On The Horizon: Navigating Climate Litigation, Consumer Class Actions and Tackling Dual-Quality Products.


Introduction

It is hard for business leaders to look beyond the spectre of financial meltdowns, war in Europe and a cost-of-living crisis at home, but when we look to the horizon for legislative changes that could impact business practices in the coming years, it is the biggest story of our time that looms large over companies – Climate Change.

By easing the path for claimant actions against companies overstating their environmental credentials, the EU’s Consumer Empowerment Directive Proposal and Green Claims Directive will empower consumers to hold corporations to account for their role in exacerbating climate change and eliminate the prevalent practice of greenwashing. The impact of climate change is felt by everyone everywhere all at once and cannot be ignored, nor now can the legal risks posed by overzealous marketing claims.

Three years on from Brexit, the application of EU law in Britain remains a significant area of focus. As the much-feted “Brexit Dividend” is yet to appear from any bonfire of regulation, there are three lesser-known EU laws coming into force that pose both practical and legal challenges to UK business.

This year we see the Representative Action Directive come into force, which is expected to result in a marked increase in cross-border class actions across Europe, including the UK. Similarly, the Omnibus Directive, which came into force last year, offers enhanced consumer rights and enforcement measures with GDPR-style fines for breaches, meaning business falling foul of the regulations will pay a significant price. We explore these legal developments in more detail below.

The Rising Tide of Climate Litigation

The slowness and perceived lack of ambition of climate policies have driven an increase in climate litigation in the past few years and the trend is likely to continue. The cumulative number of climate change-related cases has more than doubled since 2015, according to research carried out by the LSE Grantham Research Institute (GRI) [1]. Although most cases to date have been brought against governments, major corporate polluters (known as Carbon Majors) have also been targeted in the last 12 months. Research suggests that climate litigation against private actors is becoming increasingly diverse in terms of the sectors targeted with an increasing number of cases against the food and agriculture sector, transport, plastics companies and the finance sectors. Going forwards, litigation is likely to be used as a means of affecting climate change ambitions and could potentially be used as an instrument to enforce or enhance climate commitments.

There are a number of ways in which activists might seek to hold companies accountable for the false representations of corporate commitments to environmentalism and climate-friendly practices.

(1) Making a complaint to the Advertising Standards Agency (ASA) - Making a complaint to the ASA about potential green-washing is one of the easiest ways to expose greenwashing. For example, HSBC UK Bank plc was recently ordered to remove two advertisements which made various green claims and omitted information about its significant financial investment in businesses and industries that emitted notable levels of carbon dioxide and other greenhouse gases [2].

(2) Court proceedings - The courts offer an alternative route for holding companies to account for overstating their green credentials or under-playing the impact their activities have on the climate. The Paris Agreement (the Agreement),3 adopted in 2015, has provided fuel for climate litigation by providing an accepted benchmark against which to review national climate policies or decisions. Despite ratifying the Paris Agreement in November 2016, it was not incorporated by the UK Government, meaning the obligations contained within the Agreement have no legal effect in domestic law in themselves.

ClientEarth, an environmental charity, recently sought to hold Shell Plc to account for failing to adopt a climate strategy that aligned with the Paris Agreement’s goals, and failing to prepare the company for the transition to net-zero emissions. On 9 February 2023, ClientEarth announced that it brought proceedings against Shell’s Board of Directors by means of a derivative action, a claim brought by shareholders on behalf of the company, and which received support from other investors who collectively hold 12 million shares in the company. ClientEarth is seeking a declaration that the directors of the company have breached their duties under the section 172 of the Companies Act 2006, which requires them to exercise reasonable care, skill and diligence in carrying out their roles as directors.

Whilst this is the one of the first times such an action has been brought in relation to a company’s failure to prepare for climate risk, it remains to be seen whether the High Court will grant ClientEarth the necessary permission to bring its derivative claim. If successful, Shell’s directors could be the first to face legal action for failing to reduce its greenhouse emissions more quickly and efficiently than currently planned, and judgment against the company might be the clearest connection between directors’ duties and Environment, Social and Governance Law (ESG) in this jurisdiction. This is undoubtedly yet another hint that, if they have not done so already, companies should start taking ESG very seriously, before they become the focus of activist shareholders, and even institutional investors, who seek to hold them to account for their long-term environmental failings.

The fight for a greener and cleaner world will not be easy but, even if unsuccessful, companies facing climate litigation will have to navigate both reputational and operational risks in addition to costly changes if a judgment is handed down in the claimant’s favour. If pursuing legal actions, claimants will still need to establish a causal link between the activities of the alleged polluter and the alleged harm. This, coupled with the court’s general reluctance to weigh in on difficult socio-political issues, means claimants are likely to face an uphill struggle in pursuing climate litigation. However, one thing is for sure, in 2023 any kind of sustainability commitment is open to scrutiny. Companies would do well to monitor the complex interface between increasingly strict climate change laws and ongoing court cases that are being based on novel theorie.

