The claim industry as object of research

Eddy Bauw

Under the headline ‘The claim industry’, the Volkskrant on Saturday the 27th of February devoted attention to the increase in the number of collective redress procedures in the Netherlands. The figures presented by the newspaper are clear: organisations who allegedly represent half a million people, have in total claimed 1.6 billion euros in damages from businesses and institutions. Yet this message will not have surprised the average newspaper reader. The media regularly reports about new collective redress procedures and many people will have asked themselves whether they should not have also joined the proceedings. Who does not have an insurance policy which appeared to have excessive charges, drive a car with rigged software, play the State Lottery or regularly take the NS train during rush hour? Only a few people would consider litigating for themselves to recover these kinds of damages. The amounts of losses are too low and the costs and risks of litigation are too high. One speaks here of ‘scattered damage’. However, if the claims are combined in a collective claim for damages, it suddenly involves significant amounts and it becomes a very different matter.

The Volkskrant article demonstrates that a growing proportion of the collective redress procedures are started by ‘claim companies’ that operate commercially and which often have the same persons behind it. It would appear that a lucrative business sector has developed, which we will continue to hear a lot of in the future. The latter is crucial for these claim companies. After all, media attention is the fuel which runs their machine. The business model is aimed at – liked the pied piper of Hamelin – having many claimants join and to do so, publicity is an important prerequisite. With every extra claim the total claimed compensation amount increases and thereby proportionally the earnings if successful. They almost always work on the basis of no cure no pay and receive a percentage of 15 to 25 percent of the total proceeds; this is also after deducting costs an attractive return in a time of almost negative interest rates and plummeting share prices. Therefore, the claim companies increasingly seem to act like a vehicle for investors looking for a better return on investment. A phenomenon that has blown over from the Anglo-Saxon legal systems and is known there as ‘third party (litigation) funding’ (TPF); ‘third-party lenders’ invest up front in the initial costs of the claim to be able to reap a percentage of the proceeds. Of course there is a risk that the claim is irrecoverable, but investors know: no risk no return. Behold the ‘claim industry’, a phenomenon that is developing rapidly in recent years which should be studied.

At Utrecht University research is currently looking at by who and how claim organisations (foundations, associations, ‘companies’) are managed, whether and how they are financially accountable and which information they share with those that have joined them. In 2011 rules have been drawn up (the Claim Code) by a ‘Claim Code Commission’ in consultation with claim organisations and the research primarily focuses on the compliance thereof. The results are expected in early May. Previous research showed that the compliance was not going too well.[1] Because this research took place shortly after the creation of the code, it was perhaps due to the initial adjustment problems, but at the next measurement it is serious.

However, more research is needed to gain insight into the combination of factors, the ‘determinants’, that can explain the emergence of the phenomenon in the Netherlands and to identify the social impact thereof. That would have to be multidisciplinary research. After all, we are dealing with a phenomenon that cannot only be explained by legal factors. For that research information can be drawn from the experiences gained in countries like Australia and the United States.

Research can contribute to a balanced view of the phenomenon. Unlike the news seems to suggest there are not only disadvantages. After all, what is wrong with honouring a claim for damages? We can trust that the court will only grant the damages if there are good grounds for it and in that case only the actual damages are compensated. Without collective redress procedures the aggrieved parties would let it be and the companies or institutions who acted unlawfully or culpably failed to fulfil their obligations would benefit. Then there is a missed opportunity to give an incentive for greater diligence. The deterrent effect of liability law is thus undermined. It is precisely because of this deterrent effect that recent European legislation promotes the collective redress procedures when rules in the field of personal data protection and competition law are breached. That companies which are guilty of unlawful processing of personal data or forbidden price-fixing get a (hefty) fine, as is now the case, was found to be insufficient. The damages that individual consumers have suffered as a result must be compensated and that can be seen as a welcome addition to the enforcement by supervisory authorities, and as an extra incentive to adhere to the rules. A collective action is, given the generally small amounts per aggrieved party, an important measure to let this system function. The bundling of claims that this creates is also much more efficient and less taxing on the judicial system than the settlement of a large number of individual cases. As for TPF? That helps overcome the financial obstacles to access the court and profit may be made in return. In short, collective actions for damages increase the deterrent effect of liability law, promote access to justice and ensure efficient settlement of claims, so that the courts are not unnecessarily burdened.

Reasoned in this way, one wonders why there is so much concern about the development of collective redress procedures. Because that there is a concern, that is clear. In the Netherlands the efforts have been made to regulate the phenomenon. The aforementioned Claim Code is one example, but it is not binding. The legislature then attempted to give this code some status by instructing the courts in the law (art. 3:305a para. 2 of the Dutch Civil Code) to declare a claim organisation inadmissible “if (…) the interests of the persons for whose benefit the action is brought are insufficiently safeguarded” and thereby inter alia referring to the rules of the code. Until now this addition has not made much of an impact. Work is underway on a legislative proposal that on the one hand makes a class action possible and on the other hand makes a new attempt to curb the ‘proliferation’ of claim organisations. But the European Commission is also concerned about the ‘abuse’ of collective redress actions and advises Member States in a Commission recommendation amongst others not to allow profit-related remuneration (such as no cure no pay), not to allow commercial claim organisations and to grant the court opportunities to guard against abuse. Furthermore, the Commission does not rule out TPF, but wants to set conditions that see to transparency, so as to avoid conflicts of interests between claim organisations and claimants.

With the latter we touch on the core of the objections towards the claim industry, as it is developing. Claim organisations fulfil a useful purpose, as has been made clear, but should be transparent on the points required by the Claim Code: governance, supervision, financial compensation and accountability and the method of representing interests. Only then can claimants assess whether their interests are in good hands and do not come in conflict with the financial interests of directors of the claim organisations or potential lenders in the background. Such conflicts of interests could quickly arise, for example when choices have to be made whether a collective settlement is accepted or litigation is continued with all the costs attached. The research referred to above must show whether claim organisations adhere to the basic requirements of the Claim Code. If they do not, that might be ‘writing on the wall’. However, this does not show whether the feared negative effects actually also occur. For that more research is necessary. Therefore, research must also be directed at finding solutions that can preserve the aforementioned benefits of collective redress procedures and at the same time can prevent the unwanted side effects.

[1] See for a discussion of the results of that research: E. Bauw en T. Bruinen, ‘Slow start of veeg teken? Gebrekkige naleving Claimcode vereist ingrijpen’, Nederlands Juristenblad 2013, 140, afl. 3, p.165

This blog was later posted in Dutch on the UCALL-blog.