Class actions, and in particular the notion that group members may be represented without express authorization, have been criticized from four angles. First, “representation without authorization” is claimed to be unconstitutional due to its encroachment on private autonomy and, second, to be alien to continental legal traditions. Third, the practical feasibility of class actions has been impugned with reference to technical difficulties of identification and proof. Fourth, class actions have been claimed to inflict significant social damages due to their being prone to abusive litigation (litigation boom and blackmailing potential).
3.1.1 Constitutional Concerns: Private Autonomy and Tacit Adherence
The opt-out system may raise constitutional concerns, since “representation without authorization” may impair group members’ private autonomy, which consists, in this context, of the right to decide whether or not to enforce a claim and how to enforce it.
2 However, there are quite a few compelling arguments that suggest that the opt-out scheme, as far as small claims are concerned, should not be outright unconstitutional. Although the collective action may certainly be shaped in a manner that goes counter to constitutional requirements, the constitutional concerns relating to small claims are mainly an optical illusion.
European traditionalism is often wrapped up in constitutional parlance. In Germany, opt-out class actions appear to have been rejected, among others, for constitutional reasons: it has been argued that representation without authorization may raise serious constitutional concerns, e.g. it may impair the right to a hearing (Recht zum rechtlichen Gehör) and the right of disposition (Dispositionsgrundsatz).
3 While it could be argued that silence should be regarded to imply acceptance, such a legal consequence may be entailed only by proper notice and it has been highly questionable whether constructive knowledge would suffice in this regard.
4 The foregoing constitutional concerns have been taken so seriously that in 2005 the German Federal Cartel Office (Bundeskartellamt), notwithstanding the very strong policy for competition law’s private enforcement, discarded the idea of opt-out collective actions apparently because it was said to restrict the right to a hearing and to violate the principle that the party is the master of his own case (right of disposition).
5
In the context of French law, it has been consistently referred to the principle of “nul ne plaide par procureur” (“no one pleads by proxy”).
6 According to this entrenched principle of French civil procedural law, for having standing, the plaintiff has to have a legitimate interest in the case and, to be legitimate, the interest must be direct and personal; as a corollary, all the persons involved in the lawsuit must be identified and represented in the procedure.
7
It is true that mandatory representation, that is, representation without authorization not supplemented by the right to opt-out, seems to be irreconcilable with constitutional requirements. For instance, in Spain, where the judgment’s res judicata effects may extend to non-litigant group members, it has been convincingly argued that absent a specific statutory provision, the right to opt out arises from the constitutional principles of due process and access to justice.
8 However, representation without authorization supplemented with the right to opt out may merit a different treatment. It is noteworthy that this is in line with the US Supreme Court’s stance that class actions based on representation without authorization meet the requirements of due process as long as members have the right to opt out.
9
It has to be noted that a comparable set of constitutional arguments may be lined up for the introduction of collective actions.
First, in the absence of a collective litigation mechanism, numerous small claims would not get to court
10 and, hence, the collective action confers solely benefits on group members (provided they do not run the risk of being liable for the defendant’s legal costs in case the group representative fails to win the action). It would be perverse to refer to the impairment of private autonomy in a case characterized by obligee inertia,
11 where the law does not ensure the claim’s practical enforceability.
Second, opt-out systems embed, by definition, the right to opt out. While mandatory representation (that is, when group members are compelled to be part of the group and cannot opt out) may obviously go counter to the right to private autonomy (that is, the right to decide whether or not to sue, and how to enforce the claim), there is no “forced membership” in case of an opt-out system. Group members can leave the group without any further. The opt-out scheme merely reverses the mechanism of adherence and infers assent from silence. In principle, a group member has to submit a declaration, if he envisages being part of the action. In the opt-out system, a group member has to submit a declaration, if he does not want to be part of the action. The group member makes the decision and since experience shows that the vast majority of group members does not opt out, arguably, it is reasonable to reverse the mechanism of adherence.