Green claims in the EU

The European Commission (the Commission) formally presented a so-called ‘Green Claims Directive’ in March 2023, setting out new rules to regulate green claims. This, together with the Consumer Empowerment Directive Proposal (COM 2022 (143)), seeks to bring the EU one step closer towards a circular, climate-neutral economy by creating a common methodology for the  substantiation of green claims. The Green Claims Directive seeks to combat greenwashing, and to enable customers to make informed decisions based on reliable information.

Consumer Empowerment Directive Proposal (COM 2022 (143))

Although environmental credentials asserted by companies in the EU are subject to the general rules of the Unfair Commercial Practices Directive (UCPD), Continuing Professional Development (CPD) and Directive 2006/114 on Comparative Advertising, green claims are not explicitly regulated by EU law. Whilst guidance detailing how these directives should be interpreted is available, their interpretation and treatment varies widely among Member States. To address this issue, the Commission proposed the Consumer Empowerment Directive Proposal (COM 2022 (143)) in March 2022 as an initiative to support the goal of promoting sustainable consumption and protecting consumers against unfair business practices. One of the key proposals seeks to amend the UCPD, in particular Annex 1, which details 31 commercial practices (none of which relate directly to sustainability) that are considered unfair under all the circumstances. The proposed new entries specifically relate to environmental claims, greenwashing and sustainability-labelling, and would see a ban on generic claims such as ‘environmentally friendly’, ‘eco-friendly’, ‘carbon neutral’, ‘green’ or ‘eco’ unless the product or service has been officially recognised as part of an eco-labelling scheme. Additionally, ‘net-zero’ claims will only be permitted if there are clear, objective and verifiable commitments and targets, which are being monitored independently.

As the proposed directive offers specific provisions to address greenwashing, if enacted, the UCPD and CPD will act as a ‘safety net’ by complementing and filling any gaps in existing European law.

The Green Claims Directive

The Green Claims Directive aims to provide a standardised framework to assess the environmental impacts of products and substantiation of green claims. It is anticipated it will act jointly with the Consumer Empowerment Directive Proposal to reduce the risk of greenwashing and provide reliable and verifiable information that enables buyers to make substantiated green decisions.

The goal of the Green Claims Directive is described as establishing ‘harmonised requirements for the substantiation and communication of all types of environmental claims, including labels’. It aims to enable green claims to be substantiated through approved methodology and establish a framework for traders to be compared to one another. It obliges Member States to enact legislation that ensures traders substantiate their explicit environmental claims (article 3) sets out the extent to which comparative claims will be permissible (article 4), and introduces an independent verification system at Member State level to substantiate environmental claims made (articles 10 and 11).

The Green Claims Directive proposal contains its own enforcement rules (draft article 13-16), which are independent of those contained within the UCPD. It provides for monitoring by competent authorities, as well as complaints to be submitted by third parties to administrative authorities and thereafter to the courts, if the third party has a legitimate interest (including through ‘qualified entities’, such as consumer organisations).

Companies found to be in breach of the requirements of the Green Claims Directive will have 30 days from being notified of their non-compliance to take appropriate corrective action which will need to be implemented throughout the EU. Member States are entitled to sanction any non-compliance with penalties. The proposals suggest imposing effective fines, the maximum amount being “at least 4% of the company’s annual turnover in the Member State(s) concerned”, confiscation of revenues gained by the company from transactions with the concerned products, temporary exclusion for a maximum period of 12 months from public procurement process and access to public funding. Companies will need to act swiftly to rebut any unfounded complaints, and so access to data to support their environmental claims will be essential.

Although greenwashing claims are already being brought under existing national consumer laws, the Green Claims Directive seeks to complement the existing regime by expanding activities that amount to misleading and unfair commercial practices. Although the substantiation requirements and potential fines for non-compliance seek to raise the bar further, it could take up to four years before any implementing legislation becomes applicable.

What next?

Once presented by the Commission, the new rules will apply to all products and services on sale in the EU single market, except for financial services. If adopted, these proposals will limit the environmental claims businesses can make in the EU/EEA, and businesses that currently reference sustainability in their marketing campaigns are likely to incur additional costs in ensuring they are compliant with these new proposals. Whilst the main driver for this proposal is to enable customers to make more informed choices and choose products that are greener, it also offers another means to hold companies accountable for environmental claims. Businesses already at risk of facing climate litigation should keep a watchful eye on this proposal, especially in light of the growing appetite for climate litigation, and consider commenting on any draft proposals as and when they are published.

