Litigation before a Civil Court

Enforcement via a civil court is defined as a system where the principle of party presentation is prevalent rather than judicial investigation. Litigation can be initiated by individuals themselves (under special circumstances), lawyers and representatives. Judges are assumed to be impartial, and an appeal system is in place. The state subsidizes the procedure.[1]

In terms of assessing its value in the context of misleading advertising as long as the advertisement continues to be made public, the harm to society is on-going, and there will be benefits in interrupting the emission of the advertisement or changing it. In an individual lawsuit before the civil court, the 'rational apathy' is pre-existing with EUR 15 of damage.[2]Even the costs involved for the individual in a small claims case can be regarded as too high - even in the light of a loser-pays rule.[3] In some countries civil procedural rules require a minimum threshold. From a social welfare point of view, litigation costs in the civil court would, for instance, only justify legal aid being made available for this amount of damage for individual damage cases if stopping the advertisement was a side effect of a procedure and thus a remedy for the widespread harm that was caused.[4] Per definition, everyone profits from an injunction. Particularly because free-riding to injunctions is widespread and no individual profit for whomever has already incurred damage is available, the individual would be reluctant to bring forward such an action.[5] The same is true for any form of 'fining'. If a consumer has suffered only minor harm, any litigation only results in further net costs for her. The cost-benefit analysis looks different for competitors if they have an interest in the case. They profit from any remedy that will harm their competitor's business or stop the considerable harm caused to them (e.g., by way of an injunction combined with a claim for the lost profits). If she were given standing to sue for various remedies from the category 'fining', this could be highly beneficial for her and her business; even if the proceeds do not go to her, the competitor's business would be damaged. Hence, there are various possibilities to upholding a deterring effect.

From a rational point of view, the case scenarios at hand would not induce an individual consumer to sue; however, the 'optimal provision of incentives' category shall be analysed, as the competitor is an efficient risk-taker. A competitor may have an interest in using the law strategically - even potentially for cases where she has suffered no harm (thus, frivolous lawsuits).[6] In particular, this might be the case if she has easy access to remedies from the 'fining' category. This must be kept in mind when designing legal provisions and procedural safeguards. Frivolous lawsuits, for example, can be deterred by sanctioning those who bring them forward. Generally in a civil court, trivial issues such as a claimant's lack of information as to the identity and location of the wrongdoer can hinder litigation.[7] The problem persists if lawyers and the civil judges are also unable to generate this information.[8] This can in practice be an issue as regards the mala fide trader that hides. The competitor might have information advantage over a consumer as regards her competitor's business, and therefore suffer less from the inability of her lawyer or the civil judge to generate crucial information.[9]

The competitor's intervention could come in handy for the individual consumer, as it deters the wrongdoer's action. In a proceeding involving a connected damage claim, she might use findings from, for instance, an injunctions case, and free-ride. However, if damage is very small from the consumer's perspective, not even this effort for the connected damage claim might seem justified. While an intervention, as regards the competitor, can be efficient, it is not certain, particularly in situations where one industry creates a cartel-like situation in one advertising sector, and there would be no deterrence because no competitor would intervene.[10]

Consequently, when creating incentives for the consumer side to oppose wide societal harm by misleading advertisements, the possibility of 'group litigation' comes to mind. The applied definition captures any representative action before a court or agency that is primarily carried out by an association or a state authority. These representatives typically have some advanced possibilities of collecting information.[11] Individual interests are bundled in the procedure.[12] It is essential to note that group litigation can be carried out before any enforcement body, and will hence be discussed in every subsection as an alternative to individual litigation. It might serve as an efficient allocation of risks for actions initiated by the consumers' side. While it might not be worthwhile to make available a funding possibility if only one individual suffers minor harm, the situation is different if a group of individuals suffer minor harm and societal harm is extensive. Regarding the design of the representative group action that is being discussed here, an optimal design for any representative body is assumed to be possible.[13] Ingredients like the opt-in or opt-out nature of the action or mandatory procedures have to be taken into account[14] mechanism. However, the representative will also weigh carefully before which body of law an action is feasible from a financial point of view, which is why its rationale for intervention will consequently be outlined regarding the various law enforcement bodies involved.

In the case of an injunction, everybody can profit, independently of whether they contributed. For instance, enabling the carrying out of injunctions by way of group litigation can enhance welfare. However, the deterrent effect of an injunction for a mala fide trader might be low, since the extent of a company's profits up until the moment of the injunctions might lessen deterrence. A speedy proceeding involving interim measures to stop the advertisement immediately can be crucial, particularly in relation to Case Scenario 2 - the mala fide trader who counts on a fine in the best case scenario after she has made considerable profits.

