Introduction to the class actions framework
German law does not provide for collective redress that is comparable to class actions in the formal sense of Rule 23 of the United States’ Federal Rules of Civil Procedure. The concept of a lawsuit on behalf of others who are potentially eligible for the same relief and who need not be present or even named in the lawsuit was for a long time foreign to German law. The general principle, still valid today, is that to obtain the relief sought, a litigant must appeal to the court as an individual and must show that he or she seeks a certain remedy on his or her own behalf.
The German legislature introduced the first kinds of action providing for collective redress in 2002, in the Act on Injunctive Relief (UKlaG) and, in 2005, in the Capital Markets Model Case Act (KapMuG). These legal remedies are still available today but have a limited scope of application.
Responding to the ‘Dieselgate’ issue arising in 2015, the legislature saw the need for a new means of collective redress with a broader scope of application, and it introduced the Model Case Proceedings Act in November 2018. Under this regime, certain consumer organisations can bring a claim to determine specific elements of fact and of law in a declaratory judgment for future proceedings between (potentially) myriad claimants. However, it is not possible to file directly for damages (or another specific remedy). Instead, every individual of a similarly situated group must individually conduct subsequent proceedings to obtain relief. This restriction has been identified as one of the reasons why model case proceedings have had only limited acceptance. As at March 2023, only 34 cases were contained in the registry of the Federal Office of Justice (the Registry), with 15 new cases listed in 2022.
As a consequence, certain participants in the legal industry tried to circumvent the limitations of model case proceedings by bundling (damages) claims in a claimant vehicle, thus mimicking class actions directly aimed at obtaining damages. Claims with similar elements of law and of fact are typically assigned (sometimes on a fiduciary basis) by individuals to an entity, often a legal tech firm, that asserts the bundled claims on behalf of the individual assignors in one single proceeding. The claimant is typically supported by a litigation funding entity that assumes the risk of bearing a considerable amount of the costs of litigation in the event of a defeat. The claimant and the assignors usually agree on a contingency fee, which can reach up to 35 per cent and is partly passed on to the litigation funding entity in the event that the litigation is successful.
The landscape of collective redress in Germany will inevitably change within the near future with the transposition into German law of Directive (EU) 2020/1828 on representative actions for the protection of the collective interests of consumers (the Directive), introduced by the European Union on 25 November 2020.
The year in review
On 25 December 2022, the transposition period provided for in the Directive expired. By that date, Germany should have – but had not – adopted and published into national law the provisions necessary to comply with the measures set out in the Directive to introduce a representative action as a new form of collective redress. Consequently, the European Commission initiated proceedings against Germany for violation of the Treaties of the European Union at the end of January 2023.
While no agreement has yet been reached within the federal government on final draft legislation for further parliamentary consultation, a preliminary draft by the Federal Ministry of Justice exists. What is known so far reveals the direction that the final law might take.
It is almost certain that the new legislation on representative actions will largely replace the existing model case proceedings. While both proceedings may be similar in many respects, the most prominent feature of the new action will be the option to file directly for damages or another specific remedy.
In the meantime, the discussion on the various models for bundling claims through the use of the ‘assignment model’ has continued and new case law has emerged in this regard. What makes this thriving area of mass litigation subject to controversial court decisions is a rather technical issue: when practised commercially, the pursuit of claims on behalf of others must comply with the requirements of the Legal Services Act. This Act regulates the provision of legal out-of-court services by non-lawyers. To provide these services, the claiming entity must comply with high standards on proof of personal suitability and reliability to be registered in the legal services register and receive a debt collection licence. Failure to comply may result in the invalidity of the assignment and transfer of claims to the claim vehicle.
Various regional courts have found assignment models to be unlawful because they exceeded the limits of typical debt collection within the meaning of the Legal Services Act.2 Moreover, some lower courts rejected the assignment model because it gave rise to conflicts of interest.
