RESPONSE TO THE EUROPEAN COMMISSION’S GREEN PAPER “Damages actions for breach of the EC antitrust rules” COM (2005) 672

About the European Forum

The European Justice Forum is a not -for -profit international organisation incorporated in Bel gium. Its mission is to ensure that the legal environment in Europe encourages innovation, business and entrepreneurialism, while still protecting consumers. Consumers and businesses both lose when companies are forced to pay unnecessary legal defence cos ts and damages awards instead of investing their financial resources into developing new products and services and improving existing ones. Ultimately, EJF is seeking an environment where all European consumers and producers have access to and benefit fro m a fair, balanced, transparent and efficient system of civil justice.

We approach the Green Paper with a conscious sense of balance, since any company may wish either to make a damages claim or receive one.

Summary of EJF’s Response

1. We support the po licy objectives of a. enhancing the health, competitiveness and development of the European economy, and b. enabling genuine compensation claims.

2. However, we believe that the Commission’s proposals will harm the economy, encourage excessive and costly litigati on, which is -led and incurs greater costs than benefits to European consumers, and will irrevocably produce a litigation culture in Europe.

3. The Green Paper 1 does not refer to empirical that would substantiate the basic premises that there is insufficient competition, or that litigation would produce the right result. Moreover, the Green Paper does not consider possible

1 In this Response, we refer to the Green Paper as including the Staff Paper, unless expressly mentioned.

1 adverse consequences of a shift towards increased litigation. We urge the Commission to undertake a full evaluation of p ossible adverse effects.

4. The basis on which the Green Paper proposes litigation as a solution to enhancing competition or economic policy is fundamentally flawed. It fails to recognise that a spontaneous spread is occurring of class action and contingenc y fee mechanisms, which will inevitably distort national litigation systems, and produce excessive litigation. Most of this will be lawyer -led, with little benefit to consumers but of positive harm to the economy.

5. Such considerations, therefore, clearly over -ride any supposed rationale for further encouraging stand -alone damages claims, bearing in mind that damages claims may be brought now under national rules.

6. The proposals to amend rules of civil litigation procedure would overturn principles of fairn ess and equality of arms between litigants that are fundamental norms of European social culture and .

7. Thus any rationale for changing the principles of fair that apply to follow -on damages claims is also significantly undermin ed: no exception from the normal rules can be made out for such claims.

8. Better solutions can be proposed to achieve the goals, which would not run the same risk of producing damaging effects. Regulatory mechanisms are appropriate for regulating markets, and improvements in civil litigation systems are appropriate for improving systems. However, given that considerable change is in progress within national civil procedure and funding systems, great care needs to be taken to avoid producing an unbal anced system.

9. The overall position needs to be evaluated very carefully, in order to produce sensibly co -ordinated policy. The way forward is to undertake detailed, informed analysis, involving risk -benefit assessments, quantitative analysis, and pilot studies of changes.

The Basic Aim: To Enhance the European Economy

10. We take it as axiomatic that the objective of enhancing the health of the European economy is the paramount goal. Indeed, we fully support the renewed Lisbon strategy of partnership bet ween the EU and its member states for growth and more and better jobs.

11. Ensuring that there is a high degree of competition in the European market is an important means of achieving the new Lisbon goals. But the pursuit of excessive competition for its o wn sake must be questioned if it adversely affects the Lisbon goal.

12. We welcome the Green Paper as an opportunity to step back and make a serious evaluation of the importance of the different goals and issues that arise, notably

2 of competition, reform of civil justice systems, and the economic health and growth of the EU.

DG COMP’s Aim: To Enhance Competition

13. The Green Paper is based on DG COMP’s goal of increasing the level of competition within the EU market. It follows from what has b een said above, that this goal might not necessarily achieve the basic aim of the renewed Lisbon strategy. Indeed, if pursued too far, the competition goal might conflict with other goals and even harm the economy.

14. The Green Paper makes a series of assum ptions. Thus, it is asserted that the level of economic health within the Community is too low, that this would be improved by increased competition, but that the level of anti -competitive behaviour is too high, that current regulatory mechanisms are inad equate, that private damages claims would decrease anti -competitive compliance, so therefore the remedy lies in harnessing private enforcement methods to complement public regulatory authorities. Further, national civil justice systems are inadequate and not conducive to bringing such claims, so an exception needs to be made from normal procedural rules and funding arrangements so as to facilitate more private claims.

DG COMP’s Assumptions: What Evidence?

15. It is striking that the Green Paper does not quo te any empirical evidence that would substantiate any of the above assumptions. We urge that the policy decisions which the Commission may make in this challenging area should be based on sound evidence and reasoning. We suggest that answers be produced to the following questions:

1. what is the evidence and quantification of insufficient competition? 2. what is the quantification of the extent of damage suffered by victims of infringements? 3. what are the advantages and disadvantages of damages claims as a mech anism for improving the condition of competition (ie market vigour/health)? 4. what is an objective evaluation of the comparative advantages and disadvantages of all available options, and in particular of damages claims compared with other mechanisms? 5. does a likely net gain in compliance justify the proposed measures? 2

16. We believe that there is no evidence that would substantiate the assertions made by DG COMP in para 14 above. We challenge DG COMP to produce such evidence, and to show that if the policies s et out in the Green Paper were followed, the European economy would be enhanced and not, as we believe,

2 The calculation would be: would any existing compliance deficit ("x") be decreased by the proposed measure (by an amount of "y"), after allowing for any other adverse consequences (“z”). and therefore that such decrease therefore justifies incurring the anticipated disadvantages (ie does x -y exceed z)?

3 harmed. We assert that such important policy issues as are at stake here should be based on sound empirical evidence, rather than theoretical assumptio ns.

The goal of avoiding a Litigation Culture

17. The Green Paper’s proposed adoption of civil litigation as a mechanism of competition policy is based on the US model. In USA, litigation has long existed in the antitrust area, and its existence is viewed a s part of regulatory policy. However, DG COMP has rightly recognised that the US civil litigation system has many features that are not only undesirable but also positively harmful for an economy, for , business and consumers.

18. There is wid ely recognised to be excessive litigation in USA, often involving unmeritorious claims. These features are produced by the existence within the US civil litigation system of class action rules (at Federal and state levels), contingency fees, excessive dis covery, and various other matters. Further details are given in the Annex. These mechanisms lead to

a. Excessive volumes of litigation; b. Frequently unmeritorious claims; c. The imposition of high transactional costs (huge ’ fees in class actions); d. The i nability of consumers to control claims brought in their names; e. Settlements in consumer claims in which lawyers reap disproportionately large fees but consumers gain little benefit (eg coupon settlements); f. Incentives for businesses to settle irrespective o f the merits of claims, so as to avoid increasing costs and recover shareholder value (over 90% of cases settle, many being unmeritorious: blackmail settlements); g. Inconsistent decisions and ineffective coordination of enforcement policy between regulatory authorities and multiple ; h. The imposition on any defendant of huge costs of disclosure of evidence, and of business disruption; i. The exploitation of evidence for plaintiffs’ improper commercial advantage; j. A large, unnecessary and debilitation tax on b usiness and the economy, with disproportionately little benefit to competition, consumers or the economy.

19. DG COMP Paper recognises these faults in the US system, and attempts to avoid producing such effects. Thus, the Green Paper does not suggest class a ctions or contingency fees.

20. However, the proposals in the Green Paper are based on false premises, and therefore entirely misguided, and would in fact produce precisely the faults that DG COMP seeks to avoid. The starting point is to bear in mind that th at damages claims are currently permissible under member states’ and procedures in any event.