Group litigation has the potential to remedy funding issues for individuals by reducing the individual's financial burden: for instance, when costs are split or taken over by a funder. It depends, however, on the individual amount of damage at stake if this calculation works. As to direct damage claims, in cases of very small claims for damages, where the consumer's decision is led by the 'rational apathy', the option of collective action for damages might also fail.[15] It is highly likely that the EUR 15 scenario will fall below this threshold. To guarantee deterrence in this type of situation, other ways of forcing the company to face a sanction need to be found, even if the individual does not directly profit from it. Group actions can aim at various remedies from within the 'fining' category, and then everyone profits as well. An action for an injunction to side-line this action can be imagined. Not only the bringing of the action, depending on the body before which it is brought, but also the various remedies, in their preparation and realization, entail varying costs for the representatives. Injunctions are less costly to prepare and to litigate than are mass-damage cases.[16] 'Fining' triggers another set of incentives. Whereas Europe currently still has a severe funding problem in this regard,[17] one possible reason being that contingency fees are in general not accepted, new forms of financing processes are developing.[18]

A crucial point is the different degrees of information asymmetries. A hiding trader cannot be traced in a scenario before a civil court. Case Scenario 2 involving the mala fide trader will fail prima facie. Investigative powers at the civil court are limited. Group litigation can, however, be a partial remedy, and in cases where harm is difficult to detect, for instance, it has a potential to outweigh to some extent the missing investigative powers in private law enforcement. The representatives may be able to add to locating wrongdoers. While consumer associations are able to generate some additional information,[19] this is particularly true if it is a public agency that has certain investigative powers and can engage in monitoring that will become the representative. As regards online trade and advertising, they have tools to track traders in hiding by digital investigation. Hence, there is a potential to outweigh information asymmetries, and the strengths of this depend on the combination of bodies bringing actions and adjudicating actions. The most crucial point from a welfare perspective, apart from improving the risk ratio for the individual, is the assessment as to which body can generate the desired information for Case Scenario 2 in the least costly way, up to the limit where society would no longer approve of generating this information. The optimal combination of entities could guarantee an efficient 'information finding'. Importantly, a public law element would have to be involved in one way or another when it comes to mala fide traders. Within a criminal law setting, police involvement has a high potential to generate information, whereas less information can be generated within a procedure involving a consumer association acting in the civil court, for instance.[20] Moreover, both, agencies and associations have more detailed knowledge about consumer protection laws, and can therefore easier identify law infringements.[21]

Capture of associations or public agencies is an issue that leads to severe problems regarding principal agent situations, aggravated the greater the number of players involved. This is generally all the more likely, the higher the issues that are at stake. While the danger of frivolous lawsuits as to individual consumer one-third of the proceeds. This system has certain similarities with contingency fees. An advantage with several insurers would be that they could then compete, see H-W Micklitz, 'Collective Private Enforcement of Consumer Law: The Key Questions', in WH van Boom and MBM Loos (eds), Collective Enforcement of Consumer Law - Securing Compliance in Europe through Private Group Action and Public Authority Intervention (2007) 22. cases is regarded as minor, in group litigation this is a given.[22] In this regard, particularly remedies that can have an immediate effect need to be carefully designed. The same is true for cases in which competitors can profit considerably from potentially frivolous damage to their rival's business.

In misleading advertising cases, a competitor or a trader association may be a candidate to step in, and the rest of the society can free-ride on its efforts. Whereas it is costly to design an efficient form of group litigation, the benefits in the category risk allocation are very high. Societal benefits may justify this effort. The big advantage emerging is that the case is brought at all, and is not left unenforced in cases where the competitor does not step in. Furthermore, as regards other administrative costs, it is true that they vary with the remedy and with which body is carrying out the information search. Group litigation entails fewer costs per individual, but the procedure as such is more costly.[23] The question is whether one wants to set these total administrative costs in relation to the situation in which all cases have been brought in an individual proceeding, or exclude the number of cases that might not have been brought because the individual cost-benefit analysis would not have justified it.

While Case Scenario 1 can be dealt with, for example, by consumer associations as a representative at the civil court, in Case Scenario 2, investigative powers of some kind would be needed. Pure private law enforcement will fail, but it could be outweighed by another entity involved as a representative, for instance, to generate this information (for instance a public agency).