Expanding Access to Justice

Sentiment favouring EU-wide co-operation to ensure effective and affordable routes for consumers to bring class actions has been evident for some time. Pressure mounted in light of an increase in high-profile mass tort litigation, such as the PIP breast implants scandal in 2012, followed by the VW emissions litigation in 2015. The Commission made no secret of its displeasure at the disparate and unsatisfactory handling of the VW scandal and it was widely reported to have been a key driver behind the push for an EU-wide mechanism for collective redress. Fast-forward to December 2020 and the final text of the EU Directive on Representative Actions (2020/1828) (RAD) came into force. Member States were given two years to transpose the directive into their national law, with the new regime taking effect from 25 June 2023.

The time for implementation having passed, 2023 was set to be the beginning of a more efficient way for consumers to bring group litigation. However, on 27 January 2023, the Commission announced that only three Member States had transposed the RAD into national law. To exert pressure on the remaining 25 Member States to align their national law with the RAD, the Commission will be issuing formal notices to the non-compliant Member States, likely requiring them to take remedial steps within a specified period of time.

Europe: The Representative Actions Directive

The RAD supersedes any pre-existing regime and harmonises the class action regimes across the EU by setting minimum standards for procedural rules for collective redress thereby homogenising the approach to class actions. Member States can incorporate the RAD into an existing national representative action mechanism, or design a new mechanism if they prefer.

The RAD empowers non-profit consumer organisations (known as ‘qualified entities’) to bring collective actions and seek injunctive relief and/or redress (including damages, reimbursement, price reduction or repair) against businesses that breach EU laws intended to protect consumers. This gives the RAD a wide reach, as it encompasses laws in a broad range of areas from telecommunications and energy, to general consumer protection and data protection.

Member States can decide whether to implement an opt-in or opt-out system, or a combination of the two, or to implement a regime that goes further than the RAD with higher risks for defendants operating in the jurisdiction. It also allows Member States to set and apply their own mechanisms for certification of any claim, provided the courts have the authority to ‘dismiss manifestly unfounded cases at the earliest possible stage of the proceedings’.

What does this mean for businesses and consumers?

A largely claimant-friendly instrument, there is no doubt we will see an increase in group litigation with the RAD changing the litigation landscape as we currently know it - the largest impact being felt in those jurisdictions that don’t currently have a mechanism for collective redress. The discretion afforded to Member States in relation to key mechanisms might incentivise some to agree on a scheme that makes it a destination for collective redress, which could encourage forum shopping. Qualified entities are likely to scrutinise regimes established in different jurisdictions before deciding in which Member State to pursue any collective action.

The RAD presents increased challenges and risks for businesses as an increase in group litigation brings with it increasing financial and reputational exposure for any products or services found to be defective. The inclusion of an adverse costs rule in the form of cost shifting (i.e. the ‘loser pays’ rule), and the prohibition of punitive damages, will be reassuring to defendants; however, the high threshold for summary dismissal could dampen their spirits. Businesses should understand the collective redress options in the territories in which they operate, and identify any jurisdictions that appear to be favoured by claimants or qualified entities to help identify patterns and anticipate potential forum shopping. They would also do well to review contracts to ensure they contain clear jurisdiction and choice of law clauses to prevent forum shopping.

UK

The two main mechanisms for collective redress in the UK are (i) group litigation orders (GLOs) in respect of claims that give rise to ‘common or related issues or fact or law’ brought on an opt-in basis (section III, CPR 19), and (ii) representative actions for claims pursued on behalf of a class of individuals who have the ‘same interest’ on an opt-out basis (section II, CPR 19). While the use of collective actions suffered a setback following the decision in Lloyd v Google [2021] UKSC 50, the number of cases has dramatically increased and is likely to continue to do so over the coming months and years.

Lloyd v Google and the representative actions landscape

Mr Lloyd sought to bring a claim on behalf of more than 4 million UK-resident iPhone users for ‘loss of control’ of personal data under the Data Protection Act 1998 (the Act) after Google allegedly tracked users’ internet activity for commercial purposes without permission. To bring a representative action, each class member must have the ‘same interest’ in the claim (CPR 19.6), and any compensation sought must also be the same for each claimant. Mr Lloyd sought £750 compensation for each claimant, a total potential liability of £3 billion for Google. Although the Supreme Court held that damages for ‘loss of control’ were not available under the Act and the judgment was undoubtedly a blow for claimant law firms, the court made a number of important findings on the representative actions mechanism which were reasonably permissive and arguably pro-claimant:

  • The ‘same interest’ test was re-evaluated so that a claim could proceed even if claimants within the class do not have identical interests or claims, although permission to proceed remains subject to the court’s discretion.
  • Divergent interests are not ‘in principle’ a bar to a claim proceeding, but rather their interests must not conflict.
  • Representative actions can be used to resolve issues of liability as well as to award damages if they can be ‘calculated on a basis that is common to all members of the class’ and where individual evidence is not required from members of the class.

