The collective action remedy was due to become effective on 29 June, but recent statements by representatives of the newly-elected government suggest that the date will be postponed to 2009.
In the meantime, the class action law will likely be modified to address concerns raised by banks, financial institutions and insurance companies, as well as companies having a wide consumer base and even the Bank of Italy. The Italian Government appears to be very sensitive to the pressure created by these groups, while one proposal has already been filed in the Senate calling for wide-sweeping modifications to the class action law. Five features of Italian-style class action law are:
- The remedy is applicable only to a specifically defined category of subjects — ‘consumers’. The term ‘consumer’ has been interpreted to include ‘consumers of financial products’, i.e. investors, but there has been debate on this issue (see below).
- The remedy contains an opt-in mechanism, which means that those who want to be part of the action must expressly join. Any consumer not joining will not be bound by any court decision on the matter and consumers can opt-in up until the final hearing of the appeal proceeding. Consumers that have not opted-in may bring an individual action on the same matter or, arguably, join a separate collective action.
- The right to bring the collective action is granted
to consumer associations specifically identified in a list certified by the Ministry of Economic Development and to other associations that are ‘adequately representative’, as determined by a judge on a case-by-case basis. - The action may relate to a claim for breach of contract, tort or unfair commercial or competition practice, and jurisdiction is held by the court of the place where the defendant has residence or a registered office.
l The proceedings are divided into two separate and distinct stages. The first stage begins with a decision by the court on admissibility. The court will not declare the action admissible if it is ‘manifestly groundless’, if a conflict of interest exists or if there is no ‘collective interest’. Once the court determines that the case is admissible, the plaintiff must give ‘adequate public notice’ so that any interested consumer is able to decide whether or not to exercise his opt-in right and the court proceeds to decide on the right to compensation, which has a declaratory effect only, as it provides no quantification of damages. The second stage deals with the quantification of damages and, unlike the first, develops individually and in an extrajudicial context. Within 60 days after the right to compensation is determined, the defendant is requested to make an ‘offer of payment’ to the plaintiff. If accepted, this ends the proceedings; however, if the defendant makes no such offer, or if the offer is not accepted within 60 days, then a ‘conciliation committee’ may be appointed. As an alternative, the parties may jointly present a request to the tribunal asking that the quantification of damages be made by a ‘settlement body’ identified in a registry maintained by the Ministry of Justice. At the conclusion of the second stage, either the parties agree to the amount of compensation or, if they cannot reach an agreement, the second stage ends without producing a quantification of damages, in which case the only recourse left for the consumers is to bring separate individual actions.
The Italian-style class action has been widely discussed and criticised over the past year. Several questions are particularly relevant.
l Is the class action remedy retroactive? Yes, although some scholars still doubt it. The new procedure may be used in relation to actions or events that occurred prior to the enactment of the class action law in December 2007. The argument supporting retroactivity is based on the fact that the new law did not introduce any new substantive right; it only introduced a new way of enforcing rights already belonging to consumers. Naturally, banks and financial operators are hostile to the retroactivity interpretation, while investors and consumer associations are in favour of it.
- Are investors, as a class, eligible to use the new collective action? Yes. In its 2008 annual report, the Bank of Italy clearly stated that the new procedure is an instrument for the ‘protection of consumers and investors’. The same conclusion can be reached by looking at the definition of consumer in two related Italian laws, the Consumer Code (of which the class action regulation is a part) and TUF (Testo unico della finanza).
Other issues have arisen which have yet to be resolved. For example, under the new law:
- consumers have a right to enter an action up until the final hearing of the appeal proceedings, which means that until the appeal procedure is completed, the size of the class is unknown and the amount the defendant might be required to pay is not quantifiable;
- it is possible to have more than one class action on the same subject; and
- it is possible to have both class actions and individual actions on the same subject.
These circumstances make it difficult for a defendant to evaluate whether and under what condition to offer settlement. They also take away incentives to settlement (since settlement does not prevent new actions from being brought on the same matter) and do little or nothing to reduce the workload of the courts or facilitate speedy judicial proceedings — two important objectives for which the new class action law was created.
Importing the
Differences between the Italian and US legal systems that have made it difficult to import US-style class action to
- the Italian Constitution and Civil Code do not permit an ‘opt-out’ mechanism, typical of the US class action, in which the court defines the class and claimants must positively opt-out if they do not wish to be a part of the litigation. Consequently, the ‘opt-in’ mechanism was adopted for
- in the
- the Italian system is based on a different legal culture and the Italian Code of Civil Procedure does not give judges the flexibility to exercise case management required in a class action.
Why keep insisting? Investor protection requires it for one and, for two, an efficient collective action remedy could also have advantages to financial markets.
Traditionally under Italian law, investor protection is based on an ex ante regulation of the matters regarding investors. Through such regulation, investor protection is pre-contractual, meaning investors have to be in the position to be able to evaluate the pros and cons of an investment before making an investment decision. This preventive approach is effective in that it has created a ‘best practice’ standard for sellers of financial products. However, it has a major drawback in that it did not keep pace with the rapid evolution of financial markets, the innovations regarding financial instruments and the increasingly complex ways of selling and distributing financial products. By extending the class action remedy to investors, this gap could be filled. Moreover, in jurisdictions where collective action is not a choice, an individual may decide to drop a valid claim, especially if it is small (so-called ‘rational apathy’), or a large number of independent claims will be brought, which inevitably clogs up the courts and results in excessive costs all around.
Not only does an efficient collective redress make investor protection more effective, it also brings considerable advantages in the regulation of financial markets: it makes judicial protection available (and affordable) for anyone who needs it and, overall, makes it less expensive for investors to participate in the financial market. By increasing the efficiency of the regulation of the markets, it would provide investors with greater reason to trust financial institutions and will invest in the markets with greater ease.
Since last December, Italian consumer associations have been planning possible class actions. A number of those already announced relate to the protection of investors, or ‘consumers of financial products’. Applying the law retroactively, there may be actions under the new law for investors who were affected by the Parmalat, Cirio and other scandals. In addition, complex financial instruments, such as index-linked and unit-linked insurance policies, are also possible class action targets. Other class actions may be brought on claims of prospectus liability, directors’ liability and/or fraudulent activities relating to the distance marketing of financial products.
The introduction of the new Italian-style class action will affect the life of banks, entrepreneurs and insurance companies in two ways: directly, as possible defendants, and indirectly, as economic subjects. The new remedy may affect their way of carrying out their own business. Insurance companies, for instance, will first of all have to face the risk of being sued but they will also have clients who want to be insured against class action risk, particularly in connection with product and environmental liability. Insurance companies will probably have to create new products to meet the demands of their clients for protection of class action. Companies may have to pay increasing premiums for insurance for this type of expensive coverage. However, it may be required in order to do business. The remaining question is whether this added cost will be passed on to consumers.
Whether or not the new law will become effective precisely on 29 June, 2008, or some months later, is less important than the fact that there is now general agreement on many important issues, and that, above all, the introduction of the class action mechanism into the Italian legal system is close to becoming a reality.
Cristina Pagni is a dispute resolution partner at Norton Rose in
ItalyJune2008
