Dissuasive penalties for irresponsible lending - CJEU in LCL Le Crédit Lyonnais (C-565/12)

27 March 2014: CJEU in case LCL Le Crédit Lyonnais (C-565/12)

What happens when a bank forgoes to check the consumer's creditworthiness and grants him a loan that the consumer ends up not being able to pay back? What sort of a penalty may national law impose that would be considered as effective and dissuasive?

Mr Kalhan took out a personal loan of EUR 38.000 from the LCL Le Crédit Lyonnais in May 2011. This loan was to be paid back in 60 monthly instalments and the contract established both the annual fixed interest rate (of 5.60%) and an APR (of 5.918%). The consumer stopped paying back his loan in January 2012, upon which the bank immediately sought back payment of the loan's outstanding amount together with interest. It became obvious during the proceedings that the bank did not properly examine Mr Kalhan's creditworthiness before agreeing to conclude a credit agreement.

The Consumer Credit Directive (Directive 2008/48) in its Article 8 obliges Member States to ensure that the creditor examines the borrower's creditworthiness based on information provided by the latter and through a consultation with relevant databases. Article 23 of this Directive forces the Member States to put in place effective, proportionate and dissuasive sanctions for breach of its provisions.

French law, which was applicable to this case, does provide for the penalty of forfeiture of entitlement to interest, in case the consumer's creditworthiness was not examined. However, the Cour de cassation interpreted this French provision restrictively. Namely, it only sees it as applying to contractual interest and not to the statutory rate. (Par. 18, 48) This means that the consumer will still have to pay the interest, albeit at statutory and not at contractual rate. In this regard, French law prescribes for an increase of that statutory rate in case the debt was not repaid in full within two months after the court's decision became enforceable. (Par. 19) In this particular case, the contractual interest rate was set at 5.60% while the statutory, increased interest rate for 2012 would amount to 5.71%, therefore, being more beneficial to the bank than to the consumer! (Par. 21, 48) 

Naturally, the referring court asked for the CJEU's guidance as to whether such a penalty could be considered as effective in discouraging creditors from concluding loan agreements without examining carefully borrowers' financial situation, that is engaging in irresponsible lending. Unsurprisingly, the CJEU did not consider this penalty compliant with the Directive's purpose - consumer protection against the risks of over-indebtedness and bankruptcy: 

"If, after carrying out the abovementioned comparison, the referring court were to conclude that, in the dispute before it, the application of the penalty of forfeiture of entitlement to contractual interest is liable to confer an advantage on the creditor, since the amounts which it forfeits are less than those resulting from the application of interest at the increased statutory rate, it would follow that, clearly, the system of penalties at issue in the main proceedings does not ensure that the penalty incurred is genuinely dissuasive." (Par. 51)

The Member States have to ensure that the penalties are sufficiently dissuasive. A bank would have no incentive to check borrowers' creditworthiness if he knew that in case of his failure to do so the amounts he would be likely to receive when the borrower defaults on the credit would not be significantly lower. (Par. 52)

"If the penalty of forfeiture of entitlement to interest is weakened, or even entirely undermined, by reason of the fact that the application of interest at the increased statutory rate is liable to offset the effects of such a penalty, it necessarily follows that that penalty is not genuinely dissuasive." (Par. 53)

In the given case the referring court and the European Commission mentioned that the statutory rate interest would apply regardless the CJEU judgment (the Commission therefore questioned the need for it!), but the CJEU reminds the national court of the need of such an interpretation of national law that is consistent with pursuing the Directive's objectives. (Par. 54)

A fair balance? - CJEU judgment in Case C-314/12 UPC Telekabel Wien

While the authors of this blog were enjoying the consumer law conference in Oxford (more on this in a later post), the CJEU handed down its judgment in the intriguing case of UPC Telekabel Wien v Constantin and Wega last Thursday. For a summary of the facts of the case and Advocate-General Cruz's opinion, please refer to an earlier post on this blog ('Ius est ars aequi et boni').

The UPC case concerned the topical and difficult question of how to strike a balance between the rights of copyright holders (on films, in this case), consumers / internet users and internet service providers. Can providers be assigned the responsibility to take action to prevent the infringement of copyright by internet users to which they offer their services, considering that they do not have any direct contractual relationship to the copyright holders and it might be very burdensome (if not impossible) to take adequate measures to prevent users from illegally accessing copyright-protected material?

The CJEU's judgment in general seems to be in the affirmative, or at least not in the negative, though the Court takes great care to outline the conditions under which internet service providers are to be held to this responsibility.

