakama from different fields of business.48 From the point of view of the nature of the group, the kabunakama had several differences when compared with both the feudal villages such as Usuha and with the joint stock companies in England. In a certain respect, the differences between kabunakama and Japanese feudal villages were similar to the differences between joint stock companies and English feudal villages. They were voluntary rather than enforced forms of association, and the members did not necessarily live in the same community as villagers did, with all the close social bonds and dispute-resolving structures which that entailed. On the other hand, the connections among members were still much stronger than those among shareholders in a joint stock company. Kabu could not be alienated without permission from the rest of the group, so the members knew each other and maintained strict controls on entry and exit to the group. The separation of shareholders from active participation in the business was also not present in the kabunakama, which bore a much closer semblance to the guilds of Medieval Europe than to the joint stock company. Unlike shareholders in a joint stock company – who were often only passive investors who provided financing for the venture – members of the kabunakama actively participated in the trade to which it was devoted and joined in the group decision- making process through participation in the yoriai. As noted by Sheldon: To a very large degree, the individual liberties of merchants who joined nakama were absorbed into the collective will of the organization, and duties were inherent in membership. This collective will was formed at 44 45 46 47 48

Okazaki, Edo no Shijo Keizai, p. 88. Sheldon, The Rise of the Merchant Class in Tokugawa Japan, pp. 56–57. Okazaki, ‘The Role of the Merchant Coalition’, 188. Okazaki, ‘The Role of the Merchant Coalition’, 188. Sheldon, The Rise of the Merchant Class in Tokugawa Japan, p. 51.

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meetings and drawn up into agreements of various kinds. This surrender of individual to group interest was done voluntarily, in order to gain a security not otherwise obtainable.49

From the standpoint of the effect of the new group on the court’s approach to group litigation, disputes among members of a kabunakama did not have any direct effect on Tokugawa jurisprudence. The immediate explanation for this lack of change is an extremely simple one: The rules expressly forbade disputes involving nakamagoto (matters related to nakama, or ‘private matters’) from being sued on.50 As a legal system which relies on judicial precedent to generate rules cannot create new rules if no relevant cases are brought before the judiciary, obviously this created an insurmountable problem. This is an extremely tidy explanation, but in itself the fact that such cases could not be sued upon tells us very little about why the Tokugawa legal system’s approach to group litigation did not develop in the same way the English system did. Prohibitions that create inefficient or problematic results often lead to backlashes. This was the case in 1842 when the Shogunate briefly attempted to ban the kabunakama themselves, with disastrous economic consequences that ultimately forced the Shogunate to repeal the ban.51 Yet the kabunakama managed to become a major form of business organization despite the fact that disputes relating to them could not be sued upon in the Tokugawa courts. More interesting questions arise about why the Tokugawa courts never developed rules on group litigation in the way that occurred in England. From one perspective we may ask why the legal system evolved the rules in the way it did – why did they refuse to hear cases involving kabunakama? From another perspective we may ask why the kabunakama with its features that distinguish it from the joint stock company developed in the way it did – in other words in a way that allowed it to survive without recourse to the courts to resolve disputes among its members or between the group and third parties. Finally we may ask what it was about the broader socio-political context in which they operated that influenced the course of development. The following 49 Sheldon, The Rise of the Merchant Class in Tokugawa Japan, pp. 56–57. 50 Henderson, Conciliation and Japanese Law, pp. 115–116. See also volume IX of Wigmore, Law and Justice in Tokugawa Japan, Part VI-F Property, pp. 71–75. It is interesting to note that the same law also banned suits on kake-kin, a lottery club that was also used as ‘tontine savings funds, death-benefit fraternal insurance funds’ somewhat similar in purpose to the friendly associations that Yeazell identifies alongside the joint stock company as being instrumental in modernizing English group litigation. 51 Okazaki, ‘The Role of the Merchant Coalition’, 191–192.

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section attempts to explain the different course of development in Japan and England with regard to these issues.

Explaining the difference In the previous sections we have examined how the English and Tokugawa courts – with their noted similarities – moved from a common position of treating group litigation the same to one in which English courts began treating it differently while Tokugawa courts did not. The English courts of course had a much longer time-frame in which to make this change – from roughly the end of the twelfth century to the early nineteenth – whereas the Tokugawa legal system itself only existed for about two-anda-half centuries in total. This simple distinction may obviously go a long way in itself to explaining the difference. In this section, however, we examine three other factors that may have contributed to the differing path that Tokugawa law took with regard to group litigation: the nature of the Tokugawa legal system, the nature of the kabunakama and the broader social and political context in which these the legal system and the kabunakama operated.

The Tokugawa legal system It is important to note at the outset that ‘Tokugawa law’ is not completely synonymous with ‘Japanese law during the Tokugawa era’. Japan at this time could best be described as a federation of quasi-independent domains united under a titular Emperor who delegated central authority to the Tokugawa Shogun. The Tokugawa Shogun was, formally, merely the most powerful of the feudal barons who had been able to gain appointment as Shogun by the Emperor, though in fact the Tokugawa bakufu was the de facto central government of Japan. Under this system the administration of justice was largely left at the discretion of the individual domains, which applied their own law in their own courts. ‘Tokugawa law’ refers to the law followed by the courts of the domains under the direct control of the Tokugawa, which only amounted to a fraction of Japan’s total area.52 To a certain extent, in terms of cases involving what today we would consider private law at any rate, it was merely the law that applied in the largest domains in Japan at the time.

52 Henderson, Conciliation and Japanese Law, p. 82.

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A couple of features did, however, make Tokugawa law much more significant than the laws of other domains. The first had to do with the jurisdiction of the Tokugawa courts. In addition to jurisdiction over cases involving litigants in Tokugawa domains, the Tokugawa courts also handled diversity-of-jurisdiction cases – cases where the opposing parties came from different domains. Tokugawa courts thus gained jurisdiction over numerous disputes involving things such as property and water rights which crossed domain borders, as well as cases involving commercial matters that crossed borders.53 In addition the Temple and Shrine Commission54 – the same body that had jurisdiction over the Usuha case – had jurisdiction over disputes involving temples and shrines throughout Japan. So the jurisdiction of Tokugawa courts was much larger than the Tokugawa domains. A second feature that separates Tokugawa law from the rest is that it was the law that applied in both the eight Kanto provinces (where Edo, the largest city in Japan and, for a time, the world, was located), Osaka (the commercial centre of Japan) and Kyoto (the seat of the nominal imperial court). This made Tokugawa law far and away the most influential source of legal rules, and many individual domains modelled their own laws after those applied in the Tokugawa courts.55 Having set out Tokugawa legal system’s general features, we may now examine three specific aspects that may help to explain why the system developed differently from England with regard to group litigation. The first has to do with the roles of the judges themselves. In England it is an often-noted fact that the alignment of the judiciary with the winning side in the Glorious Revolution in the seventeenth century allowed the judiciary to develop greater independence from the Crown thereafter and that this, in turn, led it to be a greater force for the protection of private property rights.56 The usual point of comparison for this purpose is with France, where the judiciary sided with the losing side of the French Revolution and played a diminished, less independent role thereafter.

53 Henderson, Conciliation and Japanese Law, pp. 92–97. 54 The main Tokugawa courts were the three bugyou (commissions): the Temple and Shrine Commission, the Finance Commission and the Edo Town Commission. On Tokugawa procedural law and the structure of the court system see generally Henderson, Conciliation and Japanese Law, chs. 4 and 5. 55 Henderson, Conciliation and Japanese Law, p. 85. 56 This argument is often relied upon in the economics literature to explain differences in economic development between countries with English and French legal systems. See R. La Porta, F. Lopez-de-Silanes and A. Shleifer, ‘The Economic Consequences of Legal Origins’, Journal of Economic Literature, 46 (2008), 285, 303–305.

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Unlike their counterparts in eighteenth-century England, judges in the Tokugawa courts were not independent. They were retainers of the Tokugawa family and their judicial functions were merely one undifferentiated part of their larger administrative function. Dan Henderson has in this regard compared them to the early English judges of the twelfth century who likewise did not distinguish their judicial and administrative functions in service of the King.57 The difference is significant. As administrators Tokugawa judges viewed their role as enforcing the existing social order and could not make decisions that would endanger that. It is to be noted that concerns over increasing access to justice by litigants with seemingly just claims were an underlying theme in many of the key English cases which laid the groundwork for the rules of modern group litigation.58 Being relatively independent and viewing themselves not as administrators but, ideally, as upholders of the law gave English judges the ability to take such considerations into account when creating or modifying rules. Tokugawa judges had no such freedom. Handling cases involving land disputes between shrines and feudal villages as in the Usuha case were uncontroversial – and settling such disputes was in fact an indispensable part of their administrative function. Disputes involving kabunakama – whose membership were all merchants – were another story. Recognizing them would have implications for the existing social structure, a subject discussed later in the chapter. The second aspect is the hierarchical way of treating cases based on their subject matter, which the courts used. Cases were divided into two broad categories: ginmisuji and deirisuji.59 The former dealt with something akin to criminal and administrative law and the latter to what we would today consider private law. Deirisuji were further subdivided into three broad types of claims. The first were honkuji, which dealt mainly with property disputes and were given the highest priority. The second

57 Henderson, Conciliation and Japanese Law, p. 64. 58 See Yeazell’s discussion on Adair v. New River Co. (1805) 32 ER 1153 in which Lord Eldon held that ‘where it is impractical’ the necessary parties rule ‘shall not be pressed’. Yeazell, Medieval Group Litigation, pp. 184–186. The necessary parties rule was a major hurdle to group litigation and, though not explicitly stated, one of the motivations in thus relaxing the application of the rule was undoubtedly to increase access to justice for litigants who would otherwise be denied access to the court system because of its onerous requirements. 59 Yeazell, Medieval Group Litigation, ch. 5. See also H. Maki and A. Fujiwara (eds.), Nihon Houseishi (Tokyo: Seirin Shouin, 1993), pp. 234–245.

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were kanekuji, which dealt mainly with claims for unsecured loans. These were given less protection in the courts, and in practice the bakufu would issue proclamations once every twenty years or so declaring that all outstanding loans as of the date of the proclamation could not be sued upon in the courts.60 The final category was nakamagoto, suits involving private affairs which were supposed to be settled by the parties themselves.61 These types of claims could not be sued on at all in the courts, as noted earlier. This system of affording differentiated levels of protection served two purposes. On the one hand it helped to lighten the burden on the Tokugawa judiciary, who as noted above also had administrative functions to perform. It also reinforced the general objectives and underlying social structure of the system by allowing it to differentiate the level of legal protection afforded to certain claims based on how those claims fit into the social order. Suits that were essential to the smooth function of the system – honkuji – were given the highest protection, while those unessential – nakamagoto – were completely excluded. The third factor is the Tokugawa system’s heavy reliance on mediation rather than litigation as a form of dispute settlement in general. This is evidenced in the above-described Usuha case, where the original dispute between Modayu and Suzuki was settled by a mediator before either party initiated proceedings in the Tokugawa court system. Every effort had to be made to resolve disputes at the local level before recourse to the Tokugawa legal machinery could be made. The court system was thus a less important institution for resolving disputes in general in Tokugawa Japan, and a preference for private dispute resolution was a basic feature of Tokugawa society.62

The nature of the kabunakama In addition to the legal system, the nature of the kabunakama themselves played a role. As noted earlier, they had some superficial similarities to a joint stock company, but were by no means an equivalent form of business association. In terms of the group element, the members of a kabunakama had much closer bonds than the members of a joint stock 60 Okazaki, Edo no Shijo Keizai, pp. 78–80. 61 Maki and Fujiwara, Nihon Houseishi, p. 241. ‘Private affairs’ should not be understood in the sense that what we consider private law today could not be sued on in the courts, Tokugawa courts often dealt with cases involving property or contract disputes. 62 Henderson, Conciliation and Japanese Law, ch. 6 discusses the use of conciliation as a preliminary stage in Tokugawa civil trials.

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company. Whereas the purpose of a joint stock company was usually to raise finances from a diverse group of investors who would not actively take part in the running of the business, kabunakama did not admit outsiders for the purposes of acquiring financing. As the individual members of the kabunakama did not merely act as suppliers of financing but were active participants in the business activity of the group, the moral hazard that plagued the joint stock company – from the time of the South Seas Bubble right up to the present day – was not an issue for the kabunakama. Their management did not have other people’s money to ‘play with’, so to speak. Moreover the individual members had more ex ante involvement in the running of the business of the group through their participation in the yoriai. Where disputes did occur, they seem to have related more to individual members cheating on the rules of the group rather than on the relationship between the membership and management as with joint stock companies. Okazaki notes that many of the codes adopted by individual kabunakama contained provisions for dealing with cheating, such as the 1741 Code of Salt Wholesale Merchants which stated that ‘[i]f a broker cheats one of the members of the kabunakama concerning the salt price, all of the nakama members should promise to suspend trade with the broker who cheated’.63 Okazaki suggests that this type of blacklisting approach, which often applied to members of the nakama itself and not just third parties, provided an effective means of deterring cheating, as exclusion from the group would effectively put the offender out of business. This suggests that the main type of complaint that hypothetically could have involved the kabunakama in formal litigation was largely settled by the internal rules of the group itself.64

Social and political context Japanese society in the Tokugawa period was based upon a four-tiered set of classes, which, from highest to lowest, were: the samurai, the farmers, the artisans, and the merchants. Throughout the course of the Tokugawa period, the rise of the money economy posed a challenge to this 63 Okazaki, Edo no Shijo Keizai, p. 6. 64 On the private ordering of business associations in Tokugawa Japan, see further M. D. West, ‘Private Ordering at the World’s First Futures Exchange’, Michigan Law Review, 98 (2000), 2574.

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order.65 The warrior class survived on stipends of rice provided by the Shogunate or their domain lords, who in turn raised most of their income through taxes paid in rice. At the beginning of the era, rice was still the main store of value in society, but as the period progressed and moneybased exchange became more prominent, there was a gradual shift in economic power away from the samurai class and to the benefit of the expanding merchant class, who were ranked at the lowest order on the social scale.66 The Shogunate and, by implication, the non-independent judiciary that served it thus had an interest in discouraging the growing power of the merchant class. The kabunakama themselves were tolerated by the regime, but allowing them access to the court system to resolve their disputes would have run counter to the purpose of the courts: preserving the existing social order. There was simply no incentive for the Tokugawa judges to extend access to justice to such groups.

The difference In terms of the legal system itself, what we can broadly draw from these factors is the fact that, in sharp contrast to the English example, the Tokugawa legal system did not exist for the purpose of enforcing individual or group rights. Rather, it existed for administrative purposes in order to preserve social order. The roots of Japanese society’s lack of a sense of ‘rights consciousness’ that was much commented upon in the post-war period as the country’s judiciary sought to accommodate newly introduced American legal concepts67 may be a by-product of this historical legacy. What is also interesting to note is that the features specific to the Tokugawa legal system are ones that, to varying degrees, the English legal system also at one time in its early development possessed, but which it had largely moved on from by the eighteenth century. Early English judges also did not distinguish greatly between their administrative and judicial functions and would act on instructions directly from the King in certain cases. The early writ system also resulted in a sort of hierarchy of cases, with cases in which the claimant asserted a right being treated differently 65 Sheldon, The Rise of the Merchant Class in Tokugawa Japan, p. 1. 66 See generally Sheldon, The Rise of the Merchant Class in Tokugawa Japan. 67 See generally A. Taylor von Mehren (ed.), Law in Japan: The Legal Order in a Changing Society (Tokyo: Charles E. Tuttle Company, 1961).

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and with greater priority than those which complained of a wrong suffered in the past, which in the early days only could be sued upon to the extent that it infringed the King’s peace.68 By the time English judges reached the ‘turning point’ in group litigation, however, the judiciary was much more independent, drew a distinction between its administrative and judicial functions and was on its way to abandoning the system of differentiated writs, and the various courts competed with each other to attract cases (in order to collect fees) rather than discouraging them. We may, however, question the degree to which the differences in the legal system itself were determinative of the different path of development followed by the Tokugawa legal system. The new institutional school of economics notes that institutions – ‘the rules of the game in a society’ – matter to how societies and economies develop over time.69 The legal system provides some of the rules that govern individual and group behaviour in society, but not all of them. As reviewed above, the institutions which governed the kabunakama came from different sources – from the formal legal system, from the social structure of Tokugawa society and from the kabunakama themselves.70 One is tempted to ascribe a pattern of causation among these institutions – to suggest for example that the nature of the legal system caused the kabunakama to take the form and rules which it did. Ignoring the risk of such a line of inquiry descending into a chicken-and-egg argument, this search for a definitive causative explanation would probably tell us very little. It also misses the point: The collective institutional framework that these institutions presented was mutually reinforcing and made the type of change that occurred in England virtually impossible in Tokugawa Japan. The social structure and nature of the group supported the legal system’s approach to the kabunakama and group litigation in general, and vice versa. Changing one of these institutions – such as the legal system’s approach to group litigation – would have upset the balance. In England it was achieved after centuries of marginal changes, case by case, and well after the political upheavals of the seventeenth century. The Tokugawa legal system, on the other hand, never made this type of change.

68 Baker, Introduction to English Legal History, p. 57. 69 D. C. North, Institutions, Institutional Change and Economic Performance (Cambridge University Press, 1990). 70 Broader cultural and religious norms, which space precludes further discussion of, also would have played a role.

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Conclusion The courts of Tokugawa Japan and England both seem to have a common starting point in their approach to group litigation. Both accepted claims by and against groups without any of the distinct procedures to deal with the issues of representation and definition of the group that define modern collective actions. Both also developed their substantive and procedural rules in a similar way: through reliance on case law. Yet when economic development produced new groups in society, their paths of legal development parted. English courts, albeit reluctantly and after some time because of the effects of the South Seas Bubble and the Bubble Act, would eventually deal with the new groups and fashion a new approach to group litigation. Tokugawa courts, on the other hand, rejected dealing with such groups outright and never moved beyond this early stage in the development of group litigation. This chapter has outlined three factors that contributed to the different path taken by Tokugawa Japan – the peculiarities of the Tokugawa legal system, the fact that the new groups themselves got on reasonably well without any need for recourse to the courts to resolve their disputes and the structure of Tokugawa society itself. The cumulative effect of these factors made the development of a modern concept of group litigation in the Tokugawa legal system all but impossible. We may conclude here by briefly returning to consider the questions raised at the beginning of this chapter. What do these two stories tell us about how legal systems and rules on group litigation in general have developed? Perhaps the most telling lesson is that the stories provide conflicting answers to the age-old question of whether legal change precipitates social change or vice versa. In the English case, one could make the argument that legal changes followed changes in society as a whole. The courts evolved new rules on group litigation only when society produced new types of groups that necessitated them. On the other hand, the new groups would have had little effect on the legal rules if they had not encountered a legal system that was both willing and able to craft new rules so as to increase access to justice for the respective groups. In Tokugawa Japan social changes that likewise brought about new groups in society produced no similar legal change. The groups themselves seem to have developed in such a way as to not require new rules of group litigation, and even if they had, they likely would have come to a legal system that was unwilling to accommodate them. In short, the reasons

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for the divergence do not seem to lie completely within or completely outside of the legal systems themselves. Rather this divergence seems to be best understood as the result of the larger institutional structure operating in each society whose rules straddled the formal legal system and the informal rules of society as a whole.

6 Reconciling multilayer interests in environmental law Access to justice in environmental matters in the European Union and the United States

monika hinteregger

Access to justice as a means to reconcile multilayer interests in the protection of the environment The public interest: protection of the environment as a public duty In the modern world the protection of the environment is a public duty entrusted to the state. The ever-increasing mass of public environmental law is an impressive indication of this fact. But it is also a fact that the states and their authorities often fail to fulfil this task. The reasons for this are manifold and complex. Even in administrative proceedings economic interests sometimes prevail over environmental imperatives. The enforcement of environmental protection laws is costly and cumbersome, and public authorities, who are often in a difficult position because of lack of funding and political constraints, cannot be trusted with sole responsibility in this regard. Thus both in Europe and the United States, stakeholders spot an ‘enforcement deficit of environmental law’. To fill these gaps it is essential to ensure that protagonists who have a genuine interest in the protection of the environment have their due part in the implementation process.

The private interest: access to justice for individual persons Obviously suited for this task is the individual person who is directly affected by a polluting activity of another private person or public entity (e.g. state, municipality or public utility companies). Environmental goods – clean air, drinkable water and uncontaminated land – are of 143

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fundamental concern to every individual person, and it is therefore important that the individual person has the power to protect his or her interests in the preservation of environmental resources. In a state governed by the rule of law this is achieved by granting the individual person judicial relief when these interests are put in danger. This has a dual effect: Enabling private persons to take effective action against environmental pollution serves to protect their personal interests while simultaneously enhancing the public welfare, as the natural environment is an important public good. Accordingly, in the last decades many efforts have been made on the national as well as the international level to enhance the information, participation and litigation rights for the individual person in environmental matters. In the EU, according to the Europe 2020 strategy1 and the Stockholm Programme,2 private enforcement has now even evolved into a general policy to strengthen the enforcement of EU law. Both the Commission and Council are highly in favour of supplementing the existing instruments of public enforcement of EU law through European institutions and Member States by further mechanisms of individual redress. To empower the individual person is, however, insufficient for safeguarding environmental protection. First of all, there is no guarantee that the affected persons will indeed fight for their rights. Even an individual who is willing to do so may encounter severe difficulties when enforcing the granted rights, as individual persons often lack the expertise, the perseverance and the financial means to succeed in complex judicial proceedings, for example administrative proceedings concerning the authorization of dangerous installations or activities. Another reason for this shortcoming lies in the fact that the right of the individual person to take legal action is usually restricted by procedural law in order to prevent abusive claims and to protect the public authorities from overloading. In Europe, the rules on access to justice both in civil and public procedural law are very different.3 The most restrictive approach is maintained 1 Communication from the Commission, Europe 2020 – A strategy for smart, sustainable and inclusive growth, 3 March 2010, COM(2010) 2020 final. 2 Council document 17024/09 of 2 December 2009, OJ 2010 No. C115. 3 An analysis of the legal situation in the EU can be found in several EC-commissioned studies: N. De Sadeleer, G. Roller and M. Dross, ‘Access to Justice in Environmental Matters’, covering Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal and the UK, available at http://ec.europa.eu/environment/aarhus/pdf/accesstojustice final.pdf; ‘Inventory of EU Member States’ Measures on Access to Justice in Environmental Matters, Final Reports’, (2007), available at http://ec.europa.eu/environment/aarhus/study access

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by Germany.4 In order to have legal standing in administrative matters (administrative authorities and administrative courts), the plaintiff must show the infringement of a subjective public right. In Germany, individual persons thus are not allowed to claim the violation of an environmental protection rule which is only in the public interest. The same applies in civil law matters where, in order to have legal standing, individuals must prove the infringement of a subjective private right. Whether or not a rule confers a subjective right on an individual person is decided by the application of the so-called theory of the protective purpose of the norm (Schutznormtheorie). According to this theory, a rule confers a subjective right on an individual person, if (1) it is not merely intended to protect the public interest in the protection of the environment but also the interest of the individual person, (2) the plaintiff belongs to this class of individuals and (3) the claimed interest belongs to the type of interests that are protected by the rule.5 As the application of this theory can be rather difficult in practice, in order to provide for legal certainty many German public law statutes tend to explicitly name the type of persons who have legal standing. In France legal standing in civil and administrative matters is less restricted. A person can assert a private law claim (injunction or claim for damages), or challenge a governmental or court decision, if the person can prove a direct, personal, legitimate, effective, pertinent and certain interest.6 This concept of ‘interest’ is broader than the requirement of the subjective right under German law, but it still requires that there be a connection between the plaintiff and the cause of action. According to this pragmatic view, French courts attribute legal standing not only to the owner of the environmental good but also, for example, to the manager

.htm, which contains country reports from 25 Member States and the Study on the Implementation of the Aarhus Convention in the New Member States and Bulgaria, Romania and Turkey (http://ec.europa.eu/environment/aarhus). For legal standing in civil courts in pollution cases in various European countries see M. Hinteregger (ed.), Environmental Liability and Ecological Damage in European Law (Cambridge University Press, 2008). 4 And also by the other states of the so-called Germanic law family such as the EU Member State Austria, and Switzerland, who is not part of the EU. 5 M. Kloepfer, Umweltrecht, 3rd ed. (Munich: C.H. Beck, 2004), § 8 margin numbers 20 and 25; W. Erbguth, Allgemeines Verwaltungsrecht, 4th ed. (Baden-Baden: Nomos, 2011), § 9 ¨ margin numbers 3 et seq. See also S. Schlacke, Uberindividueller Rechtsschutz (T¨ubingen: Mohr Siebeck, 2008). 6 See ‘Inventory of EU Member States’ Measures on Access to Justice in Environmental Matters’, country report France.

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of a nature reserve, to public authorities that are in charge of the protection of biodiversity and to environmental organizations dedicated to the protection of the concerned environmental good. Individual persons and environmental organizations may even be able to obtain compensation for natural resource damage.7 England and Wales8 apply an even broader concept of legal standing. According to Article 31(3) Senior Courts Act 1981,9 the test of whether a person may file an application for judicial review is one of ‘sufficient interest’. This includes an assessment of fact and of law and is determined by the court. In recent years English courts have adopted a rather liberal view concerning the construction of sufficient interest,10 which also includes the consideration that it would be against the public interest ‘to let an illegality be unchallenged for want of a challenger with standing’. Contrary to Germany, English law thus does not per se exclude public interest claims by individuals. In tort law, however, legal standing is more restricted as plaintiffs must fulfil the specific prerequisites of the relevant tort (trespass, negligence, nuisance, liability under the rule in Rylands v. Fletcher11 ). In pollution cases the tort of public nuisance may also be available, under which the local authority or Attorney General may trigger criminal proceedings on behalf of the public and even claim compensation for personal injuries.12 There is an obvious interrelationship between the concept of legal standing and the effectiveness of private suits for environmental protection. The more individual persons are required to demonstrate the breach of a subjective right in order to obtain legal standing, the less they can contribute to the protection of collective interests in the environment. This holds especially true for environmental goods that are of primarily common or ‘collective’ interest, such as the preservation of biodiversity, or the protection of environmental goods that are not privately owned, 7 See Hinteregger (ed.), Environmental Liability and Ecological Damage, p. 632 et seq. 8 See ‘Inventory of EU Member States’ Measures on Access to Justice in Environmental Matters’, country report United Kingdom. 9 Art. 31(3) Senior Courts Act: ‘No application for judicial review shall be made unless the leave of the High Court has been obtained in accordance with rules of court; and the court shall not grant leave to make such an application unless it considers that the applicant has a sufficient interest in the matter to which the application relates’. 10 See ‘Inventory of EU Member States’ Measures on Access to Justice in Environmental Matters’, country report United Kingdom, p. 5. 11 Rylands v. Fletcher [1868] 3 LR HL 330. 12 See N. Hird, ‘English Report’ in Hinteregger (ed.), Environmental Liability and Ecological Damage, pp. 101–102.

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including the air, the climate or the sea. It is therefore apparent that, even from a purely anthropocentric viewpoint, the protection of collective goods cannot be effectively provided without adequate collective legal instruments.

Reconciling individual and collective interests: access to justice for environmental organizations To overcome these factual and legal obstacles, many European countries have opened access to justice to environmental interest groups and environmental organizations, although, in line with their legal traditions, in a quite different way and to a varying extent. While, for example, the United Kingdom and France are quite liberal in granting legal standing to environmental associations, Germany is still very restrictive in this regard.13 It is apparent that the availability of litigation rights for environmental associations serves the private interests of those individuals who are actually or potentially affected by pollution. Action by non-governmental organizations (NGOs) spares them the expenditure of cost and time and the annoyances that come with litigation. Collective action has, however, also clear benefits for the public interest in environmental protection. Litigation rights of NGOs promote the effective enforcement of environmental law. Not only the actual claim, but the mere possibility of such an action induces public authorities and business enterprises to examine more carefully the compatibility of their decisions and activities with environmental law requirements, which leads to an overall improvement of compliance with environmental laws. Moreover, litigation by environmental organizations, often accompanied by, and sometimes funded through, public campaigns, increases the public awareness of environmental issues and ensures better public participation in the decision-making processes. The admissibility of collective actions has also some benefits for the judicial system as such. Collective actions allow for the bundling of individual claims and can thus reduce the strain on administrative authorities and courts especially where many persons are affected. Environmental organizations typically have a high degree of expertise in their field and are therefore less prone to bringing unsubstantiated claims.

13 For an analysis of the situation in the European countries see De Sadeleer, Roller and Dross, ‘Access to Justice in Environmental Matters’.

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Collective actions in the environmental law of the European Union The Aarhus convention and its implementation in EU law Aarhus convention According to Principle 10 of the Rio Declaration, produced at the 1992 Earth Summit (UN Conference on Environment and Development), ‘environmental issues are best handled with the participation of all concerned citizens.’ This encompasses appropriate access to information concerning the environment, participation in decision-making processes and effective access to judicial and administrative proceedings, including redress and remedy. Inspired by this principle, the UN Economic Commission for Europe adopted on 25 June 1998 the Aarhus Convention,14 which grants the public (1) the right of access to environmental information (first pillar), (2) the right to take part in decisionmaking processes (second pillar) and (3) public access to justice (third pillar). The first pillar pertains to environmental information held by public authorities. It relates to information on the state of the elements of the environment (such as air and atmosphere, water, soil, land, landscape and natural sites, biological diversity and its components, including genetically modified organisms, and the interaction among these elements), on activities, policies or measures (including administrative measures, environmental agreements, policies, legislation, plans and programs) or to information on the state of human health and safety, where this can be affected by the state of the elements of the environment.15 Applicants need not substantiate their request.16 Public authorities are also obliged to take active measures to disseminate 14 Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters, Aarhus, 21 April 1998, in force 30 October 2001, ECE/CEP/43. See also S. Stec and S. Casey-Lefkowitz, The Aarhus Convention: An Implementation Guide (New York and Geneva: United Nations, 2000). For the Aarhus Convention see e.g. A. Epiney, ‘Zu den Anforderungen der Aarhus-Konvention an das europ¨aische Gemeinschaftsrecht’, Zeitschrift f¨ur Umweltrecht, (2003), 176; S. Stec (ed.), Handbook on Access to Justice under the Aarhus Convention (Szentendre: Regional Center for Central and Eastern Europe, 2003); V. Koester, ‘The Compliance Committee of the Aarhus Convention’, Environmental Policy and Law, 37 (2007), 83; O. W. Pedersen, ‘European Environmental Human Rights: A Long Time Coming?’, Georgetown International Environmental Law Review, 21 (2008), 7; B. Toth, ‘Public Participation and Democracy in Practice’, Journal of Land, Resources & Environmental Law, 30 (2010), 295. 15 See the definition in Art. 2(3)(a) of the Aarhus Convention. 16 Art. 4(1)(a) of the Aarhus Convention.

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environmental information in their possession.17 The second pillar obliges the public authorities to enable the affected public, which also includes environmental NGOs, to comment on project proposals, plans and programs relating to the environment.18 They are obliged to take these comments into due account in their decision making, to inform the public on the final decisions and to give the reasons for it. The third pillar constitutes the right to review procedures to challenge public decisions that have been made without respecting the right to information and participation or environmental law in general.19 Although access to review procedures concerning the first pillar is rather open,20 access to judicial review with regard to the second pillar is restricted. Depending on the tradition in the relevant Member State, in order to have legal standing the public concerned must either show a sufficient interest or, where the administrative procedural law of a Member State already so requires,21 the impairment of a right. What constitutes a sufficient interest or an impairment of a right is determined by national law. This decision, however, must be consistent with the objective of the convention to give the public concerned wide access to justice.22 The third pillar of the Aarhus Convention also provides for the judicial review of national environmental law but leaves each Member State the right to determine the criteria under which such a right is granted.23 This is rather unspecific, but when considering this right, one must bear in mind that Member States are obliged under the Convention to provide ‘adequate and effective remedies, including injunctive relief’ which are ‘fair, equitable, timely and not prohibitively expensive’.24

Implementation acts The Aarhus Convention has a substantial impact on the law of the EU, who signed the Aarhus Convention on 25 June 1998 and approved it on 17 18 19 20 21

Art. 5 of the Aarhus Convention. Arts. 6 to 8 of the Aarhus Convention. Art. 9 of the Aarhus Convention. See Art. 9(1) of the Aarhus Convention. Stec and Casey-Lefkowitz, Implementation Guide, p. 129: ‘it (the clause) is not an invitation for Parties to introduce such a fundamental legal requirement, where it does not already exist’. 22 Art. 9(2) of the Aarhus Convention. 23 Art. 9(3) of the Aarhus Convention. 24 Art. 9(4) of the Aarhus Convention.

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17 February 2005.25 The obligations deriving from the Convention are implemented by secondary legislation. In order to implement the obligations on the Community level, the EU adopted the Aarhus Regulation,26 which supplements existing Community legislation granting access to documents held by the Commission, the European Parliament and the Council. It covers the institutions, bodies, offices or agencies established by, or on the basis of the EC Treaty, which had to adapt their internal procedures and practice to the provisions of the Regulation by 28 June 2007. The Regulation also entitles NGOs to make a request for internal review of administrative acts (Article 10) and defines the criteria such organizations must meet. According to Article 11 of the Regulation they must (1) be an independent non-profit-making legal person in accordance with a Member State’s national law or practice, (2) have the primary stated objective of promoting environmental protection in the context of environmental law, (3) must have existed for more than two years and must be actively pursuing environmental protection and (4) the subject matter in respect of which the request for internal review is made must be covered by its objective and activities. With respect to the laws of the twenty-seven EU Member States, the EU adopted several directives providing for public access to environmental information and justice. These are Directive 2003/4/EC on public access to environmental information27 and Directive 2003/35/EC providing for public participation in respect of the drawing up of certain plans and

25 Council Decision 2005/370/EC of 17 February 2005 on the conclusion, on behalf of the European Community, of the Convention on access to information, public participation in decision-making and access to justice in environmental matters, OJ 2005 No. L124. 26 Regulation (EC) 2006/1367 of the European Parliament and of the Council of 6 September 2006 on the application of the provisions of the Aarhus Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters to Community institutions and bodies, OJ 2006 No. L264. The Commission has adopted two decisions to implement further the Regulation: Commission Decision of 13 December 2007 laying down detailed rules for the application of Regulation (EC) No 1367/2006 of the European Parliament and of the Council on the Aarhus Convention as regards requests for the internal review of administrative acts, OJ 2008 No. L13, and Commission Decision of 30 April 2008 amending its Rules of Procedure as regards detailed rules for the application of Regulation (EC) No 1367/2006 of the European Parliament and of the Council on the application of the provisions of the Aarhus Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters to Community institution and bodies, OJ 2008 No. L140. 27 Directive 2003/4/EC of the European Parliament and of the Council of 28 January 2003 on public access to environmental information and repealing Council Directive 90/313/EEC, OJ 2003 No. L41.

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programmes relating to the environment.28 Provisions for public participation in environmental decision making can also be found in a number of other environmental directives, such as Directive 85/337/EEC29 (‘Environmental Impact Assessment’ – EIA Directive), Directive 2001/42/EC30 (‘Strategic Environmental Assessment’ – SEA Directive), Council Directive 1996/61/EC concerning integrated pollution prevention and control (‘IPPC Directive’)31 and Directive 2000/60/EC (‘Water Framework Directive’),32 which also contain provisions on access to justice. The Proposal for a Directive of the European Parliament and of the Council on access to justice in environmental matters33 has not yet come into force. In order to review the implementation of the Aarhus Convention by the Community, the Commission provided for two implementation reports: The first was adopted on 7 May 200834 and the second on 14 April 2011.35

Collective actions The Aarhus Convention attributes to NGOS an important role for the protection of the environment and obliges Member States to provide, to a certain extent, legal standing for NGOs in their jurisdictions. According to Article 2(4) Aarhus Convention, the definition of ‘the public’, specified as ‘one or more natural or legal persons’, also extends (in accordance with national legislation or practice) to ‘their associations, organizations 28 Directive 2003/35/EC of the European Parliament and of the Council of 26 May 2003 providing for public participation in respect of the drawing up of certain plans and programmes relating to the environment and amending with regard to public participation and access to justice Council Directives 85/337/EEC and 96/61/E, OJ 2003 No. L156. 29 Council Directive 85/337/EEC of 27 June 1985 on the assessment of the effects of certain public and private projects on the environment, OJ 1985 No. L175, as amended and codified. 30 Directive 2011/42/EC of the European Parliament and of the Council of 27 June 2001 on the assessment of the effects of certain plans and programmes on the environment, OJ 2001 No. L197. 31 Council Directive 96/61/EC of 24 September 1996 concerning integrated pollution prevention and control, OJ 1996 No. L257, replaced by Directive 2008/1/EC of the European Parliament and of the Council of 15 January 2008 concerning integrated pollution prevention and control, OJ 2008 No. L24. 32 Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 establishing a framework for Community action in the field of water policy, OJ 2000 No. L327. 33 Proposal for a Directive of the European Parliament and of the Council on access to justice in environmental matters. 24 October 2003, COM(2003) 624 final. 34 SEC(2008) 556. 35 COM(2011) 208 final.

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or groups’. Article 2(5) Aarhus Convention, which defines ‘the public concerned’ as ‘the public affected or likely to be affected by, or having an interest in, the environmental decision-making’, also includes NGOs promoting environmental protection. Under the condition that they meet any requirements under national law, such NGOs ‘shall be deemed to have an interest’, and thus belong to ‘the public concerned’. For judicial review procedures with regard to the second pillar where legal standing may be restricted to the showing of a sufficient interest or the impairment of a right, the Convention makes sure that national law does not unduly restrict legal standing for NGOs. According to Article 9(2) Aarhus Convention, national law is required to deem the interest of any NGO which promotes environmental protection and meets the national requirements as a ‘sufficient interest’ in the sense of Article 9(2)(a) Aarhus Convention.36 For those Member States who require the impairment of a right for the attribution of legal standing,37 Article 9(2) Aarhus Convention provides that such organizations shall also be deemed to have rights capable of being impaired for the purpose of Article 9(2)(b) of the Convention. The meaning of this rule is not entirely clear, but it is generally held that NGOs who promote environmental protection and meet the criteria set by national law must be granted legal standing and be entitled to challenge the objective legality of any administrative decision, act or omission.38 Article 3 of Directive 2003/35/EC implemented Article 9(2) Aarhus Convention by inserting a new article (with the same wording as Article 9(2) Aarhus Convention) in Directive 85/337/EEC (new Article 10a) and Directive 96/61/EC (new Article 15a). The Proposal of the Directive on access to justice in environmental matters, which would implement Article 9(3) Aarhus Convention, would grant NGOs a right to take action without the need to show a sufficient 36 This is the case, e.g. in France, England and Wales. 37 E.g. Austria, Germany, Italy and Switzerland. 38 Stec and Casey-Lefkowitz, Implementation Guide, p. 141: ‘Where this is already a requirement under a Party’s legal system, both individuals and NGOs may be held to this standard. However, parties must provide, at a minimum, that NGOs have rights that can be impaired. Meeting the Convention’s objective of giving the public concerned wide access to justice, moreover, will require a significant shift of thinking in those countries where NGOs previously have lacked standing in cases because they were held not to ¨ have maintained impairment of a right.’ See e.g. Schlacke, Uberindividueller Rechtsschutz, p. 242 et seq. and p. 263 et seq., and S. Pernice-Warnke, Effektiver Zugang zu Gericht (Baden-Baden: Nomos, 2009), p. 138 et seq., who both oppose the restrictive approach ¨ of T. von Danwitz, ‘Aarhus Konvention: Umweltinformation, Offentlichkeitsbeteiligung, Zugang zu den Gerichten’, Neue Zeitschrift f¨ur Verwaltungsrecht, (2004), 278.

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interest or the impairment of a right.39 It is, however, not expected that this proposal will ever be enacted.

The 2004 environmental liability directive The 2004 Environmental Liability Directive (ELD)40 establishes a framework of environmental liability to prevent and remedy environmental damage, concentrating on the prevention and restoration of contaminated sites and on loss of biodiversity. Environmental damage is comprised of three types of damage: damage to protected species and natural habitats, water damage and land damage.41 Traditional damage, such as damage to person and property or economic loss, is expressly excluded from the scope of application of the directive.42 The prevention and remediation of environmental damage is the responsibility of one or several competent authorities, which each Member State must designate (Article 11(1) ELD). If harm occurs or the risk of harm arises, the competent authority has the duty to establish which operator has caused it and must assess the significance of the damage as well as determine which remedial measures shall be taken. For this purpose, the competent authority may require the relevant operator to carry out its own assessment and supply any information and necessary data. Member States must ensure that the competent authority may empower or require third parties to carry out the preventive or remedial measures (Article 11(3) ELD). Article 11(4) ELD provides for judicial review of decisions of the competent authority. Any decision that imposes preventive or remedial measures must state the exact grounds on which it is based. The operator concerned must be notified, including information about the availability of legal remedies under national law. Article 12 ELD provides for the right of the public to request the competent authority to take action. According to Article 12 ELD, natural or legal persons are entitled to submit to the competent authority any observations relating to instances of environmental damage or an imminent threat of such damage of which they are aware and may request 39 See Arts. 5 and 8 of the Proposal for a Directive of the European Parliament and of the Council on access to justice in environmental matters. 40 Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage, OJ 2004 No. L143. 41 Art. 2(1) ELD. 42 Art. 3(3) ELD.

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the competent authority to take action. Such request for action must be accompanied by relevant information and data supporting the submitted observations. Where the request for action and the accompanying information plausibly show that environmental damage exists, the competent authority shall consider such information, give the relevant operator an opportunity to make its views known and shall inform as soon as possible and in accordance with the relevant provisions of national law the person who submitted the information or request of its decision to accede to or refuse the request for action. The decision must state the reasons and be subject to review by a court or other independent and impartial body. This is provided by Article 13 ELD which further states that the directive shall be without prejudice to any provisions of national law which regulate access to justice and those which require that administrative review procedures be exhausted prior to recourse to judicial proceedings. Member States may decide not to apply the right of request for action to cases of imminent threat of damage (Article 12(5) ELD). The right to request for action under Article 12 ELD is not unconditional. With regard to legal standing of individuals, the directive follows the example set by the Aarhus Convention. Article 12(1) ELD requires the person to show that he or she (1) is affected or likely to be affected by environmental damage, (2) has a sufficient interest in environmental decision making relating to the damage or (3) alleges the impairment of a right where administrative procedural law of a Member State requires this as a precondition. What constitutes a ‘sufficient interest’ and ‘impairment of a right’ shall be determined by the Member States. The same applies to persons or organizations that either have a sufficient interest in environmental decision making relating to the damage, or, where the administrative procedural law of a Member State requires this as a precondition, allege the impairment of a right. What constitutes both ‘sufficient interest’ and ‘impairment of a right’ is determined by national law. However, the interest of NGOs promoting environmental protection and meeting the requirements of national law, shall, in any case, be deemed sufficient.

The availability of collective actions under U.S. law The public trust doctrine and claims for natural resource damage The European ELD is heavily influenced by U.S. law. An eminent similarity lies in the fundamental premise that public authorities are ‘the

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guardian’ of the environment as a public good. This corresponds to the traditional Anglo-American public trust doctrine, according to which all lands, water and wildlife are held in trust by the state for the benefit of the public.43 U.S. law empowers public entities to bring action in case of natural resource damage. The purpose of such claims is to compensate the public for the loss of the resource itself, and any lost use or enjoyment and the loss of any service that the resource provided. In American federal law, claims concerning natural resource damage are governed by Section 107 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA),44 Section 311(f)(4) of the Clean Water Act (CWA),45 Section 1002 of the Oil Pollution Act,46 the Marine Protection, Research, and Sanctuaries Act47 and the National Park System Resource Protection Act.48 In addition, many states have enacted additional statutes regarding the clean-up of waste sites and oil spills that include provisions for recovery of natural resource damages, which are similar to those in federal statutes.49 The two most prominent sources for natural resource damage are CERCLA and the Oil Pollution Act. CERCLA, which deals with the clean-up of old dumpsites, authorizes the federal government, the states and Indian tribes as trustees to recover damages from responsible parties ‘for injury to, destruction of, or loss of natural resources, including reasonable costs of assessment’, resulting from the release of hazardous 43 See e.g. J. L. Sax, ‘The Public Trust Doctrine in Natural Resource Law: Effective Judicial Intervention’, Michigan Law Review, 68 (1970), 471; J. Robinson, ‘The Role of Nonuse Values in Natural Resource Damages: Past, Present, and Future’, Texas Law Review, 75 (1996), 189; D. Slade, The Public Trust Doctrine in Motion (Bowie: PTDIM LLC, 2009). 44 42 U.S.C. § 9607. 45 33 U.S.C. § 1321. Section 311(f)(4) of the Clean Water Act provides that costs of removal of oil or a hazardous substance recoverable under the statute include any costs or expenses incurred by the federal government or any state government in the restoration or replacement of natural resources damaged or destroyed as a result of a discharge of oil or a hazardous substance. 46 33 U.S.C. § 2702. 47 16 U.S.C. § 1443(a)(1): ‘Any person who destroys, causes the loss of, or injures any sanctuary resource is liable to the United States for an amount equal to the sum of (A) the amount of response costs and damages resulting from the destruction, loss, or injury; and (B) interest’. 48 16 U.S.C. § 19jj-1(a): ‘Any person who destroys, causes the loss of, or injures any park system resource is liable to the United States for response costs and damages resulting from such destruction, loss, or injury.’ 49 L. Grayson, C. Picker, S. Siros and S. Bettison, ‘The Business Dilemma: 21st Century Natural Resource Damage Liabilities for 20th Century Industrial Progress’, Environmental Law Reporter, 31 (2001), 11356.

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substances.50 Natural resources are defined as ‘land, fish, wildlife, biota, air, water, ground water, drinking water supplies, and other such resources’ that belong to, are managed, held in trust or controlled by public entities, such as the federal government, any state or Indian tribe.51 Ownership of the resource is not required; it is sufficient that the public entity exercises a certain amount of control over the resource in question.52 Liability is strict and imposed jointly and severally amongst multiple tortfeasors. There are only a few defences available, such as act of war, act of God or act or omission of a third party unrelated to the defendant.53 The 1986 SARA (Superfund Amendments and Reauthorization Act)54 amendments also added an innocent purchaser defence.55 Recovered sums must be used to restore, replace or acquire the equivalent of the damaged natural resources.56 Federal trustees are nominated by the U.S. president and state trustees by the governor of each state.57 Trustees are obligated to assess damages to natural resources under their trusteeship. The Department of the Interior (DOI), which is the principal federal trustee under CERCLA, was delegated authority to promulgate regulations concerning the assessment of natural resource damages. These regulations identify the best available procedures to determine such damages, including both direct and indirect injury, destruction, or loss, and take into consideration factors including, but not limited to, replacement value, use value and ability of the ecosystem or resource to recover.58 According to CERCLA,59 there are two types of procedures for the assessment of natural resource damages: standard procedures for simplified assessments requiring minimal field investigation60 and alternative protocols for conducting assessments in individual cases.61 The DOI promulgated these rules62 in 1986 and 1987, and they have subsequently been amended several times pursuant 50 51 52 53 54 55 56 57 58 59 60 61 62

42 U.S.C. § 9607(a)(4)(C). 42 U.S.C. § 9601(16). Ohio v. DOI, 880 F 2d 461 (D.C. Cir. 1989). 42 U.S.C. § 9607(b). Pub. L. No. 99–499, 100 Stat. 1613 (1986). 42 U.S.C. § 9601(35)(A) and (B); 42 U.S.C. § 9607(b)(3). 42 U.S.C. § 9607(f)(1). 42 U.S.C. § 9607(f)(2)(A) and (B). 42 U.S.C. § 9651(c)(2)(B). 42 U.S.C. § 9651(c)(2). 42 U.S.C. § 9651(c)(2)(A). 42 U.S.C. § 9651(c)(2)(B). 43 Code of Federal Regulations (CFR) Part 11.

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to court decisions.63 If a trustee chooses to assess damages according to these regulations, the assessment has ‘the force and effect of a rebuttable presumption on behalf of the trustee’.64 The Oil Pollution Act (OPA) addresses the discharge of oil into navigable waters or on the adjoining shoreline. Section 1002 of the OPA65 provides for the recovery of remediation costs and damages that result from the discharge ‘including recovery by a trustee of damages for injury to, destruction of, loss of, or loss of use of, natural resources’ and the reasonable costs of assessing the damage. The principal federal trustee under OPA is the National Oceanic and Atmospheric Administration (NOAA), which is also in charge of promulgating regulations for the assessment of natural resource damages under OPA. Damage claims are to be calculated according to the costs of restoration projects. Recoverable damages are the costs needed to restore the injured resource to its baseline condition (‘primary restoration’) and the costs of ‘compensatory restoration’, which also comprise the costs of restoring or enhancing resources to compensate for interim loss of services. Damage assessment by a trustee according to the OPA rules has the effect of a rebuttable presumption, as under CERCLA.66

Citizen suits In 1970 the U.S. Congress introduced the first citizen suit67 provision in the Clean Air Act68 with the intention of providing an effective method 63 The promulgated DOI rules were challenged in court several times: Ohio v. DOI, 880 F.2d 461 (D.C. Cir. 1989); Colorado v. DOI, 880 F.2d 481 (D.C. Cir. 1989); Kennecott Utah Copper Corp. v. DOI, 88 F.3d 1191 (D.C. Cir. 1996); National Association of Manufacturers v. DOI, 134 F.3d 1095 (D.C. Cir. 1998). 64 42 U.S.C. § 9607(f)(2)(C). For further details see G. F. George, ‘Litigation of Claims for Natural Resources’, ALI-ABA Course of Study Materials, SE98 (2000), 403; J. C. Cruden, ‘Natural Resource Damages’, ALI-ABA Course of Study Materials, SE98 (2000), 855–856. 65 33 U.S.C. § 2702. 66 33 U.S.C. § 2706(e)(2). 67 M. D. Axline, Environmental Citizen Suits (Salem: Butterworth Legal Publishers, 1991); A. Babich, ‘Citizen Suits: The Teeth in Public Participation’, Environmental Law Reporter, 25 (1995), 10141; M. Burrows, ‘The Clean Air Act: Citizen Suits, Attorney‘s Fees, and the Separate Public Interest Requirement’, Boston College Environmental Affairs Law Review, 36 (2008), 103; J. R. May, ‘Now More than Ever: Environmental Citizen Suits Trends’, Widener Law Review, 10 (2003), 30. An excellent analysis and comprehensive compilation of the abundant case law concerning citizen suits including statistical data is provided in E. Lloyd, ‘Citizen Suits and Defenses Against Them’, ALI-ABA Course of Study Materials, SR45 (2010), 1 and J. R. May, ‘Citizen Suits and Defenses Against Them’, ALI-ABA Course of Study Materials, SR25 (2010), 1. 68 42 U.S.C. § 7604.

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to spur and supplement government enforcement actions, deter violators and achieve significant compliance gains.69 The new instrument proved so successful that today nearly all federal and several state environmental statutes contain similar provisions.70 As a result, citizen suits have become a common feature in the enforcement of environmental and natural resources law in the United States. They are commonly used by environmental organizations and individuals as well as corporations, states and religious organizations.71 Citizen suits serve two functions. By authorizing any person to commence a civil action against any person who allegedly has violated a standard, limitation or permit under an environmental statute, they (1) force potential polluters to comply with the statutory requirements and (2) contribute to the enforcement of environmental law by allowing any member of the public to sue the competent authority for failure to perform a non-discretionary duty under the statute. Judicial relief includes injunctions to comply with the statute and, under most statutes, civil penalties for the violations. Settlements often also provide payments for supplemental environmental projects.72 The Clean Air Act even provides for a special penalty fund dedicated to financing air compliance and enforcement activities. Courts may also order that civil penalties, in lieu of being deposited in this fund, be used in mitigation projects beneficial to public health or the environment.73 The citizen suit provisions of the various environmental statutes are rather similar. For the purpose of this chapter, their characteristics shall be exemplified by the citizen suit provision of the Clean Water Act (33 U.S.C. § 1365), which is of high practical importance. Under the Clean Water Act any ‘citizen’ may commence a civil action on his or her own behalf. The term ‘citizen’ is defined very broadly as ‘a person or persons having an interest which is or may be adversely affected’.74 The term ‘person’ means ‘an individual, corporation, partnership, association, 69 See Burrows, ‘The Clean Air Act’, 109 et seq.; Lloyd, ‘Citizen Suits and Defenses Against Them’, 1. 70 Lloyd, ‘Citizen Suits and Defenses Against Them’, Appendix A contains a list of the federal statutory citizen suits provisions which amounts to twenty provisions, and Appendix B lists the state citizen suit statutes. Fifteen of the fifty states provide for citizen suits. 71 May, ‘Now More than Ever’, 20. 72 See Babich, ‘Citizen Suits’, 10150; Lloyd, ‘Citizen Suits and Defenses Against Them’, 13 et seq. 73 42 U.S.C. § 7604(g). 74 33 U.S.C. § 1365(g). The other statutes rather use the term ‘any person’ than ‘any citizen’, see e.g. the citizen suit provision of CERCLA, 42 U.S.C. § 9659(a).

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state, municipality, commission, or political subdivision of a state, or any interstate body’.75 The position of plaintiff thus is open to individuals as well as organizations and corporations. Because of constitutional limits on statutory standing derived from Article III of the U.S. Constitution,76 citizen suits must meet further requirements for legal standing set by case law.77 Individuals must show that (1) they have suffered, or are threatened, with an injury that is concrete and particularized, (2) the injury is fairly traceable to the alleged violation and (3) that it is likely that the injury will be redressed by a favourable court decision.78 The notion of injury is comprehensive, covering not only physical and economic but also aesthetic, conservational and recreational interests. Organizations have to show that (1) members of the group have standing, (2) the interests sought to be protected relate to the group’s purpose and (3) the participation of the individual members is not required.79 The position of defendant is defined equally broadly as ‘any person’ who is alleged to be in violation of an effluent standard, limitation or order. Action can also be brought against the administrator for failure to perform any non- discretionary act or duty.80 Before the plaintiff may commence action against a violator he or she must give notice of the alleged violation to the administrator and the state in which the alleged violation occurs as well as to the alleged violator. The suit is barred if the government has commenced and is diligently prosecuting a civil or criminal enforcement action within the waiting period of sixty days from the notice. In any such action in a court of the United States, any citizen may intervene as a matter of right, whilst the administrator, if not a party, may intervene in any citizen suit.81 With

75 33 U.S.C. § 1362(5). 76 Further constitutional defences to citizen suits are: mootness, separation of power and sovereign immunity. For an extensive discussion see May, ‘Now More than Ever’, 12 et seq. 77 E.g. Sierra Club v. Morton, 405 U.S. 727 (1972); Steel Company v. Citizens for a Better Environment, 523 U.S. 83 (1998) etc. The leading case on standing is Friends of the Earth v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167 (2000); see Babich, ‘Citizen Suits’, 10146; R. Beers, ‘Standing and Rights of Action in Environmental Litigation’, ALIABA Course of Study Materials, (2007), 1; Lloyd, ‘Citizen Suits and Defenses Against Them’, 6 et seq. and May, ‘Now More than Ever’, 12 et seq. 78 Lloyd, ‘Citizen Suits and Defenses Against Them’, 6 and May, ‘Now More than Ever’, 12. 79 Lloyd, ‘Citizen Suits and Defenses Against Them’, 6 et seq. and May, ‘Now More than Ever’, 12. 80 33 U.S.C. § 1365(a)(1) and (2). 81 33 U.S.C. § 1365(c)(2).

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respect to a citizen suit against the administrator of the Clean Water Act, notice must be given to the administrator.82 The Clean Water Act specifies in detail the rights and requirements citizens are entitled to enforce,83 whereas other environmental statutes are more general in this regard.84 Contrary to the traditional rule in U.S. law that does not provide for fee-shifting to the losing party,85 courts may award costs of litigation, including reasonable attorney and expert witness fees, to any prevailing or substantially prevailing party.86

Class actions Individual persons who are the victim of environmental damage may also make use of the procedural instrument of the class action,87 which allows for the aggregation of multiple individual tort claims. The class action helps to reduce litigation costs and can provide for an equitable distribution of the compensation sums obtained. Class action is especially useful in cases where many people sustain minor damage and individual litigation by each affected person would not be feasible. Class action is regulated in Article 23 of the Federal Rules of Civil Procedure,88 which provides that one or more members of a class may sue or may be sued as representative parties on behalf of all members on the condition that (1) the class is so numerous that joinder of all members is impractical, (2) there are questions of law or fact common to the class, (3) the claims or defences of the representative parties are typical for the whole class and (4) the representative parties will fairly and adequately protect the interests of the class. Class action suits play an important role in products liability litigation, but it was also because 82 33 U.S.C. § 1365(b). 83 33 U.S.C. § 1365(a) and (f). 84 See e.g. 42 U.S.C. § 9659 (CERCLA) which relates to a ‘violation of any standard, regulation, condition, requirement, or order which has become effective pursuant to this chapter’ (chapter 103). 85 See in detail Burrows, ‘The Clean Air Act’, 4 et seq. 86 33 U.S.C. § 1365(d). 87 Case law and literature on class action is abundant. For an analysis of the use of class action litigation in mass toxic torts, see e.g. J. W. Elrod, ‘The Use of Federal Class Actions in Mass Toxic Pollution Torts’, Tennessee Law Review, 56 (1988), 243; K. S. Rivlin and J. D. Potts, ‘Proposed Rule Change to Federal Civil Procedure May Introduce New Challenges in Environmental Class Action Litigation’, Harvard Environmental Law Review, 27 (2003), 519; ‘The Influence of Mass Toxic Tort Litigation on Class Action Rules Reform’, Virginia Environmental Law Journal, 22 (2004), 250. 88 Federal Rule of Civil Procedure 23.

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of the application of the class action in prominent mass toxic tort cases89 that this instrument has received worldwide attention,90 although not (yet) worldwide acceptance.

Comparison and conclusion In the modern society governed by the rule of law instruments of collective redress gain increasing attention and recognition in many policy fields, such as consumer protection, the prevention of unfair competition and also very prominently in environmental law. These instruments are seen as effective to supplement the enforcement of public environmental law by public authorities in order to combat the generally deplored deficit in the enforcement of environmental standards. Litigation rights of associations shall support the public authorities in the performance of their duties, but shall also induce them to actually exercise their legal obligations. The employment of collective actions for the prevention and remediation of pollution thus serves the public interest in the preservation and protection of the natural environment. The establishment of mechanisms of collective redress also protects the private interest of those individuals who are actually or potentially affected by pollution, but who often do not have the financial means and expertise to master the increasing complexity of environmental litigation. U.S. law sets a high standard for the protection of collective interests in environmental litigation. It provides for redress of damage to natural resources and access to justice in environmental proceedings, and allows for the bundling of tort claims when a larger group of persons have been damaged. Both on the federal and state level environmental statutes empower public trustees to take legal action in case of natural resource damage in order to compensate the public for the sustained loss. Recoverable damages are the costs needed to restore the injured resource to its baseline condition, the so-called primary restoration, and the costs of compensatory restoration, which also comprise the costs of restoring 89 See In re Agent Orange, 745 F.2d 161 (2d Cir. 1984) (class action lawsuit brought by Vietnam veterans and their family members against seven chemical companies for injuries allegedly caused by exposure to Agent Orange and other herbicides); In re Three Mile Island, 87 F.R.D. 433 (M.D. Pa 1980) (class action lawsuit following the partial meltdown of the Three Mile Island nuclear power plant in Pennsylvania). 90 See e.g. D. R. Hensler, ‘The Globalization of Class Actions: An Overview’ in D. R. Hensler, C. Hodges and M. Tulibacka, The Globalization of Class Actions (Los Angeles: Sage Publications, 2009), p. 662.

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or enhancing other resources to compensate for interim losses of services. Individual persons and groups of persons, including environmental associations, have wide access to justice in environmental matters. By way of the procedural device of the citizen suit, commonly provided for by environmental statutes, the interested public can actively impose statutory environmental requirements and standards on potential polluters and force the competent administrative authorities to perform their tasks. In case of private loss caused by environmental harm, the availability of the class action allows for the bundling of individual claims and thus facilitates the procedural implementation of such claims. EU law is much more restrictive with regard to collective remedies in environmental law. Because of the fundamental differences in the legal traditions of the Member States, the EU is rather hesitant to impose homogeneous standards in this field. In many European countries, especially in those that follow a strictly individualistic concept of judicial redress, the fear is deeply rooted that the availability of collective actions will open the floodgates for abusive claims and overload courts and administrative authorities. An important impulse for the development of collective actions in environmental law was set by the accession of the EU to the UN Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters (Aarhus Convention), which triggered an impressive number of legislative acts by the EU to implement the Convention. The Aarhus Convention grants the public, individuals and associations alike, the right to access environmental information held by public authorities. More transparency in this field is regarded as a democratic desideratum and a necessary precondition for the public to participate in the environmental decision-making processes which underpin the convention’s overall goal that governments and their authorities shall be made accountable for their acts (and omissions) and forced to respond to the wishes and needs of the people. Despite this ambitious aim, Article 9(2) of the Aarhus Convention does not provide access to judicial review concerning the second pillar (i.e. public participation in decision making) unconditionally, but requires the plaintiff, according to the tradition in the relevant Member State, either to show a sufficient interest or the impairment of a right. The determination of what constitutes such a ‘sufficient interest’ or ‘impairment of a right’ is left to the Member States, who, however, must consider in their decision making the Convention’s objective of granting the public wide access to justice. This precondition applies to legal standing of individuals and their associations.

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Legal standing of NGOs is different. NGOs promoting environmental protection obtain legal standing by meeting the requirements set by national law. They are not required to show a sufficient interest or the impairment of a right and, therefore, are entitled to review the objective legality of any administrative decision, act or omission that is covered by the convention. EU law adopted this cautious approach. It introduced provisions with the same wording as Article 9(2) Aarhus Convention not only in those directives that are destined to implement the Convention but also in Article 12 ELD. The compromise regarding legal standing of individuals and environmental organizations found by the Aarhus Convention thus also set the general standard now provided by EU law. This solution allows Member States to keep their traditions concerning legal standing and, at the same time, provides for a broader concept of legal standing in environmental proceedings. This already applies to legal standing of individual persons, but in particular to the legal position of NGOs. With regard to NGOs promoting environmental protection, the Member States must accept that such NGOs have legal standing in the fields covered by the relevant legislation. The Member States, however, still have considerable latitude in determining which NGOs they are willing to accept, as the Member States are allowed to define the conditions NGOs must meet. An example of such a provision is provided by Article 11 of the Aarhus Regulation 2006/1367, where the Community itself formulated the criteria an NGO must meet in order to be entitled to make a request under the regulation. This rule can serve as a model for the Member States when enacting their own rules which are subject to the scrutiny of the European Court of Justice.91 If an NGO has legal standing, it is allowed to contest the objective legality of the act under review. In that, EU law comes close to the U.S. citizen suit. It must, however, be noted that the U.S. citizen suit has a much broader scope of application as it also extends to the monitoring of activities that are already licensed and being carried out by the operator, whereas under EU law the participation of NGOs relates primarily to planning and permit proceedings of proposed activities. The ELD poses an exception in that it allows for the participation of NGOs in the monitoring process. Article 12 ELD is therefore a first step for the implementation of Article 9(3) Aarhus 91 See Case C-263/08 Djurg˚arden-Lilla V¨artans Milj¨oskyddsf¨orening v. Stockholms kommun genom dess markn¨amnd [2009] ECR I-09967; [2010] 47 CMLR 1511 (not allowed to restrict the right of appeal to NGO with more than two thousand members).

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Convention which provides for access of the public to administrative or judicial procedures to challenge acts and omissions by private parties and public authorities violating environmental law.92

Outlook: collective action in environmental torts Although EU law has made considerable progress in enforcing legal standing for environmental organizations in public law proceedings, this is not yet the case with respect to the availability of collective redress in environmental torts. Compensation of damages caused by activities dangerous to the environment is still regulated by the tort law systems of the EU Member States. These rules are diverse and rather incoherent. There are huge differences with regard to all the crucial issues of environmental liability, such as the availability of non-fault liability, the establishment of causation and the scope of remedies.93 So far, with respect to environmental torts, EU law only provides for unified rules concerning jurisdiction and enforcement of court decisions (‘Brussels I Regulation’)94 and the choice of the applicable law (‘Rome II Regulation’).95 Both Regulations take up a favourable stance for the victim of transboundary environmental damage, who, with regard to jurisdiction and applicable law, has the choice between the courts, and the respective law, of the country where the damage occurred or where it was caused.96 With respect to the remedies available to victims of environmental damage, however, no harmonization of laws has yet taken place. One major obstacle for the victims of environmental damage for the enforcement of their legal interests in court is the high cost of litigation in environmental matters. The reasons for this lie in the inadequacy of the liability rules in many European countries, the often complex factual situation and, last but not least, the European tradition of the loser-pays principle, according to which the loser of a court trial must pay all trial 92 The Proposal for a Directive of the European Parliament and of the Council on access to justice in environmental matters should have implemented Art. 9 (3) of the Aarhus Convention but has not come into force yet. 93 For a comprehensive analysis of the rules of thirteen EU Member States, see Hinteregger (ed.), Environmental Liability and Ecological Damage. 94 Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, OJ 2001 No. L12. 95 Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations, OJ 2007 No. L199. 96 See Art. 5(3) of the Brussels I Regulation and Arts. 4 and 7 of the Rome II Regulation.

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costs. This makes litigation for victims of environmental damage very risky and burdensome. In order to mitigate these hardships more and more European countries are introducing collective action devices into their civil procedural laws that also apply to victims of environmental harm.97 The concept of collective actions increasingly gains acceptance in EU law as well. During the last decade, the European Commission has taken some concrete steps to provide for such devices in antitrust and consumer law.98 In February 2011 the Commission went one step further and initiated a public consultation procedure in order to formulate a consistent framework on collective redress in EU law.99 According to the document, the purpose of this undertaking is to formulate common principles on collective redress, to examine their compatibility with EU law and the laws of the twenty-seven Member States and to explore whether mechanisms of compensatory collective redress should be extended to other fields of law besides competition and consumer protection. One field that is expressly mentioned in the document is environmental law.100 In environmental law compensatory collective action is especially useful when many people are harmed by one or several identical damaging incidents. The benefits of collective redress, outlined before, also apply to such actions. It serves the individual interest in that it helps the victim to overcome the typical financial and emotional strains private persons encounter in complex court trials. Mechanisms of compensatory collective redress also promote the public interest. In legal theory it is generally accepted that tort law is not only a means to provide for the compensation of sustained harm, but it also serves as a powerful instrument to 97 E.g. Portugal (1995), Sweden (2002), Netherlands (2005), Denmark (2007), Norway (2008); see European Commission – Civic Consulting and Oxford Economics, ‘Evaluation of the Effectiveness and Efficiency of Collective Redress Mechanisms in the European Union – Final Report Part I: Main Report’, (2008). 98 See Green Paper on damages actions for breach of the EC antitrust rules, 19 December 2005, COM(2005) 672 final; White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, COM(2008) 165 final; Green Paper on consumer collective redress, 27 November 2008, COM(2008) 794 final. For a comprehensive discussion see M. Casper et al. (eds.), Auf dem Weg zu einer europ¨aischen Sammelklage? (Munich: Sellier European Law Publishers, 2009). 99 Commission Staff Working Document Public Consultation: Towards a coherent European approach to collective redress, 4 February 2011, SEC(2011) 173 final; see also European Parliament resolution of 2 February 2011 on ‘Towards a Coherent European Approach to Collective Actions’ (2011/2089(INI)). 100 See Commission Staff Working Document Public Consultation: Towards a coherent European approach to collective redress, part 4, questions 33 and 34.

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prevent the occurrence of damage. Collective actions can promote this preventive effect by ensuring that damage claims are actually enforced. However, with respect to environmental harm that is covered by the ELD (damage to protected species and natural habitats, water and land damage), the discussion on collective redress is settled for the time being. The EU decided in the ELD to follow a public law approach and to empower the competent authority to enforce the prevention and remediation of environmental damage rather than to attribute legal standing for such damage to private persons and environmental organizations. Private persons and environmental organizations may only request the competent authority to take action according to Article 12 ELD. It is nevertheless still a question whether there is a need for instruments of collective redress for the effective compensation of damage sustained by private persons. Recent catastrophic events with an environmental impact101 show that such need exists for cases where many persons suffer severe loss. The reasons for this are twofold. Victims of an environmental disaster who suffer bereavement, the loss of their home or severe injury are, on the one hand, psychically and financially not in the best position to endure long and complicated court trials. Mass cases, on the other hand, often overburden the competent courts. Instruments of collective action which allow for a bundling of such claims would enable courts to deal with the case-load more efficiently.

101 See for instance the 2011 nuclear disaster at the Fukushima plant in Japan, the 2002 oil spill by the tanker Prestige in Spain, the 2010 Deepwater Horizon oil spill in the United States or the 2010 accident at the chemical plant in Kolontar, Western Hungary.

PAR T III A need to enhance collective actions in Japan?

7 Recent problems of group rights protection for consumers in Japan kunihiro nakata

Introduction – localization of the problem As an important part of recent consumer problems, the subject of how to handle collective consumer damages should be brought up. A recent example would be the case of eel produced in China. Here the trader who was holding the eel in stock falsely labelled it as being made in Japan.1 Needless to say the false labelling itself violates the law.2 There are also cases concerning frozen Xiaolongbao (pork buns) imported from China and cases related to the usage of preservatives forbidden in Japan, as well as instances of sales of goods that are not allowed to be distributed and the earning of profits that were not supposed to be made. These actions too are all clear breaches of law.3 Although occasions such as those above are unlawful acts, at the same time they also result in proprietary damages for individual consumers. In the eel case for example, presuming the product was sold at the average price for domestically produced eel, the individual damage is the difference in price between a Chinese product and a Japanese product. If we 1 Geographical and country names of ingredients of imported ‘Broiled Eel from Taiwan’ and ‘Broiled Eel from China’ were falsely labelled as ‘Made in Aichi Prefecture’ by certain businesses and distributed by trade to other businesses. Concerning this consumer problem see K. Nakata, ‘Recent Developments in Japanese Consumer Law’, Penn State International Law Review, 27 (2009), 803. 2 This case involves a violation of the Unfair Competition Prevention Act (fuseiky¯os¯ob¯oshih¯o) (false labelling) and, depending on the situation, might even result in charges of fraud. Also it should be noted that in April 2009 some rules for direct punishment were established in the Japanese Agricultural Standard Act (norinbusshi no kikakuka oyobi hinshitsuhy¯oji no tekiseikan ni kan suru h¯oritsu; JAS h¯o), an act concerning food labelling, in order to prevent falsification of products origins. 3 Note: violations of the Japanese Food Hygiene Law (Shokuhineiseih¯o, Law No. 233 of 1947, as amended).

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look at the eel and the Xiaolongbao cases, the damages for individual consumers might be about a few hundred yen each. Even if each consumer were demanding a voluntary refund, it is hard to imagine those consumers obtaining relief of their damages by the means of a lawsuit. Alternatively, in the case of mobile phone contract cancellations, disadvantageous contract clauses cancellation by a consumer is limited, and he or she is required to pay a penalty for breach of contract, a fee which one might not think of as legitimate. But as the cancellation fee normally does not exceed 10,000 yen, it is very unlikely that damaged consumers pursue their interests by suing the mobile phone company. Even so, if unlawful acts such as these repeatedly occur, businesses can raise profits between a few million up to several billion yen. However, high profits such as these will, if they are allotted as compensation for damages, eventually disperse and become quite paltry.4 It should be clear now that in consumer disputes most of the time a high number of similar damages occur, but the individual damage is relatively small. Under these circumstances, it is hard to expect redress of damages through lawsuits brought by individual consumers who bear the expenditures and effort. We could also say that for the individual consumer it is not worth spending his or her time on suing for comparatively little money. So the usual problems with consumer contracts are solved by a consumer consulting with the consumer centre and negotiating with the business. Such negotiation is mediated by the consumer centre. However, if the negotiations break down, the consumer might have to consider filing a claim, but this realization of an individual right lacks economic merit. Firstly, characteristically consumer damages are reflected in a large number of cases with the damages being of low value. According to information collected by qualified consumer organizations, the damages in most of cases have a value between a few ten thousands and a million yen. So even if damage relief is granted by the court, expenditures such as court and attorney’s fees are likely to defeat the consumer. Secondly, the psychological and temporal burden on the individual consumer filing a claim is high. Of course Japan has a simple system for low-cost claims, but this does not solve the problem. If – for example – the case is complicated 4 This text focuses on the possibility of collective redress measures for consumers, but additionally it is clear that competitors on the market also lose the chances of making a profit because not only individual consumers but the market functions themselves are being distorted by fraudulent activities. In this meaning it should be pointed out that measures such as the ones above at the same time have functions of economic regulations maintaining the market functions.

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or the defendant requests it, the claim gets converted from a small claims suit into an ordinary one. In addition during the litigation disadvantages for the consumer may appear because of to the difference in negotiation power between consumers and businesses. In this sense it should be clear how high burdens are imposed on consumers when voluntary solutions for consumer contract issues are impossible and the parties finally go to court.5 If this is the character of recent consumer damages, it is in fact related to allowing malignant companies to repeat illegal acts and ‘make profits’. Here the necessity to set up effective instruments for prevention and redress of consumer damages has often been advocated by scholars, bar associations and consumer representatives.6

The actual state: the system for relief of consumer group damages Let me now introduce the status of the development of laws regarding the relief of consumer group damages. A first important step was the revision of the Consumer Contract Act (sh¯ohishakeiyakuh¯o) in 2006, which installed a system for injunction claims (effective 7 June 2007) through eligible consumer organizations (hereinafter ‘consumer organizations’). Furthermore in 2009 the scope of this system was expanded to unjustifiable premiums and misleading representation (Excessive Premiums and Misleading Representations Act (fut¯o keihinrui oyobi fut¯o hy¯oji b¯oshi h¯o) and the Act on Trade with Certain Goods (also: Act on Specified Commercial Transactions; tokuteish¯otorihiki ni kan suru h¯oritsu). Opinions evaluating the injunction system may differ, but the expansion might be related to the positive evaluation of the functional capability of injunctions. Additionally, at this time, the number of claims filed by consumer organizations is limited. Besides that however, the consumer organizations seem to exercise great influential power for consumer protection in negotiation phases with companies prior to filing claims. This means that as far as injunction rights are concerned, the system for qualified consumer organizations is functioning, and in this sense a positive evaluation can be given. The injunction system by eligible consumer organizations displays, if one looks at the capability of the injunction, certain results for the prevention of consumer damages and their expansion. But it also has the 5 For this point see I. Koichi, ‘Tekikaku sh¯ohishadantai kara mita genj¯ono mondai to shintaiseihe no teigen’, Gendai Sh¯ohishah¯o, 8 (2010), 50. 6 In order to react to such voices, a Study Group on a Relief System for Consumer Group Damages was set up, and it developed an expert study group on a relief system for consumer group damages, in which discussions continue.

