Belgian Court Rules on Recognition of U.S. Class Action Settlements
On 23 March 2017, the Ghent Court of Appeal in Belgium (the Court of Appeal) handed down a lengthy decision on the civil merits in the very well-known Lernout & Hauspie (L&H) case. Although the judgment rendered by the Court of Appeal is very long and covers various legal issues, it contains a specific section on the recognition, in Belgium, of two American opt-out class action settlements.
As most of you know, class action suits are legal devices that allow an individual or a small group of individuals to proceed in court on behalf of a much larger and unnamed group of individuals who have suffered a similar injury and who share common claims.
While class actions form an integral part of the legal framework in the United States, European jurisdictions (with the notable exception of the Netherlands (see my previous post)) tend to be very cautious with respect to this instrument. It is only in June 2013 that the European Union published a recommendation setting out a series of common, non-binding principles that EU Member States should adopt in order to put collective redress mechanisms in place. Based on this recommendation, some EU Members that previously did not allow for collective redress mechanisms have since introduced them into their legal systems.
In sharp contrast with the American class action system – where any individual who fulfils the conditions to be part of a class action will automatically be considered as part of the class bringing the action, unless that member expressively indicates his desire to be excluded from of the proceedings (i.e. “opt-out” system) – most European systems have adhered to an “opt-in” system where plaintiff classes are formed through the expressed consent of their members.
The case at hand therefore concerns an interesting scenario in which the Belgian court, belonging to a jurisdiction where only opt-in class action are allowed, is asked to recognise a U.S. opt-out class action settlement.
Facts of the case
L&H was a Belgian company incorporated in the 80’s which specialised in high technology and, more specifically, in voice recognition devices. The company quickly grew and was listed both on NASDAQ and on the Brussels stock exchanges. At its peak, L&H was considered as a leading company in its field and its management had even convinced Microsoft to heavily invest in it.
L&H went, however, bankrupt in the early 2000’s following massive securities fraud designed by its management.
Shortly thereafter, civil and criminal cases were initiated in Belgium against L&H’s key executives and L&H’s bank (Dexia Bank) and statutory auditor (KPMG).
In the meantime, class actions were also initiated in the United States by investors who sought reparation for the loss suffered against Dexia Bank and KPMG. Those cases were ultimately settled as KPMG agreed to pay USD 115 million and Dexia Bank agreed to pay USD 60 million. Importantly, because those cases arose in the United States, those settlements constituted opt-out settlements.
Issue of the case
One of the key issues that arose during the proceedings before the Court of Appeal, was whether the decision of the American courts approving the class action settlements in the KPMG and Dexia Bank cases could be recognised in Belgium thereby precluding the civil claimants who were part of the class that benefited from the settlements (but had not opted-out of those proceedings) to claim damages in the Belgian procedure.
In order to answer this question, the Court of Appeal turned to the Belgian legal provisions on the recognition and enforcement of foreign (i.e. non-EU) judgments. Those rules are more specifically contained in Articles 22, 23, 24, 25 and 26 of the Belgian Code of Private International Law (CODIP).
Analysis of the Court of Appeal’s reasoning
At the outset of its analysis, the Court of Appeal had no difficulty to establish that the class action settlements reached in the United States consisted of “judgments” (and were therefore subject to its scrutiny under Articles 22, 23, 24, 25 and 26 of the CODIP) as they were enacted by courts in the United States.
The Court of Appeal then turned to the important question of whether there was any valid justification to refuse to recognise the class action settlements in Belgium. In this regard, the Court of Appeal turned to Article 25 of the CODIP which provides for various grounds for refusing to recognise and enforce a foreign judgment. Among those grounds, Article 25 of the CODIP provides more specifically that:
A foreign court decision shall not be recognised and enforced in Belgium if:
1° the recognition or enforcement of this decision would lead to a violation of public policy;
2° the rights of the defence have been violated; […]
7° only Belgian courts had jurisdiction to rule on the matter; and
8° The foreign court’s jurisdiction was based on the mere fact that the defendant was located in this jurisdiction, but without any other substantial relationship with this jurisdiction.