In a first step, the Court considers that internet services providers fall within the scope of Article 8(3) of the Copyright Directive, which states that ‘Member States shall ensure that rightholders are in a position to apply for an injunction against intermediaries whose services are used by a third party to infringe a copyright or related right’ (para. 30 of the judgment). The lack of a contractual relationship does not affect this conclusion:

'Neither the wording of Article 8(3) nor any other provision of Directive 2001/29 indicates that a specific relationship between the person infringing copyright or a related right and the intermediary is required. Furthermore, that requirement cannot be inferred from the objectives pursued by that directive, given that to admit such a requirement would reduce the legal protection afforded to the rightholders at issue, whereas the objective of that directive, as is apparent inter alia from Recital 9 in its preamble, is precisely to guarantee them a high level of protection.' (para. 35)

In a second step, then, the Court establishes that it remains mostly a matter for national laws to regulate court injunctions prohibiting internet service providers from allowing their customers to illegally access copyright-protected material. EU law does not (!) preclude an injunction that 'does not specify the measures which that access provider must take and when that access provider can avoid incurring coercive penalties for breach of that injunction by showing that it has taken all reasonable measures, provided that (i) the measures taken do not unnecessarily deprive internet users of the possibility of lawfully accessing the information available and (ii) that those measures have the effect of preventing unauthorised access to the protected subject-matter or, at least, of making it difficult to achieve and of seriously discouraging internet users who are using the services of the addressee of that injunction from accessing the subject-matter that has been made available to them in breach of the intellectual property right, that being a matter for the national authorities and courts to establish.' (para. 64)

The CJEU supports this conclusion by pointing out that an injunction restricts the service provider's freedom to conduct a business (protected under Article 16 of the EU Charter of Fundamental Rights), but does not touch upon its essence - the internet provider can choose the means to prevent users from illegally accessing copyright-protected works and may avoid liability by proving to have taken all reasonable measures. Regarding the measures to be taken, the Court observes:

'In that regard, in accordance with the principle of legal certainty, it must be possible for the addressee of an injunction such as that at issue in the main proceedings to maintain before the court, once the implementing measures which he has taken are known and before any decision imposing a penalty on him is adopted, that the measures taken were indeed those which could be expected of him in order to prevent the proscribed result.'

'None the less, when the addressee of an injunction such as that at issue in the main proceedings chooses the measures to be adopted in order to comply with that injunction, he must ensure compliance with the fundamental right of internet users to freedom of information.'

'In this respect, the measures adopted by the internet service provider must be strictly targeted, in the sense that they must serve to bring an end to a third party’s infringement of copyright or of a related right but without thereby affecting internet users who are using the provider’s services in order to lawfully access information. Failing that, the provider’s interference in the freedom of information of those users would be unjustified in the light of the objective pursued.' (paras. 54-56)

In this respect, the role of national judges is underlined:

'It must be possible for national courts to check that that is the case. In the case of an injunction such as that at issue in the main proceedings, the Court notes that, if the internet service provider adopts measures which enable it to achieve the required prohibition, the national courts will not be able to carry out such a review at the stage of the enforcement proceedings if there is no challenge in that regard. Accordingly, in order to prevent the fundamental rights recognised by EU law from precluding the adoption of an injunction such as that at issue in the main proceedings, the national procedural rules must provide a possibility for internet users to assert their rights before the court once the implementing measures taken by the internet service provider are known.' (para. 57)

Finally, copyright holders might face continuing (minor) infringements of their copyright, insofar as measures to prevent access may be circumvented and copyright is not an absolute right. Still, 'the measures which are taken by the addressee of an injunction, such as that at issue in the main proceedings, when implementing that injunction must be sufficiently effective to ensure genuine protection of the fundamental right at issue, that is to say that they must have the effect of preventing unauthorised access to the protected subject-matter or, at least, of making it difficult to achieve and of seriously discouraging internet users who are using the services of the addressee of that injunction from accessing the subject-matter made available to them in breach of that fundamental right' (para. 62)

While one cannot but admire the Houdini-like turns the Court takes in order to avoid chaining itself to a fixed balancing of the rights of all stakeholders involved, this judgment leaves many questions unanswered. The judgment re-emphasises EU law's strong right-based approach to access to films and other works through the internet, which is debatable in light of ongoing developments in the digital world. Furthermore, the Court's detailed considerations on the various aspects national judges have to take into account when considering the responsibilities of a service provider in a specific case hardly give any guidance as to the actual measures that may meet all the criteria - neither to national judges nor to internet providers. True, this is to a large extent a technical matter. Yet, it seems that the main burden of finding adequate and reasonable measures to prevent illegal access to information is now put on the internet service providers (and, indirectly, on judges assessing their cases). It may be questioned whether that outcome reflects a 'fair balance' in light of the EU Charter…

For a summary of the judgment, see also the CJEU's press release.

