Saturday, 9 December 2017

The ‘proceduralization’ of Directive 93/13 and its limits

The CJEU's judgment in Banco Santander (C-598/15) that came out this week is the latest addition to a growing body of case law on procedural obstacles to consumer protection under Directive 93/13. The focus on procedures and the role of national (civil) courts in ensuring the effectiveness of the Directive, i.e. its 'proceduralization', has been the subject of debate between judges, legal practitioners and academics for a while now. It receives attention from the European Commission as well (see, e.g., the REFIT report of the European Commission, the RE-Jus project aimed at providing judicial training, and a much-anticipated study of the Max Planck Institute Luxembourg). However, Banco Santander reveals the limits of 'proceduralization' driven by preliminary references to the CJEU.

In this case, the referring Spanish court was confronted with a fait accompli, which made the judicial review of unfair contract terms impossible. It all started with a mortgage loan agreement between Banco Santander and Ms. Sánchez Lopez. The contract contained a clause - Clause 11 - by which Ms. Sánchez not only expressly agreed to enforcement through extrajudicial proceedings, but also authorised the bank to execute the sale of the mortgaged property on her behalf. Thus, the bank could represent Ms. Sánchez before the notary drawing up the sale instrument without her attendance. The bank had initiated (compulsary) mortgage enforcement proceedings, the property was acquired by the bank for 59.7% of the value, and the sale instrument had been entered into the land register, while Ms. Sánchez continued to owe the residual debt. At first, the bank had allowed her to stay on the premises as a tenant. Later, it brought a claim seeking an order for the eviction of Ms. Sánchez from the property. 

The referring court questioned the compatibility of the applicable procedural framework with Directive 93/13. The problem was that it was 'too late' for ex officio control of the unfairness of the terms - in particular Clause 11 - of the underlying mortgage contract: the transfer of ownership had already taken place. The court was merely required to enforce and protect the bank's property right. One the one hand, it could be said that Ms. Sánchez should have challenged the mortgage enforcement in time. On the other hand, the question could be raised (a) if she had any incentive to do so, because the bank initially allowed her to stay, and (b) whether she was actually aware of her rights, given the fact that the extrajudicial proceedings and the sale had taken place entirely without her involvement. 

Last June we reported on this blog that Advocate General Wahl's answer to the referred questions in this case was, in short: "we can't help you". Directive 93/13 simply does not apply to proceedings concerning property rights. The CJEU basically gives the same answer, but with two important nuances: (i) the proceedings are independent of the legal relationship between the creditor (the bank) and the consumer; and (ii) the consumer has not availed herself of the legal remedies provided. We will discuss these nuances below.

A. No link between the present proceedings and the mortgage
The scope of application of the Directive and the CJEU's competence are limited to proceedings concerning contractual relationships, whereas the present proceedings concerned property rights. Here, the party who had lawfully acquired the property happened to be the bank, but any (other) interested third party could have become the owner. Against such a third party, the consumer-debtor cannot invoke a defence based on the mortgage contract between her and the bank. 

Yet, the CJEU does not stop here. It recalls that "it has been held, in particular as regards enforcement proceedings for mortgages, that, failing effective review of the potential unfairness of contractual terms in the instrument on the basis of which the property is seized, observance of the rights conferred under Directive 93/13 cannot be guaranteed" (para 46; emphasis added). The CJEU refers to, in particular, Finanmadrid and Aziz. As the CJEU explains, the difference between this case and Aziz is that here, the action is brought on the basis of an ownership instrument as entered in the land register. This suggests that the CJEU is sensitive to the doubts of the referring court as to the course of events in the present case. It almost seems to regret that no question was asked about the unfairness of the terms in the mortgage contract, within the meaning of Article 3 of the Directive (cf. the obiter dictum in para 48). In this respect, it is a pity that the question regarding the role of the notary was inadmissible (para 31). 

