Switzerland as a venue for collective redress litigation:
Although not a member of the European Union, thanks to a series of treaties, Switzerland is a member of the European Single Market, participating in its free movement of goods, services and capital. Additionally, because of the Lugano Convention of 2007, Switzerland also forms part of what could be called a “Single Legal Area” in which court decisions are mutually recognized and executed without need of any special procedure. This frictionless interaction between Switzerland and the rest of the EU, combined with the world-renowned Swiss efficiency and discretion, has made the country a great venue for litigation, especially as regards to civil and commercial arbitration.
On March 2, 2018, the Swiss Federal Council (Bundesrat), which is the seven-member executive body of the Swiss Confederation, opened a formal consultation process that ended on June 11, 2018, on which a number of proposed amendments to the Swiss Code of Civil Procedure (ZPO) were proposed. Most importantly for us are the potential collective redress mechanism that could be incorporated, something that the current ZPO lacks.
Collective action (Verbandsklage): This method of litigation was already introduced in 2011; however, it has remained unused. It is essentially an opt in lawsuit in which a legally incorporated not-for-profit association seeks to have a product, service or action declared harmful to the people it represents. A successful Verbandsklage does not lead to compensation, but can only confirm the illegality of the defendant’s behavior, thus providing ammunition for further individual claims or, hopefully, a settlement. It is intended for small damages suffered by a big number of people, especially in the consumer protection field. The proposed amendments to the Verbandsklage can be found in article 89 and following the proposed amendments to the ZPO.
Group settlement procedure (Gruppenvergleichsverfahren): Found in articles 352 and following of the proposed amendments to the ZPO, the Gruppenvergleichsverfahren would constitute a completely new institution of Swiss law. It would allow a not-for–profit entity to represent persons, either natural or juridical, who have suffered financial losses due to the illegal conduct of one or more defendants, with the option of demanding monetary compensation. Some requirements must be met, which make it similar to the Stichting-based Dutch collective redress mechanism. First, the representative entity should fulfill the legal conditions to file a Verbandsklage, which means: 1) it cannot be a for-profit entity; 2) it must have a legal or statutory mandate to protect the interests of the affected group and 3) it must demonstrate suitability for preserving the group’s interest (which requires an evaluation of the entity’s technical knowledge as well as the organizational and financial resources). Second, the entity should move to have its members recognized as a class, which will allow the entity to represent a wider range of affected people. Finally, after the class certification is obtained, the process becomes an opt out and the representative entity litigates on behalf of all class members.
Securities litigation in Switzerland:
Securities litigation remains rare in Switzerland and the few cases that have been brought have dealt almost exclusively with prospectus liability claims. Given that structured finance products and their respective vehicles are not typically organized under Swiss law, there is little precedent on a number of important issues. If claims other than prospectus claims were to be brought, one will have to consider the following topics:
Jurisdiction in Switzerland: As a general rule, the competent courts would be the ones where the issuer of the securities is located. With respect to investment funds, for actions brought by investors or the representative of the investors, Swiss rules provide for a mandatory jurisdiction of the court where the registered office of the concerned license holder (e.g., management company, representative of the fund) is located. If the Gruppenvergleichsverfahren is enacted, one court per canton will have exclusive jurisdiction to hear these kinds of cases.
Due to recent developments in European law (Case C-12/15 of 16 June 2016, Universal Music International Holding BV v Michael Tétreault Schilling and Others), in cases dealing with purely financial losses, the place of the damage is taken to be not where the damaged party is located, nor where its affected accounts are deposited, but rather where the securities were issued. This leads, indirectly, to the same conclusion as an important U.S. Supreme Court decision (Morrison v. National Bank of Australia), in that both U.S. and EU courts will decline to hear cases involving foreign securities (including, of course, Swiss securities) unless an additional connecting factor is found.
Costs: Costs, which include court fees and attorney’s fees, among other expenses, are, in principle, allocated to the losing party. Both the court fees and the compensation for attorneys are determined based on cantonal tariffs, which take into account the amount in dispute and the complexity of the case.
Litigation funding: Swiss law allows for litigation funding principle, but prohibits contingency agreements. Lawyer fees are fixed by statute and success fees are permitted only within certain limits.
While it is very promising for Switzerland to be adopting collective redress legislation, investors have few reasons to be excited. The proposed Gruppenvergleichverfahren follows the experience of the Netherlands, but does not provide a centralized court that will develop expertise on the matter (there was even a proposal in the Netherlands to allow proceedings in English). Additionally, the current small number of cases has not allowed Swiss judges or practitioners to develop the expertise to which sophisticated investors are accustomed.
Nevertheless, as a consequence of the recent U.S. and EU decisions, the Gruppenvergleichverfahren constitutes a weapon of last resort for owners of strictly Swiss securities, which would have otherwise been left without any further redress method except for individual claims.
In the end, the pros and cons of the Gruppenvergleichverfahren can only begin being appreciated if the Swiss Parliament ultimately sanctions a reformed ZPO, a matter that remains to be determined.