Recent consumer law case law

All of the blog's contributors are currently attending the Image(s) of Consumer conference in Oxford, the UK. Therefore, we are not able to provide our readers with an immediate summary of the two interesting cases that the CJEU elaborated on yesterday. I mention here these two cases so that our readers may access the judgments' texts immediately, if they wish to. The summaries thereof will be published in the next few days.

 

On consumer credit: LCL Le Crédit Lyonnais (C-565/12)

 

On copyright infringements: UPC Telekabel Wien (C-314/12)

15th International Association of Consumer Law Conference in Amsterdam: 29 June - 1 July 2015

This is the first one of many announcements to come about a conference that I'm privileged to co-organise next year, together with my colleagues: Marco Loos and Sacha Tamboer. The 15th International Association of Consumer Law Conference will take place at the University of Amsterdam next year - book the dates: 29 June - 1 July 2015. The theme is: "Virtues and consumer law".

The theme encompasses, but is not limited to considerations of: FAIRNESS and consumer protection (e.g. unfair commercial practices, unfair contract terms, good faith and fair dealing, protection of micro-enterprises), FRUGALITY and consumer protection (e.g. financial services, banking, loans), HOPE and consumer protection (overindebtedness and clean slate-doctrine), CURIOSITY and consumer protection (e.g. influence of new technologies and innovation on consumer protection), COMPASSION and consumer protection (e.g. vulnerability of consumers), SELF-REALIZATION and SELF-DEVELOPMENT and consumer protection (consumer protection and entertainment services, tourism, education and training), FORGIVENESS and consumer protection (mediation, ADR and private and public enforcement of consumer protection legislation), TRUST and RESPECT and consumer protection (data protection, privacy and security and consumer protection), FAITH and consumer protection (the role of the principle of pacta sunt servanda in consumer law, ADR mechanisms), etc.

On this blog I will keep you, dear readers, up to date with the developments regarding the conference. A link to a conference website will follow shortly (link to IACL's website), and more details incl. on the call for papers will be announced in due time. For now: we are looking forward to welcoming you in Amsterdam next year!

Logo designed by: Irene Falgueras López

Easy money

As we have mentioned previously the European Commission and the European Parliament have been working hard together in the past years on ensuring that EU citizens had an easier access to a basic bank account (see, e.g.: Basic bank accounts for all). In order to participate in most economic transactions nowadays, consumers need a payment account. Therefore, it was vital to secure such procedures of setting up these accounts that would be transparent and easily manoeuvrable, as well as to make sure that consumers could switch their bank accounts without incurring unreasonable costs - so that the banking market could become more competitive, hopefully offering better terms to consumers. Yesterday the Council and the MEPs agreed on the final version of these rules, which means that upon the vote of the European Parliament in April the new law could become reality. (Parliament and Council agree on basic bank accounts for all) 

As a result of these new provisions, EU citizens could not be denied by a bank access to opening a basic payment account - to which they could pay in and withdraw cash from without fee or for a reasonable fee - in a country where they could show they had an interest of doing so (burden of proof should not be set too high). Fees' information should be standardized and transparent, with at least one independent website per country offering clear comparisons of fees charged by various banks. It remains, though, to be seen what form this standardized information will take and what its effects (its level of transparency) will be.

The European Court of Justice as Creator of European Contract Law

Good news for Court watchers interested in the role of the judiciary in developing rules of contract law, including the rules governing consumer contracts: the Society of European Contract Law (SECOLA) announced that it will dedicate this year's conference to the theme of 'The European Court of Justice as "Creator" of European Contract Law'. The conference will take place on 13 and 14 June 2014 and will, fittingly, convene in Luxembourg, where the CJEU is situated. More information will follow shortly on SECOLA's website.

First European Citizens' Initiative endorsed by the Commission

The Initiative's banner

While we most often discuss "normal" commodities, it is not unfrequent to discuss issues which relate very closely to non-market rights of citizens and consumers. The distrinction between market and non-market commodities is not always straightforward and sometimes the European dimension represents a source of additional complexity- and concerns. 

In  the case of water, in particular, the concern with privatisation and universal access to clean, safe water has been at the centre of the first European Citizen Initiative to reach the final stage. The initiative, supported by over 1,5 million European citizens, has been presented before the European Parliament and the Commission in the past weeks. 