4 The certainty that the Green Paper approach would produce a Litigation Culture in Europe

21. There are four reasons why the enhancement of damages claims wou ld produce a litigation culture within Europe, which would clearly harm the European economy. First, the assumption that DG COMP makes that class actions and contingency fee mechanisms do not exist, and will not exist, in Europe, is incorrect. Secondly, the whole basis of the Green Paper proposals is to enhance litigation, and to do this by tinkering with various factors that have direct economic consequences for the cost of claims, so as to reduce their cost and facilitate more claims. Thirdly, DG COMP wrongly assumes that any claim is a good claim, and that existing civil litigation systems, let alone after implementation of these proposals in relation to compensation claims, would be capable of preventing bad claims from being brought and settled at un justified economic levels. Fourthly, it is entirely predictable that the incentives created would attract lawyers and competitors to bring a large number of bad claims, with a view to their own profit, rather than to gain compensation for genuine damages.

22. The reality of national civil litigation systems is that there is a clear trend towards facilitation of excessive, uncontrolled and harmful litigation. Indeed, the realisation that this situation is occurring is precisely the reason why the European Jus tice Forum was created, so as to monitor and analyse such developments. The major developments are:

a. Laws or rules of court exist in various states under which “ class actions ”3 of any nature may be brought (England, Sweden, Spain, and rules are expected t o be introduced shortly in , Denmark, Norway, and are under consideration in Ireland, France and Italy). These rules may be used for competition claims without further amendment. 4 The traditional objections to “class actions”, epitomised in the Fr ench maxim “nul ne plaide par procureur”, are collapsing in the face of courts’ need to manage effectively multiple individual claims with similar subject -matter: 5 this was the cause of the English Group Litigation Order rule of court, 6 of the

3 We do not consider that the terminology adopted in the Ashurst Report and the Green Paper is accurate or helpful in analysing realities. Th e Ashurst Report (p 43) defines “class action” as brought by representatives of unidentified individuals, “collective claim” as brought on behalf of a group of identified/identifiable individuals, and “representative claim” as brought by an association on behalf of identified individuals. These definitions do not accord with reality or academic writing on the topic. For example, a class action may be brought, either in USA or some EU states, on behalf of identified or unidentified individuals; and the te rms “collective action” and “representative action” are both traditionally used to describe claims brought by consumer organisations (and, in some member states also have specific other meanings). As a result, we consider that the discussion of various me chanisms is wrongly categorised, and therefore misunderstood, in pages 43 -47 of the Ashurst Report. We suggest that it is helpful merely to talk about “class actions” in the broadest sense as including civil proceedings brought by, or on behalf of, multip le parties, and to refer to “collective/representative actions” as brought usually by consumer organisations. 4 The Ashurst Report and the Green Paper do not adequately analyse the true function and potential of these mechanisms. 5 Various examples of repo rting of this trend exist: M Jacoby, ‘Courting Abroad. For the , A New Client Base: European Investors’ Wall Street Journal September 2, 2005; H Smith, ‘Is America Exporting Class Actions to Europe?’ The American Lawyer February 28, 2006. 6 C Hodg es, Multi -Party Actions (Oxford, 2001).

5 recent revie w in Germany in response to the 15,000 claims against Deutsche Telecom, and of the Irish Reform Commission’s work after multiple claims. 7

b. Many member states permit collective/representative actions by consumer organisations. Such mechanisms are also developing within Community measures. These currently operate as essentially regulatory measures, and are limited to injunctive remedies, but it would be simple for the mechanisms to be extended to include damages claims. As the Commission has r ecognised, some member states have low permission thresholds for individuals or organisations to qualify to bring claims under these mechanisms. They could easily be exploited.

c. Methods of funding litigation are changing rapidly in some member states. The Commission has for some years been encouraging member states to improve their access to justice and increase their expenditure on legal aid. 8 Rather than increase public expenditure, some governments are responding to pressure to increase access to jus tice by permitting contingency or conditional fee agreements, whether officially or otherwise. 9 Contingency fees are now being used increasingly in the less developed civil justice environments of Central European states, even though often technically pro hibited in those states. 10 Contingency fees have only recently started to be used in those states, since they previously had virtually no civil litigation under centralised economies: there is now a potentially unregulated explosion waiting to happen, as individuals and companies with lower economic standards than Western societies seek to bring large claims. It is not difficult to see that the potential effect of contingency arrangements in fuelling litigation is likely to be very considerable. Bans on contingency fees have readily been circumvented in states such as Germany or the Netherlands, for example by an intermediary entrepreneur or organisation contracting with consumers on a contingency basis, with a

7 Report: Multi -Party Litigation , The Law Reform Commission, 2005, LRC 76 -2005. 8 Memorandum from the Commission: Consumer redress , Commission of the European Communities, COM(84) 692, 12.12.1984; see also Supplement ary Communication from the Commission on Consumer Redress , COM(87) 210, 7.5.1987; Council Resolution of 25 June 1987 on consumer redress, OJ No C 176/2, 4.7.87; Green Paper: Access of consumers to Justice and the settlement of consumer disputes in the sing le market, COM(93) 576, 16.11.1993; Directive 2002/8/EC of 27 January 2003 to improve access to justice in cross -border disputes by establishing minimum common rules relating to legal aid for such disputes; Council Decision of 9 November 2004, 2004/844/EC on the standard form for legal aid applications and their transmission. 9 So far, this is notably so in the UK, but it is entirely foreseeable that member states will follow a privatised option. In the UK, previously uncontrolled expenditure on legal aid was replaced from 1999by the privatised mechanism of conditional fee agreements (CFAs), although there is currently consideration of US -style contingency fees: see The Better Regulation Task Force, Better Routes to Redress (2004); Improved Access to Justi ce – Funding Options & Proportionate Costs: Report & Recommendations , Civil Justice Council, 2005. Significantly, prior to 1999, the existence of legal aid in the UK had led to excessive and uncontrolled expenditure of a series of lawyer -led and media - fue lled multi -party actions, in which huge sums of public money were spent on lawyers but very few claimants received any benefit, since the vast majority of claims failed: see C Hodges, Multi -Party Actions (Oxford, 2001). 10 The Ashust Report (p 93) states t hat contingency/conditional fees are allowed in Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Slovakia.

6 significant success fee, but the lawyer bein g paid on the normal basis. Prohibitions in other states are merely ignored. 11

23. The existence of these features and trends simply undermines the whole premise on which the Green Paper is put, and demonstrates worrying naivety. 12 It is inconceivable that la wyers and competitors would not utilise and develop these and other mechanisms to their own personal economic advantage. The effect of inventive commercial intermediaries is entirely predictable. There is clear evidence of increased, profit -driven activi sm by lawyers across Europe, in contrast to their traditionally conservative culture. US law firms are spreading through Europe in anticipation of making money. 13 The removal of the ban on advertising by lawyers in the UK had a profound effect on their be haviour, leading to active entrepreneurialism that has often been criticised. 14 The rapid rise of claims - farming intermediaries in the UK since conditional fees were permitted in 2000 has led to major frauds on consumers, which has forced the government to introduce seeking to regulate intermediaries. 15

24. We believe that there will be rapid change in the civil litigation environment in European states. Some of it will be good, but much may be bad. The spread of American “adversarial legalism” is now well documented by scholars. 16 Since there is clear evidence that the balance of factors that control access to justice is changing, it would clearly be foolish for the Commission to pursue policies that would encourage excessive litigation by fuellin g the existing underlying and unstable trends. Even if, in the short term, the situation in only some member states were conducive to producing excessive litigation, this would lead to highly damaging forum shopping. This is precisely the current situati on as between the EU and USA. It is no answer to say that the response should be that the EU should adopt bad US habits: that would be the argument of a self -interested European lawyer.