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following limits. One weak point is that recovery of damages cannot be achieved only by injunction claims. In other words, if one thinks of helping a consumer who suffered damages, not only injunction lawsuits but also alternative relief measures are necessary in order to recover damages. Another limit of the injunction claim is that it is unable to skim off a business’ profits that were made through inappropriate actions which were forbidden ex post. This means that the incentive to repeat unlawful acts cannot be taken away from businesses and therefore the system lacks deterrence. It follows that as a matter of deterrence, it is necessary to establish a system that leaves nothing of the undue profit in the hands of the business. In this view Japan should not leave the remedy at being only an injunction against companies, but should also build a system that has the possibility of recognizing pecuniary claims. In recent years the demand for such a system has attracted attention on a worldwide level.7 In addition, in Japan a ‘Study Group on a Relief System for Consumer Group Damages’ held by the Japanese Consumer Affairs Agency issued a report on 26 August 2010 (hereinafter ‘2010 report plan’8 ).9 Moreover, in November of the same year the relief system for consumer group 7 On 12 July 2007 the OECD adopted a ‘Recommendation of the Council on Consumer Dispute Resolution and Redress’ through a board meeting adopting these recommendations. Citations on group claims can be found in document II B. In addition, for Europe the Opinion of the European Economic and Social Committee on Defining the collective actions system and its role in the context of Community consumer law, OJ 2008 No. C162, the Green Paper on consumer collective redress, 27 November 2008, COM(2008) 794 final and the White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, COM(2008) 165 final have to be mentioned. Furthermore for comparative law research, see Shug¯oteki Kenri Hogo Kenkyukai, ‘Shug¯oteki kenri hogo sosh¯o ni okeru kakuseido no hikaku kent¯o, pt. 1’, New Business Law, 932 (2010), 13, and Shug¯oteki Kenri Hogo Kenkyukai, ‘Shug¯oteki kenri hogo sosh¯o ni okeru kakuseido no hikaku kent¯o, pt. 2’, New Business Law, 933 (2010), 52. In addition the following publication should be pointed out as it is a comparative and comprehensive examination concerning the group action: H.-W. Micklitz and A. Stadler, ‘Gruppenklage in den Mitgliedstaaten der Europ¨aischen Gemeinschaften & den Vereinigten Staaten von Amerika’ in B. Pirker-H¨ormann and T. Gabriel ¨ (eds.), Massenverfahren – Reformbedarf f¨ur die ZPO? (Vienna: Verlag Osterreich, 2005) pp. 111–310, H.-W. Micklitz and A. Stadler, Das Verbandsklagerecht in der Informationsund Dienstleistungsgesellschaft (M¨unster: Landwirtschaftsverlag, 2005); H.-W. Micklitz et al., Verbraucherschutz durch Unterlassungsklagen: Umsetzung und Anwendung der Richtlinie 98/27/EG in den Mitgliedstaaten (Baden-Baden: Nomos, 2007). 8 Japanese Consumer Affairs Agency, ‘Sh¯udanteki sh¯ohisha higaiky¯uzai seido kenky¯ukai h¯okokusho’, available at www.cao.go.jp/consumer/doc/101028 shiryou2-2-2.pdf. ˆ 9 For the same study group and the content of their report, see M. Koichi, ‘Shug¯oteki sh¯ohisha higaiky¯usaiseido no tenb¯o to kadai’, Gendai Sh¯ohishah¯o, 8 (2010), 4; for a brief explanation and for further information, see the home page of the cabinet concerning the Study Group and the Expert Study Group on a Relief System for Consumer Group Damages: www.cao.go.jp/consumer/kabusoshiki/shudan/index.html.

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damages was brought up as a topic at the Consumer Law Study Group.10 It is presumed that subsequently discussions concerning that topic will gain momentum as we might come closer to a legislative process.

The debate about a group action system In the following section, I will sort out the situation of the actual Japanese debate, especially the main subject of the Group Action System as one system related to collective consumer damage redress from a substantive private law point of view. In doing so I shall bring up and analyze a few controversial points. As noted previously lawsuits are not a realistic method for individual consumers to pursue damages they suffer alone because the individual sums of damages are small, and because of the time and expenditures the filing of a lawsuit takes. In other words, for a single consumer it is not worth the expenditures. In the case that because of some action by a business a high number of consumers have established the right for a claim for damages or the right for a claim for unjust enrichment and other pecuniary claims, a device is required to make it easy for the consumers to exercise these rights. (It might seem quite sweeping, but for descriptive purposes these pecuniary claims shall be hereinafter referred to as ‘claims for damages’ by consumers.) In this context, there remain the problems of how to bundle each claim (lots of claims) that occurred to a high number of consumers and how to adopt an efficient and effective mechanism for relief of certain types of collective consumer damages. This of course differs from the usual form of civil procedure where the individual is the party. In the light of this, in the following the problematic point of the role of the ‘Group Action System’ shall be reviewed as a feature of a ‘claim mechanism realizing collective private law enforcement’.11

Different types of collective claims In Japan at the moment basically three types of collective claims are discussed: opt-out solutions, opt-in solutions and two-step solutions. ˆ 10 There is a special topic compiled in Koichi, ‘Shug¯oteki sh¯ohisha higaiky¯usaiseido’, 4 et seq. entitled ‘The Way towards a Structure of a Redress System for Collective Consumer Damages’. In the same special topic, see especially N. Kano ‘Shug¯oteki sh¯ohisha higai no ky¯usaiseido to minjijittaih¯o no mondaiten’, Gendai Sh¯ohishah¯o, 8 (2010), 16, for a connection with this chapter. 11 See Kano, ‘Shug¯oteki sh¯ohisha higai no ky¯usaiseido to minjijittaih¯o’.

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In the ‘opt-out solution’, even without concrete authorization by the entitled person, the rights of persons fitting in the class (a group with one common advantage) naturally become subject to lawsuits filed by a certain individual or organization representing the same class. Rightholders, who fit the class but do not wish for the effect of a decision, have to follow procedures to withdraw within a certain period of time. The ‘opt-in solution’ is different from the ‘opt-out solution’ as it is based on the concrete authorization by each right-holder, and the individual or organization filing the claim bundles and executes the rights of a high number of consumers who consent to the suit. The ‘two-step solution’ treats the responsibility of the defendant and other common points of the dispute as the first step and – after these are determined – the individual points of dispute such as the respective damage as the second step. It addition, the first step can be further split into an opt-in or opt-out solution. Naturally this distinction has a meaning only at first glance. This means that in the two-step solution, problems relating to opt-in and opt-out of individual right-holders might also occur. For example it is not possible to think of the definition for opt-in or opt-out as absolutely contrary to the two-step solution. For example, by dealing with the problem during which period one is admitted to authorize or withdraw from the opt-out solution or the optin solution, one takes into account the viewpoint that the proceedings are divided into two steps. However in the above=mentioned terminology, opt-out and opt-in are not presumed to distinguish the levels of common points of dispute and individual points of dispute within the proceedings. Accordingly, they can differ from the two-step solution. Meanwhile on the one hand, opt-out does not request explicit authorization by the rightholder until the last step of the proceedings. On the other hand opt-in can be distinguished from opt-out by the fact that it requires an explicit authorization for the decision on the collective claim to be effective.12

The ‘opt-out solution’ The features of the ‘opt-out solution’, mentioned above, concern the fact that under certain circumstances a representative plaintiff can bundle and 12 See Kano, ‘Shug¯oteki sh¯ohisha higai no ky¯usaiseido to minjijittaih¯o’i, 17 and Shug¯oteki Kenri Hogo Kenkyukai, ‘Shug¯oteki kenri hogo sosh¯o ni okeru kakuseido no hikaku kent¯o, pt. 1 and pt. 2’.

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exercise claims for damages that are of the same kind even without individual authorization. A typical form of this proceeding is the American class action. The biggest merit of the first kind of lawsuit is proceedings for individual authorization are unnecessary. Because of this it is easy to bundle and advocate ‘claims for damages’ held by a high number of right-holders (consumers). The avoidance of typical complications of proceedings such as this theoretically makes it possible to compensate damages at the highest possible limit. As to the aspect of effectiveness of damage redress, the expectations for this method are high. Moreover it will reduce the cases in which the responsibility of the businesses, which made earnings through illegal activities, stays untouched just because consumers are not taking action. This responsibility has a preventive effect as deterrence (damage prevention) for future illegal actions. Opt-out has great merit as an effective means of damage redress, but in other areas some controversial points should be noted.

The authorization for the representative plaintiff One problem with opt-out is that of competence – why can the representative plaintiff exercise the rights of others? As we know from the theory of representation, such authorization is necessary when a person is bearing the responsibility for the actions of another person. However, the opt-out solution is structured in a way that, if someone does not opt-out in a given period of time, he or she will be believed to have authorized the representative plaintiff. In this case opt-out does not demand actions of the individual consumers to individually, explicitly authorize the representative plaintiff. If this is a sort of optional lawsuit assignment, the fiction of the ‘declaration of intention’ in assigning the process can be seen as ‘deemed’. This approval of the existence of a declaration of intention by omission is severely criticized. If, on the other hand, the method of a statutory lawsuit assignment is chosen, the fiction of a declaration of intention as well as the trouble accompanying it will become unnecessary. However the formation of a statutory lawsuit assignment is not based on the will of the person in question. Because of this, a material reason for legitimization is demanded – a material reason allowing the law to grant such status to a certain person to dispose of the rights of other persons, without depending on their will. But if we look at the current facts, granting this status can only increase the possibility that lawsuits will be pursued, because under the current state of affairs damage relief is impossible with individual persons left

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to their own litigation activities. This status must be granted to a representative in order to secure the execution of the individual consumers’ rights. Furthermore, because consumers typically are placed in a difficult position in exercising these rights, one can take the standpoint of presuming that an agreement founding such an optional lawsuit assignment exists. In other words, the statutory assignment also can be justified by the assumption that consumers would rather see their rights exercised than not, and such an assignment will facilitate this exercise.

The affected individual’s right to choose In the case where the individual affected person would like to have the possibility of pressing her own rights for her own profit, the question arises whether the representative plaintiff can exercise the rights of this person, too. For example, in the case of a high number of consumers damaged due to a false announcement or similar situations, under unjust enrichment rules individual consumers can exercise their right to cancel or demand a refund of the money they already paid. Alternatively, they can stay in the contract and claim damages. Other cases with many choices such as the one mentioned here can easily be imagined. In the same way, in the case of a purchased item with a defect, one can think of redress choices such as exercising a cancellation right, demanding a refund of the money already paid, demanding recompense of the damage caused by the defect without a cancellation or requesting full performance. In these situations it is enough for the affected individual to withdraw when there is a specific profit in pursuing proceedings. For consumer damage relief in the group action, a uniform content such as this is necessary. But it would still be possible to protect the individuals’ general enforcement interests with the help of group actions. Individuality of claims It is undeniable that the substance of individual claims by affected consumers can vary. When exercising obligatory rights such as the right to claim damages, a variety of bases for individual conditions exists. Within those limits, cases on obligatory rights can be solved by individual proceedings. This processing can occur in the usual form of civil litigation with the usual form of calculation. However the stage in which the socalled group action is becoming problematic is not this one. Two key purposes of the group action are the removal of difficulties occurring when collective damage redress takes place at individual

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proceedings and the realization of individual consumers’ right of redress. If we assume this to be correct, the traditional damage calculation method of approving individual damages (individual calculation method) cannot be used; instead a method acknowledging the overall damage of the consumers as a whole (total amount approval method) must be chosen. Optout lawsuits face a particular difficulty that individual suits and opt-in suits do not – instead of having exact figures they must instead guess both at the number of plaintiffs and the amount of their damages. Therefore there must be some mechanism such as a damage estimation to overcome these problems of uncertainty with regard to the number of damaged consumers and the amounts of their individual damages. If this change in calculation is not adopted, it will eventually make achieving the goal of using the group action as a special form of proceedings (or, in other words, achieving of the goal of the ‘restoration and relief of violated rights’ that cannot be recovered through usual litigation methods) impossible.

The problem of money distribution Additionally, in the case where the representative plaintiff wins the lawsuit, there is the problem of how the money received from the defendant shall be distributed among the consumers. After covering his expenses, the representative plaintiff is in principle bearing the duty to pay the money that was paid by the defendant’s business in relation to the amount of the obligation to the individual consumers, who are the original right-holders (see Articles 646 and 701 Japanese Civil Code). Indeed in this situation one could consider distribution of the amount each consumer is to receive not as limited to the average price as a result of the money divided by the number of heads, but rather as the real loss of each consumer as long as she can easily demonstrate her individual facts. Moreover if the affected consumer does not show interest in the shared money, the problem of how and with whom to restore this undistributed sum arises. Even if the competence of the representative plaintiff can be legitimized by the ‘deemed measure’ in the opt-out solution, it does not directly follow, for example, that it would be possible for undistributed money to automatically fall into the property of the representing plaintiff (in the case of a waiver, donation or gift by the consumer it would be different). This follows out of the fact that the representing plaintiff in theory only exercises the rights of the right-holders. However, there is no necessity to stay in this structure. The representing plaintiff can be evaluated as actively working towards realizing rights the individual consumer cannot exercise. Furthermore, including the policy nuance of

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giving her the incentive of pursuing procedures in the future, one can legitimize that a fixed part of the remaining amount should stay with the representative (organization) as a reward. The remainder can then be relegated to the national treasury. This point is also connected to the problem of whether qualified consumer organizations should be granted a claim to skim off unjust profits.13

Payment for pain and suffering as a sanction Furthermore in cases with bodily injuries or personal rights in question, the claim for payment for pain and suffering could be meaningful. While compensating for psychological damages, the payment for pain and suffering can also function as adjustment and completion of proprietary damage compensation. The opt-in solution The basic structure of the opt-in solution In the opt-in solution, the various individual right-holders authorize a representative plaintiff, and only these individuals receive the advantages or disadvantages of the group action decision. In that way it is not different from bringing a regular lawsuit except with the characteristic of the plaintiff appearing as a ‘group’. Problematic points As already mentioned, the method of the opt-in mechanism is basically laid down as a usual litigation mechanism, and in this regard it is not very different from appointing a common representative in a joint litigation. However the agent bundling this group as plaintiff does not necessarily have to be, for example, a consumer organization. In this way and also procedurally, this type does not offer any necessary merit for consumers to conduct group actions. The opt-in solution proceedings alone do not solve the problematic points of consumer damage redress, and it is enough to say that the solution therefore cannot be a group action model for relieving collective damages. However, on the contrary, when between the individual damaged consumers a common interest might exist, the opt-in solution could be utilized. For example, when there are lots of individual damages and incentives exist for individual claims, these are situations 13 See subsection ‘The Claim for Skimming Off Unjust Enrichment’.

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when affected consumers will naturally join an opt-in proceeding, and a common profit emerges out of the pursuit of each proceeding. However, this can at first be left to joint litigation.

The two-step solution The meaning of the basic type The two-step solution is a ‘process of distinguishing the step of deciding about common points of dispute regarding the defendant’s business’s responsibility and the step deciding about individual points of dispute’.14 However this two-step solution is not really an established model. Additionally there are some variations that can be thought of. For example, there can be a broad variety depending on the consideration of who can in which step and under what requirements pursue proceedings regarding a high number of obligations and depending on the question of what procedures should be set up if, in the first step, some decision was made. According to the 2010 report plan I referred to earlier, two types shall be introduced. The first type uses neither opt-in nor opt-out for the first step, and individual right-holders are beyond the reach of effects of a disadvantageous decision. But if in the first step an affirmative decision is made, it will be made public in the second step, and the targeted consumers can demand the value of their own claims based on the affirmation. Conversely, the second type adopts opt-out in the first step and persons who did not opt-out are reached by the advantageous as well as the disadvantageous effects of decisions on the existence of responsibility. In addition, if an affirmative decision has been made, it will be made public and the consumers who are subject to it will be able to make claims.15 Problematic points The two ‘types’ proposed above for the two-step solution can be basically evaluated as an opt-in solution and an opt-out solution. With that evaluation, the weak points concerning opt-out and opt-in are structurally implicated. The first type can avoid each weak point by not taking the form 14 Brazil, which is comparatively fast, already introduced such a system. In recent years also in Europe some countries implemented or are examining whether to implement such procedures. 15 See Shug¯oteki Kenri Hogo Kenkyukai, ‘Shug¯oteki kenri hogo sosh¯o ni okeru kakuseido no hikaku kent¯o, pt. 1 and pt. 2’.

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of either opt-out or opt-in. However at issue is this proceeding’s weakness of its starting point being the conducting of an affirmative action. If one moves on to the second step even more time becomes necessary. The problem is whether it is good to grant consumer organizations such a roundabout method. Of course the two-step solution is also slowing redress timewise, and so when we think about the facts of consumer damages disputes, the opt-out solution, being able to approach a settlement in one stroke, seems to be adequate as a general solution.

The claim for skimming off unjust enrichment The role of group actions in some countries’ systems is designed to make businesses disgorge profits they achieved through illegal activities. In Europe Germany is a prime example. German consumer organizations are granted a right of skimming off unjust profits. On such occasion it is also possible to recompense individual consumers for their damages. In this case the consumer organization’s incentive for pursuing proceedings is the processing fee only and the rest is referred to the treasury. But because consumer organizations in Germany receive aid from the state, they can use this function complementarily. To continuously fulfil their role as a party in trials in Japan, it would be necessary that qualified consumer organizations be allowed to collect their expenditures for conducting the collective claims mainly from those claims. This means that not just injunctive relief but also claims for skimming off of unjust profits need to be positively recognized. The optout solution has the merit of having the highest potential for this kind of recovery.16

Other problems – the structure surrounding qualified consumer organizations Strengthening qualified consumer organizations’ set-up and foundation is an indispensable requirement to make the claim system work socially. Currently the organizations are set up as NPOs and do not receive any support from the state, which makes them economically extremely weak. Consumer organizations are supported by dedicated constituent members’ efforts. If overall a system for collective consumer damage redress is

16 See Koichi, ‘Tekikaku sh¯ohishadantai’.

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set up, it is necessary to also maintain an environment in which qualified consumer organizations can show a sufficient functionality in the field of consumer damage redress. Therefore two suggestions can be made. The first one is to release information held by the defending business. In order to conduct a suit, orders to submit documents should be strengthened. The second suggestion is to strengthen the support by the administration. The problem here is how the administration should rank consumer organizations and if they should play a role in consumer damage redress. The meaning of granting injunction rights should be ranked from an administrative point of view and financial support should be given in order to ensure the proper exercise of rights. In addition sufficient financial backup should be planned for cases in which group claims are not collective but organizations still might have a right to file a claim. However, even if the weapon in the form of a qualified consumer organization being allowed to press a claim is allowed, without proper financial support it will be nothing but a paper tiger. In addition a tax system favouring such organizations should be devised.17

Conclusion As shown above, lawsuit proceedings for collective consumer damage redress are not sufficiently established in Japan. The reason that the opt-in solution is not adequate as a method for typical collective consumer damage redress is because it cannot solve the essential problem of individuals having no incentive to bring proceedings. The problematic point of the opt-out solution, or point for criticism thereof, is that the solution can be considered to be without freedom of individual execution of rights or self-determination. However, this description is not exactly correct. To reject the opt-out solution for this reason that it legitimizes the loss of rights when there is no basis for selfdetermination fails to account for the fact that a characteristic of consumer damages is that the individual basically loses the possibility of exercising individual rights in private litigation. Given a choice, consumers would probably prefer access to justice over the preservation of purely theoretical autonomy.

17 See Shug¯oteki Kenri Hogo Kenkyukai, ‘Shug¯oteki kenri hogo sosh¯o ni okeru kakuseido no hikaku kent¯o, pt. 1’, 50 et seq.

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In Japan consumer organizations are granted a right for organizational claims concerning injunction proceedings. Using this experience, qualified consumer organizations should be granted the competence to pursue group actions, especially for more speeding up of consumer damage redresses.18 In the case of this combination, a qualified consumer organization is given the right to pursue proceedings as the representative plaintiff and the form of the proceedings will be the opt-out solution. Besides these two combinations I think there is no adequate system infrastructure for group actions to relieve collective consumer damages in Japan. In this regard one must not forget that the financial base for Japanese consumer organizations is weak. To make collective claims successful, and also from a continuity point of view, consumer organizations that are bringing group claims and accelerating consumer gains must be given financial support. It also should be pointed out that consumer organizations contribute to the health of the market functions in which consumers are involved, and the organizations can be evaluated as bearing a portion of the state’s responsibility. The evaluation of public activities by qualified consumer organizations is also a basis for justifying administrative financial support of such organizations. Many consumer organizations have been founded on public goals and have shown results already, thus serving not only consumers’ individual and collective interests, but also public interests, so there is no danger of abusive processes. Of course one can imagine the importance of consumer rights protection to give the organizations or their lawyers a financial incentive. Finally regarding the opt-out solution of collective claims, the class action of American law comes immediately to mind and generally a lot of animosity towards it can be seen. Points such as the procedural guarantee for justifying the forfeiture of one’s rights in litigation law are left unsolved. But in modern society nobody can deny that in some ways violations of consumers’ ‘actual rights’ are uncontrolled. Moreover nobody can deny that it is the law’s mission to thoroughly respond to the cry for redress of consumer damages. An infringement cannot be ignored when a right is granted by substantive law. I mean no disrespect to the traditional theoretical concept regarding claims, but more than 18 This direction is about the same as the proposal of the Japanese Bar Association. For their opinion see Japanese Bar Association, ‘Aratana sh¯ugososh¯ono sosh¯otsuik¯o shutai nitsuiteno iken’, available at www.cao.go.jp/consumer/kabusoshiki/shudan/doc/ 011 20110616 sankou3.pdf.

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theoretical completeness, it is necessary to build an actual and effective redress system to resolve the problems of our country. Therefore, based on the reality of consumers’ rights being violated, it is the opt-out ‘group action’ with its possibility for redress that should be chosen and added to the existing types of litigation. This is the reason for focusing on a new legislative process.19

19 A report of the expert study group on collective consumer damage redress should be pointed out as a brief explanation of the points of discussion: ‘Shu¯ danteki sh¯ohisha higaiky¯uzai seido senmon ch¯osakai no kent¯oj¯oky¯o ni tsuite’, available at www.cao.go.jp/ consumer/kabusoshiki/shudan/doc/010 20110527 sankou1.pdf.

8 Can collective actions be a solution to improve access to justice in Japan? Examination of measures to enhance the private enforcement of competition law in Japan

akinori uesugi

Introduction Cartels and other anticompetitive conduct severely harm business and consumer interests, and this is why public enforcement of competition laws has been tightened globally in recent years, including in Japan. However, this is only one aspect of the story. Businesses and consumers should also be able to recover damages caused by cartels and other anticompetitive conduct. Weakness in private enforcement might mean that access to justice is denied for those businesses and consumers. From this aspect, it would be useful to examine the possibility of collective action to improve access to justice in Japan. In order to explore this possibility, we need to know the reason private enforcement has been weak and if there are any signs of changes in private enforcement of competition laws in Japan. If the reason lies in the legal framework of private enforcement of competition laws or a lack of incentive for those who are injured by cartels and other anticompetitive conduct, collective action alone cannot improve access to justice in Japan. From this aspect, the first section of this chapter evaluates the enforcement record of the Japanese competition law, the Antimonopoly Act (AMA)1 , by referring to various statistics to see the trend in public and private enforcement of competition law in Japan, with a particular emphasis on cartel regulations. The public enforcement of cartel provisions took years to overcome various difficulties, but it has finally reached a level that 1 Shiteki dokusen no kinshi oyobi k¯osei torihiki no kakuho ni kansuru h¯oritsu, Law No. 54 of 1947, as amended.

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is more or less similar to the U.S. or EU enforcement of cartel regulations. In contrast, private enforcement in Japan still has a long way to go before achieving a satisfactory level. Following that, the second section examines why Japan has a poor record of private enforcement, in particular focusing on two aspects: the enforcement mechanism of the AMA, which heavily relies on the Japan Fair Trade Commission (JFTC) and Tokyo High Court (THC), and the legal principles that are uniquely applied in Japan to the relationship between public enforcement (decisions of the JFTC) and private enforcement (court rulings for subsequent lawsuits filed by injured parties). Following this, I will propose a couple of necessary reforms to increase the use of private enforcement in Japan. To conclude this chapter, I discuss the several reforms recently made to the enforcement mechanism of the AMA that have much improved such historical underuse by creating incentives for private enforcement. This is a good sign for better access to justice. The question remains whether such new incentives for private enforcement are strong enough to overcome the cultural and psychological barriers shared by Japanese companies who tend to shy away from private actions. Collective actions may provide a further catalyst to vitalize private enforcement in Japan. This chapter will focus on cartel regulation because it is the area where the interface between public and private enforcement is most commonly observed globally. Examining this area will provide us with a good insight into how effectively the Japanese competition law can be enforced privately. I will also confine my discussion to situations where an enforcement action is taken by the enforcement agency before the injured party files a damage suit in court. Theoretically, the injured party could file a damage suit without any preceding public enforcement regarding his alleged claim. However, to develop more private enforcement of competition law in Japan, cases preceded by public enforcement are suitable as a good starting place, although eventually private enforcement may spread into cases where a private party can prove the cause of action by herself without relying on any preceding public enforcement.

Importance of private enforcement of competition law Evaluation of public enforcement in Japan Public enforcement record of cartel regulations The cartel is the primary target of competition law and, therefore, it is important to make sure that the deterrence effects on cartel activities

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are the highest among various violations of competition law. There are various systems2 to ensure the deterrence effects on cartel activities, but in this chapter I would like to focus on the public enforcement and the private enforcement of competition law in Japan. The most important system is naturally the public enforcement of competition law by the enforcement agency, the JFTC. Two provisions of the AMA may be applied against cartel activities (in this chapter, the term cartel is used to mean a so-called hard-core cartel): the second half of Article 3 and Article 8(1) (formerly, Article 8(1)(1)). The second half of Article 3 prohibits cartel activities by companies, and Article 8(1) prohibits cartel activities by trade associations. First, Table 8.1 shows the number of cases dealt with by the JFTC throughout the history of the AMA. In order to show the trend, the table lists the total number of the cases dealt with by the JFTC under the above two provisions during each five-year period.

Trends in public enforcement of cartel provisions From Table 8.1, we can identify several interesting trends in cartel regulations in Japan. The decade from 1952–1961 was a ‘dark age’ for the JFTC. The enforcement activities by the JFTC were severely hindered whereas other government ministries took various economic measures to boost the industrial sectors under their jurisdictions by encouraging business activities to coordinate with each other. This is called an ‘administrative guidance cartel’.3 Later on, in the 1960s and 1970s, the Japanese cartel regulation was revitalized by challenging trade associations using Article 8(1). The JFTC’s active enforcement reached its peak during the ‘Oil Shock’, when many industries engaged in ‘pass-on cartels’ where the significant increase in energy cost was passed on to the downstream markets. In 1970s, the JFTC gradually shifted its focus of cartel enforcement from Article 8(1) to the second half of Article 3 with a view to increasing the deterrent effects on individual companies. The JFTC used to rely more on Article 8(1) because under that article it was easier to collect necessary evidence on cartel activities. By its nature, a trade association needed to make a decision, whether legal or 2 For example, suspending qualification to bid is one important tool of the deterrence systems against bid-rigging. 3 See H. Iyori and A. Uesugi, The Antimonopoly Laws and Policies of Japan (New York: Federal Legal Publications, 1994), ch. 2.

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Table 8.1. Number of cartel cases dealt with by the JFTC

Fiscal year

Article 3 (second half)

Article 8(1)

Sub-total

1947–1951 1952–1956 1957–1961 1962–1966 1967–1971 1972–1976 1977–1981 1982–1986 1987–1991 1992–1996 1997–2001 2002–2006 2007–2010 Total

40 17 2 13 17 102 16 18 25 79 106 173 105 713

N/A 4 3 72 108 65 21 11 15 30 5 1 0 335

40 21 5 85 125 167 37 29 40 109 111 174 105 1048

Notes: (1) Compiled from the JFTC annual reports. These numbers are the total number of the JFTC decisions (Shinketsu) including recommendation decisions, consent decisions and decisions after hearing proceedings. (2) Since FY2007, the JFTC decisions (Shinketsu) and orders (Meirei) have been added, therefore, there could be some duplication. (3) The total number of cases dealt with under the Trade Association Act was 42 during FY1947–FY1951, and 12 during FY1951– FY1953. After that, the Act was consolidated with the AMA and became Article 8.

illegal, and the JFTC did not face much difficulty in uncovering how the trade association reached its decision. Usually, decisions were recorded in meeting minutes or other documents. Even though the JFTC did not have sufficient staff for investigations,4 using Article 8(1) enabled them to challenge many cartels because they did not have to investigate a large number of member companies involved in the cartel but instead just interrogated the management of the trade association. 4 The number of staff of the Investigation Bureau of the JFTC was fewer than one hundred up to FY1980, whereas it is more than three hundred after FY2006.

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The JFTC’s aggressive enforcement against cartel activities during the first Oil Shock5 was only possible because of the availability of Article 8(1). During this active period, it appeared that trade associations were not too worried about the risk of their activities being caught by the JFTC because the JFTC was only able to impose a cease and desist order that in effect was accompanied by no penalties for the member companies involved in the cartel activity. Criminal penalties were not a realistic option for the JFTC to use in those days (the oil price-fixing cartel6 was the only exception and revealed a lot of problems with criminal enforcement in Japan). Article 8(1) was weak in deterrence effects because the names of the member companies, even if they were clear beneficiaries of the cartel activities, were not disclosed and the management of member companies could get away with pretending that they were not responsible for the illegal conduct. Further, before 1977 there were no surcharge orders issued against the member companies, and as a result, almost no trade associations tried to rebut the JFTC decisions at JFTC hearing proceedings or at the THC. It is apparent that Article 8(1) did not have sufficient deterrent effects against cartels. It also became apparent however that companies, who became more aware of the danger of using a trade association as a vehicle of cartel activities because it inevitably leaves behind traces of meetings and communications, changed their course of action and started to avoid cartel activities through trade associations. After the amendment in 1977, the JFTC lost the incentive to rely on Article 8(1) because the JFTC became subject to the requirement that each member company of the trade association be investigated in order for surcharges to be imposed against that company,7 and the burden of proof for trade association cases became almost the same as that for cartel cases addressed to individual companies. Since the 1980s, a majority of cartel cases in Japan have been challenged under the second half of Article 3, as demonstrated in Table 8.1.

5 The first oil shock took place in 1973. The number of cartel cases disposed of was 68 during FY1973, and 42 during FY1974. 6 On 15 February 1974, the JFTC filed two accusations to the Prosecutor General’s Office on price fixing and curtailment of production volume charges. 7 In the case of an Art. 8(1) AMA violation, the JFTC issues surcharge orders against each member company of the trade association (Art. 8(3) AMA). As a result, the JFTC must investigate those member companies individually anyway.

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Amendment of the AMA in 1977 In 1977, the JFTC finally obtained the power to impose surcharges (administrative fines) on companies involved in cartel activities.8 Despite this new power granted to the JFTC, however, the enforcement against cartel activities remained quiet during the 1980s. Since FY1990, triggered by the Structural Impediments Initiative Talk with the United States9 the JFTC started to tighten its enforcement against cartel activities, and consequently the number of cartel cases has increased dramatically since then (See Table 8.2). Table 8.2 also shows that bid-rigging became the major target of cartel enforcement by the JFTC. Almost all cartel cases were challenged based on the second half of Article 3, whereas Article 8(1) cases were almost non-existent in the 2000s so far as cartels are concerned. It is noteworthy that the total number of cartel cases dealt with by the JFTC has amounted to 1,049 since the enactment of the AMA. Comparatively speaking, this is a quite significant number as a record of formal actions against cartel activities taken by a single enforcement agency, and it is probably safe to say that Japan comes second only to the United States in this sense. The problem of the Japanese cartel regulation is, therefore, not the number of cartel cases challenged by the agency, but whether those actions have sufficient deterrent effects. Sanctions on cartels Figures shown in Tables 8.3 and 8.4 illustrate the deterrent effects of the public enforcement on cartels. Those years before FY2000 were omitted from the tables because they were below five billion yen (except FY1990, FY1994–FY1996 and FY1999). The leniency program started in Japan in 2006,10 and it changed the enforcement landscape dramatically in the following years, particularly in terms of the total amount of surcharges ordered per year as well as the average amount of surcharges imposed on individual companies. In recent cases, the amount of surcharge paid by a single company is often as great as the total surcharges imposed in all cases during one year before FY2004 as illustrated by Table 8.4. 8 See Art. 7(2) AMA. The initial rate for surcharge was 2% of turnovers of cartelized goods or services for manufacturing companies. 9 See Iyori and Uesugi, The Antimonopoly Laws, p. 61. 10 See A. Uesugi, ‘How Japan is Tackling Enforcement Activities against Cartels’, George Mason Law Review, 13 (2005), 349; A. Uesugi, ‘The Japanese Leniency Program – One Year in’, Antitrust (Spring 2006), 79. A. Uesugi and K. Yamada, ‘Japan: Two Years into the New Leniency Programme’, The Asia-Pacific Antitrust Review 2008 (2008), 47.

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Table 8.2. Enhancement of cartel regulation in Japan since FY1990

Fiscal year

Number of cases challenged

Cartel cases including bid-rigging

Article 3 (second half) cases

Article 8(1) cases

Bid-rigging cases

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

22 31 34 31 24 31 21 31 27 27 18 38 37 25 35 19 13 24 17 26 12

− − − − 22 24 15 19 19 20 12 36 33 17 24 17 9 20 11 22 10

− − − − 9 22 8 15 19 20 12 36 33 17 23 17 9 20 11 22 10

− − − − 13 2 7 4 0 0 0 0 0 0 1 0 0 0 0 0 0

− − − − 19 20 5 16 17 18 10 33 30 14 22 13 6 14 2 17 4

Note: Compiled from the JFTC annual reports. The table is compiled based on the number of JFTC measures; therefore, these numbers are not equal to the JFTC decisions in Table 8.1.

In conclusion, although Japan has been enforcing those provisions of the AMA to prohibit cartels for over sixty years, effectively it was not until FY2004 that the JFTC started to exercise its enforcement power aggressively against cartel activities to join the countries with the strictest cartel regulations in the world.11 For example, total fines on cartels imposed by U.S. courts during FY2005–FY2008 were US$473 million to

11 For Japan, see Table 8.4 and for the United States, see www.justice.gov/atr/public/242359. pdf.

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Table 8.3. Total amount of surcharges ordered in each year since FY1990

Fiscal year

Total amount (billion yen)

Number of recipients

Average per recipients (million yen)

1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

12.56 8.51 2.20 4.33 3.87 11.15 18.87 9.26 11.30 27.03 36.07 72.09

175 719 248 561 468 219 399 158 162 87 106 156

72 12 9 8 8 51 47 59 70 311 340 462

Note: Compiled from the JFTC annual reports and its press releases.

US$696 million. This is roughly equal to the total surcharge ordered for FY2010. Given this stringent policy currently being undertaken, the public enforcement in Japan is sufficient to provide a satisfactory level of deterrence so far as cartels are concerned. Table 8.4. Top ten companies in terms of the amount of surcharges (as of December 2011)

Firm

Relevant goods or services

Year of decision

Surcharge ordered (billion yen)

A B C D E F G H I J

Chloride vinyl tubes Wire and cable (CV, IV, CCV) Casted iron Optical fibre Waste incineration Steel plates Waste incineration Steel plates Waste incineration Gas

2009 2010 2009 2010 2010 2009 2010 2009 2010 2011

7.96 7.26 7.07 6.76 6.50 6.26 5.73 5.40 5.17 5.14

Note: Compiled from the JFTC annual reports and its press releases.

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Evaluation of private enforcement in Japan General picture of private enforcement in Japan The difficult question we face in trying to grasp the general picture of how competition law is privately enforced in Japan is determining which records should be looked at as an appropriate indicator to evaluate how private enforcement is used. Three types of private enforcement records can be used in this regard: namely Article 25 suits under the AMA, Article 709 suits under the Civil Code and injunction suits under Article 24 of the AMA. The number of Article 25 suits is the most reliable because complete statistics are available. But this does not necessarily reflect the accurate picture of private enforcement because Article 709 of the Civil Code may also be used to recover damages caused by competition law infringements. Unlike AMA Article 25 suits, it is difficult to gather complete statistics on Civil Code Article 709 suits. Not all the cases under Article 709 have been publicly reported because in many such cases Article 709 is merely used as one of many claims by the plaintiff. AMA Article 25 suits In general, very few Article 25 suits took place before FY2002 as illustrated by Table 8.5. Further, it seems there was no reported case where the plaintiff won. Since FY2002, however, Article 25 has been used by municipal governments to recover damages caused by bid-rigging after the relevant JFTC order became final and conclusive. Unsurprisingly, such court cases were ruled in favour of the plaintiff. In contrast, Article 25 cases before FY2002 were filed by citizen groups who tried to recover damages on behalf of the relevant municipal government, and certainly Article 25 did not provide meaningful help for such groups to achieve their purpose. In 2002, the Municipal Government of Tokyo filed an Article 25 suit against manufacturers of water meters12 it had procured, and that was the first Article 25 case used by a municipal government. It is interesting considering that even before this case a number of procurement contracts were challenged by JFTC decisions as bid-rigging (see Table 8.3. Most of the cases were bid-rigging in the context of procurement by municipal governments or their sub-entities.). To obtain a more accurate picture, a closer examination is required regarding the huge hike in the number of cases between FY2007–FY2009. 12 See Tokyo Metropolitan Government v. Aichi Tokei Denki K.K and twenty-four others. This case was settled on 22 June and 4 October 2002.

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Table 8.5. Win-loss records for plaintiffs in Article 25 suits

Fiscal year

Number of cases at the start of the period

New cases filed

Plaintiff won

Plaintiff lost or withdrew

Settled

pre-2002 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

10 4 2 3 4 7 5 2 32 19 30

0 2 1 1 5 2 1 36 5 12 −

0 0 0 0 1 2 1 0 0 1 −

6 0 0 0 0 2 2 6 17 0 −

4 4 0 0 1 0 2 0 1 1 −

Notes: (1) Compiled from the JFTC annual reports. (2) Win record in the table includes cases where one of the claims prevailed or one of the plaintiffs won.

The figure during this period includes in total thirty-five cases filed under Article 25 against steel bridge contractors in relation to one particular bidrigging case after the JFTC issued the decision challenging the bid-rigging activities in this area.13 As such, in order for us to avoid double-counting, the figures for FY2007–FY2009 should be understood as seven rather than forty-two. The important role that Article 25 has played in enabling municipal governments to recover damages has been much reduced these days because almost all the procurement contracts of municipal governments in recent years contain provisions to require the contractors to pay compensation of a fixed percentage of the contracted amount in case bidrigging is uncovered later14 (in most cases, it is set at 10 percent of the contract amount). It is easier for municipal governments to recover 13 The JFTC issued a decision on steel bridge construction bid-rigging case on 18 November 2005. The contractor was Japan Highway Public Co. 14 Since June 2003, the Ministry of Infrastructure, Land and Transportation has adopted a policy to include a 10% compensation clause in its procurement contract. Many municipal governments have adopted a similar policy. See ‘Study Group Report on Encouraging Competition in Public Bidding’, available at http://dl.ndl.go.jp/view/download/digidepo 1253950 po 03111801–02-hontai.pdf?contentNo=1.

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damages by using such contractual provisions rather than resorting to Article 25 although it is important that the amount of damages awarded by courts in almost all similar cases has actually been below 10 percent (see the subsection ‘Are Current Damage Awards by Courts Sufficient to Recover Damages?’).

Article 709 Civil Code suits One available source to monitor the trend in private enforcement using Article 709 is the annual reports regarding JFTC decisions (shinketsush¯u). The JFTC tries to collect as much information as possible relating to the private enforcement of competition law to include in these reports. The annual reports do not provide a complete list, and sometimes old cases are reported in later years when the JFTC could not identify the cases in time for the report issued the year they occurred. This chapter does not go further into detailed analysis of the data regarding 709 cases included in JFTC annual reports as it is unlikely anyway that many cartelrelated Article 709 cases are reported there where the plaintiffs managed to recover damages. If, however, we include citizen suits filed on behalf of municipal governments, the situation is much better, and there have been plenty of winning cases.15 These cases are filed mostly in local district courts and could have otherwise been counted as Article 709 suits if they had been filed by the municipal governments themselves. However, those suits could not be regarded as a normal path for private enforcement because citizen suits were filed as an alternative to recover the damages caused by bid-rigging against procurement contracts of the municipal governments where those citizens resided. At that time, they were effectively the only available methods for private enforcement. The assumption we can make here is, therefore, that Article 709 suits have not been actively used, so far as other types of cartels outside of bid-rigging are concerned. Injunction suits The injunction suit system under Article 24 of the AMA was introduced in April 2001 in order to allow a private party to stop illegal activities committed against him or her, although this can only be used for unfair 15 Regarding waste incineration plant bid-riggings cases, on behalf of municipal governments thirteen citizen suits were filed in various district courts throughout Japan. See annual reports of the JFTC.

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Table 8.6. Injunction suits (Article 24 cases)

Fiscal year

Cases pending at the start of the year

New cases filed

Plaintiff won

Plaintiff lost or withdrew

Settled

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

7 14 19 22 8 4 6 8 8 10

9 5 7 2 2 2 6 1 5 −

0 0 0 0 0 0 0 1 1 −

2 10 8 16 6 5 4 1 5 −

1 0 0 4 1 0 0 2 0 −

Note: Compiled from the JFTC annual reports.

trade practice. As such, we can disregard the category of ‘injunction suit’ in Japan for the purpose of analyzing private enforcement of cartel regulations. Just for reference, the table below shows plaintiffs’ win-loss records in injunction suits under Article 24 of the AMA.

Concentration of enforcement power in the JFTC and THC Why is the enforcement power concentrated in the JFTC and THC? This section analyzes various systems that are designed to grant concentrated power to enforce the AMA to the JFTC and THC and the way such systems have impacted the private enforcement of competition law. When the AMA was promulgated in 1947, one of the most serious concerns for the drafters was how to build an effective enforcement mechanism in a country that had no prior antitrust tradition. A culture of competition was missing throughout the business community, and the AMA was too complicated for the Japanese people at that time (including judges) to understand and interpret appropriately. Considering such concerns, the General Headquarters of the Supreme Commander of the Allied Powers, which was involved in the rebuilding of the Japanese economy during the occupation of Japan, initially advised setting up a special court exclusively to handle cases related to

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competition law.16 After the idea of a special court was rejected by the Japanese government, the AMA established a system where the enforcement power was exclusively given to the JFTC and the THC. A provision was included in the AMA (currently Article 87) to set up a special panel composed of five judges at the THC to hear AMA-related cases. It was clear that in the minds of the drafters of the AMA private enforcement had only a very small role, which even resulted in a couple of systems being incorporated in the AMA to discourage private enforcement. However, by various reasons that are not necessarily related to private enforcement, those provisions that tried to concentrate the enforcement power in the JFTC and the THC have been reviewed and modified recently without considering the impacts on private enforcement. Through the AMA Amendment Bill currently pending in the Diet, those provisions that were incorporated into the original AMA to concentrate enforcement powers to the JFTC and the THC are going to be eliminated completely. By analyzing the unique aspects of the enforcement mechanism incorporated into the AMA, we can learn what factors have prevented private enforcement of competition law in Japan. This chapter focuses on the following three systems that seem important in this regard. The first example is the exclusive jurisdiction of the THC over the appeal cases from JFTC decisions, Article 25 cases as well as criminal violation cases of the AMA. The second example is the exclusive accusation system for major criminal violation cases (except minor crimes such as those under Article 91–2 etc.) By giving exclusive power of accusation in criminal cases to the JFTC, the drafters of the AMA tried to avoid a situation where prosecutors can file criminal violation cases without involving the JFTC. The criminal violation cases may be heard only by the THC. The third example is the exclusive jurisdiction of the THC over temporary injunctions, suspension of the JFTC orders while the case is pending at the JFTC’s hearing proceeding and minor fines for non-observance of JFTC orders. These types of powers are not normally the kind of powers that would belong to the jurisdiction of high courts in non-competition law cases, and the only possible explanation for such an irregularity is the drafters’ intention to concentrate the power of AMA enforcement in the THC. The original idea of the drafters seems to attempt to make Article 25 suits the only method to recover damages arising from the violation of the 16 See the draft of the AMA prepared by Posey T. Kime. Establishment of a special court was one of the priority suggestions of the General Headquarters.

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AMA because otherwise it makes no sense to give the exclusive jurisdiction on Article 25 suits to the THC. Later on, however, the court started to allow Article 709 suits under the Civil Code even when a final and conclusive JFTC decision exists,17 which because of the exclusive jurisdiction of the THC undermined greatly the merit of Article 25 suits. For local residents located far from Tokyo, it is cumbersome to file an Article 25 suit with the THC in Tokyo whereas Article 709 suits are available in any district court, including one that is geographically closer to the plaintiff. Not all injured parties are based in the vicinity of Tokyo. In fact, given the inconvenience accompanying Article 25 suits for plaintiffs located far from Tokyo, the court has accepted Article 709 suits in addition to Article 25 suits, thereby undermining the original idea of the drafters to give exclusive jurisdiction on damage suits to the THC.

Gradually reduced concentration of enforcement powers Changes to the previous systems Three important changes were made in the 1990s and 2000s to the AMA that reduced the concentration of enforcement powers to the JFTC and the THC. The first change was the introduction in 2000 of injunction suits based on Article 24 of the AMA.18 It seems natural for the AMA as a legal system to allow a private party to file an injunction suit because Article 709 suits under the Civil Code are now permissible means under which a court other than the THC has jurisdiction over AMA infringements, and case law can be developed without involving the JFTC and the THC. Given this, it seems most reasonable to allow injunction suits by private parties. Since April 2001, any district court has jurisdiction over injunction suits under Article 24 of the AMA, and also Article 84–2 provides for additional jurisdiction for the district courts located in the cities where high courts stand. The second change is the elimination in 2005 of exclusive jurisdiction of the THC over criminal violation cases.19 Criminal violation cases are ordinarily filed before the JFTC issues its decision on the case, and therefore, in many cases the THC must make its own judgment instead of reviewing 17 Ebisu Shokuhin Kigyo Kumiai v. Japan, 19 Shinketsush¯u 215 (Sup. Ct., 16 November 1972). 18 Law No. 76 of 2000. Art. 24 AMA came into effect in January 2001. 19 Law No. 35 of 2005.

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the decisions issued by the JFTC. The THC’s exclusive jurisdiction might be justifiable as an idea to concentrate expertise on competition law; however, this should not be a sufficient reason to deny the rights of criminal defendants to argue their cases under the benefit of the ‘three-tier court hierarchy system’ (sanshinsei), under which the party can have access to courts maximum three times, namely to the district court, the high court and the Supreme Court. In addition, this system had the side-effects of limiting the jurisdiction of criminal investigations related to competition law to the Tokyo High Prosecutors Office (in effect, the Tokyo District Prosecutor’s Office where the Special Investigation Department is located20 ). Because of the concentration of power in the Tokyo High Prosecutors Office to investigate criminal violations of the AMA, criminal accusations by the JFTC can be filed only when the Tokyo High Prosecutors Office has free resources to investigate the case. When they are short of resources due to other noncompetition law criminal cases, it is difficult for the JTC to file a criminal accusation. The third and biggest change is incorporated in the AMA Amendment Bill21 currently pending at the Diet. It intends to eliminate the system of hearing proceeding at the JFTC which will result in the abolition of the exclusive jurisdiction of the THC over the appeal cases regarding JFTC decisions and orders. After the amendment, an appeal to a JFTC order can be filed only to the Tokyo District Court. The Tokyo District Court has the jurisdiction over the defendant, namely the JFTC, as the most closely located district court under the general rules in Japan regarding court jurisdiction. In the Bill, the power to issue a temporary injunction order is also transferred from the THC to the Tokyo District Court.22 However, suspension of the power of the JFTC orders while hearing proceedings are pending will be eliminated in order to eliminate the special rules on JFTC 20 The Special Investigation Department was attached only to the Tokyo District Prosecutor’s Office in those days and is the only organ that can engage in criminal investigation by its own initiative. Therefore, the AMA-related investigation can be handled only by the Special Investigation Department. Nowadays, it is also attached to the Osaka and Nagoya District Prosecutor’s Offices. 21 The Bill was submitted in March 2010 to the 174th session of the Diet. The Bill is pending at the House of Representatives and could therefore be passed in the ordinary session that began on 24 January 2012. 22 New Art. 85 AMA.

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decisions. After the amendment, JFTC orders can be suspended under the general rules on suspension of power by courts under the Administrative Case Litigation Act.23 The Tokyo District Court must hear those cases by a panel consisting of five judges, which is very unusual in a Japanese district court. The THC will have no special status on competition law after the amendment, although it is the THC which reviews the decisions by the Tokyo District Court under the general rules of jurisdiction.

Analysis If the Bill is passed by the current session of the Diet, the concentration of enforcement powers to the JFTC and the THC will be eliminated, and the JFTC’s remedial as well as surcharge orders will be treated just like any other orders by other government branches. There are various pro and con arguments among economic law scholars24 whether the hearing proceeding at the JFTC should be eliminated at all. However, so far as private enforcement of competition law is concerned, it will contribute to increasing access for private parties to courts and should have a positive effect on enhancing private enforcement of the AMA. However, more court judgments are likely to come out opposing the JFTC’s view, and therefore, the JFTC needs to be more actively involved in private enforcement of the AMA by submitting briefs or opinions to the courts. After this amendment, there is no reason to confine the availability of injunction suits only to unfair trade practices. Private parties should be able to file damage suits and injunction suits to courts that have the jurisdiction over the subject matter. If a private party prefers, he can file an Article 25 suit in the Tokyo District Court, or if he wants to file a suit in a neighbouring district court, he can use Article 709 of the Civil Code as well. A private party should be able to file an injunction suit as well as a damage suit at the same time. It makes no sense to exclude private monopolization from the acceptable types of causes of action because in most cases the means to ‘exclude’ competitors, which is an essential requirement to recognize this type of

23 Art. 25 of the Administrative Litigation Act (gy¯osei jiken sosho h¯o). 24 By far the majority of economic law scholars oppose the bill to eliminate the hearing procedures at the JFTC. Many of them are in favour of the hearing proceedings that existed before the 2005 amendment, namely de novo hearing proceedings started by a complaint.

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violation, is likely to fall under one of the recognized categories of unfair trade practices.25 Under the current rules, in an Article 24 suit the plaintiff must argue that the conduct of the defendant company constitutes an unfair trade practice rather than private monopolization, even if private monopolization is the most appropriate cause of action. Such current practice reduces the chance of case law on private monopolization being developed through private enforcement. So far as cartels are concerned, injunction suits by private parties do not have an important role because that role is entrusted to the JFTC. Moreover, damage suits have sufficient deterrent effects because once such a suit is filed at a court, no injunction order is necessary in effect to make the defendant companies discontinue the alleged conduct.26 These are revolutionary changes compared with the original idea of the drafters of the AMA. These changes can be described as a process to transform the nature of JFTC decisions to something closer to ordinary decisions or orders issued by any other government branches. However, these changes are not entirely free from scepticism such as ‘if the concentration of enforcement powers in the JFTC and the THC seems to be justifiable in order to give authority and respect to the expert judgments by the JFTC and the THC in view of the complicated nature of competition law, then why is Japan heading towards decentralization of power to enforce competition law?’ or ‘does this contribute to the stronger enforcement of competition law in Japan or weaken it?’

Comparison with EU modernization reform This chapter does not provide a detailed analysis of this aspect, but interesting lessons can be obtained by looking at the modernization reform of EU competitions law.27 In May 2004, the EU competition law enforcement mechanism was changed drastically, and each competition agency and court of each Member State started to directly enforce EU competition law. By decentralizing the power to enforce EU competition law, the European Commission aims to create agencies that concentrate on important 25 Unfair trade practices can cover any exclusionary or abusive conduct in its incipiency, namely those having a tendency to impede fair competition; therefore, almost all private monopolization cases could be attacked as unfair trade practices cases. 26 In other words, once the allegation of a cartel is raised in court, it becomes impossible to continue meetings or communication among alleged members of cartel. 27 See D. Broomhall and J. Goyder, ‘Overview’ in D. Brommhall and J. Goyder (eds.), Modernisation in Europe 2008 (London: Law Business Research Ltd., 2008).

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enforcement missions such as cartel regulations and merger regulations. Also, it means that a private party can file any information on possible violations of EU competition law in the most convenient forum for her. She can file a suit directly to a court in her country. The European Commission can also assign cases to be investigated by the most appropriate agency among member countries. In conclusion, all concerns about the departure from the old regime of the JFTC and THC holding the centralized enforcement power are likely to prove unnecessary. Even if private enforcement gains a more prominent role in Japan, the importance and integrity of the JFTC as an enforcement agency will not be lost by any means. Economic law scholars seem to be worried about the adverse effects on the importance of the JFTC in enforcing the AMA and frequently stress this point as one of the reasons for their opposition to the elimination of hearing proceedings. However, I would like to reiterate the successful experience of decentralization in Europe, which should help alleviate such pessimism.

Relationship between the JFTC’s fact finding and the court’s fact finding Finding of facts in cases decided by recommendation decisions This chapter analyzes the relationship between JFTC decisions and court rulings in the subsequent damage suits. One potential factor that has weakened private enforcement may be the system of recommendation decision.28 Previously, most of the JFTC cases were resolved as a recommendation decision, which undermined the value of JFTC decisions in terms of proving violations of laws, which could have otherwise been valuable for the injured party who tried to recover damages. Therefore, it is useful to examine whether or not the gradual changes to the enforcement mechanism of the AMA have actually changed the trend in private enforcement in Japan. By analyzing those changes in comparison to the previous mechanism that was reducing the incentive of private enforcement, and evaluating why the incentive to use private enforcement has not increased even after those changes, we can learn what should be done in order to increase private enforcement in Japan.

28 The old Art. 48 AMA. Art. 48 AMA was eliminated by Law No. 35 of 2005.

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Recommendation decisions Before 2006, the JFTC was able to issue a ‘recommendation’ to the party after conducting necessary investigations, and if the party accepted the recommendation, the case was concluded by a ‘recommendation decision’.29 The recommendation contained the JFTC’s finding of facts and application of laws regarding the case, and therefore, the acceptance by the recipient company of the recommendation could potentially be interpreted as its acceptance of the finding of facts and application of laws made by the JFTC with respect to that case. However, according to the Supreme Court,30 what the recipient company accepts is not the entire recommendation, but rather the remedial measure set out in the recommendation, and as such, the findings of fact described in the JFTC decision can be challenged freely in the separate trials raised later on even if the recipient company accepted the recommendation. Even still, the recipient company must overcome the de facto presumption of illegality because a court in the following trial is often likely to presume that the facts described in the recommendation decision did indeed occur. However, the recipient company can argue that it accepted the recommendation because it has no objection to the remedial measures in the decision, although it had many objections on the findings of fact by the JFTC.31 The company can argue that it chose not to litigate the case because the time and resources required for the litigation was too costly. For the presiding court, it is sometimes difficult to presume that the recipient company actually engaged in the alleged conduct because the recommendation decision does not describe in detail how the violation took place or how individual companies acted during cartels. Contrary to European Commission decisions, JFTC recommendation decisions are fewer than ten pages, and only the outline of facts is described.

29 See Law No. 35 of 2005. If the recommendation is not accepted by a recipient company, the JFTC issues a complaint; its finding of facts and application of laws are the same as with the recommendation. For a recipient company, the next step is to file an appeal with the court of the JFTC’s findings of fact and application of laws. 30 Novo Industri v. Amano Seiyaku K.K., 22 Shinketsush¯u 260 (Sup. Ct., 28 November 1975). 31 This is a typical response by a recipient company of the recommendation decision at the subsequent suit for damages. A recipient company sometimes issues a statement when it accepts the recommendation saying, for example, that it believes no violation was committed but it has decided to accept the recommendation in order to avoid an unnecessary confrontation with the JFTC.

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More than 80 percent (1,020 out of 1,263) of cases were concluded as a recommendation decision between FY1947 and FY2005.32 Of these cases even if an Article 25 suit were filed based on a recommendation decision, the injured party could not rely on the theory of prima facie evidence.33 If the case was concluded by a recommendation decision, the injured party could not get access to the evidence collected or examined by the JFTC, at least not the evidence that might be submitted to potential hearing proceedings in the future (On this issue, see also the subsection ‘Elimination of Article 70–15 and Its Possible Effects on Private Enforcement in Japan’). Under the old rules, the JFTC did not provide a chance for recipient companies to raise objections to the tentative findings of fact or the interpretation of laws, and no access was provided to the investigation files at the time of the recommendation because this was exactly the role for hearing proceedings, and the recipient companies would be free to exercise their rights at that stage. There were problems in the system of recommendation decisions in itself, but at the same time, it also meant that a court might have given less trust to the findings of fact by the JFTC compared with the case where a full hearing was conducted on the case or where a fair opportunity to raise objections was provided to the recipient companies before issuance of the recommendation. Given this, under the system of recommendation decisions, the recipient company had more room to rebut the findings of fact at a separate court proceeding such as a damage suit. Therefore, if the case goes to hearing proceedings, the situation is much better for the injured party (private plaintiffs) because the decision contains the full description of facts on the violation and the citation of evidence, and also all evidence submitted by investigators at the hearing proceeding can be reviewed and copied by any potential plaintiffs of damage suits under Article 70–15 (see the subsection ‘Elimination of Article 70–15 and Its Possible Effects on Private Enforcement in Japan’). This right could be exercised not only for Article 25 suits but also for 32 The JFTC had issued 1391 decisions as a whole during FY1947 to FY2005. Nineteen decisions were non-AMA-related ones or procedural ones. In addition 202 decisions were rendered after the JFTC heard claims on surcharge orders. Therefore, in terms of number of cases, it is duplicative with cease and desist orders. Accordingly the total number of the JFTC decisions finding violations of AMA is 1263. There are still duplications in this total, because recipient companies in a single case can either accept the recommendation or choose to move to a hearing proceeding. 33 See Section 5(a) of the Clayton Act, 15 U.S.C. § 16.

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Article 709 suits, or even for derivative suits filed by citizens on behalf of the relevant municipal governments.34

Consent decisions In the case of consent decisions, the recipient must accept the findings of fact and the application of law contained in the complaint issued at the start of the hearing proceeding, with the complaint being the same as the original recommendation except for the remedial order.35 Even worse, the recipient company must file a petition for a consent decision, which is equal to an admission of a violation by the recipient company. Based on the principle of estoppel, the recipient company cannot deny the facts of violation in a separate court proceeding such as a damage suit. In view of these problems, the consent decision system was also eliminated in 2005 together with the recommendation decision system. Changes to the recommendation decision system in 2005 and their meaning for private enforcement After January 2006, the recommendation decision system was eliminated, and the JFTC can now issue a remedial order as well as surcharge order at the same time. The JFTC provides each recipient company a chance to be heard and to present evidence,36 if any, on his case, and therefore in the eyes of judges the facts contained in those decisions by the JFTC become more reliable compared with recommendation decisions. The presiding court can ask the defendant how she argued during this proceeding at the JFTC and to submit every document she obtained, if any, during this proceeding.37 At present, there is a lot of room for improvement of prior proceedings, but the ongoing reform is on the right track in terms of giving a fair chance of defence to recipient companies and also providing an injured party with a better chance to file damage suits by using the JFTC decision. Of course, the recipient company can deny the allegation of AMA violations or the causal relationship with the plaintiff’s injuries and the alleged conduct in 34 See 50 Shinketsush¯u 739 (Sup. Ct., 9 September 2003). 35 The JFTC takes the position that no argument on remedial order is allowed for a recipient company because a complaint does not include such order. 36 See Art. 49 AMA. 37 For example, a recipient company might have submitted a brief to the JFTC or it might have produced a memo when it had access to evidence presented during the prior proceeding.

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the damage suit, but the injured party enjoys a better chance of winning a damage award compared with the recommendation decision system. However, if a recipient company chooses not to file a petition to open a hearing proceeding, that recipient might be able to reduce the chance that injured parties will obtain critical evidence against the company. Also it is important to note that the recipient company can avoid receiving copies of evidence during the prior proceeding so that critical evidence does not officially come into its custody, thus avoiding any future discovery request from injured parties.38 If the plaintiffs do not have access to critical evidence, the recipient company might be in a better position in the private suit: for example, it may be able to settle the case on more favourable terms. There are additional issues related to this problem because the JFTC has a policy of providing information and evidence to injured parties even in non-litigated cases. This issue is touched on in the subsection on the ‘Role of the JFTC in Facilitating Private Damage Suits’.

Increase in cases concluded after hearing proceedings Before 2000, the number of cases that went to hearing proceedings used to be around ten at most. However, in the latter half of 1990s, such cases started to increase drastically. In addition, since 2000, the cases that move to hearing proceedings totalled well over fifty constantly, and for FY2003–FY2008, it was over eighty (See Table 8.7). For a better understanding of those figures, it is noteworthy that surcharge cases and cease and desist order cases are counted differently. Because a surcharge is ordered as to each recipient company, a petition for opening a hearing proceeding must be filed separately; thus, the case is counted separately even if multiple companies from a single case ask for the opening of hearing proceedings. In the case of a cease and desist order, even if multiple recipients of the order file petitions for the opening of hearing proceedings, it is counted as a single hearing proceeding case.39 38 New Art. 52 AMA provides that a recipient company can have access to or can obtain a copy of relevant evidence; therefore, once a copy is in the hands of the recipient company, the document could be discoverable by an injured person if that person files a suit against the recipient company. 39 Under ordinary circumstances, those hearing proceedings are combined and conducted as if they were a single hearing proceeding, but the docket number is not combined. In the case of a cease and desist order, theoretically recipient companies might choose to proceed separately, but the docket number is the same.

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Table 8.7. Hearing cases

Fiscal year

Cases pending at the beginning (A)

Cases started during the year (B)

Cases pending at the end (C)

Cases disposed of during the year (D)

1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

12 43 22 61 83 140 130 134 93 96 54 47

3 8 44 30 77 32 20 21 19 14 34 30

13 22 61 83 140 130 134 93 96 54 47 54

2 29 5 8 20 44 24 102 35 58 40 25

Notes: (1) Compiled from the JFTC annual reports. (2) In multiple party cases, some parties would opt-out by filing a petition for a consent decision, but the hearing cases can continue after the consent decision; therefore, A plus B minus D does not necessarily equal C.

The large number of hearing cases in Table 8.7 after FY2000 means that many recipient companies of surcharge orders had filed a petition to open hearing proceedings to take advantage of the old system.40 Namely, before January 2006, the surcharge order was vacated once the recipient company filed a petition to open hearing proceedings, and therefore, the company was able to defer the payment of the surcharge until a new JFTC decision was issued after the lengthy hearing proceedings. As Table 8.7 shows, after January 2006 the percentage of cases which went to hearing proceedings declined drastically. This change could mean two things. One is that those cases filed to take advantage of the deference of payment of surcharges are gone. This is going in a correct direction. The other is that the new system which provides a recipient company a chance of rebuttal on its case has had a positive impact on the company’s 40 The old Art. 49(3) AMA. This is a very unusual provision because the general principle is that a government order continues to in effect regardless of the filing of an appeal or a complaint unless the order is suspended by a court. Because the recommendation loses its effect once a recipient firm rejects it, it is thought that a surcharge order should be treated in the same way.

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Table 8.8. Cases that went to hearing proceedings

Total Cease and desist orders (recommendations) Surcharge orders

April 2003 to December 2005

January 2006 to November 2010

20.5% 30.3%

5.2% 4.0%

9.4%

6.6%

Note: The JFTC Activities in Recent Years (11 January 2011 version).

decision as to whether to file a petition for opening a hearing proceeding. This is also going in a correct direction. However, even after the increase of hearing cases in the latter half of the 1990s, private enforcement was not activated significantly. Those companies who filed a petition to open hearing proceedings did not seem to worry about the consequences regarding private suits seeking damages. The increase in cases which moved to hearing proceedings would not have happened if private enforcement had been active. It is important to evaluate why private enforcement was not activated even if proof of violations became easier for plaintiffs because of the increase in the number of litigated cases. The JFTC decisions rendered after hearing proceedings provided a large advantage from the injured party’s viewpoint, and therefore, we should examine whether private enforcement can be activated even if fewer cases are litigated in the future. If the increase of private enforcement results in fewer cases going to hearing proceedings, it might have negative effects on the attempt to activate private enforcement. It also means that if the hearing proceeding at the JFTC is eliminated, it is certain that much fewer recipient companies will dare to go to the Tokyo District Court, meaning fewer litigated cases in the future.41

Are current damage awards by courts sufficient to recover damages? Before moving on to other recent amendments, this section discusses how much damages can be recovered by a plaintiff through private 41 This is one of the very important issues for or against eliminating the hearing proceedings of the JFTC. If the JFTC decisions are treated like any other orders by government agencies, it is certain to get harder to revoke them. In the case of the hearing proceedings at the JFTC, the mere submission of a document can start the hearing proceedings.

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enforcement. As previously discussed,42 so far as bid-rigging cases are concerned, the court started to award damages to injured parties, who have mostly been municipal governments. Now the question is how substantial such awards could be. In 1997, an important provision was introduced to the Code of Civil Procedures. Article 248 of the Civil Procedures Code allows a presiding court to award an appropriate amount of damages in view of the whole argument during the trial and the examination of evidence, if the amount of damages is difficult to calculate. Since then, with regard to bid-rigging cases, courts have frequently awarded 5–8 percent of the contract amount agreed on with the bidder, relying on Article 248 of the Civil Procedures Code.43 As seen above, damage can be recoverable so far as bid-rigging cases are concerned. Nowadays, central and municipal governments do not need competition law in order to recover damages caused by bid-rigging. If a compensation clause is not provided in the procurement contract, and if the municipal government does not sue for damages even after the JFTC decision becomes final and conclusive, then a citizen group might file a suit to compel the governor to recover damages using the Municipal Government Autonomy Act.44 Given current fiscal difficulties, no governor can find any legitimate reasons for not suing for damages in cases where its procurement contracts were rigged. As illustrated by Table 8.3, the amount of surcharge has been getting bigger and bigger in recent years, which means that possible damage awards by courts has been getting bigger because a court usually awards damages as a fixed percentage of turnovers of cartelized goods or services. The rate for surcharge was 6 percent or 10 percent of turnovers during the cartel period before December 2005, and therefore, it is almost the same level as the amount of damages awarded by courts. Assuming that the JFTC surcharges and court awards are achieving an equivalent level,45 the possible damage award for the injured party can be deemed to be equal to the total amount of surcharges ordered by the JFTC. 42 See section ‘Evaluation of Private Enforcement in Japan’. 43 There are cases where courts had awarded 10% as damages, but recently no court seems to award 10% of turnovers as damages. 44 Art. 242–2 of the Municipal Government Autonomy Act (chih¯o jichi h¯o). 45 Those cases were decided when the rate of surcharge was 6% for a large-scale firm and 3% for a small-scale firm; therefore, this assumption could be appropriate. Even after it was raised to 10% for a large-scale firm and 6% for a small-scale firm, this assumption could still be useful as an indicator.

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As Table 8.3 shows, the total amount of surcharges as a whole amounted to thirty-six billion yen for FY2009 and sixty-six billion yen for FY2010 (until December 2010). This is not a small amount. Considering this, the lack of financial incentive cannot explain the current inactiveness of private enforcement in Japan so far as this category of cartels are concerned although it may be the case that this fact is not yet well understood by many Japanese companies.46

Amendment of Article 84 and its meaning for private enforcement Article 84 provides that the THC must ask for the opinion of the JFTC when an Article 25 case is filed. In almost all recent Article 25 suits, the JFTC submitted opinions relying on the ‘before-and after’ theory.47 The JFTC determined its opinions by examining the disparity between the quoted price at the time of bidding and the price of the project prepared internally by the procuring agency during and after bidrigging. However, such analytical data forwarded as the opinion of the JFTC under Article 84 was not accepted by the THC as being a proper basis for damages. In the eyes of the THC, the opinion by the JFTC is only one of the factors to consider, and this means that the special value attached to Article 84 was not appreciated by the THC. Through the amendment in 2009, Article 84 was altered to change the obligatory submission system to a voluntary one. Apparently the JFTC lost interest in continuing to submit opinions that are not appreciated by the THC. The fact that Article 84 was changed to a voluntary provision means that, if the THC wants to hear an opinion of the JFTC, it can do so, but in view of current court practices of relying on Article 248 of the Civil Procedure Code, no opinion of the JFTC needs to be requested by the THC (or in the future by the Tokyo District Court48 ). The current level of damages awards by presiding courts on bid-rigging cases may be below the level warranted by the general theory of damages by

46 At least, the management of injured companies does not seem to recognize the significance of recent changes. 47 This is applicable to cartel cases. As for non-cartel violations, the ‘lost profit theory’ or ‘yardstick or benchmark theory’ might be more appropriate than the ‘before and after theory’. 48 See new Art. 85 AMA.

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cartel activities.49 Naturally, in cases where large-scale cartels are detected, the current level of damages awards might be a sufficient incentive to sue. Procurement by central and municipal governments might also fall within this group. However, for the smaller victims of cartel activities, there should be more room to obtain a full recovery from injuries using Article 84 opinions by the JFTC.50 If the presiding court does not ask for the JFTC opinion on damages caused by the cartel, the damage award might not exceed 8 percent of the turnovers during the cartel period. This may have negative impacts on activating private enforcement of competition law in Japan.

Possible impacts of eliminating the JFTC hearing proceedings on private enforcements in Japan If the Bill is passed by the current Diet, the JFTC must provide an opportunity for the recipient company to be heard on its views and to present evidence to rebut the tentative findings of fact by the JFTC (new Articles 49 and 50). The most important reform is the access to evidence in the hands of the JFTC (new Article 52). To be fair to the recipient companies, a separate officer will be appointed to be in charge of handling these proceedings, and that officer must prepare a report to the Commission on any opinions presented by recipient companies (new Articles 53 through 60). Even if opinions presented by recipient companies are not reflected in the final JFTC decisions, the companies have a better chance of challenging the JFTC decision in the Tokyo District Court by using these opinions and evidence. However, this might enhance the presumption of illegality in favour of the injured party because any decision rendered after a fair chance of rebuttal will be viewed favourably by a court listening to damage claims by the injured party. The recipient companies can evaluate whether to go to the Tokyo District Court by looking at the results of the opinions and evidence presented to the JFTC at the time of the prior proceeding. But if the recipient companies do not utilize this opportunity fully, they might face difficulties in revoking the JFTC decisions at the Tokyo District 49 Higher damages could be awarded if the ‘before and after theory’ is adopted in the case of bid-rigging. The ‘before and after theory’ might not work for price-fixing cartel cases under inflationary economic conditions. 50 This is the case for collective actions for private enforcement of competition laws.

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Court. The court might ask for the reason a company did not properly take this action at the time of the prior proceeding.51 However, the value obtained by going through the hearing proceedings would be denied to the injured party.52 If fewer cases go to the Tokyo District Court compared with those that go to hearing proceedings, the benefits available to an injured party might further be diminished. This will have an influence not only on the availability of the JFTC decision after a full hearing proceeding, but also on the availability of evidence under Article 70–15 of the AMA. This change could cause a much bigger problem than anticipated in the current debates on whether the hearing proceedings of the JFTC should be eliminated. The next subsection will analyze this aspect.

Elimination of Article 70–15 and its possible effects on private enforcement in Japan The Bill to amend the AMA pending at the Diet will eliminate Article 70–15. This provision was used to give fair access to evidence to the injured party, in particular citizen groups or consumer groups who are seeking recovery of damages. However, it has also revealed new problems for recipient companies because while they are litigating at the hearing proceedings, evidence might be provided to the injured party which could then be used in the injured party’s damage suits while the company is still litigating at the hearing proceeding.53 The general rule should be that no third party has access to evidence while the case is being litigated because such premature access might diminish the reason to litigate at the hearing proceeding. If one of the recipient companies tries to litigate but the other recipient companies decide not to litigate the case, a similar problem would arise under Article 70–15. In view of such apparent problems with due process, the elimination of Article 70–15 by the Bill to amend the AMA seems to be moving in the right direction. However, its role to supplement the current weak 51 At least, a court can inquire as to how the JFTC responded to arguments raised by the plaintiff during the prior proceeding. It is far easier for a court to evaluate the merits of arguments raised by the plaintiff if it has that information about the JFTC. 52 See section ‘Increase in Cases Concluded after Hearing Proceedings’. 53 This was what had happened to waste incineration plant bid-rigging cases. The hearing proceeding at the JFTC took so long that a citizen group was able to win damage awards while the hearing proceeding was pending at the JFTC by using evidence obtained under Art. 70–15 AMA.

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rules in Japan on discovery by the plaintiff’s side should not be forgotten. This suggests that some provisions are necessary to give a wider power of discovery to plaintiffs in Japan.

The role of the JFTC in facilitating private damage suits In May 1991, the JFTC announced a policy to provide necessary evidence if plaintiffs request it under Article 226 of the Civil Procedure Code.54 This policy was issued when almost all cases were dealt with under recommendation decisions, and importantly this was when Article 248 of the Civil Procedures Code was not yet adopted. This was the time when an injured party could not have access to sufficient evidence in order to seek damages, thus this policy was meaningful to compensate for the lack of discovery power by plaintiffs in Japan. This policy statement raised a similar concern to that related to Article 70–15 on due process because even if no one tries to litigate the case, it is still possible for the injured party to obtain evidence from the JFTC. As explained above, under the new procedure in place since 2006 and after the amendment of the AMA by the Bill currently pending at the Diet, the recipient company can have access to evidence against it, and therefore, such evidence will be accessible by the injured party under the ordinary rules of discovery by the defendant companies. In view of the new situations since the 1990s, this policy needs re-evaluation in order to provide better balance among various interest groups. As the power of the plaintiff’s side increases, the role of the enforcement agency to assist recovery of damages should decline.55

Impacts on the right to litigate It seems possible that if private enforcement is activated, the recipient companies would become more cautious towards litigating, and therefore, the power on the part of the injured party to get access to evidence of AMA violations becomes a critical issue to activate private enforcement. I believe that a recipient company should be able to decide whether or not to file a petition to open hearing proceeding or to go to a court based on the merit of the cases and should not face a serious disadvantage by choosing to litigate. 54 Under Art. 226 of the Civil Procedure Act, a court can ask for forwarding documents in possession of any government agencies. 55 From a due process point of view, any incriminating evidence should be discoverable from the person who has custody of it unless it is already disclosed in an open procedure.

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As examined above, the recipient companies did not need to worry about the consequences to damage suits when they decided whether to file a petition to open a hearing proceeding. This is because private enforcement has been inactive. Now, we face a new problem. If private enforcement is encouraged in Japan, a new system might be necessary to reduce concerns for the recipient company’s side. How much disadvantage should be attached to a recipient company that files a request for the opening of a hearing proceeding on its case? If hearing proceedings are eliminated, what kind of rules should be established regarding evidence to be submitted to the THC? Should injured parties have access to evidence as before under Article 70–15? The right to challenge any decisions by government agencies should be fully respected, but the right to recover damages caused by any violations of the AMA should also be fully respected. In order to secure a fair balance between these two objectives, there must be a full understanding of the various problems arising from both the public and private enforcement of competition law. These important issues have been neglected for a long time because private enforcement by injured parties has been rare in Japan. But if private enforcement is encouraged, a new system seems necessary in order to secure a fair balance between these two objectives. As argued above, we should not forget that hearing proceedings by the JFTC have functioned as a supplemental means of discovery in Japan. When private enforcement was inactive, this alternative means of discovery did not raise serious problems. But if private enforcement is encouraged, recipient companies should be able to avoid any particular disadvantage by using hearing proceedings at the JFTC or going to the Tokyo District Court. One solution lies in the full use of prior proceedings before the JFTC issues a decision.56 In this case, the recipient companies can protect themselves by not having copies of evidence in their custody. But so far as such evidence is in the recipient companies’ custody, injured parties should be able to have access to those materials. Under the new procedures, private enforcement could rely on the increased value of decisions by the enforcement agency, and therefore, access to files in the custody of the enforcement agency may not be necessary. By this method, the problem could be solved not by way of increased access to investigation files, but by 56 New Arts. 49 to 60. If a recipient company effectively utilizes these powers during the prior proceeding, it could be helpful in its efforts to revoke the JFTC decision. But, if not, the recipient company would not have an effective means to revoke the decision by the JFTC at the Tokyo District Court.

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way of more access to the evidence in the custody of recipient companies. Such an approach is likely to give a better balance of interest between recipient companies and injured parties if private enforcement becomes active. Further, by changing the balance between public enforcement and private enforcement of competition laws, the new procedure can serve to better access to justice in Japan.