Today, the Commission has decided to give a positive response to the initiative- albeit on terms that might leave some of the proponents less-than-enthusiastic.

While Commissioner Šefčovič recalled that "the decision on how best to operate water services is firmly in the hands of the public authorities in the Member States", implicitly excluding any intervention in favour of public water management, he also expressed some important political commitments, namely:

- that the Commission will not pursue further liberalisation of water provision;

- that the domain will be safeguarded from concessions in the context of the on-going TTIP (Transatlantic Trade and Investment Partnership) negotiations between EU and US.

The Commission also announced undertakings in the areas of water safety, transparency in the sector, and supporting an open debate on the concerns raised by the ECI at both European and national level.

Besides the merits of the case, it is interesting for all European citizens (and consumers) to see that a new way of participating in EU-level agenda-setting might be finally gaining some ground.

MEPs say NO to roaming and YES to open internet

European Parliament's ITRE Committee agreed with the Commission's proposal of the new Telecoms Regulation (see our previous post: Major telecom sector reform), which among others intends to end roaming charges and prohibit blocking and degrading of online content (e.g. internet providers will not be allowed to block or slow down your access to and use of Skype), guaranteeing net neutrality. (Industry MEPs want stricter rules against blocking rival services) The Regulation will be voted on by the EP Plenary on 3 April and then needs to be approved by the Council. (EP committee vote takes us one step closer to ending roaming charges in the EU) If all goes well then as of 15 December 2015 phone users will stop noticing a difference in the price of phone calls when they are at home and when they are abroad. The EU has successfully lowered roaming charges already - roaming costs are ca 80% cheaper than in 2007, but the Commission intends to eliminate them altogether (MEPs call it a day on roaming charges).

Labelling what the eye cannot see

During the last week's Parliament's session the proposed by the Commission rules on "engineered nanomaterials" have been rejected. (MEPs object to new labelling rules) The Commission wanted to amend rules on labelling food products when they contained a certain level of nano-particles by adding a label that these products contain "nano" ingredients. Nano-particles may be used to change the taste, structure, colour and flavour of the food, but no one yet can tell what their long term effects on the human body might be. It is, therefore, important that consumers are informed of the presence of nano-particles in the food they are purchasing, so that they may decide for themselves whether to take the risk of such a purchase. (Defining nano-food: a big problem at a very small scale) The European Parliament is convinced, however, that consumers would be just more confused and misled if the currently proposed rules were adopted. First, these new rules may erroneously make consumers believe that the additives that would be labelled as nano particles were newly added to the product, while they might have previously already been a part of its content. Second, the Parliament argues for a lower threshold for an additive to be considered as "nano". European Foods Safety Agency (EFSA) recommends this threshold for additives with a 10% nano-particles threshold (due to uncertainty of the long-term effects of using these particles), while the Commission's proposal sets it at 50%. (Parliament rejects draft EU law allowing nanomaterials in food) It remains to be seen whether the Commission will prepare a new proposal of this law, following the rejection by the Parliament of the first draft.

Protection for independent travellers

Last Wednesday, the European Parliament voted in favour of the European Commission's proposal on the revision of the Package Travel Directive, which new rules among others are supposed to broaden the scope of the Directive's application to cover also packages put together by consumers themselves. (Stree-free holidays for 120 million consumers...) The Parliament followed the proposal of the IMCO committee, which we have discussed in February (Travelling in style). It still remains to be seen what fate awaits the proposal since the Council has not given its position on the review yet (and the talks with the new Council will only begin upon elections). (MEPs vote to extend protection for package holiday travellers) Additionally, the changes proposed by the Parliament are more consumer-friendly than the Commission's version, which means that the travel industry may try to lobby more against it. 

B2C vs. B2B unfairness – CJEU in case C‑52/13 Posteshop

The judgment in case C-52/13 Posteshop seems to have nothing in common with consumers. Until you notice that it supplies the old discussion on the distinction between B2B and B2C regulations with new arguments.

This request for a preliminary ruling concerned the interpretation of a B2B directive - Directive 2006/114/EC on misleading and comparative advertising. Posteshop advertised its franchise network, which B2B advertisement was assessed misleading. Posteshop brought an appeal against that decision.