25. In fact, European legal systems are set to undergo huge reform over the coming period. Changes covering the number, complexity and scale of changes are coming from many sources: national governments, the Commission, and from

11 “Some French lawyers now accept lower billing rates in exchange for a ‘success fee’”: C Fleming, ‘Europe Learns Litigious Ways; Union’s Tactic Spotlights Trend Toward U.S. -Style ’ Wall Street Journal February 24, 2004, A.16. 12 Statements have been made by Commissioner Kroes and her staff that “we can foster a competition culture, not a litigation culture”, eg at the Harvard Club, N ew York on 22 September 2005; and “We must avoid excessive litigation. We must avoid speculative lawsuits prompted by ambulance -chasing lawyers. We must avoid an avalanche of unmeritorious litigation.”: speech by Commissioner Kroes at the conference “Pri vate enforcement in EC : the Green paper on damages actions”, Brussels, 9 March 2006. The conclusion on this topic in the Ashurst Report (p 116, 117) that contingency/conditional fee arrangements do not exist in most member states is a snaps hot that does not reveal the realities of the trends that are occurring, and also contrary to their statement that most states do in fact allow such arrangements (p 129). 13 A leading US plaintiff lawyer, Michael Hausfeld was recently quoted as being on “a crusade to export America’s legal system around the world”: The Lawyer , 24 October 2005. 14 Law Society, Group Actions Made Easier (1995), para 6.6.7 et seq. 15 The Compensation Bill, 2005. 16 R A Kagan, Adversarial legalism (Harvard University Press, 2001); D Kelemen, ‘Suing for Europe. Adsversarial Legalism and European Governance’ Comparative Political Studies Vol 39 No 1, February 2006, 101 -127.

7 evolving societies and systems. Such a lot is going to change at once, with such complex interac tions, that the effects need to be evaluated very carefully, in a coherent overview. It would be wholly irresponsible to make arbitrary changes in an individual area, such as competition law, without carefully evaluating the likely effects that will be pr oduced given aspects that will be subject to unpredictable change in any event. In other words, it is unsafe to rely simply on the snapshot of one study (the Ashurst study).

The factors in the Green Paper positively encourage litigation

26. It is clear th at the proposals in the Green Paper seek to “identify the main obstacles to a more efficient system of damages claims” (para 1.3) and to remove or reduce these obstacles.

27. The problem is that almost all of the proposals will affect the economic balance bet ween litigants – precisely as it is intended to do. Yet Justice Departments, scholars and experienced litigants all know that tampering with any economic lever that affects the cost of a claim can have hugely disproportionate consequences on the incidence of claims that result. Playing around with these economic factors is a dangerous thing to do. One can either restrict claims or encourage them. If one encourages claims, there will be the problem of how to ensure that only good claims are permitted, and no national system has yet solved that issue. Indeed, there have been some spectacular disasters, such as the ongoing US system, the claims in England in 1980 -99 referred to above, and the Australian tort crisis around 2000: see the Ann ex. 17

28. This evidence demonstrates that it is a major error to assume that any claim that might be brought is a good claim. Many claims, especially those that are lawyer - led (and multi -party actions are good examples of these, in view of their multiplied fees), have poor merits. Yet it is often cost -effective for business defendants to settle such claims.

29. The following mechanisms mooted in the Green Paper have a direct bearing on the economic viability of litigation, and all swing the balance of advantag e towards claimants and against defendants:

a. Enabling people to bring claims without having to fund them, or with some protection from the normal economic consequences; b. Exempting claimants who bring claims that fail from having to pay opponents’ costs; c. Per mitting special rules on how damages are defined and calculated;

17 The introduction of contingency fees and class action mechanisms in Australia led to a vast increase in litiga tion, the collapse of the second largest insurance company, a crisis in the continuation of medical practice because of the lack of insurance, crisis measures by government to underpin medical and other insurance, legislation restricting the scope of claim s, and a requirement that lawyers certify that claims had been properly investigated and were valid: see Commonwealth of Australia Treasury, Review of the Law of Negligence: Final Report , 2002

8 d. Inflating (doubling) damages; e. Altering the burden and standard of proof in favour of claimants; f. Removing the requirement to prove fault; g. Bending rules on causation; h. Introducing special class action rules; i. Suspending normal limitation periods; j. Extending external access to company records (discovery) and even to information held by authorities, possibly going well beyond freedom of information rules.

30. A change in any one of the above factors wou ld increase the level of litigation within a national system, and hence inevitably increase less meritorious claims and increase the commercial pressure on defendants to settle. Whether it would in fact increase the number of good claims would depend on m any other factors within the national system, since civil litigation systems are complex organisms. A change in several of the above factors would clearly have a significantly adverse effect, by permitting a disproportionate number of bad claims. There i s simply no way of avoiding this result.

31. Given the development of national funding and procedural systems for civil litigation, it would be unsafe to make the assumptions, as are fundamental to the Green Paper, that any consumer or competitor who alleges breach of competition law will not be able to fund a claim, and must be given not only significant financial incentives to bring a claim, but also be insulated from the financial risk of losing if the claim turns out to be wrong.

32. Companies of any size can fund litigation. (Indeed, since they can do so now, and may currently bring claims for damages for breach of competition law under national laws, and since some member states’ systems are perfectly conducive to such claims, it is pertinent to ask whether the absence of such claims is caused by obstacles in national civil litigation systems, as the Commission assumes, or whether the incidence of genuine situations is in fact rare. Empirical evidence would answer this point, but the Commission has signally failed to produce any. Small companies and individual consumers may historically not have had the funds to bring claims, but that is a risk of life and business and true of any type of claim, not just competition claims. But there is clear evidence that the trends towards spread of class action rules and contingency fees will increase access to justice for such claimants. Further, as the Green Paper points out, both the Commission and national governments have put considerable effort in recent years to i ntroduce small claims mechanisms.

33. The above analysis has proceeded on the somewhat theoretical basis of the position of claimants and defendants. However, civil litigation systems cannot be analysed without taking account of the effects of the intermed iaries who are necessary to operate it – lawyers.

9 Creating a litigation culture is an inevitable consequence of increasing the profit incentives for private lawyers to bring claims

34. The Commission states that it aims to involve consumers more closely i n controlling markets. In our view, this laudable aspiration is unlikely to be effective in practice. In reality, consumers would not control the mechanism, and we do not believe that consumers would in fact significantly benefit. Instead, the mechanism will be operated and controlled by intermediaries - lawyers – whose involvement will be motivated solely by their own commercial interests. This would be so even if no contingency fee mechanisms were to exist within Europe, but it is of vastly greater si gnificance given that such mechanisms are spreading.

35. As the US, Australian and English experience, summarised in the Annex, demonstrates the involvement of lawyers in multiple claims (as claims involving consumers certainly are) leads to serious conflicts of interest, as a result of incompatibilities between their personal profit interests, and the interests of their clients, to say nothing of the public interest.

36. The current state of most civil litigation systems across Europe certainly is unsatisfactory , and in need of further carefully balanced reform. However, given this situation, national systems would currently be incapable of controlling the sort of abuse and excess that has been seen in USA and would certainly be produced if the Green Paper propo sals were implemented. For example, the courts or authorities are mostly not yet in sight of regulating contingency fee mechanisms properly in consumers’ interests, as the US experience shows is necessary. It would be predictable that consumers would sim ply be ripped -off by unscrupulous lawyers who took advantage of the commercial opportunities afforded by grabbing high proportions of double damages awards, no loser -pays rule, a lowered burden of proof, the absence of bans on direct or indirect advertisin g, 18 and so on.

The importance of procedural fairness

37. All civil justice systems in almost any society recognise the importance of maintaining the balance of procedural fairness between litigants. Almost all of the proposals mooted in the Green Paper ha ve been considered by national governments before – and rejected as being unfair. The principles that underpin European civil justice are fundamental norms of European society. At the heart lies the principle of fairness 19 and equality of arms between lit igants. These principles are not only matters of socio -legal ethics but underpin the economic

18 The pro posed Directive on Services will remove all current prohibitions on advertising by lawyers. This alone will have a significant effect on litigation rates in many member states, as it did following the removal of the ban in UK from 1988. One leading Briti sh firm has already advertised its ability to claim for breaches of competition law: http://www.irwinmitchell.co.uk/groupaction/our_work/commerce_and_fraud.asp . A French firm advertised class actions during 2005 even before the Ministerial review on whether to propose legislation had been completed: http://www.classaction.fr and this was subject to widespread adverse commen t. 19 See Convention on human rights, art 6.