Measures to encourage private enforcement of competition law in Japan Reasons for inactive private enforcement Situation As described above, the burden of proving the cause of their claims, namely the existence of illegal activities, may not be a big one for plaintiffs, at least after 2006 when the recommendation decision system was eliminated. The way to prove the amount of damages also used to be a big problem for plaintiffs, but now courts have frequently started to use Article 248 of the Civil Procedures Code, which offers a comfort to the plaintiffs because they can feel guaranteed of obtaining at least 5 percent of the purchased amount of goods or services from the participants of cartels. If injured parties can prove more, they can get higher damages awards. As described above, for bid-rigging cases involving procurement by central and municipal governments, the governments do not need to file damage suits because their procurement contracts already contain compensation clauses. Considering this, the current situation regarding bid-rigging seems acceptable, or at least much better than the situation in the old days. The remaining issues to be examined are how to encourage private enforcement against other types of cartels. In the case of price-fixing cartels, there could be many injured purchasers, and those small-scale purchasers might not have a sufficient incentive to sue if the damages award remains at 5–8 percent of the contracted amount. This suggests a potential motive to use collective action. Analysis As discussed above, there have been plenty of litigated cases recently that have moved to hearing proceedings where a full description of facts and supporting evidence was available to injured parties. These should be

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sufficient to encourage injured parties impacted by price fixing to seek to recover their damages. Then, what can explain the reason for the small number of damages suits around price-fixing cartel cases? Why do certain categories of injured parties, particularly other companies, not try to sue for damages even where a final and conclusive JFTC decision finding illegal cartel exists? If injured companies find that an up-stream market was colluding, that should be a legitimate reason for them to seek damages. As already discussed, no systematic problem in the incentive to sue can be identified after the recent changes in enforcement mechanism of the AMA. Therefore, the only explanation remaining is either the lack of a culture that supports seeking damages from other companies or that a situation exists in which the purchasers of cartelized goods or services might feel that the price hike due to price fixing can be passed-on to the down-stream market easily, and therefore, such companies may not regard the price fixing as being a serious problem for them.57 However, as competition becomes intensified, no manager would be comfortable with this idea. If inactive private enforcement arises from business attitudes themselves, no progress can be expected. Therefore, without examining the business attitude aspect in Japan, we cannot propose a solution for Japan. It appears that there has been a certain business culture among Japanese companies that makes them hesitate to seek relief from damages caused by price-fixing cartels. However, Japanese companies are also tightening their competition law compliance programs in order to face the new market reality after leniency programs were introduced in major markets across the world. This will inevitably include recovery of damages caused by up-stream markets. Collective measures cannot be an effective solution without changing the incentive systems in Japan. The 2005 Amendment of the Antimonopoly Act made it possible for the JFTC to impose a larger amount of surcharges because of the introduction of the leniency program, and such change created a strong incentive for injured companies to sue for damages even if the average amount of damage remains 5 percent to 8 percent of the purchased amount of the cartelized goods. Billions of yen should be sufficient incentive for injured companies who are facing 57 As competition becomes strong in a market, pass-on to down-stream markets would get harder and could trigger a shift of consumer’s choice to other substitutes. Therefore, the management of an injured company faces difficulty in insisting to the shareholders that no damage is caused to its firm.

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tough competition. This incentive alone, however, cannot give comfort to shareholders; therefore, shareholder suits might be triggered in the future in view of the increased amount of potential damage awards. In view of multilayer interests involved in such a complicated area as competition law, increased incentive to sue is a key for prompting changes. In addition, recent economic analysis can be used to identify the contribution of price fixing among the various factors contributing to the price hike of the relevant goods or services. It means that pass-on to the downward market can also be identified if necessary market data is available. As a result, more feasible and fair rules to recover damages can be developed.58

Introduction of representative suits by qualified associations via the excessive premium and misrepresentation act violations As a new system to encourage private enforcement, representative suits by qualified associations were introduced by the Excessive Premium and Misrepresentation Act.59 This Act is an important law for consumer protection that used to be enforced by the JFTC, but its jurisdiction was transferred to the Consumer Agency in 2009. There are some suggestions to introduce the similar right to sue on behalf of small businesses, but such suggestions have not so far been widely supported. To date, we cannot see any record of enforcement of rights being granted to consumer organizations, and therefore, we need to watch carefully whether the representative suits can be used effectively in Japan. Conclusion Private enforcement in Japan is underused, and measures to encourage private enforcement of competition law are crucial. If private enforcement functions well, the JFTC can leave it to injured parties to recover their damages caused by AMA violations and can concentrate on more serious cases. As for cartels, private enforcement can significantly enhance deterrent effects of the AMA. This is already apparent in bid-rigging cases. Private enforcement helps to improve access to justice in Japan by 58 In the past, a court did not award damages if other factors were also contributing to a price hike during a price-fixing cartel. 59 Art. 10 of the Excessive Premiums and Misleading Representations Act (fut¯o keihinrui oyobi fut¯o hy¯oji b¯oshi h¯o).

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addressing the individual interest in receiving compensation, an interest which has been neglected in the past. This chapter reviewed various systems that might have discouraged private enforcement in Japan and showed that the concentration of enforcement powers of competition law has been almost eliminated or will be eliminated. As many systems that previously worked to discourage or lower the incentive for private enforcement have also been eliminated, the room for private enforcement will be increased. The only remaining reason for inactive private enforcement of competition law seems to lie in the business attitudes or culture of Japanese companies. The incentive for private enforcement should be big enough to overcome inertia in the business culture of Japanese companies. Companies by their nature will respond quickly to the change in the level of incentive and take advantage of the benefit if sufficient incentive exists to do so. However, if the incentive for private enforcement is set low, Japanese companies will not change their traditional attitude of avoiding confrontation. Changing business culture among the Japanese companies is not easy, but there are signs showing us that the situation is shifting in Japan.60 Moreover, given the more aggressive enforcement activities by the JFTC, the incentive to recover damages also has increased significantly, and therefore, more frequent use of damages suits by injured companies is expected in cases where the JFTC decisions are available finding price-fixing cartels. There seem to be sufficient incentives to do so even under the current system. This is key to change in private enforcement in Japan because it can trigger other types of private enforcement to become activated. If a party starts to use the power available under the new system, that party is likely to realize that private enforcement is easier than it thought before. Injured parties seem to be carefully weighing the merits versus the disadvantages of damages suits at present, but eventually they will choose to exercise their rights to recover their damages caused by price-fixing cartels.61 In the future, such injured parties will also play a role in the enforcement mechanism of competition laws in Japan.

60 In my observation, with regard to business entities, an incentive will outweigh business culture if it is attractive enough; therefore, business attitudes would change eventually. 61 A shareholders suit is one of these ways. As municipal governments were forced to change their attitudes towards recovery of damages caused by bid-rigging, the management of injured companies would face the same pressure vis-`a-vis shareholders.

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This chapter also suggested that there is another problem with the current enforcement system in terms of the level of fairness for recipient companies. Emphasis on public enforcement in Japan means that individual interests have been neglected. Competition law is a typical area of law where multilayer interests are involved. As individual interests are emphasized, various systems need further review to secure fairness and a fair balance between the multilayer interests of recipient companies and injured parties. Under the new system to be adopted after the amendment of the AMA, both sides will be in a better situation and can protect their interests better compared with the old system.

PAR T IV Collective enforcement of company and securities law

9 Does more litigation mean more justice for shareholders? the case of derivative actions in Vietnam quynh thuy quach

Introduction The question of access to justice arises whenever law fall shorts of its supposed promises to the disadvantaged.1 Thus the nuts and bolts of access to justice centre on making the statutory rights of the weak, such as have-nots, consumers, tenants, employees and the like, effective.2 In the corporate governance realm, small shareholders are the ones in this vulnerable position. Shareholder protection matters in many countries because ‘expropriation of minority shareholders and creditors by the controlling shareholders is extensive’.3 In order to bring more justice to those who cannot protect themselves, the conventional policy solution is to diminish hurdles that constrain the weak from seeking redress. Given this basis, classical research on access to justice often deems that justice is more accessible if the economic, geographic and psychological barriers to dispute resolution forums are reduced.4 Another perspective on access to justice is shifting the task of dispute resolutions to ‘those best equipped to discharge them.’5 The ideal dispute resolution mechanism should be the one that ‘make[s] the 1 R. L. Sandefur (ed.), Access to Justice (Bingley: JAI, 2009), p. ix. 2 M. Cappelletti and B. Garth, ‘Foreword’ in M. Cappelletti and B. Garth (eds.), Access to Justice – Emerging Issues and Perspectives, (Alphen aan den Rijn: Sijthoff and Noordhoff, 1979), pp. vi–vii. 3 R. La Porta et al., ‘Investor Protection and Corporate Governance’, Journal of Financial Economics, 58 (2000), 3. 4 E. Johnson Jr., ‘Thinking About Access: A Preliminary Typology of Possible Strategies’ in Cappelletti and Garth (eds.), Access to Justice – Emerging Issues and Perspectives, pp. 3–168. 5 E. Johnson Jr., p. 27.

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[dispute resolution] process more expeditious, more accessible to disputants, less costly for government to supply or all three.’6 Among dispute resolution mechanisms, litigation is often seen as the main route for disputants to seek justice.7 In the realm of corporate governance, shareholder litigation recently is emerging as a promising weapon for oppressed shareholders to combat powerful large shareholders and managers. However, whether this main and emerging mechanism is best suited for all disputes and for all institutional settings is still controversial. Although the magnitude of litigation in investor protection is oft-debated,8 less attention has been paid to exploring whether litigation is best suited for shareholders’ disputes in the sense that it is more expeditious, more accessible to disputants and less costly for government. Putting it differently, viewing the true role of litigation through the lens of an ideal mechanism for access to justice has not been widely done so far. This chapter aims to fill that gap by seeking to answer whether litigation is a suitable mechanism for shareholders seeking justice in the context of transition economies. Using derivative actions – which are often seen as common locus standi for small shareholders – as a typical example, the first part of this chapter examines the viability of this device in a Vietnamese context. By showing the mismatch between litigation and Vietnamese institutional settings, this chapter demonstrates that expansion of a litigation right cannot assure more access to justice for shareholders if hindrances by local institutions continue to persist. In the same vein, the promises of justice that lawmakers gave to small shareholders can only be kept if lawmakers provide shareholders with workable enforcement devices. The second part of this chapter provides a brief overview of the current state of shareholder protection and recent

6 E. Johnson Jr., p. 131. 7 See D. L. Rhode, Access to Justice (Oxford University Press, 2004) (assuming that social justice is available through procedural justice and then discussing legal assistance and government policies to better assist people to come to the court). 8 Discussion of whether private or public enforcement matters for investor protection (including shareholder and creditor protection) is a hot debate in corporate governance literature. See R. La Porta, F. Lopez-de-Silanes and A. Shleifer, ‘What Works in Securities Laws?’, Journal of Finance, 61 (2006), 1 (examining securities law of forty-nine countries and concluding that private enforcement would bring better investor protection and then lead to more developed securities markets). But see J. Armour, B. Black, B. Cheffins, and R. Nolan, ‘Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States’, Journal of Empirical Legal Studies, 6 (2009), 687 (challenging the La Porta, Lopez-de-Silanes and Shleifer’s findings by analyzing the case of the U.K. which has a deep and liquid securities market without extensive use of litigation).

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changes in enforcement devices in Vietnam. The third part challenges the idea that a derivative action right is essential to protect shareholders; it does so by examining the application of this device in its place of origin and in East Asia countries that have recently adopted it. The fourth part measures the readiness of Vietnam’s institutions for derivative actions. The fifth part explores the policy implications of the role of litigation in Vietnam, as well as suggests alternatives to litigation. The final part concludes.

Newly adopted litigation rights – more ways for oppressed shareholders to access justice Poor enforcement and the gap between promises of law and reality During the last two decades, the statutory shareholders’ rights under Vietnamese law have been enlarged significantly. In 1990, the first Company Law9 granted shareholders two basic rights: receiving dividends and attending and voting at general shareholders meetings.10 In 1999, the Law on Enterprise (LOE 1999), which replaced Company Law 1990, provided four rights to shareholders, and for the first time articulated equitable treatment of shareholders.11 In the Law on Enterprise 2005 – the unified law that regulates corporate governance structure for all shareholding companies regardless of whether they are privately owned or stateowned – the number of rights for shareholders increased to eight.12 In regard to public companies, shareholders’ rights and internal corporate governance mechanisms are laid down not only in law but also in sublegislation such as the Model Charter 2007,13 Code of Corporate Governance for Listed Companies (Code of Corporate Governance 2007)14 and 9 The Vietnamese Company Law 1990 is the first law that recognizes private ownership of capital goods and legitimate rights for establishing private companies. Before the enactment of the Vietnamese Company Law 1990, companies were required to be in the form of state-owned enterprises (SOEs), which were governed by the Law on StateOwned Enterprises, or the form of foreign companies, which were regulated by the Law on Foreign Investment. 10 Art. 8 of Vietnamese Company Law 1990. 11 Arts. 52 and 53 of LOE 1999. 12 Art. 79 Law 60/2005/QH11 (LOE 2005). 13 Vietnamese Model Charter for companies listed on the Stock Exchange and Securities Trading Center enacted pursuant to Decision number 15/2007/QD-BTC dated 19 March 2007. 14 Vietnamese Code of Corporate Governance for Listed Company enacted pursuant to Decision number 12/2007/QD-BTC dated 13 March 2007.

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Table 9.1. Investor protection index of Vietnam compared with other countriesa

Country

Protecting Investor Index (World Bank Rank 2011)

GNI index US$ (Gross National Income per capita)

Transition economies (lower middle income group) China 92 Ukraine 109 Mongolia 28 Uzbekistan 131 Vietnam 173

3620 2800 1630 1100 1010

South East Asia countries (lower middle income group) Thailand 12 Indonesia 44 Philippines 132

3760 2230 1790

a

Source: World Bank, ‘Doing Business 2011’.

rules of stock exchanges.15 By and large, shareholders’ rights in Vietnam are comparable to those of other countries and jurisdictions.16 However the improvement of the law on the books was not accompanied by good shareholder protection in reality. The investor index of Vietnam lags far behind those of countries with a similar political economy or gross income (see Table 9.1). Vietnam still falls within the group of countries where investors are least protected.17 Oppression of small shareholders has commonly occurred. Shareholders’ interests may be infringed by a company’s managers or large shareholders through unequal treatment, tunnelling of the company’s assets or even by outright thievery.18 One of the main reasons for weak investor 15 See e.g. ‘Listing Rules on Ho Chi Minh City Stock Exchange’ enacted pursuant to Decision Number 168/QD-SGDCKTPHCM dated 7 December 2007. 16 For a general account of shareholders’ rights in Vietnam, see Q. T. Quach, ‘Quyeˆ` n cua coˆ ˆ thieˆ u soˆ´ theo ph´ap luˆa.t Viˆe.t Nam’, Ta.p ch´ı Lua.ˆt ho.c, 4 (2010), 18. d¯ong 17 The World Bank, ‘Doing Business 2011’, p. 47, available at www.doingbusiness.org/ reports/doing-business/doing-business-2011 18 Some cases should be mentioned, such as: In 2007, in the FPT case (Financing Promoting Technology Corp. case) the managers deprived the existing shareholders of rights to buy shares at newly established subsidiaries of FPT; in 2008, in the LaNga Sugarcane case the Chairman of Board of Management spent seventeen billion VND (around US$940,000) to invest in securities without prior consent of the rest of the Board; in 2008, in the Tuong

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protection in reality, unsurprisingly enough, is weak enforcement both publicly and privately.19 For public enforcement, the State Securities Committee (SSC) lacks authority and resources to supervise the market.20 For private enforcement,21 the right of shareholders to sue managers22 is ambiguously regulated. Derivative actions have been absent for a long time, and a class action mechanism is not yet in place. Thus, improving enforcement has been indicated as the first priority of corporate governance institutional reform in Vietnam.23 The necessity of improving litigation to better shareholder protection is more accentuated given that the low investor protection index of Vietnam is mostly caused by the country’s lack of shareholder litigation tools. According to World Bank Doing Business Reports, among the three subindexes measuring the extent of investor protection, although Vietnam gets an above average score for its disclosure index,24 it earns only two out of ten points for the director liability index and zero for the shareholder

19

20 21

22

23 24

An case (TAC case) the state shareholder ousted the company’s general director who protected shareholders’ interests and opposed a non-arm’s-length transaction between TAC and a state-owned company. See more at T. Le Minh and G. Walker, ‘Corporate Governance of Listed Companies in Vietnam’, Bond Law Review, 20 (2008), 1, 62–77. The World Bank, ‘Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: Vietnam’, (2006), p. 3, available at www.worldbank .org/ifa/rosc cg vm.pdf. World Bank, ‘ROSC’, 4–5. Private enforcement in the context of this chapter refers to actions initiated by private parties in the shadow of the law. This term is used in contrast to public enforcement that is conducted by state agencies such as securities regulators and inspectors (excluding criminal cases). For a similar view, see E. Berglof and S. Claessens, ‘Enforcement and Good Corporate Governance in Developing and Transition Economies’, World Bank Research Observer, 21 (2006), 123. Private enforcement might also be defined in a broader context that includes other mechanisms ranging from reputation, arbitration and organized crimes; see e.g. J. R. Hay and A. Shleifer, ‘Private Enforcement of Public Laws: A Theory of Legal Reform’, The American Economic Review, 88 (1998), 398. In Vietnamese shareholding companies, managers include members of the Board of Management (BOM) who set out the strategy for a company’s operation and supervise the performance of executive officers; a director or general director runs the day-to-day business of a company. The BOM is similar to the board of director in Anglo-American companies in the sense that it is the second top decision-making body. It decides other matters excluded from the shareholders’ meeting authority. But it differs from the BOD because it does not manage the day-to-day business of the company. Instead the BOM appoints a director or general director as executive manager to carry out this function. But in fact the company power concentrates on the chairman of the BOM because the chairman also concurrently holds the position of director or general director. World Bank, ‘ROSC’, 8. 6 compared to 5.2 for East Asia and Pacific countries and 6.0 for OECD countries (Source: World Bank, ‘Doing Business 2011’).

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suits index.25 This reflects the low ability of Vietnamese company directors to be sued when they engage in related-party transactions that harm company interests. In addition, the zero score for the shareholder suit index reflects that the legal system probably does not support shareholders when they bring a lawsuit against directors.26 These facts imply a critical need to provide more litigation rights to shareholders. Litigation rights are deemed essential to guard statutory rights that are given to small shareholders.

More litigation rights for shareholders – attempt by lawmakers to widen the way for shareholder access to justice Recently, Vietnamese lawmakers responded to requests for more litigation devices. In October 2010, the government enacted Decree number 102/2010/ND-CP (Decree 102) which provides members of limited liability companies and shareholders of shareholding companies with the right to sue managers (the chairman of the member council of a limited liability company, the chairman of the board of management of a shareholding company, the director or general directors) who breach fiduciary duties.27 Before the enactment of Decree 102, the principle basis for a shareholder claim against a company’s manager was provided by Article 165 of LOE 2005. The article reads ‘[t]he offender [of LOE regulations] will be liable to and indemnify any damage caus[ed] to the enterprise, owner, members, shareholders, creditors or other persons in accordance with the laws.’ Thus in principal shareholders can refer to Article 165 and the substantive regulations regarding managers’ obligations and fiduciary duties in order to sue a manager who breaches those obligations and causes damages to the company or shareholders.28 But it seems this is not the case in reality. Under LOE 2005, shareholders only can file direct lawsuits in their 25 World Bank, ‘Doing Business 2011’. 26 World Bank, ‘Doing Business 2011’. 27 Arts. 19 and 25 Decree number 102/2010/ND-CP dated 1 October 2010, providing guidance to implement some articles of LOE 2005. 28 Fiduciary duty is set forth similarly with those of other jurisdictions but not in name. Art. 119.1(b) of LOE 2005 states that the ‘[m]ember and chairman of the Board of Management, director or general director and other managers of the company will have following duties . . . exercise rights and obligations in a fiduciary, diligent [or prudent in some other translations] and optimal manner for the purpose of maximizing legitimate benefit of the company and its shareholders . . . ’ For analysis of the Vietnamese fiduciary standard and its implementation, see J. R. Davis, ‘The Developing Fiduciary Standard in Vietnam Corporate Law’ (2010), available at http://papers.ssrn.com/abstract=1722583.

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own names if their interests are harmed by the managers’ wrongdoings. The shareholders cannot challenge the errant managers in the company’s interest if they are not the ones suffering losses from the wrongdoings. The low score that Vietnam received on the director liability index in the World Bank Business Report is striking evidence for the opinion that shareholders’ litigation rights have been neglected in LOE 2005. In order to close this loophole, Decree 102 clearly states the rights of shareholders to challenge errant managers. Traditionally, under Vietnamese civil law, a person – except in the case of protecting public interests – cannot sue a wrongdoer if the wrongdoing does not result in personal damage. With Decree 102, for the first time, shareholders are granted the right to sue managers without establishing the necessary ground that the managers’ wrongdoings have harmed the shareholder.29 For members of limited liability companies, Article 19 of Decree 102 stipulates that members on behalf of themselves or on behalf of the company may bring a civil liability case against the Chairman of the Member Council or Director (General Director) in the following cases: a) The Chairman of the Member Council or Director (General Director) fails to conduct their assigned rights and tasks; fails to implement, implements insufficiently or untimely implements decisions of a Council Member; implements their rights and tasks contrary to regulations of law or the company’s charter; b) The Chairman of the Member Council, Director (General Director) uses company information, trade secrets or business opportunities for the benefit of themselves or of other entities or individuals; c) The Chairman of the Member Council or Director (General Director) abuses their power, position and company assets to benefit themselves or to benefit other entities or individuals.30 Article 25 of Decree 102 provides similar rights for shareholders of shareholding companies but with more conditions to standing for a suit, as follows: 1. A shareholder or group of shareholders holding at least one percent of the total ordinary shares for at least six consecutive months is entitled to request that the Board of Supervision bring a civil liability case 29 It is worth noting that the LOE 2005 stipulates the right of a member of a limited company to sue directors, general directors, or chairmen of the member council in his or her own name on behalf of the company (Arts. 43 (1)g and 50(3)). But shareholders of a joint stock company had not been given those rights until the enactment of Decree 102. 30 Art. 19.1 Decree 102 (emphasis added).

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against members of the Board of Management or Director (General Director) . . . 2. If the Board of Supervision fails to bring the lawsuit in accordance with the shareholders’ request or if the company does not have a Board of Supervision, the shareholder or group of shareholders as stipulated in Article 25.1 is entitled to directly sue members of the of Board of Management or Director (General Director).31 As can be seen, different litigation rights are provided for members of limited liability companies and shareholders of shareholding companies. Whereas the former can choose to sue directly under their names or derivatively under the company’s name, the latter can only sue directly. Regardless of the difference in form, both actions by their nature are derivative lawsuits as these cases are filed for the company’s redress rather than for compensation to the shareholder plaintiff.32 However, many procedural and substantial issues of derivative actions are still unclear. First, applicable remedies have not yet been specified. From the words of Decree 102 we may imply that managers must provide redress for their wrongdoings. But the term redress can refer to many types of remedies including compensation for damages, injunctions, performance of statutory obligations and immaterial liabilities such as apology or rectification.33 In principle, Article 165 of LOE 2005 only mandates compensation for damages as the available remedy for any breaches of the law. Thus it is unknown whether a shareholder may seek other kinds of remedies as regulated in the Civil Code or a shareholder is only entitled to the compensation remedy as set forth by LOE 2005. Also, other procedural issues are not regulated yet. Decree 102 states the ownership requirement for shareholders to have standing to sue, but it does not specify precisely whether those shareholders need to hold the shares at the time of the transaction at issue. Do the lawmakers presume that any shareholders who meet the ownership threshold at the time the case is to be filed are entitled to standing? In the United States, the courts – by their own examination or by a corporation’s litigation committee – have to review the merits of the case, but there is nothing akin to this procedure stipulated yet in Vietnam. Do the lawmakers suppose that at 31 Arts. 25.1 and 25.3 Decree 102 (emphasis added). 32 The term ‘derivative action’ is used for an easier understanding. Decree 102 uses instead the term ‘shareholders’ right to sue members of Board of Management and Directors (General Directors)’. 33 See Arts. 302 to 307 Civil Code 2005.

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the initial stage consideration of how to avoid frivolous suits should not be a matter of concern? Other issues include whether the obligation of the BOS (or BOM) to provide shareholders with the necessary materials to bring the case is also unregulated. All of these issues must be clarified in order to put the rules into use. Regardless of the imperfections of the derivative action rule, its enactment is a great complement to shareholder protection law after the long absence of shareholder litigation rights in Vietnam. With more litigation rights, small shareholders are empowered with more weapons to combat errant managers. Nevertheless, opening the route for oppressed shareholders to bring their claims to the courthouse is just the beginning of their journey to access justice. The more important matters are (1) whether the available remedies that derivative actions promise shareholders are really the justice that they aspire to and (2) how the courts work in reality. These two issues are analyzed below.

Derivative action – shareholders’ ‘weapon for others’ interests This part addresses the first problem with derivative actions. It aims to clarify the true effects of derivative actions by looking at how they work in countries where this device originated and countries that transplanted it from outside.

Forgotten derivative suits in their origin country The derivative action – a mechanism that enables shareholders to sue in the company’s name to seek redress for corporate misconduct the company’s managers engage in with the company34 – originated in the United States.35 But even in its origin country, the effectiveness of derivative lawsuits is uncertain as it is infrequently used and its benefits are uncertain. Some decades ago, the derivative lawsuit was seen as the ‘chief regulator of corporate management’ in the United States.36 However, over the last 34 For a definition of derivative action, see B. A. Garner, Black’s Law Dictionary, 7th ed. (St. Paul: West Group, 1999), p. 455. 35 Although the derivative action originates from English law, in fact it is more popular as a statutory device in the United States. Derivative actions were absent in the U.K. until 2006. See M. Siems, Convergence in Shareholder Law (Cambridge University Press, 2008), p. 213. 36 J. C. Coffee, ‘The Unfaithful Champion: The Plaintiff as Monitor in Shareholder Litigation’, Law and Contemporary Problems, 48 (1985), 5.

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three decades, the role of the derivative action in enforcing fiduciary duties has become no longer as central as it once was.37 An empirical study by Robert Thompson and Randall Thomas from 2002 reveals only a small fraction of derivative suits among fiduciary claims. During 1990– 2000, derivative cases made up only 13.6 percent of fiduciary claims in Delaware Chancery Court.38 In fact this tool now has been ‘forgotten’ in its origin country. Other alternatives such as independent directors, efficient securities market, media scrutiny and public enforcement now trump derivative actions in protecting shareholders’ interests both in deterrence and compensation.39 Empirical evidence shows that the benefits of the lawsuits to shareholders are insignificant. In the United States, only a tiny fraction of the cases go to trial.40 The study by Roberta Romano from 1991 shows only 32 cases out of 128 resolved suits went to trial. The study by Thompson and Thomas tentatively showed a slight increase in adjudicated cases between 1999 and 2000. But in general the derivative suits mostly fail, are settled in the interest of attorneys and defendant companies or are dismissed.41 In the sample used by Romano, only 2 judgments favour plaintiffs out of 32 adjudicated cases (6.25 percent). In the resolved cases, the awards often go into the pockets of lawyers rather than shareholders.42 The fact that attorneys’ fees take the lion’s share of compensation induce entrepreneurial lawyers (instead of plaintiff shareholders) to invest time and money in derivative lawsuits and to treat the cases as lawyers’ business transactions.43 Not only the direct pecuniary reimbursement, but 37 Coffee, ‘The Unfaithful Champion’, 7–8, see also K. B. Davis Jr., ‘The Forgotten Derivative Suit’, Vanderbilt Law Review, 61 (2008), 387. 38 R. B. Thompson and R. S. Thomas, Shareholder Litigation: Reexamining the Balance Between Litigation Agency Costs and Management Agency Costs (2002), available at http://papers.ssrn.com/paper=336162. 39 Davis, ‘Forgotten Derivative Suit’, 411–418. 40 R. Romano, ‘The Shareholder Suit: Litigation without Foundation?’, The Journal of Law, Economics, & Organizations, 7 (1991), 55, 60. 41 A series of empirical studies on this topic constantly offers the same view that there are few derivative suits that went to trial in the United States. See B. Garth et al., ‘Empirical Research and the Shareholder Derivative Suit: Toward a Better-Informed Debate’, Law and Contemporary Problems 48, (1985), 137; Romano, ‘Shareholder Suit’; Thompson and Thomas, ‘Shareholder Litigation’. 42 Romano, ‘Shareholder Suit’, 61. See also Thompson and Thomas, ‘Shareholder Litigation’, 66. 43 J. C. Coffee, ‘Understanding the Plaintiff’s Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions’, Columbia Law Review, 86 (1986), 669.

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also the indirect reimbursement that shareholders may benefit from the case, are dwarfed. Available data shows that litigation does not result in much change in stock prices. Thus the assumption that shareholders may gain from the fluctuations in securities prices carries little weight.44 Upholding the role of derivation actions, scholars explained that the first and foremost goal of a derivative action is deterrence rather than compensation; therefore, its insignificant monetary benefits do not matter.45 But even this modest assumption has been challenged by empirical data. Romano discovered little or even no significant changes in top management, board independence or outside board composition in companies who face liability.46 This means that the disciplinary effect of litigation on managers is not as extensive as it is assumed by theorists.

Driving forces in the emergence of derivative suits in East Asia countries Regardless of its declining role in its origin country, the derivative action has recently emerged globally as a promising weapon to protect shareholders against corporate wrongdoings.47 Unfortunately, this emergence has been caused by factors other than the ability of this device to bring satisfactory redress for harmed shareholders. In East Asian countries, shareholder litigation has become more important than ever before. ‘[T]hroughout the region, courts became players in corporate governance especially for the first time.’48 In Japan – a country that is commonly less litigious – the derivative action has come at the ‘forefront of corporate governance’.49 The growing role of derivative lawsuits in Japan is further illustrated by findings that the lawsuits in Japan 44 D. R. Fischeland and M. Bradley, ‘The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis’, Cornell Law Review, 71 (1986), 261, 281–282. See also Romano, ‘Shareholder Suit’, 65–68. 45 J. C. Coffee and D. E. Schwartz, ‘The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform’, Columbia Law Review, 81 (1981), 302–308 (arguing that the dominant rationale for derivative actions should be enforcing fiduciary duties of corporate officials and penalizing violation rather than compensation to shareholders). 46 Romano, ‘Shareholder Suit’, 70–84. 47 See in this book Mathias M. Siems’s Chapter 4, ‘Private Enforcement of Directors’ Duties: Derivative Actions as a Global Phenomenon’. 48 H. Kanda, K. Kim and C. J. Milhaupt (eds.), Transforming Corporate Governance in East Asia (London: Routledge, 2008), p. 1. 49 See M. D. West, ‘The Pricing of Shareholder Derivative Actions in Japan and the United States’, Northwestern University Law Review, 88 (1994), 1436, 1437.

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outnumber those of South Korea and Scandinavia (even though they still far lag behind the United States).50 South Korea shows a strong inclination towards the U.S. model of derivative action by its wholesale import of the derivative suit device from the United States with few modifications.51 Despite this legal replication of the most litigious jurisdiction, there have been very few lawsuits filed in Korea.52 However, the derivative action is still considered as ‘the last and most plausible candidate for institutional reform to improve corporate governance’ in this country.53 China offers an interesting example of using derivative actions in a transition economy. In contrast with Korea’s situation, derivative cases appeared in China even before legal enactment, that is in the absence of derivative regulation.54 Since derivative action was enacted in 2005, and came into effect on January 2006, several derivative suits have been filed.55 But the prevalence of derivative actions is not strong evidence for its desirability as a powerful weapon to protect shareholders. A possible explanation for the transplantation of derivative action is economic integration. To attract more (especially foreign) investors, governmental and entrepreneurial sectors should show their high commitment to shareholder protection.56 For that purpose, empowering shareholders by giving them more litigation rights (which is commonly used in developed markets such as the United States) would be a political choice. In addition, the strong preference of international donors such as the World Bank and International Monetary Fund for private enforcement has greatly affected legal reform in developing countries. For example, in China, one reason 50 See West, ‘Pricing of Shareholder Derivative Actions’, note 14. 51 O. Song, ‘Improving Corporate Governance through Litigation: Derivative Suits and Class Actions in Korea’ in Kanda, Kim and Milhaupt (eds.), Transforming Corporate Governance in East Asia, p. 94. 52 Fewer than ten derivative suits have been filed since the late 1990s. See Song, ‘Improving Corporate Governance through Litigation’, 92. 53 Song, ‘Improving Corporate Governance through Litigation’, 111. 54 H. Huang, ‘The Statutory Derivative Action in China: Critical Analysis and Recommendations for Reform’, Berkley Business Law Journal, 4 (2007), 226, 234. See also J. Deng, ‘Building an Investor-Friendly Shareholder Derivative Lawsuit System in China’, Harvard International Law Journal, 46 (2005), 347 (analyzing some derivative cases that were initiated before the enactment of legal provisions concerning shareholder derivative lawsuits). 55 Huang, ‘The Statutory Derivative Action in China’, 235. The author does not give the precise number of cases. 56 The entrepreneurs might lobby for development of shareholder protection law because they would benefit from an upgraded capital market. See Siems, Convergence in Shareholder Law, pp. 307–309.

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for the transplantation of the derivative action is attributed to pressure by the World Bank because they use the extent of private enforcement as one criterion to decide loan allocation.57 To a lesser extent, the nostalgia of Americans for their ‘forgotten derivative suit’ could be explained by their enthusiasm in exporting it to other countries.58 Japan presents itself as a prominent example of adopting derivative action under the U.S. influence. The derivative action was initially imported to Japan under pressure by the United States after World War II. In addition, even the recent revision of the derivative action fee in 1993 also resulted from an agreement between the United States and Japan.59 The significant incidents of derivative actions in East Asian countries in fact are not motivated by benefits to shareholders. In the case of Japan, West – in his study of 140 derivative cases filed between 1993 and 1999 – demonstrates that attorneys’ benefits such as client paying, fees, fame or altruism are driving forces of derivative actions.60 In addition, residual motivations such as the non-monetary motives of litigants, the incentive of s¯okaiya to blackmail firms with vexing lawsuits, insurance settlement motivations and internal disputes in closed corporations exist to explain why derivative actions persist in Japan. In the case of South Korea, for the most part derivative suits were commenced not by shareholders but by the People’s Solidarity for Participatory Democracy (PSPD) – a non-profit organization whose mission is to cure the Korean corporate governance system.61 The PSPD has utilized the derivative action as a weapon to cope with chaebol firms that have paralyzed Korean corporate governance by their dominance.62 In China, it is explained that litigation is used simply because of the absence of alternative mechanisms for dispute resolutions.63

57 M. A. Layton, ‘Is Private Security Litigation Essential for the Development of China’s Stock Markets?’, New York University Law Review, 83 (2008), 1948. 58 See Davis, ‘Forgotten Derivative Suit’, 388 (‘Ironically, although we rely on the derivative suit less and less in this country, we are eager to see whether other countries embrace it. To invert a familiar bit of nostalgia, the derivative suit seems to be “forgotten, but not gone.”’). 59 Siems, Convergence in Shareholder Law, p. 317. 60 M. D. West, ‘Why Shareholders Sue: The Evidence from Japan’, Journal of Legal Studies, 30 (2001), 351, 352. 61 Song, ‘Improving Corporate Governance through Litigation’, 104. 62 See Song, ‘Improving Corporate Governance through Litigation’, 104; see also C. J. Milhaupt, ‘Nonprofit Organizations as Investor Protection: Economic Theory and Evidence from East Asia’, The Yale Journal of International Law, 29 (2004), 169, 176–177. 63 Berglof and Claessens, ‘Enforcement and Good Corporate Governance’, 134.

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The above discussion tells us that the emergence of the derivative action does not reflect its capacity as an effective tool to provide justice for shareholders. The derivative action neither effectively deters corporate misconduct that creates mistreatment of small shareholders nor grants shareholders satisfactory redress for their damages. This means that the derivative action falls short in providing shareholders with both the deterrence and compensation effects which they seek when bringing a claim to court.

The case against more litigation in Vietnam This part of the chapter addresses the other side of the coin: even setting aside the uncertain benefits of derivative actions, is the Vietnamese court a reliable forum for shareholders’ claims to be heard? In this matter, evidence suggests that reliance on the court to bring justice to oppressed shareholders would likely fail. Three explanations for this are offered below.

Insufficiencies of the court From the supply side of litigation, Vietnamese courts are suffering many defects that prevent them from becoming reliable arbiters for shareholders disputes.

Critical paucity of judges The lack of judges has been a hot issue in National Assembly Meetings during the past few years. Understaffing is one of the most common claims that the People Supreme Court (SPC) has reported in their annual reports at the Meeting. Since 2003, the SPC has been asking the National Assembly to increase their staff quota. In 2003, it was reported that Vietnam lacks around 1,210 judges.64 In 2010 the courts nationwide were short around 800 judges compared to the staff quota.65 The gap between the judge population and the practical need could well be larger given that the staff quota is just an estimation of the social demand for judges. Such paucity remains critical because the quota is increasing but the pool of potential 64 Supreme People’s Court, ‘Annual Report 2003’, p. 14. ‘Staff quota’ is the maximum number of staff that courts can recruit. This quota is decided by the National Assembly based on the calculated social need for staff in each sector or ministry. 65 Supreme People’s Court, ‘Annual Report 2003’, p. 32.

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candidates for judge appointment has not increased correspondingly.66 The Chief Judge of the Supreme Court claimed that the courts’ staff is only sufficient to tackle around 30 percent of their workload. This means that approximately 70 percent of cases cannot be dealt with timely because of the lack of human resources.67

Capacity of judges is insufficient It is commonly stated that Vietnamese judges are poorly trained and lack ´ˆ kinh capability, especially for economic (business) disputes (tranh chap doanh thu’o’ng ma.i). Negative assessments of judges’ capacity have been repeated in the SPC’s Annual Reports year after year since 2003 when the Vietnamese Judicial Reform Strategy (JRS) was launched.68 Despite many incentives of the JRS to enhance the judges’ capacity,69 it is difficult to gauge how much the judges’ capacity has been improved. Empirical data of judges’ capacity improvements cannot be found even in the latest report of the SPC’s Department of Personnel and Organization.70 Most recently, the 2010 Annual Report of the SPC still stresses that poor adjudication quality and judges’ capacity limitations are inherent defects of the Vietnamese court system.71 Court judgments are commonly unenforceable The last point illustrating the unreliability of the court is the real effect of judgments. According to a statistical report by the Ministry of Justice, 66 See Supreme People’s Court, ‘Annual Report 2003’, p. 32. It is recognized that ‘Lacking judges and weakness in capacity of judges and court’s staff are one of the biggest hurdles to personnel development of local courts. This situation has lasted for many years and became a challenge to court sector . . . ’. 67 Speech of the Supreme People’s Court’s Chief Judge at the National Assembly Meeting in March 2010, available at www.baodientu.chinhphu.vn/Home/Nganh-Toa-an-dang-quatai/20103/28723.vgp. 68 In 2002, the Politburo issued Resolution number 08/NQ-TW dated 2 January 2002 of ‘Main tasks for judicial sector in the following time’. This Resolution formed the groundwork for the Vietnamese Judicial Reform Strategy afterward. 69 The JRS proposed several solutions to improve the courts’ capacity such as restructuring the court system, expanding the authority of first-instance courts, promoting higher qualification of judges, fostering independence and accountability of the court by decoupling courts’ budgets from the provincial government’s budget or expanding the judges’ tenure. Items 2.2 and 2.4 Resolution number 49/NQ-TW approved ‘Judicial Reform Strategy up to 2020’ dated 2 June 2005. 70 Report of SPC’s Department of Personnel and Organization at Annual Meeting of SPC held in Hanoi on 6 January 2011. 71 Supreme People’s Court, ‘Annual Report 2010’, p. 7.

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during 2006–2008 only around 50 percent of civil judgments were enforced (enforced cases).72 The problem is that only some of the judgments meet the requirements to be enforced (enforceable cases). Among the enforceable cases, only a small proportion can be implemented in reality. In 2006, the enforceable cases made up around 63 percent of judgments; the ratio in 2007 was 64 percent, in 2008 62 percent and in 2009 66 percent.73 Among these, the ratio of enforced civil cases in 2006 and 2009 were 71.2 percent and 81.05 percent respectively.74 In 2009, 98,754 out of 188,000 cases (approximately 52 percent) were unenforceable due to judgments being too vague or impractical.75

Disfavour of litigation by shareholders On the demand side of shareholder litigation, that only a small number of company disputes have been brought to the courts illustrates that the court is not a favoured dispute resolution mechanism of Vietnamese shareholders. ´ˆ represent a modest portion of the First, business cases (vu. a´ n kinh te) courts’ total workload in Vietnam. From 1999–2005, there was a small fluctuation in the number of business cases, but even at its highest the number was not over 1500 cases per year.76 Since 2005, business cases have risen significantly. However, the total caseload has also increased. At the maximum, business cases comprise around 2 percent of the total caseload of the courts.77 ´ˆ Among business cases, ‘members v. companies’ disputes (tranh chap 78 cˆong ty vo´’i th`anh viˆen cˆong ty) are only a small proportion, but a 72 Supreme People’s Court, ‘Vietnam Development Report 2010’, p. 93. (The ratio of enforced judgments for 2006 is 45.9 percent of judgments; for 2007 it is 46.7 percent and for 2008 it is 50.7 percent). 73 Data from 2006–2008 is extracted from the Vietnam Development Report 2010, p. ` 93. Data from 2009 is drawn from N. Anh, ‘Thu.’c tie˜ˆn thi h`anh a´ n dˆan su.’: Va˜ˆn con nhieˆ` u toˆ` n do ¯ . ng’, available at www.nguoidaibieu.com.vn/Trangchu/VN/tabid/66/CatID/ 7/ContentID/94796/Default. This number is the total number of civil cases; a breakdown of business cases is not available. 74 In 2009, judgment-executing agencies received 662,961 civil cases from the courts. Among these, 354,490 cases were executed. See Anh, ‘Thu.’c tie˜ˆn thi h`anh a´ n dˆan su.’’. 75 See Anh, ‘Thu.’c tie˜ˆn thi h`anh a´ n dˆan su.’’. 76 P. Nicholson, Borrowing Court Systems: The Experience of Socialist Vietnam (Leiden: Martinus Nijhoff Publishers, 2007), pp. 262–263. 77 Supreme People’s Court, ‘Annual Report 2005’, ‘Annual Report 2006’, ‘Annual Report 2007’ and ‘Annual Report 2008’. Unfortunately, SPC Reports since 2009 have not presented break-downs of business cases separate from total civil cases. 78 The phrase ‘dispute between companies and companies’ members’ was interpreted by the court as referring to the following kind of disputes: (1) disputes over implementation

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Table 9.2. Statistics of members v. companies cases at Hanoi People Court, 2007–2009

Period

Dismisseda

Settledb Pendingc

Total business cases Ratio

2007 (1 January–31 December) 2008 (1 October–31 December) 2009 (1 January–31 March)

4

5

7

223

7.2%

0

2

8

141

7.1%

0

2

8

154

6.5%

Members v. Companies cases

a

Art. 192 Civil Procedure Code 2005. The case will be dismissed in some circumstances such as when the parties reach a settlement, there is a petition to withdraw the lawsuit or the plaintiff or defendant dies or has been dissolved. b The case has proceeded and can be ended by a trial or settlement. c The case is not settled yet during this period of time. Source: Author’s compilation based on data collected at the Court.

breakdown of these cases nationwide is not available. Therefore, data collected at the Hanoi People’s Court is used as an example. During the period of 2007–2009 reports of the Hanoi People’s Court – one of the two biggest courts with jurisdiction over business disputes – show the low number of disputes between companies and their members (Table 9.2). Although the ratio of these disputes varies because the data is not homogenous, the total number of cases remains low: around ten cases per year on average. It is worth noting that Hanoi is the second largest business centre in Vietnam; thus we assume the number of cases this court took was a large portion of such disputes nationwide.79 Among those cases, there are none triggered by mistreatment of shareholders or fiduciary duty breaches. For the most part, shareholders disputed capital endowment or transfer of capital ownership. A survey of judges ´ˆ of the Hanoi People’s Court in 2009 of the Business Court (T`oa Kinh te) revealed that breaches of managers’ obligations such as noncompliance of members/shareholders’ rights to endowment or transfer of the shares and (2) disputes over other matters relating to establishment, operation, dissolution, merger, incorporation, splitting-up and organizational transformation of company. See Section I, item 3.5 Resolution 01/NQ-HDTP of guidance to implement regulations of Civil Procedure Code. The breach of fiduciary duty – the matter at issue in derivative lawsuits – would be the latter kind of dispute. 79 Unfortunately, since 2007, the SPC Reports have not provided a break-down separating business cases from other civil cases. Thus a comparison cannot be made.

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with shareholders’ information rights, refusal to buy back shares, failure to run the company in compliance with LOE 2005 or problems with the company’s charter and insider trading are rarely brought to court.80 The few cases of ‘members v. companies’ disputes are compatible with the concept that Vietnamese entrepreneurs and citizens do not favour formal legal mechanisms to resolve their disputes. Such a concept is primarily based on the fact that law does not play a great role in Vietnamese culture.81 It is said that after a long period of time living in a culture that appreciates harmonization over confrontation, the Vietnamese are inclined to resolve their disputes by methods based on consensus and cooperative connections.82 To some extent a litigation-averse culture has been established.

An immature legal profession and the hurdle of litigation costs As John Coffee highlights, lawyers rather than their clients – plaintiff shareholders – are the ones seeking corporate misconduct and filing the derivative actions.83 Therefore, the active role of lawyers would compensate for the apathy of dispersed and unsophisticated shareholders so as to save the lawsuits. In this vein, the improvement of lawyers and the lawyer service market is a solution to stimulate a higher incidence of derivative lawsuits.84 In Vietnam, the immaturity of the legal profession and the practicalities of litigation costs would diminish a lawyer’s willingness to work as the ‘initiator’ of a case. This means there is less chance for lawyer-driven litigation to appear.

Small lawyer population The number of lawyers and the ratio of lawyers to citizens in Vietnam are quite low compared with other countries in the area. Vietnam has around 6,000 lawyers85 for a population of 86,000,000 people. The per capita ratio of lawyers to citizens of Vietnam is around 1/15,000 compared with ratios 80 Survey conducted by the author at the Hanoi People’s Court (August 2009). 81 Nicholson, Borrowing Court Systems, p. 247; Supreme People’s Court, ‘Vietnam Development Report 2010’, 87. 82 Supreme People’s Court, ‘Vietnam Development Report 2010’, 87. 83 Coffee, ‘Understanding the Plaintiff’s Attorney’, 678–680. 84 For a similar view, see Song, ‘Improving Corporate Governance through Litigation’, 105–108; see also Huang, ‘The Statutory Derivative Action in China’, 249. 85 Lawyers are members of the Lawyer Association or those who obtained a bachelor of law degree, fulfilled lawyer training course requirements at the Judicial Academy and completed a probation period at a Lawyer Association. See Arts. 10 and 11 Law on Lawyer number 65/2006/QH11 2006.

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of 1/1,526 in Thailand, 1/1,000 in Singapore, 1/4,546 in Japan, 1/1,000 in France and 1/250 in the United States.86 It is estimated that in order to correspond with the average GDP index, by 2020 Vietnam needs around 12,000 more lawyers.87

Limited litigation skills Quality of lawyers is another area of concern. In business cases, Vietnamese lawyers’ services are generally confined to legal consultancy. Even for consultant lawyers, it is estimated that only around 1.2 percent of practicing lawyers have enough expertise to provide consultations to entrepreneurs in business and commercial fields.88 The number of lawyers who specialize in litigation is even smaller. It is estimated that lawyers who can litigate in cross-border disputes was around only ten to fifteen people.89 In addition, foreign lawyers, those who might work as an elite group to promote a litigation culture, are not allowed to represent litigants in courts in Vietnam.90 Litigation costs poorly incentivize lawyers to initiate cases Litigation costs are comprised of court fees and lawyer fees. According to Vietnamese law, plaintiffs have to pay court fees in advance when they commence litigation.91 These fees will ultimately be borne by the losing

86 Source: Ministry of Justice, ‘Du.’ thao chieˆ´ n lu’o.’c ph´at trieˆ n ngheˆ` luˆa.t su’ d¯eˆ´ n n˘am 2020’ (October 2010), p. 7. 87 Ministry of Justice, ‘Du.’ thao chieˆ´ n lu’o.’c ph´at trieˆ n ngheˆ` luˆa.t su’ d¯eˆ´ n n˘am 2020’, 10. Some with sceptical views argue that this number was only roughly estimated without consideration of some other variables such as citizen need for legal aids and various developments in the judicial sector (courts). See T. Tung, ‘Chien luoc phat trien nghe luat su: Chay theo so luong la chua on’, available at www.phapluattp.vn/20101030111650277p0c1063/ chien-luoc-phat-trien-nghe-luat-su-chay-theo-so-luong-la-chua-on.htm. 88 Ministry of Justice, ‘Du.’ thao chieˆ´ n lu’o.’c ph´at trieˆ n ngheˆ` luˆa.t su’ d¯eˆ´ n n˘am 2020’, 7. ˆ` h`anh vo´’i doanh nghiˆe.p’, available at 89 See Vnexpress, ‘V`ao WTO – Thieˆ´ u luˆa.t su’ d¯ong www.vnexpress.net/GL/Kinh-doanh/2006/08/3B9ECBA2/. 90 According to Art. 76 Law on Lawyer number 65/2006/QH11 2006, foreign law firms are allowed to provide consultations on foreign law or international law in all cases (i.e. work as solicitors). They only can give consultations on Vietnamese law if they graduate with a Bachelor of Laws in Vietnam. They are not allowed to work as barristers at the courts. Law on Lawyer number 65/2006/QH11 permits Vietnamese lawyers working for foreign law firms to work as barristers. But in reality they cannot perform this function. The reason authority agencies raised to refuse lawyers from attending litigation is the regulation of Resolution 71/2006/QH11 of approval Protocol to join World Trade Organization of Socialist Republic of Vietnam. This Resolution stipulates that lawyers working for foreign law firms are not permitted to participate in litigation as barristers. 91 Art. 130 Civil Procedure Code 2005.

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party.92 There is an exception that entities or organizations who file a case in the interests of the others may be exempt from the advance court fee. This rule, however, is not applicable to individuals.93 This means that individual shareholders, even if they bring the case for the company’s interests, still have to pay advance court fees. Derivative actions are thus costly to shareholders. Lawyer fees are paid by each litigant party regardless of whether they win or lose the case.94 Lawyers and their clients are allowed to negotiate lawyer fees.95 There is no restriction on lawyer fees. If lawyers want to follow the U.S. practice of contingency fees – that is they contract with their clients to advance all litigation costs and gain compensation afterward – no legal obstacle would hinder them. However, some practical obstacles exist. First, plaintiffs cannot ask defendants to pay for their lawyer fee.96 This means that lawyers can only obtain compensation if they win or settle the case for a sufficient amount to cover their fees. Lawyer fees are not ‘rational damage’ of wrongdoings that can be reimbursed by wrongdoers. It is often argued that hiring lawyers is a personal choice of the plaintiff. The wrong actions of defendants do not necessarily compel plaintiffs to hire lawyers to protect their interests as plaintiffs could protect their interests by themselves. Adjudication of the case is the task of the judge, with or without lawyers. This notion reflects the remnants of an inquisitorial system that places the lawyers at the margin of the adjudication process. This practice may dampen plaintiffs’ and their lawyers’ willingness to commence litigation if they are not assured of a high possibility of winning. Second, the practice of ‘no win, no fee’ is not common yet in Vietnam. This means that if shareholders want the lawyers to invest in the case, they have to contract on a case-by-case basis. 92 Art. 131 Civil Procedure Code 2005; Art. 27 Ordinance number 10/2009/UBTVQH12 of Litigation Fees and Court Fees. 93 Art. 10(2) Ordinance number 10/2009/UBTVQH12 of Litigation Fees and Court Fees. 94 Art. 144 Civil Procedure Code 2005. 95 Arts. 54 and 55 Law on Lawyer number 65/2006/QH11 number 65/2006/QH11. 96 The only one exception is in the dispute over intellectual property rights. According to Art.205.3 of Law on Intellectual Property 2005, holders of industrial property have the right to ask organization or individual who deem to infringe the industrial property right to pay lawyer fee for the holders. In other disputes, currently, there is only one case in which the court of Tien Giang province ordered the loser to pay the lawyer fees of the plaintiff. However, this case received criticism because this adjudication is contrary to the regulation of Art. 144 of Civil Procedure Code that stipulates that each party must bear its own lawyer fees. See ‘Boˆ` i ho`an ph´ı luˆa.t su’ du ¯ ’o.’c khoˆ ng?’, Ph´ap luˆa.t TP Hoˆ` Ch´ı Minh, 31 May 2010, available at www.phapluattp.vn/20100530105540510p0c1063/ boi-hoan-phi-luat-su-duoc-khong.htm.

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To the extent that small shareholders who are intrinsically unsophisticated need the assistance of proficient lawyers to file and handle the lawsuits, the low lawyer population coupled with the lack of litigating lawyers hampers the way shareholders bring their claims to court. The active role of lawyers is further constrained in Vietnam by compensation mechanisms that do not incentivize lawyers to invest in cases.

Policy implications Litigation as hardship route to justice for shareholders The discussion above captures the picture of the true role of the derivative action. In its origin country as well as in other adopting countries, the derivative action that provides locus standi for small shareholders turns out to be device for others’ interests rather than those of shareholders. Assuming that at the minimum derivative lawsuits would create liability risks to deter potential wrong-doings, this effect only arises if hurdles to access to the courthouse are eliminated. On this point, the case of Vietnam is particularly representative. Newly adopted regulations of derivative actions contain many ambiguities. Even what remedies are available through derivative actions is not well clarified. Procedural issues enabling shareholder claims to proceed smoothly to court remain unregulated. And most important, the institutional settings of court functioning are not in place yet. On the supply side of litigation, the Vietnamese court is unreliable because of its dearth of capable judges as well as the low enforceability rate of judgments. On the demand side of litigation, shareholders rarely use the court forum for their disputes. Immaturity of the legal profession further weakens the link between the supply and demand sides of litigation. As long as lawyers are poorly incentivized to bring derivative cases to court, the courts face no pressure from a high volume of cases to improve their capacity, and the shareholders remain apathetic as there is no one to help them clear the concerns of litigation costs and litigation procedures. Thus, litigation is unlikely to occur. This evidence suggests that the route leading shareholders to the courthouse has many hardships. Putting it differently, there are many reforms that lawmakers need to carry out to increase the reliability of courts and to decrease hurdles that prevent shareholders from utilizing the court forum. In the meantime, so long as these hurdles last, litigation is not an ideal dispute resolution for shareholder disputes. For shareholders, litigation in deficient courts would be time-consuming, costly and likely

242 collective enforcement of company and securities law

even unjust. For the state, because litigation is poorly supported by the current institutional settings, it is not a reliable dispute mechanism, nor will it be one without extensive investments to improve the institutions. The conclusions that we can draw from this are straightforward. First, litigation, at least in the interim, cannot bring justice to oppressed shareholders in Vietnam. Second, if lawmakers want to encourage shareholders to use the court forum, they must carry out reforms to strengthen the court, eliminate the economic and psychological obstacles of shareholders in utilizing lawsuits, develop the legal profession and adjust the litigation cost scheme.

Less costly mechanisms as possible alternatives for litigation If justice only means attaining redress for harmed interests, does the marginal role of litigation imply that Vietnamese shareholders rarely reach justice? This would not be the case if we hold the view that justice (at the minimum) is when the law can keep a promise that it gave to shareholders. It means, as long as the statutory rights of shareholders are observed, their just treatment is guaranteed. Justice is then not only reached in an ex-post basis of just treatment in dispute resolution but also in an ex-ante basis of deterring mistreatment that may occur. In this background, the alternatives to litigation that are listed here are not only alternative routes for oppressed shareholders to seek for justice to be done, but they also are alternatives for shareholders’ interests to be protected, or at least for their rights not to be harmed. Although whether they are more (or less) effective than litigation needs further research, these alternatives are tentatively proposed because they require less state investment than does litigation.

Strong regulator Whereas litigation is an ex-post mechanism to deter wrongdoings, mechanisms to screen out the potential breaches ex-ante might also decrease wrongdoings and save on litigation costs. A strong regulator who supervises implementation of corporate governance practices in companies might be relied upon for this task. A strong regulator might assure better mandatory disclosure and hence reduce opportunities for insider trading or fraud.97 A regulator can also supervise implementation of a code of 97 For the necessity of a strong regulator for mandatory disclosure, see R. A. Prentice, ‘The Inevitability of a Strong SEC’, Cornell Law Review, 91 (2006), 775.

does more litigation mean more justice for shareholders? 243

corporate governance and other corporate governance practices. Corporate governance principles would be better observed, and opportunities for managers to run companies for their own benefits would be lower. Even though giving more power to public agencies may create some opportunity costs such as corruption or bureaucracy, there is no evidence that these costs are higher than those associated with allocating this power to the court. Last but not least, investment to create a strong regulator that is well-staffed and well-funded is obviously lower than investment to reform and strengthen the judiciary and many complementary institutions.

Arbitrators In business disputes, arbitration and litigation have been substitutes for each other.98 In the United States, arbitration was deemed to be a cure for the ills of litigation such as frivolous or unmerited suits, high attorney costs and high social costs.99 Whether arbitration may work as a substitute for litigation in Vietnam is a question worth asking. In fact, this substitution is not a perfect mechanism, especially for disputes between shareholder and manager or controlling shareholders (i.e. controllers). There are some obstacles to the use of arbitration for shareholder claims in listed companies. First is the concern of the binding contractual obligation between shareholders and managers and controlling shareholders in these companies. The fiduciary duty that the controllers owe to the shareholders for the most part is described by statutory law rather than by an arms-length contract. Hence it seems difficult for them to contract for an arbitration clause. Even if the arbitration clause could be contained in a company’s charter, whether parties are well aware of this clause before joining a company is still a troublesome issue. Besides, some well-known advantages of arbitration do not carry much weight in shareholder disputes. For example, it does not matter much for shareholders in listed companies to keep good relationships with companies or keep their disputes in secret.100 The shareholders may also prefer a subsidized court rather than an arbitrator that they have to pay for from

98 C. R. Drahozal and S. J. Ware, ‘Why Do Business Use (or Not Use) Arbitration Clauses’, Ohio State Journal on Dispute Resolution, 25 (2010), 433. 99 S. A. Ramirez, ‘Arbitration and Reform in Private Securities Litigation: Dealing with the Meritorious as Well as the Frivolous’, William and Mary Law Review, 40 (1999), 1055. 100 J. Dammann and H. Hansmann, ‘Extraterritorial Courts for Corporate Law’ (2005), available at http://papers.ssrn.com/sol3/papers.cfm?abstract id=724165.

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their own pockets. These reasons explain why arbitration is often more used in disputes of private companies rather than of listed companies.101 Keeping all the limitations in mind, arbitration is suggested as a substitute for litigation in Vietnam not because of its higher effectiveness; the foremost reason to promote arbitration is that it shifts from a state-funded reform system to an industry-sponsored reform system. Arbitration in its capacity as a profit-seeking organization could finance itself without state subsidies, thus allowing arbitration to solve company disputes without requiring much investment from the state.

Conclusion Vietnam has taken the first step in adopting derivative actions for company law. Regulations over derivative actions could be seen as a foreseeable result of the influence of international financial organizations and the worldwide shareholder litigation bandwagon. Equitably speaking, the adoption of the derivative action might be viewed as the progress of Vietnam’s corporate law in empowering shareholders. It perhaps has advanced the Vietnamese ranking in the investor protection index, which has been quite low up to now because of the lack of shareholders’ litigation rights. However, the role of the derivation action as a promising device to enforce shareholders’ rights remains to be seen. Institutional analysis gives poor evidence of the effectiveness of the derivative action in Vietnam. It implies that giving shareholders more rights to challenge corporate misconduct by no means guarantees more justice for them. Justice for oppressed shareholders may only be achieved if the litigation device in principle serves the best interest of shareholders, and impediments to the litigation process are minimized. Derivative actions could be, and should be, the last resort of oppressed shareholders to combat errant managers, but these may not be an effective device to satisfy aggrieved shareholders. With inherent limited resources, Vietnam should pay more attention to other reforms that have firmer foundations in the existing institutional environment and are less costly. Expectations for the benefits of the derivative action should be left for another day when courts, lawyers and shareholders are all more ready for its operation.

101 J. Carter, ‘Arbitration and Corporate Governance: Publicly Held Companies’, available at www.oecd.org/dataoecd/23/17/14894780.pdf.

10 The United States Supreme Court and implied private cause of actions under SEC Rule 10b-5 The politics of class actions

arthur r. pinto *

Introduction Class actions under Rule 10b-5 of the Securities and Exchange Act of 19341 (‘Rule 10b-5’ or the ‘Rule’), which is a broad antifraud rule, are probably the most litigated by private plaintiffs under the federal securities laws, even though such actions were not expressly provided by the law but were instead implied by the courts. Class actions and private enforcement of federal securities laws raises both legal and policy issues concerning access to justice2 and reconciling multilayer interests. Because investors may not hold a large percentage of the securities of a company and are therefore unwilling individually to take on the expense of the litigation, the class action allows small claimants to act together to protect themselves.3 Class actions can provide compensation for investors injured by those who fail to comply with the law, and the threat of potential liability may deter * I would like to thank my research assistant Joshua Noreuil, Brooklyn Law class of 2011, for his assistance. I appreciate the helpful comments of my colleagues Professors Fanto, Karmel and Poser. I also acknowledge Brooklyn Law School’s summer stipend program. 1 17 C.F.R. §§ 240, 10b-5 (2010). 2 As Justice Douglas, one of the drafters of the federal securities laws, once wrote: ‘The class action is one of the few legal remedies the small claimant has against those who command the status quo. I would strengthen his hand with the view of creating a system of law that dispenses justice to the lowly as well as to those liberally endowed with power and wealth.’ Eisen v. Carlisle & Jacquelin, 417 U.S. 186 (Douglas, J., dissenting). 3 The reluctance of small investors to bring an action on their own reflects a collective action problem, and their willingness to let others pursue the wrong presents a free-riding problem. The class action is a partial solution to these problems. J. R. Macey and G. P. Miller, ‘The Plaintiffs’ Attorney’s Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform’, University of Chicago Law Review, 58 (1991), 1, 9–11.

245

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future violations. Class actions can also be viewed as supplementing public enforcement of the law.4 In addition, society benefits because investors know their interests can be protected, which encourages investment and bolsters the integrity of the markets. However, concern has been expressed that class actions result in frivolous litigation that is costly to companies and harms investors5 and that the benefits of such litigation do not exceed the costs.6 Under American law, each party usually pays its own fees and expenses (i.e. no loser-pays rule), and attorneys are permitted to take cases on a contingency basis, which means they only are paid out of the settlement or judgment. The willingness of class action attorneys to shoulder the burden of time and expense of litigation is beneficial to investors because plaintiffs with small claims would otherwise not fund the litigation. However, given the dispersed nature, size and number of the claimants, there is often a lack of monitoring of the attorneys by the client. This could mean the attorneys are acting primarily for their own interest in the litigation.7 Although the federal rules provide some protections, such as court approval of settlements and amount of attorneys’ fees,8 concerns remain that defendants may settle with plaintiffs’ attorneys to avoid litigation expenses.9 Rule 10b-5 is a broad antifraud rule that does not define the elements of a cause of action, leaving it to the courts to determine them over time. Legal and policy issues have been important in the development of these elements, and changing attitudes towards private class actions have influenced how the United States Supreme Court (the ‘Court’) moved from an expansive to a more restrictive reading of the Rule. The Court has articulated a number of reasons for its decisions concerning Rule 10b-5, 4 The awarding of attorney fees based upon the idea of supplementing public enforcement under a private attorney general theory was rejected by the Court in Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975). 5 Because settlements are usually paid by the company or from insurance the existing shareholders of the company are often funding it. J. C. Coffee, Jr., ‘Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation’, Columbia Law Review, 106 (2006), 1534, 1549–1556. 6 J. J. Johnson and E. Brunet, ‘Critiquing Arbitration of Shareholder Claims’, Securities Regulation Law Journal, 36 (2008), 181, 183–185 (a good summary of critiques of securities class actions). 7 This is described as the entrepreneurial attorney issue. See J. C. Coffee, Jr., ‘The Regulation of Entrepreneurial Litigation: Balancing Fairness and Efficiency in the Large Class Action’, University of Chicago Law Review, 54 (1987), 877. 8 Fed. R. Civ. P. 23(e), (h). 9 See text at notes 56–57 for discussion of this vexatious litigation in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975).

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such as the importance of following the language of Section 10b,10 the policy concern of not establishing insurance against investing losses,11 concerns with not interfering with state law12 and different attitudes towards implied causes of action and whether they should be viewed restrictively or expansively.13 However, in a number of important Court cases the view of the majority opinion also emphasized the concerns about private class actions that reflected evolving concerns expressed about litigation and such actions in society and were part of the political debates at those times.14 When acting restrictively in cases involving class actions and Rule 10b5, the Court initially focused on the concerns of ‘vexatious litigation’15 and later about the competitive costs to business, the economy and the stock markets. When acting expansively, the Court focused on the importance of private enforcement and the broad language of the Rule, the context of 1934 when the statute was enacted and the need for flexibility to promote the remedial purposes of the law in order to protect investors and

10 15 U.S.C. § 78j (2010). ‘[O]ur cases considering the scope of conduct prohibited by § 10(b) in private suits have emphasized adherence to the statutory language, “[t]he starting point in every case involving construction of a statute is the language itself.”’ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197 (1976) (quoting Blue Chip Stamps). As a result there have been debates about statutory interpretation. E.g. Merck & Co. Inc. v. Reynolds, 130 S. Ct. 1784 (2010) (different views expressed about the statutory meaning of both ‘discovery’ and ‘facts constituting the violation’ for purposes of applying the statute of limitations). 11 For example, the Court has recognized that securities law and private actions maintain public confidence in the marketplace. ‘But the statutes make these latter actions available, not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause.’ Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 341 (2005) (an inflated purchase price does not establish loss causation thus a plaintiff must ‘provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind’. Ibid., 347). 12 For example, in Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977), the Court held that Rule 10b-5 did not apply to a breach of fiduciary duty claim in a freeze-out merger because there was no allegation of a lack of full disclosure, i.e. no deceptive practice under the statute. To reach its conclusion, the Court used the statutory language that requires deceit to have occurred, but also suggested policy reasons not to use the Rule. The policies were not directed at concerns about class actions, but concerns about the primacy of state law fiduciary duty remedies. 13 See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008). 14 The role of litigation in the United States and whether it is a litigious society is a longstanding issue. One commentator sees litigation as a result of public policy choices and a preference for judicial solutions to problems. T. F. Burke, Lawyers, Lawsuits and Legal Rights (Berkeley: University of California Press, 2002). 15 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739 (1975).

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the markets. This chapter will focus on how these different attitudes towards class actions and their attorneys are reflected in and have influenced many of the Court’s opinions. In looking at this history, one can see not only the importance of the common law courts in developing the law, but also how politics and changing societal attitudes shaped legal development, with the Court generally shifting to a more restrictive view of Rule 10b-5 because of concerns over class actions. This history reflects an emphasis away from the need for collective actions to protect investors and ensure justice to the concerns over the effect of such litigation, particularly on business.

The development of an implied private cause of action under Rule 10b-5 The federal securities laws are a product of the market instability of the late 1920s and the stock market crash of 1929. The two major pieces of legislation are the Federal Securities Act of 1933 (the ‘1933 Act’)16 and the Securities and Exchange Act of 1934 (the ‘1934 Act’).17 The legislation was enacted by Congress in reaction to the stock market crash of 1929, and the subsequent election of Franklin Delano Roosevelt in 1932 and the implementation of his New Deal. The major theme of the legislation was the protection of investors and the securities markets, primarily through disclosure.18 The Securities and Exchange Commission (SEC) was established with the primary function of implementing and enforcing the law.19 Both the 1933 Act20 and the 1934 Act21 have important express remedies that allow investors to sue under particular express provisions of the 16 15 U.S.C. §§ 77a–77aa. 17 15 U.S.C. §§ 78a–78kk. 18 See, e.g. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 186 (1963) (stating that the purpose common to the securities laws was to ‘substitute a philosophy of full disclosure for the philosophy of caveat emptor’). 19 15 U.S.C. § 78d(a) (2006) (‘There is hereby established a Securities and Exchange Commission . . . ’). There are also criminal sanctions which are enforced by the U.S. Justice Department. 15 U.S.C. § 78ff (2002). 20 Section 11, 15 U.S.C. § 77k (2006), (creates liability for misleading registration statements for purchasers) Section 12, 15 U.S.C. § 77l (2000) (allows purchaser to sue the seller for false and misleading statements); Section 15, 15 U.S.C. § 77o (2010) (secondary liability on controlling persons for primary liabilities of controlled persons under §§ 11 and 12). 21 Section 9, 15 U.S.C. § 78i (2000) (allows a suit based upon manipulation); Section 16b, 15 U.S.C. § 78p (2010) (allows a derivative suit against certain insiders for short swing trading); Section 18(a), 15 U.S.C. § 78r (2006) (allows any person who, in reliance on

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laws. These express private remedies under both Acts have important limitations. For example, the private remedies under the 1933 Act apply only to purchasers and not to sellers who were defrauded. Section 18 of the 1934 Act requires proof of reliance on filed documents. However, Congress also enacted broad statutory authorizations that allowed both the SEC and the courts to be flexible in approaching problems and in protecting investors. The prime example of this approach was the enactment of Section 10(b) of the 1934 Act. Section 10(b) (as enacted) provided (in pertinent part): It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange [. . . .] (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, [. . .] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.22

From its language this provision granted broad authority to the SEC to promulgate rules which applied 10(b) not just to publicly owned securities but to broader coverage including securities transactions that took place through interstate commerce or the mails. In 1942, the SEC used its power to promulgate under 10(b) Rule 10b-5 dealing with the employment of manipulative and deceptive practices.23 The Rule states that: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, a false or misleading statement or omission in a document required by the 1934 Act who purchases or sells a security at a price affected by such statement); Section 20, 15 U.S.C. § 78t(e) (2010) (secondary liability on controlling persons for primary liabilities of controlled persons under any provision of the 1934 Act). 22 15 U.S.C. § 78j (2010). 23 The history of the Rule is interesting. In 1942, SEC lawyers in the Boston Regional Office learned that a company president was issuing pessimistic statements about company earnings while simultaneously purchasing the company’s stock. The 1933 Act in Section 17 prohibited fraudulent sales of securities but not purchases. Rule 10b-5 was modelled after Section 17 but applied to both purchasers and sellers. The SEC approved the Rule without debate or comment quickly with one Commissioner saying, ‘Well, we are against fraud aren’t we?’ Remarks of M. Freeman, ‘Conference on Codification of the Federal Securities Laws’, Business Law, 22 (1967), 793, 922.

250 collective enforcement of company and securities law a) To employ any device, scheme, or artifice to defraud, b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.24

The broad language of Section 10(b) and Rule 10b-5 has made them the most important legal weapon for both the SEC and private enforcement of the federal securities laws. They are the primary law against insider trading25 and for dealing with fraud and deceit in the purchase or sale of securities. Rule 10b-5 applies to face-to-face transactions, purchases and sales in the markets and to companies where there has been a material misrepresentation or omission.26 Section 10(b) of the 1934 Act has never granted investors an express private cause of action. However, in 1946 a federal district court found that there was an implied private cause of action under Rule 10b-5.27 The court allowed plaintiffs to bring a private cause of action under the Rule where a closely held corporation induced shareholders to sell their shares through misrepresentations and non-disclosure. Rejecting the idea that Congress had provided express remedies and failed to do so here, the court found that there was congressional intent to create an implied remedy. As the court indicated: It is whether an intention can be implied to deny a remedy and to wipe out a liability which, normally, by virtue of basic principles of tort law accompanies the doing of the prohibited act. Where, as here, the whole statute discloses a broad purpose to regulate securities transactions of all kinds and, as a part of such regulation, the specific section in question provides for the elimination of all manipulative or deceptive methods in such transactions, the construction contended for by the defendants may not be adopted. In other words, in view of the general purpose of the Act, 24 17 C.F.R. §§ 240.10b-5 (2010). 25 Insider trading is not often the basis for a class action because the damages are generally limited to disgorgement of the profits made by the insider, which in a class action results in only a small pro rata recovery. W. K. S. Wang, ‘Measuring Insider Trading Damages for a Private Plaintiff’, U.C. Davis Business Law Journal, 10 (2009), 1, 3. 26 If the misrepresentation or omission with a duty to disclose involves ‘a manner reasonably calculated to influence the investing public . . . ’ then Rule 10b-5 may apply. SEC v. Texas Gulf Sulphur, 401 F. 2d 862 (2nd Cir. 1968) (en banc). 27 Kardon v. National Gypsum Co., 69 F. Supp. 514 (E.D. Pa. 1946).

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the mere omission of an express provision for civil liability is not sufficient to negative what the general law implies.28

The decision reflected at the time a long tradition of courts allowing private parties to sue based upon a statute even when no private express remedy is provided.29 Thus, in addition to the power of the SEC to bring administrative, injunctive and civil penalties30 and the Justice Department to seek criminal penalties for wilful violations,31 private plaintiffs could bring a private cause of action. Although all of the circuit courts eventually recognized an implied cause of action and the Supreme Court dealt with such actions, it was not until 1983 that the Court explicitly recognized one.32 The recognition of an implied private action under Rule 10b-5 would eventually lead to its use in class actions.33 Because Rule 10b-5 is a broad antifraud rule that does not spell out the particular conduct covered or elements for either the SEC or private cause of action, the judiciary had to do so.34 The Court in the process has used a variety of rationales including the language of the statute,35 congressional intent,36 the history of the enactment of the securities law 28 Kardon v. National Gypsum Co., 69 F. Supp. 514 (E.D. Pa. 1946). The courts today look to congressional intent – not whether a court thinks implying a cause of action can improve the statute. Touche Ross & Co. v. Redington, 442 U.S. 568 (1979). 29 The court also grounded its decision on § 29(b) of the 1934 Act, which provides that contracts in violation of any provision of the Act shall be void and thus implies a remedy in respect of it. 15 U.S.C. § 78cc(b) (2010). Kardon v. National Gypsum Co., 69 F. Supp. 514 (E.D. Pa. 1946). In J.I. Case Co. v. Borak, 377 U.S. 426 (1964), the Supreme Court, examining the statute’s legislative history and looking at what it believed were the purposes of the statute, held that a private right of action should be implied under the proxy rules and § 14(a) of the 1934 Act. 377 U.S. 426 (1964). Under the circumstances, the Court said it was ‘the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose’. Ibid., at 433. 30 15 U.S.C.A. § 78u(d)(1) (2008). 31 15 U.S.C. § 78ff (2002). 32 Herman & MacLean v. Huddleston, 459 U.S. 380 (1983). 33 Although class actions are usually direct suits seeking relief for investors of the class, there may also be a derivative Rule 10b-5 action brought if the harm alleged was primarily to the corporation. E.g. Goldberg v. Meridor, 567 F. 2d 209 (2nd Cir. 1977). 34 In general, the elements of a Rule 10b-5 claim developed by the courts for a class action involving publicly traded securities require economic loss as the result of the purchase or sale of securities, by plaintiffs, in justifiable reliance upon the defendant’s misrepresentation or omission of a material fact of which defendant had a duty to disclose made with scienter. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 341, 342 (2005). 35 See note 10 discussing importance of the statutory language. 36 Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994). According to the Court, ‘determining the elements of the 10b-5 private liability scheme, has posed difficulty because Congress did not create a private § 10(b) cause of action and

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and underlying policies,37 the common law roots of fraud38 and views of private litigation, particularly class actions.