  • [1] See Landes and Posner (1975) 31.
  • [2] See Landes and Posner (1975) 33; Schäfer (2000) 195; Howells and Weatherill (2005) 604; Garoupa (2001) 233 as to the factors that motivate individuals. Cafaggi and Micklitz (2009). According to a recent European Union study, 5% would take a business to court for EUR 20 or less, 4% for EUR 21-50 and 6% for EUR 51-100; see European Commission, Special Eurobarometer n 342 Consumer Empowerment (requested by Eurostat and DG SANCO 2011), 218. This is the average data for Europe. The percentage for taking a business to court in case of a damage of EUR 20 or less is 9%.
  • [3] This is particularly related to the preparation of such a formal procedure, expressed in contrast to an ADR procedure, see interview with Alicia Menendez Gonzalez, Spanish ADR board (Madrid 16 November 2011).
  • [4] It might indeed be worthwhile from a social welfare perspective to make available some form of funding if the harm is widespread.
  • [5] See Van den Bergh and Visscher (2008) 14; Landes and Posner (1975) 29.
  • [6] Regarding the situation of competitors in antitrust cases, see Renda (2007) 563. It can effectively become a medium used to restrict entry to new competitors and create a net loss in social welfare, see Jordan and Rubin (1979) 540.
  • [7] See Van den Bergh (2007) 180, 201.
  • [8] Special regimes apply for instance to websites, such as siteinfo/, that allow to track IP addresses.
  • [9] See Renda (2007) 77, who sets this out for antitrust cases; CBP Mahe (2009), 'De concurrent als "handhaver" van consumentenbescherming', in E Engelhardt et al. (eds), Handhaving van en door het privaatrecht, 174: there are little or no information asymmetries as they know the market segment.
  • [10] Another aspect is the question when the competitor realizes a loss of profit and if she, for example, invests in regularly checking advertising measures of her competitors. Note that Jordan and Rubin (1979) 531, argue that in a competitive industry no firm would lose from false advertising by competitors; neither would any competitor sue in a monopolist situation, only in cases of oligopolies. There would indeed again be no lawsuit if all the oligopolists engaged in the false advertising.
  • [11] See for the characteristics of an administrative agency (such as powers to monitor, investigate, carry out market surveys) also the respective Subsection 3.4.
  • [12] See for the various forms that group litigation can take: for instance, S Keske, Group Litigation in European Competition Law: A Law and Economics Perspective (2010).
  • [13] Regarding the question of which form of group litigation can more successfully be designed in an optimal way, there is currently no consensus, although many suggestions for a design have been made that remedy certain weaknesses of other enforcement mechanisms. Cf. R Van den Bergh, 'Enforcement of Consumer Law by Consumer Associations', in MG Faure and FH Stephen (eds), Essays in the Law and Economics of Regulation - In Honour of Anthony Ogus (2008) 279-306, who is critical about optimizing group litigation involving consumer associations; R Van den Bergh and S Keske, 'Rechtsökonomische Aspekte der Sammelklage', in M Casper et al. (eds), Auf dem Weg zu einer europäischen Sammelklage? (2009) 40; as to favouring an adequate design of representative actions over class actions instigated by lawyers: van Boom (2006) 40; Keske (2010) 246: substantial changes are needed to both collective and representative actions. See generally the suggestions for a workable design in G Howells and H-W Micklitz (eds), CLEF, Guidelines for Consumer Associations on Enforcement and Collective Redress (2009) 14.
  • [14] See Van den Bergh and Visscher (2008) 9.
  • [15] See RA Posner (ed.), Economic Analysis of Law (8th edn, 2011) 785, regarding class actions.
  • [16] This was confirmed in an interview with the Spanish consumer association Organización de Consumidores y Usuarios (OCU) (Madrid 16 November 2011) as regards requiring less preparation and accuracy as to the exact amount of damage that was suffered.
  • [17] See GP Miller, 'Compensation and Deterrence in Consumer Class Actions in the US and Europe', in F Cafaggi and H-W Micklitz (eds), New Frontiers of Consumer Protection - The Interplay between Private and Public Enforcement (2009) 282.
  • [18] See F Cafaggi and H-W Micklitz, 'Administrative and Judicial Enforcement in Consumer Protection', F Cafaggi and H-W Micklitz (eds), New Frontiers of Consumer Protection - The Interplay between Private and Public Enforcement (2009) 418. In Austria, a system of pre-financing was developed where the Verein für Konsumenteninformation (Association of Consumer Information - VKI) concludes an agreement with a finance company that refinances the costs of the procedure. If the case is successful, they retain
  • [19] A network or resources from membership, for instance. Then again, problems are reported, for example, from Germany where consumer associations lack the possibility to generate the information on the profits of the company that they would need to generate in line with the skimming-off procedures. This was discussed at the conference, Borderless Consumer Protection!? Effective Enforcement, Powerful Consumers (Berlin, 7 November 2011).
  • [20] See Van den Bergh (2008) 284.
  • [21] See Van den Bergh and Visscher (2008) 17.
  • [22] A formal model on incentives for frivolous suits was developed by D Rosenberg and S Shavell, 'A Model in Which Suits Are Brought for Their Nuisance Value' (1985) 5 International Review of Law and Economics 3-13. For Europe see Schäfer (2000) 183-213.
  • [23] See van den Bergh and Keske (2009) 26.
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