B. Availability of legal remedies
The CJEU also reiterates the importance of guaranteeing effective judicial protection to consumers (cf. Article 47 of the EU Charter of Fundamental Rights), by enabling them to contest the contract at hand in legal proceedings, including in the enforcement phase, and under reasonable procedural conditions (para 38). The CJEU considers that "it appears" that legal remedies were available to Ms. Sánchez, "subject to verification by the referring court" (para 49). The choice of words - the CJEU uses "opportunity" - is interesting. What if such an opportunity existed from a strictly legal perspective, but Ms. Sánchez was, in fact, deterred from using it as a consequence of Clause 11 and the bank's conduct, reinforced by the procedural rules at issue? The effective judicial protection of consumers under Directive 93/13 is based on the presumption that a case comes before a court, as was observed in a Conclusion by AG Sharpston last week. Here, we run into the limits of 'proceduralization'. Perhaps it is time to recognise that the mere existence of a legal remedy is not enough; perhaps, there is a need for a shift in focus to the more fundamental question whether a certain procedural regime is justified in light of the interests it aims to protect [*].

[*] See for a first exploration: Anna van Duin, 'Metamorphosis? The Role of Article 47 of the EU Charter of Fundamental Rights in Cases Concerning National Remedies and Procedures Under Directive 93/13/EEC', available on SSRN

Thursday, 7 December 2017

Prohibiting online platforms from reselling luxury goods - CJEU in Coty Germany (C-230/16)

The CJEU gave its judgment (C-230/16) yesterday in a competition law case that may impact how luxury goods are sold to consumers online in the future. Coty Germany - a supplier of luxury cosmetics in Germany - brought a case against one of its authorised distributors, Parfumerie Akzente for using online third-party platforms ( to resell their products. Coty set up a selective distribution network in order to protect the luxurious image of the brands it represents (eg Marc Jacobs, Calvin Klein). Their claim was that if their distributors use then online third-party platforms to resell their products, the objective of brand image protection is undermined. The distribution agreement allowed for the online sale of products supplied by Coty but only through the online webstore of the authorised distributor, whilst ensuring that the luxury character of the cosmetics was maintained. German courts brought the case the the CJEU as there was doubt whether the express prohibition in the distribution agreements of re-selling products through online stores of third-parties could restrict competition under art. 101(1) TFEU.

The CJEU has no doubts that maintaining a prestigious, luxurious image of the brand may justify the introduction of the selective distribution system (paras 28-29). Can such a distribution agreement prevent the distributor from re-selling the goods on an online website of a third-party? The CJEU determines that such a limitation could be justified, provided that it would apply in a non-discriminatory fashion, uniformly to all distributors, and was proportionate. From the Court's observations it seems that in this case the restriction was justified and proportionate (paras 44-53). As Coty does not have a contractual relationship with an online third-party platform reselling its goods, it would be difficult for it to ensure that they are being sold in a way guaranteeing to show off their luxurious character (paras 48-49). Moreover, distributors are allowed to sell these goods online - just on their own websites, which makes the restriction proportionate.

This judgment may mean that the offer for certain luxury goods on online platforms such as Amazon or eBay will be more limited in the future. Unless, suppliers of these goods will create their own webstores on these platforms.

Digital content proposal extended to IoT

Last month we have reported on the updated proposals for the Directive on online and other distance sale of goods (Towards a more coherent...). This proposal is part of one package together with a proposal for a Directive on the supply of digital content. Last week, in the first reading at the European Parliament certain amendments have been introduced to this latter proposal (see here for the full text of amendments). 

One of the amendments changes the scope of the proposal by making it apply not only to the supply of the digital content but also explicitly to digital services. Amendment 11 clarifies that the Directive would also apply to dual purpose contracts. Amendment 14 leaves it to the Member States to regulate remedies for 'hidden defects' as well as to continue to provide for the short-term right to reject. 

One of the most controversial amendments is Amendment 18 which extends the scope of application of the Directive to smart goods (IoT) (further confirmed by Amendments 25 and 31). Whenever the digital content or digital services come pre-installed in goods, 'the trader should be liable under this Directive to the consumer for meeting his obligations only in respect of the embedded digital content or digital service. Liability for the other elements of those goods should be governed by the applicable law.' The same rules would apply to IoT goods purchased online and offline. Whilst the liability of producers and traders of software for IoT goods should then not extend to covering other elements of IoT goods, traders of IoT goods would be subject to the conditions of the proposed Directive which require digital content and digital services providers to guarantee a high standard of security and interoperability. The European Parliament considers these adjustments necessary to guarantee that the proposed Directive remains relevant when faced with the reality of the use of modern technology. Apparently, however, the Council is likely to object to these amendments (European Parliament pushes on IoT device security and interoperability). We will continue to observe the fate of these proposals.