This pro-claimant approach was recently followed in Commission Recovery Ltd v Marks & Clerk LLP and Long Acre Renewals [2023] EWHC 398. In undertaking the ‘same interest’ test, the court reiterated that the focus was the absence of any prejudicial interest or conflict rather than requiring them to be uniformly aligned. Despite issues with limitation and knowledge, the Court exercised its discretion to permit the action to continue by way of representative action (for now), preferring the issue to continue than otherwise not proceeding at all.

In considering the UK landscape, we must also bear in mind the decision of the Competition Appeal Tribunal (CAT) in Merricks v Mastercard [2020] UKSC 51. Not only was it the first class action to be certified on an opt-out basis in the UK since the current regime was introduced in 2015, but because it also provides guidance on the approach to certification of applications for collective redress. Here a majority of the Supreme Court held that the assessment of whether a claim was ‘suitable’ to proceed by way of Collective Proceedings Order was a relative one. As the claim was being brought on behalf of 46 million consumers, the Supreme Court concluded that it would be a ‘practical impossibility’ for individual proceedings to be issued, such that collective proceedings were preferable. Arguably this low-bar approach makes it easier for claimants to bring collective proceedings in circumstances where it would be difficult or expensive for claims to be brought individually.

As Knowles J said in an endnote to Commission Recovery, ‘[w]e are still, perhaps, in the foothills of the modern, flexible use of CPR 19.6, alongside the costs, costs risk and funding rules and practice of today and still to come. In a complex world, the demand for legal systems to offer means of collective redress will increase not reduce’. By broadening the ‘same interest’ test and endorsing a more flexible approach to representative actions, those disheartened by Lloyd v Google may welcome this significant judgment and the greater clarity it offers on the limits of representative actions in England and Wales. However, only time will tell if claimants feel empowered to forego the more well-trodden path of seeking GLOs in favour of the more unpredictable representative action.

The Omnibus Directive

In 2018, the European Commission sought to modernise and strengthen the enforcement of EU consumer protection through various initiatives, one of which was the Enforcement and Modernisation Directive ((EU) 2019/2161) (EMD, also known as the Omnibus Directive). The Omnibus Directive made various changes to the EU consumer protection regime, and Member States had until 28 May 2022 to implement these provisions into national legislation, although some Member States, such as Poland and Italy, did not implement the rules until much later, meaning that for many Member States, these rules are still fairly new.

The Omnibus Directive sought to amend various consumer protection directives in order to provide increased transparency and enforcement measures and to allow for fully harmonised consumer protection rules to a larger extent. Our focus here is on the Unfair Commercial Practices Directive (2005/29/EC)[4] (UCPD).

Implications for consumers and businesses

The Omnibus Directive introduces strict rules on ‘dual-quality’ products. By this we mean any products being marketed in one Member State as being identical to a good marketed in another Member State, or implying that the products are identical when, in reality, they have significantly different compositions or characteristics. Traders can sell products that are different between different Member States, however they must be very clear about these differences on the face of the product.

While such marketing practices would arguably contravene the UCPD, to clarify the position further, the Omnibus Directive confirms that businesses whose commercial practices breach the ‘dual-quality’ definition will be regarded as employing misleading commercial practices unless any differences between products can be justified by legitimate and objective factors (article.3(3) EMD).

These provisions were introduced in response to complaints from Eastern European countries that products marketed in their Member States were of lower quality, for example by being made from cheaper and/or unhealthy alternative ingredients, than the products being sold in Western European countries.

In assessing whether a product falls foul of the dual-quality marketing rules, the competent authority will take into account:

(i) whether the difference is easily identified by the consumer; and

(ii) the trader’s right to adapt goods of the same brand for different geographical markets due to legitimate and objective factors such as national law, availability of raw materials, and voluntary strategies to improve access to healthy and nutritious food. These provisions apply to goods only, with a particular focus on food. Breaches of the Omnibus Directive have particularly large potential fines, up to 4% of a company’s annual turnover in the Member State (or States) in question, or €2 million if turnover cannot be determined.