The Supreme Court and Rule 10b-5 class actions Although a district court in 1946 found an implied cause of action under Rule 10b-5,39 and over time most other courts also recognized one, the implications and elements of such actions developed slowly.40 Starting in the 1960s and onward, private litigation under federal securities laws began to develop. The decade of the 1960s began with the election of

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had no occasion to provide guidance about the elements of a private liability scheme. We thus have had “to infer how the 1934 Congress would have addressed the issue[s] had the 10b-5 action been included as an express provision in the 1934 Act.”’ Ibid., at 174. Although there is a significant amount of congressional history on the overall thrust of the 1934 Act, there is very little direct history on Section 10b. S. Thel, ‘The Original Conception of Section 10(b) of the Securities Exchange Act’, Stanford Law Review, 42 (1990), 385. Because the language of Section 10b used the word deceptive, issues have arisen as to the extent to which the elements of the common law actions in deceit should be incorporated in Rule 10b-5. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 341, 344 (2005) (‘Judicially implied private securities fraud actions resemble in many (but not all) respects commonlaw deceit and misrepresentation actions’). But according to the dissent in Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), ‘the majority states that “[s]ection 10(b) does not incorporate common-law fraud into federal law.” Of course, not every common-law fraud action that happens to touch upon securities is an action under section 10(b), but the Court’s opinion in Zandford did not purport to jettison all reference to common-law fraud doctrines from section 10(b) cases. In fact, our prior cases explained that to the extent that “the antifraud provisions of the securities laws are not coextensive with common-law doctrines of fraud,” it is because common-law fraud doctrines might be too restrictive. “Indeed, an important purpose of the federal securities statutes was to rectify perceived deficiencies in the available common-law protections by establishing higher standards of conduct in the securities industry.” I, thus, see no reason to abandon common-law approaches to causation in § 10(b) cases.’ 552 U.S. 174 (2008) (citations omitted). See N. S. Poser, ‘Securities Fraud and the Common Law’, Journal of Securities & Futures Law, 1 (2008), 3 (discusses the shift in federal courts that federal securities law fraud was broader than the common law to one that is now narrower). Kardon v. National Gypsum Co., 69 F. Supp. 514 (E.D. Pa. 1946). The court in Diamond v. Oreamuno, 301 N.Y.S. 2d 78, 84–85 (N.Y. 1969), indicated that ‘a class action under the Federal rule [referring to 10b-5 in an insider trading case] might be a more effective remedy but the mechanics of such an action have, as far as we have been able to ascertain, not yet been worked out by the Federal courts and several questions relating thereto have never been resolved. These include the definition of the class entitled to bring such an action, the measure of damages, the administration of the fund which would be recovered and its distribution to the members of the class’.

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a Democratic president replacing a Republican administration that had been in power since 1952.41 At that time, politically Democrats were often viewed as more liberal, more supportive of both government regulation with stricter enforcement of regulation of business, and of judicial activism, more pro-litigation and more supportive of consumer protection. Republicans were generally viewed as more conservative; more likely to be pro-business, preferring free markets as a form of self-regulation as opposed to government regulation, more supportive of a stronger role for states and for less federal intrusion in economic activities, and more likely to prefer judicial restraint and less litigation.42 Thus, the 1960s ushered in a more activist government and SEC. During this period, class actions became significant in other areas of the law such as civil rights litigation, which looked to the federal courts often for equitable relief, and products liability claims seeking monetary damages. It was these litigations that were a major impetus behind the changes in the Federal Rules of Civil Procedure, which helped clarify the rules and foster modern class actions.43 In addition, the Court was active in expanding civil liberties 41 The SEC was mostly inactive during the 1950s under Republican president Dwight D. Eisenhower, but was revitalized in the 1960s under Democratic presidents John F. Kennedy and Lyndon B. Johnson. J. Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (Boston: Northeastern University Press, 1995), chs. 9 and 10. It was the SEC decision In re Cady, Roberts & Co., 40 S.E.C. 907 (1961) that became the basis for using Rule 10b-5 as the main legal weapon to combat insider trading in the United States. 42 Appointees to the Supreme Court by a president from one party may not always represent that president or party’s same political views. Two of the more liberal Supreme Court justices, Warren and Brennan, were appointed by Eisenhower, whereas Justice Blackmun was appointed by Republican president Nixon. Justice Blackmun became one of the leading defenders of private causes of actions under federal securities laws and of investors’ rights. He was often the leading dissenter in federal securities cases during his tenure from 1970–1994. J. Fanto, ‘Justice Blackmun and Securities Arbitration: McMahon Revisited’, North Dakota Law Review, 71 (1995), 145. 43 Under current federal rules adopted in 1966, class actions involve ‘questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy’. Fed. R. Civ. P. 23(b)(3). The prior class action rule for federal courts was adopted in 1938; it included abstract categories and did not deal with practical issues involved in the administration of such actions. B. Kaplan, ‘A Prefatory Note’, Boston College Law Review, 10 (1969), 497. For a large and dispersed class, notice can be difficult and expensive but under the rule, notice is to be ‘the best . . . practicable’. Kaplan, ‘A Prefatory Note’, 499. See also J. Seligman and L. Hunter, ‘Rule 23: Class Actions at the Crossroads’, Arizona Law Review, 39 (1997), 407 (discusses the changes). ‘The 1966 revisions specified four prerequisites for class certification: numerosity, commonality, typicality, and adequacy of representation. The

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and rights of criminal defendants. This political back-drop fostered an expansive view of federal securities law and class actions.44

The Burger Court (1969–1986) The election of President Richard Milhous Nixon, a Republican, in 1968 was a change in the political landscape. Judicial activism became a political issue because of the Warren Court’s expansion of certain civil liberties and rights of criminal defendants. Nixon promised to appoint conservative judges who would be strict constructionists.45 Although the focus of this approach was on the narrowing of constitutional protections, a more conservative judicial approach would also lead to a narrow approach to federal securities laws and implied causes of actions and class actions. In addition, a more pro-business approach would lead to less litigation. Although Nixon appointed four justices whose impact eventually led to a narrowing of the scope of Rule 10b-5, there were two cases involving private litigation decided prior to the shift that were more expansive. In 1971 the first Court case dealing with Rule 10b-5 in a private cause of action46 was Superintendent of Insurance of the State of New York v. Bankers Life and Casualty Company.47 In a unanimous decision, the Court found

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drafters designed these revisions to ensure that the class action would be an appropriate and effective means of pursuing individual class members’ claims and that class representatives and class counsel would be adequate agents of absent class members. Additionally, the revised Rule 23 states that individual plaintiffs, upon certification, may opt out of certain classes and that members of the plaintiff class must receive notice of this right.’ See generally Comment, ‘Adequate Representation, Notice and the New Class Action Rule: Effectuating Remedies Provided by the Securities Laws’, University of Pennsylvania Law Review, 116 (1968), 889; Note, ‘Developments in the Law – The Paths of Civil Litigation: IV. Class Action Reform: An Assessment of Recent Judicial Decisions and Legislative Initiatives’, Harvard Law Review, 113 (2000), 1806, 1809 (both discuss the federal rule). Although there was no Supreme Court case directly involving Rule 10b-5, the Court found an implied private cause of action could be brought under the antifraud proxy rule, using reasoning similar to that of the district court in Kardon v. National Gypsum Co., 69 F. Supp. 514 (E.D. Pa. 1946) (discussed in the text at notes 27–29) when it found that such a cause of action existed under 10b-5. J.I. Case Co. v. Borak. 377 U.S. 426 (1964). T. H. Peebles, ‘Mr. Justice Frankfurter and the Nixon Court: Some Reflections on Contemporary Judicial Conservatism’, American University Law Review, 24 (1974), 1, 4–5. The first Rule 10b-5 case involved the SEC as the plaintiff. SEC v. National Securities, Inc., 393 U.S. 453 (1969). Superintendent of Inssurance v. Bankers Life & Casualty Co., 404 U.S. 6 (1971).

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that bondholders of an insurance corporation whose merger was accomplished through the alleged fraud of outside collaborators and corporate officers were ‘sellers’ of those bonds under the Rule and were therefore protected by Rule 10b-5. The opinion never explicitly recognized a private right of action, but gave a broad view of the Rule, indicating: ‘we do not read section 10(b) as narrowly as the Court of Appeals; it is not limited to preserving the integrity of the securities markets though that purpose is included. Section 10(b) must be read flexibly, not technically and restrictively’ [emphasis added].48 The next decision in 1972 was Affiliated Ute Citizens of Utah v. United States,49 which involved the issue of reliance under Rule 10b-5. Again the Court reiterated the need to read the Rule flexibly with the idea being ‘to effectuate its remedial purposes’ [emphasis added].50 The Court held that, in a case of omission where there is a duty to disclose a material fact, positive proof of reliance will not be required.51 Thus these first two decisions involving class actions called for flexibility to enhance the remedial aspects of the Rule. In 1975, with the addition of four justices appointed by President Nixon, the Court began the process of narrowing private causes of action under Rule 10b-5 and moving away from an emphasis on its aspect. In Blue Chip Stamps v. Manor Drug Stores, the majority determined that the phrase ‘in connection with the purchase or sale of any security’ used in Section 10(b) and Rule 10b-5 required the plaintiff in a private action for damages to have been a purchaser or seller of securities in order to be a plaintiff in the litigation.52 The Court initially looked at the statutory framework to 48 Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 12 (1971). The Court recognized in footnote nine that there was an implied cause of action under the Rule. In addition, in broad language the Court indicated that there could be liability for deceptive practices ‘touching’ the sale of securities which if viewed broadly could implicate tenuous connections to securities fraud. Subsequent decisions have not viewed this broadly. 49 Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). 50 Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 152 (1972). 51 Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 154–155 (1972). Lower courts have uniformly taken the case to mean that in omission cases under Rule 10b-5 there is a rebuttable presumption of reliance once materiality is shown. See e.g. Castellano v. Young & Rubicam, Inc., 257 F. 3d 171, 186 (2nd Cir. 2001). The case cited its similar decision that positive proof of reliance is not required in SEC Rule 14a-9, which is the antifraud proxy rule. Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970). 52 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 at 731–732 (1975). The SEC need not be a purchaser or seller. Ibid., at 751. Importantly, the Court did not require the defendant to be a purchaser or seller so that corporate defendants that are not purchasers or sellers

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justify its decision and further noted that its holding was consistent with the long-standing application of the purchaser-seller requirement in the Second Circuit.53 However, as indicated by Justice Rehnquist’s majority opinion, the decision was also about policy:54 Having said all this, we would by no means be understood as suggesting that we are able to divine from the language of section 10(b) the express ‘intent of Congress’ as to the contours of a private cause of action under Rule 10b-5. When we deal with private actions under Rule 10b-5, we deal with a judicial oak which has grown from little more than a legislative acorn. Such growth may be quite consistent with the congressional enactment and with the role of the federal judiciary in interpreting it, but it would be disingenuous to suggest that either Congress in 1934 or the Securities and Exchange Commission in 1942 foreordained the present state of the law with respect to Rule 10b-5. It is therefore proper that we consider, in addition to the factors already discussed, what may be described as policy considerations when we come to flesh out the portions of the law with respect to which neither the congressional enactment nor the administrative regulations offer conclusive guidance [emphasis added].55

The decision then discussed concerns with ‘vexatious litigation’ associated with an implied cause of action and particularly class actions.56 The Court expressed concern that weak cases brought under the Rule may have substantial settlement value out of proportion to their prospects for success because of access to liberal discovery rules and that ‘[t]he very

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and who make disclosures that violate Rule 10b-5 ‘in a manner reasonably calculated to influence the investing public . . . ’ may serve as defendants. Basic v. Levinson, 485 U.S. 224, 235 (1988) (citing SEC v. Texas Gulf Sulphur, 401 F. 2d 862 (2nd Cir. 1968) (en banc)). The dissent in Basic v. Levinson would have used the ‘in connection’ requirement to apply Rule 10b-5 only to defendants who purchase and sell securities, which would have been a major limitation on its reach. 485 U.S. at 261–262. The Court adopted the Birnbaum rule, taken from a Second Circuit decision in Birnbaum v. Newport Steel Corp., 193 F. 2d 461 (2nd Cir. 1952). The Second Circuit, because it sits in New York, has been viewed as the ‘Mother Court’ in this area of the law. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 762 (1975). According to the Court in a subsequent case, Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 126 (2006), ‘insofar as the argument assumes that the rule adopted in Blue Chip Stamps stems from the text of Rule 10b-5-specifically, the “in connection with” language, it must be rejected. Unlike the Birnbaum v. Newport Steel Corp. Court (Second Circuit decision), which relied on Rule 10b-5’s text in crafting its purchaser-seller limitation, this Court in Blue Chip Stamps relied chiefly, and candidly, on “policy considerations” in adopting that limitation’. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 738 (1975) (citation omitted) (emphasis added). Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739 (1975).

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pendency of the lawsuit may frustrate or delay normal business activity’.57 The dissent warned: I am uneasy about the type of precedent the present decision establishes. Policy considerations can be applied and utilized in like fashion in other situations. The acceptance of this decisional route in this case may well come back to haunt us elsewhere before long. I would decide the case to fulfill the broad purpose that the language of the statutes and the legislative history dictate . . . [emphasis added].58

Decided in 1975,59 Blue Chip Stamps represented a significant shift and turning point for the Court, when for the first time it used a policy discussion related to negative perceptions of class actions and their lawyers. A reading of the statute and Rule broadly and flexibly to further the remedial purpose as espoused in Affiliated Ute three years prior was no longer the view of the Court’s majority, instead taking a back seat to concerns of vexatious class action litigation. The next case that continued a restrictive view of Rule 10b-5 was Ernst & Ernst v. Hochfelder,60 in which the Court held that scienter61 as opposed to negligence, which would be easier to prove, was a required element for a violation of Rule 10b-5 for both private plaintiffs and the SEC.62 The majority decision, written by Justice Powell,63 was based on the 57 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 741 (1975). Another was that without the purchaser/seller requirement the trier of fact would need to depend on oral testimony, and that case will not easily be dealt with before trial except by settlement. Ibid., at 742. 58 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 771 (1975). According to the dissent ‘[t]he Court exhibits a preternatural solicitousness for corporate well-being and a seeming callousness toward the investing public quite out of keeping, it seems to me, with our own traditions and the intent of the securities laws’; ibid., at 763. 59 Another important case in 1975 was Cort v. Ash, 422 U.S. 66 (1975), where the Court changed its approach to implied private causes of action from the judiciary finding a remedy for statutory wrongs to the use of a four-factor test where congressional intent on implying the cause of action became the most important factor. This approach implicitly rejected the idea of allowing private plaintiffs the ability to sue based upon violations of the statute. 60 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). 61 The Court never defined scienter, but most lower courts have used some form of reckless behaviour as opposed to intentional action. P. T. Heenan et al., ‘Securities Fraud’, American Criminal Law Review, 47 (2010), 1015, 1024. 62 See Aaron v. SEC, 446 U.S. 695 (1980) (scienter applied to the SEC). 63 Justice Powell’s influence on the Court’s securities law jurisprudence was significant, and he was previously a practicing lawyer who dealt with class actions. See A. C. Pritchard, ‘Justice Lewis F. Powell, Jr. and the Counter Revolution in the Federal Securities Laws’, Duke Law Journal, 52 (2003), 841.

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majority’s view of the statutory language of Section 10(b) and established the principle that the Court should ‘turn first to the language of section 10(b), for (t)he starting point in every case involving construction of a statute is the language itself’.64 Yet section 10b’s language did not clearly respond to many of the issues raised about the elements of a cause of action; therefore, policy issues remained important in the decisions. The majority decision was not based upon the policy concerns expressed in Blue Chip Stamps65 but again, as the dissent pointed out, involved the majority ignoring the view that the statute should be viewed broadly and flexibly to further its remedial purpose.66 However, the case established the important principle that the statute would be the key to deciding the reach of Rule 10b-5. Both Blue Chip Stamps and Ernst & Ernst reflected the shift in the membership of the Court and the politics of that time with concerns about litigation and judicial activism.

An important exception Although many of the cases decided during the period from 1975 forward have taken a restrictive view of Rule 10b-5, sometimes referring to the policies articulated in Blue Chip Stamps, one case stands out as being a significant victory for plaintiffs in class actions. In Basic v. Levinson,67 the Court allowed the use of the fraud on the market theory68 as a rebuttable 64 Ernst & Ernst v. Hochfelder, 425 U.S. 185, 198 (1976) (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975)). This was also the basis of Justice Powell’s concurrence in Blue Chip Stamps. 65 In a footnote Justice Powell referred positively to the policy of Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), expressing concerns for increasing liability for additional defendants such as accountants and the expertise they provide. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 215 n.33 (1976). 66 According to the dissent, ‘once again the Court interprets section 10(b) of the Securities Exchange Act of 1934 and the Securities a Exchange Commission’s Rule 10b-5 restrictively and narrowly and thereby stultifies recovery for the victim . . . ’; Ernst & Ernst v. Hochfelder, 425 U.S. 185, 216–217 (1976) (citations omitted). 67 Basic v. Levinson, 485 U.S. 224 (1988). The case also dealt with the issue of materiality; the Court rejected any bright-line test, instead adopting the test of ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available’. Basic v. Levinson, 485 U.S. 224, 231–232 (1988). Recently the Court continued to reject any bright-line test for materiality in Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. –, 131 S. Ct. 1309 (2011). 68 According to the Court, ‘[t]he fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business . . . Misleading statements will therefore defraud purchasers of stock even if the

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presumption of reliance in Rule 10b-5 cases.69 Use of the theory eases the burden on the plaintiffs in a class action to prove reliance among each claimant in the class who buys or sell securities in the secondary market.70 Plaintiffs rarely read the misrepresentation but instead rely on the stock price to reflect that information or omission.71 The decision did not emphasize the remedial aspects of the Rule but recognized the practical issues in market transactions of proving reliance, proof of which would be ‘an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market’.72 Although the decision was consistent with earlier Court decisions about reliance,73

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purchasers do not directly rely on the misstatements . . . The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.’ Basic v. Levinson, 485 U.S. 224, 242–243 (1988). Basic v. Levinson, 485 U.S. 224, 247 (1988). Although the plaintiffs have no pre-existing relationship, their position as shareholders acts as a link. This link makes class actions under securities law possible because the fraud on the market theory presumes reliance and facilitates awarding of compensation which is not found in mass tort litigation. R. A. Nagareda, Mass Torts in a World of Settlement (University of Chicago Press, 2007). If the plaintiffs have established that the fraud-on-the-market theory is applicable generally by showing that the alleged misrepresentations were made publicly, that the company’s shares were traded in an efficient market, and that plaintiffs traded shares between the time the misrepresentations were made and the time the truth was revealed, then plaintiffs have shown that common questions predominate on the issue of reliance (usually referred to as transaction causation). If the plaintiffs are subsequently unable to prove that they suffered any loss (usually referred to as loss causation) as a result of the alleged misrepresentations, the defendant will prevail on the merits, but the presence or absence of proof is irrelevant to the question of class certification. Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S., 131 S. Ct. 2179, L. Ed. 2d, 2011 WL 2175208 (2011), at *5. The Court did not address the issue of whether a plaintiff must prove reliance in a case where there was no existing market but where there are allegations that the fraud created the market that resulted in the sales of securities. Some lower courts have accepted this theory but after Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) some courts have begun to reject the use of the theory. These courts rely on the Stoneridge language that suggested that Rule 10b-5 should not be extended and that only the presumptions of Basic v. Levinson, 485 U.S. 224 (1988) and Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) should remain. M. J. Kaufman and J. M. Wunderlich, ‘Fraud Created the Market’, Alabama Law Review (forthcoming). Basic v. Levinson, 485 U.S. 224, 245 (1988). ‘Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action, since individual issues then would have overwhelmed the common ones.’ Ibid., at 242. The Court referred to its earlier decisions in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), and Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970), where positive proof of reliance was not required. Both cases involved material omissions by the defendants – Basic v. Levinson, 485 U.S. 224, 243 (1988).

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a requirement of proof of actual reliance would have effectively precluded most class actions under Rule 10b-5 where the defendant is alleged to have issued false and misleading material information.74

The Rehnquist Court (1986–2005)75 A very important case decided in 1994 was Central Bank of Denver v. First Interstate Bank of Denver,76 where the Court held that Rule 10b-5 did not reach aiders and abettors notwithstanding the fact that lower courts had decided otherwise.77 The decision applied to only private litigation and did not address actions by the SEC.78 The majority again relied on the language of Section 10(b), which does not specifically include aiders and abettors.79 In addition, the majority relied on congressional intent

74 The dissent was concerned not only with the Court adopting an economic theory on the efficiency of markets that Congress not the Court should have determined, but also with the problems of class actions. ‘And who will pay the judgments won in such actions? I suspect that all too often the majority’s rule will “lead to large judgments, payable in the last analysis by innocent investors, for the benefit of speculators and their lawyers.” This Court and others have previously recognized that “inexorably broadening . . . the class of plaintiff[s] who may sue in this area of the law will ultimately result in more harm than good.”’ Basic v. Levinson, 485 U.S. 224, 263 (1988) (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 747–748 (1975) and Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976). 75 From 1976 until 2005 (Roberts Court) there were eight Court appointments, six of which were by Republicans. Even though some of those appointments turned out to be more liberal in philosophy, the Court continued its restrictive view of Rule 10b-5. 76 Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994). 77 According to the dissent, ‘In hundreds of judicial and administrative proceedings in every Circuit in the federal system, the courts and the SEC have concluded that aiders and abettors are subject to liability under § 10(b) and Rule 10b-5 . . . all 11 Courts of Appeals to have considered the question have recognized a private cause of action against aiders and abettors under §10(b) and Rule 10b-5.’ Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 192–193 (1994) (Stevens, J., dissenting) (quoting Brennan v. Midwestern United Life Ins. Co., 259 F. Supp. 680 (N.D. Ind. 1966)) (citations and footnotes omitted) (emphasis added). 78 Because of concerns that the holding in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994) could apply to the SEC, in 1995 Congress gave the SEC the power to use its authority against aiders and abettors but has not overruled the case as to private plaintiffs. 15 U.S.C.A. § 78u-4; 15 U.S.C. §78t(e). Recently Congress explicitly allowed the SEC to bring actions for knowingly or recklessly providing substantial assistance to violations of the 1934 Act. Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173, 111th Cong. (2010) (enacted) at § 929O. 79 The Court indicated that when the case involves conduct prohibited by Rule 10b-5 the text of Section 10b resolves the case, and when it does not then the Court will infer how Congress would have addressed the issue if it had included an express provision. Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 179 (1994).

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in 1934 by comparing other provisions of the federal securities laws that did not include aiding and abetting in their scope. However, the majority, aware that the statute did not explicitly preclude such actions, and that, in 1934, Congress had understood that tort principles included aiders and abettors,80 also used policy arguments to support its holding.81 The Court expressed the Blue Chip Stamps concern that a class action under Rule 10b-5 ‘presents a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general’.82 The fact-oriented aspect of determining liability may force settlements and increase costs. The Court also put litigation costs in a broader context by expressing concerns about the effect of the litigation on business, such as the impact on smaller companies’ ability to get advice, as well as the costs of such advice being passed on to the companies who hire advisors who may be sued under an aiding and abetting theory. This idea that litigation affected economic competitiveness reflected a new emphasis on litigation costs and competitiveness, which became a political issue.83 Under President George Herbert Walker Bush and his Council on Competitiveness (headed by Vice President Dan Quayle) civil litigation reform expanded from the scope of tort reform to encompass all aspects of the civil justice system with a focus on the costs and incidence of civil litigation and the effect those factors have on U.S. businesses’ ability to compete in the global economy.84 Federal securities class actions also became an issue in the congressional elections of 1994 because of concerns from emerging hightech and biotech companies.85 These policy issues regarding class actions that were part of the political debates were important to the Court, and the concerns now reflected not just ‘vexatious’ litigation but its impact on the economy and business. 80 Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 194–195 (1994) (Stevens, J., dissenting). 81 According to the majority, ‘Policy considerations cannot override our interpretation of the text and structure of the Act, except to the extent that they may help to show that adherence to the text and structure would lead to a result “so bizarre” that Congress could not have intended it.’ Ibid., at 188 (quoting Demarest v. Manspeaker, 498 U.S. 191 (1991)). 82 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739 (1975). 83 See R. M. Mastro, ‘The Myth of the Litigation Explosion’, Fordham Law Review, 60 (1991), 199 (good description of the debates at the time in a critical review of a popular book by W. K. Olson, The Litigation Explosion: What Happened When America Unleashed the Lawsuit (New York: Dutton, 1991). 84 ‘Symposium on Civil Justice Reform: Foreword’, American University Law Review, 42 (1993), 1245. 85 See discussion of the Contract with America in the text at notes 90–93.

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The dissent emphasized the ‘remedial’ approach of the law,86 but expressed concern that the majority was now using a more current and narrower view of implied causes of actions to justify its decision.87 The dissent argued that the Court needed to look to 1934 views on the remedial purpose of the statute, which were more expansive.88

Congressional action From 1960 until 1994, Congress was controlled by the Democrats, who usually favoured private enforcement of the securities laws. During this period, no significant laws were enacted that affected federal securities class actions.89 In the election for Congress in 1994, the politics of class actions, particularly under federal securities laws, was brought to the forefront of political debate. The fraud on the market theory90 made it easier to bring class actions against companies that had allegedly issued material and misleading information to the markets and investors.91 Many 86 Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 197 (1994). 87 ‘While we are now properly reluctant to recognize private rights of action without an instruction from Congress, we should also be reluctant to lop off rights of action that have been recognized for decades, even if the judicial methodology that gave them birth is now out of favor. Caution is particularly appropriate here, because the judicially recognized right in question accords with the longstanding construction of the agency Congress has assigned to enforce the securities laws. Once again the Court has refused to build upon a “secure foundation . . . laid by others . . . ”’ Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 201 (1994) (Stevens, J. dissenting). 88 ‘At that time, [passage of the 1934 Act] and indeed until quite recently, courts regularly assumed, in accord with the traditional common-law presumption, that a statute enacted for the benefit of a particular class conferred on members of that class the right to sue violators of that statute. Moreover, shortly before the Exchange Act was passed, this Court instructed that such “remedial” legislation should receive “a broader and more liberal interpretation than that to be drawn from mere dictionary definitions of the words employed by Congress. There is a risk of anachronistic error in applying our current approach to implied causes of action, ante, at 1448, to a statute enacted when courts commonly read statutes of this kind broadly to accord with their remedial purposes and regularly approved rights to sue despite statutory silence.” Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 196–197 (1994) (citations omitted). 89 An exception was the enactment of the Insider Trading and Securities Fraud Enforcement Act of 1988, which added Section 20A to the 1934 Act and provided for an express private right of action for violations of federal securities laws involving illegal insider trading through tipping, with those traders being liable to ‘contemporaneous traders’ regardless of whether such plaintiff can prove reliance on any misinformation. 15 U.S.C. § 78t(d) (2010). 90 See Basic v. Levinson, 485 U.S. 224 (1988) discussed in the text at notes 67–74. 91 ‘These entities [accountants, security firms and high tech companies] felt that they had been unjustly victimized by lawsuits alleging “fraud by hindsight.” In such suits, a sudden drop in a company’s stock price was claimed to be evidence that the issuer and its agents

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of the companies sued were part of then-emerging growth industries, such as high-tech or biotechnology, so in addition to the concerns about lawyer-driven litigation, there were also ones expressed about the harm such litigation may inflict on emerging industries and economic growth.92 These concerns were reflected in the Republican’s ‘Contract with America’ that promised several legislative reforms, including some aimed at federal securities class actions.93 The new Congress with a Republican majority elected to the House of Representatives passed the Private Securities Litigation Reform Act of 1995 (PSLRA).94 The PSLRA contains a number of provisions which attempt to limit class actions under the federal securities laws;95 these include limitations on who can be a plaintiff, finding an appropriate representative plaintiff who may be a large institutional shareholder,96 the selection of attorneys, increased pleading requirements and possible

92

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had been covering up the bad news that led to the price drop.’ R. H. Walker, D. M. Levine and A. C. Pritchard, ‘The New Securities Class Action: Federal Obstacles, State Detours’, Arizona Law Review, 39 (1997), 641, 642. ‘Instead of spending money on research and development, or hiring more employees, or reducing the cost of their products, companies end up spending big bucks on strike suit insurance and legal fees. High-technology, biotechnology and other growth companies are hardest hit because their stocks are naturally volatile. Small- and medium-sized companies alone have paid out nearly $500 million dollars during the last two years (settling a case is often times cheaper and quicker than defending in court). The problem is rapidly getting worse: in the last five years, the number of strike suits has tripled.’ ‘The Common Sense Legal Reforms Act’, available at www.house.gov/house/Contract/legalrefd.txt. ‘Republican Contract with America’, available at www.house.gov/house/Contract/ CONTRACT.html. Pub. L. No. 104–67, 109 Stat. 737 (codified in scattered sections of the Securities Act of 1933 and the Securities Exchange Act of 1934, 15 U.S.C. §§ 77z-1, 78j-1, 78u-4, -5), 991. It was the only legislation during President Clinton’s terms where his veto was overturned. According to Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 83 (2006), ‘policy considerations similar to those that supported the Court’s decision in Blue Chip Stamps prompted Congress, in 1995, to adopt legislation targeted at perceived abuses of the class-action vehicle in litigation involving nationally traded securities. While acknowledging that private securities litigation was “an indispensable tool with which defrauded investors can recover their losses,” the House Conference Report accompanying what would later be enacted as the [PSLRA], identified ways in which the class-action device was being used to injure “the entire U.S. economy.” According to the Report, nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and “manipulation by class action lawyers of the clients whom they purportedly represent” had become rampant in recent years. Proponents of the Reform Act argued that these abuses resulted in extortionate settlements, chilled any discussion of issuers’ future prospects, and deterred qualified individuals from serving on boards of directors.’ (citations omitted). Pub. L. No. 104–67, §101, 109 Stat. 737, 738–742.

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fee shifting.97 In addition, the legislation protects forward-looking statements and projections by corporations by providing a safe harbour from litigation.98 The PSLRA policies have been reflected in subsequent decisions by the Court in limiting Rule 10b-5.99 Attempts by plaintiffs’ lawyers to avoid the restrictions of the federal law by bringing class actions under state securities laws were thwarted when Congress pre-empted many of these causes of action by enacting the Securities Litigation Uniform Standards Act of 1998.100 Continued concerns over state class actions resulted in Congress enacting the Class Action Fairness Act in 2005, which confers original jurisdiction over many class actions that could have been brought in state courts.101 The corporate financial scandals involving a number of large publicly traded corporations such as Enron and WorldCom led to the passage of the Sarbanes-Oxley Act of 2002 (SOX).102 Although concerns were expressed that cases such as Central Bank were harmful to protection of investors,103 the legislation did not overrule the case. However, by increasing disclosure requirements and reporting responsibilities of boards of directors and management, SOX may have created the possibility of more class action claims.104 In addition, the statute of limitations for Rule 10b-5 actions was 97 See A. R. Pinto and D. M. Branson, Understanding Corporate Law, 3rd ed. (New Providence: LexisNexis, 2009), §14.09. 98 The safe harbour applies to projections and other forward-looking statements, either written or oral, that later prove to be inaccurate, if they are immaterial or accompanied by cautionary statements or if the plaintiff cannot prove that the forward-looking statement was made with actual knowledge that the statement was false or misleading. 15 U.S.C. § 78u-5. 99 See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008). 100 Pub. L. No. 105–353, 112 Stat. 3227 (1998). The Court in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) indicated a broad view of the pre-emption because of the policy concerns over class actions reflected by the legislation. 101 J. J. Johnson, ‘Securities Class Actions in State Court’, University of Cincinnati Law Review (forthcoming). It has been suggested that these statutes intended to curb litigation may have resulted in more concentration among plaintiffs’ lawyers. See generally, H. M. Erichson, ‘CAFA’s Impact on Class Action Lawyers’, University of Pennsylvania Law Review, 156 (2008), 1618–1619. 102 Pub. L. No. 107–204, 116 Stat. 745 (2006); A. M. Tracey and P. Fiorelli, ‘Nothing Concentrates the Mind Like the Prospect of a Hanging: The Criminalization of the Sarbanes-Oxley Act’, Northern Illinois University Law Review, 25 (2004), 125 (detailing history of the illegal acts that led to the creation of SOX). 103 C. Gerner-Beuerle, ‘The Market for Securities and Its Regulation through Gatekeepers’, Temple International and Comparative Law Journal, 23 (2009), 317, 364. 104 K. T. Cowart, ‘The Sarbanes Oxley Act: How a Current Model in the Law of Unintended Consequences May Affect Securities Litigation’, Duquesne Law Review, 42 (2004), 293, 302.

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expanded to the earlier of two years after discovery of the facts constituting the violation or five years after the violation.105

The Roberts Court (2005–present) The Roberts Court has had a number of securities law decisions,106 including two significant ones involving the policy issues related to class actions.107 The first such case decided in 2008 was Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.,108 which involved potential liability for defendants who were alleged to be part of a ‘scheme to defraud’ because they recklessly allowed the dissemination of misstatements attributable to others.109 The Court earlier in Central Bank110 had found no aiding and abetting liability under Rule 10b-5, but left the opportunity to sue some secondary actors if they are acting as a primary violator of the Rule.111 Plaintiffs tried to persuade the Court that ‘scheme liability’ involved primary and not secondary liability. In Stoneridge, the Court rejected this view and emphasized the reliance requirement under Rule 10b-5 for private plaintiffs.112 Thus, the need for plaintiffs to show reliance on a defendant’s actions meant that a secondary actor can be liable

105 28 U.S.C. § 1658. Previously the statute of limitations had been one year after discovery or three years after the fraud occurred. 106 A. C. Pritchard, ‘Securities Law in the Roberts Court: Agenda or Indifference?’ unpublished paper, available at http://papers.ssrn.com/sol3/papers.cfm?abstract id= 1691683. 107 The Court decided a number of cases that involved or implicated private class actions but the justices did not discuss the policy issues related to private class actions. In some opinions the Court took a position that was favourable to class actions and consistent with Court precedent. For example, in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S., 131 S. Ct. 2179, L. Ed. 2d, 2011 WL 2175208 (2011), at *5, a unanimous Court held, consistent with Basic v. Levinson, 485 U.S. 224 (1988), the plaintiffs need not prove loss causation in order to be certified as a class action so long as loss causation can be established at trial. See also, e.g. Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. —, 131 S. Ct. 1309 (2011) (Court continues to use Basic’s definition of materiality). 108 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008). 109 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 168 (2008). 110 Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994). 111 Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 191 (1994). 112 The Court made clear that it would not expand liability under Rule 10b-5 but recognized its earlier decisions in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) and Basic v. Levinson, 485 U.S. 224 (1988) that created rebuttable presumptions of reliance. This may limit any expansion of those presumptions to other cases alleging fraud created the market, discussed in note 71.

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only if the secondary actor itself made a misstatement113 or engaged in a manipulative act that is disclosed to the public.114 The majority decision saw ‘scheme liability’ as similar to aiding and abetting in Central Bank and thus not subject to Rule 10b-5, but it also was concerned that acceptance of the ‘scheme liability’ theory could expand liability into state law concerns.115 The Court also concluded that the fact that Congress in 1995 gave the SEC the power to use aiding and abetting while withholding that power from private plaintiffs in the PSLRA was evidence of congressional intent to limit attempts to expand liability. However, policy issues relating to class actions again became an important rationale for the Court’s decision. The Court reiterated concerns in Blue Chip Stamps over extensive discovery and the potential in a lawsuit 113 In the recent 5–4 decision of Janus Capital Group Inc. v. First Derivative Traders, 564 U.S. —, 131 S. Ct. 2296 (2011), the Court continued to restrict liability by narrowing the possible defendants to those who actually ‘make’ misleading statements and to those who have ultimate authority over the statement. The Court did not address policy issues relating to class actions but based the decision upon statutory interpretation. The dissent viewed the narrow definition of ‘make’ as incorrect and inconsistent with prior cases. They thought the defendant who acted as investment advisor and controlled the mutual fund that issued the statement could also be viewed as a primary violator under Rule 10b-5. The case engendered a good deal of commentary. Compare Editorial, ‘So No One’s Responsible?’, New York Times, 14 June 2011 (‘the Supreme Court has made it much harder for private lawsuits to succeed against mutual fund malefactors, even when they have admitted to lying and cheating’) with ‘A Thwarted Liability Scheme: The Supremes Dismiss Another Plaintiffs Bar Money Raid – Barely’, Wall Street Journal, 14 June 2011, available at http://online.wsj.com/ article/SB10001424052702303714704576383640212008736.html (‘The Court’s ruling continues a string of recent cases that put limits on trial-bar marauding . . . ’). 114 The SEC usually supports an expansive view of the securities law, but in this case its decision to file a brief in support of the plaintiffs was overruled by the Bush administration when the Solicitor General who argues for the government before the Supreme Court supported the defendants. Pritchard, ‘Securities Law in the Roberts Court’, 41. See also P. Dillion and C. M. Cannon, Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees (New York: Broadway Books, 2010), pp. 424–428 (describing the split with the SEC and explaining that concerns with class actions outweighed the post-Enron belief of some that litigation was needed). As a result of the rejection of scheme liability in Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), some of the class action litigation surrounding Enron was dismissed. Ibid., 442–443. 115 ‘Were the implied cause of action to be extended to the practices described here, however, there would be a risk that the federal power would be used to invite litigation beyond the immediate sphere of securities litigation and in areas already governed by functioning and effective state-law guarantees.’ Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 162–163 (2008).

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for uncertainty and disruption, which can lead to extorted settlements, which the Court then weighed against extending possible liability. Under such expanded liability, parties who contract with the company would have to raise their cost of doing business because of the risk of being included in a potential lawsuit as an aider and abettor. The Court also expressed concerns for the first time that overseas firms could be deterred from doing business in the United States as a result of such potential liability and the accompanying costs.116 In addition, a rise in the costs of being a public company in the United States may move securities offerings overseas. These added concerns about the effect of securities class actions on our securities markets, such as ‘vexatious litigation’ raised in Blue Chip Stamps and business competitiveness in Central Bank, were major concerns expressed in the politics of that time.117 The dissent disagreed with the majority’s broad reading of Central Bank, the use of reliance and concerns about state law. Further, the fact Congress did not reverse Central Bank in passing the PSLRA did ‘not mean that Congress wanted to exempt from liability the broader range of conduct that today’s opinion excludes’.118 However, as to policy issues raised by the majority, the dissent saw no harm to American competitiveness but 116 This theme was subject to a report issued at the time. See Dept of Commerce, ‘The U.S. Litigation Environment and Foreign Direct Investment’ (2008). 117 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 164–165 (2008). This concern in the decision reflected discussions and studies such as the Paulson Plan and the 2007 Bloomberg-Schumer report on globalization and the competitive position of the U.S. equity markets and federal securities litigation. E. C. Burch, ‘Securities Class Actions as Pragmatic Ex Post Regulation’, University of Georgia, 43 (2008), 63, 65. Treasury Secretary Henry M. Paulson in 2006 remarked in a speech, ‘[s]ome observers cite the decline of foreign IPOs in the U.S. market as an indicator of the competitiveness of our capital markets. We should go beyond the numbers and examine some of the possible reasons for this decline. Several factors contribute to the recent trends, including public policies in other countries. But several other contributing factors offer a framework to assess our own capital markets. These include: [. . . . A] legal system in the U.S. that exposes market participants to significant litigation risk.’ Remarks by Treasury Secretary H. M. Paulson on the Competitiveness of U.S. Capital Markets, Economic Club of New York (20 November 2006) www.iasplus.com/usa/0611paulson.pdf. ‘Private securities class action lawsuits pose an immediate and alarming threat to the health of the U.S. economy. Massive and abusive securities litigation is eroding the competitiveness of U.S. capital markets at the same time those markets face increased challenges from foreign competitors.’ U.S. Chamber Institute for Legal Reform, ‘Securities Class Action Litigation: The Problem, Its Impact, and the Path to Reform’ (2008), 1 (report). 118 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 175–176 (2008).

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instead stressed that ‘investor faith in the safety and integrity of our markets is their strength. The fact that our markets are the safest in the world has helped make them the strongest in the world.’119 The decision also reflected clearly different attitudes towards implied causes of action, the history of such causes of action and whether implied causes of action should be viewed restrictively or expansively.120 The majority clearly signalled that implied causes of action under Rule 10b5 would be viewed narrowly.121 The dissent saw the majority view as being hostile towards a Rule 10b-5 private cause of action and was of the opinion that narrower views of private causes of action as expressed in the majority decision do not reflect the fact that the securities laws were passed during an era reflecting a long history of judicial activism in the common law tradition.122 The second important case, Morrison v. National Australia Bank,123 decided in 2010 is illustrative of the Court’s continuing hostility towards an expansive view of Rule 10b-5 in the context of private litigation. The Court in Morrison overruled long-standing Second Circuit jurisprudence124 and held that Section 10(b) of the Exchange Act does not apply to transactions which take place outside the United States. The decision was based upon a long-standing view that legislation is presumed 119 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 175–176 (2008). 120 See notes 87–88 which discuss this point. 121 The Court followed Stoneridge’s view of giving ‘narrow dimensions . . . to a right of action Congress did not authorize when it first enacted the statute and did not expand when it revisited the law’ (citing Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 167 (2008). 122 ‘Fashioning appropriate remedies for the violation of rules of law designed to protect a class of citizens was the routine business of judges. While it is true that in the early days state law was the source of most of those rules, throughout our history – until 1975 – the same practice prevailed in federal courts with regard to federal statutes that left questions of remedy open for judges to answer.’ Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 177–178 (2008) (citation omitted). 123 Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010). 124 Over the years, the Second Circuit had applied Rule 10b-5 to transnational securities transactions using either an ‘effects’ or ‘conduct’ test. Morrison v. National Australia Bank, 130 S. Ct. 2869, 2890 (2010). The Second Circuit located in New York, the ‘[n]ation’s financial center’, has been the significant court in legal developments under federal securities laws. According to the concurrence, ‘[w]hen we deal with private actions under Rule 10b-5,’ then-Justice Rehnquist wrote many years ago, ‘we deal with a judicial oak which has grown from little more than a legislative acorn’. (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975)). The ‘Mother Court’ of securities law tended to that oak; Morrison v. National Australia Bank, 130 S. Ct. 2869, 2890 (2010).

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to apply within the United States unless there was contrary congressional intent.125 In addition, the existing judicial tests for extraterritorial application of federal securities laws were found difficult to administer and unpredictable.126 Relying on congressional silence and the general presumption against federal law having extraterritorial effect, the Court held that there was no affirmative indication that Section 10(b) applies extraterritorially and Rule 10b-5 should apply only to transactions in securities listed on domestic exchanges and domestic transactions in other securities.127 This particular case was not difficult to exclude because all the parties were foreign and acted outside of the Unites States. However, the opinion established a broad rule that could preclude class actions by U.S. investors who trade overseas from receiving long established protections under Rule 10b-5.128 But the majority opinion also further justified its holding by expressing hostility to class actions and their lawyers.129 The Court added that ‘[w]hile there is no reason to believe that the United States has become the Barbary Coast for those perpetrating frauds on 125 Morrison v. National Australia Bank, 130 S. Ct. 2869, 2878–2879 (2010). 126 See generally A. R. Pinto, ‘The Internationalization of the Hostile Takeover Market: Its Implications for Choice of Law in Corporate and Securities Law’, Brooklyn Journal of International Law, 16 (1990), 55 (discussing different tests the courts had used for extraterritorial application of the federal securities laws). 127 In response to Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), Congress immediately reacted by enacting Section 929P(b) of the Dodd-Frank Act that amended the 1934 Act and allows the SEC or the U.S. Department of Justice to bring enforcement actions in instances where (i) there is ‘conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States’; or (ii) ‘conduct occurring outside the United States that has a foreseeable substantial effect within the United States’. Dodd-Frank Act, § 929P(b). Thus, for purposes of actions brought by the SEC or the Department of Justice, DoddFrank effectively restores the ‘conduct and effects’ test, which examines where a supposed fraud was perpetrated and where the effects of such fraud would be felt. This will not affect private actions, although a provision of the Act requires an SEC study of applying the above test to private actions. Dodd-Frank Act, § 929Y. 128 E.g., in Cornwell v. Credit Suisse Group, No. 08–3758, 2010 WL 3069597, at *2–3 (S.D.N.Y. 27 July 2010) the court held, citing Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), that Section 10(b) does ‘not apply to transactions involving (1) a purchase or sale, wherever it occurs, of securities listed only on a foreign exchange, or (2) a purchase or sale of securities, foreign or domestic, which occurs outside the United States’. 129 Class action lawyers have never been held in high esteem by those concerned about such litigation. In 2007–2008 there was the indictment and eventual guilty pleas by Mel Weiss and William Lerach, two of the most prominent class action lawyers, for paying plaintiffs to serve as plaintiffs in many class actions they brought. M. A. Perino, ‘The Milberg Weiss Prosecution: No Harm, No Foul?’, AEI Legal Center Briefly, 11 (2008), 9. There was widespread coverage of the cases and Lerach, which was the subject of Dillion and Cannon, Circle of Greed.

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foreign securities markets, some fear that it has become the Shangri-La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets’.130 The concurrence pointed out that: [t]he real motor of the Court’s opinion, it seems, is not the presumption against extraterritoriality but rather the Court’s belief that transactions on domestic exchanges are ‘the focus of the Exchange Act’ and ‘the objects of [its] solicitude.’ In reality, however, it is the ‘public interest’ and ‘the interests of investors’ that are the objects of the statute’s solicitude.131

Conclusion Class actions under SEC Rule 10b-5 can be viewed as a solution to the problems (1) that individual investors often have insufficient claims to justify the costs associated with litigating their rights, and (2) that the government has insufficient resources to pursue all wrongdoing and may have different priorities. Thus private enforcement is a collective action mechanism that has often been viewed as a necessary supplement to government regulation and enforcement aimed at deterring violations of the law and compensating victims of securities fraud. Because the legislation that allowed for the creation Rule 10b-5 was broadly written and not detailed, private litigation also created the elements of the cause of action designed to protect investors and the markets. Through this lens, class actions under Rule 10b-5 were designed to enhance access to justice and serve multilayer interests by protecting societal interests. But class actions under SEC Rule 10b-5 have also engendered criticisms and concerns about the role of entrepreneurial lawyers and the effect of the litigation on business and competitiveness of U.S. stock markets This chapter described how the Court initially viewed these class actions and the law more broadly based upon the need for flexibility to promote the remedial purposes of the law in order to protect investors and the markets. Later, a political shift in society and on the Court reflecting concerns about litigation abuses and judicial activism and a more probusiness attitude132 moved the Court to narrow the reach of the law and 130 Morrison v. National Australia Bank, 130 S. Ct. 2869, 2886 (2010). 131 Morrison v. National Australia Bank, 130 S. Ct. 2869, 2894 (2010). 132 L. Epstein, W. M. Landes and R. A. Posner, ‘Is the Roberts Court Pro-Business?’, available at http://epstein.law.northwestern.edu/research/RobertsBusiness.pdf (study showing a more pro-business bias in the Roberts Court when compared with previous Courts with that trend beginning with the Burger Court).

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these class actions. Over time concerns about economic competitiveness and global issues involving U.S. stock markets also were important to the Court. This history of the development of these private causes of action and the Court’s interpretation of SEC Rule 10b-5 illustrate how the politics of class actions and shifting attitudes and concerns reflected in society influenced its decisions and development of the law.

PAR T V Indirect purchasers and collective actions

11 Indirect purchaser suits under the class action fairness act Reconciling multilayer interests in antitrust litigation

william h. page *

Introduction Consumers, the intended beneficiaries of American antitrust law,1 often cannot sue for damages from illegal price fixing or monopolization. Under Hanover Shoe, direct purchasers from offenders have the right to sue for the full overcharge, even if they ‘passed on’ all or part of it to indirect purchasers by increasing their own prices;2 under Illinois Brick, the indirect purchasers, including consumers, have no right to recover for their harms.3 The Supreme Court reasoned that this allocation of rights would promote more effective deterrence at lower cost. The federal antitrust laws, the Court explained, ‘will be more effectively enforced by concentrating the full recovery for the overcharge in the direct purchasers rather than by allowing every plaintiff potentially affected by the overcharge to sue only for the amount it could show was absorbed by it’.4 To allow indirect purchaser actions, the Supreme Court predicted, would lead to ‘massive multiparty litigation involving many levels of distribution and including large classes of ultimate consumers remote from the Defendants’.5 * I thank Shane Bryant for research assistance and Bob Lande and Andy Gavil for helpful comments. 1 See Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979) (stating the law is ‘a consumer welfare prescription’) (quoting R. H. Bork, The Antitrust Paradox (New York: Basic Books, 1978), p. 66). 2 Hanover Shoe, Inc. v. United Shoe Machinery Corporation, 392 U.S. 481 (1968). 3 Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). 4 Illinois Brick Co. v. Illinois, 431 U.S. 720, 735 (1977). 5 Illinois Brick Co. v. Illinois, 431 U.S. 720, 740 (1977). Scholars have differed over the wisdom of the Illinois Brick rule. See American Bar Association, Section of Antitrust Law, Indirect Purchaser Litigation Handbook (Chicago: ABA Section Antitrust Law, 2007), pp. 358–360.

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Numerous recommendations to overturn Illinois Brick at the federal level have failed, most recently a proposal by the Antitrust Modernization Commission in 2007.6 About half of the states, however, now allow indirect purchaser suits, either by statute7 or judicial decision.8 The rationale for these laws is to provide consumers access to justice – some form of compensation for passed-on overcharges through class action recoveries.9 (Some states provide for parens patriae suits by state attorneys general as another way of obtaining recoveries on behalf of state citizens.)10 Until 2005, indirect purchaser class actions were filed and remained almost exclusively in state courts while direct purchaser class actions alleging the same core conduct proceeded in federal court. Because federal courts usually lacked subject matter jurisdiction over the state-law claims,11 and state courts lacked 6 Antitrust Modernization Commission, ‘Report and Recommendations’, available at www. govinfo.library.unt.edu/amc/report recommendation/amc final report.pdf, (2007), pp. 265–283. For discussion, see W. H. Page, ‘Class Interpleader: The Antitrust Modernization Commission’s Recommendation to Overrule Illinois Brick’, Antitrust Bulletin, 53 (2008), 725. 7 See Sullivan v. DB Investments, Inc., 613 F. 3d 134, 147 (3d Cir. 2010) (listing state statutes allowing indirect purchaser suits), vacated on other grounds, 619 F. 3d 287 (3d Cir. 2010). See also E. J. McCarthy, G. S. Seador and C. R. Price (eds.), Indirect Purchaser Lawsuits: A State-by-State Survey (Chicago: American Bar Association, 2010) (cataloguing the laws of every state); American Bar Association, Indirect Purchaser Litigation Handbook, pp. 305–341; R. H. Lande, ‘New Options for State Indirect Purchaser Litigation: Protecting the Real Victims of Antitrust Violations’, Alabama Law Review, 61 (2010), 447 (classifying statutes and recommending best formulations). 8 Sullivan v. DB Investments, Inc., 613 F. 3d 134, 147 (3d Cir. 2010) (listing state decisions allowing indirect purchaser suits). The federal antitrust laws do not pre-empt these state remedies. California v. ARC America Corp., 490 U.S. 93 (1989). 9 K. J. O’Connor, ‘Is the Illinois Brick Wall Crumbling?’, Antitrust, 15 (Summer 2001), 34, 34. 37. Some supporters of the laws argued that direct purchasers would not sue for fear of offending their suppliers. As I show below, however, direct purchasers almost always sue for the same offenses as indirect purchasers. 10 See e.g. In re TFT–LFT (Flat Panel) Antitrust Litigation, MDL No. 1827, 2011 WL 1399441 (N.D. Cal. 2011) (staying parens patriae classes actions for the benefit of natural persons on the ground that they were duplicative of indirect purchaser suits by purchasers in the same states). 11 See A. I. Gavil, ‘Thinking Outside the Illinois Brick Box: A Proposal for Reform’, Antitrust Law Journal, 76 (2009), 167. Some federal courts asserted diversity jurisdiction where it was possible that one of the named plaintiffs could recover the jurisdictional amount of $75,000, relying on Exxon Mobil Corp. v. Allapattah Services, Inc., 545 U.S. 546 (2005). See e.g. Aikens v. Microsoft Corporation, 159 Fed. Appx. 471 (4th Cir. 2005) (asserting supplemental federal jurisdiction over the state law claims under 29 U.S.C. § 1367(a)). See also Sullivan v. DB Investments, Inc., 613 F. 3d 134, 147 (3d Cir. 2010) (noting that the district court had asserted supplemental jurisdiction).

indirect purchaser suits under class action fairness act 277

subject matter jurisdiction over the federal claims, no single court could hear all of the cases.12 In earlier studies of indirect purchaser litigation, I found that this dispersed and inefficient system13 provided little benefit to consumers who actually paid an overcharge.14 First, many courts declined to certify consumer suits as class actions under the standards of the applicable rules of civil procedure15 because it was impractical to prove impact on consumers on a class-wide basis; individual issues of impact, in other words, predominated over class issues.16 Although direct purchasers usually suffer class-wide injury, ‘the problem of proof in an indirect purchaser case is intrinsically more complex because the damage model must account for the actions of innocent intermediaries who allegedly passed on the overcharge’.17 The class certification inquiry is crucial because it usually determines the outcome of the case: If the case is not certified, plaintiffs (especially if they are consumers) will not be able to proceed individually, because their claims are too small to justify the suit; if the case is certified, the defendants will typically be forced to settle.18 Second, even courts that did certify classes found it impractical to distribute most of the settlement funds to consumers who actually suffered harm, instead relying on dubious coupon and cy-pr`es distributions. Indirect purchaser suits provided 12 See A. I. Gavil, ‘Federal Judicial Power and the Challenges of Multijurisdictional Direct and Indirect Purchaser Antitrust Litigation’, George Washington Law Review, 69 (2001), 860, 863 (‘Multidistrict litigation, therefore, has become more multijurisdictional, and the procedural means for capturing the efficiencies to be gained through coordination are far less certain.’). 13 See e.g. D. Baker, ‘Hitting the Potholes on the Illinois Brick Road’, Antitrust, 17 (2002), 14, 17 (arguing that state indirect purchaser suits have ‘produced duplicative litigation and recoveries’); Gavil, ‘Federal Judicial Power’, 863 (arguing that the dispersal of jurisdiction over direct and indirect purchaser claims ‘imposes unnecessary litigation burdens on the parties and leads to unjustifiable systemic inefficiencies’). 14 See generally J. E. Lopatka and W. H. Page, ‘Indirect Purchaser Suits and the Consumer Interest’, Antitrust Bulletin, 48 (2003), 531. 15 Fed. R. Civ. P. 23(c) and its counterparts under state law. 16 Fed. R. Civ. P. 23(b)(3) (requiring that ‘questions of law or fact common to class members predominate over any questions affecting only individual members’). See generally W. H. Page, ‘The Limits of State Indirect Purchaser Suits: Class Certification in the Shadow of Illinois Brick’, Antitrust Law Journal, 67 (1999), 1. 17 Page, ‘Limits’, 12. 18 Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F. 3d 154, 162 (3d Cir. 2001) (observing that ‘denying or granting class certification is often the defining moment in class actions (for it may sound the “death knell” of the litigation on the part of plaintiffs, or create unwarranted pressure to settle nonmeritorious claims on the part of defendants’)).

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no added deterrence because direct purchasers almost always sued for the full overcharge.19 In 2005, Congress enacted the Class Action Fairness Act20 in an effort to limit the obvious costs of duplicative state law class actions.21 That statute’s most important innovation was to relax the criteria for federal diversity jurisdiction in ways that permit federal courts to hear most antitrust class actions brought under state law.22 State law indirect purchaser class actions are now almost always either filed in federal court by plaintiffs or removed there by defendants.23 Once pending in federal district courts, class actions under numerous states’ laws are often consolidated for pretrial proceedings along with direct purchaser actions based on the same conduct.24 Under this mechanism, federal courts applying primarily federal standards determine the suitability of the putative classes representing all of the multilayer interests in the case for class treatment. In this chapter, I consider whether these procedural and jurisdictional changes have improved the performance of indirect purchaser class action litigation in the United States. I examine all of the reported decisions on class certification since 2005, comparing the results in direct and indirect purchaser classes where possible. I find that the federal courts have certified these class actions at roughly the same rate as state courts in the earlier periods. In virtually all of the controversies, both direct and indirect purchasers sued; courts certified almost all of the direct purchaser classes, but only slightly more than half of the indirect purchaser classes. In the indirect purchaser decisions, the grounds for certification or refusing

19 Lopatka and Page, ‘Indirect Purchaser Suits’, 561. 20 Class Action Fairness Act, Pub. L. 109–2, 119 Stat. 4 (2005) (amending, inter alia, 28 U.S.C. §§ 1332 and 1453). 21 For early discussion, see G. G. Wrobel and M. J. Waters, ‘Early Returns: The Impact of the Class Action Fairness Acton Federal Jurisdiction over State Law Class Actions’, Antitrust (Fall 2005), 45; B. V. Spiva and J. K. Tycko, ‘Indirect Purchaser Litigation on Behalf of Consumers After CAFA’, Antitrust (Fall 2005), 12; I. Simmons and C. E. Borden, ‘The Defense Perspective: The Class Action Fairness Act of 2005 and State Law Antitrust Actions’, Antitrust (Fall 2005), 19; C. B. Casper, ‘The Class Action Fairness Act’s Impact on Settlements’, Antitrust (Fall 2005), 26; R. D. Blair and C. A. Piette, ‘Coupons and Settlements in Antitrust Class Actions’, Antitrust (Fall 2005), 32; C. G. Vergonis and E. L. Fountain, ‘Supplemental Jurisdiction in Diversity-Only Class Actions After Exxon Mobil Corp. v. Allapattah Services, Inc.’, Antitrust (Fall 2005), 38. 22 Under the statute, there is diversity jurisdiction if any member of the plaintiff class is a citizen of a different state than any defendant, and if the aggregate amount in controversy of the class claims is $5 million. 28 U.S.C. § 1332(d) (2008). See Spiva and J. K. Tycko, ‘Indirect Purchaser Litigation’, 14–15 (explaining statutory changes). 23 See 28 U.S.C. § 1453 (2006). 24 28 U.S.C. § 1407(a) (2006).

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to certify were essentially the same as the state courts applied in the earlier periods. Although the consolidation of multiple state law class actions in federal court for pretrial proceedings has undoubtedly reduced the direct costs of private enforcement, the cases give us little reason to think that substantially more consumers are actually receiving meaningful access to justice from the process. Direct purchasers, by contrast, are evidently well situated and motivated to bring suit for the full overcharge and thus impose the appropriate deterrent penalty. American antitrust law should return to the Illinois Brick standard at both the state and federal level. Other jurisdictions around the world should avoid recognition of claims by indirect purchasers. More effective deterrence would provide better access to justice for all of the layers of interests harmed by overcharges.

Class certification in pre-CAFA indirect purchaser litigation Over a decade ago, I published a study of class certification decisions in state indirect purchaser litigation.25 I found that states differed markedly in how they approached the key question of whether class issues predominated over individual issues, as the rules governing class certification require.26 Some courts took what I called the ‘sanguine’ view of the problems of proof of impact. Valuing ‘compensation over deterrence, equity over efficiency, and approximation over accuracy’, sanguine courts certified classes with little examination of the plaintiff ’s evidence of class-wide harm.27 Other courts, however, took a ‘sceptical’ view of the issue. Valuing ‘deterrence over compensation, efficiency over equity, and accuracy over approximation’, sceptical courts focused on numerous problems of proof that a theory of class-wide harm would have to address.28 Sceptical courts thus required plaintiffs, in their proposals for class treatment, to address the very problems with indirect purchaser standing that troubled the Supreme Court in Illinois Brick. In most instances, the courts taking the sceptical view denied class certification. The difference between the sanguine and sceptical views was apparent in how courts resolved the dilemma29 of conducting a ‘rigorous 25 See Page, ‘Limits’. See also C. S. Coutroulis and D. M. Allen, ‘The Pass-On Problem in Indirect Purchaser Class Litigation’, Antitrust Bulletin, 44 (1999), 179, 184–186. 26 Page, ‘Limits’, 6. 27 Page, ‘Limits’, 18–19. 28 Page, ‘Limits’, 17–18. 29 R. G. Bone and D. S. Evans, ‘Class Certification and the Substantive Merits’, Duke Law Journal, 51 (2002), 1268 (‘Ever since Falcon, the federal courts have struggled to chart a middle course between Falcon’s requirement of a rigorous analysis and Eisen’s prohibition

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analysis’ of whether plaintiffs had complied with the standards for certification,30 but not a ‘preliminary inquiry into the merits of the suit’.31 Sanguine courts resolved ‘any doubts as to whether the class should be granted certification . . . in favor of certification’32 and refused to choose at the certification stage between opposing expert claims.33 Sceptical courts, in contrast, resisted theoretical generalizations about passing-on as ‘facile, abstract, and based on unrealistic assumptions’ while accepting defence experts’ evidence of individualized harm as ‘giving an accurate picture of a complex commercial reality’.34 I also found that some class characteristics made certification less likely under any standard. For example, if evidence of the time, quantities and prices of relevant purchases is lacking, as it often is in consumer markets, classes were difficult to certify.35 Certification was also less likely if prices changed frequently, were negotiable by intermediate purchasers with bargaining power or were passed through more than one level of indirect purchasers.36 And certification was less likely if the product was heterogeneous or was an ingredient in more complex products downstream from the offenders.37 Because plaintiffs’ counsels are well aware of these problems, I surmised that some indirect purchaser claims are never

30 31

32 33

34 35 36 37

of a preliminary inquiry into the merits.’). See also Karofsky v. Abbott Laboratories, No. CV-95–1009, at slip op. 6 (Me. Super. Ct. Cumberland Co. 1997) (observing that the court must ‘walk the fine line between a rigorous analysis of the basic claims and methods of proof presented by the plaintiffs and the inappropriate delving into an assessment of the merits of those claims’). General Telephone Co. v. Falcon, 457 U.S. 147, 161 (1982). Eisen v. Carlisle and Jaquelyn, 417 U.S. 156, 177 (1974). Examining the plaintiff’s evidence may involve ‘entanglement with the merits’. Coopers & Lybrand v. Livesay, 437 U.S. 463, 469 (1978). See also United Steel, Paper and Forestry, Rubber, Mfg. Energy, Allied Indus. & Serv. Workers Int’l Union, AFL-CIO v. ConocoPhillips Co., 593 F. 3d 802, 808 (9th Cir. 2010) (‘Although certification inquiries such as commonality, typicality, and predominance might properly call for some substantive inquiry, “[t]he court may not go so far . . . as to judge the validity of these claims”’.) (citation omitted); Earnest v. Amoco Oil Co., 859 So. 2d 1255, 1258 (Fla. App. 2003) (‘In conducting its “rigorous analysis,” the trial court may look beyond the pleadings and, without resolving disputed issues, determine how disputed issues might be addressed on a class-wide basis.’). Page, ‘Limits’. See e.g. Goda v. Abbott Laboratories., No. Civ. A. 01445–96, 1997 WL 156541, at *79 and *144 (D.C. Super. Ct. 1997) (noting that it was ‘not permitted to assess the persuasive force of the plaintiff’s expert compared to the defendant’s expert’). Page, ‘Limits’, 24. See Durden v. Abbott Laboratories., No. CV 93–663, at slip op.8 (Ala. Cir. Ct. 1996) (characterizing the plaintiff’s expert’s theory as ‘evidentiary voodoo’). Page, ‘Limits’, 31–33. Page, ‘Limits’, 27–34. Page, ‘Limits’, 31.

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Table 11.1. Indirect purchaser class certification I

Pre-1999 1999–2004

Total

Total Non-Microsoft Microsoft

Decisions

Granted

Rate

27 27 13 14 54

10 18 7 11 28

.37 .67 .54 .79 .52

filed, even if indirect purchasers, including consumers, actually suffered harm.38 The rates of certification also varied over time. In my study of the state indirect purchaser decisions before 1999, I found that courts granted certification slightly more than one-third of the decisions. In some states that adopted the sceptical view, certification was all but impossible; in others the outcome depended on the nature of the product, among other economic factors. I predicted that, as courts became more familiar with the issues in these cases, indirect purchaser litigation might begin to wane in importance (and cost). In the short term, however, the opposite occurred. In a later study, I found that, from 1999 to 2004, courts granted certification of indirect purchaser classes at almost twice the rate as in the early period.39 On closer examination, however, I found that much of this increase was attributable to the Microsoft indirect purchaser litigation. Table 11.1 summarizes the rates in two time periods.40 Of the fourteen Microsoft indirect purchaser cases, state courts certified classes in eleven instances, almost 80 percent. I argued that these cases had special characteristics that led more courts, rightly or wrongly, to favour class treatment.41 All of the states that had adopted the sanguine view in earlier cases certified their Microsoft classes. Three states that had adopted the sceptical view in earlier cases denied certification. But some previously sceptical states also certified their Microsoft classes. The most 38 See also D. A. Crane, ‘Optimizing Private Antitrust Enforcement’, Vanderbilt Law Review, 63 (2010), 675, 682 (observing that determining which ‘groups suffered the real economic harm is often difficult or impossible given the complexity and variability of the relevant economic relationships’). 39 W. H. Page, ‘Class Certification in the Microsoft Indirect Purchaser Litigation’, Journal of Competition Law & Economics, 1 (2005), 303, 310. 40 Page, ‘Class Certification’. 41 Page, ‘Class Certification’, 311–313.

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dramatic of these was Minnesota, in which the court granted certification, even though the state’s courts had denied certification in all nine of their previous indirect purchaser cases. The court distinguished the earlier cases by noting that, in Microsoft, there was only one alleged offender making well-documented sales of a small number of products relatively infrequently to each class member.42 The court accepted as plausible the plaintiff’s expert’s very general proposed methodology for proof of harm. I noted that the court incorrectly interpreted the district court in the government’s Microsoft case as finding that Microsoft’s conduct caused an overcharge to consumers.43

Class certification in indirect purchaser litigation after CAFA The Class Action Fairness Act44 became effective on 18 February 2005. Among other innovations, CAFA relaxes the requirements for federal diversity jurisdiction over state law class actions ‘commenced’ after its effective date.45 Plaintiffs can now file more state law indirect purchaser class actions in federal court and defendants can remove more of them to federal court from state court.46 Indeed, on the evidence of reported cases 42 Gordon v. Microsoft Corporation, No. 00–5994, 2001 WL 366432, at *8–*12 (Minn. Dist. Ct. 2001). 43 Gordon v. Microsoft Corporation, No. 00–5994, 2001 WL 366432, at *9 (Minn. Dist. Ct. 2001). 44 Class Action Fairness Act of 2005, Pub. L. No. 109–002 (codified at 28 U.S.C. §§ 1332, 1453, 1711–1715). 45 Class Action Fairness Act of 2005, Pub. L. No. 109–002 (codified at 28 U.S.C. §§ 1332, 1453, 1711–1715) § 9, 111 Stat. 14. There is still a dispute in the federal courts over when an action commences for purposes of this section of the Act. See e.g. Admiral Ins. Co. v. Abshire, 574 F. 3d 267 (5th Cir. 2009). One federal court, for example, rejected removal of a Microsoft indirect purchaser action, finding that it had commenced before 18 February 2005. Comes v. Microsoft Corporation, 403 F. Supp. 2d 897 (S.D. Iowa 2005). The details of these disputes are interesting, but not relevant to my purpose, which is to consider the effect of the shift to a federal forum on class certification in indirect purchaser cases. On that issue, it is irrelevant whether a federal jurisdiction rested on CAFA or on another ground. Consequently, in my discussion, I treat all federal indirect purchaser cases since 2004 the same. 46 In re Graphics Processing Units Antitrust Litigation, 253 F.R.D. 478, 500 (N.D. Cal. 2008) (observing that ‘indirect-purchaser class actions that have been heard in federal courts . . . have increased in number since the passage of the Class Action Fairness Act in 2005’); In re Flonase Antitrust Litigation, 692 F. Supp. 2d 524, 531 (E.D. Pa. 2010) (asserting diversity jurisdiction under CAFA, 28 USC § 1332(d)(2)); In re OSB Antitrust Litigation, No. 06–826, 2007 WL 2253425, at *3 (E.D. Pa. 2007) (same). Cf. Bell v. Hershey Co., 557 F. 3d 953 (8th Cir. 2009) (holding that where the complaint in state court alleges damages below CAFA’s jurisdictional amount of $5 million, the defendant must show by

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after CAFA, state courts hear very few indirect purchaser class actions.47 The Judicial Panel on Multidistrict Litigation consolidates federal law direct purchaser class actions and state law indirect purchaser class actions in the same federal district court for pretrial proceedings.48 This procedural step reduces duplication of the costs of the administration of class actions, particularly discovery. Equally important, a federal district court now typically resolves the issues of the sufficiency of the complaint and of class certification under federal standards.49 In this section, I consider whether the enactment of CAFA and the consequent shift of most class certification decisions to federal court have changed the picture of indirect purchaser litigation. During the period of my study, federal courts certified indirect purchaser classes (including a preponderance of the evidence that the amount in controversy meets the jurisdictional minimum). 47 Only four of the twenty-two reported decisions on certification of indirect purchaser classes were by state courts. See Anderson Contracting, Inc. v. DSM Polymers, Inc., 776 N.W. 2d 846 (Iowa 2009); Wright v. Honeywell Int’l, Inc., No. 201–11-04 Oecv, 2008 WL 4106736 (Vt. Super. Ct. 2008), revised Wright v. Honeywell Int’l, Inc., 989 A. 2d 539 (Vt. 2009) (concluding that the lower court erred by refusing to certify indirect purchaser class); Fagan v. Honeywell Int’l, Inc., No. 04–4903-BLS2, 2008 WL 4106393 (Mass. Super. Ct. 2008); Premier Pork, Inc. v. Rhone-Poulenc S.A., No. CV2000–3, 2006 WL 1388464 (Kan. Dist. Ct. 2006). Before 2000, essentially all were state cases. This result is consistent with findings on the effect of CAFA on class action litigation generally. H. M. Erichson, ‘CAFA’s Impact on Class Action Lawyers’, University of Pennsylvania Law Review, 156 (2008), 1593, 1626 (reporting that ‘CAFA appears to have effected a marked shift in class action activity from state courts to federal courts’). 48 See 28 U.S.C. § 1407(a). See e.g. In re Polyurethane Foam Antitrust Litigation, MDL No. 2196, 2010 WL 4940145 (J.P.M.L. 2010) (consolidating eight actions for pretrial). It remains unclear whether courts can certify nationwide classes of indirect purchasers under multiple states’ laws. See e.g. Sullivan v. DB Investments, Inc., No. 04–2819 (SRC), 2008 U.S. Dist. LEXIS 81146 (D.N.J. 2008) (certifying a nationwide settlement class), vacated, 613 F. 3d 134 (3d Cir.) (noting that ‘many states withhold standing from indirect purchasers’ and that ‘the variability in consumer protection and unjust enrichment law in a context like this is extreme’), vacated pending reh’g en banc, 619 F. 3d 287 (3d Cir. 2010); In re New Motor Vehicles Canadian Export Antitrust Litigation, 269 F.R.D. 80, 88 (D. Me. 2010) (certifying a national settlement class and noting that, in Sullivan v. DB Investments, Inc., No. 04–2819 (SRC), 2008 U.S. Dist. LEXIS 81146 (D.N.J. 2008), ‘unlike this case, no federal damages claim was ever asserted [and] the nationwide damages class . . . made no distinction among those states that permitted damages recovery and those that did not’); In re Fresh Del Monte Pineapple Antitrust Litigation, No. 1:04-md-1628, 2008 WL 5661873, at *5 (S.D.N.Y. 2008) (declining to consider whether individual issues precluded certification of a national class of indirect purchasers under many different state laws because individual issues predominated for other reasons). 49 Some courts treat presumptions relevant to class certification as issues of state substantive law binding on federal courts. In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, at 600–601 (N.D. Cal. 2010).

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settlement classes) in eleven cases and denied certification in nine. In each case in which a federal court certified an indirect purchaser class action, it also certified a direct purchaser class action.50 In all but one51 of the cases in which a federal court refused to certify an indirect purchaser class, the court certified a direct purchaser class.52

50 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, at 600–601 (N.D. Cal. 2010) (indirect); In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 291 (N.D. Cal. 2010) (direct); In re Static Random Access Memory (SRAM) Antitrust Litigation, 264 F.R.D. 603 (N.D. Cal. 2009) (indirect); In re Static Random Access Memory (SRAM) Antitrust Litigation, No. C 07–1819 CW, 2008 WL 4447592 (N.D. Cal. 2008) (direct); In re BP Propane Indirect Purchaser Antitrust Litigation, No. 06-C-3541, at slip op. (N.D. Ill. 2009) (indirect); Schagringas Co. v. BP Prods., No. 1:06-CV-3621, at slip op. (N.D. Ill. 2009) (direct); In re OSB Antitrust Litigation, No. 06–826, 2007 WL 2253425 (E.D. Pa. 2007) (certifying a greatly narrowed class of indirect purchasers); In re OSB Antitrust Litigation, 2007 WL 2253418 (E.D. Pa. 2007) (direct); Sullivan v. DB Investments, Inc., No. 04–2819 (SRC), 2008 U.S. Dist. LEXIS 81146 (D.N.J. 2008) (indirect and direct), vacated, 613 F. 3d 134, 142 (3d Cir.) (vacating certification of a national indirect purchaser class that asserted claims under various state laws, noting that defendants did not oppose certification of a direct purchaser class that asserted claims under the Sherman Act), vacated pending reh’g en banc, 619 F. 3d 287 (3d Cir. 2010)); Vista Healthplan, Inc. v. Warner Holdings Co. III, Ltd., 246 F.R.D. 349 (D.D.C. 2007) (indirect); Cohen v. Chilcott, 522 F. Supp. 2d 105 (D.D.C. 2007) (indirect); Meijer, Inc. v. Warner Chilcott Holdings Co. III, Ltd., 246 F.R.D. 293 (D.D.C. 2007) (direct); Texas v. Organon USA Inc., 2005 WL 2230314, In re Remeron End-Payor Antitrust Litigation, No. Civ. 02–2007, Civ. 04–5126, 2005 WL 2230314, at *2 (D.N.J. 2005) (indirect and direct); In re Relafen Antitrust Litigation, 231 F.R.D. 52, 60 (D. Mass. 2005) (indirect and direct); In re Terazosin Antitrust Litigation, No. 99-MDL-1317 (S.D. Fla. 2005) (indirect); In re Terazosin Antitrust Litigation, 352 F. Supp. 2d 1279 (S.D. Fla. 2005) (direct). 51 See In re New Motor Vehicles Canadian Exp. Antitrust Litigation, 522 F. 3d 6 (1st Cir. 2008), vacating 243 F.R.D. 20 (D. Me. 2007), in which the First Circuit vacated the district court’s certification of twenty state damage classes of indirect purchasers and a nationwide injunction class of indirect purchasers. Apparently, no class of direct purchasers sued. 52 See Somers v. Apple, 258 F.R.D. 354, 356 (N.D. Cal. 2009) (denying certification of an indirect purchaser class and referring to an earlier order certifying a direct purchaser class) (citing In re Apple iPod iTunes Antitrust Litigation, No. C 05–00037 (N.D. Cal. 2008)); Sheet Metal Workers Local 441 Health & Welfare Plan v. Glaxosmithkline, plc, No. 04–5898, 2010 WL 3855552, at *2 (E. D. Pa. 2010) (denying certification of a class of indirect purchasers of Wellbutrin and referring to an earlier decision certifying a class of direct purchasers); In re Wellbutrin SR Direct Purchaser Antitrust Litigation, No. 04–5525, 2008 WL 1946848 (E.D. Pa. 2008) (certifying a class of direct purchasers); In re Flash Memory Antitrust Litigation, No. C07–0086SBA, 2010 WL 2332081, at *2 and *3 (N.D. Cal. 2010) (denying certification of an indirect purchaser class and reserving judgment on certification of a direct purchaser class); In re K-Dur Antitrust Litigation, MDL No. 1419, 2008 WL 2660723 (D.N.J. 27 March 2008) (denying certification of an indirect purchaser class); In re K-Dur Antitrust Litigation, MDL No. 1419, 2008 WL 2699390 (D.N.J. 14 April 2008) (certifying a direct purchaser class); In re Fresh Del Monte Pineapple Antitrust Litigation, No. 1:04-md-1628, 2008 WL 5661873, at *3–*11 (S.D.N.Y. 2008) (denying certification

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Table 11.2. Indirect purchaser class certification II

Pre-1999 1999–2004 Pre-2004 (total) 2005–10

Total a

Federal State Total

Decisions

Granted

Rate

27 27 54 20 4 24 78

10 18 28 11a 3 14 42

.37 .67 .52 .55 .75 .58 .54

This figure includes one case that certified a much narrower class of indirect purchasers than the one proposed by the plaintiffs. In re OSB Antitrust Litigation, No. 06–826, 2007 WL 2253425, at *11 (E.D. Pa. 2007). It also includes certifications in connection with approvals of settlements of class action litigation. In these cases, the courts provided little analysis of the problems of proving passing-on.