12
It has to be noted that the opt-out system is much more constitutional and preserves private autonomy much better than the EU Injunction Directive
13 covering 17 consumer protection Union acts.
14 The Directive authorizes various entities to launch proceedings for a declaratory judgment or injunction on behalf of a class of unidentified consumers without the need for any individual authorization or assent, and, theoretically, it does not even make it possible for group members to leave the group. This means that group members cannot opt-out even if they want to; they are stuck in the group. Still, the constitutionality of the Injunction Directive has never been questioned.
Third, it has to be noted that while the right of disposition is constitutionally protected, access to justice is equally a constitutional fundamental right. The purpose of collective litigation is to make practically unenforceable rights a reality.
Whatever the strength of these points may be, interestingly, the rigid unconstitutionality arguments have found no reflection in the constitutional case-law. This suggests that while certain limits do apply, opt-out mechanisms are not outright unconstitutional. While representation without authorization does call for a justification, it may be warranted in small-value cases, which would very likely not be brought to court anyway. The cases that can be raised from national constitutional laws, used as arguments that the opt-out scheme is irreconcilable with national constitutional requirements, can be distinguished from the enforcement of small pecuniary claims in an opt-out collective procedure. In fact, in 2014 the French Constitutional Council (Conseil constitutionnel) confirmed the recently introduced French regulatory regime, which, in certain points, has salient opt-out features.
The European Court of Human Rights (ECtHR) addressed the question of representation without authorization
15 in
Lithgow v. United Kingdom.
16 The case emerged in the context of the UK’s expropriation of a British company. To avoid the flood of individual actions, the law on nationalization provided for the appointment of a “stockholders’ representative”, who was to be elected by the shareholders or appointed by the government and whose power of attorney to claim compensation precluded group members’ individual actions. In other words, the scheme established mandatory representation without authorization where group members were forced to join and could not opt out.
The ECtHR proceeded from the proposition, as established in
Ashingdane,
17 that the
right of access to the courts secured by Article 6 para. 1 (art. 6-1) is not absolute but may be subject to limitations; these are permitted by implication since the right of access ‘by its very nature calls for regulation by the State, regulation which may vary in time and in place according to the needs and resources of the community and of individuals’.
The limitations may not impair the very essence of the right and need to “pursue a legitimate aim” and there needs to be “a reasonable relationship of proportionality between the means employed and the aim sought to be achieved.”
18 As to the scheme at stake, the ECtHR came to the conclusion that these conditions were met. The very essence of the right to a court was not impaired,
19 because individual rights were (indirectly) safeguarded: the group representative was “appointed by and represented the interests of all” group members and individual group members could seek remedy in case the representative breached one of his duties. This conclusion was not undermined by the fact that the group members’ right to control the representative was very limited and it was not the individual shareholders but their community who was entitled to exercise these rights.
20 Furthermore, the Court held that the scheme “pursued a legitimate aim, namely the desire to avoid, in the context of a large-scale nationalization measure, a multiplicity of claims and proceedings brought by individual shareholders” and there was “a reasonable relationship of proportionality between the means employed and this aim.”
21
The above jurisprudence was confirmed in
Wendenburg.
22 Here, in the context of a procedure before the German Federal Constitutional Court (Bundesverfassungsgericht), the ECtHR, referring to
Lithgow, held that while “the applicants were barred from appearing individually before that court”, “in proceedings involving a decision for a collective number of individuals, it is not always required or even possible that every individual concerned is heard before the court.”
National constitutional courts followed a very similar line of reasoning.
In the early ‘90s, due to the particular historical situation, the Hungarian Constitutional Court had the chance to adjudicate cases centering around representation without authorization. In 1989, the socialist regime collapsed in Hungary and the country adopted a new constitution,
23 while the laws adopted beforehand persisted. Although the parliament tried to weed Hungarian law of the provisions that were not reconcilable with a constitutional democracy, some reminiscences remained and had to be quashed by the Constitutional Court itself. One of these was the rules of socialist law that conferred mandatory representation without authorization on the attorney general and trade unions. These entities could launch civil proceedings even against the obligee’s will. These laws had a very peculiar feature: the right of representation of these entities was general and mandatory, that is, they not only lacked the party’s authorization, but the represented person could not opt out and terminate his own action. These rules were struck down by the Constitutional Court. However, the court also established that, if justified, “representation without authorization” can be constitutional. Albeit that these cases involved no class actions, they provide clear guidance also as to the opt-out principle’s constitutionality.