As the rules have only been brought into national legislation recently, there are currently limited enforcement examples. The first evidence of enforcement action was in the Czech Republic, where a brand called 7Days was investigated by the local regulator for their pizza rolls. They found the rolls were made with sunflower oil in Austria and Germany but with palm oil in the Czech Republic. This was controversial given the environmental impact and health concerns associated with palm oil. The Czech regulator ordered that this was in breach of the dual-quality provisions, as the goods were marketed as the same in both Member States. Mondelez (owner of the 7Days brand) was ordered to remove the rolls from the Czech market. Interestingly, no fine was issued, however this is likely due to the breach only being discovered shortly after Mondelez bought the 7Days brand.

There is currently coordinated action at EU level following investigations in Romania into various Fanta products, after the local regulator found the drinks had varying orange juice content between different Member States. The Romanian regulator has escalated these complaints to EU level so that a joint verification of the products can be completed to establish, at a cross-border level, the differences between the product in the different Member States. Should a double standard be found, the Romanian regulator has been clear that it will issue a fine to the company concerned. In Romania alone, a fine of 4% of the company’s turnover could amount to over €20 million.

By 28 May 2024, we expect the Commission to have reported on the application of the Omnibus Directive, including whether more stringent provisions are required (for example, by providing more information on how to differentiate goods). This suggests that the Commission recognises it might not have gone far enough in providing guidance.

What about businesses operating in the UK?

The Omnibus Directive was signed and came into force before the UK left the EU, but the date for implementation fell after the expiry of the Brexit transition period on 31 December 2020. As a result, the UK was not obliged to adopt the measures into its national legislation. UK businesses might therefore be forgiven for thinking they can disregard EU legislation, but they would be wrong. Companies operating in the UK but exporting into Member States could still be subject to consumer claims and regulatory action in those countries if they fall foul of the implementing law, despite any choice of law or jurisdiction claims.

In the UK, a copy of the proposed Digital Markets, Competition and Consumers Bill was published in April 2023. The Bill proposes updates to consumer protection regulation and will revoke the Consumer Protection from Unfair Trading Regulations 2008 (CPUT). Instead a list of unfair commercial practices is provided under Section 218 of the Bill, which covers largely the same material as contained in CPUT.

Unlike developments in the EU, the Bill does not specifically call out dual quality marketing issues. However, section (1) (b) states that it will be misleading to provide “an overall presentation which is likely to deceive the average consumer about a matter relating to a product, a trader or any other matter relevant to a transactional decision”.

Although the Bill does not significantly change the list of unfair commercial practices as already in force under CPUT, it will provide the Competition and Markets Authority (CMA) with the direct power to establish consumer law breaches and impose fines of up to 10% of global turnover.

Conclusion

This wave of consumer-centric legislation aims to ensure that those selling goods to EU Member States are upholding their climate commitments and providing consistent quality products throughout the EU. Where they fail to do so, this developing regime proposes strict penalties and eases the route for claimants to bring actions against wrongdoers, as Europe becomes an
increasingly claimant-friendly environment. It will take some time to see the extent to which these changes directly impact UK companies and whether the Courts will indeed start to see an influx of climate cases. Businesses should be on notice: “fudging” your environmental commitments or selling variable quality products into Member States poses a serious legal risk to your business and the penalties can be harsh.

The efforts to increase access to justice by virtue of the RAD are undoubtedly a welcome development – especially in those Member States where collective redress is not currently available. Producers operating in those countries may possibly see a rise in litigation as consumers take advantage of this new mechanism to hold companies accountable for breaches of consumer rights. As for the UK, although there appears to be appetite for broadening the current regime to allow US style opt-out litigation outside of the realms of competition law, only time will tell.

Businesses, both in the UK and Europe, should review their risk exposure to include this increased risk from representative actions if they have not done so already.

Finally, while not the focus of this article, medical device manufacturers will be all too aware of the forthcoming transition to the Medical Device Regulations. A recently agreed extension of time means these regulations, which seek to offer increased consumer protection and bring newly classified medical devices into the scope of the regulations, will not come into effect until December 2027 for high-risk devices, and December 2028 for medium- to low-risk devices. While the extension of time will be a welcome relief to those operating within the sector, for those companies subjected to medical device compliance for the first time, there is likely to be a steep learning curve. For those businesses familiar with medical device regulation, now is the time to press on with ensuring compliance with the new regulations to avoid being left behind in five years’ time.

This article was first published in ICLG - Product Liability.

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Cécile Burgess

Cécile Burgess

Partner, Head of Product Safety & Disputes
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Elaine Barker

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Managing Associate, Product Safety & Disputes
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Rosalind Davies

Rosalind Davies

Associate, Commercial Disputes
London, UK

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