10 points discussed above of not encouraging a disproportionate number of bad claims. Thus, good reasons exist for the balance of procedural and funding factors th at exist in national civil litigation systems. In fact, the national systems demonstrate a significant degree of coherence in respect of the balance that they achieve. Even though there may be some differences of detail between states, each has its own b alance, and arbitrary alterations in one factor across all 25 states may produce disproportionate consequences in some states.

38. Highly convincing evidence would be needed to justify any change or exemption from the existing norms. The Commission has not addressed the issue that the area of competition damages claims would justify an exception to the prevailing procedural norms. Strong empirical evidence would be needed to substantiate such a case.

39. Realistically, it would also be impossible to make chan ges in procedural and funding rules in the competition law area without them also having a destabilising effect on general procedural and funding norms, and hence undermining all other types of claims. Such change would be a major affront to profound soci al norms of fairness, and thus unconstitutional. The risks to European stability and culture would be considerable.

Conclusions so far: the failure of a policy that encourages litigation

40. We most strongly urge the Commission and member states to reject the basic approach proposed in the Green Paper of making special rules for the litigation of competition damages claims. We strongly believe that such changes would have profoundly adverse effects on the European economy and culture.

41. The above considera tions demonstrate that the encouragement of increased litigation in the current situation in Europe will merely fuel precisely the kind of features that exist in USA.

42. Certainly, any stand -alone action would suffer from these damaging consequences. Follow -on actions may also be adversely affected, but it is difficult to estimate how seriously. A follow -on mechanism should be able to avoid many of the difficult issues (access to evidence, funding of claims, cost -shifting, burden of proof, or other facilita tion of proof), but the problems of quantification of damages remain. We urge that the normal principles of fairness and proportionality should underpin the approach to issues such as proof and damages. We see no justification for altering the normal bur den of proof.

43. The issue of whether there should or should not be a fault requirement is a matter for ideological debate, unaffected by the above considerations. As we have said above, we approach this issue disinterestedly, since we may be plaintiffs or defendants at any time. We are influenced by the fact that fault is a requirement in many member states. We favour harmonising this approach as a substantive rule, pending empirical evidence that it is a barrier to genuine claims.

11 What can be done to i mprove the economy in relation to the matters raised in the Green Paper?

44. We would, however, wish to be constructive in assisting the Commission to achieve its goal of enhancing the European economy. We offer the following suggestions, and would be happy to engage in further detailed dialogue:

a. We agree that increased effort should be put behind improving national civil justice systems; b. We suggest that change should be based on independent high -quality research, involving legal and economic analysis of em pirical quantitative and qualitative data: we would not support further policy based on theoretical assumptions; c. Such research would begin by analysing the complex influences of civil litigation systems in the EU, USA and elsewhere, with a view to identify ing models that could be developed for 21 st century Europe; d. Full cost impact, and cost -benefit, assessments would be made before any changes were adopted; e. Changes would be carefully controlled, involving pilot studies and close monitoring and measurement o f their effects f. We also believe that since these types of claims are so complex, and require expertise in and consistency of policy, cases should be restricted to a small number of special that have expert and expertise. This would also tend to reduce costs and delay.

45. If proper empirical evidence were to be produced that demonstrated a need for - increased regulation, or - improvement in gaining compensation then the question would arise whether there might be a better way of ac hieving these goals.

What are the Real Goals? Providing effective regulation and compensation

46. What are we actually trying to achieve here? The Green Paper is, in fact, trying to address two entirely different issues: the first is to improve regulatio n of the market (a goal) and the second is to facilitate civil compensation of individuals or businesses that have suffered damage through infringements (a goal). These two functions have traditionally been approached on different b ases, and with good reason. Confusion of the regulatory and compensatory goals can lead to considerable difficulties and confusion.

47. The Green Paper asserts that it is seeking to enhance damages claims as a means of enforcement. It is, therefore, proposi ng to use a compensatory (civil, corrective justice) mechanism as a regulatory (public law) mechanism. Thus, it is asserted that civil litigation and compensation mechanisms have a deterrent effect, and are hence valid regulatory tools. In contrast, we a ssert that experience has demonstrated that any value that deterrence might normally produce within a civil

12 compensation mechanism is low, 20 and will often be outweighed by the added costs and complications that a compensation mechanism will bring. We chal lenge the Commission to prove otherwise. Of course, if the possible penalty is disproportionately high, then the deterrent effect increases, but Europeans need to ask whether the benefits to be gained from the threat of paying double damages, including in terest, in a small number of cases, and the likelihood of paying much higher lawyers’ fees as the price of settling a considerably increased number of cases, are worthwhile. A distinguished Commission lawyer has made exactly this point, coupled with the a ssertions that the costs of pursuing corrective justice are likely to be high, that less than full deterrence is optimal, and that public enforcement is inherently superior to private enforcement. 21 Litigation as regulation is a confused approach, 22 and far better approaches may be adopted.

48. There is no substantive doctrinal policy rationale for the adoption of increased litigation as a tool of regulatory policy. The Green Paper proposals are not part of any substantive competition law. The claim to justifi cation on the basis that they will assist in achieving the economic policy of the EU is not substantiated. They are simply an effort to change the rules of civil procedure to make private litigation of competition claims easier and more profitable for cla imants.

49. The Commission’s inspiration comes from the US experience. But the whole balance of the socio -legal system in USA is different, and cannot be transplanted without recognising fundamental differences. For example, the Department of Justice, unlik e the European Commission, does not have authority to impose fines for breach of antitrust rules. Importantly, the US litigation system is widely regarded as having got out of control, in view of excessive and unfettered permissibility of asserting indivi dual claims as a matter of constitutional right. The vast excessive and wasteful costs that such a system imposes on the economy are outlined in the Annex. Such costs have a hugely chilling effect on innovation and economic health, and produce social div isiveness. The undesirability of the US system is well recognised there, but political gridlock is such that achieving reform is very difficult (partly because plaintiff lawyers use their considerable wealth to support state court judges and the Democrati c Party). The Class Action Fairness Act 2005 is a welcome but only a limited step. Meanwhile, Congress is in any event considering reform of antitrust regulation and litigation.

50. We strongly favour the adoption of public law regulatory mechanisms to cont rol markets. This has the advantage of maintaining consistency and effective, responsive regulation. These benefits are achieved though the involvement of permanent and expert authorities, rather than multiple, single -decision -making courts. Authorities may set and alter long -term enforcement policies, and their decisions and approach may be highly cost -effective. They may achieve compliance through advisory means, and be flexible in dealing with individual cases and companies, and important example bei ng the leniency programme.

20 Any general effect is, at best, diffuse. Any effect on a given individual is always post facto and hence also far less effective than more immediate regulatory tools. 21 W P J Wils, ‘Should Private Antitrust E nforcement Be Encouraged in Europe?’ World Competition 26(3): 473 -488, 2003. 22 The chaotic situation in USA is illustrated by various contributions to W K Viscusi, Regulation through Litigation (AEI -Brookings Joint Centre for Regulatory Studies, 2002).

13 Scholars have identified the principle of “responsive regulation” as being a particularly effective enforcement strategy. 23 All these aspects are antithetical to an adversarial, litigious approach. It is effectively impossible t o combine a leniency programme with permitting multiple private compensation claims.