Thursday, 30 November 2017

Between equivalence and effectiveness: Opinion of AG Sharpston on unfair terms control in default proceedings

Today, Advocate General Sharpston delivered her Opinion in a Belgian case (C-147/16Karel de Grote Hogeschool v Susan Kuijpers) on the scope of Directive 93/13 as well as the powers and obligations of national courts under that Directive. The case concerns the 'Europeanization' of (national) civil procedure and the 'proceduralization' of unfair terms control. More particularly, it concerns the role of the civil court in default proceedings, i.e. when the defendant does not appear.

Judicial districts in Belgium
A claim was brought by an educational establishment against a student who had borrowed the amount of money she needed to pay her registration fee, but subsequently defaulted on her repayments. The student did not take any (active) part in the proceedings the school initiated to recover the outstanding debt. In Belgium, when a judgment in default is given, civil courts are only required to apply national rules of public policy (Article 806 of the Judicial Code, amended in 2015). This caused uncertainty within the judiciary as regards the rules on unfair contract terms [*]. Could and should a court examine of its own motion (ex officio) whether the contract at hand falls within the scope of the Directive as implemented in Belgian law, and if so, whether its terms are unfair?

AG Sharpston first reiterates that the procedural autonomy of the EU Member States is limited by the principles of equivalence and effectiveness. She then refers to Asturcom (C-40/08) to point out that the principle of effectiveness "cannot be stretched so far as to mean that a national court is required to make up fully for the total inertia on the part of the consumer" (para 28). However, the principle of equivalence entails that inasmuch as the court is required to assess whether a term conflicts with domestic rules of public policy, it must do the same with the rules under Directive 93/13. Thus, those rules should be treated as rules of public policy.

In a forthcoming article [cited below], the Belgian scholar Janek Nowak explains the two approaches very clearly. The difficulty with the effectiveness approach is, in short, that Belgian civil courts would have to disregard Article 806 insofar as it limits them in their tasks. The equivalence approach is less 'disruptive': it reconciles EU law requirements with national civil procedure, while it also avoids the issue of the (lack of) horizontal direct effect of directives. AG Sharpston shares the Belgian Government's view that Article 806 provides room for a broad interpretation of the national court's powers and obligations in light of Directive 93/13. Yet she also refers to the effective legal protection guaranteed by the Directive which must be ensured "whatever the rules of domestic law":  the Directive must be applied "irrespective of the status afforded to the national rules" implementing it in the national legal order and irrespective "of the parties' procedural actions or submissions" (para 33). The only exception is that national courts do not have to - and cannot - intervene where none of the parties has brought proceedings. In all other cases, they must exercise ex officio control.

The second part of the Opinion addresses the meaning of 'seller or supplier'. AG Sharpston advocates a broad interpretation (see para 67). She focuses on "the capacity of the contracting parties" (para 66). In this respect, there is a link between the first and the second part: the substantive imbalance between the parties (in terms of both bargaining power and level of knowledge) is accentuated by a procedural inequality. A consumer is, in the words of AG Sharpston, "likely to find himself on the receiving end" of the proceedings, which "will affect his legal situation, whether he participates in the proceedings or not" (para 32). This would justify an active role of national (civil) courts as decentralized EU-judges, even though such a role might 'clash' with their position in the domestic (procedural) framework. Especially in default proceedings with consumers as defendants, national courts struggle with the practical problem of having to deal with a great number of cases, insufficient factual information and the need to take the interests of the claimant into account (as follows from the CJEU's case law on the right to a fair hearing as safeguarded by Article 47 of the EU Charter of Fundamental Rights). The stream of preliminary references on procedural questions is not likely to stop anytime soon.

[*] J.T. Nowak, 'On the impact of EU law on national civil procedure. Some considerations and recent examples from Belgium', draft paper (to be published) presented on 25 November 2016 during the 21st annual conference of the Ius Commune Research School.

Wednesday, 29 November 2017

Temptation of subscriptions

In the UK the organisation Citizens Advice conducted a study of consumers subscribing to various services and discovered that on average consumers pay ca 160GBP over a period of three months for unwanted services. These would include subscriptions to gyms, insurance, online streaming, TV channels - that would not end up being used. The message to consumers is to be aware of their usage habits and not to be too easily tempted to conclude yet another service at a seemingly attractive price, with an easy subscription process. Reading contract terms before signing up is always a good idea. A simple subscription process makes consumers easily sign in, but the sign-out process may be more complex and conditional. Citizens Advice reports on 9 out of 10 consumers being initially refused cancellation, in practice. This indicates the need for more inquiry into the terms and conditions of these services providers and the fairness of their provisions on terminating the contract. Still, even if termination is possible, consumer behaviour biases mean we tend to overestimate our future behaviour (how many times we will make use of the gym subscription, for example) and may be unlikely to timely cancel a contract we don't benefit from. An attractive price still may mean paying money for something that we end up not using at all, which profits service providers not consumers. 