In Case 8/1990 (IV.23.) AB, the Hungarian Constitutional Court dealt with trade unions’ right to represent an employee without authorization. The constitutional concerns were entailed by the trade union’s “mandatory power of attorney” and not by a “presumed power of attorney.” The legislation did not prevent trade unions from exercising the right of representation against the employee’s will, which were authorized to intervene also in matters where the employee was not a member of the trade union. The Constitutional Court suggested that the legislator may maintain the trade union’s right of representation in relation to its own members.
In
Case 1/1994. (I.7.) AB, the Constitutional Court dealt with the attorney general’s power to act on behalf of private parties. The Court held that party autonomy (right of disposition) embraces both the liberty to act and the liberty not to act; the attorney general’s all-pervasive power to sue and appeal without the party’s express assent restricts the party’s constitutional rights and needs to be examined whether this restriction is necessary and proportionate. In this case, the Constitutional Court came to the conclusion that there were no constitutionally acceptable legitimate ends justifying the attorney general’s blanket power to act on behalf of the party. Here again, the most important source of concern was the attorney general’s “mandatory power of attorney”, which—if warranted by an important national or economic interest—could be exercised also against the party’s will. At the same time, the Constitutional Court did not question the attorney general’s power to sue in cases where the obligee was not able to protect his rights. Quite the contrary, the Court held that in such cases representation without authorization is considered an inevitable restriction of party autonomy (right of disposition) and
the protection of the subjective rights of the party who is unable to enforce or protect his rights is the constitutional obligation of the state. Accordingly, the state has to ensure that in such cases one of its organs acts for the sake of protecting the rights of the individual.
In sum, the case-law of the Hungarian Constitutional Court suggests that representation without authorization may meet the constitutional requirements, if it is justified by a legitimate end. Both the absence of a “mandatory power of attorney” and the party’s right to opt out point towards compliance with the constitutional requirements. While the above cases give no guidance as to whether public notice is sufficient or group members need to be informed individually about the collective action and the right to opt out, they indicate that if the party is unable to protect his rights, the state is even obliged to intervene.
The French Constitutional Council (Conseil Constitutionnel) examined the question of representation without authorization
24 first in 1989 in the context of trade unions’ right to launch proceedings on behalf of their members, and recently it scrutinized the de facto opt-out mechanism introduced by the French legislator in 2014.
The matter concerning group actions initiated by a trade union on behalf of its members became famous in the European scholarship on class actions and had been referred to as an authority to justify the unconstitutionality of the opt-out system. Not surprisingly, this case centered around the issue of proper notice, which was considered to be an essential requirement against representation without authorization.
Here, the French Constitutional Council held that the employee is to be “afforded the opportunity to give his assent with full knowledge of the facts and that he remained free to conduct personally the defense of his interests” and he shall have the opportunity to opt out from the procedure. Furthermore, “the employee concerned must be informed by registered letter with a form of acknowledgement of receipt in order that he may, if he desires so, object to the trade union’s initiative.” This ruling was interpreted by many as excluding the possibility of an opt-out system as such schemes secure no actual knowledge.
25
Although this question lost much of its significance, as the 1989 decision, whatever its proper construction may be, seems to have been jumped by the 2014 decision analyzed below, it has to be noted that, arguably, the fact pattern addressed by the 1989 decision can be distinguished from opt-out systems in small claim procedures. The former dealt with a law that authorized trade unions to launch any action (toutes actions) on behalf of the employee, including claims of unfair dismissal.
