The success of class actions in the Czech Republic will also depend on the activity of the subjects involved

As is well known, on 1 July 2024, the long-awaited Act on Class Civil Proceedings came into effect in the Czech Republic, significantly lagging behind EU directives. This Act is expected to open the door for consumers and micro-entrepreneurs to bring legal actions that were previously not financially viable. Our litigation specialists, Dušan Sedláček (DS) and Adam Forst (AF), discussed the practical impacts, benefits, and shortcomings of this Act in an interview for the monthly magazine Konkursní noviny.

Does the new Class Action Act bring truly revolutionary changes?

AF: Yes and no. Certain elements of class actions have been part of the Czech legal system for many years, but they were rarely used in practice. The new Class Action Act introduces the first comprehensive legal framework for consumer class action proceedings. Previously, this issue was inadequately addressed by a few sections in the Consumer Protection Act and the Civil Procedure Code.

DS: Among the most significant changes brought by the new legislation is the possibility to bring an action for injunctive measure but also actions for specific financial compensation. Consumers will now be able to claim, for example, monetary damages, return of unjust enrichment, price reductions, and more. There are many other significant changes as well. For example, a public register of class proceedings is being introduced, and detailed conditions are set for consumer organisations to obtain authorisation to act as claimants in class proceedings, and much more.

So, are these the reasons why the legislator came up with this Act in the first place?

DS: Yes, it is a mandatory transposition of the Directive on Representative Actions for the Protection of the Collective Interests of Consumers, which was adopted by the European Union in 2020 and required Member States to transpose it by June 2023.

AF: It is important to note that the previous regulations on consumer class actions were entirely ineffective. The Czech Republic, along with Slovakia and a few other countries, was among the last EU Member States where class proceedings had no relevance. It was only a matter of time before this institute was introduced in our country, driven in part by the outcomes of class actions in common law jurisdictions, particularly in the USA, but also in Canada and the UK. In fact, as early as 2019, before the adoption of the Directive on Representative Actions, the Ministry of Justice had independently proposed a fairly sophisticated draft Class Action Act.

Why was such an important law adopted with such a delay?

AF: This was due to several factors. Firstly, it was necessary to prepare a truly new comprehensive law. The existing fragmented legal framework could not be built upon in any respect. The aforementioned draft Act from the Ministry of Justice in 2019 was much more radical and did not align with the new assignment from the Czech government, which called for minimal transposition, incorporating only what the new Directive strictly required. Additionally, during the legislative process, an exceptionally large number of comments were received, which needed to be addressed.  The Act also spent a considerable amount of time in the second reading in the Czech Chamber of Deputies.

DS: However, the resulting one-year delay is not, in our opinion, a catastrophe.  What we find more unfortunate is that the Act was published in the Collection of Laws on 24 June 2024, and came into effect on 1 July 2024, giving both the professional and lay public only one week to familiarize themselves with it.  Considering that this is one of the most significant changes to civil procedure in the Czech Republic in the last decade, such a process is not entirely in line with the principles for adopting new legislation.

In what ways does the Czech legislator go beyond the minimal transposition of the Directive?

AF: Firstly, the Act expanded the scope of claims that can be pursued in class proceedings. Under this Act, it will be possible to pursue not only purely consumer claims arising from the relevant EU consumer legislation, as the Directive requires, but any claims related to relationships where a consumer is on one side and an entrepreneur on the other. This means these can be claims that have no connection to EU consumer protection legislation.  Moreover, and this is a significant extension, the Act considers micro-entrepreneurs as consumers for its purposes. These are entrepreneurs who employ fewer than 10 people and have an annual turnover not exceeding CZK 50 million. 

DS: The extension of the Act to include micro-entrepreneurs was relatively surprising and occurred only in the Chamber of Deputies. Earlier considerations to extend the applicability of the Act to small-size entrepreneurs were rejected. Paradoxically, this can lead to situations where a group of micro-entrepreneurs joins forces to sue another entrepreneur, with the group being represented by a consumer organisation, which is established to protect consumer rights, and not the rights of entrepreneurs.