Tuesday, 28 November 2017

New EU regulation on organic farming

The Proposal for a new Regulation on organic production and labelling of organic products was approved by the Agricultural Committee of the EU Parliament on 22nd November.

Organic farming in the EU has increased rapidly over the last years, yet it only represents 6% of the total EU agricultural area (see the background note of the EU Parliament). Therefore, the European Commission wishes to further encourage organic farming in order to reduce the need for imported organic products and increase consumer confidence in the EU. For that reason, the decision was taken to repeal and replace the previous Regulation (EC) No 834/2007 so that the legal framework better corresponds to the changing needs of the sector.

Organic farming plays a dual role, both in meeting the increasing consumer demands for organic products and in promoting sustainable farming. The aim of the new Regulation is to balance promoting sustainable organic farming with the internal market meaning promoting consumer interests as well as the interests of EU farmers.

Some of the key changes introduced by the new Regulation include that in the future imported organic goods will have to comply with EU rules on organic products rather than equivalent standards. The stricter standards for imported goods are meant to translate to increase consumer confidence in organic produce. That rule will apply after 2025, following a transitionary period of 5 years.

Avoiding contamination of organic food from pesticides is another important issue as farmers will have to take precautions. Still it will be allowed for farms to combine conventional and organic production provided the two activities are clearly separated. Furthermore, measures will be taken to boost organic production, such as increasing supply of organic food and animals and making it easier for small farms to get organic certification.

The new Regulation is designed to deliver an increased level of consumer trust by ensuring the high quality of products as well as improve the clarity of the information provided to consumers about organic products, in a market where consumers have high expectations.

Yet, the new Regulation, and the benefits it can deliver for consumers, will be only as good as its enforcement. The EU Parliament has been crucial in ensuring that the enforcement procedures are not undermined. It secured that organic farming had its own rules on controls rather than centralising them as the EU Commission envisioned. Furthermore, controls will not be limited to the final product but will happen all throughout the production cycle. 

If the EU Commission is serious about increasing consumer confidence in organic products it needs to be vigilant in supervising the control bodies that offer accreditation.

Monday, 27 November 2017

Towards the creation of the EU Financial Consumer Protection Agency?

A couple of months ago we reported on the results of the public consultation on the Operation of the European Supervisory Authorities (ESAs), and mentioned that civil sector representatives (Better Finance) advocated a complete overhaul of the existing system of EU financial supervision as opposed to partial improvements in the interest of consumers. This voice has now become lauder, and several representatives, including BEUC has joined their forced to request this reform. Today they posted an Open Letter to the EU Commission on the Proposal for the EU financial supervisory reform.

In this letter they explain that the current supervisory framework is not adequate to effectively protect consumers. Consumer protection comes as the last objective of the ESAs enjoying low priority as compared to other objectives. This low priority is evidenced for example by a failure to ever use one of their most significant powers, a power to temporarily prohibit the use of dangerous financial products. The letter also highlights that the ESAs has also failed to adequately coordinate national supervisory authorities, and that consequently consumer protection, or conduct of business supervision is neglected in some Member States.

In order to priorities consumer protection, the letter advocates the move towards a 'twin peak' model in the EU, that is, a towards a creation of a separate supervisory authority that would be in charge to control the ways in which financial firms conduct business with their customers. This separation of the consumer protection objective from other supervisory objectives (the 'twin peak' model) is already working well in some EU countries like the UK and Belgium, and outside the EU, for example, in the US. The letter therefore urges the EU Commission to reconsider its current approach to keeping the regulatory/supervisory structure as it is, and to give thought, and preferably action, to the 'twin peak' model.

Importantly, in addition to raising the importance, the letter also sets out a basic strategic plan for moving towards the new model. Phase 1 would include a clear separation of consumer protection mandate from other mandates of the existing ESAs, by reforming the Consumer Protection Divisions of these authorities and in phase 2, these would then be merged into a newly created  single authority, the EU Financial Consumer Protection Agency. The letter addressed other important questions such as funding, governance and mandate.