26 Pecuniary small claims can be clearly distinguished from employment law claims at large, especially unfair dismissal matters: the latter normally involve higher stakes, higher monetary value and may lead to the employee’s readmission (which entails personal consequences). Furthermore, the French Constitutional Council did not hold that representation without authorization or inference of the right of representation from the employee’s silence would be unconstitutional. Quite the contrary, it held that if the employee fails to object to the trade union’s procedure, he can be regarded as adhering to it.
27 The French Constitutional Council treated this case rather as an issue of notice: the employee has to be informed by registered mail and actual notice has to be ensured.
28 Accordingly, the requirement established by the French Constitutional Council concerning opt-out regimes was proper notice. It has to be taken into consideration that, as noted above, the French statute’s opt-out scheme covered the whole spectrum of employment claims and the constitutional requirements concerning the means of notice may be less stringent in case of small-value pecuniary claims.
In 2014, France adopted collective action rules that remained within the limits set up by the decision of 1989. Although under the rules of 2014, the group representative may launch a collective action without the express authorization of group members, the final judgment, in essence, will extend only to those who expressly accept the award; at this stage, tacit adherence is not sufficient. This regime passed the test of constitutionality. It seems that it was decisive for the French Constitutional Council that the res judicata effects cover solely those group members who received compensation at the end of the procedure.
29 Apparently, the circumstance that only benefits accrue to group members and that the judgment’s res judicata effects cover only those group members who assented to it (since compensation can be paid only if the group member accepts the final judgment), were sufficient to satisfy the constitutional concerns.
All in all, although opt-out collective actions do raise constitutional issues in some EU Member States, the above arguments and case-law suggest that they are far from irreconcilable with the constitutional traditions common to the European Union’s Member States.
3.1.2 Opt-Out Collective Actions Are Alien to Continental Legal Traditions
This statement is, in fact, not true. It may have been true some decades ago, however, in the last couple of decades Europe has seen the appearance of collective action laws in a number of Member States that enable the enforcement of pecuniary claims in an opt-out system (as will be discussed below). Furthermore, EU law itself contains a very important and popular opt-out mechanism that permits representation without authorization (EU Injunction Directive).
The Injunction Directive covers 17 consumer protection Union acts
30 and empowers various entities to launch proceedings for a declaratory judgment or injunction on behalf of a class of unidentified consumers, without any need for individual authorization or assent. The proposition that judgments rendered in collective actions for an injunction may and shall have legal effects on all interested consumers was confirmed by the CJEU in Case C-472/10
Nemzeti Fogyasztóvédelmi Hatóság v Invitel Távközlési Zrt.31 The case dealt with Article 7 of the Unfair Terms Directive,
32 which enshrines a similar collective action for injunction. The ruling may be extrapolated to all collective actions coming under the Injunction Directive.
“[T]he national courts are required (…) to draw all the consequences provided for by national law in order to ensure that consumers who have concluded a contract to which those GBC [general business conditions] apply will not be bound by that term. (…) [The Directive] does not preclude the declaration of invalidity of an unfair term included in the GBC of consumer contracts in an action for an injunction (…) from producing, in accordance with that legislation, effects with regard to all consumers who concluded with the seller or supplier concerned a contract to which the same GBC apply, including with regard to those consumers who were not party to the injunction proceedings;
where the unfair nature of a term in the GBC has been acknowledged in such proceedings,
national courts are required, of their own motion, and also with regard to the future,
to take such action thereon as is provided for by national law
in order to ensure that consumers who have concluded a contract with the seller or supplier to which those GBC apply will not be bound by that term.”
33
What is more, the procedure provided for by the Injunction Directive is, literally speaking, not an opt-out scheme (in fact, it is “worse”), since it does not make it possible for group members to leave the group. That is, group members cannot opt out even if they want to—they are stuck in the group. Although pecuniary claims cannot be enforced by means of this mechanism, from the perspective of legal tradition this should make no difference, since both pecuniary and non-pecuniary claims are, legally speaking, claims. It seems that there is no legitimate reason to accept the opt-out system for declaratory judgments and injunctions and to pronounce this an alien conception in relation to pecuniary claims.