Will only consumer organisations will be able to bring class actions, and not groups of consumers or micro-entrepreneurs directly?

AF: Yes, class actions can only be brought in the Czech Republic by consumer organisations that meet the requirements set out in the Act and are registered on a special list maintained by the European Commission or on the Czech list of qualified entities maintained by the Ministry of Industry and Trade of the Czech Republic. When registering, these non-profit organisations must demonstrate active involvement in consumer interests’ protection for at least one year and must be completely independent of any entities that might have an inappropriate economic interest in the conduct of class proceedings.

DS: A consumer organisation acts as a representative for a group of consumers or micro-entrepreneurs, bringing an action in its own name on behalf of the group members who have opted in the proceedings. The Czech legislator has chosen the opt-in model for class proceedings, meaning the proceedings only involve those who have explicitly expressed their desire to participate in the proceedings as the group members.  This group must consist of at least ten people, but they do not have the status of a party or an intervener in the proceedings in the true sense. Their procedural rights are mainly limited to the right to information and the right to express their views on the case...

AF: ... Additionally, the claimant consumer organisation must be represented by an attorney in the proceedings. This is a relatively controversial point of the new regulation, which was repeatedly criticised during the legislative process. In the end, however, this solution was chosen on the grounds that it would ensure a higher professional quality of the actions brought.

Is it generally worthwhile for consumers to exercise the opt-in right to a class action?

DS: As the consumer has almost no obligations or costs associated with class proceedings, he/she has little to lose by participating. Opting in will usually not be complicated, requiring the consumer to provide the consumer organisation only with basic documentation to support his/her claim, such as a purchase contract or a receipt for a defective product and the like. The consumer organisation bears all the economic risks of losing the litigation.

AF: However, if an opted-in consumer’s claim is rejected in the class action, he/she cannot pursue the claim individually afterward.

However, if the consumer does not opt in class proceedings, can he/she pursue his/her claim individually?

DS: Yes, it is purely up to the consumer to decide whether to pursue his/her claim individually or as part of class proceedings. If he/she decides to conduct the proceedings individually, he/she will be in control of the proceedings, but will have to bear all the costs of the litigation, including any obligation to pay the opposing party's costs if he/she is unsuccessful.

AF: Class proceedings are expected to be particularly useful for claims that are now not worth pursuing individually, as due to their rational apathy, consumers do not often address many of their claims if such claims are worth, for example, only less than one thousand Czech crowns. The new Class Action Act may thus open the way to lawsuits that were previously unprofitable.

What specific types of claims can be pursued in class proceedings?

DS: As already mentioned, claims can be pursued from any relationships between consumers and entrepreneurs, or between micro-entrepreneurs and entrepreneurs. This likely includes not only any claims from mutual contracts but also tort claims from larger-scale damage events.

AF: From international experience, we know that class actions typically involve the financial sector, digital services, telecommunications, pharma, ESG, retail, investments, transportation, and similar areas. If consumers or micro-entrepreneurs stand on the side of qualified entities, class actions will be applicable in these sectors in the Czech Republic as well. Conversely, class actions in labour law matters are unlikely to be possible in the Czech Republic, despite being a significant area of potential in countries where such claims are allowed.  However, if the class action legislation proves effective, we can undoubtedly expect its scope to expand to other types of disputes in the future.

Can claims that arose before the Act was adopted be addressed in class proceedings?

DS: According to the transitional provisions of the Act, class actions can be heard in relation to all claims that arose after 24 November 2020, the date when the Directive on Representative Actions for the Protection of the Collective Interests of Consumer was adopted.

AF: This limitation relates to the conditions of the proceedings. If the action pertains to earlier legal relations that arose before that date, it cannot be certified in the first stage of class proceedings, and the proceedings would have to be terminated.  This differs from cases where time-barred claims were pursued. In such cases, the court would decide on the merits, but the action would be dismissed based on the objection of statute of limitations if raised.

What exactly is meant by the certification stage?