51. Similarly, the Green Paper’s proposal to empower consumer organisations is flawed. Consumer organisations have had power to bring collective/representative actions under national measures for many years, and the approach has recently been expanded under some Community measures, but the evidence is that they are ineffective. There is no evidence that consumer organisations have even been active as enfor cers: this is partly because they perceive their representative role as being inconsistent with that of a regulator, 24 and partly because they do not wish to risk their limited funds on litigation (but as discussed above, the economic equation in litigation is changing). 25

52. As the Commission recognises, considerable difficulties arise over setting criteria for which non -public organisations might be empowered to bring claims. It is not in the public interest to permit proliferation of organisations that may bring claims. Member states have, however, shown widely differing approaches to permitting consumer organisations to bring consumer protection actions under national law and the Community measures, and some permit many such organisations to institute acti ons: this confused expansion of rights may in practice now lead to difficulties to be more restrictive for competition claims. 26

53. If it is right to restrict the number of consumer organisations that are empowered to institute damages claims, surely it is pr eferable to restrict this function to a public regulatory body? This would have the benefit of maintaining consistency, flexibility, the public interest, as with the Australian Consumer Compensation Commission or the UK Office of Fair Trading. Such a bod y could limit action to seek compensation orders to situations in which multiple consumers (rather than companies, with the possible exception of SMEs) had suffered small amounts of damage where they would be unlikely to take action themselves, and it was in the public interest on a cost -benefit assessment that the actions was worth taking.

54. The distinction between public and private law mechanisms is also highlighted in relation to damages. As the Ashurst Study shows (p7) all member states assess damages in civil claims on the basis of injury suffered, rather than profits made by

23 I Ayres and J Braithwaite, Responsive Regulation: Transcending the Deregulation Debate (Oxford, 1992). 24 Leading academics have concluded that consumer organisations can only claim to be integrated into the enforcement of consumer law if they are professio nalized, but that this situation does not currently exist; they also state that the legal and practical significance of injunctive actions is rather low: M U Docekal, P Kolba, H -W Micklitz and P Rott, The Implementation of Directive 98/27/EC in the Member States (Bamberg/Vienna, 2005). 25 It is interesting that no damages claims have been brought by the consumer organisation empowered to do so under the UK’s 2002 legislation: Competition Act, s 47, amended by Enterprise Act 2002. Significantly, although the approved consumer organisation is also empowered to make ‘supercomplaints’ to the public regulatory body (the OFT), all regulatory decisions are taken by that public body. 26 The study on implementation of the Directive on injunctions for the protection of consumers’ interests describes the picture as showing “no coherent system”: M U Docekal, P Kolba, H -W Micklitz and P Rott, The Implementation of Directive 98/27/EC in the Member States (Bamberg/Vienna, 2005).

14 the defendant. This approach is based firmly on the policy, which is universally observed in EU states, that the function of damages is purely compensatory. It is simply not the function of a private law remedy to impose a public law remedy, such as a fine. Indeed, a major cause of the US’s problems lies in the confusion of functions, and permissibility of civil courts’ ability to award punitive damages. The postulation of the adoption of double compensation or other similar punitive approaches in Europe therefore runs into inevitable difficulties, such as the unfairness of windfall profits to the recipient, and problem of how a consumer organisation might identify all valid rec ipients who might have suffered damage, what level of proof might be required for qualification for some money, how to calculate each person’s due amount, and how to distribute the funds.

55. All these problems, and their associated costs, can be avoided if the traditional principles are adhered to: claimants who wish to opt -in to claim compensation through the courts (assisted in future by national “class action” rules), or through ombudsmen or voluntary schemes, may do so, on the basis of compensation for their losses, but a regulator should have the option, where it is deemed to be an appropriate and proportionate purpose for expending public funds, to prosecute traders and seek removal of wholly excessive profits through fines imposed by courts. The fund s would go to public funds. There must be an element of proportionality here: it must be recognised that many consumers will not wish to seek reimbursement of small amounts, having undertaken a cost -benefit assessment of redress mechanisms, particularly i f they recognise that regulators are using powers to change traders’ behaviour (eg by reducing future prices).

Constitutionality and abuse of privacy

56. We question whether there is sufficient jurisdictional basis for many of the options under the EU Treat y.

57. Extending access to documentary and oral evidence can be seen to equate to giving private persons a power equivalent to a public authority regulator’s investigative power. Is it right such a powerful weapon should be available to any private person wh o makes an allegation? 27 Given that competitors will inevitably use the mechanism to over -ride normal rules of professional secrecy, such a rule would simply undermine commercial confidence, innovation and the economic viability of enterprises. Would disc losure of information held by a regulator, or open discovery to anyone who makes an allegation, seriously assist the economy and competitiveness, or, as we believe, undermine it?

Conclusions

58. We wish to see a European economy that is healthy, strong, com petitive and innovative, in which business works for the benefit of citizens. In order to foster the sustained development of such economic health, we support the balanced

27 See Convention on human rights, art 8.

15 regulation of markets, appropriate protection of consumers and civil justice mechan isms that achieve speedy and cost -effective redress of genuine damage.

59. However, the key to maintaining a balanced economic and social order is that of maintaining balance . We profoundly believe that the adoption of litigation as a mechanism of competiti on regulation would be damaging for the European economy. We believe that there is a great risk of inhibiting business and competition through the threat of litigation and of wholly disproportionate costs. We urge the Commission and member states to reje ct this approach.

60. We do not favour regulation by litigation. It is open to considerable abuse by intermediaries, who will extract disproportionate transactional costs from the economy.

61. We favour regulation by public authorities. This leads to consist ency, expertise, and appropriate enforcement policies, including flexibility.

62. The amount of change that is in any event occurring in national civil litigation systems needs to be very carefully monitored and co -ordinated – and we believe that there is ins ufficient high -level understanding or policy on these issues. European Justice Forum is established precisely to contribute to the study and debate of such issues.

63. The ultimate test of these proposals is whether, as DG COMP claim, they would assist the EU economy. We strongly believe that the proposals would unequivocally harm it. In view of the serious risk of harming the economy that encouraging increased litigation presents, we urge that an evidence -based approach should be applied to future policy -making in this area. We suggest that empirical research must form the basis of any eventual impact assessment, before taking any steps that might encourage increased incentives for litigants and intermediaries. Any implementation that may then be justifi ed should be introduced with the utmost care. We strongly recommend consideration of pilot studies rather than sudden and irreversible generic reform, so as to be able to monitor effects in their practical context.

European Justice Forum 28 Brussels April 2006

28 Cur rent members are Baxter International, BristolMyersSquibb, Cephalon, Cook Group, CMS, EUCOMED, General Motors, GlaxoSmithKline, Johnson & Johnson, 3M, Merck, Microsoft, Nestlé, Pfizer, Philip Morris International, Schering -Plough, Sanofi -Aventis, Unilever, the United States Chamber of Commerce, and the German Chemical Industry Association (VCI)

16 Specific Responses to Questions

Q. A: Should there be special rules on disclosure of documentary evidence in civil proceedings for damages under Articles 81 and 82 of the EC Treaty? If so, which form should such disclosure take?

Response: We see no justification for altering normal national rules on disclosure of documentary evidence. US -style discovery is an alien concept to . The US experience is that is usually hugely costly and disruptive. Precisely for this rea son, the 1999 reform of court rules in the UK has limited discovery.

Q.B: Are special rules regarding access to documents held by a competition authority helpful for antitrust claims? How could such access be organised?

Response: We strongly oppose speci al rules for access to documents submitted to a competition authority. That would undermine an effective ongoing relationship between regulators and business, such as a leniency programme. It would give unjustified access to confidential business informa tion, thereby undermining economic health and innovation.

Q.C: Should the claimant's burden of proving the antitrust infringement be alleviated and, if so, how?

Response: We strongly support the fundamental principle that the party who is alleging the ab use has the burden of proving it, as provided under the law of all member states, and by Art 2 of Regulation 1/2003. There is no justification for any exemption, and to introduce one would destabilise the general principle in other areas. In any event, i n the competition field, proof of a cause of action is not usually a problem, but proof of quantum and causation can be problematic.

Q.D: Should there be a fault requirement for antitrust -related damages actions?