Table 11.2 summarizes the rate of decision in cases that reached and resolved the issue of class certification in the three periods that I have examined.53 of an indirect purchaser class and certifying a direct purchaser class); In re Ciprofloxacin Hydrochloride Antitrust Litigation, 363 F. Supp. 2d 514, 517 (E.D.N.Y. 2005); American Seed Co. v. Monsanto Co., 238 F.R.D. 394 (D. Del. 2006) (denying certification of both indirect and direct purchaser classes), aff’d, 271 F. App’x 138 (3d Cir. 2008); California v. Infineon Technologies AG, 2008 WL 4155665 (N.D. Cal. 2008) (denying certification of a class of government entities that included both direct and indirect purchasers); In re Dynamic Random Access Memory Antitrust Litigation, No. M 02–1486 PJH, 2006 WL 1530166 (N.D. Cal. 2006) (certifying a class of direct purchasers of DRAM). One court denied certification of an indirect purchaser class, Graphics Processing Units, and also denied certification of a class of all direct purchasers, but certified a much narrower class of ‘all individuals and entities who purchased graphics cards directly from defendants online up until the date the third amended complaint was filed’. In re Graphics Processing Units Antitrust Litigation, 253 F.R.D. 478, 497 (N.D. Cal. 2008). 53 The numbers include certifications for settlement purposes. See e.g. In re Relafen Antitrust Litigation, 231 F.R.D. 52 (D. Mass. 2005). It does not include at least one case that denied certification on grounds of mootness. See In re Ciprofloxacin Hydrochloride Antitrust Litigation, 363 F. Supp. 2d 514 (E.D.N.Y. 2005). It also does not include pending litigations in which the issue of class certification has not yet been resolved. See e.g. In re Chocolate Confectionary Antitrust Litigation., No. Civ. A. 1:08-MDL-1935, 2010 WL 3749288 (M.D. Pa. 2010) (ruling on motions to dismiss various claims); In re Packaged Ice Antitrust Litigation, 723 F. Supp. 2d 987 (E.D. Mich. 2010) (same); In re Flonase Antitrust Litigation, 692 F. Supp. 2d 524 (E.D. Pa. 2010) (same); In re Potash Antitrust Litigation, 667 F. Supp. 2d 907 (N.D. Ill. 2009) (same); In re Aftermarket Filters Antitrust Litigation, MDL No. 1957, 2009 WL 3754041 (N.D. Ill. 2009).

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Although there are fewer class certification decisions in the most recent period, each one applies to more classes: most federal decisions determine the certification of multiple state law classes that, in an earlier period, might have been the subject of numerous separate state court opinions.54 More significant, it appears that the rate of certification has dropped to a level below the rate I observed in the 1999–2004 period, but higher than the rate I observed in the pre-1999 period. On average, contrary to the apparent expectations of some those who urged passage of CAFA, the federal courts are certifying state law class actions about as frequently as state courts did before CAFA.55 The similarities in the pre- and post-CAFA cases go beyond the rate of certification. Federal courts that analyze the issue of certification cite the state court decisions of the earlier era and adopt their reasoning on particular issues. There are echoes, for example, of the sanguine and sceptical views in the federal cases just as there were in the state cases. Sanguine federal cases emphasize the importance of class actions as a means of compensating consumers in price-fixing cases, and suggest that courts should err on the side of certification in cases of doubt.56 Some invoke a presumption of class-wide impact, not only to direct but to indirect purchasers in cases involving horizontal price fixing;57 refuse to choose 54 See e.g. In re Static Random Access Memory (SRAM) Antitrust Litigation, 264 F.R.D. 603 (N.D. Cal. 2009) (stating that indirect purchaser plaintiffs had ‘move[d] to certify twentyseven separate classes pursuant to Fed. R. Civ. P. 23(b)(3)’); In re OSB Antitrust Litigation, No. 06–826, 2007 WL 2253425, at *1 (E.D. Pa. 2007) (‘Plaintiffs ask me to certify two classes: under the antitrust and consumer protection laws of 21 states, a multistate class of individuals and businesses who indirectly purchased either OSB for their own use or structures containing OSB; and a similarly defined nationwide class under federal law.’). 55 This result falls short the expectation (or hope) of some backers of CAFA. See E. A. Purcell, Jr., ‘The Class Action Fairness Act in Perspective: The Old and the New in Federal Jurisdictional Reform’, University of Pennsylvania Law Review, 156 (2008), 1823, 1864 (‘The conviction that animated most of CAFA’s supporters was that the federal courts were much less likely to certify suits as class actions than were state courts and that denials of certification would, one way or another, quickly and abruptly end many, if not most, of them.’). 56 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 591–592 (N.D. Cal. 2010); In re Static Random Access Memory (SRAM) Antitrust Litigation, 264 F.R.D. 603 (N.D. Cal. 2009). 57 In re Static Random Access Memory (SRAM) Antitrust Litigation, 264 F.R.D. 603, 612 (N.D. Cal. 2009); In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 600–601 (N.D. Cal. 2010). Cf. In re New Motor Vehicles Canadian Export Antitrust Litigation, 609 F. Supp. 2d 104 (D. Me. 2009) (dismissing California indirect purchaser plaintiffs’ claims without prejudice to permit them to refile their case in California state courts where they could better argue for a presumption of injury).

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between expert opinions, so long as experts offer a plausible methodology for showing impact; accept the use of aggregated data to calculate average pass-through rates; dismiss the significance of individualized factors in pricing;58 accept experts’ assumption of a full pass-through based on the familiar tax-incidence model of passing on;59 and accept any proposed method of proving damages that is better than nothing.60 Sceptical federal cases characterize passing on as a conscious decision of intermediate purchasers based on many factors61 and reject predictions of passing on based on economic theory or presumptions.62 They are more 58 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 605 (N.D. Cal. 2010); In re Static Random Access Memory (SRAM) Antitrust Litigation, 264 F.R.D. 603, 614 (N.D. Cal. 2009); Wright v. Honeywell Int’l, Inc., 989 A 2d 539, at 550–551 (Vt. 2009). A state court affirmed certification of an indirect purchaser class even though the plaintiff ’s expert admitted he had ‘not yet been provided with prices . . . at lower levels of the [distribution] channels that would allow me to make a preliminary conclusion’ concerning pass-through. Anderson Contracting, Inc. v. DSM Polymers, Inc., 776 N.W. 2d 846 (Iowa 2009). 59 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 602 (N.D. Cal. 2010); In re Static Random Access Memory (SRAM) Antitrust Litigation, 264 F.R.D. 603, 614 (N.D. Cal. 2009). 60 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 606 (N.D. Cal. 2010); In re Dynamic Random Access Memory Antitrust Litigation, No. M 02–1486 PJH, 2006 WL 1530166, at *10 (N.D. Cal. 2006); In re Static Random Access Memory (SRAM) Antitrust Litigation, 264 F.R.D. 603, 615 (N.D. Cal. 2009). Some plaintiffs fall short even by that standard. Somers v. Apple, 258 F.R.D. 354, 361 (N.D. Cal. 2009) (denying certification where the plaintiffs’ expert did ‘nothing more than make a vague five-paragraph long collection of proposals for accomplishing what the Court sees as a daunting task’). 61 Somers v. Apple, 258 F.R.D. 354, 358 (N.D. Cal. 2009); In re Graphics Processing Units Antitrust Litigation, 253 F.R.D. 478 (N.D. Cal. 2008); In re Fresh Del Monte Pineapple Antitrust Litigation, No. 1:04-md-1628, 2008 WL 5661873, at *9 (S.D.N.Y. 2008) (denying certification where plaintiffs failed to offer any methodology for calculating damages). 62 In re Flash Memory Antitrust Litigation, No. C07–0086SBA, 2010 WL 2332081, at *11 (N.D. Cal. 2010); In re Graphics Processing Units Antitrust Litigation, 253 F.R.D. 478, 496 (N.D. Cal. 2008) (holding that an expert ‘may not meet his burden by simply stating that “economic theory” dictates that prices for retail and wholesale purchases generally go up together’); In re K-Dur Antitrust Litigation, MDL No. 1419, 2008 WL 2660723, at *9–*13 (D.N.J. 27 March 2008) (refusing to presume injury to both consumers and third party payors from purchases of a branded drug); American Seed Co. v. Monsanto Co., 238 F.R.D. 394, 402 (D. Del. 2006) (‘Even assuming overcharges were in fact passed through in toto in all cases, negating any need for individualized inquiry, the premise of plaintiffs’ theory . . . rests upon the presumption of impact on the direct purchasers.’), aff’d, 271 Fed. Appx. 138 (3d Cir. 2008); In re OSB Antitrust Litigation, No. 06–826, 2007 WL 2253425, at *11 (E.D. Pa. 2007) (holding an expert’s ‘opinion regarding pass-through for home buyers has little probative value’ because he ‘has relied almost entirely on economic theory and generalizations about market competitiveness and “elasticities” of supply and demand, without analyzing the competitiveness or elasticities of actual housing markets’); In re

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willing to choose between experts,63 to scrutinize the plaintiff’s expert’s damage model reliability64 and to question the use of average prices in damage models,65 Apart from these differences in perspective, essentially the same characteristics of proposed classes that influenced the certification decision in the state courts now do so in federal courts. First, courts are less likely to certify classes of indirect purchasers of products that are sold through multiple distribution channels and incorporated into other products. For example, in a case alleging price fixing in ‘oriented strand board’, a wood-based form of construction panelling, the court refused to certify a class that included buyers of homes built with OSB,66 but did certify a much more limited class of end users who purchased OSB panels from construction supply outlets. The court observed that proving how the ‘alleged conspiracy affected the end-use price of OSB itself – as opposed to the prices of thousands of houses that included small amounts of OSB – obviously requires a different, simpler analysis’,67 which the plaintiff ’s expert had begun using actual data.68 Similarly, a state court refused to certify a class of purchasers of Honeywell’s round thermostats used in home heating and air conditioning systems, noting that in the ‘trade channel’, which accounted for 56 percent of sales, Honeywell sold to distributors,

63

64

65 66 67 68

Fresh Del Monte Pineapple Antitrust Litigation, No. 1:04-md-1628, 2008 WL 5661873, at *5–*6 (S.D.N.Y. 2008) (accepting defendants’ expert’s characterization of passing on as ‘an empirical question’ and rejecting plaintiffs’ expert’s assumption of a ‘uniform [100%] pass-through rate’). Sheet Metal Workers Local 441 Health & Welfare Plan v. Glaxosmithkline, PLC, No. 04– 5898, 2010 WL 3855552, at *6 (E. D. Pa. 2010) (stating that ‘resolving expert disputes in order to determine whether a class certification requirement has been met is always a task for the court’ and ‘is not only permissible; it may be integral to the rigorous analysis Rule 23 demands’) (quoting In re Hydrogen Peroxide Antitrust Litigation, 552 F 3d 305, 323–324 (3d Cir. 2008)). In re Graphics Processing Units Antitrust Litigation, 253 F.R.D. 478, 507 (N.D. Cal. 2008); California v. Infineon Technologies AG, 2008 WL 4155665, at *9 (N.D. Cal. 2008) (recognizing a ‘duty to conduct a “rigorous analysis” to ensure that class certification is, in fact, warranted’ and concluding ‘that plaintiffs’ expert has ultimately failed to come forward with a sufficiently plausible methodology that reassures the court that the evidence that plaintiffs intend to present concerning antitrust impact – and specifically, pass-through – will be sufficiently generalized so as to allow common questions as to impact to predominate’). Sheet Metal Workers Local 441 Health & Welfare Plan v. Glaxosmithkline, plc, No. 04–5898, 2010 WL 3855552, at *30 (E. D. Pa. 2010). In re OSB Antitrust Litigation, No. 06–826, 2007 WL 2253425, at *11 (E.D. Pa. 2007). In re OSB Antitrust Litigation, No. 06–826, 2007 WL 2253425, at *11 (E.D. Pa. 2007). In re OSB Antitrust Litigation, No. 06–826, 2007 WL 2253425, at *12 (E.D. Pa. 2007) (noting that plaintiffs’ expert had conducted a regression real-world data and appropriate variables).

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who resold to home builders and construction contractors ‘who incorporate the price of the thermostat into the overall price of [new home construction and home improvement projects], so that the price of the thermostat alone to the end-user may be impossible to determine’.69 Similar reasoning appears in cases involving high-technology components such as flash memory,70 dynamic random access memory71 and graphics processing units.72 In the Flash Memory case, for example, the court rejected the plaintiffs’ expert’s ‘one-size-fits-all theoretical construct’ because ‘[w]ithin the three broad categories of products at issue (flash memory cards, USB flash drives and flash-based digital media players), there are thousands of differentiated products with diverse price points that have been purchased by putative class members over the course of the last decade’ that have been ‘sold to class members by hundreds of different retailer suppliers’ with differing pass-through policies.73 The court also found an asserted presumption of impact based on state law to be inapplicable because the product changed in the channels of distribution.74 69 Fagan v. Honeywell Int’l, Inc., No. 04–4903-BLS2, 2008 WL 4106393, at slip op. 60 (Mass. Super. Ct. 2008). Another state trial court agreed, refusing to certify its Honeywell class action, noting that ‘Plaintiff has not offered common methods or common questions capable of resolving damage issues’ in a case ‘where intermediaries are many and varied, some bundling the HRT as part of home or HVAC system, some selling it as a standalone boxed hardware product, and all selling into a variable and competitive secondary market across a span of years beginning in 1986’. Wright v. Honeywell Int’l, Inc., No. 201–11-04 Oecv, 2008 WL 4106736, at slip op. 22 (Vt. Super. Ct. 2008). In reversing, the state supreme court mistakenly suggested that thermostats are not ‘incorporated into various other products that proceeded through diverse distribution channels’. Wright v. Honeywell Int’l, Inc., No. 201–11-04 Oecv, 2008 WL 4106736, at *8, n* (Vt. Super. Ct. 2008). 70 In re Flash Memory Antitrust Litigation, motion for reconsideration denied, 2011 WL 1301527 (N.D. Cal. 2011). 71 California v. Infineon Technologies AG, 2008 WL 4155665, at *10 (N.D. Cal. 2008) (noting that plaintiff failed ‘to offer specific methodologies that purport to adequately demonstrate impact for all class members across customer, product, and procurement type’ even though ‘the proposed classes include class members who belong to divergent customer groups, purchase DRAM pursuant to divergent purchasing mechanisms, and whose DRAM purchases are based on purchases of divergent downstream DRAM-containing products’). 72 In re Graphics Processing Units Antitrust Litigation, 253 F.R.D. 478 (N.D. Cal. 2008). 73 In re Flash Memory Antitrust Litigation, No. C07–0086SBA, 2010 WL 2332081, at *11 (N.D. Cal. 2010). 74 In re Flash Memory Antitrust Litigation, No. C07–0086SBA, 2010 WL 2332081, at *14 (N.D. Cal. 2010). (‘Given the sheer diversity in NAND flash memory chips and products incorporating such technology, the effects of Defendants’ allegedly anticompetitive conduct cannot be assumed as in the case of unaltered glass food containers at issue in B.W.I.’).

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In the Flat Panel case, however, the federal district court certified a class of indirect purchasers of TFT-LCD panels used in televisions and computer monitors, among other products.75 The defendant’s expert contended that impact on consumers of end products was individualized because of ‘the industry growth during the class period, the customized nature of some TFT-LCD panels, the significant competition with nonLCD technologies in particular applications, and the recent history of major entry and substantial shifts in shares among manufacturers’, and emphasized the multitude of factors that affected each ‘pass-on decision’.76 But the court accepted, for purposes of certification, the plaintiffs’ expert’s assertion that all of the distribution levels for all of the products incorporating the panels were competitive and therefore likely to pass on the full overcharge. The expert proposed to prove common impact by ‘regress[ing] the price of the product at the bottom of the channel (the amount the end customer pays) on its cost at the top of the distribution channel (the amount Defendants charge direct customers)’.77 The court concluded that this proposal was sufficient support for the assertion ‘that the channel-length pass-through rate can be measured, regardless of the path or the number of steps the panel went through from defendants to class members’.78 Interestingly, the court noted that, in the Microsoft cases, state courts had rejected Microsoft’s argument ‘that injury could not be proven on a class-wide basis due to the complexity and changing nature of the software industry and the multi-layered and variable distribution chain’.79 Second, heterogeneity of the product complicates the task of proving impact from an overcharge. For example, graphics processing units, which handle the high-level calculations necessary to render complex computer graphics, have numerous and rapidly changing forms and capacities.80 The court in Flat Panel, however, certified a class despite the varieties of flat panels used in different high-technology products.

75 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 591–592 (N.D. Cal. 2010). 76 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 603 (N.D. Cal. 2010). 77 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 602 (N.D. Cal. 2010). 78 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 604 (N.D. Cal. 2010). See also In re Static Random Access Memory (SRAM) Antitrust Litigation, 264 F.R.D. 603 (N.D. Cal. 2009) (holding that ‘divergent pricing and sales practices are not necessarily an impediment to measuring pass-through’). 79 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 603 (N.D. Cal. 2010). 80 In re Graphics Processing Units Antitrust Litigation, 253 F.R.D. 478 (N.D. Cal. 2008).

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Despite defendants’ suggestions to the contrary, the court accepted the characterization of TFD-LCD panels as ‘fungible, interchangeable, and largely homogenous’.81 Third, the federal courts, like the states, are influenced in the class certification inquiry by the strength of the evidence of an illegal overcharge. In the GPU litigation, for example, the court denied certification in part because the plaintiffs had relied mainly on a presumption of class-wide impact on direct purchasers.82 In New Motor Vehicles,83 the First Circuit reversed the certification in part because the plaintiff ’s theory of injury was more ‘novel and complex’ than a price-fixing case.84 In Flat Panel, by contrast, the court justified certification in part by noting that there was solid evidence of an overcharge from price fixing: ‘seven defendants have pled guilty to Sherman Act violations, there is an amnesty applicant, and the DOJ’s investigation is ongoing’.85 Fourth, both state and federal courts were influenced by the ‘ascertainability’ of the class of indirect purchasers. In state indirect purchaser cases

81 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 605 (N.D. Cal. 2010). 82 In re Graphics Processing Units Antitrust Litigation, 253 F.R.D. 478 (N.D. Cal. 2008). Cf. Somers v. Apple, 258 F.R.D. 354, 360–361 (N.D. Cal. 2009) (noting that there was no basis for estimating an overcharge, because there was no clear point at which Apple’s allegedly exclusionary policies with respect to iTunes and the iPod began). 83 In re New Motor Vehicles Canadian Exp. Antitrust Litigation, 522 F. 3d 6 (1st Cir. 2008), vacating 243 F.R.D. 20 (D. Me. 2007). 84 In re New Motor Vehicles Canadian Exp. Antitrust Litigation, 522 F.3d 6, 27 (1st Cir. 2008), vacating 243 F.R.D. 20 (D. Me. 2007). The court noted that ‘[i]n step one of plaintiff’s theory, but for the defendants’ illegal stifling of competition, the manufacturers would have had to set dealer invoice prices and MSRPs lower to avoid losing sales to the lowerpriced Canadian cars coming across the border for resale in the United States. In step two, the higher dealer invoice prices and MSRPs enabled by this stifling of competition resulted in injury to consumers in the form of higher retail prices.’ Ibid. When a theory of impact is this complicated, the district court is required to ‘engage in a searching inquiry into the viability of that theory and the existence of the facts necessary for the theory to succeed’. Ibid., at 26. On remand, the district court, rather than reconsider certification, granted summary judgment to the non-settling defendants on the ground that they were unable to establish impact on indirect purchasers, an essential element of the offense under the relevant state laws. In re New Motor Vehicles Canadian Export Antitrust Litigation, 609 F. Supp. 2d 104 (D. Me. 2009). The district court later certified settlement classes as to the two defendants that had settled in 2006. In re New Motor Vehicles Canadian Export Antitrust Litigation, 269 F.R.D. 80 (D. Me. 2010). 85 In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 605 (N.D. Cal. 2010). See also In re Static Random Access Memory (SRAM) Antitrust Litigation, No. 07-md01819, 2010 WL 5071694, at *9 (N.D. Cal. 2010) (refusing to decertify direct and indirect purchaser classes in part because plaintiffs presented ‘substantial evidence of class-wide injury and damages amounts are not uncertain’).

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against producers of additives such as lysine86 and high fructose corn syrup,87 courts denied certification in part because it was impossible to identify downstream purchasers or any specifics about their purchases. Similarly, a federal court recently found that indirect purchasers of fresh pineapples were unsuitable for class treatment, because it was impossible to determine who had purchased the product during the damage period or to structure any sensible means of distributing damages to those who had paid an overcharge.88 Several post-CAFA cases involved claims that a monopolistic settlement of patent litigation between branded and generic drug manufacturers delayed generic entry and thus allegedly caused prices of the affected drugs to be higher than they would otherwise have been. These cases were distinctive because the indirect purchasers, or ‘end payors’, included both patients who paid for drugs for their own use and insurance companies who paid for drugs under the terms of their contracts. In some of the cases, courts denied certification because plaintiffs were unable to show impact on either class members who would have continued to pay for branded drugs despite generic entry or on class members subject to a fixed copayment under their insurance plans.89 Other courts granted certification despite these shortcomings,90 but in most instances the certification was part of a settlement agreement disposing of the litigation.91

86 Ashley v. Archer-Daniels-Midland Co., No. CV-95–336-R, at slip op. 32–5 (Ala. Cir. Ct. 1998). 87 Wilcox v. Archer-Daniels-Midland Co., No. 96–82473-CP, at slip op. 7 (Mich. Cir. Ct. 1997). 88 In re Fresh Del Monte Pineapple Antitrust Litigation, No. 1:04-md-1628, 2008 WL 5661873, at *5 (S.D.N.Y. 2008). For criticism of the decision and the use of the ‘ascertainability’ criterion generally, see M. Gilles, ‘Class Dismissed: Contemporary Judicial Hostility to Small-Claims Consumer Class Actions’, DePaul Law Review, 59 (2010), 305. Prof. Gilles is rightly concerned that the failure of consumer class actions may leave consumer protection laws unenforced. This danger is less significant where, as in cases such as Del Monte, the court certifies a direct purchaser class action that can sue for the full overcharge. 89 Sheet Metal Workers Local 441 Health & Welfare Plan v. Glaxosmithkline, plc, No. 04–5898, 2010 WL 3855552, at *23–*28 (E. D. Pa. 2010); In re K-Dur Antitrust Litigation, MDL No. 1419, 2008 WL 2660723, at *9–*13 (D.N.J. 27 March 2008). 90 In re Abbott Laboratories Norvir Antitrust Litigation, Nos. C 04–1511, 2007 WL 1689899, at *8–*10 (N.D. Cal. 2007). 91 Vista Healthplan, Inc. v. Warner Holdings Co. III, Ltd., 246 F.R.D. 349 (D.D.C. 2007); Cohen v. Chilcott, 522 F. Supp. 2d 105 (D.D.C. 2007); In re Relafen Antitrust Litigation, 231 F.R.D. 52 (D. Mass. 2005); Texas v. Organon USA Inc., 2005 WL 2230314, at *2.

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The continuing failure of indirect purchaser suits In the period before 2005, the costs of indirect purchaser litigation were obvious. Multiple layers of indirect purchasers asserting class-wide harm from the same alleged violations sued in different state courts while direct purchasers also sued for harm from the same violations in federal court. The Class Action Fairness Act has undoubtedly reduced some of the direct costs of litigation by allowing consolidation of these proceedings. Nevertheless, indirect purchaser suits are still failing to accomplish their stated goals. CAFA has accomplished an approximation of the Antitrust Modernization Commission’s proposal in 2008 to make ‘[d]irect and indirect purchaser litigation . . . more efficient and more fair’ by allowing it to take place ‘in one federal court for all purposes’ under a standard that would ‘allow both direct and indirect purchasers to sue to recover for actual damages’, measured by the amount of the initial overcharge to direct purchasers.92 The initial overcharge, according the AMC, should be ‘apportioned among all purchaser plaintiffs – both direct and indirect – in full satisfaction of their claims in accordance with the evidence as to the extent of the actual damages they suffered’.93 Federal law should allow ‘removal of indirect purchaser actions brought under state antitrust law to federal court to the full extent permitted under Article III . . . [,] consolidation of all direct and indirect purchaser actions in a single federal forum for both pre-trial and trial proceedings . . . [, and] certification of classes of direct purchasers, consistent with current practice, without regard to whether the injury alleged was passed on to customers of the direct purchasers’.94 As the foregoing section suggests, under CAFA, many state law indirect purchaser claims are now filed in or removed to federal court and consolidated with a federal direct purchaser class in a single federal forum. These transfers are only for pretrial proceedings, but that limitation means little because the cases are almost always settled. The settlement process can create a fund equal to a reasonable percentage of an estimate of the overcharge, taking account of the defendant’s ability to pay and the risk that the case will fail at trial. The settlement’s allocation of the fund among 92 Antitrust Modernization Commission, ‘Report and Recommendations’, 267. 93 Antitrust Modernization Commission, ‘Report and Recommendations’, 267. 94 Antitrust Modernization Commission, ‘Report and Recommendations’, 267.

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classes with rights of action could, in principle, bear some relationship to the rate of passing on. This proposal is a reasonable attempt to achieve the goal of providing access to justice for multiple layers of interest in class action litigation. Admittedly, it is not clear how closely the stated allocation of settlement funds corresponds to the real rate of passing on: direct purchasers are not subject to a passing-on defence and there is no federal right of action for indirect purchasers – both would be present under the AMC proposal. Although CAFA has reduced its direct costs, indirect purchaser litigation still fails to meet any coherent antitrust objective. First, on grounds of efficiency, it is inferior to a pure Illinois Brick rule. Direct purchasers have every incentive to sue for the full overcharge, and the present study confirms that they almost invariably do so and achieve class certification. Allowing indirect purchasers to sue does not (or should not, in principle) increase the amount of damages; it only allocates it among more classes. This process necessarily increases the costs of litigation and settlement. One might argue that direct purchasers are more likely to sue if indirect purchasers do so first. I would suggest, however, that government action is by far the more important triggering condition for all private litigation. Second, the present system does not systematically advance the goal of compensation or access to justice. As the last part shows, federal courts deny certification to indirect purchaser classes on the same grounds and about as frequently as state courts did in the pre-CAFA period. Indirect purchaser classes are about half as likely to be certified as direct purchaser classes because of the added challenges of proving on a class-wide basis that intermediate purchasers passed on some portion of the overcharge to the plaintiffs. Many classes of indirect purchasers, because of the characteristics of their markets, cannot satisfy the applicable standards. Counting opinions that deny certification, as I have done in the present study, understates the number of these classes because many futile cases are never brought. Even if classes are certified, the resulting settlements do little to benefit the consumers who paid the overcharges.95 Some settlements allocate a relatively small share of the overall amount to indirect purchasers – presumably recognizing their relatively greater obstacles to proving 95 Lopatka and Page, ‘Indirect Purchaser Suits’, 552–556. But cf. S. Calkins, ‘Perspectives on State and Federal Antitrust Enforcement’, Duke Law Journal, 53 (2003), 673, 691–693 (citing settlements of state antitrust litigation that provided for payments to consumers, but including some cy-pr`es payments).

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harm.96 The settlement funds are undoubtedly substantial. One recent study calculates that indirect purchaser settlements through 2010 totalled over US$4 billion, of which about half were in cash and half were vouchers in the Microsoft litigation.97 But the study does not indicate how many members of each class filed claims and how much of the funds were actually distributed to injured consumers. It is very often impractical to distribute tiny individual damage awards to consumers at a reasonable cost.98 Even if offered amounts are more substantial, most consumers typically do not make claims. In the Microsoft litigation, for example, consumers only claimed a small fraction of the settlement amounts in the various state settlements. In Massachusetts, ‘only 1 percent of US$34 million in vouchers was claimed’.99 This is access to justice only in the most formal sense. Courts have rejected fluid recoveries through compensatory price reductions because they do not compensate those actually injured.100 Where courts cannot distribute the settlement fund to those actually

96 See e.g. In re Air Cargo Shipping Services Antitrust Litigation, No. 06-MD-1775, 2009 WL 3077396, at *5 (E.D.N.Y. 2009) (allocating 18 percent of the settlement fund to indirect purchasers). 97 P. E. Cafferty, ‘Indirect Purchaser Class Action Settlements’, available at http://papers. ssrn.com/sol3/papers.cfm?abstract id=1736642, (2010). See also R. H. Lande and J. P. Davis, ‘Benefits from Private Antitrust Enforcement: An Analysis of Forty Cases’, University of San Francisco Law Review, 42 (2008), 879 (describing awards to both direct and indirect purchasers). 98 In re Microsoft Corporation Antitrust Litigation, 185 F. Supp. 2d 519, 523 (D. Md. 2002) (noting the ‘unfeasibility of economic distribution of class proceeds’ to consumers). Cafferty, ‘Indirect Purchaser Class Action Settlements’ does not report claims rates or success in distribution of the settlement amounts. In some instances, some distribution can be attempted. In In re Relafen Antitrust Litigation, 231 F.R.D. 52 (D. Mass. 2005), for example, about $1 million in checks were mailed to consumers who had filed claims, and almost $15 million in checks were mailed to consumers who were identified by subpoenas of pharmacy records. About 20 percent of the checks were never cashed, and the plaintiffs made a second distribution. Affidavit of Thomas R. Glenn Regarding Distribution of Unclaimed Settlement Funds to Consumer and Subpoena Claimants. See also Crane, ‘Optimizing Private Antitrust Enforcement’, 686 (observing that ‘identifying, locating, and compensating the real economic victims of an antitrust overcharge is often impossible’). 99 S. Alexander, ‘Most Microsoft Settlement Money Unclaimed’, available at www.startribune.com/business/15468476.html (2008). Minnesota had the highest claims rate – 37 percent of $174.5 million. Ibid. 100 See e.g. In re Fresh Del Monte Pineapple Antitrust Litigation, No. 1:04-md-1628, 2008 WL 5661873 at *6–*8 and *10 (S.D.N.Y. 2008) (rejecting ‘automatic price reductions’ on pineapple as ineffective means of compensating those who actually paid an overcharge).

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harmed, they sometimes resort to cy-pr`es distributions.101 In the Microsoft litigation, for example, part of the unclaimed settlement amount was distributed to schools.102 This expedient has continued in the period under study103 although some courts now insist on a closer nexus between the recipient and the class members for approval of a proposed distribution.104 Although cy-pr`es distributions have been criticized,105 they have also found defenders on the ground that if properly directed they further the broader goals of antitrust enforcement.106 Regardless of their merits on these grounds, cy-pr`es distributions do not further the goal of compensating indirect purchasers.107 101 Lopatka and Page, ‘Indirect Purchaser Suits’, 552–556. See also R. Mulheron, The Modern Cy-pr`es Doctrine (London; UCL Press, 2006). 102 Page, ‘Class Certification’, 334. 103 Abbott Laboratories (Norvir), 562 F. Supp. 2d 1080 (C.D. Cal. 2008) (stating that the bulk of the settlement fund would be distributed to non-profit organizations that benefit HIV/AIDS patients). 104 See In re New Motor Vehicles Canadian Export Antitrust Litigation, MDL No. 1532, 2011 WL 1398485, at *5 (D. Me. 2011). Although the plaintiffs make their proposal in good faith, I conclude that cypr`es is an inappropriate use of the settlement funds. First, the value of these claims that will not receive a cash recovery (when divided by the millions of purchasers) is so low that it is negligible; they do not require recompense even by the theoretical relief of cy-pr`es. Second, despite the plaintiffs’ lawyers’ attempt to suggest ways to benefit the class members in other jurisdictions and during other periods, the best they can offer are educational programs or antifraud activities that might benefit car buyers and lessees generally. These really are programs for the car-buying public as a whole, not for the particular consumers in those jurisdictions who were affected by the defendants’ activity during the time period in question but will not receive a cash recovery. Thus, they do not actually provide cy pres relief for those members of the class, as compared to countless others. Third, the consumers who will obtain payments because of the strength of their state law claims still are not receiving full recompense [emphasis added]. 105 M. H. Redish, ‘Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis’, Florida Law Review, 62 (2010), 617. 106 A. A. Foer, ‘Enhancing Competition through the Cy Pres Remedy: Suggested Best Practices’, Antitrust (Spring 2010), 86 (arguing that cy-pr`es distributions to antitrust research institutes is consistent with antitrust policy); R. H. Lande, ‘New Options for State Indirect Purchaser Legislation: Protecting the Real Victims of Antitrust Violations’, Alabama Law Review, 16 (2010), 447, 492 (arguing that state statutes should authorize cypr`es distributions to antitrust enforcement agencies and ‘antitrust-enhancing activities of nonprofit education or research organizations’). 107 For a plausible effort to provide compensation through cy-pr`es, see In re Abbott Laboratories Norvir Antitrust Litigation, Nos. C 04–1511, 2008 WL 8202771, at *1 (C.D. Cal. 2008) (describing a settlement in which ‘Abbot will pay $10 million, seventy percent of which will be deposited into a cy pres fund and distributed to non-profit

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Despite this history, antitrust enforcers and scholars outside the United States have advocated adoption of a right of action for indirect purchasers.108 The European Commission, for example, adopting a principle of full compensation, proposed in a recent White Paper that indirect purchasers should be allowed to sue and to rely on a presumption that they paid the entire overcharge.109 Direct purchasers would be subject to a passing-on defence. At the same time, however, the White Paper proposes relatively constrained use of collective actions and only limited discovery. The EU proposal is facing significant obstacles,110 with good reason. European courts confront greater challenges of coordinating enforcement among multiple jurisdictions than have American courts.111 Even if these problems could be solved, indirect purchaser suits would not provide indirect purchasers with meaningful access to justice. Compensation is impractical even with the expansive class action and discovery procedures in American courts; it would be still less practical in European courts with their more constrained procedural mechanisms.112 Worse, the recognition

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organizations that benefit individuals with HIV/AIDS’ with the remainder ‘allocated to indirect purchaser class members who purchased Norvir in California and file valid claims’). See e.g. F. Cengiz, ‘Antitrust Damages Actions: Lessons from American Indirect Purchasers’ Litigation’, International and Comparative Law Quarterly, 59 (2010), 39 (‘Compensation of victims of antitrust violations, most notably of consumers, through damages actions deters anticompetitive behaviour, corrects harmful effects of such behaviour on consumer welfare, and consequently constitutes an essential pillar of modern antitrust regimes.’). For the Canadian experience, see M. A. Eizenga, D. H. Assaf and E. Davis, ‘Antitrust Class Actions: A Tale of Two Countries’, Antitrust (Spring 2010), 83. But see Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284 (affirming an order striking a putative representative action on behalf of direct and indirect purchasers of air freight services on the ground that the members of the class were not identified and did not have the same interests). White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, COM(2008) 165 final; Green Paper on consumer collective redress, 27 November 2008, COM(2008) 794 final. N. Heaton et al., ‘Private Damage Claims in the EU: The Story of the Hare and the Tortoise’, Competition Law International (September 2010), 81. Cengiz, ‘Antitrust Damages Actions’, 56–63 (reviewing procedural and jurisdictional challenges to indirect purchaser litigation in Europe and proposing possible reforms). Crane, ‘Optimizing Private Antitrust Enforcement’, 701–702. See also Heaton et al., ‘Private Damage Claims in the EU’, 85–87 (surveying UK law in areas relevant to private damages actions, including the availability of the passing-on defence and class actions); T. L. Russell, ‘Exporting Class Actions to the European Union’, Boston University International Law Journal, 28 (2010), 141, 167 (enumerating as obstacles to adoption of private damage actions ‘the cost and risk of litigation, unfavorable discovery rules, uncertainty as to whether plaintiffs can rely on Commission documents and Commission decisions in national proceedings, uncertainty over how national rules on damages and injunctions apply, uncertainty as to who can sue (Competitors, Direct Purchasers, Indirect

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of the passing-on defence will undermine the incentives of direct purchasers to sue for the appropriate deterrent penalty.

Conclusion The experience of two decades of indirect purchaser litigation has confirmed the wisdom of the Illinois Brick rule. Direct purchasers are best situated to sue for the overcharge, the most reliable measure of the optimal deterrent penalty; distributing the overcharge among classes of indirect purchasers only makes the goal of deterrence more costly to achieve. The Class Action Fairness Act has reduced some of the direct costs of multidistrict litigation by allowing consolidation of dozens of state law indirect purchaser class actions with federal direct purchaser class actions in a single court. These litigations represent the most ambitious procedural mechanism yet devised for providing relief to multilayer interests in collective actions. Nevertheless, indirect purchaser class actions fail to provide meaningful compensation. As the present study suggests, indirect purchasers often lack the requirements for class certification. Even when they meet the requirements, the legal system cannot practically provide compensation to consumers. A pure Illinois Brick rule remains the best policy option for both American and international legal systems. Purchasers), and the possibility of dual enforcement (National Courts have an obligation to ensure that their decisions do not conflict with any decisions given at the Community level, so national courts may in certain circumstances have to stay proceedings’)), and Russell, ‘Exporting Class Actions to the European Union’, 169 (listing as obstacles to adoption of class actions ‘lack the procedural devices’, unfavourable rules for funding litigation, the ‘perceived excesses’ of the U.S. system and ‘uniformity problems’).

12 Collective actions by indirect purchasers Lessons from the Japanese oil cartel cases

simon vande walle

Introduction ‘Ripples of harm’ that ‘flow through the Nation’s economy’ is how the effects of antitrust violations have been described.1 Many antitrust violations affect not only those who directly purchase an overcharged product, but also a multitude of individuals and companies downstream: distributors, retailers and ultimately consumers. These downstream purchasers, commonly referred to as indirect purchasers, usually suffer scattered and low-value damage. Should they have access to justice, and, if so, what is the appropriate collective action mechanism to ensure this access? Moreover, can access to justice for these indirect purchasers be reconciled with society’s wider interest in avoiding wasteful litigation? This chapter tries to answer these questions by looking at three landmark cases in Japanese antitrust litigation. The three cases2 were brought by consumers, who used Japan’s opt-in collective action mechanism to seek damages from a cartel of oil companies. The lessons from these cases are then used to assess the prospects of indirect purchaser litigation in the European Union (EU) and to conduct a reality check on the European

1 Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982). 2 (1) Kai v. Nihon Sekiyu K.K., 41(5) Minsh¯u 879 (Tokyo H. Ct., 17 July 1981), aff’d 41(5) Minsh¯u 785 (Sup. Ct., 2 July 1987) (hereinafter Kai v. Nihon Sekiyu K.K.); (2) Sat¯o v. Sekiyu Renmei, 43(11) Minsh¯u 1340 (Yamagata D. Ct., Tsuruoka Branch, 31 March 1981), rev’d 43(11) Minsh¯u 1539 (Sendai H. Ct., 26 March 1985), the latter rev’d sub nom. Nihon Sekiyu K.K. v. Sat¯o 43(11) Minsh¯u 1259 (Sup. Ct., 8 December 1989) (hereinafter Sat¯o v. Sekiyu Renmei); (3) Miyazaki v. Nihon Sekiyu K.K., 28 Shinketsush¯u 188 (hereinafter Miyazaki v. Nihon Sekiyu K.K.) and Iwata v. Nihon Sekiyu K.K. 28 Shinketsush¯u 200 (Tokyo High Ct., 2 July 1981) (hereinafter Iwata v. Nihon Sekiyu K.K.).

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Commission’s proposals to improve access to justice for indirect purchasers, among others, by introducing an opt-in collective action.3 The analysis is not confined to the legal issues raised by the oil cartel cases but also aims to quantify the costs of these lawsuits. In doing so, it hopes to inject into the debate some much-needed quantitative elements about the cost-benefit balance of collective actions brought by indirect purchasers. The results of this analysis offer little hope that effective access to justice for indirect purchasers can be reconciled with society’s interest in avoiding wasteful litigation, meaning litigation that is excessively complex, lengthy and costly in proportion to the value of the claim. In fact, the experience with the three oil cartel cases suggests that, in a legal system that allows only opt-in collective actions and has traditional rules on causation, collective actions by indirect purchaser litigation are bound to be complex, lengthy and inefficient. I first explain why Japan’s experience with indirect purchaser lawsuits is relevant for the ongoing debate in the EU about collective redress in the field of competition law. Next, I set out the background, facts and outcome of the three oil cartel cases. I then explain why these cases illustrate the potential benefits of indirect purchaser litigation, including increased access to justice for indirect purchasers, but, more strikingly, also show that these claims are bound to generate wasteful litigation. Finally, I draw lessons from these cases for the EU and query whether and how the EU could reconcile access to justice with society’s interest in avoiding wasteful litigation.

Relevance of Japan’s experience with indirect purchaser litigation A lively debate is currently raging within the EU about whether and how to facilitate lawsuits by indirect purchasers. At the heart of the controversy are the following questions: (1) Is it necessary and wise to introduce a collective action mechanism and, if so, what kind of mechanism?4

3 White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, COM(2008) 165 final, pp. 4 and 7–8 (proposing the introduction of certain collective redress mechanisms and special rules on causation throughout the European Union to make indirect purchaser litigation more feasible). 4 See e.g. European Parliament, ‘Resolution on the Report on Competition Policy 2009’, 20 January 2011, p. 14 (stressing the need for a form of collective redress based on the opt-in principle). Contra R. Mulheron, ‘The Case for an Opt-out Class Action for European Member States: A Legal and Empirical Analysis’, Columbia Journal of European Law, 15 (2009), 409.

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(2) Should there be special rules concerning the proof of causation and damages?5 There are two reasons an examination of the oil cartel cases can assist in answering these questions. First, virtually all of the existing European literature on collective redress and indirect purchaser litigation is purely theoretical. Many authors make policy recommendations based simply on the potential advantages and disadvantages of indirect purchaser litigation. Even the EU is developing its policy mainly based on theory. The impact study made in preparation of the White Paper6 resorted mostly to qualitative statements, not quantitative ones.7 As to the costs resulting from indirect purchaser litigation, for instance, the impact study simply states that litigation costs will be higher if indirect purchasers are allowed to sue than if they are not.8 That is stating the obvious. The question is how much higher. Second, the existing empirical research almost exclusively relates to the United States. This research is instructive but it is closely linked to the particular collective redress mechanism of the United States, which is an opt-out class action, and a number of other distinctively American procedural features. By contrast, the situation of indirect purchasers in Japan is in many respects similar to the one in much of the EU. Japan, like most EU countries, has no punitive or treble damages, no opt-out class action, no extensive discovery and the traditional tort rules on causation also apply to antitrust damages actions.9 Contingency fees are rarely used,10 the antitrust bar is mainly defence-oriented and the number of 5 White Paper on damages actions for breach of the EC antitrust rules, pp. 7–8 (suggesting that indirect purchasers benefit from a presumption that the illegal overcharge was passed on in its entirety throughout the distribution chain); European Parliament, ‘Resolution on the White Paper on Damages Actions’, 26 March 2009, p. 18 (taking an ambiguous position on whether there should be a presumption that damages have been passed on). 6 White Paper on damages actions for breach of the EC antitrust rules, pp. 7–8. 7 C. Hodges, ‘From Class Actions to Collective Redress’, Civil Justice Quarterly, 28 (2009), 41, 49 (calling the impact assessment a ‘vast waste of effort’ for this reason). 8 A. Renda et al., ‘Making Antitrust Damages Actions More Effective in the EU: Welfare Impact and Potential Scenarios - Final Report’, (2007), p. 468, available at http://ec.europa. eu/competition/antitrust/actionsdamages/files white paper/impact study.pdf. 9 D. Waelbroeck, D. Slater and G. Evan-Shoshan, ‘Study on the Conditions of Claims for Damages in Case of Infringement of EC Competition Rules, Comparative Report’ (2004), p. 40 (class actions), p. 47 (punitive damages), p. 50 (discovery), pp. 68–72 (causation and damages), available at http://ec.europa.eu/competition/antitrust/actionsdamages/ comparative report clean en.pdf. 10 The rules of the Japan Federation of Bar Associations do not prohibit them. Hence, they are considered allowed. For an example in an antitrust case, see Residents of Uji City v. Uji

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lawyers per capita in Japan is much closer to the average in the EU than to the average in the United States.11 In sum, Japan’s experience with the oil cartel cases offers a rare chance to analyze the dynamics of indirect purchaser litigation in a civil law jurisdiction. These cases allow for testing of the various theoretical claims that are made about the costs and benefits of indirect purchaser litigation. To my knowledge, no judgments in cases brought by indirect purchaser have been rendered in the EU.12

Overview of the three oil cartel cases Although the three consumer lawsuits attracted widespread attention from Japanese media13 and scholars alike,14 they have not been the subject

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City, 63(4) Minsh¯u 703 (Sup. Ct., 23 April 2009), www.courts.go.jp/english/judgments/ text/2009.04.23–2007.-Ju-.No.. 2069.html. Japan has 23 lawyers per 100,000 inhabitants; Finland has 34.4; Sweden has 49.4. The average for the EU is 120. By contrast, the United States has around 390 lawyers per 100,000 inhabitants. For Japan: my own calculation, based on the following data: population of 125.77 million (October 2010) and 30,000 lawyers; source: ‘Bengoshis¯u, hatsu no san mannindai ni – shih¯o sh¯ush¯ude 1900 nin g¯okaku’, Nihon Keizai Shimbun, 15 December 2010. For Finland, Sweden and the EU: see European Commission for the Efficiency of Justice, European Judicial Systems: Edition 2010 (Data 2008): Efficiency and Quality of Justice (Council of Europe, 2010), p. 237. For the United States: my own calculation, based on the following data: population of 307 million (July 2009) and 1.2 million lawyers (American Bar Association data, 2010). In England, in a case relating to the air cargo cartel (European Commission, 9 November 2010 (fining eleven airlines a total of almost 800 million euro)) a damages claim was brought against British Airways by two importers of cut flowers who sued on behalf of themselves and ‘all direct and indirect purchasers’ of air cargo services. However, the representative part of the claim, including the claim on behalf of the indirect purchasers, was struck from the lawsuit (Emerald Supplies Ltd v. British Airways plc [2009] UKCLR 801, [2009] EWHC 741 (Ch), [2009] CP Rep 32, upheld by Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284). In the Netherlands, also with respect to the air cargo cartel, a damages action was filed by a group of plaintiffs that possibly includes indirect purchasers. The case is pending at the time of writing. ‘Luchtvaartkartel krijgt reuzeclaim van verladers’, De Volkskrant, 30 September 2010. Finally, in Germany, an action by an indirect purchaser is pending in relation to damages resulting from the carbonless paper cartel. See e.g. ‘Yami karuteru – fut¯ona rieki wo kaese – shufura nanaj¯unin sosh¯o’, Asahi Shimbun, 10 September 1974, p. 3; ‘T¯oyu saiban nigai wakai’, Asahi Shimbun, 3 July 1981, p. 13; ‘Sekiyu yami karuteru – henkan sosh¯o no wakai seiritsu – motourigawa ga 400 man shiharau’, Nihon Keizai Shimbun, 3 July 1981, p. 23. Y. Hasebe, ‘Songai no sh¯omei – tsuruoka t¯oyu jiken’ in M. It¯o and S. Kat¯o (eds.), Hanrei kara manabu – minji jijitsu nintei (Tokyo: Y¯uhikaku, 2006), pp. 36–40; T. Shiraishi, ‘Hanrei hy¯oshaku – tsuruoka t¯oyu jiken j¯okokushin’, H¯ogaku Ky¯okai Zasshi, 113(5) (May 1996), 850–869; T. Shiraishi, ‘Hanrei hy¯oshaku – tokyo t¯oyu jiken’, H¯ogaku Ky¯okai Zasshi, 106(10) (October 1989), 1901–1916.

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of much analysis in the English-language literature. The oil cartel also gave rise to two notorious criminal cases and the judgments in those cases15 have been partly translated and extensively commented on.16 By contrast, the three damages cases have only been thoroughly analyzed in two articles, both written before the Japanese Supreme Court had its final say on the matter.17 I first give some background information about the kerosene cartel that lay at the basis of the damages actions. Next I introduce the three different cases that were brought and the opt-in collective action mechanism that was used by the plaintiffs. Finally, I explain how one out of the three cases was settled, while the other two ended in a loss for the consumers.

The kerosene cartel In Japan, kerosene is the main source of heating for homes,18 making it an important consumer product. It is a derivative of oil, like gasoline, diesel, LPG and others. Because Japan has virtually no oil, it imports enormous

15 Japan v. Sekiyu Renmei, 983 Hanrei Jih¯o 22 (Tokyo H. Ct., 26 September 1980), translated in J. M. Ramseyer, ‘The Oil Cartel Criminal Cases: Translations and Postscript’, Law in Japan, 15 (1982), 57, 66; Japan v. Idemitsu K¯osan K.K., 985 Hanrei Jih¯o 3 (Tokyo H. Ct., 26 September 1980), aff’d in part and rev’d in part, 1108 Hanrei Jih¯o 3 (Japan Sup. Ct., 24 February 1984). 16 Law in Japan – An Annual, 15 (1982), 1 (containing articles by J. O. Haley, W. Pape, L. Repeta, J. M. Ramseyer, M. Matsushita and K. Sanekata on the criminal oil cartel cases and on administrative guidance); J. M. Ramseyer, ‘Japanese Antitrust Enforcement After the Oil Embargo’, American Journal of Comparative Law, 31 (1983), 395. 17 Ramseyer, ‘Japanese Antitrust Enforcement After the Oil Embargo’, 395–430; J. M. Ramseyer, ‘The Costs of the Consensual Myth: Antitrust Enforcement and Institutional Barriers to Litigation in Japan’, Yale Law Journal, 94 (1985), 604 (analyzing the Yamagata District Court judgment and the Tokyo High Court judgment; both of these judgments were appealed); A. Sh¯oda, ‘Dokusenkinshih¯o ihan k¯oi to songai baish¯o’, Keizaih¯o Gakkai Nemp¯o, 3 (1982), 1, translated in S. Salzberg, Law in Japan: An Annual, 16 (1983), 1 (focusing on the court’s ruling on the evidentiary value of a JFTC recommendation decision). See also P. L. Maclachlan, Consumer Politics in Postwar Japan: The Institutional Boundaries of Citizen Activism (New York: Columbia University Press, 2002), pp. 157–159 (briefly discussing the cases as a stage in the development of the Japanese consumer movement). Because the Supreme Court judgments have given rise to erroneous interpretations and misunderstandings, a translation of key parts of the Supreme Court judgment in the Tsuruoka case (Nihon Sekiyu K.K. v. Sat¯o), which was the final word in the oil cartel saga, is appended below. 18 Petroleum Association of Japan, ‘2005 nen dai san ank¯eto’, available at www.paj.gr.jp/ life/enq/2005/12/result.html (showing that 62.3 percent of respondents used kerosene as main source of heating; electricity came in second at 27 percent).

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indirect purchasers and collective actions Crude oil suppliers Oil refiners and primary distributors (cartel) Wholesalers Retailers or cooperatives Consumers

Figure 12.1. Distribution chain.

quantities from abroad, especially from OPEC countries.19 When OPEC cut crude oil production in October 1973, the price of crude oil on the world market quadrupled20 and Japan was heavily hit. The oil crisis, known as the oil shock in Japan, contributed to double-digit inflation,21 shortages and panic buying by consumers.22 To deal with the rising cost of crude oil, a cartel of twelve oil companies, comprising virtually all refiners and primary distributors of kerosene in Japan, jointly raised prices for kerosene in 1973. The oil refiners did not sell kerosene directly to consumers. Instead, they sold to wholesalers, who sold to retailers or, in some cases, cooperatives. Finally, the retailers or cooperatives sold to consumers (Figure 12.1). Consumers were outraged over price increases and the shortage of basic consumer goods. The Japanese government, particularly the Ministry of International Trade and Industry, sought to restrain prices through administrative guidance and saw cartels as a benign tool to avoid sudden and uncontrolled price increases. Japan’s antitrust authority, the Fair Trade Commission (JFTC), saw things differently. At the end of 1973, it raided the offices of the oil 19 Petroleum Association of Japan, ‘Petroleum Industry in Japan’ (September 2010), p. 12, available at www.paj.gr.jp/english/data/paj2010.pdf (over 90 percent of Japan’s oil imports came from OPEC in 1973). 20 Petroleum Association of Japan, ‘Petroleum Industry in Japan’ (September 2010), p. 21, available at www.paj.gr.jp/english/data/paj2010.pdf. 21 N. Yoshino and E. Sakakibara, ‘The Current State of the Japanese Economy and Remedies’ Asian Economic Papers, 1 (2002), 110, 113 (consumer price index rose by 15.92 percent in 1973, by 20.93 percent in 1974, and the wholesale price index rose in 1973 (21.67 percent) and 1974 (20.09 percent)); see also J. O. Haley, Antitrust in Germany and Japan: The First Fifty Years, 1947–1998 (Seattle: University of Washington Press, 2001), p. 59 (mentioning 30 percent). 22 Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o (Tokyo: Nippon H¯os¯o Shuppan Ky¯okai, 1980), pp. 176–177.

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companies.23 Subsequently, criminal and administrative proceedings were brought for price fixing, resulting in convictions24 and a ceaseand-desist order.25

The consumers go to court In the wake of the JFTC investigation into the oil companies’ cartel, a number of consumers decided to take action. They formed the ‘Association of Consumers to Take Back What They Were Robbed of’ (torareta mono wo torikaesu sh¯ohisha no kai).26 As the association’s name implies, their aim was to recover what they had overpaid as a result of the illegal cartel. Preparing the lawsuit proved a challenge. Many consumers were initially willing to join, but had not kept proof of their purchases. Others felt reluctant to be part of a lawsuit. The leaders of the consumer group reportedly were busy until late at night, visiting households to explain the lawsuit and seek their approval.27 In September 1974,28 the consumers filed their damages claims with the Tokyo High Court (hereinafter the ‘first Tokyo case’).29 The lawsuit pitted 343 consumers, from various parts of Japan, against six of the twelve oil companies30 that had engaged in price fixing. Claims ranged from as high as 16,630 yen (around 40,000 yen or US$ 485 in present value) to as low as 67 yen (around 160 yen or US$ 2 in present value).31 Soon thereafter, a similar suit was filed before the same court by members of the Housewives Association (shufuren) and several consumer

23 ‘Sekiyu renmei wo teire – niseki nado oote 13ka sho mo – yami neage no utagai’, Asahi Shimbun, 27 November 1973; Y Tsurumi, ‘Japan’, Daedalus: Journal of the American Academy of Arts and Sciences (Fall 1975), 122. 24 Japan v. Idemitsu K¯osan K.K.; Japan v. Sekiyu Renmei. 25 JFTC Recommendation Decision, 22 February 1974, 20 Shinketsushu¯ 300. 26 ‘Yami karuteru’, 3; Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 180. The ‘to’ in torareru is written with the character for robbing, plundering (ubau). 27 Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 182. 28 Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 180; ‘T¯oyu saiban nigai wakai’, 13; ‘Sekiyu yami karuteru’, 23. 29 Miyazaki v. Nihon Sekiyu K.K. (filed in 1974) and Iwata v. Nihon Sekiyu K.K. (filed one year later, but handled together with Miyazaki v. Nihon Sekiyu K.K.). 30 Six of the twelve companies had contested the JFTC decision. Art. 26(1) of the Antimonopoly Act only allows damages suits after the JFTC decision has become final. 31 ‘Yami karuteru’, 3.

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cooperatives (hereinafter the ‘second Tokyo case’).32 The lawsuit would ultimately encompass the claims of ninety-eight consumers. Both of these cases were filed on the basis of Article 25 of the Japanese Antimonopoly Act33 , which explicitly provides for a right to damages in case of antitrust violations, provided there is a final JFTC decision establishing that violation. The Antimonopoly Act also specifies that these claims must be brought before the Tokyo High Court. Five hundred kilometres north of Tokyo, in Tsuruoka, a small city in Yamagata Prefecture, consumers chose a different legal tactic. Not inclined to sue in the distant Tokyo High Court, they filed a claim for damages on the basis of the Japanese Civil Code’s general tort provision (hereinafter the ‘Tsuruoka case’).34 This meant they were free to sue in the local district court, the Tsuruoka branch of the Yamagata District Court.35 It was the first antitrust damages case filed on this basis.36 But the case was even more extraordinary for the number of plaintiffs: 1,654 in total,37 making it one of the largest consumer actions in Japanese post-war history. In the next section, I look at the mechanism plaintiffs used to initiate these multi-party suits.

The procedural mechanism: the Japanese class action In all three cases, the plaintiffs used the opt-in mechanism available under the Japanese Civil Procedure. Article 30(1) of that Code, which was Article 47(1) of the Code at the time of the lawsuits,38 provides 32 Kai v. Nihon Sekiyu K.K.; See Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 180. 33 Shiteki dokusen no kinshi oyobi k¯osei torihiki no kakuho ni kansuru h¯oritsu, Law No. 54 of 1947, as amended. 34 Sat¯o v. Sekiyu Renmei. 35 In addition, they could sue all twelve oil companies and the Petroleum Association. At the time, trade associations could not be sued on the basis of Art. 25 of the Antimonopoly Act. This restriction has now been removed. Because a final JFTC order is not required for a damages action based on tort, the fact that six of the twelve companies were contesting the JFTC decision did not matter. 36 In Ky¯oei Dennetsu K¯ogy¯o v. Okabe Maika K¯ogy¯osha, 283 Hanrei Taimuzu 324 (Osaka D. Ct., 23 June 1972) the plaintiff sued in the Osaka District Court for damages on the basis of an antitrust violation. However, the plaintiff did not invoke Art. 709 of the Civil Code but rather Art. 25 of the Antimonopoly Act as the basis of his claim and the court rejected the claim because there was no final JFTC decision. 37 ‘Sh¯ohisha saiban d¯o kecchaku’, Asahi Shimbun, 25 March 1981, p. 13. 38 In 1996, the Code of Civil Procedure was subjected to a major overhaul. However, Art. 30(1) in the current code is identical – except for the fact that the provision’s

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as follows: ‘A number of persons who share common interests . . . may appoint, from among them, one or more persons as parties to stand as plaintiffs or defendants on behalf of all’.39 Based on this provision, representative parties (senteit¯ojisha) can sue on behalf of a large number of represented parties (senteisha). Once appointed, the representative plaintiff40 can perform all acts related to the litigation, including settling the case, without the need for a specific authorization from the represented party.41 The represented plaintiffs take no active part in the litigation and are technically not a party to the case. Whether one calls this a class action, representative action or something else is a matter of semantics, as none of those terms has a fixed meaning.42 What matters is how the mechanism functions in practice. First of all, it is an opt-in mechanism, meaning nobody is part of the group of represented plaintiffs unless he or she takes an affirmative step by appointing, in writing,43 a representative. This feature sets the Japanese mechanism apart from the opt-out class actions that exist in jurisdictions such as the United States, Canada and Australia.44 At the time of the oil cartel cases, opt-in was only permitted at the start of the action. Once the action had been initiated, no one could join by simply appointing a representative.45 This rule was changed as part of

39 40 41

42

43 44 45

archaic language was modernized – to Art. 47(1) in the former Code. The former Code of Civil Procedure is available at http://homepage3.nifty.com/matimura/joubun/minso/ minso1–2.html. Code of Civil Procedure (minjisosh¯oh¯o), Art. 30(1) (former Code of Civil Procedure, Art. 47(1), available at www.japaneselawtranslation.go.jp. Defendants can also use the mechanism, but in what follows the discussion is focused on plaintiffs. M. It¯o, Minji sosh¯oh¯o, 3rd ed. (Tokyo: Y¯uhikaku, 2005), p. 161; E. Adachi, ‘Senteit¯ojisha’, Waseda Law Review, 74 (1999), 473. To the objection that this could expose the represented parties to acts against their interest taken by the representative parties, the answer of Japanese scholars is that the appointment is optional and can be withdrawn at any point in time (Adachi, ‘Senteit¯ojisha’, 474). Different authors use different terms for the Japanese mechanism. See e.g. C. F. Goodman, ‘Japan’s New Civil Procedure Code: Has It Fostered a Rule of Law Dispute Resolution Mechanism?’, Brooklyn Journal of International Law, 29 (2004), 511, 589 (using the term ‘representative action’); Adachi, ‘Senteit¯ojisha’, 474 (pointing out that the mechanism has been described by scholars as the Japanese version of the class action). Rules of Civil Procedure (minjisosh¯o kisoku), Art. 15, available at www.japaneselaw translation.go.jp. See R. Mulheron, The Class Action in Common Law Legal Systems: A Comparative Perspective (Oxford: Hart Publishing, 2004), pp. 29–38. However, someone who was already a plaintiff in the case could appoint a representative among his fellow plaintiffs and then withdraw from the lawsuit (Former Code of Civil

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the major overhaul of Japan’s Code of Civil Procedure in 1996. Under the present system, parties can opt-in even after the lawsuit has been initiated.46 Second and related to the first point, all parties have to be identified, meaning there are only named class members – no unnamed or ‘absent’ class members. Third, the amount claimed by each plaintiff, both representative and represented ones, is normally specified at the start or during the proceedings.47 Fourth, the proceedings will result in a judgment that is binding on all parties, both the representative and represented ones.48 Finally, the representative plaintiff is not allowed to receive any remuneration for representing other parties.49 The idea behind the mechanism is to make lawsuits in case of scattered low-value damages possible,50 but it was and still is only sparsely used.51 The oil cartel cases are probably the most famous case in which the mechanism has been used.

A bitter settlement in the first Tokyo case The cases dragged on for years. In the first Tokyo High Court case, the court recommended that the parties work out a settlement.52 Negotiations

46 47 48 49

50 51

52

Procedure (ky¯u minjisosh¯oh¯o), Art. 47(2)). Therefore, a party can ‘opt-in’ by bringing his own suit, then having it joined to the prior lawsuit, then appointing a representative plaintiff among the other plaintiffs in the case, after which he will become a represented party (Adachi, ‘Senteit¯ojisha’, 470). Some plaintiffs in the first Tokyo case used this technique to join the lawsuit after it was initiated. See Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 180. Code of Civil Procedure, Art. 30(3) and Art. 144 (allowing claims to be added until the end of oral argument). See e.g. in the Tsuruoka case: Sat¯o v. Sekiyu Renmei, at 1353 (mentioning an inventory with the amounts claimed by each represented party). Code of Civil Procedure, Art. 115(1)(ii); It¯o, Minji sosh¯oh¯o, p. 158. This would apparently conflict with the Trust Act (shintakuh¯o), Law No. 108 of 2006, Art. 10 (prohibiting litigation trusts) and Attorney Act (bengoshih¯o), Law No. 205 of 1949 (prohibiting non-attorneys from providing representation in lawsuits for the purpose of obtaining compensation). See Adachi, ‘Senteit¯ojisha’, 477. Adachi, ‘Senteit¯ojisha’, 474. Y. Taniguchi, ‘The 1996 Code of Civil Procedure of Japan - A Procedure for the Coming Century?’, American Journal of Comparative Law, 45 (1997), 767, 783; Adachi, ‘Senteit¯ojisha’, 472; Goodman, ‘Japan’s New Civil Procedure Code’, 590 (concluding, on the basis of interviews with Japanese attorneys that ‘the New Code brought about no great change’). Miyazaki v. Nihon Sekiyu K.K., at 188; ‘Sekiyu yami karuteru’, 23; ‘T¯oyu saiban nigai wakai’, 13.

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took months53 and finally, the parties reluctantly agreed on the terms of a compromise.54 The oil companies paid four million yen (around US$ 18,000 at the time)55 to cover part of the consumers’ litigation expenses and made a ‘donation’ of five million yen to a legal aid agency.56 The consumers themselves recovered nothing. In sum, the oil companies paid nine million yen (around US$ 40,000 at the time) under the settlement, which is almost twenty-five times the amount claimed by the plaintiffs. I will address this odd outcome in the section on the costs of indirect purchaser litigation. Although the amount paid by the defendants was a multiple of the amount claimed, for many consumer plaintiffs the settlement left a bitter aftertaste57 – not so much because they had not obtained any damages themselves, but because they had hoped for a clear judgment holding the oil companies liable and vindicating the consumers’ sense of economic justice. With the settlement, the oil companies did not acknowledge any liability.

Rejection by the Supreme Court in the two other cases Although the first Tokyo case was settled, the plaintiffs in the second Tokyo case and the Tsuruoka case vowed to litigate ‘till the very end’.58 Ultimately, the cases reached the Supreme Court. In two judgments, one rendered in 1987 and one in 1989, it rejected the consumers’ claims.59 At the core of the Supreme Court’s reasoning was the question of whether the consumers had suffered damage as a result of the cartel. This issue of the existence of the damage is fundamentally an issue of causation. In Japan, like in many other jurisdictions, plaintiffs must show that ‘but for’ the violation, they would not have suffered harm. This meant that

53 The court had recommended a settlement at the twenty-first oral hearing in the case, which took place on 8 December 1980. See ‘T¯oyu saiban nigai wakai’, 13. A settlement was reached on 2 July 1981. See Miyazaki v. Nihon Sekiyu K.K., at 188. 54 Miyazaki v. Nihon Sekiyu K.K., at 195. 55 The exchange rate on the day of the settlement was 228 yen for one dollar; see ‘Dollar at 36-year High Against Franc in U.S.’, New York Times, 2 July 1981, p. 11. 56 The Japan Legal Aid Association (h¯oritsu fujo ky¯okai), whose activities have now been taken over by the Japan Legal Support Center (nihon shih¯o shien sent¯a). 57 ‘T¯oyu saiban nigai wakai’, 13 (citing a consumer representative). 58 ‘T¯oyu saiban nigai wakai’, 13 (‘akumade hanketsu motomeru’). 59 Kai v. Nihon Sekiyu K.K., at 785–791; Nihon Sekiyu K.K. v. Sat¯o, at 1259–83.

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the plaintiffs had to show that the actual retail price they paid was higher than the hypothetical retail price, that is, the price that would have existed without the cartel.60 The plaintiffs insisted that the hypothetical retail price should simply be equated to the retail price immediately prior to the cartel.61 According to the Supreme Court, such reasoning is acceptable in a stable economic situation when there are no changes in the various factors that determine the retail price.62 But in this case, the Supreme Court rejected this simple ‘before and after’63 analysis as inappropriate because, at the time of the oil cartel in 1973, there was a multitude of factors pushing retail prices up. These factors made it unclear whether, without the cartel, the retail price would actually have been lower. Foremost among those factors was the steady increase in the price of crude oil, the raw material from which kerosene is distilled. It was, after all, the time of the OPEC oil embargo. In addition, the demand for kerosene in Japan had increased spectacularly. To complicate matters further, prices of kerosene were at the time strictly supervised by Japan’s Ministry of Industry and Trade (MITI). MITI put consistent pressure on the oil industry to keep prices for consumer-use kerosene low, and any price increases, including the ones as a result of the cartel, were approved by MITI. Finally, there were economic changes in the distribution chain, where labour costs had risen in parallel with the rampant inflation.64 Because of all of these factors, the Supreme Court held that the hypothetical retail price could not simply be inferred from the retail price prior to the cartel.65 Instead, the plaintiffs had to take these factors into account and show that, but for the cartel, the actual retail price would have been lower. This they failed to do. Hence, the consumers did not prove that the cartel caused any harm and their claim was dismissed.

60 Nihon Sekiyu K.K. v. Sat¯o, 1271 (‘it must be the case that the actual retail price would have been lower without the cartel agreement in place’); Kai v. Nihon Sekiyu K.K., at 787. 61 Nihon Sekiyu K.K. v. Sat¯o, at 1278; Kai v. Nihon Sekiyu K.K., at 898. 62 Nihon Sekiyu K.K. v. Sat¯o, at 1271; Kai v. Nihon Sekiyu K.K., at 788. 63 In fact, the Supreme Court only mentioned the ‘before’ price. Comparison with the ‘after’ price was not meaningful in the case, because in the period after the cartel ended, the price of kerosene kept on rising as a result of higher prices for crude oil. At the time of the hearing in the first oil cartel case, the price for 18 litres of kerosene was 1500 yen, versus 330 yen at the time the lawsuit was initiated. See ‘T¯oyu saiban nigai wakai’, 13. 64 Nihon Sekiyu K.K. v. Sat¯o, at 1272–1277 (listing the factors that had an impact on prices). 65 Nihon Sekiyu K.K. v. Sat¯o, at 1277; Kai v. Nihon Sekiyu K.K., at 789.

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Although the Supreme Court’s judgments have been heavily criticized as imposing an almost impossible burden of proof on plaintiffs,66 the Court’s conclusion followed logically from the application of traditional tort rules on causation. It is difficult to imagine how the Court, without any legislative basis, could have used a different causation rule than the classic ‘but for’ test or how it could have shifted the burden of proof for causation to the defendants. Some of the criticism seems to be based on a misunderstanding of the oil cartel cases.67 Several commentators suggest that the oil cartel cases foundered because the plaintiffs had trouble proving the damages.68 In fact, the court never even reached that stage. A distinction must be made between proving the existence of the damage and the extent of the damage. In the United States, this is often referred to as the fact of the damage and the amount of the damages. The first component is intrinsically linked with causation: If the violation did not cause damage, no damage exists. By contrast, the issue of the assessment of the damages is only a second step, to be taken after the existence of damage has been established. The first issue is usually subject to rather strict burdens of proof whereas the second issue is governed by more lenient standards.69 In Japan, for instance, Article 248 of the Code of Civil Procedure, introduced in 1998, allows courts to make a reasonable estimate of the damages when it is extremely difficult to prove their amount.70 66 M. Matsushita, ‘The Antimonopoly Law of Japan’ in E. M. Graham and J. D. Richardson (eds.), Global Competition Policy (Washington DC: Institute for International Economics, 1997), pp. 166–167; Ramseyer, ‘The Costs of the Consensual Myth’, 604 (criticizing the judgments at the first instance level, which applied a similar reasoning as the Supreme Court). 67 T. Shiraishi, Dokkinh¯o jirei no kandokoro, 2nd ed. (Tokyo: Y¯uhikaku, 2010), pp. 40–41 (pointing out that many authors read the Supreme Court judgment as having rejected the plaintiffs’ claim for failure to prove the amount of damages, whereas, in fact, the issue was whether there was any damage at all). 68 See e.g. I. Takahashi, ‘The Development of Competition Law for the Last 15 Years in Japan: Progress or Setback?’ in A. Heinemann, A. Kellerhals and R. Z¨ach (eds.), The Development of Competition Law: Global Perspectives (Chelthenham: Edward Elgar, 2010), p. 104 (‘the court judged against the plaintiffs because the amount of damages was not identified’); Haley, Antitrust in Germany and Japan, p. 155 (stating that the plaintiffs failed in proving damages). 69 See, for the EU: Waelbroeck, Slater and Evan-Shoshan, ‘Study on the Conditions of Claims for Damages in Case of Infringement of EC Competition Rules’, 71 (showing that a number of EU jurisdictions have rules that relax the burden of proving the amount of damage); for the United States: Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 562 (1931). 70 Code of Civil Procedure, Art. 248.

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Although the consumers ultimately lost, the two Supreme Court judgments were favourable to consumers in a number of respects. First, the Supreme Court upheld the Tsuruoka plaintiffs’ theory that an antitrust violation is a tort and can be the basis of a suit on the basis of the general tort provision of the Civil Code, that is, Article 709.71 This was an important precedent as it opened the way for plaintiffs to seek damages without having to wait for a final JFTC decision and without having to bring the case before the Tokyo High Court. In fact, ever since, Article 709 of the Civil Code has proven to be a more popular route for antitrust damages actions than the specific damages provision in the Antimonopoly Act. Second, the Supreme Court confirmed that indirect purchasers have standing to sue for antitrust damages.72 The oil manufacturers had argued that only direct purchasers should have standing. This is the rule in the United States,73 and the oil manufacturers cited the U.S. case law in support of their argument.74 The Supreme Court dryly noted that, under Japanese law, there is no legal basis to deny standing to a plaintiff who alleges an antitrust violation, damage and a causal link between the two, regardless of whether the plaintiff is a direct or indirect purchaser. If it turns out that the plaintiff has not suffered damage, his or her claim will be dismissed on the merits, but not as a matter of standing.75

The merits of indirect purchaser litigation Access to justice Unlike U.S. federal antitrust law, Japanese law allows indirect purchasers to sue for damages. The most obvious benefit of such a rule is that it allows consumers who have been harmed by unlawful conduct to obtain compensation. In the oil cartel cases, the consumers ultimately recovered nothing because they failed to prove that they had been harmed, but at least they had access to a forum where their claims were heard. Access to the court system also allowed consumers to draw public attention to the issue of unlawful cartels and the damage they cause 71 Nihon Sekiyu K.K. v. Sat¯o, at 1262–1263. 72 Nihon Sekiyu K.K. v. Sat¯o, at 1263–1264. In 1977, the Tokyo High Court had already held that consumers, as indirect purchasers, have standing to sue a manufacturer who engages ¯ in vertical price fixing. See Okawa v. Matsushita Denki Sangy¯o K.K., 863 Hanrei jih¯o 20 (Tokyo H. High Ct., 19 September 1977), summarized in English in Law in Japan: An Annual, 10 (1977), 165. 73 Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). 74 Nihon Sekiyu K.K. v. Sat¯o, at 1278–1280. 75 Nihon Sekiyu K.K. v. Sat¯o, at 1264.

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to consumers. In fact, in the oil cartel cases, the consumers may have valued this aspect just as much as any actual compensation that they would obtain. One of the consumer advocates involved in the lawsuits commented that ‘consumer organizations filed suits that were destined to fail simply because there was no better forum for publicizing the status of consumer rights in Japan.’76

Direct purchasers do not sue The oil cartel cases illustrate that in some cases only indirect purchasers will sue. The other actors in the distribution chain, that is, wholesalers and retailers, never claimed damages. Neither did the businesses that bought kerosene as end-users. This is remarkable because they were charged even higher prices than consumers for the same product, as the oil companies marketed the same kerosene separately as consumer-use and business-use kerosene, each having a different colour.77 There are generally two reasons direct purchasers often refrain from suing. First, they do not want to harm the business relationship with their supplier. Some have suggested that this is particularly true in Japan, where vertical relationships between businesses are particularly close and continuous.78 The oil cartel cases offer some evidence of this close relationship: Consumers who had lost their receipts obtained duplicates from the retailers but were reluctant to use them out of fear that the helpful retailers would be subject to retaliation.79 Second, and probably more important, distributors can simply pass on the overcharge to their customers. Hence, they suffer no or little loss as a result of the cartel. Since Japanese law, like most jurisdictions other than the United States, allows plaintiffs to recover only for the harm actually sustained, they have little or no incentive to sue. 76 K. Nishikawa, cited in Maclachlan, Consumer Politics in Postwar Japan, p. 159. 77 Kai v. Nihon Sekiyu K.K., at 968; Sat¯o v. Sekiyu Renmei, at 1498. 78 Sh¯oda, ‘Dokusen kinshih¯o ihan k¯oi to songai baish¯o’, 16–18; H. Iyori and A. Uesugi, The Antimonopoly Laws and Policies of Japan (New York: Federal Legal Publications, 1994), p. 239 (‘In a country like Japan where business relations tend to be continuous, it is less probable that injured persons who are direct customers would file damage suits’); Ramseyer, ‘Japanese Antitrust Enforcement After the Oil Embargo’, 424 (‘Apparently, however, no direct purchaser in Japan has ever brought an antitrust damage action against his supplier. In such a cultural context, the American rule [allowing only direct purchasers to sue] could be enormously counterproductive.’). 79 Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, pp. 182–183. Obviously, the retailers are not direct purchasers either in this case, because they bought from wholesalers who bought from the oil companies. The point, however, is that close vertical relationships may inhibit suits.

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Whatever the reason, the fact is that direct purchasers sometimes refrain from bringing a damages action. In that case, indirect purchaser suits are the only private enforcement mechanism that can seek the return of the unlawful profits obtained by infringers. In this way, indirect purchaser lawsuits contribute to society’s wider interest in deterring antitrust violations. But the oil cartel cases show that the deterrent effect should not be overestimated. First, if an additional sanction was necessary to effectively deter, it could have been meted out much more efficiently in the criminal proceedings by imposing a higher fine, rather than having to rely on a costly damages actions. Second, even if the consumers had prevailed, the aggregate amount of their claim was too small to have any significant deterrent effect. The oil companies were undoubtedly much more concerned with the criminal charges they were facing than with the damages claims.