Although the opt-out system does qualify as a minority position in Europe, it is far from being unknown. Currently, in the European Union there are 10 Member States where it is possible to enforce pecuniary claims in an opt-out system: Bulgaria,
34 Belgium,
35 Denmark,
36 France, Greece,
37 Hungary,
38 Portugal,
39 Slovenia,
40 Spain
41 and the United Kingdom.
42 As illustrated above, although French law adopted a unique pattern, which formally retained the requirement of opt-in, the French system can be characterized as a de facto opt-out system. This means that approximately one-third of the Member States has an opt-out system in place.
43
Finally, it appears to be perverse to use tradition as a blocking argument when drafting a new scheme. It hardly seems to be reasonable to reject a new regulatory solution simply on the basis that it is new. The opt-out scheme is, indeed, a novel regulatory solution in continental Europe, however, it can be judged only after a full-blown analysis, taking into account its merits and drawbacks. It would be truly perverse to say, in the course of searching for the regulatory solution to be adopted, that a new regulatory concept should not be adopted simply because it is new and not part of the law (the law which is considered for reform).
The innovation of today is the tradition of tomorrow. Although its roots can be traced back to equity,
44 the institution of class action was inserted into US federal procedural law only in 1938. This regime was profoundly revised in 1966 and subjected to some minor changes in 2003.
45 It can be established that the US system of class action was finalized in 1966, since it was the 1966 reform that made the wide-spread use of class actions possible.
46 Today, this regulation is regarded as the “American tradition”, contrary to the continental tradition.
The classical litigation system proceeds from the assumption that the parties to the action are equal both in terms of money and capacity, have unlimited free time and resources to present their case. The reality of the 21st century is, however, not this. The age of masses is characterized by standardized contracts and standardized cases. The projection of the mass economy has already appeared in substantive law: the regime on unfair terms in standardized consumer contracts is based on the recognition of the fact that in the mass economy individual enterprises face masses. Collective actions recognize this in procedural law. “[I]ndividually tailored law-suits for consumers are often as much an anachronism as the concept that all cars that are put on the market should be handcrafted (…). [E]conomies of scale now dictate mass redress procedures for consumers prejudiced by a common legal wrong.”
47
3.1.3 It Is Very Difficult to Identify the Members of the Group and to Prove Group Membership
It is a frequent argument against class actions that in opt-out systems group members do not (or normally do not) get their money and the benefits of opt-out actions (that is, the moneys awarded) go to group representatives. The Commission’s Recommendation on Collective Redress contends that “an ‘opt-out’ system may not be consistent with the central aim of collective redress, which is to obtain compensation for harm suffered, since such persons are not identified, and
so the award will not be distributed to them.”
48
The above assertion is based on a fatal misunderstanding. Just as opt-in systems, opt-out collective action mechanisms aim to provide recovery to group members and, as a general rule, the award is normally distributed to group members and they really receive the money.
49 Although in certain systems “fluid recovery” or “cy pres” is available,
50 this does not have to be necessarily adopted along with the introduction of collective actions (though it is advisable).
Obviously, it is much simpler to allot the award in an opt-in system, since here group members are identified by coming forward to join the action. However, the award can be distributed to group members also in the opt-out system, if group members are identifiable. It is a regulatory choice whether the availability of collective actions should be limited to cases where group members are clearly identifiable and what degree of “identifiability” should be required. However, in numerous cases, the court judgment can define the group properly: by way of example, the subscribers of a dominant cable television company between 1 January and 31 December 2018; or those persons who had to pay a higher vehicle registration tax, which proved to be contrary to the rules of the internal market; or those EU citizens who had to pay a discriminatory tuition fee for the academic year of 2018–2019. Such a definition would make group members easily identifiable.