Response: We support the continuation of a requirement for fault under domestic laws of the Member States. This is a matter of jurisprudential principle, and of subsidiarity. Fault will always be present in hard core cartels anyway, but removing it as a criterion would give rise to many proble ms in other competition areas, where there are grey areas over whether behaviour was legitimate or not. There is a risk of leading to many inconsistent decisions between regulators and courts.

Q.E: How should damages be defined?

Response: We support the normal compensatory principle in civil proceedings for tort (non - contractual civil liability), which is that the claimant should be restored to the position as though the tort had not been committed. It would be wrong to introduce a different

17 norm into t he firmly established principles of member states’ law. The functions of compensatory damages and of punitive sanctions should not be confused. Punitive or double damages give windfall profits to claimants and their lawyers: surely this is itself anti -competitive? The enforcement of US treble damages has hitherto been considered contrary to the ordre public in Europe, preventing blackmailing exercises here by US lawyers. 29

Q.F: Which method should be used for calculating the quantum of damages?

Respons e: We consider that the courts in the Member States should continue to calculate damages under principles already established. There is no requirement for interfering in national orders with special rules. Guidelines on the quantification of damages may, however, be useful (Option 19).

Q.G: The Passing -on defence and indirect purchasers' standing.

Response: The passing -on defence is an inevitable requirement in a system that is based on the principle that damages follow the compensatory principle: it mus t be retained for civil damages claims, as matter of justice. We believe that a balance has to be struck between the ideal objective of proper compensation for all affected parties and the practicalities, costs and efficacy of organising the system. We do not favour allowing indirect purchasers to join an action, since it will inevitably add cost, complexity and time to the proceedings. Few individuals are likely to be denied a valid claim if indirect purchasers are excluded. The passing -on defence is inc luded in European law for good reasons of fairness and proportionality.

Q.H: Should special procedures be available for bringing collective actions and protecting consumer interests?

Response: No. National systems are developing class action rules in a ny event. We strongly believe that the evidence shows that it is ineffective to empower consumer associations to bring actions. Private actions should not be a substitute for public enforcement. Such an approach is contrary to the Commission’s “Better R egulation” policy. The empowerment of consumer organisations would be another matter that would fuel the use of class action mechanisms by lawyers, for their own ends. Huge consequential difficulties would arise, such as over organisation, proof, damages , and at considerable cost.

Q.I: Should special rules be introduced to reduce the cost risk for the claimant? If so, what kind of rules?

Response: No special rules are necessary or desirable for competition cases. The loser pays rule is a well -establish ed principle within member states and to alter it would be contrary to norms of fairness and destabilise societies. The experience of USA, UK and Australia shows that abolition of a cost -shifting rule is a major factor in encouraging unmeritorious litigat ion.

29 Hague Convention on Taking Evidence Abroad in Civil or Commercial matters, arts 13, 23.

18 Q. J: Achieving optimum co -ordination of private and public enforcement

Response: The difficulties that are caused by trying to fuse public regulatory with private compensatory systems lead to the conclusion that such an approach is fundamentally mis guided. It is impossible to operate an effective enforcement policy, such as a leniency programme, through multiple single -decision private decisions made by civil courts at the same time as by regulatory authorities.

It is quite inappropriate to disclos e the contents of any leniency application in any subsequent civil proceedings. Leniency applications should be encouraged, and knowledge that the application and documentation could be used against the party in civil proceedings would be a strong disince ntive.

We consider that the other suggestions put forward (of a conditional rebate or limitation of the damages exposure) would still constitute a disincentive and would be complex to administer. We therefore oppose Options 29 and 30.

Q. K: Which substa ntive law should be applicable to damages claims?

Response: We support the option that the applicable law should be determined with reference to the normal conflict rule, namely the place where the damage occurs (Option 31). We do not consider that any sp ecial rules for applicable law are necessary or desirable: the other options are unjust and would encourage forum shopping.

Q.L: Should an expert, whenever needed, be appointed by the court?

Response: This is a matter for national law, and a matter of s ubsidiarity. We would expect that modern systems would provide for the adequate involvement of expertise. We therefore oppose Option 35.

Q.M: Should limitation periods be suspended? If so, from when onwards?

Response: There is no case to suspend limit ation periods. These are aspects both of national law and matters of fairness. Limitation periods vary between member states but are typically of sufficient time to allow certainty to both parties. They allow plaintiffs to assert legitimate claims and defendants to know that such claims cannot be pending indefinitely. In any given case, the parties may enter into a private agreement to effectively permit the plaintiff to bring a claim at a later time if there are fundamental issues that may be resolved by a pending case.

Q.N: Clarification of the legal requirement of causation

Response: This is a matter for national law. No doubt comparative scholarly work may assist development of principles that will assist the hugely complex task of Europeanisatio n in this area.

19 Annex: Examples of uncontrolled class actions by lawyers

64. So called "private enforcement" is essentially just profit -driven private litigation. It is not some neutral endeavour undertaken by disinterested enforcers for the public good. It is carried out by intermediaries whose commercial interests lie in maximization of the litigation market volume and of the size of fees recovered in individual cases. These commercial ends are achieved purely by partisan and self - interested behaviour .

65. There is ample evidence that, where lawyers’ fees and activities are uncontrolled, they act against the public good to maximise their profits. We cite three examples from around the world.

The US litigation disaster

66. It is well known that the litig ation system in USA is seriously out -of -control. The transactional costs that flow from contingency fees in class actions can be hugely disproportionate to the amounts at stake. The US system has not found a means of adequately regulating the size of law yers’ fees. Although fees may permissibly be based on hourly rates, any class action will involve a contingency arrangement. No claimants have any financial cost or risk: there is no need for them to fund any attorney, or to have to pay anything on losin g. Similarly, attorneys have no financial penalty if they lose. Rather, the attorney has a huge financial investment in the case, that will far exceed the stake of any individual consumer.

67. As a result, excessive volumes of litigation occur. Many claims are of little merit 30 . Class action and similar rules, plus the possibility of claiming punitive damages, serve to increase the potential financial stakes in claims. Most litigation is lawyer -led. In other words, it is initiated by attorneys, rather tha n consumers, and then managed by the attorneys, usually without reference to their clients. The argument is put forward that attorneys act as private attorneys general, and need significant financial incentives in order to make it sufficiently attractive to them to engage in privatised enforcement. However, that argument is thoroughly discredited. The USA is, in any event, a highly regulated business environment, with powerful regulators and enforcement. Many civil claims are worthless to consumers, but of great commercial value to lawyers. The whole society is well known for being excessively litigious, giving rise to undesirable responses such as huge legal and insurance costs for business, a cooling of innovation and defensive medicine.

68. Many class or collective claims have significant nuisance or blackmail component, and are settled on the basis of defendants having to buy off claimants’ attorneys, based on the need to avoid excessive and unrecoverable costs of

30 A dramatic recent example of this is Heinrich Beck v Atlantic Coast plc, Delaware C.A. No 303 -N, in which the of Vice Chancellor Strine of February 11, 2005 begins “I regret having to write this opinion. But the Plaintiff’s lawyers have given me no choice, having failed to acknowledge their own responsibility for wast ing the time of this court and of a defendant in this purported class action by filing false pleadings and failing to produce documents clearly within the scope of a valid request for production”.

20 discovery and business interruption. Indeed, settlements can involve an element of collusion between plaintiffs’ attorneys and defendant corporations in settling cases so as to allow share prices to recover, but although significant profits are pocketed by the attorneys, settlements can resu lt in worthless benefits to consumers (often vouchers which are of little value).

69. Attorneys can therefore become very rich. Their funds can then be used to support political parties or the election of state court judges and politicians, or in lobbying adm inistrations to extend their ability to bring claims. There have been reports for some years of US law firms setting up in the EU precisely in anticipation of liberalisation in European civil litigation systems that are expected to produce increased litig ation and the ability to exploit class action and contingency fee mechanisms for private profit. In the USA, this can lead to bias in some state court decisions, which blights the local economy. The state of Mississippi, for example, recently passed refo rm legislation, after which levels of claims fell, industry started to reinvest, employment levels rose, and doctors returned to practice in the state.

