Collective Redress Directive: what will it bring for businesses and consumers?

In 2020, the European Union (EU) adopted the Collective Redress Directive[1] as a part of the New Deal for Consumers package. Strong consumer protection rules increase total consumer shopping, which boosts trade and market development. Therefore, the EU has taken a step further and established collective protection of consumers’ rights through representative actions.

The Directive gives rights to organisations or public bodies to represent a group of consumers collectively against companies, whether this is for national or cross-border actions. The Directive was adopted on 20 December 2020, and its requirements must be applied by 25 June 2023.

What are representative actions?

Representative actions are a legal mechanism that allows a business to be sued in the name of consumers that have collectively suffered an infringement of their rights by the company in question. Qualified entities may bring actions before national courts or administrative authorities on behalf of those consumers to impose injunctive measures to stop traders’ unlawful practices, or ensure redress measures that can include refunds, replacements or repairs.

Qualified entities: specific requirements to be met

A qualified entity means any specifically designated organisation or a public body representing consumer interests. It needs to meet certain criteria set by law, for example, they must:

• be a legal person
• be non-profit-making
• be independent and not influenced by persons other than consumers – in particular, not influenced by market operators
• disclose its organisational, management and membership structure, objectives, working methods and activities

The benefit for consumers and new challenges for businesses

The Directive aims to alleviate issues that may deter consumers from seeking redress, like the financial burden. Since the Directive allows third-party funding, even consumers with low incomes can join the claim. Also, it eases the procedural burden as the claim preparation work is carried out by the qualified entity. Thus, the Directive makes litigation for consumers more accessible.

For businesses, it means that the number of claims and the amount of compensations claimed may rise in case of violating consumer rights and the number of cross-border cases may increase. Companies should carefully monitor their compliance with EU law and each EU state’s national requirements to avoid possible collective claims. This includes laws in different areas such as data protection, travel and tourism, financial services, and energy and telecommunications, in addition to general consumer law.

Implementation in Latvia: amendments to the Consumer Rights Protection Law and the Civil Procedure Law

Latvia will transpose the Directive by amending the Consumer Rights Protection Law and the Civil Procedure Law. Previously, there was no collective claim mechanism established in Latvian law as such.

Qualified entities

Currently, the Consumer Rights Protection Law sets the legal framework for associations for consumer rights protection. This framework will be amended to align it with the Directive. As per the draft amendments, the criteria of the qualified entities in Latvia do not deviate from the specific criteria set by the Directive – they need to be non-profit, independent, etc.

Opt-in device

Latvia will implement the opt-in device – only those consumers who have submitted an application to the qualified entity, authorising it to represent the consumer, can be represented. It is because the Latvian legal system does not allow awarding specific compensation for an indefinite number of consumers, without evaluating the damage to each individual consumer.

Out-of-court settlement

The amendments provide that a qualified entity has an obligation to ensure the possibility for the company to settle the dispute out of court. The given term for the company to make a decision must be at least 30 days.

Third-party funding

Draft laws create new provisions for third-party litigation funding. The qualified entities may also be financed from the state budget funds allocated to the Consumer Rights Protection Centre for this purpose.

How the transposition is going

Despite the transposition deadline being set for 25 December 2022, Latvia and several other countries failed to meet the term, and the transposition is still ongoing. Currently, draft amendments to the Consumer Rights Protection Law and the Civil Procedure Law are with the responsible ministry at an early legislation stage. Thus, the draft amendments are still subject to changes, and there is still a long legislative road ahead for the directive to be transposed.

Current situation of the transposition in Estonia

Despite the deadline for the transposition of the Collective Redress Directive (set at 25 December 2022), the legislators of Estonia and several other EU Member States have not met the respective deadline. According to publicly available information, the transposition of the Directive is still in the early stages of legislative drafting within the Estonian Ministry of Justice, having been included in the Ministry’s work plan for the year 2023. Therefore, the draft law, which, according to the usual legislative process, has to undergo three readings in the Riigikogu (in addition to the legislative discussions within the Government of the Republic), is not yet available. However, it is still important to commence the work on the transposition without any delay, otherwise Estonia faces another infringement proceedings initiated by the European Commission, which has been a growing trend in recent years in respect of Estonia (due to its inability to transpose multiple directives within the established deadlines).

Notwithstanding the situation that Estonia has been late with transposing the Directive, the current legal framework already provides certain measures for putting an end to malicious practices of traders which harm consumers’ collective interests. In particular, the Estonian Consumer Protection Act enables to issue an injunction or initiate an action before the court to stop malicious practices which are detrimental to consumers’ collective interests. In this context, such malicious practice to the collective interests is defined by law as any act which affects or is likely to affect the collective interests of an indefinite number of consumers, also being contrary to the applicable law. However, the prior is still not sufficient to meet the requirements of the Directive – for instance, there are no measures enabling the application of redress measures against traders collectively on behalf of the consumers with an objective to receive compensation for occurred damages or demand any other suitable legal remedy (e.g., replacement of a certain product).

Should Estonia complete the transposition of the Directive, the time will actually tell whether it is indeed feasible for the Consumer Protection and Technical Regulatory Authority (CPTRA), with its limited resources, to be prepared to initiate actions to claim such damages on behalf of many consumers. The focus, in this case, is primarily on complex and voluminous proceedings, potentially involving a large number of consumers concerned, each with different volume of claim, as well as different evidence, all of which will remain for the CPTRA to process.

[1] The official title of the Collective Redress Directive is Directive (EU) 2020/1828 of the European Parliament and of the Council of 25 November 2020 on representative actions for the protection of the collective interests of consumers and repealing Directive 2009/22/EC.