Although it is true that in certain cases it is difficult or even impossible to create a definition for identifying group members, this can be accomplished in numerous other cases. As a legislative option, identifiability could be made a pre-requisite of collective litigation. However, it would be perverse to argue that since the opt-out scheme would not work in certain cases, due to the lack of identifiability, it should be abandoned also in cases where it could work.
Contrary to the Recommendation’s assertion, in case of opt-out collective actions, the biggest trouble is not that group members are not identified—since, as noted, identifiability can be made a pre-requisite of the collective action. An important problem is that in certain cases group members are legally identifiable but proof of group membership may face serious practical hurdles. For instance, assume that taxi drivers fix prices, thus overcharging customers.
51 Although the violation of antitrust law is proven and group members are legally identifiable, it is assumed that the vast majority of the victims would not be able to prove their membership, since they usually do not keep the receipts.
Nonetheless, even if group members cannot turn the award into cash, this does not necessarily entail that their share is paid out by the defendant (although it is easy to argue that the wrongdoer should not keep the windfall of his mischief). Collective litigation does not necessarily imply collective enforcement. Although it is submitted that collective action mechanisms should encompass collective enforcement, there is no indication in the Recommendation that the proposed collective mechanism would extend to enforcement as well. In fact, it is a major shortcoming of most European schemes that they ignore that the purpose of the action, as far as pecuniary claims are concerned, is not a judgment but money.
Finally, it is submitted that while it is not inevitable that the share of non-identifiable group members is paid out to the group representative, it would be reasonable to oblige wrongdoers to pay compensation also for legally or practically non-identifiable group members. The law cannot leave the enrichment earned through an illegal conduct with the wrongdoer. From a social perspective, it appears to be more reasonable to give a windfall to the group representative than to leave an illegal enrichment with the wrongdoer (it is to be noted that this would not even amount to a windfall, taking into account that the group representative does invest a lot in the claim’s enforcement). It is tempting to argue that this non-distributable money should be spent on a public interest purpose, like funding collective actions.
It is worthy of note that an effective collective action mechanism yields the highest benefits not when it is used but when it is not; collective actions may make practically unavailable civil recovery a reality. While in the absence of collective action several rules and rights established by the law are regarded as practically non-existent (and practically unenforceable), effective collective litigation makes the violation of these rules extremely risky and prompts enterprises to respect them.
3.1.4 Opt-Out Collective Actions Would Lead to a Litigation Boom and Would Create a Black-Mailing Potential for Group Representatives
Perhaps the most popular misunderstanding in respect of opt-out collective actions is that, similarly to US law, it would lead to a litigation boom and would enable group representatives, who aggregate a mass of claims, to blackmail defendants and to wring illegitimate settlements from them.
52 These fears are completely unfounded.
There is no causality between the opt-out system and the alleged American litigation boom and blackmailing potential. In the US, the high number of class actions and the defendants’ inclination to settle are not due to the opt-out rule but to the regulatory and social environment that surrounds this model.
53 Namely, US law contains a set of rules that are unrelated to class actions but catalyze their operation. By way of example, under US law, generous punitive damages are available and certain statutes provide for treble damages
54; the “American rule” on attorney’s fees does not follow the “loser pays” principle (that is, the parties pay their attorney irrespective of the action’s outcome); certain statutes (for example the Sherman Act, the Magnuson-Moss Warranty Act) provide for one-way cost-shifting: if the claimant wins, he is entitled to compensation for his reasonable attorney’s fees but this does not work the other way around; statistics demonstrate that the American society is much more litigious than the European
55; the operation of litigators is normally based on contingency fees and law firms work according to an entrepreneurial model,
56 where the law-firm invests money and working hours in the action, thus, in exchange for an appropriate risk premium, it takes over the risks of litigation from the parties; finally, jury trials and extensive pre-trial discovery smooth things down for the plaintiff and reinforce these factors. Taking this into account, it is easy to see that the alleged litigation boom and black-mailing potential (provided they exist) are as much peculiar to individual actions as to class actions. These are general features of the US system and not a specific characteristic of the class action.