70. The Class Action Fairness Act 2005 was an attempt to control some of the worst excesses, but was only p assed after major political battles. It seeks to limit contingency fees in “coupon claims”, cap fees, and restrict some class actions to Federal courts, but it is limited in scope. Most class action rules in USA are still based on an opt -out rather than opt -in mechanism, which encourages inflated numbers in class actions.

71. The litigation culture in USA has the effect of polarising relations between consumers and industry, which is unhelpful towards business but particularly advanced scientific -based secto rs and innovation.

72. A system in which litigation costs are excessive will adversely impact on the ability to produce new goods and services (innovation), on employment levels, on the availability of insurance, and of the financial viability of businesses, with a disproportionate impact on smaller enterprises. Data from USA illustrates these trends in that : 31

a. A US federal government analysis in 2002 concluded that excessive tort litigation costs in 2000 were an $87 billion drag on the national economy. 32 The study estimated that the impact of wasteful legal expenditures equated to a 1.3% tax on consumption, or a 2.1% tax on wages.

b. Over the past 50 years, tort costs in the US grew more than 100 -fold from less than $2 billion in 1950 to $246 bill ion in 2003, while GDP has only grown by a factor of 37. The 2003 figure equates to a “litigation tax” of $845 per person, compared to $12 in 1950, and is equal to more than 2% of the Gross Domestic Product of the United States. Nearly one in six

31 Somewhat curiously, there is little published economic da ta on some aspects of the US civil justice system, and the general effects of contingency fees and class actions, save in the tort area, but the scale of the generic problem and its effects can readily be grasped from the published figures. 32 An Economic A nalysis of the U.S. Tort Liability System , (U.S. Council of Economic Advisers, 2002).

21 aw ards is now $1 million or more. Over 7% of businesses experienced a liability loss of $5 million or more during the past five years. 33

c. A survey of 500 U.S. CEOs by the Conference Board found that lawsuits caused 36% of their companies to discontinue produ cts, 15% to lay off workers, and 8% to close plants. 34

d. A Gallup survey of U.S. small businesses found that 26% of owners said that fear of liability kept them from releasing new products, services or operations to the market. 35

e. US corporations paid $9.6 b illion to shareholders to settle securities class actions in 2005, excluding a $7.1 billion settlement involving Enron. 36 Settlements in securities cases have grown successively over the past decade: in 735 cases between 1997 and 2005, the total settlement amount was $26 billion. 37 This would have yielded plaintiffs’ lawyers’ fees $7.8 billion assuming the average 30% contingency fee is assumed.

f. Over 200 insurance companies failed in USA in the past decade. 38

Lessons from UK Group Actions

73. The UK recently experienced excessive and wholly lawyer -led multi -party litigation, which was significantly driven by an absence of control over the funding available to lawyers. From roughly 1980 to the late 1990s there was a series of product liability claims in Engla nd and Wales, mainly involving medicinal products. These exhibited consistent features of advertising by lawyers, claimants being funded almost exclusively by legal aid, and in general a strikingly low success rate, with many individual and concerted clai ms being dismissed before . Claimants generally did not have to pay their lawyers and experts, and were insulated from any liability to pay opponents if they lost, under the legal aid rules.

74. These cases were heavily criticised as being lawyer -led, and on the basis that the legal aid rules were insufficiently rigorous to distinguish good from bad claims, at least early enough in the process, so claimants’ lawyers were paid large sums from public funds whether they won or lost. In response, it was s aid that important issues of public safety were raised and deserved to be investigated in court, in the absence of other arenas. Nevertheless, tens of thousands of people were encouraged to bring claims that failed, and lawyers were paid hundreds of thous ands of pounds.

33 U.S. Tort Costs: 2004 Update, Trends and Findings on the Cost of the U.S. Court System , (Tillinghast -Towers Perrin, 2004) p. 2. 34 U.S. Senate Commerce Committee Report on Product Liability Reform Act of 1997. 35 National Small Business Poll (National Federation of Independent Businesses, 2002). 36 L E Simmons and E M Ryan, Post -Reform Act Securities Settlements: 2005 Review and Analysis (Cornerstone Research, 2006). 37 Ibid . 38 A M Best, ‘Rising Number of P/C Company Impairments Continues Trend’ March 10, 2003, quoted in D Deal et al, Tort Excess 2005: The Necessity for Reform from a Policy, Legal and Risk Management Perspective (U S Chamber of Commerce, 2005).

22 75. Since major reforms of English civil procedure, coupled with the deconstruction of legal aid and its replacement by regulated conditional fee agreements, from 1999 the number of claims commenced has fallen.

76. Lloyd’s of London estimates th at the annual cost of litigation to British industry at £10 billion a year and rising at 15% annually. 39

The Australian crisis

77. Australia has a system based originally on English law and procedure. It suffered a major crisis around 2000, and major legislative action was required to stabilise the economic and legal systems. The causes were multiple and included the following. First, successive judicial decisions from the 1960s had expanded liability under the law of negligence, 40 and relaxed causation rules, 41 in part based on the assumption that liability insurance would always be available, and that any misfortune deserved compensation. Secondly, a growth of specialist plaintiff law firms occurred following deregulation of legal advertising in 1993, deregulation of legal fees, plus the introduction of contingency fees, and the introduction of class actions (known as representative proceedings). 42 By June 2000, the insurance market also experienced a trough. The spiralling costs of insurance led to the collapse of a major insurer and a medical indemnity organisation.

78. The government had to put in place emergency indemnity arrangements, followed by several Acts, in order to stabilise the insurance sector, particularly in relation to ensuring on going medical practice. Federal and state -level reform of negligence law and practice was also undertaken. 43 Amongst a raft of proposals, 44 the law of negligence was subject to statutory restrictive restatement, causation and limitation rules were strength ened, damages were capped, punitive damages abolished in negligence cases, recoverable costs limited, and plaintiff lawyers were subject to a requirement to certify that they had investigated the merits of a case.

39 C Fleming, ‘Europe Learns Litigation Ways’ Wall Street Journal , Feb 24, 2004, A16. 40 Hon J J Spigelman, ‘Negligence: The Last Outpost of the Welfare State’, 76 A.L.J. 432 (200). 41 Lisle v. Brice [2002] 2 Qd R 168 at 173. 42 For example, Federal Court of Australia Act 1976 (Cth) Pt IVA. 43 Commonwealth of Australia Treasury, Review of the Law of Negligence: Final Report , 2002 44 Many of which have been implemented at Federal level, although the reform position througho ut the states is currently patchy.

23 SUMMARY OF RESPONSE TO THE EUROPEAN COMMISSION’S GREEN PAPER “Damages actions for breach of the EC antitrust rules” COM (2005) 672

The Green Paper approach will inevitably create a litigation culture in Europe:

A. National litigation systems ar e already adopting class actions and contingency fees

1. The Commission is entirely correct to wish to avoid creating a litigation culture in Europe. Unfortunately, the Green paper’s proposals will, however, inevitably create a litigation culture.

2. This is because the Commission wrongly assumes that the state of civil litigation mechanisms in EU member states is static, and will not be conducive to the excesses that are identified in US litigation culture.

3. In fact, EU national litigation systems are already inevitably evolving to adopt US -style mechanisms (especially class action mechanisms and contingency fees), and the result will be that increased class action litigation will be inevitable in Europe. Contingency fees are being used in both Western and Ce ntral European EU states for different reasons, even though sometimes banned. Class action laws are also spreading quickly. These developments are affecting all types of damages claims brought in national courts. There is no need to single out competiti on claims for special treatments, and procedural changes to competition claims would inevitably spread to other areas of law.

4. Most of the Green Paper proposals aim simply to encourage more litigation, by improving the financial incentives for people to bring claims. This assumes that more litigation is necessarily better, without acknowledging that many claims are not meritorious.