Is a single supervisory authority for consumer protection viable in the EU, or could consumers be just as effectively protected by prioritizing the consumer protection objective of the existing authorities? What do you think?

Tuesday, 21 November 2017

More consumer access to cross-border online services

The European institutions reached an agreement on further EU approach to "unjustified" geoblocking of online consumer products or services (EU negotiators agreed to end unjustified geoblocking). What does it mean "unjustified"? First, it would apply to situations where traders prevent consumers from other Member States to conclude online contracts for the sale of goods, even if traders are released from the obligation of delivery to the consumer's Member State. If the consumer undertakes to pick up the good at the trader's premises or arrange the delivery himself, preventing the sale of goods contract from being concluded based on the geographical location of the consumer seems unjustified. Also, when consumers wish to purchase electronically supplied services (such as hosting services for their websites), they should not be required to pay additional fees than consumers located in the same Member State as the service provider. The same should apply to the situation when the services are provided in a specific physical location, as it should not matter then who purchases these services. Does this mean that traders will now have to sell cross-border? No, there won't be an obligation to sell to consumers from other Member States, but rather an obligation not to discriminate against them, without a justification. It could be seen as unjustified to require consumers to pay only with the debit or credit card issued in the Member State of the trader's location. The plan is for the new Regulation to enter into force within the next year.

Thursday, 16 November 2017

New Commission study on insurance services

On 27th October the European Commission published a study on consumers’ decision making in insurance services. Insurance services are particularly important due to the size of the market (with non-life premiums rising to € 343bn in 2015, according to Insurance Europe) as well as for ensuring financial stability.

The study focused on non-life insurance products purchased domestically and cross-border, with cross-border purchases being key for the internal market. The methodology of the study combined a systematic literature review, market data collection and stakeholder interviews along with behavioural experiments both online and in the laboratory. The use of behavioural experiments shows the increasing influence and status of behavioural economics in EU policy making, as the results of the study are meant to inform the European Commission’s Consumer Financial Services Action Plan

The study produced some interesting findings. For example it highlighted that consumers are more likely to engage with the information provided when it is presented in a concise, salient and user-friendly way. However, the real challenge lies in pointing out exactly the strategies that would make the presentation of the info user-friendly, and the study provides some insights on that. For example, separating sections using boxes and presenting text in two columns, using icons to indicate the subject of each section, and using traffic light coloured ticks as bullet points to indicate risks covered and not covered. Weight is placed on national authorities frequently monitoring the provision of information and harmonising the rules on provision of information where possible. Price comparison websites, another informational aspect, can be helpful for consumers but the study raised concerns as to their impartiality and independence.

Another key finding of the study is the negative effect of pressure in the decision making of consumers, with pressure selling being particularly prevalent in car rental and add-on insurance. Pressure selling makes consumers make sub-optimal decisions or buy products they do not need. Beyond improving enforcement, what is suggested could help with pressure selling is better information, especially underlining the existence of alternatives and presenting the product in a balanced way. Timing is key for addressing pressure, as well as for processing information. Allowing consumers time to reflect on their decisions and to modify them at a later date can prove to be helpful, according to the results of the study. However, there is the issue of how much consumers make use of such measures and what can be done for addressing pressure selling ex ante.

As most behavioural studies, this one also points out that consumers tend to be passive, they prefer the familiar and do not devote sufficient time and effort in comparing alternatives in the market. Consumers have a low awareness and understanding of contract terms. Behavioural biases play a role in consumers buying excess that is too low for their needs or choosing not to buy insurance at all. The image of the consumer painted in this study is at odds with the that of the average consumer as used in CJEU case law, a consumer who is expected to be ‘reasonably well-informed, observant and circumspect’.

In relation to cross-border shopping for non-life insurance the study found that although there is some interest for it, there are barriers preventing consumers from cross-border purchases, including low awareness of the possibility for cross-border purchases, language barriers and the complexity of the market, as well as regulatory differences and concern over problem solving. Harmonisation is key for promoting cross border purchases and it is one of the suggestions made, especially for harmonising definitions and contract formats.

Though the study itself calls for further research and collection of more data, it is a welcome systematic effort to study the European insurance market with robust methodology and concrete suggestions. It remains to be seen how much it will influence EU policy when it comes to taking concrete measures.