In two landmark cases, the highest German court in civil law matters, the Federal Court of Justice, disagreed with the lower courts’ arguments and declared the relevant assignment models to be lawful. In July 2021, it found that an assignment model was legal even if it was exercised commercially and not limited to the out-of-court collection of monies but, rather, designed to assert claims in court.3 The Federal Court of Justice also found that, in general, no conflicts of interest arise from the bundling of damages claims. However, because of the generality of the ruling, its scope remained uncertain and was disputed among scholars and lower courts. For example, in October 2021, the Higher Regional Court of Braunschweig held that the bundling of tort claims governed by foreign law was not legal because it was not covered by the relevant debt collection licence.4 The case concerned one of the numerous lawsuits against Volkswagen related to the Dieselgate issue. A legal tech firm had bundled more than 2,000 claims from Swiss clients governed by Swiss law.
In its second landmark decision, in June 2022, the Federal Court of Justice confirmed the authority of its prior case law, according to which the service of debt collection implied by the Legal Services Act must be construed broadly.5 The Court made clear that the debt collection licence also permits the assertion of claims that are subject to Swiss law. Furthermore, it used the opportunity to address, and readdress, controversial aspects of the admissibility of the assignment model and, among other things, found that the legality of this model does not depend on the number of claims asserted by the claimant.6
Moreover, the Federal Court of Justice also addressed the issue of potential conflicts of interest. In this regard, a court of instance had previously found that a litigation financing entity assuming the financial risks related to the outcome of the litigation was in a position to influence the claimant as to how to conduct the litigation.7 Consequently, the court was concerned that the funding entity could exert pressure on the claimant to settle cases early, even though this might not be in the best interest of the assignors of claims. The Federal Court of Justice found this not to be justified. It held that the mere involvement of a litigation financing entity does not automatically lead to a conflict between the interests of the entity pursuing the assigned claims and the litigation financing entity on the one side and those of the represented group of assignors on the other. Further, it stated that nothing else resulted from the fact that in the case in question the litigation financing entity’s consent was required to litigate the matter further after having lost in the first instance proceedings, and that its consultation was required prior to concluding a settlement agreement.
This ruling might foreshadow potential future discussions under the law transposing the Directive, given that the preliminary draft of the latter explicitly declares the involvement of a litigation financing entity admissible in principle, provided that the latter cannot ‘unduly’ influence the proceedings or the conclusion of a settlement.
Finally, according to the Federal Court of Justice, the bundling of claims with different prospects of success does not per se constitute a conflict of interest. The different prospects of success can be taken into account by forming individual groups of assignors. Such grouping can also take place subsequently (e.g., in the course of settlement negotiations).
In a decision of July 2022, the Higher Regional Court of Munich followed the line provided by the latest Federal Court of Justice ruling.8 Nevertheless, controversy regarding the assignment model remains, in particular, as to damage claims under antitrust law. In this context, the assignment model has not yet been declared lawful by the competent cartel senate of the Federal Court of Justice.
In October 2022, the Regional Court of Mainz found unlawful an assignment model in which the claimant had bundled and asserted cartel damages claims.9 A registered debt collection agency asserted the alleged claims of 18 sawmills, amounting to approximately €120 million, against the state of Rhineland-Palatine. As is common practice, the claimant and the assignors agreed on a contingency fee calculated on the basis of the amount recovered from winning or settling the case. Beyond that, the contingency fee was supposed to be calculated on the basis of the legal costs of pursuing the claim. However, the fee was not to exceed 50 per cent of the recovered amount.
The Court held that, because of the complex nature of cartel damages claims, the claimant’s expertise was not sufficient and, therefore, the assertion of claims exceeded the limits of the claimant’s debt collection licence. Some commentators concluded that this decision contradicted the most recent Federal Court ruling and served to underscore the fact that the legality of an assignment model should not depend on the type and nature of the asserted claims. If a debt collection agency can lawfully assert claims governed by foreign law without exceeding the limits of debt collection implied under the Legal Services Act, the same should apply for the assertion of cartel damages claims. In both cases, the debt collection agency lacks specific knowledge of the law and needs to be assisted by lawyers.
The Mainz Court also found a conflict of interest. It argued that the calculation of the contingency fee created incentives for the claimant to undertake unnecessary and cost-intensive procedural actions at the expense of the represented assignors.
Whether other lower courts will have similar reservations against the assignment model in the area of antitrust law remains to be seen. Beyond that, it is uncertain whether the incentives to make use of the assignment model for mass litigation will lessen with the introduction of the representative action. This will depend on the scope of the upcoming transposition.