Class action in Germany

June 2021  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

June 2021 Issue

German law is fundamentally based on protecting individual rights. Class actions are not part of the tradition of the German legal system. Nevertheless, forms of collective legal protection are increasingly finding their way into the German legal system. In Germany, collective legal protection in the broadest sense has existed for some time in the form of representative action and model proceedings.

Since there is no classic class action in German procedural law, masses of individual lawsuits had to be filed by many individual claimants in cases where a multitude of individual persons were concerned. As a result, in particular in the wake of the so-called emissions scandal, new approaches to class actions were developed by introducing the model declaratory action.

As a further alternative to raise claims in mass cases, claims are also regularly assigned by a large number of consumers to a third party (mostly legal tech companies), which asserts this claim as claimant in its own name in a lawsuit (so-called non-genuine class action).

This article mainly focuses on developments affecting model declaratory action and non-genuine class action. Other forms of collective legal protection from other legal areas have not been taken into consideration.

Non-genuine class action

Legal tech companies, which act as collection service providers, offer customers, who raise claims against another person, the opportunity to enforce their claims in return for a share of any damages paid, bundled by way of an objective accumulation of claims. For this purpose, customers assign their claims to the collection service provider on a fiduciary basis.

Assignment of claims transfers the procedural right to bring an action to the collection service provider. The right to bring an action is a prerequisite for the validity of the action and the merits of the claim. The person with the right to bring an action is the person who, according to the substantive legal situation, is the owner of the right being claimed. In Germany, the Legal Services Act governs the activity of collection service providers.

In a precedent decision from 2019, the German Federal Supreme Court decided that the business model of legal tech companies requires a governmental permit under the Legal Services Act. All circumstances of an individual case must be assessed, including specific contractual agreements, to determine permissibility.

Practical relevance. The assignment of claims has already developed into a business field (‘plaintiff industry’) and is currently mainly found in the automotive sector. Since some collection service providers do not have the necessary capital resources themselves, their class action is financed by a third party litigation financier, which covers court fees and legal fees incurred as well as (in the event of losing) claims for reimbursement of costs made by the other party. In return, the third party litigation financier receives a share of the success commission earned by the collection service provider from the assignors. The assignors should not incur any costs in connection with the class action; in return, however, they also agree that the collection service provider will make all procedural decisions at its own discretion and, if necessary, may also negotiate a settlement agreement.

Limits of admissibility. The key question with regard to a non-genuine class action is whether the legal tech company has the right to bring an action. According to case law, the absence of a permit always invalidates any corresponding assignment agreement. Consequently, there will be no right to bring an action, and any action brought will lack merit. In 2020, several courts – with different grounds – ruled in the first instance that the business model of a collection service provider did not comply with relevant legal provisions and thus lacked the right to bring an action. These decisions caused great concern for professional collection service providers and have been appealed. A decision of the competent court of appeals has not yet been rendered. So, it remains to be seen whether this method of pursuing claims in court will be possible in the future.

Model declaratory action

With the model declaratory action, collective legal protection in Germany has been further expanded. This model has been developed for consumer disputes against a company. The consumers themselves do not formally become parties to the proceedings. The proceedings are conducted exclusively between a qualified entity (consumer protection organisation) and the defending company.

The consumer organisation is entitled to act by ultimately exercising the rights and interests of the consumers. The consumer has no influence on the course of the proceedings. Their participation is limited to registering or deregistering from the register of complaints, and to opt out in the event of a settlement agreement, thus rejecting the result and pursuing a claim on their own (bearing the corresponding costs, risks, but also potential upside).

A significant difference between the model declaratory action and a US class action is that no claims for payment can be pursued under the model declaratory action, only clarification of facts and legal issues. The consumer has to litigate a specific payment claim in an individual subsequent lawsuit on the basis of the result of the model declaratory action.

Practical relevance. The model declaratory action is a relatively new type of lawsuit. The first were filed immediately after the introduction of the model declaratory action on 1 November 2018, mainly against banks and automobile manufacturers. The practical experience of this type of lawsuit has begun, and the first decisions have been made.

Overview of the procedure of a model declaratory action. Only a qualified consumer organisation can request a declaratory judgement on the existence of factual and legal requirements for claims or legal relationships between consumers and a company. The consumer organisation must have at least 10 associations or 350 natural persons as members and has to be included on an official list at the German Federal Office of Justice at least four years before filing the lawsuit. It must focus on advising consumers and may not bring actions with the intention of making a profit, nor may it obtain more than 5 percent of its funds through financial donations from companies. We have already seen the first rejections of model declaratory actions because the consumer organisations did not meet these strict requirements. Consumers can register for this action, at which point their claims do not become time-barred during the model procedure. The model declaratory action ruling is binding for all registered consumers, as if they had filed a lawsuit themselves. The process means consumers can avoid a large part of the court proceedings, as well as related effort and cost. Although subsequent proceedings are necessary, it does reduce litigation risk for the consumer.

The future perspective: ‘EU-representative action’

Directive (EU) 2020/1828 introduces a new system of collective legal proceedings that distinguishes between representative actions for injunctive relief and redress. In order to be able to bring a representative action, infringement of Annex 1 of the Directive is required, and there must be a threat to the collective interest of consumers.

The newly formed representative action is similar to the model declaratory action. It can only be pursued by qualified entities and only for the purpose of protecting consumers. Redress within the meaning of the Directive may take the form of compensation, repair, replacement, price reduction, termination of the contract or reimbursement of the price paid, depending on the case and insofar as this is provided in EU law or national law.

In contrast to the model declaratory action, redress has to be in a form that makes a further lawsuit unnecessary. Member states have to transpose the Directive into national law by December 2022. Member states have broad scope for implementation and the Directive only stipulates minimum requirements. It remains to be seen how the German legislator will use its leeway for implementing these requirements.

Potential risks for companies

Collective legal actions are on the rise due to new forms of collective legal protection and the development of IT technology. Since legal tech companies do not usually meet the requirements of a consumer organisation, non-genuine class action and model declaratory action are likely to coexist.

What both have in common is that the amount of damages can quickly multiply. Potential total damages may even threaten a company’s existence. It is therefore advisable to consult a specialist lawyer at an early stage to plan a defence and implement internal strategies to deal with collective actions in the best possible way.

 

Eric Wagner is a partner at Gleiss Lutz. He can be contacted on +49 711 8997 248 or by email: eric.wagner@gleisslutz.com.

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BY

Eric Wagner

Gleiss Lutz

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