In the case at hand, the plaintiffs before the Court of Appeal contested the fact that the U.S. class action settlements should be recognised in Belgium (as this would result in a limitation on their rights to claim damages).
More specifically, the plaintiffs argued: (i) that recognising the U.S. class action settlements would be a violation of public policy (Article 25, §1, 1° of the CODIP) as Belgium only recognises “opt-in” (and not “opt-out” class action mechanisms); (ii) that the U.S. opt-out class action system violated their rights of defence (Article 25, §1, 2° of the CODIP); and (iii) that the American courts had exercised an exorbitant jurisdiction and that only the Belgian Courts should have been competent to rule on this matter.
First, with respect to the public policy argument, the Court of Appeal noticed that class action mechanisms have recently been introduced under Belgian law and that in enacting those new legal provisions, the Belgian legislature had specifically emphasised that class action mechanisms complied with Article 6 of the European Convention on Human Rights. Furthermore, the Court of Appeal methodically proceeded with a comparison of the American and the Belgian class action systems and it concluded that the U.S. class action regime did not offer less procedural guarantees than the Belgian system. Indeed, the American class actions system allows for the right to appeal, organises spread-out publications and provides for an assessment of adequacy and reasonability of the settlements before enactment.
Secondly, the plaintiffs argued that the Court of Appeal should refuse to recognise the U.S. class action settlements as the U.S. proceedings violated their rights of defence. More specifically, they asserted that their rights of defence had been violated since some members of the class were non-U.S. residents and were therefore not sufficiently informed of the proceedings, and particularly of the legal consequences of the opt-out system. The Court of Appeal, however, noted that: (i) all the identifiable members of the class actions had been personally notified of the class action proceedings; (ii) the class action proceedings were mentioned in several newspapers such as The Wall Street Journal and The Wall Street Journal Europe; (iii) articles were published in De Tijd and other Belgian newspapers; (iv) a website had been set up solely for those class actions’ purposes; and (v) the Belgian financial institutions also relayed the information. Consequently, the Court of Appeal concluded that a normal and diligent investor, placed under the same circumstances, would have been aware of the action and that the plaintiffs’ rights of defence had not been violated.
Thirdly, the plaintiffs relied on Articles 25 7° and 8° of the CODIP and alleged that the American courts had exercised an exorbitant jurisdiction and that only the Belgian Courts should have been competent to rule on this matter.
Both claims were however dismissed by the Court of Appeal.
With respect to the application of Article 25 7° of the CODIP, the Court of Appeal found that the plaintiffs did not sufficiently demonstrate that only Belgian Courts had jurisdiction over the dispute.
With respect to the application of Article 25 8° of the CODIP, the Court of Appeal found that the American courts had validly asserted jurisdiction since L&H had sufficient links with the United States (one of L&H’s headquarters was located in Massachusetts and the company was listed on the NASDAQ stock exchange).
In sum, the Court of Appeal ruled that none of the grounds listed under Article 25 of the CODIP could validly be raised in the case at hand and consequently, the U.S. class action settlements had to be recognised in Belgium.
As a consequence, all civil claimants in the proceedings before the Court of Appeal who were also part of the class that benefited from the U.S. settlements, but had not opted-out of those proceedings, were precluded from asserting their rights before the Court of Appeal.
To the best of my knowledge (correct me if I am wrong), this case is the first time that a Belgian court has ruled on the recognition in Belgium of a U.S. class action settlement.
Although the end result is not surprising, it must be noted that one must now be particularly careful with opt-out class action settlements. Indeed, it is extremely likely that many L&H Belgian investors were indeed aware of the existence and the consequences of those settlements. However, they probably never thought that those settlements would have had any consequences on their rights under Belgian Law. Although the decision of the Court of Appeal does not imply that all class action settlements will automatically be recognised under Belgian Law (they still need to be examined on a case-by-case approach to make sure that, for instance, they do not violate the plaintiff’s rights of defence). However, the Court of Appeal’s judgment confirms that U.S. opt-out class action settlements are not, per se, deprived of any legal effects in Belgium.