DS: This is one of the fundamental differences between class proceedings and regular civil proceedings.  The class proceedings are divided into two relatively separate stages. The first stage involves the certification of a class action. At this stage, the court only assesses the admissibility of the action, primarily whether it was brought by a duly registered consumer organisation on behalf of a group of at least ten members.  The court also examines whether the claims of individual members are based on similar factual and legal grounds. Lastly, the court examines whether the action was not brought with abusive intent or financed by a third party that could create a conflict of interest between the consumer organisation and the defendant entrepreneur, or between the claimant and the group members.

AF: If these conditions are met, the court issues a decision on the admissibility of the class action.  Only after this decision becomes final can the court begin to address the substance of the case. This decision can be appealed. If the appellate proceedings result in a decision declaring the class action inadmissible, the claimant can even file for an appellate review of such decision. Internationally, it is common for defendants to seek a quick settlement once a class action passes this certification stage.  Therefore, certification is not just a formality but a crucial stage in resolving the dispute.

What rules apply to the enforcement of decisions in class proceedings?

AF: The standard provisions of the Civil Procedure Code and the Enforcement Procedure Code apply to the enforcement of decisions in class proceedings. However, if a court decision in class proceedings imposes an obligation whose non-compliance can be sanctioned with a fine, the court or the bailiff may impose a fine of up to CZK 5,000,000. The amount of the fine is determined based on the significance of the breached obligation, the extent and severity of its breach, and the financial circumstances of the obliged party, to ensure the fine is not ruinous.

How does the new Class Civil Proceedings Act affect insolvency proceedings?

DS: If the defendant becomes insolvent during class action proceedings, consumers must individually file applications of their claims in insolvency proceedings. We see this as a shortcoming of the new legislation because, in proceedings with a large number of consumers, it would be simpler if the claimant, i.e., the consumer organisation, could file applications of claims collectively, as it already represents the consumers in class proceedings.  However, this would require a significant amendment to the Insolvency Act, which was apparently not feasible.

AF: If any of the consumers participating in class proceedings enters, for example, debt relief or bankruptcy, this does not affect the class proceedings in any way. In such a case, the class proceedings are not suspended. The insolvency administrator of the participating group member is entitled to exercise the rights of this member in the class proceedings. The insolvency administrator must also inform the court about the ongoing insolvency proceedings.

DS: In the context of class actions, it is worth mentioning that in the USA, which is the cradle of modern class actions, successful class actions can lead to the insolvency of the defendant and the initiation of insolvency proceedings, where claims from class actions are settled together with claims from other creditors.

What challenges do you foresee for courts and participants at the beginning of the effectiveness of this Act?

DS: Firstly, it should be noted that the Municipal Court in Prague will be the only court with subject-matter and local jurisdiction to hear class actions in the first instance, meaning all class actions will be heard by this court.  If class actions are widely used in the first years, it could be a burden for the Municipal Court in Prague. However, we do not expect a large number of class actions to be brought in the Czech Republic.  We anticipate it will take some time for this institute to become established in our legal system. The explanatory report anticipates the filing of five to forty class actions annually.  However, given that hundreds of claims can be heard in class proceedings that would otherwise need to be heard in separate proceedings, class proceedings can also relieve the judicial system.

AF: The further development will largely depend on the activity and the professional and financial capabilities of consumer organisations authorised to bring class actions. Experience from other European countries show that the professional quality and financial background of consumer organisations are, in many respects, a more significant factor than the quality of legislative regulation.  For example, the current legal regulation of consumer class actions in Austria is not very robust, but thanks to the procedural activity of organizations like the Association for Consumer Information (Verein für Konsumenteninformation), they have achieved significant successes in consumer protection compared to other European countries with comprehensive class action regulations.

DS: Consumer organisations also play a key role in informing the public about the possibilities of bringing class actions. The level of their activity in this area will determine the extent to which the new legislation will be utilized.

How does the new Act address the financing of class actions?

DS: In the Czech context, the financing of class actions is based on a combination of various partial measures. The Act primarily exempts the claimant from court fees, thereby reducing the initial costs for the claimant. Additionally, the Act allows for class actions to be financed by third parties, provided there is no conflict of interest.