The problems with indirect purchaser litigation Costly and inefficient: ‘it’s just not worth it’ The three oil cartel cases are examples of very costly and inefficient litigation. By costly, I do not mean that they imposed large damages awards on defendants. Such an award is the ultimate goal of a compensatory system and, in economic terms, does not represent a cost but a simple transfer of money from one party to the other. The costs at issue here is money that ‘goes up in smoke’: the parties’ legal costs, the costs imposed on the judiciary for handling the litigation, and opportunity costs, that is the costs resulting from the fact that the time spent by the parties and their employees on litigation cannot be spent on more productive activities. These costs are sometimes called transaction costs.80 By inefficient, I mean that the costs caused by these cases far exceeded the amount of harm that the plaintiffs alleged they had suffered. The costs outweighed the benefits or, put differently, the cases did not pass the so-called ‘it just ain’t worth it’ test.81 In fact, the plaintiffs’ attorneys’ fees alone largely exceeded the recovery sought. In other words, what the 80 See e.g. D. R. Hensler et al., Class Action Dilemmas: Pursuing Public Goals for Private Gain (Santa Monica: RAND, 2000), p. 438. 81 Hensler et al., Class Action Dilemmas, p. 31 (2000) (discussing attempts in the United States to add a cost-benefit test to Rule 23(b)(3) of the Federal Rules of Civil Procedure and mentioning that this test is often referred to as the ‘it just ain’t worth it’ test).

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plaintiffs spent on their attorneys was worth more than the harm caused to them by the cartel. In what follows, I first compare the recovery sought by the plaintiffs with what they spent on attorneys’ fees. Next, I compare that same recovery with the total costs caused by the litigation.

Attorneys’ fees for plaintiffs exceeded the potential recovery The judgments do not contain information on either side’s attorneys’ fees, but the settlement in the first Tokyo case allows us to get an idea of the amount involved. Under the settlement, the defendants paid the consumers four million yen to cover part of their attorneys’ fees.82 At the time of the settlement, the case was still pending before the first instance court (the Tokyo High Court). This amount represented only part of the plaintiffs’ attorneys’ fees, so it is a minimum. As a conservative estimate, I assume that in the other two cases, which were fully litigated in the first instance and then appealed until a final judgment was rendered by the Supreme Court, the attorneys’ fees were at least double that amount, that is, eight million yen per case. The Tsuruoka case involved a much larger number of plaintiffs and was litigated at three different levels (district court, high court and Supreme Court), whereas the second Tokyo case involved a much smaller number of claims. Plaintiffs’ attorneys spent time sorting out each individual’s claim,83 so I use slightly different estimates for each. The Tsuruoka plaintiffs were most numerous and therefore aggregated the largest claim (3,890,000 yen84 ). The claims in the first and second Tokyo cases were significantly smaller (362,847 yen85 and 75,801 yen,86 respectively) (Figure 12.2). In reality, attorneys’ fees were probably higher than the estimates in this table, but even when estimated conservatively, it is clear that they far exceeded the harm suffered by plaintiffs. Given this cost-benefit balance,

82 Miyazaki v. Nihon Sekiyu K.K., at 175 (‘the oil companies will bear part of plaintiffs’ litigation expenses in an amount of 4,000,000 yen’). 83 ‘Yami karuteru’, 3 (mentioning that in the first Tokyo case a team of thirty lawyers was needed just to collect receipts and prepare the suit). 84 Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 181; ‘Sh¯ohisha saiban d¯o kecchaku’, 13. 85 Miyazaki v. Nihon Sekiyu K.K., at 196 and 200 (127,590 yen plus 235,257 yen); Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 180 (mentioning a slightly different amount: 362,950 yen). 86 Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 180.

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1st Tokyo Case (343 plaintiffs)

(minimum)

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Claim Attorney Fees

(est.)

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(est.) 0

2

4

6

8

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Amount (in 1,000,000 yen)

Figure 12.2. Comparison amount of claim and plaintiffs’ attorneys’ fees (in million yen).

it is not surprising that the oil cartel cases were the first, but so far also the last, indirect purchaser suits to occur in Japan.

The total costs caused by the litigation exceeded the potential recovery The plaintiffs’ attorneys’ fees mentioned in the previous paragraph constitute only a fraction of the total costs generated by these cases. Litigation also takes up significant judicial resources: The court clerk has to ensure service of process on the defendants87 and judges have to prepare and conduct hearings, examine the evidence and render judgment. Their salaries are paid by the state and, ultimately, the taxpayer and society. In addition, litigation entails attorneys’ fees for defendants. It also results in opportunity costs: The time spent by the defendants’ employees collecting documents, conferring with counsel and preparing for litigation cannot be spent on other more productive activities. The significance of these opportunity costs and attorneys’ fees for the defendants is evidenced by the settlement in the first Tokyo case. The plaintiffs claimed a mere 363,000 yen in that case, and yet the defendants settled for nine million yen. What can explain why a defendant would settle for twenty-five times more than he or she could be held liable

87 In Japan, service of the complaint and summons is effected not by the plaintiff but by the court clerk.

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1st Tokyo Case (343 plaintiffs)

317

(est.)

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2nd Tokyo Case (98 plaintiffs)

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Tsuruoka Case (1,654 plaintiffs)

(est.)

0

5

10

15

20

25

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Amount (in 1,000,000 yen)

Figure 12.3. Comparison amount of claim and total litigation costs (in million yen).

for?88 Interest, that is, the prejudgment interest at 5 percent per year that would be due on the 363,000 yen in case of a loss,89 can only explain a very small fraction of the difference. There is, of course, some value to a settlement in that it gives certainty and avoids a possible judgment clearly affirming the defendants’ liability. But the most plausible reason is simply that, for the defendant companies, it was cheaper to settle for nine million yen than to keep litigating because of attorneys’ fees and opportunity costs. Taking these costs into account, the inefficiency of the oil cartel cases is even more glaring. A simple back-of-the-envelope calculation quickly reveals the disparity between the total costs and the potential recovery (Figure 12.3). I assume defendants’ attorneys’ costs to be equal to plaintiffs’ attorneys’ fees.90 Next, I add defendants’ opportunity costs, that is,

88 The plaintiffs did not seek recovery of their attorneys’ fees. Hence, their only claim was the claim for 363,000 yen, increased with interest at 5 percent until the date of payment. See Miyazaki v. Nihon Sekiyu K.K., at 196. 89 Civil Code (minp¯o), Arts. 404 and 419. 90 Cf. R. H. Lande, ‘Are Antitrust “Treble” Damages Really Single Damages?’, Ohio State Law Journal, 54 (1993), 115, 139 (using a similar assumption); S. C. Salop and L. J. White, ‘Economic Analysis of Private Antitrust Litigation’, Georgetown Law Journal, 74 (1986), 1001, 1015, n. 49 (suggesting that defendants may have higher legal costs because they use more expensive law firms but noting that, in their sample of responses, plaintiffs tended to have slightly higher legal costs than defendants).

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the corporate time and expenses spent on preparing the case, which I estimate at half of the attorneys’ fees.91 I also add the costs for the judiciary.92 Because I have no meaningful yard-stick and because I want to make a conservative estimate, I do not add the opportunity costs of the plaintiffs. The estimates do not aim for accuracy but are presented to provide some general sense of the costs involved and how they compare against the possible benefits for plaintiffs. Based on these estimates, costs outweighed the potential recovery by a factor of thirty (first Tokyo case), three hundred (second Tokyo case) and seven (Tsuruoka case).

Lengthy and complex The oil cartel cases illustrate that indirect purchaser lawsuits easily turn into lengthy and exceedingly complex proceedings. The first case was settled after seven years while the case was still pending at the first instance level.93 Proceedings in the second Tokyo case and the Tsuruoka case lasted thirteen and fifteen years respectively. In each case, at the first instance level alone, more than twenty hearings took place, with over fifty witnesses being heard.94 91 Cf. Lande, ‘Are Antitrust “Treble” Damages Really Single Damages?’, 142–143 (calculating that the lost corporate time and expenses resulting from an antitrust case in the United States at approximately 53 percent to 79 percent of attorneys’ fees). 92 Calculated as follows: District Court judges work 2,000 hours per year, for a salary of around ten million yen per year, resulting in a cost of 5,000 yen per hour. The cases involved around sixty witnesses, more than twenty hearings and a 200-page judgment. I estimate the total number of hours for all three judges at 600. Hence, the cost was three million yen at the District Court level in the Tsuruoka case (600 × 5,000). Based on a similar calculation, the costs of proceedings at the High Court level were estimated at 4.5 million yen (4 million yen in the first Tokyo case because the case was settled after the last hearing but prior to judgment) and, at the level of the Supreme Court, 1 million yen. Other court costs (court clerks, administrative staff) were not taken into account. I am grateful to Judge Shinji Sakakibara for his help in giving me an idea of the time and cost for handling a case. Compare Lande, ‘Are Antitrust “Treble” Damages Really Single Damages?’, 144 (estimating the marginal cost of an antitrust case for the judiciary, that is, the extra cost for one additional antitrust case, at US$ 21,000). 93 The case was filed in September 1974 and the settlement concluded on 2 July 1981. See Miyazaki v. Nihon Sekiyu K.K., at 188 (settlement on 2 July 1981); Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 182 (case initiated in September 1974). 94 Nippon H¯os¯o Shuppan Ky¯okai, Nihon no sh¯ohisha und¯o, p. 184 (fifty-eight in the first Tokyo case; sixty-seven in the Tsuruoka case); ‘T¯oyu saiban nigai wakai’, 13 (twenty-one hearings in the first Tokyo case).

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Civil cases in Japan at the trial level normally do not last longer than one or two years,95 and proceedings at the appellate level are even shorter.96 Although longer proceedings are not unusual, lawsuits lasting thirteen and fifteen years are clearly exceptional. Apart from being lengthy, the oil cartel cases were also markedly complex. At first glance, the oil cartel cases seem to represent indirect purchaser litigation at its simplest. The product was homogenous and the distribution chain was relatively straightforward. And yet, the cases soon ran into a quagmire of difficult factual and legal assessments. As these were follow-on cases, plaintiffs had comparatively little trouble establishing the antitrust violation. Everything else was difficult. The key issue was: if there had been no cartel, would the price for consumers have been lower? This is essentially an issue of causation, that is, whether the cartel caused damage to consumers. The court did not even reach the calculation of damages stage, which would undoubtedly have been difficult as well. I discuss three factors that greatly complicated the court’s assessment of causation. The first major complicating factor was the spectacular price increase in crude oil at the time of the cartel. The oil companies argued that the cartel simply implemented a price rise that was made inevitable because of the spectacular rise in the cost of crude oil. The consumers countered that the oil companies were using the price increase of crude oil as a pretext. In a way, there were two cartels at play in these cases: the kerosene cartel by the manufacturers and, in the background, a much larger cartel, that is, OPEC, whose production restraints caused the price of crude oil to go up. Determining the impact of the price increases of crude oil was complicated by the fact that oil is a so-called joint product. Oil cannot be refined in a 95 See e.g. for the year 2001, Supreme Court, ‘Annual Report of Judicial Statistics for 2001’, Chart 21, available at www.courts.go.jp/sihotokei/nenpo/pdf/08CCC4465B35B66 D49256D4F0004D50F.pdf; the figures for the 1980s, when the oil cartel cases were litigated, are similar. See Y. Yanagida et al., Law and Investment in Japan: Cases and Materials, 2nd ed. (Cambridge: Harvard University Press, 2000), p. 465. 96 See e.g. for the year 2001, Supreme Court, ‘Annual Report of Judicial Statistics for 2001’, Chart 28, available at www.courts.go.jp/sihotokei/nenpo/pdf/1A4F9885A78077D449256 D4F0004D539.pdf. But see J. O. Haley, ‘The Myth of the Reluctant Litigant’, Journal of Japanese Studies, 4 (1978), 359, 383 and the updated data in Yanagida et al., Law and Investment in Japan, p. 509 (listing delays of two-and-a-half years at the High Court level and two years at the Supreme Court level).

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way that it only yields kerosene. Refining automatically results in all oil derivatives, from heavy fuel to diesel, kerosene and gasoline. Hence, an increase in the price of crude oil does not necessarily lead to a proportional increase in the price of each individual oil product. In theory, the refiner could pass on the increase in the price of crude to diesel, LPG and gasoline and leave the price of kerosene untouched. On this basis, one of the lower courts in the oil cartel cases had held that abstraction should be made of the price rise in crude oil.97 In reality, however, a price increase of crude oil will have an impact on the price of kerosene. How much of the increase the oil companies will pass on and which products will be affected will be determined by the elasticity of demand for each oil product. The Supreme Court reversed the lower court’s reasoning and held that the price of crude oil was a factor affecting the price of kerosene.98 Thus, it was something that the plaintiffs had to address if they were to prove that the retail price would not have risen without the cartel. To be fair, this issue is not specific to indirect purchaser litigation. Had the direct purchasers sued, they would have faced the same issue. But it does neatly illustrate the difficulty involved in determining whether and how a cartel overcharge (the overcharge resulting from OPEC’s cartel) is passed along a distribution chain in which products change composition. Similar issues arise in indirect purchaser litigation about products that have been integrated into other products, such as ingredients or components. A second complicating factor was the government’s influence over prices. In fact, the price for consumer-use kerosene was not freely determined by the market. MITI exercised consistent pressure on the oil industry to keep prices for consumers low. On MITI’s instruction, the oil industry distinguished between consumer-use and industrial-use kerosene.99 Prices for industrial users were increased more frequently and therefore were higher than those for consumers.100 For two years, from 1971 until June 1973, MITI instructed the oil companies to keep prices for consumeruse kerosene frozen. Ultimately, in July 1973, it approved the price increase decided on by the cartel. But two months later, in October 1973, the government again instructed the oil companies to keep prices frozen at September 1973 levels. Based on these facts, in the first Tokyo case, the 97 98 99 100

Sat¯o v. Sekiyu Renmei, at 1273 (citing the Sendai High Court). Sat¯o v. Sekiyu Renmei, at 1276. Kai v. Nihon Sekiyu K.K., at 968; Sat¯o v. Sekiyu Renmei, at 1498. Kai v. Nihon Sekiyu K.K., at 968; Sat¯o v. Sekiyu Renmei, at 1498.

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lower court concluded that, had there been no cartel but free price-setting, prices would not have been lower.101 The Supreme Court affirmed. This issue is again not specific to indirect purchaser litigation. But it would probably have been much easier for a direct purchaser to litigate this issue than for consumers, as the direct purchasers had better information about MITI’s price guidance and its actual influence on price-setting. A third set of complicating factors related to the fact that, before reaching end-consumers, the kerosene travelled through a multilevel distribution chain. This meant an additional set of factors influenced the retail price of kerosene, such as rising labour and transportation costs at the wholesale and retail level. In the Tsuruoka case, these complications became a key issue.102 The District Court held that there was no proof that a rise in prices at the refiner level had been passed on to the retail level. These complications are inevitable when trying to prove that an overcharge travelled down a distribution chain and, hence, they are inherent in indirect purchaser litigation. Even with the benefit of hindsight and in spite of the advances in our understanding of the economic effects of cartels, it is still extremely difficult to assess whether the consumers suffered any harm. Intuitively, one is tempted to think that the cartel must have resulted in a price increase. Why else would producers engage in a cartel? But intuition is not always right. Empirical studies have found that in around 7 percent of cases, cartels do not result in higher prices.103 Was the oil cartel one of those cases? The question remains unanswered.

Implications for indirect purchaser litigation in the EU Indirect purchaser litigation is unlikely to be effective with an opt-in mechanism and traditional rules on causation and damages As demonstrated in the previous part, the indirect purchaser lawsuits against the oil cartel were inefficient and complex. The inefficiency resulted from the fact that, with the available opt-in mechanism, the aggregate claims were too small to justify the large costs of the actions. 101 Kai v. Nihon Sekiyu K.K., at 789–790 (citing the Tokyo High Court). 102 Sat¯o v. Sekiyu Renmei, at 1525–1526 (the Yamagata District Court noted that prices at the retail level had gone up without price increases at the refiner level, and vice versa). 103 Oxera and A. Komninos, ‘Quantifying Antitrust Damages: Towards Non-Binding Guidance for Courts – Study Prepared for the European Commission’, 90, available at http://ec.europa.eu/competition/antitrust/actionsdamages/quantification study.pdf.

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The complexity resulted from the difficulty in proving a counterfactual situation in a way that would meet the traditional standards on causation and damages in tort law. Although, in part, this complexity would also have been present in case the direct purchasers had sued, the distance between the infringement and the indirect purchasers exacerbated the complexity. The same factors that make indirect purchaser litigation unworkable in Japan are also present in the EU. Until recently, very few jurisdictions in Europe had a mechanism to pool actions for antitrust damages. Recently, a number of jurisdictions have introduced such a mechanism, but almost all of them function on an opt-in basis.104 Moreover, in most EU jurisdictions, plaintiffs have to establish causation and damage according to traditional tort rules.105 Hence, indirect purchaser actions in the EU are likely to be fraught with the same problems as were the oil cartel cases.106 There may of course be cases in which costs are lower, amounts at stake higher and complex issues fewer. This is possible, but unlikely. In most indirect purchaser cases, the harm suffered by consumers is small because it is equal to a small percentage of a small value, namely the part of the price increase resulting from the cartel that was subsequently passed on to the consumers. Cartel overcharges are on average 20 percent,107 and if, for instance, half of that overcharge is passed on to consumers, the harm is 10 percent of the wholesale value of the consumer good. In the past years, the European Commission and the JFTC have uncovered or investigated cartels for zippers, LCD screens, sinks, taps, exotic fruit, window mountings, candle wax, shutters, etc. In some of these cases, the harm sustained by individual consumers may be somewhat higher than in the kerosene cases, but it is unlikely to make a difference: The gap 104 See Mulheron, ‘The Case for an Opt-Out Class Action for European Member States’, 421–425 (pointing out that all Member States have opt-in mechanisms, except Portugal’s ‘popular action’ (acc¸a˜ o popular), Denmark’s group procedure and the Netherlands’ collective settlement mechanism). 105 Waelbroeck, Slater and Evan-Shoshan, ‘Study on the Conditions of Claims for Damages in Case of Infringement of EC Competition Rules’, 72–73 and 78. 106 Although no indirect purchaser lawsuits have been brought in the EU, consumers have brought actions for damages as direct purchasers on an opt-in basis and these lawsuits confirm the cost-benefit problems. See e.g. UFC Que Choisir v. SFR, Tribunal de Commerce de Paris, 6 December 2007 (rejecting the consumers’ claim), affirmed sub nomine UFC Que Choisir v. Bouygues T´el´ecom, Cour d’appel de Paris, 22 January 2010, RG 08–09844, in which costs for plaintiffs amounted to 500,000 euro and the claim was around 700,000 euro (‘12,000 clients d’Orange, de SFR et de Bouygues en justice’, Le Monde, 30 August 2006, p. 24). 107 Oxera and Komninos, ‘Quantifying Antitrust Damages’, 90.

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between costs and benefits is simply too large. In the two Tokyo cases, the total costs outweighed the benefits by a factor of 300 and 30 respectively. Even in the Tsuruoka case, which was remarkable for its high number of plaintiffs, total costs were seven times as high as the possible recovery. Although it may now be easier to collect claims by using websites and email, there is little reason to believe that, in other cases, plaintiffs will be able to pool more claims than the consumers did in the oil cartel cases. The oil cartel cases therefore strongly suggest that indirect purchaser litigation in Europe will not be workable, at least not with an opt-in collective redress mechanism and the existing rules on causation and damage. Indirect purchasers will either bring actions that will result in wasteful litigation, that is, litigation that is complex and lengthy and generates more costs than benefits,108 or simply refrain from suing because of the poor cost-benefit balance and the complexity in proving causation and damage. Whether actions will be brought will, to a large extent, depend on the rules on cost allocation. If the cost rules allow the plaintiffs to recover their high costs from the defendants in case of success, then the actions will be brought regardless of whether, in the aggregate, they are wasteful. In sum, indirect purchasers will either have no access to justice or access that will lead to lawsuits that are at odds with society’s wider interest in avoiding wasteful litigation.

Possible solutions To enable access to justice for indirect purchaser litigation, the European Commission has proposed special rules on causation and an EU-wide collective action mechanism.109 In light of the experience with the oil cartel cases, these proposals are unlikely to solve the problems inherent in indirect purchaser litigation. With respect to causation, the Commission proposes the introduction of a rebuttable presumption that the overcharge was passed on.110 Such a presumption would of course make it easier for indirect purchasers to obtain damages, but it would not necessarily make the cases less costly or complex. Instead of the plaintiffs trying to show that the overcharge was 108 That is, benefits for the plaintiffs. The deterrent effect that these lawsuits may have on other infringers is a benefit to society but it is unlikely to be large because indirect purchaser actions in the EU and Japan are likely to be follow-on actions, and hence, the infringement has already been detected and sanctioned by the competition authorities. 109 White Paper on damages actions for breach of the EC antitrust rules, pp. 4 and 7–8. 110 White Paper on damages actions for breach of the EC antitrust rules, pp. 7–8.

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passed on, and the defendants vigorously contesting this, the tables would simply be turned: Defendants will be trying to show that the overcharge was not passed on, with plaintiffs vigorously contesting this. Hence, such a change may not have a large impact on costs and complexity. As a mechanism to pool various small claims, the EU Commission proposes the introduction of an opt-in collective action throughout the EU.111 The cost-benefit analysis of the oil cartel cases strongly suggests that such a mechanism will not be effective. What then, could the EU do? A first option would be to introduce an opt-out mechanism although such a mechanism may result in a range of other problems, as I explain below. A second option would be to abandon the goal of ensuring access to justice for indirect purchasers, although that may not be feasible legally or politically. I discuss each of these two options in turn.

First option: an opt-out class action The first option, introducing an opt-out mechanism, has been advocated by Rachael Mulheron. She argues that opt-in collective actions are legally and practically cumbersome and sweep in too few plaintiffs.112 The oil cartel cases, with their abysmal cost-benefit balance, offer evidence for that assertion. They also offer evidence for her assertion that one of the problems with opt-in mechanisms is that costs are typically ‘front-loaded’, that is, they have to be paid in the initial stage of the litigation.113 In the oil cartel cases, considerable resources were spent on identifying and particularizing each individual’s claim before the lawsuit was commenced.114 Ultimately, that effort turned out to be a waste of time and money, as the court never even reached the assessment-of-damages stage. A better cost-benefit balance would have been obtained with an optout class action. Had Japanese law allowed for such actions, a larger number of claims could have been pooled. As the claims of more plaintiffs would have been pooled, the costs involved would also have risen, but not proportionally. If instead of 1,600 plaintiffs, 3,200 plaintiffs had sued in the Tsuruoka case, the legal costs would be higher, but not double. At some point, the cost-benefit balance would become more reasonable. 111 White Paper on damages actions for breach of the EC antitrust rules, p. 4. 112 Mulheron, ‘The Case for an Opt-Out Class Action for European Member States’, 438– 441. 113 Mulheron, ‘The Case’, 428. 114 ‘Yami karuteru’, 13 (mentioning that in the first Tokyo case, before the case could be brought, receipts had to be collected and a team of thirty lawyers had to prepare the case).

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However, the case would still have generated enormous costs resulting from the requirement that all class members be given notice and that damages or settlement money be distributed. Hence, an opt-out action as such is not a guarantee that the action is efficient. This is evidenced by the experience in the United States, where, in spite of the opt-out mechanism, transaction costs regularly outweigh the recovery for plaintiffs.115 It has been suggested that cost issues could be mitigated by avoiding the expensive and difficult distribution of damages to all injured plaintiffs with instead the money being distributed to related purposes via so-called cy-pr`es distributions or ‘fluid’ recoveries. But that begs the question: Why burden the court system with these cases in the first place if they do not result in compensation? The standard answer is that these cases contribute to deterrence. But as most consumer antitrust lawsuits are follow-on actions, the same measure of deterrence could be achieved by simply increasing the penalty imposed by the public authorities. Apart from being costly, opt-out class actions generate at least two other problems. The experience in the United States, where indirect purchaser lawsuits can be brought as opt-out class actions based on state antitrust law, sheds some light on those problems. First, the actual indirect purchasers often receive little or no compensation.116 This is because it is unfeasible to distribute small amounts to a large number of plaintiffs and because of the principal-agent problems inherent in opt-out class actions. These problems lead to collusive behaviour between plaintiffs’ attorneys and defendants, resulting in settlements that are profitable for lawyers but provide little for the 115 D. Crane, ‘Optimizing Private Antitrust Enforcement’, Vermont Law Review, 63 (2010), 675, 683 (‘after lawyers’ fees and administrative fees are accounted for, each consumer’s share of the recovery is negligible’); Hensler et al., Class Action Dilemmas, p. 436, Fig. 15.5 (showing that, in five of the ten class actions reviewed, attorneys’ fees for plaintiffs and, hence, transaction costs (as attorneys’ fees are only one of the components of the transaction costs) were equal to or exceeded the actual amount recovered by plaintiffs; hence transaction costs certainly). But see B. T. Fitzpatrick, ‘An Empirical Study of Class Action Settlements and Their Fee Awards’, Journal of Empirical Legal Studies, 7 (2010), 21 (finding that plaintiff attorneys’ fees in antitrust class actions accounted for 26 percent of the total settlement amount in 2006; although attorneys’ fees are of course only part of the transaction costs, so it is possible that transaction costs were much higher). 116 J. E. Lopatka and W. H. Page, ‘Indirect Purchaser Suits and the Consumer Interest’, Antitrust Bulletin, 48 (2003), 531, 552–556 (‘if compensation of consumers is the goal of indirect purchaser class action litigation, that litigation has been a miserable failure’); J. Bronsteen, ‘Class Action Settlements: An Opt-in Proposal’, University of Illinois Law Review, (2005), 903, 910–914.

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actual plaintiffs. Moreover, the rational apathy problem that limits participation rates in opt-in class actions also appears at the filing-of-claims stage in opt-out class actions.117 The second problem with opt-out class actions is that the enormous claims resulting from large groups of virtual plaintiffs reportedly force defendants into settling actions that have no merit.118 In the oil cartel cases, an opt-out class action on behalf of all consumers who purchased kerosene while the cartel was in place would have led to a class of millions of consumers. Such a claim, if awarded, is large enough to bankrupt a company, even the deep-pocketed oil companies. Hence, there would have been enormous pressure to settle, in spite of the fact that, as the court later decided, the case had no merit.

Second option: no standing for indirect purchasers The second option would be to abandon the goal of compensation for indirect purchasers altogether. By adopting the Illinois Brick rule, that is, by allowing only direct purchasers to sue119 and allowing them to recover the full overcharge,120 complex and costly indirect purchaser litigation would be avoided. This may be a practical and sensible solution, but it is unlikely that it will ever be adopted in the EU or Japan. Too many legal and political forces are pulling in the opposite direction. Legal constraints include the European Court of Justice’s case law, which has read into the EU treaties a right to compensation for ‘any individual’ harmed by an antitrust violation.121 There is also, especially in continental Europe and Japan, a strong reticence towards using the tort system for anything other than compensation and an aversion to a system that allows some parties (direct purchasers) to receive an ‘unjust enrichment’. On the political level, the European Commission has – perhaps out of political pragmatism – chosen the path of compensation over

117 J. C. Coffee, ‘Litigation Governance: Taking Accountability Seriously’, Columbia Law Review, 110 (2010), 288, 334. 118 Bronsteen, ‘Class Action Settlements’, 920; S. Calkins, ‘An Enforcement Official’s Reflections on Antitrust Class Actions’, Arizona Law Review, 39 (1997), 413, 439, note 151 (noting that judges ‘react with horror’ to the pressures that antitrust class actions can bring to bear on defendants and citing judicial opinions in support); Contra Mulheron, Class Action in Common Law Legal Systems, pp. 72–77. 119 Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). 120 Hanover Shoe, Inc. v. United Shoe Machinery Corporation, 392 U.S. 481 (1968). 121 Joined Cases C-295/04 to C-298/04, Manfredi v. Lloyd Adriatico Assicurazioni, [2006] ECR I-6619, at para. 61.

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deterrence.122 The European Parliament has backed that choice123 and so have consumer groups and business groups. Hence, it seems the EU finds itself in a Catch-22 situation. Opt-in actions alone are unlikely to make indirect purchaser litigation feasible. Introducing opt-out collective actions would bring about a host of new problems, making the cure possibly worse than the disease. And finally, abandoning the goal of stimulating indirect purchaser litigation is legally and politically impossible. The only hope, then, is the representative action which the EU Commission proposes to introduce alongside the collective opt-in action.124 Such a representative action would allow qualified entities such as consumer associations, state bodies or trade associations to sue for damages ‘on behalf of identified or, in rather restricted cases, identifiable victims’. Although costs would still be high, at least some of the problems inherent in opt-out class actions may be mitigated with such a system. Because only official or certified entities are allowed to sue, blackmail settlements and principal-agent problems may be less severe. This then, is perhaps the only way to ensure a modicum of access to justice for indirect purchasers, while at the same time safeguarding society’s interest in avoiding wasteful litigation.

Annex: translation of the Supreme Court judgment in the Tsuruoka oil cartel case125 [*1259] Damages case (Case number: Sh¯owa-60-o No. 933 and No. 1162; Supreme Court, 2nd Petty Bench, 8 December 1989 – original judgment reversed and substituted by own judgment) 122 White Paper on damages actions for breach of the EC antitrust rules, p. 3. 123 European Parliament, ‘Resolution on the White Paper on Damages Actions’, 8; European Parliament, ‘Resolution on the Report on Competition Policy 2009’, 14. 124 White Paper on damages actions for breach of the EC antitrust rules, p. 4. 125 Nihon Sekiyu K.K. v. Sat¯o, 43(11) Minsh¯u 1259 (Sup. Ct., 8 December 1989). Translation made by the author. This is a translation of the most important parts of the Supreme Court judgment in the Tsuruoka oil cartel case. Other parts of the judgment have been summarized between square brackets. The court reversed a judgment of the Sendai High Court that had partly granted the claims of the plaintiffs. The Sendai High Court judgment itself was rendered on appeal from the Yamagata District Court, which had rejected the plaintiffs’ claims. Numbers between square brackets refer to the pages in the original publication of the judgment, that is, the Supreme Court Reporter for Civil Cases (43 Minsh¯u 1259).

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Appellant: Nihon Sekiyu K.K. and nine other parties [ . . . ] (original defendant, respondent in the proceedings before the High Court) Respondent: Hideo Sat¯o and eighteen other parties, acting as representative parties (original plaintiff, appellant in the proceedings before the High Court) Initial proceedings (first instance): Judgment of the Yamagata District Court, Tsuruoka Branch, 31 March 1981 Proceedings on appeal (second instance): Judgment of the Sendai High Court, Akita Branch, 26 March 1985 [ . . . ] [*1260] [ . . . ] [*1261] Held: [Summary: The Supreme Court reverses the judgment of the Sendai High Court to the extent that it accepted the claims of respondents (the original plaintiff-consumers), dismisses the appeal of the respondents (the original plaintiff-consumers) and holds them liable for the litigation costs] [*1262] Reasons: Part I: Decision on the reasons for appeal of Nihon Sekiyu K.K., Idemitsu K¯osan K K., Ky¯od¯o Sekiyu K.K., Mitsubishi Sekiyu K.K., Maruzen Sekiyu K K. (appellant before being succeeded in the case), Daiky¯o Sekiyu K.K. (current trade name Kosumo Sekiyu K.K.), Zeneraru [General] Sekiyu K.K., Sh¯owa Sheru [Shell] Sekiyu K.K., Kigunasu Sekiyu K.K., Ky¯ush¯u Sekiyu K.K. and Taiy¯o Sekiyu K.K. 1) Concerning appellants’ first argument [the argument that the court does not have jurisdiction] [Summary: The Supreme Court rejects appellants’ argument that antitrust damages actions cannot be brought on the basis of the general tort provision of the Japanese Civil Code (Art. 709 Civil Code).] [*1263] 2) Concerning appellants’ second argument, points one through four [the argument that plaintiffs do not have standing because they are indirect purchasers] Appellants argue that only those dealing directly with entrepreneurs that have engaged in unreasonable restraints of trade can claim damages

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based on tort for injury resulting from a violation of Article 3 of the Antimonopoly Act (i.e. an unreasonable restraint of trade). [*1264] They argue that respondents lack standing as plaintiffs because they were not dealing directly with the appellant entrepreneurs that allegedly engaged in unreasonable restraints of trade. However, in a damages action based on tort, plaintiffs do not lack standing if they allege, as the object of the action, that they have a right to damages. If we find that, based on the facts they allege, plaintiffs are not entitled to damages, then this would simply mean that the claim must be dismissed on the merits because it has no grounds. The claim is not considered unlawful for lack of standing on the part of plaintiffs. In this case, it is clear that respondents allege that their rights have been infringed and that they have sustained harm as a result of appellants’ aforementioned violation of the Antimonopoly Act, that is, they allege, as the object of the action, that they have a right to damages based on a violation of the Antimonopoly Act. Therefore, in light of what we explained above, plaintiffs do not lack standing. Moreover, in a tort action based on a violation of the Antimonopoly Act (unreasonable restraint of trade) such as the one mentioned, there is no basis to limit the group of persons that can claim damages to direct trading parties of the entrepreneur that engaged in unreasonable restraints of trade. Therefore, as is generally the case, if there is a sufficient causal link between the violation of the Antimonopoly Act and the damage, damages can be claimed by both direct trading partners of the entrepreneur and indirect trading partners further downstream of the direct parties. Hence we cannot say that respondents’ allegations as such have no grounds. Accordingly, on this point, we can affirm the High Court’s judgment, as it reached the same outcome as we set out above, and it does not contain the alleged legal error. We cannot accept appellants’ argument. [*1265] 3) Concerning appellants’ third argument [the argument that the High Court unlawfully applied a factual presumption based on the Fair Trade Commission’s recommendation decision] [Summary: Appellants argue that the High Court judgment erred in law because it inferred the existence of an antitrust violation merely from the existence of a recommendation decision by the JFTC. The Supreme Court holds that the mere existence of a recommendation decision is not sufficient to find a violation. Hence, the High Court judgment erred in law and the judgment must be reversed on this point.] [*1270]

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4) Concerning appellants’ ninth argument [the argument that respondents did not suffer any damage] (As set forth under point 3, we cannot approve the High Court’s decision to presume the existence of the alleged price-fixing agreements by applying a factual presumption solely on the basis of the existence of a recommendation decision. However, for the time being, we will leave aside the related question as to whether or not the alleged price-fixing agreements actually existed, and continue our judgment.)

1 In a case like this, in order for the end consumers of oil products to seek damages from the primary distributors of oil products based on harm they have suffered as a result of an illegal cartel, the consumers must allege and prove the following facts. [*1271] First, there must exist a causal relationship, in the sense that the price increase at the level of the primary distributors of oil products attributable to the cartel must be translated into the wholesale price, and this increase must in turn lead to an increase in the actual retail price for the end consumers. It falls on the end consumers as injured parties to allege and prove this relationship (cf. the aforementioned Supreme Court Judgment, 1st Petty Bench, 2 July 1987). Second, the damage sustained by the purchasers of a product as a result of the primary distributors’ illegal price cartel must be understood to be the additional expense imposed on the purchasers as a result of the implementation of the cartel. Therefore, when the end consumers of oil products seek damages from the primary distributors, as in this case, it must be the case that the actual retail price (hereinafter the ‘actual purchase price’) would have been lower without the cartel agreement in place. It falls on the end consumers as injured parties to allege and prove this fact. Of course, the price that would have existed without a cartel (hereinafter the ‘hypothetical purchase price’) is a price that never really existed. It cannot be denied that it is difficult to estimate this price directly. Therefore, it is permissible to estimate this price on the basis of the actual price that existed in the market. In general, it can be said that, to the extent that there are no changes in the economic conditions, market structure and other economic factors that determine the retail price of the said product between the time the cartel went into effect and the time when

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the consumer buys the product, the hypothetical purchase price may be presumed to be the retail price that existed immediately prior to the implementation of the cartel (hereinafter the ‘price immediately prior to the cartel’). Conversely, when there are marked changes in the economic factors affecting the retail price, between the time the cartel goes into effect and the time when the consumer buys the product [*1272], the conditions for the afore-mentioned factual presumption are lacking and, hence, it follows that the hypothetical purchase price cannot simply be inferred from the price immediately prior to the cartel. In that case, in addition to the price immediately prior to the cartel, a series of other price-determining factors, including the particular price structure of the product in question, and the nature and extent of changes in the economic conditions, etc., must all be taken into account in order to estimate the hypothetical purchase price (cf. the afore-mentioned Supreme Court Judgment, 1st Petty Bench, 2 July 1987). Moreover, because, as mentioned, the burden of proof to establish the hypothetical purchase price is on the end consumers, if they allege that the price immediately prior to the cartel corresponds to the hypothetical purchase price, they must prove that this assumption is appropriate. In other words, they must prove in fact that there are no significant fluctuations in the economic conditions affecting the retail price between the time the cartel went into effect and the time the consumers purchased the product. If they are unable to prove this, the afore-mentioned presumption does not hold, and in that case the consumers will have to allege and supply the basic data for an estimate based on an aggregate of elements, as described above, including the particular price structure of the product in question, and the nature and extent of the economic fluctuations.

2 In spite of this, the High Court judgment’s concerning the calculation of the hypothetical purchase price was as follows: The oil industry is characterized by fierce competition for sales. Even had there been a factor causing a price increase, such as the rise in the cost of [crude] oil, the fact remains that the primary distributors of oil products cannot easily raise prices at their own discretion and through their own individual efforts. In light of these conditions, we are of the opinion that, even if there were price fluctuations (price increases), in the absence of a cartel, the price immediately prior to the cartel agreement, i.e. the price at the primary distributors’ level right before it was influenced

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indirect purchasers and collective actions by the cartel agreement, and therefore also the price at retail level, would normally have remained unchanged. Hence, except in the special case where there is a noticeable factor causing a price increase at the level of the primary distributors or the distribution level and where the price rise in the absence of a cartel can be reliably estimated in terms of specific timing and range [*1273], we are warranted to take the primary distributors’ price immediately prior to the cartel as the hypothetical price at the primary distributor level and, likewise, to take the retail price immediately prior to the cartel as the hypothetical purchase price. Is this a case where these special conditions are present? We first examine the situation at the level of the primary distributors. 1) The value added to oil by the refining process is low and hence the price of crude oil is the main component in the total cost of oil products. Therefore, generally speaking, a rise in the price of crude oil will evidently result in a rise of the price of oil products. In point of fact, from January 1973 onwards, as a result of the so-called OPEC offensive, there was a steady rise in the CIF price of crude oil. However, the price of commercial products is determined through competition in the market, and even if there is an increase in the cost price of crude oil, it is not automatically translated into an increase in the price of the end-product. Even if such an increase does eventually bring about an increase in the price of the end-product, the market mechanisms that determine the price of products are neither simple nor uniform and, more importantly, oil products being joint products, there is no cost price for each separate product, so the extent to which an increase in the cost [of crude oil] is reflected in the price of the end product depends on each company’s pricing policy. Therefore, even granting that the price of oil products would have been raised on account of the higher cost price of crude oil, without there being a cartel agreement concluded, it would still be impossible to determine for which individual product, e.g. white kerosene (kerosene for consumer use), the price had been increased and, if so, when and to what extent. 2) Starting from around the beginning of 1973, the demand for lighter oil products increased and the demand for white kerosene gradually grew. In a period of low demand, that is, from April 1973 until September 1973, the turnover of kerosene showed a spectacular increase compared to the quantity sold during the same period in the previous year. As a general rule, an increase in demand while supply remains constant will bring about an increase in price. However, in response to guidance from the Ministry of International Trade and Industry, the industry increased production between April 1973 and August 1973. Both the output and the stock during that time span showed a significant increase over the two previous years. Because we can say that the supply of kerosene increased in proportion to the increase in demand, the aforementioned basic law of economics [*1274] did not apply. Moreover, because the

collective actions by indirect purchasers industry had been told to refine higher quantities of crude oil, oil products other than kerosene were also produced in large quantities. Consequently, we cannot accept as fact the claim that this has entailed extra expenditures for stocking or that the producers had imported more expensive light crude. 3) The period between the fall of 1973 and the spring of 1974 was one of skyrocketing prices and it is a well-known fact that prices of all consumer goods sharply rose across the board during that period. Because it is said that this phenomenon occurred mainly because of the steep rise in the price of crude oil, it cannot be denied that, at that time, there existed manifest conditions affecting prices at the level of the primary distributors. However, the precise extent to which these conditions specifically affected the timing and range of the price increase for specific oil products such as white kerosene is unclear. 4) When viewed in the light of the basic price guidance policy of MITI and against the background of the particulars of its guidance, the maximum recommended price at the level of the primary distributors set by MITI does not in itself constitute a recognition by MITI that a price increase for oil products implemented by the primary distributors is appropriate and based on sufficient deliberation. Therefore the mere fact of setting a maximum price does not constitute proof of the existence of significant price-raising factors nor of the appropriateness of the range of the price increase by the cartel agreement. Next, we look at the conditions in the distribution chain. 5) The growing demand for white kerosene attributed to a shift in demand towards lighter oil products is in actual fact based on the growing demand for kerosene in industry, and not attributable to a growing demand for consumer-use kerosene in households. Consequently it does not constitute a compelling reason for a price increase at the distribution (retail) level. Moreover, because an increase in the price downstream in the final analysis is caused by a price increase by the primary distributor, inasmuch as there were no compelling economic grounds to raise the price charged by the primary distributors, there was no factor warranting a price change at the distribution (retail) level. 6) If we look at the yearly rise of the consumer price index, wholesale price index and nominal wage index from 1971 onwards and the fact that labour costs make up around 50 percent [of total costs] at the retail level [*1275], it is true that a rise in labour costs will directly bring about a price increase, particularly at the retail level. However, it is not possible to get a precise understanding of the extent to which there was a rise in labour costs for the cooperatives sector; furthermore, kerosene is a side-business for the majority of the retailers, so a rise in product prices and rising labour costs cannot be linked solely to

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indirect purchasers and collective actions kerosene-related costs, nor is it possible to know exactly to what extent they are kerosene-related. 7) The quantity sold by Apollo Gassan to the Tsuruoka Cooperative in October and November 1973 was indeed significantly higher than the quantity sold in the same period of the previous year. However, in both the second half of the fiscal year 1973 and the second half of the fiscal year 1972, sales turnover showed a dramatic increase, and therefore the increase in the above-mentioned period (October and November 1973) cannot be viewed as resulting from speculative demand, and even if there are grounds to accept the existence of speculative demand in the general trade sector (other than the cooperatives sector), it is not possible to accurately gauge whether this affected the sales price and if so, to what extent. 8) On 28 November 1973, MITI issued guidance setting the maximum retail price for household kerosene at 380 yen (for 18 litres in over-thecounter sales, fee for the kerosene container excluded). When setting this price MITI had solicited the view of all oil traders, all oil cooperatives and other parties concerned, but in the end, the price it came up with in its guidance simply confirmed the prevailing price, and did not suggest a retail price that could have existed without the cartel.

These were the instructions of the High Court on the eight points. The court held that these reasons, which can be factors resulting in price increases at the primary distributors’ and retail level, could not constitute the kind of special conditions that would be exactly predictable in the specific way mentioned before. With respect to the claim of the respondents who as members of the Tsuruoka cooperative purchased their white kerosene from the cooperative (all respondents except Hideo Sat¯o (but only the part of his claim related to the represented parties with numbers 251 to 274 on the annexed list 1 of represented parties), Hiroko Honma and Shinz¯o Sunada), the court inferred, for the purchases that were made from 21 October 1973 onwards through the registration system, the hypothetical purchase price from the retail price immediately prior to the cartel, that is 280 yen (for 18 litres; hereunder all prices mentioned refer to the price for 18 litres). Likewise, for the purchases in cash that were made up to 20 October 1973, the court assumed the hypothetical purchase price to be 320 yen (per 18 litres). [*1275] With respect to the claim of the respondents who had bought from regular retailers, that is, Hideo Sat¯o (but only the part of his claim related to the represented parties with numbers 251 to 274 on the annexed list 1 of represented parties), Hiroko Honma and Shinz¯o Sunada, the court assumed that the hypothetical purchase price as of 1 January 1973 would not have exceeded 280 yen.

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3 However, the circumstances in which the hypothetical purchase price can be inferred from the price immediately prior to the cartel agreement must be understood as being those circumstances described in Part I(4)(1)(second point) of this judgment. It is therefore clear that we cannot affirm the High Court’s decision on this point. First, with respect to the above-mentioned eight elements discussed in Part I(4)(2) of this judgment, there still remain some passages in the High Court’s evaluation of the facts where it remains questionable if it could simply make the evaluation it did. But even more important, the High Court also affirmed that the following points were indeed present: the continuation of a significant rise in the price of crude oil (1st element), a spectacular increase in the demand for white kerosene (2nd element), significant price increases in general consumer goods during the so-called period of skyrocketing prices (3rd element), the guidance by MITI in setting a recommended maximum price at the primary distributors’ level (4th and 8th element), increased purchasing costs at the distribution (retail) level (5th element), and increased labour costs at the distribution (retail) level (6th element). Moreover, the High Court took into account the fact that MITI, from the perspective of its consumer price countermeasures and social countermeasures, initiated by its so-called ‘ten cent burden’ administrative guidance [MITI’s request to the oil industry to absorb ten cents per barrel of the increased costs of crude oil] of April 1971, was particularly wary of the effects a price increase in white kerosene could have on the general consumers’ prices, and therefore adopted a vigorous policy of price restraints; to be more precise, in October 1971, it instructed each primary distributor not to raise the price charged for white kerosene in the winter of that year and to keep the price below the average price of February and March 1971. In January 1972, the oil industry, in order to cope with the rise in crude oil prices as a result of the fourth price increase by OPEC, submitted to MITI a proposal to raise the prices for oil products, based on the premise that the ten cent burden would be cancelled. The MITI official in charge initially denied the request to cancel the ten cent charge, but eventually consented to a plan for price increases of various ranges depending on the product, but on average 300 yen per kiloliter [*1277]. Then in July 1973 the MITI official in charge conveyed his consent for a plan of the industry to raise prices, set to go into effect as of 1 August 1973, but on 3 August 1973 he proposed an amendment on the plan he

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had consented to and requested that the price increase for white kerosene for households be reduced to a range of 700 to 800 yen. The industry did not follow this guidance and there followed exchanges between the industry and MITI for some time, and eventually MITI issued a guidance to freeze the price at the level of the end of September 1973. Thus the High Court acknowledged that MITI’s price guidance with regard to white kerosene was by nature a measure to set a maximum price and recognize price fluctuations within that bracket. Taken together, the above-mentioned facts indicate that, between the time the cartel was implemented and the time at which respondents allegedly purchased the white kerosene, there were significant changes in the economic conditions, market structure, etc. at the level of the primary distributors of householduse kerosene (even the High Court recognized as undeniable the fact that there were significant factors affecting prices at the primary distributors’ level). It follows that the necessary conditions were lacking to infer the hypothetical purchase price from the price immediately prior to the cartel and, therefore, that the High Court judgment, which inferred the hypothetical purchase price from the price immediately prior to the cartel, applied the law erroneously and therefore erred in law. It is clear that this error affects the judgment and, therefore, appellants’ arguments are valid and we have no other choice but to reverse the High Court judgment on this point. Furthermore, with respect to a possible cost-based calculation of the price of white kerosene, the High Court acknowledged that, given the fact that oil products are so-called joint products, although there may be a price for the aggregate of all oil products, there is no cost price for each separate oil product, nor is there a method to calculate a cost price for each separate oil product. Likewise, with respect to a possible calculation of the hypothetical purchase price on the basis of similar oil products from companies not affected by the various cartel agreements, the High Court found that it could not ascertain that there were any oil product prices in Japan at the time that were not affected by the afore-mentioned cartel agreements. Therefore, it is obvious that neither of these methods can be used to determine the hypothetical purchase price. [*1278] Furthermore, an examination on the basis of the court records of the way this case has proceeded reveals that respondents in this case have consistently alleged that the damages should be calculated on the basis of a hypothetical purchase price that is equal to the price immediately

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prior to the cartel. They have also consistently alleged that there is no other method to calculate the amount of damages. Concerning the pricedetermining factors set out in Part I(4)(2) of this judgment, which can provide enough basic data to calculate the afore-mentioned hypothetical purchase price, that is, the particular pricing structure of kerosene for household use, the nature and extent of the economic changes, etc. (in particular the factors that would determine the hypothetical price at the level of the primary distributors had there been no cartel), no evidence whatsoever was submitted. Hence, we cannot accept that the retail price that would have existed had there been no cartel agreements would have been lower than the actual retail price (see also the afore-mentioned Supreme Court Judgment, 1st Petty Bench, 2 July 1987). Therefore, in the end, respondents’ claim on this point is without merit (irrespective of the fact that the High Court judgment must also be reversed for having erred in law as set out in Part I(3) of this judgment), and the original District Court judgment which rejected the claim ultimately decided the case correctly. 5) [Conclusion of Part I] For all of the above-mentioned reasons, we reverse the sections in the High Court judgment concerning respondents Kobayashi and Sunada and the sections in which appellants lost against the other respondents, and we dismiss the final appeal of the said respondents with respect to each of those sections.

Part II: Decision on Idemitsu’s Application Pursuant to Article 198(2) of the Code of Civil Procedure [ . . . ] [*1279]

Part III: Conclusion We refrain from judging on the remaining reasons for appeal raised by the lawyers of all appellants mentioned in Part I of this judgment, as well as on the reasons for appeal raised by the lawyers of Taiy¯o Sekiyu K. K. in a separate appeal. In accordance with Articles 408, 396, 384, 198(2), 96, 89 and 93 of the Code of Civil Procedure, we unanimously render the decision mentioned above in the section containing this court’s holdings,

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except for Justice Rokur¯o Shimatani who filed a concurring opinion and Justice Yasukazu Kagawa, who filed an opinion. Concurring opinion of Justice Rokur¯o Shimatani [ . . . ] [*1279–1281] Opinion of Justice Yasukazu Kagawa [agrees with majority on the conclusion but not on the reasons] [ . . . ] [*1282–1283] (Chief Justice Rokur¯o Shimatani, Justice Keiji Maki, Justice Akira Fujishima, Justice Yasukazu Kagawa, Justice Kenichi Okuno)

PAR T V I Recent developments in and future perspectives on collective actions

13 Collective enforcement European prospects in light of the Swedish experience

annina h. persson

Introduction In Swedish law, consumer interests have always been a priority with the legislature. A host of specific consumer protection laws in the field of property law were already enacted in the 1970s.1 Some of them went so far that the question was raised in Swedish doctrine whether Sweden was out to show that it could ‘break records in consumer protection’.2 At the same time, enterprises introduced self-regulation activities and internal measures to solve and overcome various consumer problems.3 The most debated point of Swedish law in this field lately has concerned ways of ensuring that consumer rights are effectively enforced. Arguments have been put forward for improving procedural legal safeguards for ‘group claims’ because the Code of Judicial Procedure,4 the salient principles of which were established more than half a century ago, is not designed for dealing with disputes of this kind.5 Not surprisingly, this development has coincided with the strengthening of consumer rights that has taken place within the EU. But, in addition to the approximation of substantial law, as for example with work on a new Marketing Act,6 the need for 1 See e.g. the Consumer Credit Act (1977:981), the Consumer Sales of Goods Act (1973:877) and the Market Court Act (1970:417). 2 H. Tiberg, ‘Hur skall det g˚a med avbetalningsk¨opet?’ in K. Gr¨onfors, J, Hellner and P. G. Persson, Studier i kreditr¨att och associationsr¨att: Festskrift till Knut Rodhe (Stockholm: Norstedt, 1976), p. 467. 3 Report from the self-regulatory bodies of the Industry, 2009/2010:RFR12, p. 8. 4 SFS (note: i.e. Swedish Code of Statutes) 1942:740. 5 See Government Bill No. 2001/02:107, Group Proceedings Act (‘Lag om gruppr¨atteg˚ang’; GRL), appendix 1, p. 185 (taken from State Official Reports, SOU, 1994:151). 6 SFS 2008:486.

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approximation and coordination has also begun to receive attention where procedural rules and sanctions are concerned.7 On 1 January 2003, as a result of these developments, the Group Proceedings Act of 2002 (Lag om gruppr¨atteg˚ang, GRL) came into force in Sweden, making it one of the first countries outside the Anglo-American legal sphere to introduce legislation in this field.8 The GRL provides a possibility of bringing group proceedings when a plurality of claims against the same defendant are based on the same or similar circumstances (commonality) and when the claims cannot be equally well pursued through other procedural forms (superiority). Group pleadings mean that a party with no power of attorney pleads on behalf of the members of a group. The group members are not parties to the trial and need not be actively involved. A ruling in the process, however, is binding both for and against all members who joined the group (“opt-in system”). The GRL provides for three types of group actions. Group actions can be instituted by (1) an individual member of a group that can in itself be a natural person or a legal entity (private group action), (2) by an association of consumers or wage-earners (organizational group action) and (3) by a designated public authority (public group action). For consumer disputes the government has designated the Consumer Ombudsman (Konsumentombudsmannen) as the appropriate public authority. Group proceedings can also be filed by the Consumer Ombudsman and in the second instance by associations of consumers or wage-earners before the Swedish National Board for Consumer Complaints (Allm¨anna reklamationsn¨amnden, ARN). ARN proceedings are not to be regarded as a trial, the Board not being a court of law. Its decisions are purely recommendations and as such do not have force of law and are not enforceable.9 However, there are no obstacles preventing the Consumer Ombudsman from first lodging group proceedings before the ARN and subsequently, if the opposite party does not comply with the Board’s

7 See A. Bakardjieva Engelbrekt, ‘Fr˚an materiella regler till genomf¨oranderegler: en ny fas i det europeiska r¨attssamarbetet p˚a konsumentskyddsomr˚adet’, Svensk Juristtidning, 92 (2007), 578. See also A. Bakardjieva Engelbrekt, ‘Grey Zones, Legitimacy Deficits and Boomerang Effects: On the Implications of Transposing the Acquis in Central and Eastern Europe’ in N. Wahl and P. Cram´er, Swedish Studies in European Law: Volume 1 (Oxford: Hart Publishing, 2010). 8 See P. H. Lindblom, ‘Utv¨ardering av lagen om gruppr¨atteg˚ang’, Svensk Juristtidning, 93 (2008), 833. 9 See P. H. Lindblom, Grupptalan i Sverige (Stockholm: Norstedts Juridik, 2008), pp. 251 and 293.

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decision, initiating group proceedings under the GRL before an ordinary court.

Structure and purpose of this chapter The purpose of this chapter is firstly to briefly describe the Swedish legislation on group proceedings, especially the public group action, where the action is filed by the KO. Secondly, I will describe the main scheme for settlement between consumers and individual business operators in Sweden through the ARN, especially when the Consumer Ombudsman acts as a representative of the consumers. Thirdly, I will discuss the Swedish legislation in light of the forthcoming changes proposed by the European Commission.10 In its Consumer Policy Strategy for 2007–2013 the European Commission underlined the importance of effective redress mechanisms for consumers.11 In November 2008 the European Commission published a Green Paper on Consumer Collective Redress.12 The purpose of this chapter was inter alia to assess the current state of redress mechanisms in the different Member States. In its Green Paper the Commission identified four alternative forms of action at the EU level where collective redress was concerned. In 2009 the DG SANCO published a new Consultation Paper for discussion on the follow-up to the Green Paper on Consumer Collective Redress.13 The conclusion drawn from 10 I will not be discussing possibilities of collective redress for parties suffering damage through infringements of EC antitrust legislation. See further White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, COM (2008) 165 final. See also Faktapromemoria (‘Swedish facts memorandum’), 2007/08:FPM99 and 2007/08:NU17. It can be added, however, that the preliminary Swedish standpoint is that more effective competition law is desirable in the government’s opinion and that the government therefore favours proposals conducive to this end. See R˚adspromemoria (‘Swedish Council memorandum’), 24 November 2010. 11 Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee – EU Consumer Policy strategy 2007–2013 – Empowering consumers, enhancing their welfare, effectively protecting them, 13 March 2007, COM (2007) 99 final. 12 Green Paper on consumer collective redress, 27 November 2008, COM(2008) 794 final. Four policy options were presented. The first option was no EC action at all. The second option focused on developing cooperation between Member States. The third envisaged a mix of policy instruments. The fourth focused on a non-binding or binding EU measure to ensure that a collective redress judicial mechanism exists in all Member States. 13 Consultation Paper for discussion on the follow-up to the Green Paper on consumer collective redress, 29 May 2009. Five policy options were presented for assessment, namely (1) taking no action at all at the EU level, (2) developing a standard model of collective alternative dispute regulation (ADR), and self-regulatory measures for traders to establish

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these consultation proceedings was that no single option provided in the Green Paper was satisfactory for achieving the objectives of improving the functioning of the Internal Market and improving access to effective means of redress for mass consumer claims in the EU.14 A further Consultative Paper has therefore been published in the beginning of 2011.15 The consultation ended on 30 April 2011. In recent years there have also been cases of EU legal instruments being made to include provisions on consumer information and extrajudicial examination. Article 14 (2) of the Directive on the protection of consumers in respect of certain aspects of timeshare, long-term holiday product, resale and exchange contracts16 lays down that the Member States shall encourage the setting up or development of adequate and effective out-of-court complaints and redress procedures for the settlement of consumer disputes under the directive. Furthermore, the Member States shall, where appropriate, encourage traders and their branch organizations to inform consumers of the availability of such procedures. The European Commission also raises, among other things, the question of out-of-court settlement of disputes, in a Communication from 2009 on the enforcement of the consumer acquis.17 The Communication states that the Commission encourages the introduction of different methods of alternative dispute resolution (ADR) and has endeavoured to promote such solutions by adopting recommendations18 on principles,

14 15 16

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an internal complaint handling system, (3) establishing non-binding measures for setting up collective ADR schemes and judicial collective redress schemes in combination with additional powers under the Consumer Protection Cooperation Regulation, (4) obliging the Member States to set up collective ADR schemes and judicial collective redress with benchmarks in combination with additional powers under the Consumer Protection Cooperation regulation and finally (5) establishing an EU-wide judicial collective redress mechanism including collective ADR. The binding instrument would ensure that all Member States set up a judicial collective redress mechanism with harmonized features. The mechanism chosen would be a test case procedure with certain features. See M. Tulibacka, ‘Europeanization of Civil Procedures: In Search of a Coherent Approach’, Common Market Law Review, 46 (2009), 1527, 1553. See Commission Staff Working Document Public Consultation: Towards a coherent European approach to collective redress, 4 February 2011, SEC (2011) 173 final. See Directive 2008/122/EC of the European Parliament and of the Council of 14 January 2009 on the protection of consumers in respect of certain aspects of timeshare, long-term holiday product, resale and exchange contracts, OJ 2009 No. 33. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the enforcement of the consumer acquis, 2 July 2009, COM (2009) 330 final. See Commission Recommendation of 30 March 1998 on the principles applicable to the bodies responsible for out-of-court settlement of consumer disputes, OJ 1998 No. L115;

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procedures and quality criteria for bodies offering alternative resolution of disputes. A Green Paper has also been published on ADR in civil and commercial matters.19 A new Consultation Paper has been presented by DG SANCO in the beginning of 2011.20 The consultation ended on 15 March 2011. In addition to those already mentioned, there are also other instruments at the EU level intended for consumer cases of this kind. The Injunctions Directive21 sets forth a procedure enabling public authorities and consumer organizations to put a stop to infringements abroad. The Regulation on Consumer Protection Cooperation,22 for example, empowers the national supervisory authority to request authorities in other Member States to take action against an infringement. In addition, there are two instruments which can widen the possibilities of dealing with group claims in cross-border situations, namely the Mediation Directive,23 which is to be transposed in 2011,24 and the Small Claims

19 20

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Commission Recommendation of 4 April 2001 on the principles for out-of-court bodies involved in the consensual resolution of consumer disputes. OJ 2001 No. L109. Green Paper on alternative dispute resolution in civil and commercial matters, 19 April 2002, COM (2002) 196 final. See Consultation Paper on the use of Alternative Dispute Resolution as a means to resolve disputes related to commercial transactions and practices in the European Union, 18 January 2011. Directive 98/27/EC of the European Parliament and of the Council of 19 May 1998 on injunctions for the protection of consumers’ interests, OJ 1998 No. L166. The Consumer Ombudsman and qualified consumer organizations may seek injunctions before the Swedish Market court. In cross-border disputes, prior consultation is mandatory before taking action. The Consumer Ombudsman also has direct injunction powers. The average duration of an injunction procedure is six months. In Sweden’s case, injunction proceedings are seen as a well-established, rapid and efficient way of implementing consumer legislation relating to collective consumer interests. Experience of the Market Court’s handling of cases involving collective consumer interests has been predominantly positive. See Bakardjieva Engelbrekt, ‘Fr˚an materiella regler till genomf¨oranderegler’, 602–603. See regarding this Directive, for example, G. Betlem, ‘Public and Private Transnational Enforcement of EU Consumer Law’, European Business Law Review, 18 (2007), 683, 700. Regulation (EC) No 2006/2004 of the European Parliament and of the Council of 27 October 2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws, OJ 2004 No. L364. Directive 2008/52/EC of the European Parliament and of the Council of 21 May 2008 on certain aspects of mediation in civil and commercial matters, OJ 2008 No. L136. The purpose of the directive is to encourage and facilitate mediation as an alternative form of resolution of cross-border disputes in the EU. The substantive provisions of the directive entered into force in the Member States by 21 May 2011.

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Regulation,25 implementation of which began on 1 January 2009. Finally it should be mentioned that enforcement provisions are appearing more and more frequently in various directives in the area of consumer law.26 Provisions of this kind have become increasingly distinct since they first began to be introduced as early as the 1980s.27 All the policy documents and legislative instruments that have now been mentioned show that there is an increased focus on civil procedure. The consequences that all this can have for Swedish law are uncertain at present, but a few reflections will be offered in the concluding section of this chapter.

The Swedish Group Proceedings Act As already mentioned, the Swedish Group Proceedings Act opens up broad possibilities for instituting group proceedings. It consists of fifty sections, which include questions about competent courts, special process conditions, determination of the group, etc. A group proceeding can only be initiated by a plaintiff on behalf of a group of members. A plaintiff who directs its action against a group of defendants cannot pursue a group proceeding. It is only the group representative who is the plaintiff and 25 Regulation (EC) No 861/2007 of the European Parliament and of the Council of 11 July 2007 establishing a European small claims procedure, OJ 2007 No. L199. The regulation intends to improve access to justice by simplifying cross-border small claims litigation in civil and commercial matters and reducing costs. See SFS 2008:1038; the District Courts (tingsr¨att) are competent to deal with the Small Claims Regulation. Compare also the Regulation 1896/2006 of the European Parliament and of the Council of 12 December 2006 creating a European order for payment procedure, OJ 2006 No. L399. 26 See e.g. Art. 41 of the Proposal for a Directive of the European Parliament and of the Council on consumer rights, COM(2008) 614 final, where it states that the Member States shall include provisions where public bodies or their representatives, consumer organizations having a legitimate interest in protecting consumers, or professional organizations having a legitimate interest in acting, may take action under national law before the courts to ensure that national provisions for the implementation of the directive are applied. See also Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts, OJ 1997 No. L144, and Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council. OJ 2005 No. L149. 27 See Art. 4 of the Council Directive 84/450/EEC of 10 September 1984 relating to the approximation of the laws, regulations and administrative provisions of the Member States concerning misleading advertising, OJ 1984 No. L250 and Art. 7 of the Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ 1993 No. L95. See Bakardjieva Engelbrekt, ‘Fr˚an materiella regler till genomf¨oranderegler’, 580.

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therefore a party to the proceeding. Both natural and legal persons can act as plaintiff. Proceedings can, as mentioned above, be initiated on behalf of a group of consumers by (1) an individual member of a group that can in itself be a natural person or a legal entity (private group action), (2) by an association of consumers or wage-earners (organizational group action) and (3) by a designated public authority (public group action). For consumer disputes the government has designated the Consumer Ombudsman as the appropriate public authority. During the years that the Act has been in place, most cases have been private group actions. Only one public group action has reached the ordinary courts, and as yet no organizational group action has done so. According to the travaux pr´eparatoires of the Act, public group action can only come into question when a private group action or an organizational group action is not likely to be initiated or there is otherwise a special public interest so that a public group action is initiated.28 It is further stated that public group action is expected to play an especially important part when the main purpose of the proceedings is to direct the course of action or to create precedent and promote the development of the law. The proceeding is thus well in line with the general role of the authorities in promoting community interests and refraining from intervening in the mutual legal relations of individuals, other than in exceptional cases.29 The need for a public group action may be assessed case by case, but it is generally not for the competent district court to determine if such a need exists.30 As mentioned above, the Consumer Ombudsman is able to initiate public group actions under Section 6 of the GRL.31 According to Section 14 (b) of the Swedish Consumer Agency (Standing Instructions) Ordinance (1995:868), the Consumer Ombudsman may, where justified by public interests, file a public group action in disputes between consumers and traders over services provided mainly for private use. It is the Consumer Ombudsman that determines whether the requirements of that provision are met. The right of recourse is general in that it includes consumer disputes of every kind. Group proceedings can be instituted before a number of selected ordinary district courts designated by the government. The government has 28 29 30 31

See Government Bill No. 2001/2002:107, p. 54. See Government Bill No. 2001/2002:107, p. 37. See Lindblom, Grupptalan i Sverige, p. 315. The Environmental Protection Agency is also able to initiate a group action relating to compensation for certain environmental damages. See also Lindblom, Grupptalan i Sverige, pp. 316 and 581.

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decided to designate the district courts that are competent to hear real estate disputes. The reason for those particular courts being selected to handle a group action is that they often have considerable resources for and experience in handling complex and complicated disputes with many persons involved. They are also geographically spread across the country.32 A group action is subject to the general rules of the Code of Judicial Procedure, RB,33 concerning civil disputes, unless otherwise provided in the GRL.34 Accordingly, the same general procedural conditions apply as in ordinary cases, that is, under Chapter 34, Section 1 of the RB the court is required ex officio to examine its competence or the group action must refer to a claim admissible by a common court. In addition to the general procedural requirements, a group action must also meet the special procedural conditions of Section 8 of the GRL. The following special conditions must be met for lodging a group action: (1) the action is based on factual circumstances that are common or similar to the group, (2) a group action is not seen as inappropriate because of considerable divergences in the claims, (3) the majority of the claims cannot be equally well-conducted in separate proceedings of the group members, (4) the group is well-defined in terms of the value of the claims, delimitation, etc. and (5) the plaintiff is well-suited to represent the group. The special procedural conditions are peremptory, and the examination is therefore conducted ex officio by the court. No demurrer is needed in order for the court to dismiss the claim.35 The procedural prerequisites for initiating group proceedings are set out in a very flexible manner, giving the court relatively broad discretion to allow or disallow claims to be conducted in group proceedings. This has been seen as a necessary safeguard against possible abuse of group proceedings. The group is defined through an opt-in procedure. The group members do not become parties to the procedure. If a plaintiff ’s application is not dismissed, the court shall notify the group members as indicated in the application as per Section 13 of the GRL. The decision by the court is binding upon all members of the group according to Section 29 of the GRL. An appeal against the decision is possible under the general rules of civil procedure. The GRL does not set any limitation on the civil law 32 33 34 35

See Lindblom, Grupptalan i Sverige, p. 300. See SFS 1942:740. Section 2 of the GRL. See Lindblom, Grupptalan i Sverige, p. 332.

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remedies to be obtained.36 Typically the main remedy that would be relevant in group proceedings would be compensation of damages on the basis of contractual or non-contractual liability. The law gives consumers a broad arsenal of lasting and enforceable remedies. At least one group action so far has been initiated as an action for a declaratory action (fastst¨allelsetalan).37 Only one public group action has been brought in Sweden since the Act came into force. The Swedish Ombudsman initiated an action on 15 December 2004 against an energy supplier in the north of Sweden. The company failed to supply electricity to 7,000 consumers at the price agreed in the contract. The case concerned damages of EUR 100 to 1,000 per subscriber for additional expenses following the respondent’s failure to deliver electric power in accordance with a fixed price agreement. The Consumer Ombudsman filed in the first instance a performance action requesting an interlocutory judgment in the matter of liability in damages. Previously the Consumer Ombudsman had conducted a group action before the ARN in the matter. The respondent, who had lost a number of individual cases concerning the same matter but had also won one or two cases, had refused to comply with the ARN’s recommendation concerning payment. The proceedings were delayed by the respondent asserting among other things that the special procedural conditions under the GRL were not satisfied. The district court overruled the respondent’s objections on 20 June 2005. The respondent then took the matter to the court of appeal, which, however, dismissed the appeal on 16 December 2006, whereupon the respondent appealed to the Swedish Supreme Court. In a ruling on 25 September 2007 the Supreme Court found no cause for granting a review dispensation. The proceedings were then resumed by the district court, which in January 2010 ordered the respondent to pay damages to the consumers concerned.38 An appeal has now been lodged with the Court of Appeal for Upper Norrland, and the case is still pending. As mentioned above, most cases have been private group actions. Only one public group action has reached the ordinary courts, and no organizational group action has. The number of cases is also small: twelve cases in six years. Thus the influx of cases has proved smaller than the legislature anticipated. One of the main obstacles to increasing the 36 See Lindblom, ‘Utv¨ardering av lagen om gruppr¨atteg˚ang’, 833. 37 See S. v. F¨ors¨akringsbolaget S., Stockholm District Court, Case No. T 6341–03. 38 Ume˚a District Court, Case No. T 5416–04.

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number of cases is the lack of an opt-out system and the time-consuming nature of the proceedings. These obstacles are palpably illustrated by the above- mentioned Consumer Ombudsman case: The case itself has dragged on, and the Consumer Ombudsman has devoted a great deal of work to defining the group.39 The procedure, affording as it does the possibility of separately appealing the court’s decisions on individual issues, makes the estimated duration of a trial up to ten years.40 Liability for costs is another obstacle.41 For group proceedings the ordinary rules on litigation costs (namely the losing party paying) apply in principle. The plaintiff in a group action thus bears the litigation costs, including those of the defendant, if he or she loses the case. Members of the group are in principle not liable for the litigation costs. This main rule also applies when the action is brought by the KO. Authorities such as the Consumer Ombudsman are sensitive about costs, which can explain why only one single case of public group action has occurred in Sweden. Before bringing such an action, the Consumer Ombudsman has to work out whether the cost of losing the case can be accommodated within the budget, which in itself inhibits litigation. If the Consumer Ombudsman loses the case, this in turn can impact profoundly on the authority’s other established activities.42 It should be added that resources for public group actions do not appear to have been sufficient hitherto.43 This aspect should be particularly borne in mind with reference to the above-mentioned proposals by the European Commission, in which authorities such as the Consumer Ombudsman assume progressively greater importance. This can prove difficult failing special funding for the purpose.

The National Board for Consumer Complaints Group action at ARN The main scheme for settlement of disputes between individual consumers and individual business operators in Sweden is through the Swedish National Board for Consumer Complaints (Allm¨anna reklamationsn¨amnden, ARN). This is a public body for out-of-court dispute 39 40 41 42

See Lindblom, Grupptalan i Sverige, p. 283. See Bakardjieva Engelbrekt, ‘Fr˚an materiella regler till genomf¨oranderegler’, 600–601. See Lindblom, Grupptalan i Sverige, p. 167. See Lindblom, Grupptalan i Sverige, p. 167. Compare also Ds (i.e. Department Publication Series) 2008:74, p. 162. 43 See Ds 2008:74 p. 173.

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settlement specializing in business-to-consumer matters. The Board was set up in 1968, as part of the then-consumer policy. In addition, there are also private Ombudsmen or complaints boards that provide ADR services in specific sectors44 and a number of bodies addressing ethical issues and making pronouncements on marketing measures of different kinds.45 There are some fifty-two self-regulating bodies altogether. The board of the ARN consists of the Chairman (who is also the administrative head of the agency), the Vice-Chairman and the Chairmen of the different divisions and the members, the number of which is determined by the government. The Chairman, Vice-chairman and Chairmen of the divisions shall be lawyers qualified for the bench46 and are appointed by the government. The other members of the board are nominated by consumers, labour, industry and others. The Board’s main task is to adjudicate disputes between consumers and traders concerning a product, service or other commodity which the trader has provided to the consumer, as well as certain other damages disputes.47 The proceeding can be initiated by a consumer, but can also be initiated by the Consumer Ombudsman on behalf of a group of consumers (group action) or by an association of consumers or wage-earners on behalf of a group of consumers; The latter occurs, however, only if the Consumer Ombudsman has declined to initiate proceedings himself.48 The ARN may adjudicate disputes between a group of consumers and a trader if (1) there are a number of consumers who presumably have made claims on the trader on essentially similar grounds, (2) the disputes concern matters admissible by the authority and (3) an examination of the disputes is justified in view of the public interest. Group proceedings before the ARN are based on an opt-out principle. The claim extends automatically to all members of this group without a need for an active step made by every consumer. 44 For example the Customer Ombudsman of the Folksam Group, Fastighetsmarknadens Reklamationsn¨amnd, the Complaints Board of the Driving Schools National Association, the Disciplinary Board of the Swedish Hotel and Restaurant Association etc.; see report from the self-regulatory bodies of the Industry, 2009/2010:RFR12. See also the Legal Affairs Committee memo, 2003/04:URD. 45 For example the R˚adet f¨or marknads¨overvakning. 46 Section 26 of the Standing Instructions for the Board; Regulation 2007:1041 with instructions for the Board for Consumer Complaints. 47 Section 1 of the Standing Instructions. 48 Under Section 3 of the Standing Instructions; Regulation 2007:1041 with instructions for the Board for Consumer Complaints; cf. Section 5 of Regulation 2009:607 instructions for Consumer Agency.

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The Board is competent to make recommendations in disputes between, for example, a consumer and a trader concerning goods and services that have been provided by the trader to the consumer. On the other hand, the Board does not, for example, examine disputes concerning the purchase and rent of real estate or those concerning health care and legal services.49 There is also a threshold in terms of the minimum value of disputes decided by the Board.50 The procedure is entirely in written form, and a complaint must be lodged no later than six months after the trader has turned down the consumer complaint.51 A dispute cannot be decided by the ARN if it is pending before, or already decided by, an ordinary court. The ARN decision is not subject to appeal, but can, subject to certain conditions, be reviewed.52 The ARN issues a recommendation in which it can recommend how the dispute should be settled. The decision is not enforceable. Nevertheless, there is a high rate of compliance, approximately 75 percent, among business operators, with the recommendations of the Board. Proceedings are free of charge to the parties. The absence of any fees is one of the main advantages of the procedure. The duration of handling a case in 2009 averaged six months (181 days). In 2009 the Board received 10,862 complaints.53 In Sweden, many consumers (45 percent) believe that resolving disputes with traders through ADR is easy, and they have high confidence in that system.54 The drawback to the ARN is that there are certain disputes which it cannot adjudicate. Furthermore, the ARN is criticized on account of its activities being governed by an Ordinance and not by an Act of the Riksdag.55 The Consumer Ombudsman has filed group proceedings with ARN in a number of cases.56 During 2010, for example, the ARN received a group complaint concerning district heat delivery. The complaint was filed by the Consumer Ombudsman against a district heating company (Hammar¨o Energi AB.) The Consumer Ombudsman alleged that the company is not entitled to charge certain of its district heating customers 49 50 51 52 53 54 55 56

Sections 4 and 5 of the Standing Instructions. Section 6 of the Standing Instructions. Section 5 of the Standing Instructions. Sections 24 and 29 of the Standing Instructions. See www.arn.se. See Green Paper on consumer collective redress, p. 4, note 13. See Bakardjieva Engelbrekt, ‘Fr˚an materiella regler till genomf¨oranderegler’, 588. See A. H. Persson, ‘Country Report Sweden’ (2008), available at www.ec.europa.eu/ consumers/redress cons/sv-country-report-final.pdf.