The above is reinforced by practical experiments. The opt-out system is available in 10 EU Member States and none of these saw a “litigation boom” (not even a “litigation pop”).
57 In a continental legal and social environment, the opt-out system operates in a completely different manner than in the US. The experiences in Australia
58 and Canada
59 are also informative. In these countries, the opt-out class action was introduced (at federal and state level) and while it has provided effective remedy to group members,
60 no litigation boom occurred.
61 Finally, it should not be disregarded that Europe is not the only region of the world where collective actions had to be accommodated to a civil-law environment: this happened in a number of Latin-American countries.
62
According to European fears, the group representative can create an aggregate of claims through bunching a vast number of demands and can force out an unfair settlement with the defendant even in frivolous cases.
63 However, this blackmailing potential is an illusion. A group representative enforcing a €1 billion claim-aggregate has exactly the same blackmailing potential as the representative of a €1 billion individual claim. If European eyes see a black-mailing potential in the US system, this is not due to the US class action but to those principles and rules of general application which characterize the US system at large. For instance, because of the “American rule” on attorney’s fees, for the defendant, a settlement is a more attractive alternative, even if the plaintiff’s case is weak, since the defendant has to bear the attorney’s fees, even if he wins the case and the plaintiff’s claim proves to be frivolous. If the defendant enters a settlement, he can save the attorney’s fees. Furthermore, punitive damages and treble damages may multiply the action's expected costs.
Assume that the legal costs attached to the action are € 200,000–200,000 for the plaintiff and the defendant, respectively; they have to bear these expenses irrespective of the outcome of the action. The claim’s value is € 1,000,000 and the plaintiff has a very weak case with a minuscule 10% chance to win. The claimant sues for the breach of antitrust rules, thus, under the Sherman Act, he is entitled to treble damages; furthermore, as an exception to the general “American rule”, he can claim reimbursement for his reasonable attorney’s fees in case he wins (that is, there is one-way cost-shifting).
64
Accordingly, (if disregarding court fees, inflation and the procedure’s length) a rational plaintiff would decide whether to sue on the basis of the following calculation. On the expected costs side, the expenses run to € 200,000. The expected income is the product of the claim’s value, the reimbursement for legal costs and the chance of success: € 320,000 = (€ 1,000,000 × 3 + € 200,000) × 10%. As a corollary, the balance of the law-suit is positive: € 320,000 − € 200,000 = € 120,000, so it is rational for the plaintiff to sue.
The defendant, on the expenses side, also faces attorney’s fees in value of € 200,000 (which are not recoverable) and there is 10% chance that he will have to pay 3 × € 1,000,000 as damages and € 200,000 as reimbursement for the plaintiff’s reasonable attorney’s fees: (€ 1,000,000 × 3 + € 200,000) × 10% + € 200,000 = € 520,000. At the same time, he cannot expect any income, since even if he wins, the only “return” is that he does not have to pay damages (the expected income is € 0). Accordingly, the defendant’s balance is negative (€ −520,000 = € −200,000 + € −320,000). The defendant’s expected loss attached to the action is very significant in comparison to the claim’s value, although he has 90% chance to win.
Under such circumstances, the parties will endeavor to reach a settlement, where the plaintiff does not accept less than € 120,000 and the defendant is not willing to pay more than € 520,000. The precise amount will depend on the parties’ bargaining skills. It is noteworthy that in the above case it is rational for the defendant to pay a sum that is higher than 50% of the claim’s value, while the plaintiff has merely 10% chance to win.
If we put the above case in a continental legal environment, it would not be rational for the plaintiff to sue due to the low chance of success. For the plaintiff, the action’s expected income is € 100,000 (€ 1,000,000 × 10%), while there is 90% chance that he will have to bear both his and the winning defendant’s legal costs (€ 400,000 × 90% = € 360,000). Accordingly, the plaintiff’s balance is negative (€ 100,000 − € 360,000 = € −260,000); this is due to the lack of treble damages and to the European approach on legal costs (two-way cost shifting).