AF: The current legislation does not provide for the establishment of a special public fund or the provision of special public aid for this purpose, although this was previously considered.  It is assumed that the claimant consumer organisation will conduct the proceedings at its own costs and risk. Of course, by bringing the action, it risks being required to pay the opposing party’s costs of proceedings if it is unsuccessful. As for the costs by the individual group members, it is not expected that they will be directly affected by the costs of proceedings.

Is the reimbursement of the costs of proceedings in favour of the successful party not specifically addressed?

DS: The rules for the reimbursement of the costs of proceedings in class proceedings remain in effect according to general rules, meaning the losing party bears the costs. What is specific to class proceedings is that the claimant can claim reimbursement of reasonably incurred costs related to the receipt of applications and the maintenance of the group member list, as well as the costs of publishing information about class proceedings.

AF: As already mentioned, individual consumers who are group members are protected from the obligation to pay the costs of proceedings, meaning this risk is borne solely by the claimant.

Can the claimant consumer organisation agree on a fee in the form of a share of the awarded amount?

DS: Certainly. The Act explicitly allows for the possibility of agreeing on a so-called success fee. There was a long debate about what the upper limit of this fee should be.  Ultimately, the Act stipulates that the fee must not exceed 16 percent of the awarded amount or CZK 2.5 million if the fee is set as a lump sum.

AF: It is worth adding that the amount of this fee should be stated in the action itself, and its reasonableness must be justified.  However, the final amount of the fee is determined by the court.  Therefore, this amount may ultimately differ from what the claimant consumer organisation initially anticipated.

How would you recommend entrepreneurs prepare for the new Act?

DS: In addition to familiarizing themselves with the Act, entrepreneurs should first internally assess the risk of a class action threat. If such a risk is significant, it is necessary to inform key persons on how to proceed if a class action is brought against the entrepreneur. Neglecting the procedure at the beginning of the proceedings can have significant negative impacts on the development of the dispute, especially if sufficient defence is not conducted in the first certification stage of the proceedings.

AF: It is also important to strengthen internal mechanisms for handling customer complaints and to seek out-of-court dispute resolution options that can prevent the risk of class actions by consumers. Entrepreneurs should also regularly monitor the public register of class proceedings and check whether their competitors operating in the same fields are facing class actions.

DS: The public register will contain chronologically ordered information about all brought class actions that have passed the certification stage. It will include the identification details of the parties to the proceedings and their legal representatives, information about the subject of the class proceedings, the conditions for group membership, the date the action was brought, and the date the proceedings commenced, as well as other information under the Act or court decision.

How do you see the future of class actions in the Czech Republic?

AF: As we have already mentioned, the success of class actions in the Czech Republic will largely depend on the activity of the entities concerned, primarily the claimant consumer organisations, which are the cornerstone of the new system. In this regard, we cannot fully predict the future, as our clients are more often larger business corporations rather than individual consumers or consumer organisations.

DS: However, it is certain that there is already some self-regulation among entrepreneurs to reduce the risk of class actions.  The new legislation can thus contribute to strengthening the position of consumers without a significant increase in the number of class actions brought.

What will you personally focus on in the area of class actions going forward?

AF: We have intensively dealt with the Act during its preparation over the past few years. We have assisted many clients in the preparation of comments and their discussion during the various stages of the legislative process. This activity continues with the current assistance to clients in implementing the Act into their internal processes. In addition, we continue to deal with the Act at academic level and are also preparing a commentary on it. In collaboration with the Faculty of Law at Masaryk University, we plan to organize an international conference early next year. Additionally, we are preparing a series of lectures on this topic as part of the HAVEL & PARTNERS Academy.

DS: As mentioned earlier, our clients are typically larger companies interested in the Class Action Act from the perspective of potential defendants. This aligns with the nature of our current and future activities in this area. We are currently helping clients primarily to assess the risks of facing class actions. If such a risk exists, we assist in preparing materials for potential defence in the proceedings. We also organize training for key personnel who should be involved in handling class actions. And, of course, we are ready to immediately take on legal representation in this area if any of our clients need it.

*This is not an official translation*