The national court decided to refer the following question to the Court of Justice for a preliminary ruling:

‘With regard to the protection to be afforded to traders, is Directive [2006/114] to be interpreted as referring to advertising that is misleading and at the same time based on unlawful comparison, or to two separate offences, each of which may be relevant in its own right, namely, misleading advertising and unlawful comparative advertising?’. (Paragraph 18)

The referred question is extremely simple and so is the answer. The CJEU decided that Directive 2006/114/EC:

‘is to be interpreted as referring to misleading advertising and unlawful comparative advertising as two independent infringements and to the effect that, in order to prohibit and penalise misleading advertising, it is not necessary that that latter at the same time should constitute unlawful comparative advertising’. (Paragraph 28)

The question of the national court may have resulted not only from some linguistic inaccuracies in the Italian version of the Directive, but also from the lack of transparency in the division between a B2C and a B2B directive. The CJEU had to explain the fundamental rules of the prohibitions of unfair practices under EU law:

‘Directive 84/450, in its original version, concerned only misleading advertising. Regulation of comparative advertising was inserted into that latter directive by Directive 97/55/EC (…) amending Directive 84/450 concerning misleading advertising so as to include comparative advertising (…). The objective of Directive 97/55, pursuant to recital 18 in the preamble thereto, was to establish the conditions under which comparative advertising is permitted. On the other hand, that directive did not in any way amend the provisions of Directive 84/450 on misleading advertising. Next, (…) Unfair Commercial Practices Directive (…) limited the scope of Directive 84/450 to the protection of traders. Lastly, codified that latter directive. It follows that the European Union legislature did not intend, in adopting Directives 97/55 and 2006/114, to amend the rules relating to misleading advertising as provided for in Directive 84/450, except by restricting their scope.’ (Paragraph 27)

So, 9 years after the adoption of the UCP Directive even the most basic rules remain enigmatic for the national courts. Therefore, one may ask again if the distinction between B2C and B2B unfairness was necessary taking into account that the unfair B2C and B2B practices are closely linked (see my paper in Journal of Consumer Law, volume 36, issue 3, September 2013, pp. 329-342). 

Leaving aside the answer to this question, the impact of the Directive on misleading and comparative advertising on the UCP Directive is evident (e.g. with regards to the average consumer test). It is likely that in the coming years we will find out if the solutions of the UCP Directive have an inverse impact on the B2B acts: the revised Directive 2006/114/EC [see Communication from the Commission ‘Protecting businesses against misleading marketing practices and ensuring effective enforcement. Review of Directive 2006/114/EC concerning misleading and comparative advertising’, COM (2012) 702 final] and on a directive (regulation?) on unfair trading practices in the B2B supply chain [see Green Paper on B2B Unfair Trading Practices in the Business-to-Business Food and Non-Food Supply Chain in Europe, COM (2013) 37 final]. 

On the unfairness in Budapest

On March, 13th Pázmány Péter Catholic University and the Hungarian Competition Law Research Centre organized the Second Annual Conference on the Unfair Commercial Practices Directive. The once-a-year meetings aim at sharing national experiences with the regulations, which transpose the UCP Directive to national law systems, among experts and academics from various Member States.

This year the conference focused on special forms of unfair commercial practices: health claims and ‘up to’ claims. Nevertheless, three contributions gave a general overview of the unfair commercial practices regulations and practice. Sophie Ridoux (DG Justice EU Commission, Brussels) presented the main conclusions of the Commission's Report on the application of the UCP Directive and the revision of the 2009 UCP Directive Guidance. Attila Kőhalmi (member of the Competition Council) spoke on the importance of UCP cases for the Hungarian Competition Authority. Additionally, Professor Spencer W. Waller (Loyola School of Law, Chicago) assessed class action system in the U.S. as helping consumers receive compensation upon being victimized by misleading advertising.

Two authors of this blog were honoured to be speakers. 

I (Monika Namysłowska, University of Lodz) presented the Polish experience with health claims which unfortunately become more and more frequently a subject of an unfair commercial practice. Since Poland takes an infamous first place in Europe in the number of medicines bought per head, it does not surprise that the use of (unfair) health claims to tempt consumers is attractive to the advertisers. 

Joasia Luzak (CSECL, University of Amsterdam) discussed the Dutch experiences with ‘up to’ claims. While there are quite a few cases of the Dutch self-regulator, the RCC (Reclame Code Commissie), estimating potential misleading character of advertising statements that a purchase of a certain good or service would save consumers ‘up to’ a certain amount of money, there seems not to be a specific standard how to assess their unfairness. Such claims may need to be given a closer look by the academics and regulators in order to come up with a fairness standard that would protect consumers, not obscure marketing and guarantee legal certainty. For all speakers see: http://www.ucpdirective.com

We hope to join the Third Annual Conference on the UCPD next year and to participate in future numerous inspiring discussions on the unfairness, as well as to enjoy the beautiful city of Budapest further.