5. To do this at the same time as other national developments are occurring will hugely distort the delicate balance that is necessary between optimising access to justice for genuine claims and keeping out unmeritorious claims.

6. The Green Paper talks about enabling consumers to bring claims, on the assumption that they do not have the financial incentive to bring low -value cla ims that affect many people. It rightly assumes that most competitor companies will

1 have sufficient funds to claim. But the Commission’s analysis ignores the reality that by altering the financial incentives in litigation, it is creating huge incentives for lawyers to make profits out of bringing litigation.

B. Lawyers will milk the system and encourage bad claims so as to inflict blackmail settlements in class action.

7. US experience, supported by evidence of group claims in UK and the Australian li tigation crisis, clearly show that if lawyers’ financial incentives are allowed to get out of proportion, which is in fact the general trend in Europe, the result will be: a. sizeable and unmeritorious class actions and b. company defendants will be blackmailed into settling many of these to avoid even bigger costs, c. thereby giving huge compensation to lawyers and little benefit to the EU economy.

8. The end result will be to increase unmeritorious litigation in Europe, to impose a sizeable tax on businesses (lawy ers’ transactional costs, mostly unmerited) which will be passed on to consumers in the form of higher prices and will make the EU economy less competitive .

9. The Green Paper does nothing to identify how a private litigation industry of lawyers, once create d and established in the EU, will be controlled to prevent the serious costs and wasted resources experienced in the U.S.

10. The legal blackmail element is assisted because of the complexity, and lack of clarity, in some areas of EU competition law, such as non -discrimination principles and price discounting: the Paper claims the proposals will focus mainly on cartels , but in fact they will affect all forms of competition claims and will impact the whole civil litigation system .

C. The proposals would irrev ocably worsen the European cultural approach to litigation generally in all other sectors

11. Many of the proposals canvassed in the Green Paper would have a huge effect on unbalancing the balance of financial factors in litigation generally, and would have a hugely disruptive effect on areas of litigation other than competition law, especially product liability cases, personal injury, and other complex litigation. As the U.S. has learned in trying to cope with reigning in broad and expensive document discove ry and class actions, it is extremely difficult to close the floodgates once opened, even after the problem is recognized.

12. The US model of privatised regulation through civil litigation is an expensive failure, and imposes huge costs for little net gain , except to lawyers . The EU should not make the same mistake.

2 D. The evidence is that empowering consumer organisations is a failed mechanism.

13. Similarly, the mechanism of empowering consumer organisations to institute litigation, as quasi -regulators, has not been a success, and should be abandoned. Such mechanisms have existed in member states’ systems for some years, and the evidence shows that they have not been effective. The current uptake of this mechanism in some EU consumer protection legislation is misguided, and its value, in attempting to engage consumers more closely in the European enterprise, is largely cosmetic. General purpose consumer associations do not have broad representative legitimacy and do not actually represent any particular cla ss of claimants in a specific matter.

Conclusion: The right way forward is to make targeted improvements to regulation and litigation separately

14. Although couched in terms of public interest in enhancing the EU economy, and consumer protection, the gene ral desire to expand private litigation will neither serve the public interest nor assist with proper enforcement of competition law in Europe, and is likely to have unintended consequences in other areas of substantive law and civil procedure.

15. There is no basis to assume that expanded profit oriented private litigation will result in better or benefits to consumers, particularly based on the empirical evidence from the U.S., which has already developed an uncontrollable litigation indust ry.

16. The Commission has not conducted any empirical analysis to determine whether increased litigation will actually be good for the economy or consumers. There is a need for very convincing economic evidence in order to overcome the very strong presump tion that these proposals will create great harm.

17. The inevitable changes that are occurring in national litigation systems will encourage follow -on claims in any event, and proper empirical evidence is needed before a case for any other system changes are contemplated.

18. The right way forward is to

a. Maintain strong regulatory mechanisms, avoiding regulation by litigation; b. Improve modernisation of member states’ civil litigation systems, but maintaining proportionality of legal fees through strong regulati on, and controlling class action mechanisms so as not to increase unmeritorious claims.

European Justice Forum April 2006

3 Annex 1: Comparing existing systems

It is clear from comparing the models below which is more likely to result in legitimate pr ivate claims that actually benefit the injured party instead of the lawyers, and do not result in wasted resources and high costs that are passed on to consumers. The EU Model below is a simplification, since several aspects of the U.S. approach have alre ady infiltrated some European national systems.

EU Private Litigation Model U.S. Private Litigation Model  Litigation uncommon,  Litigation common, very inexpensive expensive  Document discovery  Document discovery o Civil law systems do not o Broad access to all forms allow broad inquiry into of documents, email internal business o Scope: “all relevant communications documents likely to lead to o Testimony only at trial admissible evidence” o Results in need to question many involved participants about documents in sworn testimony even prior to trial  Attorney’s fees: loser pays costs,  Attorney’s fees: each party pays discouraging frivolous claims its own costs o Contingency fees allowed, encouraging a legal industry to fund targeted litigation likely to result in se ttlement, regardless of merit o Plaintiffs receive fees if win, but do not pay if they lose  Damages: compensates for any  Damages: punitive, including actual harm suffered trebled damages  Proof  Proof o Party is required to prove o Prior ac tion is conclusive damages and liability on damages and liability when against defendant, encouraging multiple suits until one plaintiff wins  Class Actions: historically none  Class Actions: widespread and o Group or collective liberally allowed actions increasingly o Results: lawyers receive allowed in some substantial fees, members jurisdictions of class receive little individually

4 Annex 2: The financial implications of excessive litigation – US experience

1. A US federal government analysis in 2002 concluded that excessive tort l itigation costs in 2000 were an $87 billion drag on the national economy. 1 The study estimated that the impact of wasteful legal expenditures equated to a 1.3% tax on consumption, or a 2.1% tax on wages.

2. Over the past 50 years, tort costs in the US grew more than 100 -fold from less than $2 billion in 1950 to $246 billion in 2003, while GDP has only grown by a factor of 37. The 2003 figure equates to a “litigation tax” of $845 per person, compared to $12 in 1950, and is equal to more than 2% of the Gross Domestic Product of the United States. Nearly one in six jury awards is now $1 million or more. Over 7% of businesses experienced a liability loss of $5 million or more during the past five years. 2

3. A survey of 500 U.S. CEOs by the Conference Board found that lawsuits caused 36% of their companies to discontinue products, 15% to lay off workers, and 8% to close plants. 3

4. A Gallup survey of U.S. small businesses found that 26% of owners said that fear of liability kept them from releasing new products, ser vices or operations to the market. 4

5. US corporations paid $9.6 billion to shareholders to settle securities class actions in 2005, excluding a $7.1 billion settlement involving Enron. 5 Settlements in securities cases have grown successively over the past decade: in 735 cases between 1997 and 2005, the total settlement amount was $26 billion. 6 This would have yielded plaintiffs’ lawyers’ fees $7.8 billion assuming the average 30% contingency fee is assumed.

6. Over 200 insurance companies failed in USA in t he past decade. 7

1 An Economic Analysis of the U.S. Tort Liability System , (U.S. Council of Economic Advisers, 2002). 2 U.S. Tort Costs: 2004 Update, Trends and Findings on the Cost of the U.S. Court System , (Tillinghast -Towers Perrin, 2004) p. 2. 3 U.S. Senate Commerce Committee Report on Product Liability Reform Act of 1997. 4 National Small Business Poll (National Federation of Independent Businesses, 2002). 5 L E Simmons and E M Ryan, Post -Reform Act Securities Settlements: 2005 Review and Analysis (Co rnerstone Research, 2006). 6 Ibid. 7 A M Best, ‘Rising Number of P/C Company Impairments Continues Trend’ March 10, 2003, quoted in D Deal et al, Tort Excess 2005: The Necessity for Reform from a Policy, Legal and Risk Management Perspective (U S Chamber o f Commerce, 2005).

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