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for administrative overheads, as no provision to this effect has been made in the contract between the parties. The Board made a decision on 15 March 2011.57 The ARN has also received a complaint concerning non-performance of flights from Iraq. That complaint has been filed by the Consumer Ombudsman and is directed against airlines and companies that have sold tickets for the flights concerned. The Consumer Ombudsman maintains that the passengers are entitled to compensation for the economic damage they have incurred. The case is pending. It should be added that the ARN has participated in the ECC-Net (the European Consumer Centre’s Network). As mentioned above, the European Commission has been active in promoting the development of ADR. This endeavour has included the creation of the above-mentioned Centres, which are intended to provide consumers with information and assistance in accessing an appropriate ADR scheme in another Member State. The Centres operate in networks and form part of the European Consumer Policy Strategy.58 ECC-Net aims at promoting consumer confidence by advising citizens on their rights as consumers and providing easy access to redress in cases where the consumer has purchased something in another country from his or her own. ECCs provide consumers with a wide range of services, such as giving advice on out-of-court-settlement procedures and providing consumers with easy and informed access to such procedures.59 As part of this cooperation, the ARN has the task of trying disputes that arise between consumers from other EU countries and Swedish business operators.60 Municipal consumer advisers should also be mentioned in this connection.61 They are tasked with providing information, particulars and guidance to individual consumers in specific matters.62 They can also mediate in disputes between a specific consumer and a specific trader. 57 The Board decided that Hammar¨o Energi AB, contrary to what has been agreed, had charged the consumers with the company’s increased operating costs. The Board stated that the company should have anticipated the increased costs already when it concluded the agreements with the consumers. The Board recommended that the company pay back ¨ 2010–4253). and waive the payment of these expenses (case nr Anr 58 Konsument Europa is the name of the Swedish advisory office, which is an autonomous unit within the Swedish Consumer Agency. 59 See www.ec.europa.eu/consumers/ecc/index en.htm for more detail on ECC-Net. 60 ARN also tries financial disputes within the FIN-Net network. The network has been created for legal bodies /organs, trying financial disputes. 61 See e.g. Consumer Agency Report 2010:21. 62 See e.g. Government Bill No. 1985/86:121.

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Consumer guidance is available in most municipalities, but about half the population of Sweden know nothing of its existence, even though a mere 6 percent of the country’s inhabitants live in municipalities without consumer guidance officers of their own. During 2009 consumer guidance officers were consulted by consumers on some 142,000 occasions. According to an estimate by the Swedish Consumer Agency, mediation by consumer guidance officers leads to a settlement of about 95 percent of the disputes concerned.63

KO as representative for individual consumers The Consumer Ombudsman also may represent individual consumers before ordinary courts in proceedings between a consumer and a business. The scheme was initially introduced as an experiment for only a limited time, but since 1998 it has been prolonged three times. Since 1 January 2007 the scope of the scheme extends to all kinds of consumer disputes and the duration of the trial period up to the end of 2011. The legislature has proposed making the scheme permanent through a new law.64 The legal basis for the Consumer Ombudsman to act as a representative in these situations is found in the Act on Pilot Scheme of Participation by the Consumer Ombudsman in certain disputes.65 This Act authorizes the Consumer Ombudsman to act as representative of an individual consumer before ordinary courts and before the Enforcement Authority (Kronofogdemyndigheten). A prerequisite for the Consumer Ombudsman to intervene in a lawsuit in support of the consumer is that the case is of particular importance for law-building and legal interpretation and that there is a general consumer interest in the dispute being tried by the court of law. Once the Consumer Ombudsman intervenes, the case cannot be tried under the rules of small claims procedures. A decision by the Consumer Ombudsman not to intervene is final. The criteria for intervention are very generally formulated and leave a broad margin of discretion to the Consumer Ombudsman in deciding whether to intervene. It may sometimes be difficult for a consumer to persuade the Consumer Ombudsman

63 See Bakardjieva Engelbrekt, ‘Fr˚an materiella regler till genomf¨oranderegler’, 588–589. 64 See Ds 2010:48 Evaluation of the Act on experimentation on participation by the Consumer Ombudsman in certain disputes (1997:379). 65 See the Act on experimentation on participation by the Consumer Ombudsman in certain disputes (1997:379) as amended by SFS 2006:1021.

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to take on a case which involves high risk and possibly high costs for the public purse, because if the Consumer Ombudsman represents the consumer and the latter is liable to reimburse the opponent for his or her legal costs, under the Code of Judicial Procedure, those costs will instead have to be borne by the state.66 On the other hand, the State is not liable for costs incurred by the trader after the Consumer Ombudsman has ceased to represent him or her and the trader has been notified accordingly. Representation by the Consumer Ombudsman is free of charge to the consumer. If the Consumer Ombudsman decides to assist the consumer, it is certainly very advantageous for the consumer. Willingness to achieve a settlement between the consumer and the trader rises dramatically once the Consumer Ombudsman has become involved. The Consumer Ombudsman receives between fifty and seventy applications annually for legal representation, but only about thirty have been granted altogether.67

Evaluation of the Swedish Group Proceedings Act In 2007 the Ministry of Justice appointed a special investigator to evaluate the Group Proceedings Act.68 The investigator was to consider whether the Act had achieved its basic purposes, such as strengthening the genuine redress available to individuals, and in this connection, to consider whether the provisions enacted for the specific purpose of safeguarding the interests of the respondent could be considered appropriate. The remit further included investigating the effects of the introduction of group action proceedings on small firms and other undertakings, for example, regarding the risk of abuse that had been feared at the time of the Act being passed. On these premises the investigator was to review the group action cases which had been tried up till then, including those which had ended without any judgment being returned. The investigator was also to follow up on any out-of-court settlements reached in such cases and to endeavour to ascertain the extent to which threats of group action had been used as a means of bringing pressure to bear extrajudicially. Finally the investigator was to gauge whether the willingness of companies to 66 See Section 5 of the Act on experimentation on participation by the Consumer Ombudsman in certain disputes. 67 See Lindblom, Grupptalan i Sverige, p. 253. 68 Memorandum from the Justice Department, 14 June 2007. Evaluation of the Law on class action proceedings, Ju 2007/5800/P. The investigator was Judge of Appeal Marianne Wasteson.

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invest in Sweden had been affected, and at the same time to put forward proposals for amendments to the Act, should any be needed. The investigator’s remit was concluded in May 2008. The report began by noting that the inquiry had taken place at an early stage and that the supporting documentation with regard to court proceedings had been somewhat meagre. In many respects, therefore, it was too early for any firm conclusions to be drawn, but the findings revealed that no information had emerged to suggest that the fears expressed on behalf of business undertakings had been justified by events. The Act had not been abused as a means of extorting oppressive settlements out of court, nor was there anything to suggest that the Act had impacted adversely on willingness to invest in Sweden. Instead the GRL could be taken to have augmented the accessibility of justice to the individual in that a number of actions were pending that individuals were unlikely to have pressed otherwise. Accordingly, in the investigator’s opinion, the group action mechanism was to be seen as a positive addition to Swedish procedural law, but the Act was not found to be sufficiently effective. In particular, the handling of the special procedural requirements had proved somewhat unwieldy.69 One of the problems emerging was that examination for impediments to proceedings, under Section 8 of the GRL, tended to be complicated and time-consuming. The investigator therefore proposed certain amendments.70 The proposal has not been made a basis of any new legislation. In the doctrine it is argued that there is every reason to put off reforming the Act for another few years, pending a larger body of experience.71 In addition, the Consumer Ombudsman has submitted that the opt-in system necessitates a disproportionate amount of work to determine the group.72 It is understandable that the Consumer Ombudsman should not be overeager to pursue group actions, given the legal costs involved, the complexities of group definition and the existing alternative of the ARN proceedings.73 The desirability of an opt-out system for public group actions has therefore been argued.74 As things stand, however, the investigator found no reason to propose any change to the opt-in system now operating.75 This has been criticized on the grounds that 69 70 71 72 73 74 75

See Ds 2008:74. See Lindblom, ‘Utv¨ardering av lagen om gruppr¨atteg˚ang’, 835. See Ds 2008:74, p. 15. See Lindblom, ‘Utv¨ardering av lagen om gruppr¨atteg˚ang’, 846–847. See Ds 2008:74, p. 69. See Bakardjieva Engelbrekt, ‘Fr˚an materiella regler till genomf¨oranderegler’, 601. See Ds 2008:74, p. 71. Ds 2008:74, p. 71.

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international developments are moving in the contrary direction.76 The investigator also discussed whether the Act would be made more effective if other authorities, such as the Swedish Competition Authority and the Equality Ombudsman, were empowered to file group proceedings,77 but no proposal was made in this respect. The investigator went on to discuss the funding aspect of group actions, observing that finance is a problem and that this can be a reason for potential legal representatives declining briefs on the plaintiff side. The risk of also incurring liability for the opponent’s legal costs is another deterrent. Here again, however, no major alterations have been proposed for overcoming the problem.78

The Swedish View on the Green Paper on Collective Redress As mentioned above, the European Commission has underlined the importance of effective redress mechanisms for consumers in its Consumer Policy Strategy for 2007–2013.79 Collective redress, that is, representative actions, pilot cases or group trials, make it easier for consumers to obtain remedies and compensation following a trader’s infringement of statutory consumer safeguards.80 The above-mentioned proposal on consumer collective redress81 came to be discussed in Sweden by the Riksdag Committee on Civil Affairs.82 The Committee stated that the Swedish government was generally in favour of measures at the EU level aimed at inspiring consumer confidence and activity in the Internal Market. As regards the more specific standpoint 76 Lindblom, ‘Utv¨ardering av lagen om gruppr¨atteg˚ang’, 843–844, arguing that ‘opt in is out, opt out is in!’. 77 See Ds 2008:34, p. 183. 78 See Ds 2008:74, p. 179. 79 Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee – EU Consumer Policy strategy 2007–2013 – Empowering consumers, enhancing their welfare, effectively protecting them. 80 See also proposals concerning collective redress for victims of infringements of the EU rules of competition. See White Paper on damages actions for breach of the EC antitrust rules. See also Faktapromemoria 2007/908:FPM99 and 2007/98:NU17. 81 Green Paper on consumer collective redress. The first alternative involved no EC action at all. The second focused on developing cooperation between Member States. The third envisaged a mix of policy instruments. The fourth addressed a non-binding or binding EU measure to ensure that a collective redress judicial mechanism exists in all Member States. 82 See opinion of the Riksdag Committee on Civil Affairs 2008/09:CU22; Justice Department 2008/09:FPM58.

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concerning the proposals contained in the Green Paper, however, the Committee was not prepared to advocate further rules on collective redress for consumers. Clearly, the Committee felt that the first alternative, namely that of no measures at all being taken at the EU level, was the most appropriate. The Committee pointed out that only half the Member States (fourteen out of twenty-seven) had a system for trying consumer claims against traders in various types of collective proceedings.83 The Committee, however, took the view that Swedish law, as mentioned above, included a number of such systems. The laws governing these systems, however, were of relatively recent origin, and so experience with them was limited. Among other things, the Committee drew attention to the above-mentioned evaluation of the GRL in which it had been stated that five years was far too short a time on which to base any firm conclusions regarding the practical outcome of the legislation. The Committee also observed that the GRL had not been applied to any great extent, and it also drew attention to the Small Claims Regulation84 and the Mediation Directive,85 which had been created for the very purpose of dealing with group claims in cross-border situations. The Committee therefore considered the first alternative to be the most suitable, that is, awaiting the effects of the above-mentioned national and Community enactments before proceeding to take any further measures. Regarding the third alternative,86 namely a proposed mixture of policy instruments which, among other things, would encourage the Member States to create systems for alternative settlement of disputes, the Committee observed that Swedish law already had a working system for this purpose. Here the Committee pointed among other things to the ARN’s activities and to the advisory committees which exist and are funded by various business organizations.87 By reason of the Committee’s conclusion, State Secretary Magnus G. Graner88 therefore stated as the Swedish view that the question of collective redress, at all events for the time being, was best regulated 83 Compare F. Cafaggi and H.-W. Micklitz, ‘Collective Enforcement of Consumer Law: A Framework for Comparative Assessment’, European Review of Private Law, 16 (2008), 391–425. 84 Regulation (EC) No 861/2007 of the European Parliament and of the Council of 11 July 2007 establishing a European Small Claims Procedure. 85 Directive 2008/52/EC of the European Parliament and of the Council of 21 May 2008 on certain aspects of mediation in civil and commercial matters. 86 Green Paper on consumer collective redress, p. 10 et seq. 87 See the Report from the self-regulatory bodies of the Industry, 2003/04:URD5. 88 M. G. Graner, ‘Response in reaction to the Commission’s Green Paper on Consumer Collective Redress’, Dnr Ju 2008/10181/DOM, 2 March 2009.

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at the national level. He also stated that a collective redress system would ‘need, maybe more than other procedural legislative instruments, to be thoroughly considered and tested in order to safeguard the balance between the plaintiff ’s and the defendant’s interest. It is likely that such well-balanced models will emerge gradually, when practical litigation has shown how group proceedings work in reality.’ He went on to say that an ‘EU instrument introducing a judicial procedure for collective redress would have to be drafted with reference to and, to some extent, in coherence with existing basic procedurals rules. Since these rules show great differences in different Member States – and since the Green Paper of course do not aim towards broader harmonisation of national procedural systems – there is a risk that such an instrument would have to be watered down and thus less efficient.’ He ended, however, by arguing that the national systems for collective redress did not have to be limited to nationals of the respective Member States, going on to say that ‘cooperation between the Member States may work as an alternative to Community legislation’. The establishment of a ‘network and cooperation between Member States’ could be a possible way forward.

Collective redress on its way? On 29 May 2009, after the Member States had commented on the Green Paper, the Commission held a hearing of representatives of the Member States, the business community and consumer organizations. The starting point of the discussions was a document compiled by DG SANCO outlining various alternative courses of future action.89 The measures set forth were variants of those already presented in the Green Paper. In September 2010, however, EU Justice Commissioner Viviane Reding90 stated in an interview that there would be no legislative proposal for a group action for consumers in the short term. Reding said that this applied to both consumer law and competition law. She argued that the risks for businesses were too severe, which would be particularly undesirable, taking into consideration the current state of the economy.91 Soon after this statement had been made, however, a note was published in the journal European Voice to the effect that the European Commission would be reopening 89 See notes 13 and 14. 90 Commissioner for Justice, Fundamental Rights and Citizenship. 91 www.ftd.de/politik/europa/:verbraucherschutz-eu-laesst-verbraucher-imstich/50171741.html.

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the debate on EU legislation on collective redress.92 Vice President of the European Commission Joaqu´ın Almunia said soon afterwards93 that the College of Commissioners had debated issues related to collective redress and discussed a joint information note signed by himself, Vice President Reding and Commissioner John Dalli.94 The note called for a coherent European framework to strengthen collective redress, drawing as much as possible on the different national traditions. Collective redress was also included in the Commission’s work program for 2010, which called for a launch of a new public consultation on the subject. The three Commissioners noted that up till now the issue of collective proceedings had been treated separately for different fields of activity and that this had not worked efficiently. The Commissioners now saw the need for a holistic approach95 and therefore intended, as a joint measure, to open a broad-based public consultation from February 2011 until the end of April 2011.96 In light of the replies that the Commission would receive, it would propose a framework for collective redress. This framework would become the basis for possible legislative initiatives in several policy areas including environment, consumer protection, and others. The purpose of the consultation is, inter alia, to identify common legal principles on collective redress. The consultation should also help to examine how such common principles could fit into the EU legal system and into the legal orders of the twenty-seven EU Member States. The

92 S. Taylor, ‘Talks on Group Compensation to Resume’, European Voice, 7 October 2010. 93 J. Almunia, ‘Common Standards for Group Claims across the EU’ (Valladolid, 15 October 2010). See also J. Almunia, ‘State of Play and Future Outlook’ (Brussels, 21 October 2010). In these speeches five common principles were listed. These principles were firstly to support effective compensation for everyone who had suffered damages, recalling that in many cases group claims are cheaper and more practical than a large number of individual claims. Secondly, measures were needed to avoid abusive litigation. Almunia said that the Commission was committed to avoiding the excesses and drawbacks of the U.S. class action system. Therefore, it was necessary to identify safeguards that would prevent importing a U.S.-style litigation culture. Thirdly, opportunities should be created to resolve disputes either through settlements or using alternative systems. Fourthly, collective judgments should be enforceable throughout the EU. Fifthly, it would be ensured that adequate financing could be allowed to give citizens and businesses – especially SMEs – fair access to justice. 94 Commissioner Dalli is in charge of Health and Consumer Policy. 95 See also V. Reding, J. Almunia and J. Dalli, ‘Towards a Coherent European Approach to Collective Redress: Next Steps’, 5 October 2010, SEC (2010) 1192. 96 See Commission Staff Working Document Public Consultation: Towards a coherent European approach to collective redress, 4 February 2011, SEC (2011) 173 final.

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Consultation should also explore in which fields different forms of collective redress could have an added value for improving the enforcements of EU legislation or for better protecting the rights of victims. The resulting set of principles should guide any possible initiative for collective redress in EU legislation.97 Based on the outcome of previous consultations, a first set of common core principles has been identified by the three Commissioners. These include (1) the need for effectiveness and efficiency of redress, (2) the importance of information and of the role of representative bodies, (3) the need to take account of collective consensual resolutions as a means of alternative dispute resolution, (4) the need of strong safeguards to avoid abuse litigations, (5) the availability of appropriate financing mechanisms, notably for citizens and small and medium-sized enterprises (SMEs), and (6) the importance of effective enforcements across the EU. The Swedish government has stated that it remains intent on observing the discussion in progress at the European level concerning collective redress. It is important to ensure that any future legislative acts are based on the European legal tradition and that there is a balance between the interests of plaintiff groups and those of the respondents. Any initiative from the Commission towards a European system of collective redress can be expected to impact on Sweden’s Group Proceedings Act. As the view of the Swedish legislature towards the content of the new Consultations paper is not known, it is hard at present to judge the consequences any more closely. Thus the economic consequences of a possible proposal cannot yet be assessed. 97 See also R˚adspromemoria, 24 November 2010; Justice Department: Public consultation: Towards an integrated European approach to collective redress, information from the Commission. As a point of departure for the consultation, a number of principles had already been presented in November 2010. As a first principle, an EU initiative as compared with individual actions must save expenses for both parties and enhance the efficiency of proceedings. As a second principle, ADR must be available, but in order for there to be sufficient incentives for applying ADR, there must be an effective legal system for collective actions. As a third principle, judgments in collective actions should be enforceable throughout the EU. As a fourth principle, there must be appropriate methods of financing collective proceedings. As a fifth principle, it was important to avoid factors conducive to unjustified actions, such as commission fees and penal damages. As a sixth principle, consideration should be given to procedural rules requiring the party losing the case to pay the opponent’s legal costs. As a seventh principle, consideration should be given to special prior examination of the permissibility of collective proceedings in the individual case. See also appendix 201/11:2450CE. See also the appendix to the EU committee meeting, 201–11-29, appendix 2010/11:2450 C9.

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Conclusion As has been shown in this chapter, collective redress has been much discussed both by the Swedish legislature and the European Commission in the past several years. The plans for regulating consumer collective redress at the EU level has therefore been welcomed by the consumer organizations98 but opposed by the business representatives. Generally speaking, Swedish law has an advanced and diversified system of consumer protection in this field, protecting multiple layers of interests, or multilayer interests. The interest of an individual can be protected through a legal process in a common court proceeding, through a complaint to the ARN or through when the Consumer Ombudsman acts as the representative for an individual consumer. Various forms of collective actions are also available in order to protect an individual through the GRL: a private group action, an organizational action or a public group action. The Consumer Ombudsman can also file a group proceeding at the ARN. The public interest is also satisfied as the number of cases that can be solved though ADR lowers the costs of the national court system without the consumers losing their confidence in the system. As already mentioned, the Swedish Group Proceedings Act has been found to increase access to justice for the individual in that there are a number of actions pending which the individual would not have pressed otherwise. There is of course room for improvement. What then could be changed? The consumer organizations, for example, could occupy a less withdrawn position.99 One may ask, however, why they should be more active when the legislation provides effective public dispute resolution alternatives through the ARN and the KO. On the other hand, more resources should be allotted to the KO, given the pivotal role of that authority in maintaining good consumer protection. It is hard to tell in which direction EU developments will move where consumer redress is concerned, but, as has been mentioned already, there are several documents indicating that changes are imminent. In addition to the public consultation mentioned above, the Commission has also stated that it will facilitate fast and inexpensive out-of-court resolution of consumer problems in the EU by proposing a legislative instrument on an ADR mechanism in 2011. The 98 See the European Consumers’ Organization, ‘European Group Action, Ten Golden Rules’ (2008). 99 See Lindblom, Grupptalan i Sverige, p. 253 and Bakardjieva Engelbrekt, ‘Fr˚an materiella regler till genomf¨oranderegler’, 604.

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Commission will be submitting an initiative on the use of ADR in the EU and will adopt a recommendation in 2011 on the network of ADR systems for financial services. Furthermore, the Commission will propose a European system for settlement of online disputes for digital transactions by 2012 and promote wider use of mediation by 2013.100 A specific proposal on antitrust damages actions will also be presented.101 The question, though, is what the regulatory package is going to look like. Collective actions are a very advanced procedural tool. Their introduction at the EU level will require a significant level of intervention in national court structures, civil procedures, etc.102 As we have now seen, Sweden, in common with many other EU countries, has a number and variety of solutions for dealing with collective claims. Furthermore, discussion is needed as to whether we are to have an opt-in or an opt-out system.103 A study conducted in 2004 indicated that a majority of the consumers would be against an opt-out system as it deprives them of control of the suit.104 However in opt-in systems, the rate of participation is very low (less than 1 percent) compared with a system of opt-out, where participation is almost 100 percent.105 Another drawback with opt-in systems is that defining the group can take a very long time, as Swedish experience confirms. The way ahead may therefore be a combination tool with more judicial cooperation than procedural unification.106 The discussion as to how collective redress should be regulated is certain to continue.

100 EU Citizenship Report 2010 dismantling the obstacles to EU Citizens’ rights, 27 October 2010, COM(2010) 603 final. See also Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions. Towards a Single Market Act for a highly competitive social market economy 50 proposals for improving our work, business and exchanges with one another, 11 November 2010, COM(2010) 608 final, proposal 46. 101 Almunia, ‘Common Standards for Group Claims across the EU’. See also Almunia, ‘State of Play and Future Outlook’. See also Commission Recommendation of 12 May 2010 on the use of a harmonised methodology for classifying and reporting consumer complaints and enquiries, OJ 2010 No. L136. 102 See Tulibacka, ‘Europeanization of Civil Procedures’, 1552. See also F. Valguarnera, ‘Legal Traditions as an Obstacle: Europe’s Difficult Journey to Class Action’, Global Jurist, 10 (2010), Art. 10. 103 See J. Stuyck, ‘Class Action in Europe? To Opt-in or to Opt-out, that Is the Question’, European Business Law Review, 20 (2009), 483–505. 104 See J. Simon, ‘The Consumer Law Compendium: A New Era for European Consumer Law?’, European Business Law Review, 20 (2009), 454. 105 The European Consumers’ Organization, ‘European Group Action’. 106 See Tulibacka, ‘Europeanization of Civil Procedures, 1540 and 1552–1553.

14 Transnational class settlements Lessons from Converium

benoˆı t allemeersch

Introduction For several years now, the collective redress theme has been a rich source of inspiration for academic debate around the globe. As one observer puts it, in slightly overstated terms: ‘At present every other proceduralist and commentator on civil justice [ . . . ] is writing about aggregated actions’.1 In the minds of many European commentators, the initiatives taken by the European Commission to spur the discussions have probably been the main factor in this development. But what is remarkable is that, despite the fact that transnational litigation has been one of the areas where European harmonization has been most successful, the transnational aspects of collective litigation have drawn relatively little attention until now. In the words of Deborah Hensler: ‘While lawyers and investors are joining forces to litigate worldwide, public decision makers are proceeding as if they can cabin litigation within their boundaries and procedural rules.’2 This is strikingly illustrated by the Commission’s recent public consultation on collective redress, issued in February 2011. In the fourteen-page document that comes with the consultation, relatively little attention is given to the transnational context. The Commission has limited itself to observing that ‘any action at EU level should address the specific crossborder dimension of collective redress’ and devotes one question out of thirty-four exclusively to the subject. 1 J. Peysner, ‘Book Review of C. Hodges, The Reform of Class and Representative Actions in European Legal Systems’, Civil Justice Quarterly, 28 (2009), 285. 2 D. R. Hensler, ‘The Future of Mass Litigation: Global Class Actions and Third-Party Litigation Funding’, George Washington Law Review, 79 (2011), 306, 323.

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This is perhaps not so irrational. To deal with the issue of collective redress in a consistent way, it is logical to first start with basic considerations and questions, such as why we should introduce collective redress schemes, what objectives should be given priority, what the role of the supranational level should be, etc. Europe is only one player in the world forum, however, and in a globalized economy international developments may catch up with the Commission’s plan. As we speak, an international market of class action litigation is developing, with plaintiffs, defendants and their legal counsel acting on a much broader scale than ever before. Exporting collective disputes is becoming a business. Now that more and more European countries are experimenting with collective litigation schemes, we can expect more cross-border litigation in this field within the EU. This brings to the forefront very specific issues, issues such as jurisdiction for claims with cross-border aspects, recognition and enforcement of foreign collective judgments, representativeness in transnational cases, adequate notification abroad, preclusive effect of opt-out class action decisions, etc. There has, however, been relatively little jurisprudence yet. Some courts of Member States have dealt with the transnational effects of U.S. class actions in Europe but in respect of collective procedures across Europe, material is scarce. An exception is the Netherlands, where a class settlement procedure created in 2005 is now producing interesting case-law. The most remarkable decision to date is the one in the Converium case,3 which according to some opens the door to more or less universal jurisdiction for the Amsterdam court handling the class settlement cases. This raises particularly interesting questions. Should access to justice for collective claims not only involve access to adjudicatory mechanisms, but also to alternative methods of dispute resolution? And if the answer is affirmative, are the multilayer interests aligned when it comes to channelling all global class settlements to one jurisdiction, such as the Netherlands? In this text, I will discuss the Converium decision in detail, evaluate its merits and present some critical thoughts about this extraordinary development. For those readers who are not familiar with the Dutch context, I will first give a brief introduction to the Dutch class settlement procedure and explain the events leading up to the Converium decision. 3 Court of Appeals Amsterdam 12 November 2010, JOR (2011), 448, with case note by J. S. Kortmann; see also H. van Lith, ‘Internationale bevoegdheid Nederlandse rechter WCAM-zaak’, Ondernemingsrecht – Effectenrecht, (2011), 117 (case annotation of Court of Appeals Amsterdam 12 November 2010); also available at www.rechtspraak.nl.

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The Dutch class settlement TheDutch Act on Dutch Act on Collective Settlements of Mass Harm (Wet Collectieve Afwikkelingen Massaschade, commonly referred to as ‘WCAM’ by Dutch commentators and practitioners) is comparatively unique in the world. Applicable to any mass harm in most areas of law, the Dutch WCAM provides for a class settlement without a class action. The procedural system in the WCAM can indeed only be activated if a settlement with a representative organization has been concluded and does not require the anterior filing of a claim. Once the agreement is reached, the parties who have negotiated the settlement may obtain a ruling that the settlement is confirmed as a class settlement, with the effect of full and final termination of the underlying dispute. To this end, the negotiating parties must file jointly a petition with the Amsterdam Court of Appeals. The Court will then evaluate the reasonableness of the settlement and assess the representativeness of the entities that negotiated on behalf of the interested parties, that is, the class which suffered the mass harm.4 All interested persons have the opportunity to be heard and must therefore be duly notified. The burden of notification is on the parties that negotiated. If the Court of Appeals grants the request, the settlement is confirmed and declared binding erga omnes in respect of all members of the class, save for those who opt out within three months after the confirmation judgment is issued. There is certainly more to say about this exceptional system, but that is not the purpose of this contribution. The reader who is interested in learning more about the WCAM is referred to the more elaborate literature on this topic.5

The path leading to Converium It is noteworthy that the Dutch class settlement act was not created with an international ambition, so to speak. The legislation was a response to a mediatized and quite dramatic case of product liability, the DES matter. 4 The representatives must be legal entities, that is, foundations or associations. Contrary to the situation in the United States, individuals cannot act as ‘lead plaintiff ’. 5 See for instance F. Weber and W. H. van Boom, ‘Dutch Treat: The Dutch Collective Settlement of Mass Damage Act (WCAM 2005)’, Contratto e Impresa/Europa, 1 (2011), 69. It is also noteworthy that the Dutch Ministry of Justice has made available a concise summary in English of the WCAM: ‘The Dutch “Class Action (Financial Settlement) Act” (“WCAM”)’, available at www.rijksoverheid.nl at Alle onderwerpen > Wet collectieve afwikkeling massaschade (Wcam) > Documenten en publicaties > Circulaires.

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DES was a prescription drug that in the 1950s to 1970s was thought to reduce the risk of miscarriage but ended up causing birth defects and increasing the risk of cancer. Thousands of women were affected and the WCAM was developed to help the judicial system cope better with cases of this magnitude. The DES case being mostly a Dutch problem, with no or only few cross-border aspects, the WCAM was drafted without any reference to transnational disputes. The act does not explicitly state that it applies to cross-border cases, but does not rule it out either. To date, six cases have been reported under the WCAM regime. The first three had relatively few cross-border elements, and the problem of jurisdiction was not addressed in the court decisions. Then came Shell. The Shell case turned around allegedly misstated oil reserves and the resulting drop in the company’s share price. Class actions had been filed in the United States, but the federal court for the District of New Jersey had eventually refused jurisdiction over non-U.S. shareholders. Meanwhile, an agreement had already been reached to settle the non-U.S. claims, and this settlement was submitted to the Amsterdam court. This case was truly international as the shareholders were scattered all over the world. The case still had a strong connection with the Netherlands though, as one of the two Shell entities settling the case was Dutch, Shell being a company with dual headquarters in the UK and the Netherlands. Amsterdam assumed jurisdiction, and the settlement was declared binding in May 2009. The case sparked a lot of attention, partly because of the size of the settlement but also because it opened perspectives for Amsterdam to serve as a world forum for non-U.S. class settlements. Those who were favourable to this idea were encouraged when one year later, in June 2010, the U.S. Supreme Court curtailed the extraterritorial effect of Section 10(b) of the 1934 Securities and Exchange Act in Morrison v. National Australia Bank, making U.S. federal courts less hospitable to global securities class actions. By the end of 2010, at the request of the Dutch Ministry of Justice, a report was issued on the private international law aspects of the WCAM.6 The report concluded that the European rules on jurisdiction, notification and recognition were not fully in line with the terms of the WCAM and made recommendations for modifications in the EU texts. Shortly thereafter, the Converium ruling came out. 6 H. van Lith, The Dutch Collective Settlements Act and Private International Law. Aspecten van Internationaal Privaatrecht in de WCAM (Antwerp: Maklu, 2011). The study was supervised by F. De Ly and X. Kramer and is also available at www.wodc.nl at Onderzoek. Any subsequent reference will be to the page numbering of the electronic document.

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The Converium case Just like Shell, Converium was a case where the class of shareholders was truly international. What distinguished it from Shell though, was that none of the defendants or any of the circumstances leading to the mass harm had any connection with the Netherlands. The Converium case related to alleged securities fraud involving Converium, a Swiss reinsurance company formerly known as Zurich Re. The company was listed on the Swiss stock exchange but also traded indirectly on the New York Stock Exchange through the listing of derivative securities known as American Depositary Shares (ADS). In the summer of 2004, following the unexpected announcement of an increase in the company’s reserves in the amount of several hundreds of millions of dollars to cover for heavy losses in its North American subsidiary, the share price dropped and several class action complaints were filed. The case then proceeded as a consolidated securities class action in the Southern District of New York. In March 2008, the District Court certified a plaintiff class that included all purchasers (both U.S. residents and non-U.S. residents) of Converium ADS on the New York Stock Exchange as well as all U.S.-based purchasers of Converium shares on the Swiss stock exchange. Foreign purchasers of Converium shares on the Swiss stock exchange were thus excluded from the class action. In the terminology that is commonly used by American observers in this context, the court assumed jurisdiction over the ‘foreign-squared’ or ‘f-squared’ claims (claims brought on behalf of Americans who purchased securities of foreign companies on foreign exchanges) but not over the ‘foreign-cubed’ or ‘f-cubed’ claims (claims brought on behalf of foreign plaintiffs who bought securities of foreign companies on foreign exchanges). A few months later, the case was settled. In December 2008, the District Court judge issued a final judgment approving the $84 million dollar settlement, which brought the U.S. court procedure to an end. The ‘f-cubed’ plaintiffs not having been included in the class, they were not eligible for any compensation under the U.S. settlement.

The international Converium settlement and the Dutch court ruling Following the U.S. settlement, an agreement was reached to also compensate the non-U.S. residents who had purchased Converium stock on the Swiss stock exchange (or any other exchange outside of the United States, for that matter), the so-called f-cubed class. This agreement resulted in two

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new settlements being entered into between the defendant companies and two Dutch entities representing the interests of the non-U.S. purchasers, one of which was a foundation specifically created for this purpose. The f-cubed class was estimated to include approximately 12,000 shareholders, of which around 8,500 were believed to be residing in Switzerland and 1,500 in the UK. The remaining 2,000 were to be found in other countries, 200 of which were traced back to the Netherlands. Subsequently, the parties filed a petition with the Amsterdam court to declare the two settlements binding upon all interested parties residing outside of the United States, regardless of their place of residence or domicile. The question was then raised whether the court had international jurisdiction to hear such a case. In a judgment issued on 12 November 2010 the Amsterdam court answered this question affirmatively. This ruling is preliminary and may be reconsidered after the interested parties – the shareholders – have had the opportunity to make observations. To that end, a hearing was held on 3 October 2011.7 The preliminary nature of the judgment, however, is not a reason to underestimate its importance and its precedential value. The decision is so thoroughly motivated that the legal reasoning developed by the court is thought to be quite revealing as to the position of the judges in respect of the global reach of the Dutch class settlement system in general.

The Dutch courts’ arguments in favour of jurisdiction The main argument in favour of international jurisdiction which can be distilled from the Converium decision is one of – what continental lawyers would call – a ‘practical’ nature, that is, that assuming jurisdiction to declare these settlements binding would in these circumstances be the best solution. The Court indeed emphasized more than once that the settlements that it is being asked to consider are entirely ‘complementary’ to the U.S. settlement, covering all claims not included in the latter.8 The Court even goes further than just framing this argument as a matter of efficiency. More than once, the Dutch judges speak in terms of a ‘need’ (behoefte) for their court to assume international jurisdiction,9 adding even that this need is ‘emphatically shown in this particular 7 At the time of writing the case was set for judgment no later than 17 January 2011. 8 Court of Appeals Amsterdam 12 November 2010, at para. 2.3. 9 The term ‘need’ is used twice in Court of Appeals Amsterdam 12 November 2010, at paras. 2.6 and 2.7.

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case’.10 In the absence of any similar class settlement procedure in the jurisdiction of any other Member State of the European Union, the Court explains, there is no other solution to allow the shareholders excluded from the U.S. class action to receive compensation under the settlement that was declared binding by the U.S. court.11 For the legal basis justifying its decision, the Court relies mainly on the so-called Brussels Regime, consisting of the Council Regulation (EC) No 44/2001, known as the Brussels I Regulation, and the almost identical provisions in the Lugano Convention, which applies to the member states of the European Free Trade Association including amongst others Switzerland. In applying these rules, the Court does not focus on the underlying dispute, that is, the harmful event, but merely on the settlement itself. It then goes on to draw a distinction between the two main obligations contained in the settlement. The first obligation is to distribute the funds to the interested parties. Here, the Court refers to Article 5(1) of the Brussels I Regulation and the Lugano Convention. This well-known provision, captured under section heading 2 ‘Special jurisdiction’, attributes for contractual matters jurisdiction over persons domiciled in Member States to the courts of the place of performance of the obligation in question. Article 5(1) applies, according to the Court, because the purpose of the Dutch procedure is to give binding effect to the obligations undertaken in the settlements, and one of the main obligations under the settlements is the payment of financial compensation. This payment is to be effected by the Dutch legal entities that negotiated on behalf of the shareholders and the funds will be distributed from a Dutch bank account. Consequently, the Netherlands qualify as the place of performance within the meaning of Article 5(1), the judges argued. The second obligation contained in the settlement, as observed by the Court, is for the interested parties to abstain from suing in court to obtain a higher compensation. Here, the Amsterdam court turned to Articles 2 and 6(1) of the Brussels I Regulation and the Lugano Convention to develop an argument that had already been key to the Court’s Shell decision. Article 2 sets out the basic principle of the Brussels Regime, that is, that persons domiciled in a member state shall be sued in the courts of that state. Article 6(1) allows plaintiffs in cases involving multiple defendants to 10 ‘[ . . . ] welke behoefte zich in de huidige procedure [ . . . ] nadrukkelijk doet gevoelen’ (Court of Appeals Amsterdam 12 November 2010, at para. 2.6). 11 Court of Appeals Amsterdam 12 November 2010, at para. 2.5.

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sue defendants in the courts of the place where one of the co-defendants is domiciled, provided there is a sufficiently close connection between the claims. Qualifying the shareholders as defendants in this procedure, the Court applied Article 2 to assume jurisdiction over the two hundred Dutch residents in the class and subsequently used Article 6(1) to justify its authority to include all other EU and EFTA citizens as well. For all shareholders residing outside of EU and EFTA territory, the court invoked a provision contained in the Dutch civil procedure code with similar effect as Article 6(1).12 The strength of the legal arguments given by the Amsterdam court to justify its global jurisdiction is, however, debatable. In what follows, I will discuss the validity of the two legal grounds for jurisdiction identified by the Amsterdam court, starting with Article 5(1) of the Brussels I Regulation and the Lugano Convention and then moving on to Article 6(1).

The obligation to pay and the applicability of Article 5(1) In assessing its jurisdiction in respect of the obligation to pay the settlement amounts to the shareholders, the court relies heavily on Article 5(1). It is very questionable whether that provision actually applied in the case at hand. Article 5(1) of the Brussels I Regulation and the Lugano Convention concerns defendants in matters relating to contract. The point of reference to evaluate whether this condition is fulfilled is the time of filing the claim. As the shareholders are not a party to the agreement at the time of initiation of the court procedure, it is difficult to see how they could be considered defendants to a contractual claim.13 Admittedly, the expression of matters related to contract has an autonomous meaning,14 and this meaning is not construed narrowly by the Court of Justice of the European Union.15 Could perhaps then a request to declare an agreement binding upon third parties not be considered a matter of contract? This is doubtful. The Court of Justice has pointed out in the Engler and Tacconi judgments that ‘while article 5(1) [ . . . ] does not require a contract to have been concluded, it is nevertheless essential for that provision to apply

12 Art. 3a of the Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering). 13 If they can be qualified as defendants at all [ . . . ]. 14 A. Briggs and P. Rees, Civil Jurisdiction and Judgments, 5th ed. (London: Informa, 2009), p. 214. 15 Case 27–02, Petra Engler v. Janus Versand GmbH [2005] ECR I-481, at para. 48.

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to identify an obligation’.16 Now which contractual obligation could be at odds with the interested parties if they are not even yet a party to the agreement?17 As Adrian Briggs and Peter Rees rightly put it, the agreement on which the claim is based must be inter partes.18 This condition was not fulfilled at the time of filing the claim. True, Briggs and Rees do state that when two contracting parties confer a benefit on a stranger to the contract, the claim brought by the intended beneficiary is contractual.19 However, this situation differs from the one in Converium in that in the latter case, at the time when the claim was made, the agreement did not yet confer any benefit to the interested parties. This was conditional upon the court’s approval. A second difference is that in the situation described by Briggs and Rees, it is the beneficiary making the claim on the basis of the agreement, whereas in a class settlement procedure the beneficiaries are not making any such claim. The references made by the Amsterdam court to the Effer v. Kantner and the Verein f¨ur Konsumenteninformation v. Henkel case-law fall short of altering that conclusion. In Effer v. Kantner, Article 5(1) was said to apply even when the existence of the contract is in dispute.20 The reasoning of the Court of Justice was that, to prevent Article 5(1) from being deprived of its legal effect, a defendant could not defeat the rule contained in Article 5(1) simply by denying the existence of the contract. There was no such risk in the Converium case, where all of the parties to the procedure agreed that the settlement was not binding on the interested parties until it would be confirmed by the court. The reference in the Converium judgment to the Verein f¨ur Konsumenteninformation v. Henkel case is equally unpersuasive. In this decision, the Court of Justice held that the rule of special jurisdiction contained in Article 5(3) applies in the same way to claims seeking to prevent the occurrence of damage as to claims seeking compensation for damage that has already occurred. The justification for this decision was that considerations of proximity and

16 Case 27–02, Petra Engler v. Janus Versand GmbH [2005] ECR I-481, at para. 50; Case C-334/00, Fonderie Officine Meccaniche Tacconi SpA v. Heinrich Wagner Sinto Maschinenfabrik GmbH [2002] ECR I-7357, at para. 22. 17 The analysis of Kortmann seems to be going in the same direction: Kortmann, ‘Case Note’, 460. 18 Briggs and Rees, Civil Jurisdiction and Judgments, p. 218 (‘It is clear that, if the dispute is in some sense concerned with a contract, but the claim is not between the parties to that contract, the claim is not contractual’). 19 Briggs and Rees, Civil Jurisdiction and Judgments, p. 218. 20 Case 38/81, Effer v. Kantner [1982] ECR I-825, at para. 7.

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ease of taking evidence that are in favour of jurisdiction for the courts of the place where the harmful event occurred are equally relevant when the damage is still expected to occur. It is in my opinion sufficiently clear that the analogy with the Converium case is flawed. And there is more. The Court of Justice has held on several occasions that the definition of matters relating to contract within the meaning of Article 5(1) is not to be understood as covering a situation in which there is no obligation freely assumed by one party towards another.21 Yet, this is exactly the case when one seeks to declare an agreement binding on persons who were not privy to the negotiations, were unaware of the agreement at the time of its enactment and have not signed off on it.22 It is to be distinguished from the hypothesis described by Peter Mankowski, where a claim is made to coerce a party to conclude a contract.23 In the latter case, ‘the result as such dominates the characterisation. On its face, the resulting contract does not spell out that it was formed pursuant to legal obligations.’24 This is different in the case of a class settlement, from which it is abundantly clear that the interested parties did not conclude it. Finally, even if Article 5(1) were applicable, it is still questionable whether that provision constituted a sufficient basis for the jurisdiction of the Dutch court. Article 5(1) refers to the place of performance of the obligation. In respect of the interested parties, the obligation that is to become enforceable is the obligation to refrain from suing for a higher compensation in any court. This is an undertaking not to do something, which is not subject to any geographical limit, just like in the Besix case. In that case, the Court of Justice held that for such an undertaking, which is characterized by a multitude of places for performance, Article 5(1)

21 Case C-26/91, Jacob Handte & Co. GmbH v. Traitements M´ecano-chimiques des Surfaces SA (TMCS) [1992] ECR I-3967, at para. 15; Case C-51/97, R´eunion europ´eenne SA and Others v. Spliethoff ’s Bevrachtingskantoor BV and the Master of the Vessel Alblasgracht V002 [1998] ECR I-6511, at para. 17; Case C-334/00, Fonderie Officine Meccaniche Tacconi SpA v. Heinrich Wagner Sinto Maschinenfabrik GmbH [2002] ECR I-7357, at para. 23; Case C-265/02, Frahuil [2004] ECR I-1546, para. 24. In other words, the term ‘contractual matters’ in the meaning of Art. 5(1) does not cover claims based on obligations not voluntarily accepted by the debtor – see B. Hess, T. Pfeiffer and P. Schlosser, The Brussels I Regulation 44/2001. Application and Enforcement in the EU (Munich: C.H. Beck, 2008), p. 53. 22 See also Kortmann, ‘Case Note’, 460. 23 P. Mankowski, ‘Art. 5’ in U. Magnus and P. Mankowski (eds.), Brussels I Regulation, in: European Commentaries on Private International Law (Munich: Sellier, 2007), at 109. 24 Mankowski, ‘Art. 5’.

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is not operable.25 The Amsterdam Court of Appeals has tried to dodge that problem by focusing its analysis under Article 5(1) exclusively on the obligation to distribute the funds. However, this is a rather artificial way to approach the issue. The obligation to be identified is the obligation which forms the basis of the claim. We know that, as such, there was no real claim in the common sense of the word in the Converium case, other than a request for confirmation of the settlement. However, assuming that there were a claim, in the search for the basis of that claim, the obligation to distribute the funds is probably not the most obvious choice given that those who will benefit from the distribution were not yet even a party to the procedure. In addition, the strategy to focus exclusively on the obligation to distribute the funds is obstructed by two more obstacles. First, there is the Leathertex doctrine. In that case, the Court of Justice interpreted Article 5(1) to say that when two obligations of equal rank arise from the same contract and according to the conflict rules of the forum state one of the obligations is to be performed in the forum state while the other is not, the same court does not have jurisdiction to hear the whole of an action founded on both obligations.26 Second, following the Tessili doctrine, the place of performance is to be determined under the law applicable to the contract, which is Dutch law. Remarkably, though, Dutch commentators have observed that under Dutch law the place of performance is not the Netherlands but rather the place of residence of each of the shareholders receiving compensation.27 When all of these objections are added up, there does not seem to be a credible case left for Article 5(1) as a satisfactory ground for international jurisdiction in the Converium case.

Forum Connexitatis In the second prong of the Court’s jurisdictional analysis, the focus was on the undertaking for the beneficiaries of the settlement not to initiate new proceedings on the merits. As explained before, the Court applied Article 2 to assume jurisdiction over the two hundred Dutch purchasers and then, in a sweeping motion, invoked connexity as head of jurisdiction (Article 6(1)) to assert its powers over the remaining purchasers who it considered 25 Case C-256/00, Besix v. WABAG and Plafog [2002] ECR I-1699, paras. 48 and 49. 26 Case C-420/97, Leathertex Divisione Sintetici SpA v. Bodetex BVBA [1999] ECR I-6747, at para. 40. 27 Van Lith, ‘Internationale bevoegdheid Nederlandse rechter WCAM-zaak’, 117, para. 20.

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as co-defendants. But for Articles 2 and 6(1) to operate in such a way as to confer jurisdiction, ‘there must be a genuine claim, or a claim which is properly brought, against the defendant who is being sued in the courts of his domicile’.28 Here, there was no real claim made against anyone. And even more important, there were no real defendants. Indeed, the difficulty with the Court’s approach lies in the defendant label which the court used for the purchasers. Several authoritative commentators in the Netherlands have already questioned whether those on whose behalf the settlement was negotiated can be validly considered defendants in a class settlement procedure.29 As rightly pointed out by one scholar, considering interested parties as defendants in the meaning of Article 2 would in international securities litigation mean that almost all EU and EFTA countries could have jurisdiction, which can hardly be the purpose of Brussels I.30 The fact of the matter is that the Dutch collective settlements act itself does not as such qualify these interested persons as defendants. Under the terms of the WCAM, they are simply referred to as ‘persons on whose behalf the agreement has been entered into’ (personen ten behoeve van wie de overeenkomst is gesloten). Even though they have the opportunity to be heard, there is no actual claim brought against them. The interested persons are not entitled to file an appeal or cassation either – these means of requesting judicial review are reserved for the petitioners. Although it is true that there is a duty to notify the interested persons, the duty to notify in personam does not extend to those persons whose identity has remained unknown. In other words, the integrity of the procedure remains unaffected even if the vast majority of the interested persons cannot not be directly notified, as is often the case in securities litigation. From all of these elements, it follows that the position taken by the interested persons in the WCAM procedure is very different from that of a defendant in an adversarial trial. At best, the interested parties are ‘potential defendants’. Their status is, in my opinion, not akin to what in most continental European procedural systems is understood to be a defendant. Rather, if there is any analogy to be made, then the WCAM class settlement process is closer to what is commonly referred to as an ex-parte procedure. This is because the procedure may be conducted with an aim to bind interested persons who remained unidentified and 28 Briggs and Rees, Civil Jurisdiction and Judgments, p. 290. 29 Kortmann, ‘Case Note’, 448, para. 12; van Lith, ‘Internationale bevoegdheid Nederlandse rechter WCAM-zaak’, 117, para. 18. 30 Van Lith, ‘Internationale bevoegdheid Nederlandse rechter WCAM-zaak’, 117, para. 18.

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therefore were not notified personally. From the Denilauer case law, we know that the Brussels Regime is not fit for proceedings conducted ex parte. Although this case was about recognition and enforcement, the statements of the Court in that decision also have a bearing on the issue of jurisdiction. To quote the Court: All the provisions of the convention, both those contained in title II on jurisdiction and those contained in title III on recognition and enforcement, express the intention to ensure that, within the scope of the objectives of the convention, proceedings leading to the delivery of judicial decisions take place in such a way that the rights of the defence are observed. It is because of the guarantees given to the defendant in the original proceedings that the convention, in title III, is very liberal in regard to recognition and enforcement. In the light of these considerations it is clear that the convention is fundamentally concerned with judicial decisions which, before the recognition and enforcement of them are sought in a state other than the state of origin, have been, or have been capable of being, the subject in that state of origin and under various procedures, of an inquiry in adversary proceedings.31

The reference to the rights of defence and the link made with the adversarial character of the proceedings are particularly enlightening. This brings the entire discussion back to the central point of controversy in the European debate on class actions, that is, whether a collective redress mechanism with an opt-out is in compliance with the fair trial requirement and the fundamental right of defence. In many European countries this question was answered negatively, and a deliberate choice was made for an opt-in. It is not my intention to take one or the other side in that discussion, but I want to stress that the Brussels I Regulation and the Lugano Treaty were not drafted with this controversy in mind. For this reason, I argue that Article 2 in conjunction with Article 6(1) of the Brussels I Regulation does not operate to assert jurisdiction over interested parties in a WCAM class settlement procedure in the court of the member state where they are domiciled. As a consequence, the basis to confer jurisdiction over co-defendants domiciled in other member states for reasons of connexity is not legally sound.

Is a Forum clause the solution? The jurisdictional analysis in Converium appears somewhat artificial. This, I believe, is due to the court having tried to fit the WCAM procedure 31 Case 125/79, Bernard Denilauler v. SNC Couchet Fr`eres [1980] ECR I- 1553, at para. 13.

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into the scheme of the Brussels I regime. The result of this exercise is a bit awkward because the Brussels I regime has been crafted with a totally different model in mind, the adversarial model, which bears little resemblance to the procedural situation under the WCAM. This is why I see no real rescue coming from inserting a forum clause in the settlement, as suggested by H´el`ene van Lith. The broad effect given by the drafters of the Brussels I Regulation to choice-of-court agreements does not imply the unwavering possibility for the negotiating parties to choose the forum where they have the best opportunity to impose the effect of their agreement on those who were not involved in the process. Just imagine Greece adopting a similar act as the WCAM. And imagine a Swedish securities case being settled by a special purpose foundation assisted by Swedish, Greek and U.S. lawyers and submitted for confirmation to the Greek court. This would mean that Swedish shareholders, if they want to uphold their rights, would be forced to participate in a Greek court procedure simply because the special purpose foundation and the defendant company have chosen that forum. I doubt whether this result is satisfactory. Even if the choice-of-court argument would pass, the problem would only be shifted to the issue of recognition and enforcement by the other EU and EFTA member states. Indeed, it is put into question whether EU and EFTA member states are bound to recognize and enforce foreign judgments that draw their binding effect from an opt-out regime.32 The concept of mutual trust can hardly be stretched to impose the effects of an opt-out on the member states that have rejected the preclusive effect of opt-out judgments as incompatible with fair trial requirements. If we were to apply the Brussels I Regime, however, then at least the better option would be to apply the rules to the underlying situation instead of to the settlement process. This will, at a minimum, guarantee that the case has some connection to the forum. For instance, for there to be choice of court, it would not be sufficient for a forum clause to be in the settlement; rather the forum clause would have to be traced back to the legal relationship between the defendants and the parties on whose behalf the settlement was negotiated. I will now discuss how the Converium decision was received by the (specialized) public, before moving on to the remainder of my analysis, which will focus on the access to justice element first and then on the multilayer interests that are at stake. 32 See e.g. B. Hess, ‘Cross-border Collective Litigation and the Regulation Brussels I’, Praxis des Internationalen Privat- und Verfahrensrechts, (2010), 120.

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Converium, the aftermath In theory, the Converium decision is an interim ruling of a preliminary nature. This means the Court’s analysis could be subject to reconsideration, depending on the objections raised on behalf of the interested parties. However, in most observations from Dutch commentators, it is implicitly assumed that the Court will not overturn its decision. The content of the opinion indeed gives the impression that the issue is already settled.33 The decision was applauded by many as a positive step towards truly global class action litigation. Many comments emphasized the potential for attracting large-scale litigation to the Netherlands, one newspaper even branding the Netherlands as a ‘hotspot’ or ‘legal hub’.34 Particularly telling were the reactions from legal practitioners. Lawyers from major national and international law firms in the Netherlands hailed the decision as a ground-breaking precedent, seen as making Amsterdam ‘the forum outside the US to settle class actions’35 or ‘Europe’s most attractive venue to facilitate (collective) settlements’.36 Clearly, Converium was perceived by Dutch lawyers as opening their market to a whole new line of business, which they could market to their corporate clients. In doing so, they also understated the legal uncertainty surrounding the issue of universal jurisdiction for WCAM settlements. For example, in one publication it is stated that a Dutch judgment confirming an international settlement would have to be recognized by the courts of other European member states. However, this is far from certain. Several obstacles to near-automatic recognition have already been identified in the study by van Lith, such as public policy as a ground for refusal and complications with notification of interested parties.37 Moreover, it is far from certain whether a decision conferring binding effect to a settlement in respect of unidentified parties would even fall within the scope of the rules on regulation and enforcement contained in the Brussels I Regulation and the Lugano Convention. 33 For a similar conclusion, see B. J. De Jong, ‘Een nieuw exportproduct’, Ondernemingsrecht. Effectenrecht, (2010), 671. 34 Het Financieele Dagblad, 17 November 2010, p. 13. 35 R. Klatten, ‘Dutch Doors Wide Open to Class Action Settlements’, available at www. kennedyvanderlaan.com at News > Newsletter > Newsletter March 2011. 36 R. Hermans et al., ‘Converium: Dutch Court has jurisdiction to declare an international collective settlement of mass claims binding’, available at www.debrauw.com at News > Legal Alerts & Newsletters. 37 Van Lith, The Dutch Collective Settlements Act and Private International Law, 98–107.

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To Dutch scholars, Converium was also a blessing. It came precisely at a time when more resources were being made available to conduct research on the topic of collective redress. For example, in 2010, the Dutch government funded two research projects to study the WCAM procedure,38 and in 2011 several foreign academics were invited to Dutch universities to become acquainted with how the class settlement system works. The literature on Converium produced by Dutch legal scholars is, however, not unequivocally positive. The strength of the legal arguments in the judgment has been called into question.39 One observer argued that applying the WCAM to cases with no connection to the Netherlands was beyond the intention of legislators and speculated whether the Amsterdam court in deciding Converium had been led by economic motives.40

Access to justice Collective redress is considered an essential chapter of the access to justice theme. So the question is: Does Converium contribute to better access to justice? The answer is one in the line of ‘yes, but’. As emphasized by Christopher Hodges, amicable resolution of disputes is a valid instrument to offer collective redress.41 Making sure parties receive some form of compensation in cases where they are unlikely to obtain it on their own initiative is a means of delivering access to justice, whether that justice was obtained through adjudication or through settlement. Offering a hospitable forum to give a settlement general binding effect in respect of a class can also provide for better access to justice. It is fair to say that companies will be more likely to accept a settlement or be prepared to pay more if they have assurances that this deal will end the matter once and for all. On the other hand, some critics have opposed ADR, calling it second best to adjudication. In the words of Ugo Mattei, ‘ADR systematically favors the stronger economic and political interests against the weaker 38 G. van Dijck, C. J. M. van Doorn and I. N. Tzankova, ‘Individueel of collectief procederen bij massaschade? Experimenten naar het effect van opt-in modellen en opt-out modellen op het procesgedrag van benadeelden’ (2010), available at www.wodc.nl at Onderzoek; van Lith, The Dutch Collective Settlements Act and Private International Law. 39 Kortmann, ‘Case Note’, 448, paras. 12 and 14–19; van Lith, ‘Internationale bevoegdheid Nederlandse rechter WCAM-zaak’, 117, para. 18; De Jong, ‘Een nieuw exportproduct’, 671. 40 De Jong, ‘Een nieuw exportproduct’, 671. 41 C. Hodges, ‘Collective Redress in Europe: The New Model’, Civil Justice Quarterly, 29 (2010), 370, 391 et seq.

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ones while at the same time effectively taming social dissent and silencing the demand for justice’.42 Looking at it from a different angle, one can even wonder who is to benefit most from the free access to a world forum for class settlements. Access to justice as a fundamental right ordinarily implies a willingness by the beneficiaries to have their claim heard by the justice system. Here, those who have exerted their will to gain access to the courts are the petitioners, that is, the defendant companies and the special purpose foundation. They make the choice of the forum and, in a way, it is mostly they who have gained their access to justice. And, one can add, also their lawyers. So, in some respect, this is not about access to justice for the so-called interested parties because they do not get to choose their forum. Even more, they risk the loss of the forum of their home state if they do not opt out timely. This is all the more pressing in situations where the case has little connection to the Netherlands because that will affect predictability. In summary, it is at least debatable whether access to justice justifies channelling a case to a forum with which it has no connection or almost no connection at all. I concede that having the Netherlands as one global forum has some advantages. First, it does away with the problem of overlapping classes, which – as Burkhard Hess has observed – is a source of serious concern in a world with coexisting systems of collective litigation in many countries of the world. Second, it provides us with a legal instrument of high quality. Not only is the WCAM intrinsically well thought-out, but it is also put into practice by a judiciary that meets the highest standards. That being said, nothing precludes other countries from adopting the same concept, and they will likely do so if they see an economic advantage in it. Without adequate rules in place, jurisdictional issues will surely arise and complicate the settlement process. In terms of access to justice, most of the progress may then be lost again.

Multilayer interests As explained by Stefan Wrbka,43 the spotlight of collective redress sets apart three different kinds of interests: private individual interests, 42 U. Mattei, ‘Emergency-Based Predatory Capitalism: The Rule of Law, Alternative Dispute Resolution, and Development’, 2, available at http://works.bepress.com/ugo mattei/36. See also the iconic article by O. Fiss, ‘Against Settlement’, Yale Law Journal, 93 (1984), 1073. 43 See in this book chapter 2 by Stefan Wrbka, ‘European Consumer Protection Law: Quo Vadis? – Thoughts on the Compensatory Collective Redress Debate’.

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collective interests and public interests. Which one of these interests benefits from the extraterritorial application of the Dutch settlement act? The collective interest is surely well-served as long as the Amsterdam court continues to supervise the quality and integrity of the settlement process. If only good settlements are approved, the collective fares well. For the individual interest, much depends on the situation. The larger the class and the more dispersed it is, the higher the chances that the interests of minority groups within the class will not be sufficiently preserved. Take for instance a securities litigation case where a small group of shareholders resides in a country whose legislation entitles them to a far higher amount in compensation than the majority. The Amsterdam court has shown its readiness to take some variations into account,44 but that may not always prove possible. Insofar as the public interest is concerned, the outcome is undecided. Extraterritoriality can be a means to increase jurisdictional competition: Other states will try to win back ‘market share’. Some scholars assert that jurisdictional competition is beneficial, as it forces countries with ill-functioning justice systems to reform.45 Assuming – for the sake of analysis – that opt-out is the better law, one could argue that the extraterritorial approach in Converium serves the public interests of those countries without an opt-out. This does not hold, however, in respect of those countries that have deliberately considered and rejected opt-out for its purported breach of fair trial requirements. Among those is Germany, a country whose justice system is generally recognized as outstanding, if not superior.46 Therefore, to German policymakers, the extraterritorial Converium doctrine may be the backdoor through which opt-out is still forced upon them. In respect of the Netherlands, the picture is different again. Some assume that making Amsterdam a global forum for class settlements is in the Dutch public interest. Attracting international settlements will bring in extra fees for Dutch lawyers, the Dutch organizations representing 44 This was the case in one of the first settlements under the WCAM, the Dexia matter. It was decided to leave out the Belgian purchasers because Belgian legal requirements were more protective of consumers and thus entitled them to higher compensation. 45 J. Dammann and H. Hansmann, ‘Globalizing Commercial Litigation’, Cornell Law Review, 94 (2008), 1; A. A. S. Zuckerman, ‘Conference on the ALI-UNIDROIT Principles and Rules of Transnational Civil Procedure’, Civil Justice Quarterly, 21 (2002), 322. 46 J. H. Langbein, ‘The German Advantage in Civil Procedure’, University of Chicago Law Review, 52 (1985), 823; J. R. Maxeiner, G. Lee and A. Weber, Failures of American Civil Justice in International Perspective (Cambridge University Press, 2011), p. 342.

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consumer and shareholder interests will see a budget increase, the distribution of settlement amounts through local bank accounts will make Dutch banks happy and the added prestige may strengthen the country’s appeal to investors.47 However, some of these benefits have to be taken with a grain of salt. Firstly, dealing with complicated international settlements comes at a significant system cost. Specialized judges have to be made available, using court resources that could otherwise have been allocated to local disputes. This has to be taken into account. Secondly, the Dutch representative organizations and special purpose foundations may perhaps see their expenses covered, but a recently developed code of conduct, called ‘claimcode’, entails that their intervention is in principle on a not-for-profit basis.48 Thirdly, the extraterritorial application of the WCAM will certainly bear fruit for the Dutch lawyers but if the outcome of the Shell case is in any way predictive of future evolutions, then it looks like the U.S. lawyers will reap most of the benefit. Hensler cites The American Lawyer to report that the U.S. law firm negotiating the non-U.S. settlement in Shell paid the fees of the Dutch law firm representing the special purpose foundation on a fee-per-hour basis and then received for its contribution $47 million dollar from Shell, which it apparently had to split with two other U.S. law firms.49 Hensler also reports that the U.S. lawyers in the Shell case appeared to have been awarded significantly more fees than in an average U.S. class action, that is, 20 percent of the total accumulated settlement amount compared to a mean 12 percent. As she puts it, ‘the U.S. lawyers appear to have fared considerably better collectively in the global context than they would have had the Shell Petroleum settlement been prosecuted solely in U.S. courts’.50

Conclusion In a way, Converium goes against the tide. In choosing for extraterritoriality the Converium court does the opposite of the U.S. Supreme court in Morrison, which curtailed the ambition of plaintiff lawyers to turn U.S. federal courts into world courts for securities claims. Some have suspected economic motives to be at the root of the Court’s decision in

47 See e.g. De Jong, ‘Een nieuw exportproduct’, 671–672. 48 Available at www.consumentenbond.nl/morello-bestanden/716993/compljuniclaimcodecomm2011.pdf. (only in Dutch). 49 Hensler, ‘The Future of Mass Litigation’, 318. 50 Hensler, ‘The Future of Mass Litigation’, 319.

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Converium. I prefer to believe the Amsterdam judges worked on the basis of a sincere belief that their solution was the best possible in the given circumstances. This accords with the wording of the ruling, speaking in terms of ‘compelling need’. Broad jurisdiction was asserted to make available to non-U.S. shareholders the same settlement conditions as U.S. purchasers could enjoy. So what is wrong with that? And what if U.S. lawyers can use the Dutch procedure to increase their revenue? Or that some Dutch lawyers see Converium as a marketing tool in the effort to win their share of a profitable market? As one Dutch colleague put it in a conversation we had during a conference, ‘nothing prevents the others from adopting a similar instrument if they want their piece of this business’. That is one way to look at it. But am I the only one who feels slightly uncomfortable when discussions about access to justice slide into a discourse framed purely in terms of market share and competitiveness? This ‘legal capitalism’ that is surfacing may lead us to lose sight of some of the core values underlying civil justice and the rule of law. Creating better access to justice and improving the quality of redress mechanisms should not be a competition. Now as Hodges observes: ‘It remains entirely curious that we still do not know, after several years of extensive research, how much of a problem collective redress is. It does not appear to be all that frequent or serious a problem generally, or in relation to consumer issues, but it is plausible that it could be, whether now or, more likely, at some stage in the future.’51 If we are to let jurisdictional competition take the upper hand in the European approach to collective redress, I am convinced that collective redress will become more problematic. Not so much because of a sudden increase in the number of mass harm cases, but because of the lack of coordination in dealing with them. What is apparent from this discussion is that opt-out lies at the core of the controversy. For European lawyers, the question is whether the principal mutual trust extends beyond the borders of what in most EU countries is considered as acceptable procedural methods to aggregate claims. If the Dutch courts may assert jurisdiction over claims that are hardly connected to their territory, this will put pressure on other member states to introduce similar instruments. So what is at stake here is more or less the framing of Europe’s future collective redress policy. I believe that neither the WCAM nor the Brussels Regime were made to address this issue. The solution can only be found on the EU level. The tables have 51 Hodges, ‘Collective Redress in Europe’, 395.

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turned: In times when even American scholars call for an international treaty in matters of collective redress,52 the odds are definitely in favour of increased international cooperation. 52 L. J. Silberman, ‘Morrison v. National Australia Bank : Implications for Global Securities Class Actions’, New York University School of Law, Public Law & Legal Theory Research Paper Series, Working Paper no. 11–41 (June 2011), pp. 20–21, available at http://ssrn. com/abstract=1864786.

15 The impetus for class actions reform in England arising from the competition law sector rachael mulheron * Introduction With their typical features of low value claims per class member, and a loss spread across numerous potential claimants, competition law infringements appear to be a particular cadre of legal grievance which is eminently suited to collective, rather than unitary, redress. Indeed, this contention has received support from two separate spheres of activity in England: the judicial and litigant-driven, and the governmental and political. For example, while acknowledging the relative paucity of private actions by either consumers or businesses for anticompetitive infringements, whether upon a follow-on or stand-alone basis, the English competition regulator has frequently and consistently nodded approval towards an opt-out collective action regime,1 for the ‘right type of case’. Although there will inevitably be differences of opinion among stakeholders as to what that ‘right type of case’ may be, such comments are significant in pointing to the need for ‘something better’, by way of procedural mechanisms in the competition law sector, than presently exists. Interestingly, recent class actions law reform movement occurred in quite a different direction: in respect of ‘financial services claims’.2 In * Although the author is a member of the Civil Justice Council of England and Wales (CJC), the views expressed in this chapter are written in a personal academic capacity and should not be taken to necessarily represent the views of the CJC. This chapter draws upon the materials and speech which formed the basis of part of the writer’s Inaugural presentation at Queen Mary University of London on 16 February 2011. For readers’ convenience, a list of the author’s published materials 2004–2011 which informed that presentation, and which have been variously and substantially drawn upon for this chapter, are available in the handout at www.law.qmul.ac.uk/events/41504.html. 1 That is litigation commenced by a representative claimant on behalf of a described class of persons, and which affords individual litigants the right to opt-out (or dissociate) from the litigation, if they so wish. 2 Financial Services Bill 2010, cl. 21. The regime would have applied to banks and financial entities that were carrying on regulated banking and other financial activities, and would

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2010, and for the first time in England’s legal history, Parliament considered a legislative regime which contained an opt-in or opt-out class action (depending upon judicial choice), following the promulgation3 and debate of the Financial Services Bill. This sectoral regime was introduced to Parliament against a backdrop of increasing levels of litigation4 about financial services and products. However, the Bill was a casualty of the legislative ‘wash-up’ which followed the calling of the general election on 6 April 2010, and the final version of the Bill5 omitted any reference to the proposed collective actions regime. Meanwhile, the detailed rules of court which had been drafted in anticipation of that regime being enacted remain unpromulgated by the Civil Procedure Rules Committee.6 Hence, English law continues to await the implementation of any collective action which facilitates class litigation brought on an opt-out basis. This chapter considers the possible implementation of an opt-out regime in English law, from the particular perspective of competition law infringements. The first section examines why the need for opt-out class actions reform is so pressing in England based on consideration of case-law either brought or not instituted, whereas the second section examines the English and European political positions on the question. The third section then outlines why certification – a separate hearing to scrutinize whether certain threshold requirements are met in relation to the action – was considered in the recent reform initiative, by both policymakers and law-makers, to be an integral part of an English class action.

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have applied, for example, to the levying of bank charges and the selling of regulated financial products such as payment protection insurance. Introduced to Parliament on 19 November 2009 by HM Treasury. For an analysis of the developments preceding the reform, and of certain aspects of the reform proposal, see: R. Mulheron, ‘Recent Milestones in Class Actions Reform in England: A Critique and a Proposal’ Law Quarterly Review, 127 (2011), 288. For discussion of the bank litigation which flooded the English County Courts in 2007– 2008, see e.g. R. Mulheron, ‘Reform of Collective Redress in England and Wales: A Perspective of Need’, research paper for the CJC (February 2008), Pt IV, Section 17, available at www.judiciary.gov.uk/Resources/JCO/Documents/CJC/Publications/Other%20papers/ reform-of-collective-redress.pdf; and also R. Mulheron, ‘Disgruntled Customers and Bank Charges: Class Actions (Reform) Activity’, in S. Grundmann and Y. Atamer (eds.), Financial Services, Financial Crisis and General European Contract Law (Alphen aan den Rijn, Wolters Kluwer, 2011), ch. 11. Financial Services Act 2010, c. 28, which obtained Royal Assent on 8 April 2010. These were drafted by a Working Group comprised of members of the judiciary, the CJC, the MOJ, and the CPR Committee, during 2009–2010. The author was a member of that Working Group. The draft rules, and explanatory notes, are available for perusal at www.civiljusticecouncil.gov.uk/index.htm.

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Although certification is by no means a universal feature of class action regimes elsewhere, it was considered mandatory for an English regime, and indeed, represents one of the positive ‘lessons’ learnt from experience in other jurisdictions.

The impetus for class actions reform in the competition law sector from a judicial and litigant perspective A number of factors in combination suggest that competition law infringements, whether alleged or proven, require a further form of collective redress than presently exists ‘on the statute books’ in England. Each of these will be dealt with in turn (and in no particular order of importance):

Faltering attempts to use the representative rule In the recent decision of Emerald Supplies Ltd v. British Airways plc,7 the Court of Appeal rejected the representative action brought in that case as being improperly constituted. Essentially, the individual aspects of the claim prevailed over its collective aspects, rendering the representative rule unsuitable. The lack of success of the representative claimant in this case has wider significance for the private enforcement of competition law infringements in England. As one commentator has recently stated, ‘[t]he ruling . . . left many claimant lawyers wondering how consumer clients who are victims of cargo conspiracies will get access to justice.’8 Emerald Supplies Ltd (Emerald) was an importer of cut flowers into England from Columbia and Kenya. The company used the air freight services of British Airways (BA) and other international airlines. It was alleged that a worldwide price-fixing conspiracy was entered into by these airlines over a seven-year period, whereby BA and the other enterprises participated in alleged anticompetitive agreements or concerted practices prohibited by Article 81(1) of the EC Treaty9 and the Chapter 1 prohibition contained in Section 2 of the Competition Act 1998.10 Emerald sued on 7 Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284 (Mummery L.J., with Toulson and Rimer L.JJ. agreeing). 8 K. Dowell, ‘Class Dismissed by Hausfeld to Appeal Again’, The Lawyer, 29 November 2010, p. 6. 9 Now Art. 101 of the Treaty on the Functioning of the European Union. 10 Investigations by U.S. and EU competition regulators have also ensued, as reported, for example, in ‘British Airways Fined 104M Euros for Role in Air Cargo Cartel’, The Telegraph, 13 December 2010, and ‘Airlines Fined Over Cargo Cartel’, BBC News Business, 9 November 2010.

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its own behalf and on behalf of a class described as all direct or indirect purchasers (or both) of air freight services from BA and from certain other air carriers between December 1999 and March 2006.11 Emerald sought to bring its action pursuant to the current version of the long-standing representative rule contained in the Civil Procedure Rules 1998 (CPR)12 as r. 19.6. The opening words of that rule set its criteria for application to any given mass grievance: 1) Where more than one person has the same interest in a claim – a) the claim may be begun; or b) the court may order that the claim be continued, by or against one or more of the persons who have the same interest as representatives of any other persons who have that interest.

Emerald argued that it was entitled to seek a declaration that BA was a party to the alleged air freight cartel, but that proof of individual losses (damage) suffered by it, and by the class of price-fixed victims, would be individually determined, outside the context of the representative action.13 Hence, liability in toto could not be determined within the representative action itself, but Emerald submitted that the declaration incorporated those issues that were pertinent to all class members’ claims.14 On application by BA, however, the representative element of the claim was struck out by Chancellor Morritt,15 and that decision was affirmed on appeal.16 A further appeal to the Supreme Court was foreshadowed,17 but has since been withdrawn. The first precondition of the representative rule in CPR r. 19.6(1) – the numerosity requirement, whereby ‘more than one person’ must have the same interest in a claim – caused no difficulties at all, with around two 11 Noted in Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284 at [34]. 12 SI 1998/3132. 13 Devenish Nutrition Ltd v. Sanofi-Aventis SA (France) [2008] EWCA Civ 1086; [2009] 3 WLR 198 at [147] (Longmore L.J.) and [151] (Tuckey L.J.). 14 Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284 at [58]. 15 Emerald Supplies Ltd v. British Airways plc [2009] UKCLR 801, [2009] EWHC 741 (Ch), [2009] CP Rep 32. The author has critiqued this decision as wrongly decided in R. Mulheron, ‘Emerald Supplies Ltd v British Airways plc: A Century Later, The Ghost of Markt Lives on’, Competition Law Journal, 8 (2009), 159. 16 Also critiqued in R. Mulheron, ‘A Missed Gem of an Opportunity for the Representative Rule’, European Business Law Review, 23 (2012), 49. This section of the chapter is drawn from part of that critique (see 50–53, 59). 17 K. Dowell, ‘Class Dismissed’, 6.

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hundred other claimants, apart from Emerald, referred to at the hearing.18 It was the second precondition of the representative rule that failed for this representative action. Emerald, as representative claimant, and the class members, had to have the ‘same interest in a claim’ per CPR r. 19.6(1) – a requirement which has traditionally posed vexing conundrums for a class of claimants seeking to bring their claim before the court in collective fashion pursuant to the representative rule. In fact, because of ten separate strictures that the phrase ‘same interest’ has judicially generated over the course of more than a century of English jurisprudence, the author has previously described this requirement as ‘the most legally difficult aspect of the [representative] rule’.19 Other academic commentary has vouched similarly for the difficulties that the criterion has created.20 It was held, in Emerald, that the representative claimant, and those it purported to represent in the litigation, did not have the ‘same interest’ in this alleged price-fixing claim. The Court of Appeal (per Mummery L.J. who delivered the judgment for the Court) affirmed two particular reasons earlier put forward by Chancellor Morritt as to why there was no ‘same interest’ such that the representative action was ‘fatally flawed’.21 First, it had to be possible to say at all stages of the proceedings, and not just at judgment date, whether a particular person or entity qualified for membership of the represented class – and, in this case: Judgment in the action for a declaration would have to be obtained before it could be said of any person that they would qualify as someone entitled to damages against BA. The proceedings could not accurately be described or regarded as a representative action until the question of liability had been tried and a judgment on liability given. It defied logic, and seemingly

18 Emerald Supplies Ltd v. British Airways plc [2009] UKCLR 801, [2009] EWHC 741 (Ch), [2009] CP Rep 32 at [9]. 19 R. Mulheron, ‘From Representative Rule to Class Action: Steps rather than Leaps’, Civil Justice Quarterly, 24 (2005), 424, 427–431. 20 E.g. S. Degeling and J. Seymour, ‘Collective Claims for Unjust Enrichment’, Civil Justice Quarterly, 29 (2010), 449; D. Fairgrieve and G. Howells, ‘Collective Redress Procedures: European Debates’, International and Comparative Law Quarterly, 58 (2009), 379; J. Seymour, ‘Justice and the Representative Parties Rule: An Overriding Interest?’, Legal Studies, 25 (2005), 668; J. Seymour, ‘Representative Procedures and the Future of MultiParty Actions’, Modern Law Review, 62 (1999), 564; P. Balen, ‘Group Actions, Aims, Aspirations and Alternatives: A Historical Global Perspective’, Journal of Personal Injury Law, (1995), 196; K. Uff, ‘Recent Developments in Multi-Party Actions’, Civil Justice Quarterly, 11 (1992), 345. 21 Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284 at [62].

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This reflected the view of Chancellor Morritt, at first instance, that where the criteria for inclusion in the class depended on the outcome of the action itself (which could vary for each class member, depending upon whether each purchaser of air freight services actually suffered damage or whether the particular purchaser successfully passed on the overcharge to others down the distribution line), then that was inconsistent with any finding of a ‘same interest’ in the claim among Emerald and the other purchasers.23 Secondly, there was the problem of different defences being available to some class members and not to others (emphasizing the individual nature of the claims, insofar as the judiciary saw them). This arose out of the ‘passing-on’ defence, where, say, ‘BA could successfully run a particular defence against those who had passed on the inflated price, but not against others. If there is liability to some customers and not to others they have different interests, not the same interest, in the action.’24 Again, this reflected the earlier view of Chancellor Morritt that the relief claimed by Emerald was not ‘in its nature beneficial to all’25 it purported to represent, as the class was potentially beset with conflicts of interest in proving one of the constituent elements of their cause of action, viz, damage (because of the aforementioned question of which class members absorbed the price inflation and which class members successfully passed it on). The case brings into sharp relief just how ill-suited the representative rule continues to be for claims in which each class member has suffered a differential measure of damage from other class members.26 On the one 22 Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284 at [63]. 23 Emerald Supplies Ltd v. British Airways plc [2009] UKCLR 801, [2009] EWHC 741 (Ch), [2009] CP Rep 32 at [37]. 24 Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284 at [64]. 25 Drawing from the oft-cited meaning of ‘same interest’ given by Lord Macnaghten in Duke of Bedford v. Ellis [1901] AC 1 (HL) 8: ‘[g]iven a common interest and a common grievance, a representative suit was in order if the relief sought was in its nature beneficial to all whom the plaintiff proposed to represent’, and cited in Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284 at [46]. 26 A point also made by G. Barling, ‘Collective Redress for Breach of Competition Law: A Case for Reform?’, Competition Law Journal, 10 (2011), 5 (Emerald ‘appears to confirm the restricted scope of CPR r. 19.6 and . . . would appear to render the rule of doubtful assistance in a case where damages are an element of the cause of action’).

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hand, the Court of Appeal concluded that ‘it [cannot] be right that, with Micawberish optimism, Emerald can embark on and continue proceedings in the hope that in due course it may turn out that its claims are representative of persons with the same interest.’27 On the other hand, the sobering reality is that the global air freight surcharges cartel, out of which the case arose, has been litigated in Australia,28 in Canada29 and in the United States30 under opt-out class action regimes enacted in those respective jurisdictions. The procedural barriers that the Court of Appeal has placed in the path of the price-fixed victims in Emerald have, undeniably, contributed to a lacuna in English procedural law and mean that a legislative, rather than a judicial, route must now be considered even more urgently by those law- and policymakers who are concerned to address that lacuna. In fact, this particular English representative action has distinct ‘Naken-type’ overtones,31 in that it calls to mind the statement of Estey J in Naken that ‘the rule, consisting as it does of one sentence of some thirty words, is totally inadequate for employment as the base from which to launch an action of the complexity and uncertainty of this one’.32

A representative statutory action, under the Competition Act 1998, is of limited utility As a part of the ‘public face’ of competition law private enforcement, Section 47B of the Competition Act 1998 has, since 2003, permitted representative actions to be brought by a specified body, in respect of ‘consumer claims made or continued on behalf of at least two individuals’, which are follow-on actions for damages in respect of previously proven anticompetitive breaches.33 It is a specialist, sectoral 27 Emerald Supplies Ltd v. British Airways plc [2010] EWCA Civ 1284 at [65]. 28 See ‘Air Cargo Class Action’, available at www.mauriceblackburn.com.au/areas-ofpractice/class-actions/current-class-actions/the-air-cargo-class-action.aspx. 29 See e.g. Nutech Brands Inc v. Air Canada [2009] CanLII 7095 (Ont. SCJ). 30 See In re Air Cargo Shipping Services Antitrust Litigation, No. 06-MD-1775, 2009 WL 3077396, (E.D.N.Y. 25 September 2009). For an update of the U.S. action, and the involvement of Qantas in that litigation, see e.g. S. Creedy, ‘Airlines Agree to Cargo Price-Fixing Cartel Settlement’, The Australian, 15 January 2011. 31 General Motors (Canada) Ltd v. Naken [1983] 1 SCR 72 (SCC), which concerned the Ontario equivalent of the representative rule in Supreme Court of Ontario Rules of Practice, r. 75. 32 General Motors (Canada) Ltd v. Naken [1983] 1 SCR 72 at 105 (SCC). 33 Inserted by the Enterprise Act 2002, c. 40, s. 19.

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representative action. It operates on opt-in principles whereby the consent of each consumer is required before that consumer can be a member of the class. The regime has several limiting features. An action can only be instituted by a specified body as ideological claimant (and not by a directly affected consumer as representative claimant), and only consumers (who are individual persons) can be included within the class (not businesses who have suffered detriment as a result of anticompetitive conduct).34 In addition, the representative action is a true follow-on action. No representative claim is possible under Section 47B until an anticompetitive infringement (as defined in Section 47A(5)) has been established. Under Section 47A(6), such a decision, which then paves the way for a follow-on action if there is a desire to bring one, may be made by the Office of Fair Trading (OFT), by the Competition Appeal Tribunal (CAT) or by the European Commission. As the Competition Appeal Tribunal recently explained, ‘follow-on’ damages actions are ‘so called because they must follow-on from a prior existing finding that there has been an infringement of competition law) as opposed to freestanding or stand-alone damages actions (which do not rely on a prior finding of infringement)’.35 In respect of a Section 47B action, the consumers represented in the class are immunized from any adverse costs order should they lose. There has been a notable paucity of actions under the statutory regime. In fact, in the several years since Section 47B was enacted, there has been just one case instituted: The Consumers Association v. JJB Sports plc.36 The consumers in this case purchased either replica Manchester United football shirts or replica England shirts, in circumstances where there were price-fixing arrangements among the manufacturers and distributors of these football shirts during 2000 and 2001. As a result of this cartel in operation, the price uplift per replica football shirt was approximately £15. The OFT found JJB Sports plc and its co-defendants guilty of price fixing and imposed a substantial fine on JJB Sports of £18.6 million (together 34 Competition Act 1998, s. 47B(7), limiting the provision to ‘consumer claims’. 35 Enron Coal Services Ltd v. English Welsh and Scottish Railway Ltd [2009] CAT 7 at [30], and cited in Deutsche Bahn AG v. Morgan Crucible Co. plc [2011] CAT 16 at [9]-[11] and Emerson Electric Co. v. Morgan Crucible Co. plc [2011] CAT 4 at [7]. 36 Case No. 1078/7/9/07. The discussion of this case, and of the regime which permitted it to be brought, has been drawn from the critique in R. Mulheron, ‘The Case for an Opt-out Class Action for European Member States: A Legal and Empirical Analysis’, Columbia Journal of European Law, 15 (2009), 409, 438–40; and Mulheron, ‘Reform of Collective Redress in England and Wales’, Section 8.

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with lesser fines on the co-defendants). At the outset, the number of consumers actually named in the claim form was as low as 144. The case eventually settled.37 A further problem with the Section 47B regime is the undue reliance that English lawmakers have placed upon the English Consumers’ Association ‘Which?’ as representative claimant. At the date of writing, Which? remains the only ‘specified body’ permitted to bring representative actions under Section 47B.38 This creates resource problems for Which? itself, and removes any ability for other interested ideological claimants (or, indeed, for any well-financed individual who has a direct claim) to pursue an action on behalf of consumers. As legal counsel involved in the football shirts litigation noted, Which? is ‘a registered charity with limited financial resources compared to large multi-nationals.’39 Many who were influential in both paving the way for the commencement and for the subsequent conduct of the action in The Consumers Association v. JJB Sports plc (that is, Which?’s own representatives, legal counsel acting in the case and the OFT) have expressed doubts about the exclusively opt-in principles to which Section 47B adheres, which require the action to be pursued from the very commencement as an action on behalf of named consumers rather than on behalf of a described class.40 Legally too, the Which? claim against JJB Sports was difficult because the relief sought also included a claim for ‘exemplary or restitutionary damages in the sum of 25% of the relevant turnover of the defendant net of VAT’. The same issue was litigated before the Court of Appeal in Devenish Nutrition Ltd v. Sanofi-Aventis SA (France).41 The court unanimously held in Devenish that restitutionary damages and an account of profits are not available in competition infringement cases, nor can punitive damages be claimed where the defendant has already been fined by a 37 Described by Which? at www.which.co.uk/reports and campaigns/consumer rights/ reports/Ripoffs,%20scams%20and%20fraud/JJB agree shirts deal news article 557 128985.jsp, and discussed in more detail in Mulheron, ‘Reform of Collective Redress in England and Wales’, 46–48. 38 Per Specified Body (Consumer Claims) Order 2005, SI 2005/2365. This designation occurred on 1 October 2005, and it is only since then that ‘consumer claims’ have been possible to pursue under s. 47B, via this representative action. 39 P. Ruttley, ‘The Lessons of the UK Consumers’ Association Case (2007)’ (London, 25 October 2007), slide 28. 40 The point in this section is drawn from, and explored further, in Mulheron, ‘Reform of Collective Redress in England and Wales’, 39–44. 41 Devenish Nutrition Ltd v. Sanofi-Aventis SA (France) [2008] EWCA Civ 1086; [2009] 3 WLR 198.

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competition regulator. This outcome adversely affected the prospect of significant (and class-wide) damages being recovered in any representative action instituted by Which? (given that the compensatory damages are dependent upon how many price-fixed victims come forward under any opt-in regime). Bearing in mind these comments, it is striking how much more effective the follow-on ‘football shirts’ case may have been, had it been possible to litigate such an action under an opt-out regime that permitted an aggregate class-wide assessment of damages, and thereafter, a cy-pr`es order for damages distribution.42 An effective cy-pr`es damages distribution requires, at the outset, the creation of a monetary fund that is not fully distributed to class members43 – and in the absence of any restitutionary or exemplary damages award being available at law for the representative to claim on behalf of the class, an aggregate assessment of damages will be the sole remaining alternative for the creation of that cy-pr`es fund. Although there has been rare endorsement of aggregated damages under the representative rule in English law,44 undoubtedly (were a new collective action regime to be enacted in England) English lawmakers would follow the lead of the drafters of the opt-out regimes in Australia45 and Canada46 in permitting aggregate assessment where suitable criteria are met.47

OFT-imposed fines do not lead to many subsequent private actions for compensation The interface between the public and private faces of competition law enforcement is particularly interesting when taking account of the period 42 As discussed in Mulheron, ‘The Case for an Opt-Out Class Action for European Member States’, 439–440, and Mulheron, ‘Reform of Collective Redress in England and Wales’, 45–46. 43 For a proposed seven-step framework for cy-pr`es damages distributions, and for discussion of such distributions, past and future, in English law, see R. Mulheron, ‘Cy-Pr`es Damages Distributions in England: A New Era for Consumer Redress’, European Business Law Review, 20 (2009), 307. See too R. Mulheron, The Modern Cy-Pr`es Doctrine: Applications and Implications (London: Routledge Cavendish, 2006), especially chs. 7 and 8. 44 EMI Records v. Riley [1981] 1 WLR 923 (Ch). 45 Pt IVA of the Federal Court of Australia Act 1976, s. 33Z(1)(f). 46 E.g. British Columbia’s Class Proceedings Act 2006, RSBC 1996, c. 50, s. 29(1) and Ontario’s Class Proceedings Act 1992, SO 1992, c. 6, s. 24(1). 47 Indeed, the drafting of appropriate Regulations permitting aggregate assessment in the case of collective actions for financial services claims was contemplated under the Financial Services Bill 2010, cl. 22.

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of 2001–2007, during which the OFT imposed numerous fines and penalties upon parties found liable for infringing behaviour. There were more than twenty such cases.48 Perhaps the most claimant-friendly avenue for seeking redress for such infringing behaviour (and quite apart from the representative follow-on action available under Section 47B) is the individual follow-on action permitted by Section 47A of the Competition Act 1998,49 in respect of OFT decisions and European Commission decisions finding infringing behaviour, which permits a victim of a cartel to bring a follow-on action to claim personal relief.50 The purpose of such litigation ‘is not to establish liability, but to deal with causation and quantum.’51 The provision has certainly received favourable judicial commentary. In BCL Old Co. Ltd v. Aventis SA, the Competition Appeal Tribunal stated that ‘this specialised jurisdiction under section 47A has been created by Parliament with a view to facilitating claims for damages or restitution on the part of those who have suffered loss as a result of infringements of domestic or European competition law.’52 Moreover, follow-on actions have distinct advantages to a claimant over stand-alone actions for anticompetitive conduct. The CAT explained several of these in Cityhook Ltd v. Office of Fair Trading, including that: explicit evidence of unlawful conduct can be difficult to identify by a stand-alone claimant; a claimant cannot use the investigatory powers available to the OFT in respect of obtaining documents and information; funding a stand-alone private action against a defendant with substantial resources can be challenging; and there may be extrajurisdictional service problems or language barriers for the stand-alone claimant.53 However, follow-on private actions for damages under Section 47A have been relatively uncommon. For example, only seven follow-on actions were instituted under Section 47A of the Competition Act 1998

48 Discussed at Mulheron, ‘Reform of Collective Redress in England and Wales’, 50–55, with reference to the ‘CA98 Public Register of Decisions’, available at www.oft.gov.uk/advice and resources/resource base/ca98/decisions/ with some further details about individual cases drawn from individual relevant decisions by the CAT, at www.cattribunal.org.uk. 49 Section 47A was introduced by the Enterprise Act 2002, s. 18, and came into effect on 20 June 2003. 50 Devenish Nutrition Ltd v. Sanofi-Aventis SA (France) [2008] EWCA Civ 1086; [2009] 3 WLR 198 at [7] (Arden L.J.). 51 Enron Coal Services Ltd v. English Welsh and Scottish Railway Ltd [2009] CAT 7 at [30]. 52 BCL Old Co. Ltd v. Aventis SA [2005] CAT 2 at [28]. 53 Cityhook Ltd v. Office of Fair Trading [2007] CAT 18 at [205]-[210].

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from its implementation in 2003 up to 2008 (some of which were discontinued or dismissed).54 Indeed, in the opinion of the President of CAT, the follow-on actions which are permissible under Section 47A reflect a rather too-limited ability of aggrieved claimants to pursue redress in the specialist tribunal of the Competition Appeal Tribunal. Sir Gerald Barling has recently pointed out that the inability of claimants to bring stand-alone actions in CAT for alleged anticompetitive conduct was ‘perverse’ and that this restriction on CAT’s damages jurisdiction was in dire need of reform.55 This view, when coupled with the relatively limited number of Section 47A actions, only enhances the impression of an under-developed landscape of private enforcement in England.

The ‘missing’ competition law cases in England Several further factors suggest that there are ‘missing’ private actions for competition law infringements and absent procedural avenues by which to bring them on behalf of individual consumers and businesses. For example, in the author’s 2008 empirical study,56 some English claimant lawyers who responded to the study identified actions which raised possible competition law infringements, but which, for cost-benefit reasons, they were unwilling to bring on behalf of the relevant claimant under the Group Litigation Order (GLO) – the opt-in regime implemented in the English Civil Procedure Rules in 2000.57 To date, no GLO arising from alleged or proven competition law infringements has been ordered for a competition law case. In that regard, the author respectfully disagrees with the suggestion by another commentator that ‘[d]oubtless, as a practical matter, the GLO procedure has gone a long way towards circumventing the deficiencies in 54 Identified in Mulheron, ‘Reform of Collective Redress in England and Wales’, 57. For more recent references to s. 47A litigation, see the cases cited in note 35 above, that is, Enron Coal Services Ltd v. English Welsh and Scottish Railway Ltd [2009] CAT 7; Deutsche Bahn AG v. Morgan Crucible Co. plc [2011] CAT 16; Emerson Electric Co. v. Morgan Crucible Co. plc [2011] CAT 4. 55 Barling, ‘Collective Redress for Breach of Competition Law’, 6–7. The President notes that claimants should have the option of commencing stand-alone claims in the CAT, rather than only before the High Court Chancery Division or the Commercial Court. 56 Mulheron, ‘Reform of Collective Redress in England and Wales’, 64–65; and Mulheron, ‘The Case for an Opt-out Class Action for European Member States’, 440–441. 57 Contained in CPR 19.III, rr. 19.10–19.15. For discussion and critique of this regime, see R. Mulheron, ‘Some Difficulties with Group Litigation Orders – and Why a Class Action is Superior’, Civil Justice Quarterly, 24 (2005), 40.

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[the representative rule]’58 , and with the assertion by Chancellor Morritt, in Emerald, that those litigants ‘are more conveniently accommodated under that procedure’.59 The use to which the GLO regime has been put since its introduction, the serious reservations that claimant lawyers have about the rule’s application to low-value/large class claims, and the inherent difficulties posed by an opt-in system of redress for competition law cases, all signify that the GLO is of practically no utility for competition law infringement allegations. This section of the chapter would not be complete without reference to the high-profile dairy cartel case. During 2002 and 2003, certain supermarkets and dairy processors colluded to fix the price of milk, dairy and cheese products. Fines totalling more than £116 million were levied by the OFT against the relevant defendants – with the OFT stating that the cost to consumers brought about by the overcharges were estimated to be approximately £270 million.60 It estimated that the collusion meant customers had to pay three pence extra for a pint of milk, fifteen pence extra per quarter-pound of butter, and fifteen pence extra per half-pound of cheese. As commentators pointed out at the time, the fines did nothing to redress the out-of-pocket customers, and the sizable profits made by the relevant defendants exceeded their fines by a considerable margin.61 Subsequently, the difficulties in funding a follow-on action for damages drew media attention: US Class action law firm Cohen Milstein Hausfeld & Toll has given up on its ambition to make the supermarkets and dairies price-fixing case its first collective action in the UK. . . . after assessing the possibility of taking the case forward, Cohen Milstein confessed that it was not viable, as funding the claim was an issue. . . . ‘The essential problem in this case was that funders tend not to look at putting money into a case that is worth less than around £10m, as they would not get back a big enough slice. The UK’s current [group litigation order] system needs claimants to opt in. We’d have to find a million people who’ve lost £10 to find 58 Editor, ‘Representative Parties with the Same Interest’, Civil Procedure News (December 2010), 9. 59 Emerald Supplies Ltd v. British Airways plc [2009] UKCLR 801, [2009] EWHC 741 (Ch), [2009] CP Rep 32 at [38], and critiqued by the author on this basis in Mulheron, ‘Emerald Supplies Ltd v British Airways plc’, 171–174. 60 E.g. ‘Dairy Price-Fixing Admitted’, Commercial and Business News, 10 December 2007; ‘Asda and Sainsbury’s Fined over Dairy Price Fixing’, Sky News, 7 December 2007; ‘Dairy Price-Fixing Probe’, BBC News, 7 December 2007. 61 See e.g. the comments made by quoted parties in ‘Supermarkets Fined £116M for PriceFixing’, The Guardian, 8 December 2007.

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recent developments and future perspectives a funder. The cost of the publicity and notices for us means it’s not viable.’62

Once again this reiterates that, for all the numbers of potential victims in price-fixing rows, the legal infrastructure necessary to seek compensatory redress, at the very least, is missing.

The need for ‘add-on’ English classes to U.S. federal class actions for competition law infringements The British Airways-Virgin Atlantic price-fixed fuel surcharge claim set a piece of legal history in England recently. Both airlines admitted pricefixing fuel surcharges on long-haul flights between August 2004 and March 2006. In the absence of any opt-out class action available in England, UK residents were successful in forming one of the settlement classes in the U.S. litigation concerning the same infringement.63 Media reports noted the importance of the settlement: Class action giant Cohen Milstein Hausfeld & Toll has won a landmark victory in the US courts after securing a $200m (£102m) settlement from British Airways and Virgin in relation to price-fixing, it was announced today (15 February). The settlement will see £73.5m put aside for just over five million UK residents who will have until 2012 to claim up to £20 for a return flight . . . Under the arrangement – the first-ever transatlantic recovery – the airlines will also pay out $59m (£30m) to US passengers over the price-fixing charges. The amount consumers can claim represents around a third of the fuel surcharge levied per long-haul ticket. Cohen Milstein senior partner Michael Hausfeld commented: ‘This is the first time non-US citizens have been rewarded on an equal footing to US citizens in a case before the US courts, making this a legal precedent and a significant milestone in both US and UK legal history.’64

Although a positive outcome was achieved for the cartel victims, this case raises two matters of interest: First, the very necessity of seeking redress for English consumers from an American court highlights the 62 ‘Cohen Milstein Drops Dairy Price-Fixing Action’, The Lawyer, 28 January 2008. 63 In re International Air Transport Surcharge Antitrust Litigation, 2008 U.S. Dist. LEXIS 50415 (ND Cal., 25 April 2008). 64 C. Ruckin, ‘Cohen Milstein Lands $200m BA/Virgin Settlement’, Legal Week, 15 February 2008, citing Cohen Milstein Senior Partner, Michael Hausfeld. See also J. Russell, ‘British Airways and Virgin Atlantic to Pay $200m in Fuel Cartel Lawsuit’, Telegraph, 20 February 2008.

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need for England’s own opt-out action, which also encompasses a cypr`es (or other) solution for undistributed damages; and secondly, the scenario raises for consideration the potential difficulties which may arise in obtaining the recognition and preclusive effect of a U.S. class action judgment in England, should any absent English class member wish to relitigate the same subject matter in an English court. Both of these issues and themes are explored more fully by the author elsewhere.65

Important commentary by the President of the English Competition Appeal Tribunal Very recently, Sir Gerald Barling, President of the Competition Appeal Tribunal, has expressed the view, extrajudicially, that ‘there appears to be general agreement that more can and should be done at both EU and UK level to encourage private actions as a means of enforcing competition rules’, that ‘there are a number of benefits that may flow from introducing an opt-out regime, at least in the UK’, and that its ‘main gain would be the removal of the often significant hurdle of enticing a sufficient number of consumers to sign up to a claim where its financial value to each claimant is relatively small, but where the collective loss is enormous.’66 Amongst other potential benefits mentioned by the President were that the English courts may ‘lose out to another jurisdiction’, if potential class representatives chose to institute their claims under a more claimant-friendly regime elsewhere, and defendants would be able to ‘achieve closure more completely [under an opt-out regime] than at present’.67 This extrajudicial commentary is very significant, given the judicial seniority of the author of these comments, given that their timing coincides with further reviews of collective redress at both English and European levels (discussed in the following Section), and given the relevance of the comments to the competition law sector in particular. Such views are welcomed by this author, and may of themselves herald an even 65 Mulheron, ‘The Case for an Opt-Out Class Action for European Member States’, 441–448 and R. Mulheron, ‘The Recognition, and Res Judicata Effect, of a United States Class Actions Judgment in England: A Rebuttal of Vivendi’, Modern Law Review, 75 (2012), 180. 66 Barling, ‘Collective Redress for Breach of Competition Law’, 11 and 19–20. 67 Barling, ‘Collective Redress for Breach of Competition Law’, 11 and 19–20; ibid., under the heading, ‘Towards an Opt-out Model of Collective Redress?’, the President cited six separate benefits in total that may flow from the introduction of an opt-out regime.

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greater interest in collective redress reform than has hitherto been the case.

The impetus for class actions reform in the competition law sector: an examination of the governmental position The OFT’s curtailed function The Office of Fair Trading has an investigative responsibility under the Competition Act 1998 to determine whether unlawful and prohibited anticompetitive behaviour has occurred. However, as the OFT has itself cautioned, it cannot ‘do it all’ – its function is to achieve enforcement and deterrence and not to achieve compensation for those injured by anticompetitive conduct.68 Moreover, the OFT has emphasized that, as with all competition regulators, its resources are finite, that considerable time and expense is already devoted to establishing infringing behaviour that enables follow-on actions to be brought, and that ‘it is not realistic to expect that a competition authority could investigate all cases where consumers have been harmed and then take on the role of securing redress for them’.69 The OFT has been keen to point out that some of the ramifications of its enforcement role and of its penalties upon cartels, for example, are the conferral of benefits on society in general from lower prices and increased productivity. However, this is benefit on a ‘macro scale’; individualized compensation to those affected, from a ‘micro’ perspective, is not within the OFT’s remit.70 According to the Chairman of the OFT, ‘a successful competition regime needs public resources to be supplemented or complemented by private resources through actions in the courts,’ and the relative lack of private enforcement was ‘a concern’.71 The problem is only exacerbated in England by the opt-in and individualized regimes which are

68 OFT, ‘The Deterrent Effect of Competition Enforcement by the OFT’ (OFT963, November 2007), p. 5, available at www.oft.gov.uk/shared oft/reports/Evaluating-OFTs-work/ oft963.pdf. 69 OFT, ‘Private Actions in Competition Law: Effective Redress for Consumers and Business: Recommendations from the OFT’ (OFT916, 26 November 2007), [5.7], available at www.oft.gov.uk/shared oft/reports/comp policy/oft916resp.pdf. 70 OFT, ‘Deterrent Effect’, 5. 71 P. Collins, ‘Public and Private Enforcement Challenges and Opportunities’ (London, 6 June 2006), available at www.oft.gov.uk/shared oft/speeches/0306.pdf.

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available for the recovery of damages for alleged competition law infringements. The position of the European Commission is exactly the same, in that it has been reiterated that, while it has investigative and punitive powers to levy penalties, its role is not to achieve compensation for victims of anticompetitive conduct.72

Political admissions that there is a problem, both in England and in the EU There is undoubtedly widespread dissatisfaction at both European and domestic governmental levels with the lack of realistic avenues for private enforcement of competition law infringements. It may be useful to deal with various key European developments chronologically. Back in 2005, the European Commission (DG COMP)’s Green Paper on Damages Actions for Breach of the EC Antitrust Rules, sounded a depressing tone: ‘While Community law therefore demands an effective system for damages claims for infringements of antitrust rules, this area of the law in the 25 Member States presents a picture of “total underdevelopment”’.73 The subsequent, and distinctly ‘green-tinged’, 2008 White Paper,74 and its accompanying Staff Working Paper (SWP), recommended ‘two complementary mechanisms’ by which victims of anticompetitive behaviour can seek to obtain monetary compensation:75 either allowing class members to proactively opt into a single collective action; or by relying upon a ‘qualified entity’, an ideological representative claimant (such as a consumer, state or trade association), to bring the action on the victims’ behalf, where the entity acted ‘on behalf of 72 Memo from DG COMP, Competition: Commission Action against Cartels – Questions and Answers, 8 November 2006, MEMO/06/415 and Press Release, EC, Directorate General Communication, Commission Fines Ten Companies for Carbonless Paper Cartel, 20 December 2001, IP/01/1892. 73 Green Paper on damages actions for breach of the EC antitrust rules, 19 December 2005, COM(2005) 672 final, [1.2]. For earlier discussion about relevant EU and domestic pronouncements discussed in this section of the chapter, see: Mulheron, ‘Reform of Collective Redress in England and Wales’, Section 9, especially pp. 48–50 and 60–63. 74 White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, COM(2008) 165 final, critiqued in R. Mulheron, ‘Antitrust Litigation: A White Paper Tinged with Green?’, Brussels Agenda (May 2008), from which some of the text in this section of the chapter is adopted. 75 Commission staff working paper accompanying the White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, SEC(2008) 404, [2.1].

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identified or, in rather restricted cases, identifiable victims’. This second option was not explicit about facilitating opt-out actions, although this is seemingly what was connoted by an entity acting on behalf of ‘identifiable victims’. This seemed to contemplate that described classes of victims – those, say, who purchased a brand of product between dates x and y – could proceed in representative actions. The SWP also referred to the possibility of both aggregate assessment of damages that could be used to compensate ‘all those represented in the action (e.g. the harm suffered by the producers in a given industry)’, and cy-pr`es distributions of damages of any unclaimed residue.76 Thus, although neither the White Paper nor the SWP expressly gave a clear recommendation for opt-out actions, the above-mentioned indications, in combination, supported a class-wide representative action, and indeed, the Commission itself said that there was a ‘clear need for mechanisms allowing aggregation of the individual claims of victims of antitrust infringements’.77 Certainly, the competition law sphere of activity was the first to convey the broadening view that the EU displayed towards collective redress. More recently, comments by Joaqu´ın Almunia, VP of the European Commission responsible for competition policy, in an important speech in October 2010, reflect that sentiment. Referring to two high-profile European cartel cases, the Vice-President highlighted, in stark terms, the need for further legislative action: [W]hen [cartel] victims are consumers and small businesses, they would not go to court if their losses do not justify the costs of litigation and the uncertainty of the outcome. They often receive no compensation for the harm they suffer. Let me give you two well-known examples; one involving consumers and the other small businesses. In 2005, French mobile operators were found to have created a cartel that for two years overcharged as many as twenty million subscribers for their services. A French consumer association tried to represent a large group of these consumers in court but, owing to current French rules, they did not succeed. Two years later, Dutch brewers were found to operate a cartel that raised the price of beer for a great number of bars and caf´es in the Netherlands. The establishments tried to bring the brewers to court through their association but, again, could not initiate a representative action under Dutch law. In both cases, the aggregate economic harm was large but the harm caused to each victim too small to justify individual and separate lawsuits. 76 Commission staff working paper accompanying the White Paper on damages actions for breach of the EC antitrust rules, 2 April 2008, SEC(2008) 404, [47], [56]. 77 White Paper on damages actions for breach of the EC antitrust rules, [2.1].

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It is estimated that unrecovered damages of infringements of EU antitrust law alone amount to over €20 billion per year. It is clear that we need to take action because rights that cannot be enforced in practice are worthless.78

The Vice-President outlined his ambitions at the EU level, that is, to commence (yet another) public consultation to gather the views and concerns of stakeholders and society ‘to look at all the policy domains that are relevant to collective redress, and not only at the private enforcement of competition law’, and thereafter, for the European Commission to ‘agree on a common European approach and a general legal framework to collective redress across the Union in the Spring of 2011.’ It was anticipated that such a framework would then be used to base specific legislative initiatives, including ‘a specific proposal on antitrust damages actions, hopefully in the second half of 2011. The initiative will set common standards and minimum requirements for national systems of antitrust damages actions to ensure that rights are a reality for all. National authorities will then see how to translate these common principles into practice in line with their legal traditions.’79 The EU public consultation foreshadowed by Vice-President Almunia duly appeared on 4 February 2011,80 and consultation closed on 30 April. Any potential initiative for collective redress in EU legislation (supposedly an aim of the consultation81 ) appears some distance away, given the challenge of identifying ‘common legal principles on collective redress’ from the numerous consultation responses filed by individuals and entities,82 and given the Commission’s most unfortunate and misguided intertwining of the compensatory and injunctive remedies of collective redress in the consultation. 78 J. Almunia, ‘Common Standards for Group Claims across the EU’ (Valladolid, 15 October 2010), available at www.europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/ 10/554. The scale of the French mobile phone case, in particular, was truly mind-boggling, and is outlined in detail in, for example, BEUC, ‘Private Group Actions: Taking Europe Forward’, (Doc X/049, 2007), 15; and see too, recent interesting comment upon this decision in C. Leskinen, ‘Recent Developments on Collective Antitrust Damages Actions in the EU’, Global Competition Litigation Review, 4 (2011), 79, 81–82 (following an overview of competition law litigation across the EU, this commentator recommends the introduction of an opt-out collective redress regime in Member States to be utilized on a case-by-case basis at courts’ discretion). 79 Almunia, ‘Common Standards’. 80 Commission Staff Working Document Public Consultation: towards a coherent European approach to collective redress, 4 February 2011, SEC(2011) 173 final. 81 One of the objectives of the consultation, as noted by the European Commission at ec.europa.eu/justice/news/consulting public/news consulting 0054 en.htm. 82 These are reproduced at ec.europa.eu/justice/news/consulting public/news consulting 0054 en.htm.

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With reference to the English jurisdiction, governmental opinion has also identified the lack of private compensatory redress for competition law infringements as one that urgently requires attention. The OFT has remarked: . . . private actions have not played the role that was envisaged for them . . . there remain significant barriers to those who have suffered loss (consumers and small and medium-sized businesses, in particular) taking a private action, such that the likelihood of obtaining compensation remains remote and that incentives for business to comply with competition law are more limited than was intended. This impedes the overall effectiveness of the competition regime in the UK, such that the regime is not yet delivering the productivity and competitiveness benefits to the UK economy that were originally contemplated. A system which incorporates effective public enforcement and a real possibility of private actions will increase the likelihood that anti-competitive behaviour is detected and addressed, whether by way of a complaint to the competition authorities, an approach to the infringing undertaking(s), or through the issuing of legal proceedings.83

This opinion was influenced by a research paper prepared for the OFT by Deloittes, which showed that private damages actions for anticompetitive infringements was ranked fifth (out of five), in terms of importance in deterring infringements, by both competition lawyers and companies who responded to Deloitte’s survey. The results provide a sobering indication of the scale of use of damages actions for competition infringements in the UK. Only five of the 202 companies in the sample (just over 2 percent) had brought an action for competition law infringements. Unsurprisingly, Deloittes concluded that ‘the threat of private damages actions is seen as a relatively unimportant factor in creating a deterrent effect’.84 The OFT has also pointed out that a collective action on behalf of named specified individuals can be problematical, given the ‘track record’ of the solitary action brought to date under Section 47B of the Competition Act;85 that opt-in and opt-out regimes can coexist, and ‘[i]t could be left 83 OFT, ‘Private Actions in Competition Law: Effective Redress for Consumers and Business: Recommendations from the Office of Fair Trading’, [2.2], [3.3], [5.13] and [6.8]; and earlier, OFT, ‘Private Actions in Competition Law: Effective Redress for Consumers and Business’ (April 2007), Section 4, ‘Representative Actions’, available at www.oft.gov.uk/ shared oft/reports/comp policy/oft916.pdf. 84 OFT, ‘The Deterrent Effect of Competition Enforcement by the OFT: A Report Prepared for the OFT by Deloitte’ (OFT962, November 2007), [5.84]–[5.96], available at www.oft. gov.uk/shared oft/reports/Evaluating-OFTs-work/oft962.pdf. 85 OFT, ‘Private Actions in Competition Law: Effective Redress for Consumers and Business: Recommendations from the Office of Fair Trading’, [7.12].

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to the judge to decide, in the circumstances of each case but on the basis of appropriately defined criteria and filters’ as to which should apply;86 that ‘[i]f the potential claimant group consists predominantly of vulnerable consumers, we suggest that the opt-out mechanism should be the default option, unless there are other overriding factors’;87 and that the utility of Section 47B was severely hampered if it could only deal with ‘consumer claims’, concerned with goods (or services) received as a consumer, and not in a business context.88 The Chairman of the OFT has also reiterated that to allow representative bodies to bring either stand-alone or followon actions for damages on behalf of businesses should be a priority for reform.89 Added to all this, in late 2008, the Department for Business, Enterprise and Regulatory Reform (BERR) commissioned research on opt-out competition law class actions, noting that it was ‘considering consulting on proposals to introduce in the UK the possibility for a representative body to bring an action in competition law on behalf of consumers and businesses at large (currently, such representative actions can be brought on behalf of named consumers only).’90 However, that particular consultation (and research91 ) did not ultimately result in any legislative implementation. More recently, in a 2011 consultation,92 the Right Honourable Dr Vince Cable MP foreshadowed the prospect of future proposals on ‘private sector-led challenges to anti-competitive behaviour’,93 while the Executive 86 OFT, ‘Private Actions in Competition Law’, [7.28], [7.29]. 87 OFT, ‘The Role and Powers of the Consumer Advocate: A Consultation Response by the OFT’ (OFT1212, March 2010), [4.5] and [4.43], available at www.oft.gov.uk/shared oft/ reports/oft response to consultations/oft1212resp.pdf. 88 OFT, ‘Private Actions in Competition Law’, [4.6] and [4.13]. 89 P. Collins, ‘Interaction between Public Enforcement and Private Damages Actions: Competition Authorities’ Perspective’ (Valladolid, 14 October 2010), p. 9, available at www.oft.gov.uk/shared oft/speeches/689752/speech1210.pdf. 90 BERR, ‘Specification of Research into the Need for Private Representative Actions in Competition Law in the UK’. The author was commissioned to conduct this research to examine the number and type of competition law class actions that were filed in certain countries on behalf of consumers or businesses at large. 91 Contained in R. Mulheron, ‘Competition Law Cases under the Opt-Out Regimes of Australia, Canada and Portugal’, research paper for BERR (10 October 2008), available at www.bis.gov.uk/files/file49008.pdf. 92 Department for Business, Innovation and Skills, ‘A Competition Regime for Growth: A Consultation on Options for Reform’ (March 2011), available at www.bis.gov.uk/assets/ biscore/consumer-issues/docs/c/11–657-competition-regime-for-growth-consultation. pdf. 93 Department for Business, Innovation and Skills, ‘A Competition Regime for Growth’, ‘Foreword’, 4 (emphasis added).

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Summary noted that the government was ‘investigating whether there are complementary and additional changes that might enhance private sector-led challenge to anti-competitive behaviour. We intend to publish our views on this approach in due course.’94 Whilst such reform-minded comments are very welcomed, there is obviously much work to be done at the political level in England too, whether as part of that consultation or parallel to it. It is, of course, not only the achievement of compensation that is at the heart of such reform measures. As the then-Chancellor of the Exchequer, the Right Honourable Gordon Brown MP, remarked back in 2007, an effective competition law regime has two important byproducts for a jurisdiction: it ‘promot[es] a greater awareness of competition law, and reinforce[es] deterrence without encouraging ill-founded litigation’.95

The Civil Justice Council’s recommendation and the Ministry of Justice’s response An important ‘sub-recommendation’ of the CJC’s November 2008 proposal to the Lord Chancellor to introduce a generic collective action was that stand-alone competition law cases could serve as a useful precursor to the introduction of the generic action as a whole, in order to evaluate how the introduction of an opt-in/opt-out (depending upon judicial choice) regime would work in real and practical terms. The CJC stated that, before bringing the generic action into force: there is merit in introducing for a short period of time a discrete, rather than generic, collective action for claims arising out of competition law breaches which have caused harm to individual consumers. . . . the advantage of introducing what the Master of the Rolls has acknowledged to be radical reform on a trial basis ahead of generic reform would be to gather the evidence of experience in England of such an action in actual use.96 94 Department for Business, Innovation and Skills, ‘A Competition Regime for Growth, ‘Foreword’, 7. See also the comments under [5.49]–[5.52]. This section of the chapter was used by the author to assist with the drafting of the Civil Justice Council’s formal response submitted to the Consultation noted ibid., which response was prepared by the Collective Redress Working Party of the CJC. 95 ‘HM Treasury Budget 2007’ (HC 342, April 2007), [3.45]. 96 Civil Justice Council, ‘Improving Access to Justice through Collective Actions: Developing a More Efficient and Effective Procedure for Collective Actions: Final Report’ (November 2008), p. 139, available at www.judiciary.gov.uk/NR/rdonlyres/0C2D2070–5C52– 4FAB-8C12-C0A6C128C3F8/0/CJCImprovingAccesstoJusticethroughCollectiveActions. pdf. The author was a contributing author to that report.

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It was the CJC’s view that generic reform was important and that ‘the purpose of the initial trial would be to enable the Civil Procedure Rules Committee to assess how the generic action should be implemented and not to assess whether it should be implemented.’97 Ultimately, however, the CJC’s sub-recommendation for a trial of a collective action for claims arising out of competition law breaches was not implemented. Further, its recommendation for a generic regime was rejected by the government (via the Ministry of Justice), with sectoral reform being preferred,98 and as mentioned previously,99 a sectoral regime (in the financial services sector) was introduced, but, in the end, unenacted. In light of the foregoing discussion in this chapter, it was heartening to see that ‘competition law’ was one of the sectors which the government considered may be appropriate for sectoral reform.100 However, as the author has argued elsewhere,101 for several reasons, generic rather than sectoral reform would have been a far preferable legal approach for the government to adopt and that the CJC’s recommendations should have been adopted in that regard.

The certification hurdles for competition law collective actions A certification process – the formal hearing at an early stage of the litigation to determine whether legislative threshold requirements for the progress of the action as a collective action are satisfied – was a central plank of the CJC’s recommendations to the Lord Chancellor.102 That recommendation was consistent with the concerns that the OFT had 97 Civil Justice Council, ‘Improving Access to Justice through Collective Actions’ Final Report’ (November 2008), p. 139, available at www.judiciary.gov.uk/NR/rdonlyres/ 0C2D2070–5C52–4FAB-8C12-C0A6C128C3F8/0/CJCImprovingAccesstoJustice throughCollectiveActions.pdf. (emphasis added). This sub-recommendation was based upon the views of some stakeholders at various CJC stakeholder meetings conducted prior to publication of the final report, together with discussions between the CJC and other parties, regarding the unsatisfactory state of collective redress for competition law grievances at that time. 98 Ministry of Justice, ‘The Government’s Response to the Civil Justice Council’s Report: “Improving Access to Justice through Collective Actions”’ (July 2009), available at www. justice.gov.uk/publications/docs/government-response-cjc-collective-actions.pdf. 99 See discussion in Introduction. 100 Ministry of Justice, ‘The Government’s Response to the Civil Justice Council’s Report’, [12] and p. 21, definitions. 101 R. Mulheron, ‘Recent Milestones in Class Actions Reform in England’, 288. 102 Civil Justice Council, ‘Improving Access to Justice through Collective Actions’, 21, recommendation 4.

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previously expressed: ‘[w]e are supportive of opt-out claim systems, although we accept that safeguards need to be in place to prevent unsuitable claims and the costs they may impose on businesses’.103 In turn, the requirement for certification was adopted, both in the Financial Services Bill and in the rules that were drafted as an insertion in the Civil Procedure Rules (as Pt 19.IV) which were intended to underpin that Bill. When considering this feature of class actions reform, it is inevitable that the contrasting positions of two Commonwealth jurisdictions, those of Canada and Australia, must be considered.104 On one hand, the various provincial Canadian regimes have statutorily implemented an express certification requirement.105 The Australian federal regime, on the other hand, provides the court with the authority to discontinue the action in class action form, thereby facilitating a type of ‘certification’ requirement by a combination of their commencement criteria106 and discontinuance107 circumstances. Of the two approaches, the CJC preferred the former, for several reasons.108 First, certification ensures that the dispute is one that not only suits a collective action, but also determines that the collective action is the most appropriate form of dispute resolution for each case. In the interests of fairness and judicial economy, it is appropriate that other mechanisms for collective redress be evaluated, for example, an opt-out collective action may simply not be better than, say, a group litigation order, a representative rule proceeding, an opt-in collective action, an order for joinder or consolidation, a test or lead case, a regulatory mechanism for compensatory redress, or an Ombudsman scheme – any or all of these options may be evaluated by a certification court. Secondly, certification avoids interlocutory skirmishes that amount to a quasi-certification hearing in any event, as Australia’s class action litigants have frequently 103 OFT, ‘OFT’s Response to the EU Green Paper on Consumer Collective Redress’, [2.8], (OFT1063, March 2009), available at www.oft.gov.uk/shared oft/reports/oft response to consultations/oft1063.pdf; and see also: OFT, ‘OFT’s Response to the EU Consultation on Consumer Collective Redress Benchmarks’ (OFT983, March 2008), [1.6]–[1.7], available at www.oft.gov.uk/shared oft/reports/oft response to consultations/oft983.pdf. 104 For further discussion of the certification requirement under the Commonwealth regimes, see e.g. R. Mulheron, The Class Action in Common Law Legal Systems: A Comparative Perspective (Oxford: Hart Publishing, 2004), pp. 23–29, and the detailed analysis of the various certification criteria in Pt II thereof. 105 See e.g. s. 5(1) of Ontario’s Class Proceedings Act, SO 1992. 106 See e.g. Australia’s federal class action in Pt IVA of the Federal Court of Australia Act 1976, s. 33C(1). 107 Pt IVA of the Federal Court of Australia Act 1976, ss. 33L, 33M or 33N. 108 See discussion at Civil Justice Council, ‘Improving Access to Justice through Collective Actions’, 151–158.

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found. Thirdly, certification is consistent with the generally proactive approach to case management that English civil litigation has adopted, post the Woolf reforms, especially for group litigation. Fourthly, certification allows the managing court to weed out unmeritorious actions (albeit that frivolous litigation is liable to be struck out under English court rules, but certification brings the issue to the fore early in the action). In line with this, the proposed rules of court (and, to reiterate, these rules remain in draft and unenacted at the time of writing) stated that the ‘permission of the court must be obtained . . . to bring a claim in collective proceedings’.109 That permission (it was intended) would require that the court scrutinize a number of threshold matters, as outlined in Table 15.1. It has been remarked, in Canada, that the certification hearing has become the ‘chief battleground’ of class actions disputes. For example, in Consumers’ Assn of Canada v. Coca-Cola Bottling Co, Russell J. observed that ‘[o]ne probably unintended consequence of class proceedings statutes has been the transformation of certification proceedings from preliminary step to battleground; in some senses, the certification proceeding is the trial.’110 A loss at the certification hearing is crucial, for as Cullity J. remarked in Stewart v. General Motors of Canada Ltd, ‘[a]s a practical matter, the effect of a denial of certification will often terminate the proceeding.’111 Space limitations herein preclude any analysis of the application of similar certification criteria to competition law class actions which have been brought under opt-out class action regimes in other jurisdictions. However, suffice to say that competition law class action jurisprudence in both Australia and Canada demonstrates that the screening mechanism provided by certification (or, more accurately in Australia’s case, given the absence of a formal certification stage, discontinuance in class action form) has been effective to curtail the number and scope of competition law cases going forth as class actions.112 This experience refutes the likelihood that, should a regime which facilitates 109 Proposed CPR 19.17(2). 110 Consumers’ Assn of Canada v. Coca-Cola Bottling Co [2006] BCSC 863 at [35], citing: Gariepy v. Shell Oil Co. (2002), 23 CPC (5th) 393 at [5]. 111 Stewart v. General Motors of Canada Ltd (Ont SCJ, 8 June 2007) at [3]. 112 See discussion in Mulheron, ‘Competition Law Cases’, Part II, Section 7. See, for an important empirical study of Australia’s class actions regime, V. Morabito, ‘An Empirical Study of Australia’s Class Action Regimes: First Report’, (December 2009), Table 14, ‘Pt IVA Applications (as Classified by the Court) Filed from 4 March 1992 to 3 March 2009’, which notes competition law cases to have comprised 9.5 percent of all filed cases during the relevant period, available at http://globalclassactions.stanford.edu/sites/default/files/ documents/Australia Empirical Morabito 2009 Dec.pdf.

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Table 15.1. Proposed certification criteria for the CPR Criterion

Where that criterion would have appeared in the proposed Civil Procedure Rules, had the draft court rules been implemented

Commonality

The claim would need to raise the ‘same, similar or related issues of fact or law’a

Adequacy of representative

Either an ‘ideological claimant’ or a directly-affected class member could bring the claim, if that person/entity was an ‘appropriate person’.b As a financial adequacy requirement, the representative claimant would have to satisfy the court that he/she/it would be able to pay the defendant’s recoverable costs if so orderedc

Preferability/superiority

The collective proceedings would need to be the ‘most appropriate means for the fair and efficient resolution of the common issues’,d and ‘appropriate [to] further the overriding objective’e

Numerosity

A minimum number of class members would need to allege a common grievance in the claim, and thereby constitute ‘an identifiable class of persons’f

Preliminary merits

A claim that was weak, but not so weak that it could be struck out, could fail certification because, ‘in all the circumstances’, it should not be certifiedg

Veracity

The representative claimant would be required to state in its application, verified by a statement of truth, that it believed that the claim had real prospects of successh

Cost-benefit

The court would have to take into account ‘the costs and the benefits of the proposed collective proceeding’ when deciding whether the collective proceedings were the most appropriate means for the fair and efficient resolution of the common issuesi

a Proposed CPR 19.16, definitions section. b Proposed CPR 19.21(3). c Proposed CPR 19.21(2)(b)(iv). d Proposed CPR 19.20(2)(b). e As outlined in CPR 1.1(2). f Proposed CPR 19.20(2)(a). g Proposed CPR 19.20(2)(c). h Proposed CPR 19.18(3)(c). i Proposed CPR 19.20(3)(a).

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opt-out class actions be introduced into England, there would be a flood of competition law class actions going forth. The reality would suggest just the opposite. Furthermore, the number of competition law class actions in other jurisdictions do not, by any means, indicate any ‘floodgates’ concerns. The filtering screens which certification, costs rules, security for costs, and the claimant lawyers’ own evaluation of the action provide, clearly have applied considerable ‘brakes’ upon the number of actions commenced.

Conclusion Competition law infringements, or alleged anticompetitive wrong-doing, have featured rather dramatically in recent English collective litigation, both in respect of those (relatively sparse) actions which have been brought, and those which have not. Some price-fixing litigation that has been brought in England to date has manifested various difficulties for victims (and their lawyers) while the obverse lack of litigation for most infringements of competition laws has been bluntly termed ‘a picture of “total underdevelopment”’.113 In many respects, the subject area has been the torch-bearer for confronting serious procedural and legal issues on behalf of a potential class of victims. The sector has also attracted close governmental attention in both this jurisdiction and in Europe. The political climate, undeniably, is moving forward (in steps rather than leaps, perhaps), in seeking to establish new and improved means of gaining private redress for proven or alleged anticompetitive infringements. As an overarching requirement, however, certification has been considered by English law-reformers and law-makers alike to be a mandatory feature of any new collective action regime that may be introduced for the ‘checks and balances’ which that stage inevitably provides (albeit at a cost). In light of the developments considered in this chapter, competition law collective disputes, as a sector, is one area that may test the application of an opt-out collective action in England sooner rather than later. Although there may be temporary pauses in the reform progress, the inevitability of such reform is underscored by the sentiments expressed by highly regarded and influential policymakers. There is no better note to conclude 113 Green Paper on damages actions for breach of the EC antitrust rules, [1.2], citing the earlier study of the relevant Working Group which purveyed the same matter.

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on than to requote the words of Vice-President Almunia, which resonate particularly in England in light of the litigious events described earlier in this chapter: ‘[i]t is clear that we need to take action, because rights that cannot be enforced in practice are worthless’.114 114 See note 78.

INDEX

Aarhus Convention, 148–153 collective actions, 151–153 implementation acts, 149–151 overview, 148–149 access to justice, 1–20 competition law context, 60–63 Converium case and, 379–380 environmental law, 143–147 European consumer protection law, 27–31 Florence Project, 3–8 merits of indirect purchaser litigation, Japan, 312–313 multilayer interests, 8–12, 143–147 overview, 1–3 as redress for harm, 61–63 structure of and contributions to book, 12–19 Action Plan, 28 active consumer disputes, 33 ADR (alternative dispute resolution), 11, 379–380 Affiliated Ute Citizens of Utah v. United States, 255 Almunia, Joaqu´ın, 360, 402–403 alternative dispute resolution (ADR), 11, 379–380 AMA (Antimonopoly Act), Japan, 15–16, 306 1977 amendment, 189 2005 amendment, 215–216 Article 25 suits, 192–194 American rule contingent fees/no contingent fees, 105 derivative actions, 97 Antimonopoly Act. See AMA, Japan

antitrust litigation, reconciling multilayer interests in, 275–298 Antitrust Modernization Commission, 293–294 arbitration, 243–244 ARN. See National Board for Consumer Complaints Article 709 suits of civil code, 194 Balarin, Jan, 27 Barling, Gerald, 396, 399 Basic v. Levinson, 258–260 BCL Old Co. Ltd v. Aventis SA, 395 BERR (Department for Business, Enterprise and Regulatory Reform), UK, 405 bid-rigging cases, Japan, 208 Blue Chip Stamps v. Manor Drug Stores, 255–257 Board of Management (BOM), Vietnam shareholding companies, 225 Bork, Robert, 66–67 boycotts, 69 Briggs, Adrian, 372 Brown, Gordon, 385–386, 406 Brussels I Regulation Article 5(1), 371–374 Brussels Regime, 370–371 Bubble Act 1720, England, 128 Burger Court (1969–1986), 254–265 Bush, George Herbert Walker, 261 business cases, Vietnam, 236–237, 238 Buttigieg, Eugene, 67 Cable, Vince, 405–406 Cachafeiro, Fernando Garcia, 77

413

414

index

CAFA (Class Action Fairness Act) of 2005 class action jurisdiction, 264 indirect purchasers suits after, 275–292, 293–298 overview, 278 Cafaggi, Fabrizio, 31 Calvani, Terry, 68 Cameron, Camille, 10 Camesasca, Peter, 60 Cappelletti, Mauro diffuse interests, 5–8 Florence Project, 3 public enforcement, 90 cartel cases. See also oil cartel cases, Japan handled by JFTC, 187 regulation enhancement in Japan, 190 CAT (Competition Appeal Tribunal), 392, 396 Central Bank of Denver v. First Interstate Bank of Denver, 260 Centre for Business Research (CBR) dataset, 107–108 CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act), 155–157 China, derivative actions, 101–105, 232–233 citizen suits, US law, 157–160 Cityhook Ltd v. Office of Fair Trading, 395 Civic’s Evaluation Study group actions, 34–35 representative actions, 35 Civil Justice Council of England and Wales (CJC), 406–411 civil law. See common law/civil law divide Civil Procedure Rules. See CPR of 1998 Civil Procedures Code of 1997, Japan, 208 CJC (Civil Justice Council of England and Wales), 406–411 claims collective, Japan, 174 foreign-cubed, 368

foreign-squared, 368 high value, 30, 49–50 individual, bundling, 73–75 low/lowest value, 30 for skimming off unjust profits, Japan, 180 Class Action Fairness Act of 2005. See CAFA class actions Burger Court, 254–265 Collective Settlements of Mass Harm Act, 367 England, impetus for reform in competition law sector, 387–407 insider trading and, 250 Japan, 306–308 Rehnquist Court, 260–262 Roberts Court, 265–270 US law, 160–161 class certification decisions in indirect purchaser litigation after CAFA, 282–292 in pre-CAFA indirect purchaser litigation, 279–282 class settlements. See transnational class settlements Clean Air Act, 158 Clean Water Act (CWA), 155, 158–160 Code of Civil Procedure, Japan, 306–308, 311 Coffee, John, 238 collective actions Aarhus Convention, 151–153 access to justice, 1–20 reconciling tensions through, 75–81 role in context of multilayer interests, 10–12 collective enforcement, 341–363 collective redress, 359–361 Green Paper, Swedish view of, 357–359 National Board for Consumer Complaints, 350–355 overview, 341–343 Swedish Group Proceedings Act, 346–350, 355–357

index collective interests Dutch settlement act and, 381 overview, 25 collective redress, 359–361 Collective Settlements of Mass Harm (WCAM) Act class action cases, 367 overview, 366 common fund theory, 97 common law/civil law divide, 113–114 convergence and legal families, 105–106 derivative actions and, 95–96 stare decisis doctrine, 120 Companies Act of 1993, 102 Companies Act of 2006, 101 Company Law of 1990, Vietnam, 223 compensation impediment of legal standing and, 81–82 multilayer interests and, 72–73 representative actions, 76–77 role of fines in, 394–396 compensatory collective redress. See European consumer protection law Competition Act of 1998, 391–394 Competition Appeal Tribunal (CAT), 392, 396 competition law, 57–92 access to justice and collective actions, 60–63 collective actions in, 73–75 corrective justice principles, 60 deterrence, 60 England, 387–400, 407–411 harm, 63–70 hybrid enforcement mechanisms, 89–91 overview, 57–59, 184–185 private enforcement, Japan, 185–191, 192–195, 214–216 proportional justice principles, 60 relationships among stakeholders, 70–73 tensions, 75–89

415

Competition Law: Safeguarding Consumer Interests (Buttigieg), 67 competitors, legal standing and, 82–83 Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 155–157 Consumer Contract Act of 2006, Japan, 171 consumer law acquis, EU, 31–32 Consumer Ombudsman (KO), 347, 352–353, 354–355 consumer protection. See also European consumer protection law access to justice and, 30–31 Japan, 169–183 Consumers’ Assn of Canada v. Coca-Cola Bottling Co, 409 The Consumers Association v. JJB Sports plc, 392–393 contractual damages, 53 Converium case aftermath, 378–379 Dutch Courts’ arguments in favour of jurisdiction, 369–371 international settlement and Dutch Court ruling, 368–369 overview, 368 path leading to, 366–367 corrective justice principles, competition law, 60 Cort v. Ash, 257 Courage case, 65 courts Burger Court, 254–265 People Supreme Court, Vietnam, 234–235 Rehnquist Court, 260–262 Roberts Court, 265–270 sanguine, 279, 286–287 sceptical, 279, 287–288 Tokyo High Court, 185 Vietnam, 234–238 CPR (Civil Procedure Rules) of 1998 criteria for application to any given mass grievance, 388 derivative actions, 102

416

index

CPR (Civil Procedure Rules) of 1998 (cont.) proposed certification criteria for, 410 Crane, Daniel, 88 creditors, legal standing and, 86 customers deadweight loss, 69, 71, 80–81, 85–86 umbrella, 68–69, 71, 81, 84–85 CWA (Clean Water Act), 155, 158–160 de facto certification requirement, class actions, 408–409 deadweight loss customers, 69, 71 collective actions and, 80–81 legal standing and, 85–86 Decree 102, Vietnam, 226, 227–228 deirisuji cases, 136–137 Department for Business, Enterprise and Regulatory Reform (BERR), UK, 405 Department of the Interior (DOI), 156–157 derivative actions, 96–106 availability of, by country, 110 China, 101–105 correlation between variables and, 113 development of law between 1995 and 2005, 109–111 France, 97–101 Germany, 101–105 Japan, 97–101 legal families, 105–106, 111–115 methodology and dataset, 107–109 South Korea, 232, 233 UK, 101–105 US, 97–101 Vietnam, 221–244 DES case, 366–367 deterrence competition law, 60 over-deterrence, 83 private litigation, 65 Devenish Nutrition Ltd v. Sanofi-Aventis SA (France), 393–394

Diamond v. Oreamuno, 252 different interests, 59 diffuse interests, 5–10, 59 direct purchasers, 70–71 collective actions and, 79–80 legal standing and, 83 director liability index, Vietnam, 225–226 directors’ duties, private enforcement of, 93–115. See also derivative actions challenge of, 94–96 derivative actions, 96–115 overview, 93–94 disclosure index, Vietnam, 225–226 dispute resolution continuum model, 38 DOI (Department of the Interior), 156–157 Dutch class Settlement, 366 Ease of Shareholder Suits Index, 108–109 East India Company, 128 ECC-Net (European Consumer Centre’s Network), 39, 353 ECJ (European Court of Justice), 53–54 EEJ-Net (Network for the Extra-judicial settlement of consumer disputes), 38–39 Effer v. Kantner, 372 ELD Article 11, 153 Article 12, 153–154 Article 13, 154 ELD (2004 Environmental Liability Directive), 153–154 Emerald Supplies Ltd v. British Airways plc, 387–391 employees, legal standing and, 86 England, 385–412 certification hurdles for competition law collective actions, 407–411 feudal origins of group litigation, 122–127 impetus for class actions reform in competition law sector, 387–407

index incorporation, 128 joint stock companies, 128–130 overview, 119–122 political admission of inadequacy of private enforcement of competition law infringements, 401–407 private interests, 146 stare decisis doctrine, 120 English rule contingent fees and no contingent fees, 105 derivative actions, 102 environmental law, reconciling multilayer interests in, 143–166 environmental torts, 164–166 Ernst & Ernst v. Hochfelder, 257–258 EU (European Union), 148–154 Aarhus Convention, 148–153 competition law, comparison with Japan, 200–201 consumer law acquis, 31–32 Consumer Policy Strategy, 39 Environmental Liability Directive, 153–154 implications for indirect purchasers litigation, 321–327 political admission of inadequacy of private enforcement of competition law infringements, 401–407 Eurobarometer surveys, 41 Euroguichet Network, 38 European Commission Green Paper, 23–24, 28–29, 40, 357–359, 401 Injunctions Directive, 33–34, 345 Mediation Directive, 345–346 Regulation on Consumer Protection Cooperation, 345 Small Claims Regulation, 345–346 SWP, 401–402 White Paper, 57–58, 297–298, 300, 301, 401–402 European Consumer Centre’s Network (ECC-Net), 39, 353 European consumer protection law, 23–56

417

access to justice, 27–31 Green Paper on Collective Consumer Redress, 38–42 looking ahead, 42–54 multilayer interests, 24–27 overview, 23–24 redress tools, 31–38 European Court of Justice (ECJ), 53–54 European Union. See EU Excessive Premium and Misrepresentation Act, 216 external origins, compensatory consumer redress, 39–42 f-cubed (foreign-cubed) claims, 368 Federal Securities Act of 1933, 248–249 feudal origins of group litigation England, 122–127 Tokugawa Japan, 122–127 Flash Memory case, 289 Flat Panel case, 290–291 follow-on damages actions, 392 foreign-cubed (f-cubed) claims, 368 foreign-squared (f-squared) claims, 368 forum clause, transnational class settlements, 376–377 forum connexitatis, transnational class settlements, 374–376 Foss v. Harbottle (1843), 101 France derivative actions, 97–101 Devenish Nutrition Ltd v. Sanofi-Aventis SA., 393–394 private interests, 145–146 Francioni, Francesco, 4 fraud-on-the-market theory, 259 free rider problem, 59 f-squared (foreign-squared) claims, 368 Galanter, Mark, 4–5 Garth, Bryant diffuse interests, 5–8 Florence Project, 3 public enforcement, 90

418

index

German Capital Markets Model Case Act, 51 German Telekom case, 26 Germany derivative actions, 101–105 private interests, 144–145 skimming-off procedure, 36–37, 48–49 ginmisuji cases, 136 GLO (Group Litigation Order), 396–397 Graner, Magnus G., 358–359 Green Paper, 23–24, 28–29, 38–40, 42, 357–359 on Damages Actions for Breach of the EC Antitrust Rules, 401 Swedish view of, 357–359 GRL (Group Proceedings Act) of 2002, Sweden, 342–343 Group Action System, Japan, 173–180 collective claims, 173–174 opt-in solution, 178–179 opt-out solution, 174–178 two-step solution, 179–180 group litigation, 119–142. See also Tokugawa Japan Civic’s Evaluation Study, 34–35 England, 119–127, 128–130 KapMuG cases, 35 Group Litigation Order (GLO), 396–397 Group Proceedings Act (GRL) of 2002, Sweden, 342–343 harm access to justice as redress for, 61–63 competition law context, 63–70 hearing cases, Japan, 206 Henderson, Dan, 136 Hensler, Deborah, 364 Hess, Burkhard, 380 high value claims, 30, 49–50 Hodges, Christopher, 379 honkuji, deirisuji cases, 136 Hudson Bay Company, 128 hybrid enforcement mechanisms, 89–91

incorporation, England, 128 indemnity order, 102 indirect purchasers, 70–71, 299–338. See also oil cartel cases, Japan class certification I, 281 class certification II, 285 collective actions and, 80 implications for litigation in EU, 321–327 Japan, 299–302, 312–321, 327–338 legal standing and, 84 suits after Class Action Fairness Act, 275–298 individual (private) interests Dutch settlement act and, 381 environmental law and, 143–147 representative actions influence on tension among, 76–77 tensions between public interests and, 81–89 individual claims, bundling, 73–75 individual litigation, 33 injunction system, Japan, 171–173, 194–195 Injunctions Directive, European Commission, 33–34, 345 insider trading, 250 Insider Trading and Securities Fraud Enforcement Act of 1988, 262 internal origins, compensatory consumer redress, 38–39 Investor Protection Index, Vietnam, 224 Japan, 184–218. See also JFTC; Tokugawa Japan consumer protection, 169–183 derivative actions, 97–101 enforcement of competition law, 185–195 merits of indirect purchaser litigation, 312–314 oil cartel cases, 302–312 overview, 299–300 problems with indirect purchaser litigation, 314–321

index relevance of experience with indirect purchaser litigation, 300–302 Tokyo High Court, 185, 195–201 Japan Fair Trade Commission. See JFTC Japanese Antimonopoly Act (AMA), 15–16, 215–216, 306 Japanese class action, 306–308 JFTC (Japan Fair Trade Commission), 201–214 Article 84 amendment, 209–210 awarded damages, 207–209 cartel cases handled by, 187 changes to recommendation decision system in 2005, 204 fact finding in cases decided by recommendation decisions, 201–204 impact of Article 70-15 elimination, 211–212 impact on right to litigate, 212–214 increase of cases concluded after hearing proceedings, 205–207 possible impacts of eliminating hearing proceedings, 210–211 role in facilitating private damage suits, 212 Tokyo High Court and, 195–201 joinder procedures (joint actions) alleviating tension through, 75 overview, 73–75 joint stock companies, England, 128–130 Judicare system, 4 judicial ex post protection, 95–96 Judicial Panel on Multidistrict Litigation, 283 jurisdiction class actions, 264 compensatory collective consumer redress, 52–54 competitors and, 82 kabu, 130–131 kabunakama nature of, 137–138 overview, 130–134 kanekuji, deirisuji cases, 137

419

KapMuG cases, 35 Kerosene Cartel, 303–305 KO (Consumer Ombudsman), 347, 352–353, 354–355 Kodek, George, 48 Kuneva, Meglena, 39–40 law enforcement, justice concepts envisaged by, 60–61 Law on Enterprise (LOE) of 1999, 223 Law on Enterprise (LOE) of 2005, 223, 226–227 Leathertex doctrine, 374 legal profession, Vietnam, 238–240 legal standing compensatory justice and, 81–82 competitors, 82–83 creditors, 86 deadweight loss customers, 85–86 direct purchasers, 83 employees, 86 indirect purchasers, 84 shareholders, 86 stakeholders and, 82–86 suppliers, 86 umbrella customers, 84–85 Lerach, William, 269 Leslie, Christopher, 80–81, 85 Leuven Study, 25, 38 leximetrics, 107 litigation. See also group litigation; indirect purchasers individual, 33 private, 64–66 Vietnam alternatives for, 242–244 costs, 239–240 as hardship route to justice for shareholders, 240–242 LOE (Law on Enterprise) of 1999, 223 LOE (Law on Enterprise) of 2005, 223, 226–227 loser-pays-principle, 47, 164–165 low/lowest value claims, 30 Lugano Convention Article 5(1), 371–374

420

index

Mackenrodt, Mark-Oliver, 63, 85 Mankowski, Peter, 373 Marine Protection, Research, and Sanctuaries Act, 155 Martin’s case, 123 mass damages, consumer, 43, 49–51 Mattei, Ugo, 379–380 Mediation Directive, European Commission, 345–346 Micklitz, Hans-Werner, 31 Microsoft indirect purchaser cases, 281–282 MITI (Ministry of Industry and Trade), Japan, 310, 320–321 Monti, Giorgio, 63–67 Morrison v. National Australia Bank, 268–270 Mulheron, Rachael, 10–11, 63, 324 multilayer interests access to justice as redress for harm, 61–63 collective actions in competition law context, 73–75 diffuse interests to, 8–10 European consumer protection law, 24–27 harm, 63–70 hybrid enforcement mechanisms, 89–91 justice concepts envisaged by law enforcement, 60–61 reconciling in antitrust litigation, 275–298 reconciling in environmental law, 143–166 relationships among stakeholders, 70–73 role of collective actions in context of, 10–12 tensions between, 75–89 transnational class settlements and, 380–382 Murphy, Bernard, 10 nakama, 131 nakamagoto, deirisuji cases, 133, 137 national accreditation procedures, 47

National Board for Consumer Complaints (ARN), 350–355 Consumer Ombudsman as representative for individual consumers, 354–355 group action at, 350–354 National Oceanic and Atmospheric Administration (NOAA), 157 National Park System Resource Protection Act, 155 negotiations, between consumers and professionals, 33 Network for the Extra-judicial settlement of consumer disputes (EEJ-Net), 38–39 NGOs (non-governmental organizations) Aarhus Convention, 151–153 litigation rights, 147 private interests, 163–164 Nixon, Richard Milhous, 254–255 NOAA (National Oceanic and Atmospheric Administration), 157 non-governmental organizations. See NGOs objective class definition, 78, 79 OFT (Office of Fair Trading) curtailed function, 400–401 role of fines in compensation, 394–396 oil cartel cases, Japan, 302–312 consumers go to court, 305–306 Japanese class action, 306–308 Kerosene Cartel, 303–305 rejection by Supreme Court, 309–312 Tokyo Case, 308–309 Oil Pollution Act (OPA), 157 oil shock, Japan, 304 Okazaki, Tetsuji, 131–132, 138 one-shot litigants, 5 OPA (Oil Pollution Act), 157 opt-in solution collective redress mechanisms, 50 Group Action System, 178–179 representative actions, 76

index opt-out solution Group Action System, 174–178 redress of scattered damages, 47–48 representative actions, 76 organizational private attorney general approach, 7 over-deterrence, 83 Page, William, 80 A Panorama of the World’s Legal Systems (Wigmore), 120 parens patriae suit, 90 passing-on defence, 89 passive consumer disputes, 33 People Supreme Court (SPC), Vietnam, 234–235 Preliminary Programme of the European Economic Community for a Consumer Protection and Information Policy, 28 primary victims, 68 private (individual) interests Dutch settlement act and, 381 environmental law and, 143–147 representative actions influence on tension among, 76–77 tensions between public interests and, 81–86, 89 private attorney general approach, 7 private enforcement competition law, Japan, 192–195 complications to encouraging in Japan, 213–214 defined, 225 of directors’ duties, 93–96, 115. See also derivative actions private law concepts, 37–38 private litigation, 64–66 Private Securities Litigation Reform Act (PSLRA) of 1995, 263–264 proportional justice principles, competition law, 60 protective scope competition law, 63–67 private litigation, 64–66 PSLRA (Private Securities Litigation Reform Act) of 1995, 263–264 public enforcement

421

competition law, Japan, 185–191 defined, 225 public interests, 7 Dutch settlement act and, 381 environmental law and, 143 overview, 25–26 stakeholders, 71–72 tensions between individual interests and, 81–89 public trust doctrine, 154–157 Quayle, James Danforth, 261 recoverable damages, 161–162 Reding, Viviane, 359 redress tools, European consumer protection law, 31–38 Rees, Peter, 372 Regulation on Consumer Protection Cooperation, European Commission, 345 regulator, litigation in Vietnam, 242–243 Rehnquist Court (1986–2005), 260–262 repeat-player litigants, 4–5 repercussions, dispute, 8–9 representative actions Civic’s Evaluation Study, 35 influence on tension among individual interests, 76–77 representative rule, 387–391 representative suits by qualified associations, 216 Rhode, Deborah L., 3–4 right to sue (standing), 82. See also legal standing Riksdag Committee on Civil Affairs, Sweden, 357–359 Roberts Court (2005 – present), 265–270 Romano, Roberta, 230–231 Rule 10b-5, SEC Act, 245–271 Burger Court, 254–265 development of implied private cause of action under, 248–252 overview, 245–248

422

index

Rule 10b-5, SEC Act (cont.) Rehnquist Court, 260–262 Roberts Court, 265–270 ‘rule of law’ index, World Bank, 113 sanguine courts defined, 279 federal cases, 286–287 SARA (Superfund Amendments and Reauthorization Act) of 1986, 156 Sarbanes-Oxley Act (SOX) of 2002, 264 scattered damages, consumer, 42–43, 47–49 sceptical courts defined, 279 federal cases, 287–288 secondary victims, 68 Securities and Exchange (SEC) Act of 1934, 248–252. See also SEC Act, Rule 10b-5 Securities Litigation Uniform Standards Act of 1998, 264 settlements. See transnational class settlements shareholder suits index, Vietnam, 225–226 shareholders. See also group litigation legal standing and, 86 Shearson Lehmann Hutton decision, 52–54 Sheldon, Charles, 132–133 skimming-off procedure, 36–37, 48–49 Small Claims Regulation, European Commission, 345–346 Smitka, Michael, 130 South Korea, derivative actions, 232, 233 SOX (Sarbanes-Oxley Act) of 2002, 264 SPC (People Supreme Court), Vietnam, 234–235 Special Investigation Department, Tokyo District Prosecutor’s Office, 198 Stadler, Astrid, 48 Staff Working Paper (SWP), 401–402 stakeholders competitors, 82–83

creditors, 86 deadweight loss customers, 85–86 direct purchasers, 83 employees, 86 indirect purchasers, 84 relationships among in competition law context, 70–73 shareholders, 86 suppliers, 86 umbrella customers, 84–85 standing (right to sue), 82. See also legal standing stare decisis doctrine, 120 statutory lawsuit assignment, 175–176 Stewart v. General Motors of Canada Ltd, 409 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 265–268 Storskrubb, Eva, 6 subjective class definition, 78–79 Superfund Amendments and Reauthorization Act (SARA) of 1986, 156 Superintendent of Insurance of the State of New York v. Bankers Life and Casualty Company, 254–255 suppliers, legal standing and, 86 Supreme Court, US, 252–270 Burger Court, 254–265 Rehnquist Court, 260–262 Roberts Court, 265–270 surcharges ordered each year in Japan, 191 top 10 companies in terms of amount of, Japan, 191 Swedish Group Proceedings Act evaluation of, 355–357 overview, 346–350 SWP (Staff Working Paper), 401–402 tensions class actions and, 78–81 collective actions and compensatory justice, 86–87 deterrence, 87–89 between individual and public interests, 81–89

index tertiary victims, 68 Tessili doctrine, 374 test cases alleviating tension through, 75 collective actions in competition law context, 73–74 collective redress tools, 35–36 KapMuG cases, 35 for mass damage cases, 50–51 THC (Tokyo High Court), 185, 195–201, 308–309 Thomas, Randall, 230 Thompson, Robert, 230 Tich´y, Luboˇs, 27 Tokugawa Japan, 120–121 contrasted with England legal system, 139–140 feudal origins of group litigation, 122–127 kabunakama, 130–134 legal system, 134–137 nature of kabunakama, 137–138 social and political context, 138–139 Tokugawa Shogun, 134 Tokyo High Court (THC), 185, 195–201, 308–309 Tokyo High Prosecutors Office, 198 torts, environmental, 164–166 Toyotomi Hideyoshi, 131 transnational class settlements, 364–384. See also Converium case access to justice, 379–380 Dutch class Settlement, 366 forum clause, 376–377 forum connexitatis, 374–376 multilayer interests and, 380–382 obligation to pay and applicability of Article 5(1), 371–374 overview, 364–365 Trubek, David, 61–62 two-step solution, Japanese collective claims, 174, 179–180 UK. See also England Department for Business, Enterprise and Regulatory Reform, 405

423

derivative actions, 101–105 umbrella customers, 68–69, 71 collective actions and, 81 legal standing and, 84–85 UN Conference on Environment and Development (1992 Earth Summit), 148 unidentifiable victims, 68 United States citizen suits, 157–160 class actions, 160–161 derivative actions, 97–101 judicial ex post protection, 95–96 public trust doctrine and claims for natural resource damage, 154–157 Supreme Court, 245–270, 271 Usuha case, 123–125 Van den Bergh, Roger, 27, 60 van Lith, H´el`ene, 377, 378 Vickers, John, 68 Vietnam. See derivative actions Viitanen, Klaus, 34 Wales, private interests (legal standing), 146 Watson, Alan, 121 WCAM (Collective Settlements of Mass Harm) Act class action cases, 367 overview, 366 Weiss, Mel, 269 White Paper, 57–58, 297–298, 300, 301, 401–402 Wigmore, John, 120 Wrbka, Stefan, 380–381 Yeazell, Stephen C. development of group litigation, 120 group cases, 126 joint stock company, 128–129 Ziller, Jacques, 6