I INTRODUCTION TO THE CLASS ACTIONS FRAMEWORK
Class actions in a formal sense do not exist under German law. 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 is largely foreign to German civil law procedure. In principle, 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.
This situation has recently been meaningfully changed with the introduction of the Model Case Proceedings. While not a class action, this instrument for the first time allows a form of collective redress not limited to specific areas of law. Certain consumer organisations can now bring a claim to determine specific elements of law and of fact for future proceedings between myriad claimants.
In addition to this, German law provides certain limited means of obtaining collective redress. All these measures partly resemble class actions in terms of their procedural objective, but none of them qualifies as a class action in the formal sense. In addition, all of them have specific drawbacks, which decrease their efficiency compared to class actions.
II THE YEAR IN REVIEW
The aim of the Model Case Proceedings is to allow for redress for only minor damage, for which a single party might not rationally bring action owing to the insufficient potential benefits.2 The introduction of the first global collective redress mechanism in Germany was heavily influenced by the events of 'Dieselgate' (i.e., the revelations on the alleged manipulation of diesel emissions tests by Volkswagen (VW)). This matter demonstrated to a larger audience the striking differences between the United States and Germany when it comes to collective redress. The fact that roughly 500,000 American plaintiffs were able to recover damages from VW in a single, comparably short court proceeding, whereas German plaintiffs had to enforce their alleged claims individually in thousands of individual lawsuits, has been perceived as unjust by sections of the German public.3 In fact, as at the beginning of 2020, about 60,000 individual actions have been filed against VW with competent local courts throughout Germany.4 Nearly five years into Dieselgate, with courts of appeal failing to adopt a uniform approach, the matter is still far from settled. What is more, none of these cases has been finally decided by the Federal Court of Justice yet.
Rather predictably, an action for Model Case Proceedings was brought against VW over diesel manipulation allegations immediately after the entry into force of the new law on 1 November 2018. In the time up until the first oral hearing, which took place on 30 September 2019, seemingly 463,000 consumers had registered their claims to the action.
So far, the matter has revolved around procedural issues primarily, such as how to calculate the time periods for the various procedural steps and how to demonstrate that the case concerns the required number of consumers. Ultimately, the court has indicated that it leans towards considering the action against VW to be admissible, and that the motions fulfil the pertinent legal requirements, at least in part. At the same time, it urged the parties to find an amicable solution to the dispute. Contrary to prior statements by VW's legal counsel, the parties to the dispute announced in January 2020 that they would work towards a settlement and the latest news (early March 2020) was that they had reached a settlement.
Other early actions based on the new Model Case Proceedings have been unsuccessful. One of these cases concerned the Mercedes-Benz Bank, which was alleged to have provided insufficient consumer credit information. In this matter, consumers apparently struggled with the formal requirements of the Model Case Proceedings. According to news reports, only 140 out of more than 600 consumers who registered their claims in this matter were acknowledged by the court, and the majority of registered claims did not relate to the matter in hand but instead concerned, for example, alleged diesel issues with Mercedes and even VW cars.5 The court eventually rejected the action as inadmissible (thus it did not rule on the merits) as it found that the organisation that launched the case was not eligible to initiate Model Case Proceedings.6 Concurrently, another court refused to accept registration of a similar action against VW Bank filed by the same consumer association.7 Critics have therefore raised concerns about the legal requirements for a consumer association to file a suit being too strict, thereby rendering Model Case Proceedings ineffective.8
Since then and as at the time of writing, a total of seven actions have been accepted for registration under the new Model Case Proceedings,9 which is far fewer than the German government initially expected (about 450 actions per year).10 In addition to the aforementioned Mercedes-Benz Bank case, only one other case has led to a judgment to date. The matter concerned (allegedly) excessive rent increases in connection with a planned refurbishment of residential apartments. The Higher Regional Court of Munich ruled largely in favour of the consumers on 15 October 2019.11 The case has been appealed, but a decision by the Federal Court of Justice is not expected any time soon.
Also in the realms of Dieselgate, two Model Case Proceedings trials under the Capital Markets Model Case Act have recently been commenced against VW and Porsche SE. More than 2,000 shareholders filed suits against VW for damages totalling approximately €9 billion.12 The Model Case Proceedings are pending before the Higher Regional Court of Braunschweig. These recommenced on 26 November 2018 after a delay to the oral hearings. Separate proceedings against Porsche SE were rejected as inadmissible by the Higher Regional Court of Stuttgart on 27 March 2019. In doing so, the Court upheld the view that the proceedings before the Higher Regional Court of Braunschweig concerned the same subject matter and thus barred all other proceedings on this matter.13
Despite the introduction of Model Case Proceedings, a US law firm-led initiative continues to bring mass actions seeking payment from automobile manufacturers, and these are sometimes named class actions in layman's terms. Having made headlines by commencing a lawsuit before the Regional Court of Braunschweig on behalf of more than 15,000 car owners in November 2017, this law firm-led initiative is reported to have filed many other actions in the meantime.14 For this purpose, the law firm is cooperating with a limited liability company called 'financialright GmbH', known under the brand name 'myRight'. The company is using the opportunity to bundle claims through fiduciary assignment. Car owners assign their potential claims to myRight, which then asserts these claims in court. In the event of success, myRight receives a payment, or more precisely a fee, of 35 per cent of the realised amount. Technically, however, every single claim transferred to myRight must be ruled on by the court individually.
Until recently, courts and commentators were unsure whether the bundling of claims through fiduciary assignment for the purpose of mass action was legal in Germany and, hence, whether such claims could rightfully be brought to court. On 27 November 2019, the Federal Court of Justice allowed this operation in principle in a landmark case concerning a company seeking to enforce tenancy law.15 Despite this judgment, myRight subsequently suffered a setback with regard to the legality of its business model before the Regional Courts of Braunschweig and Munich. In an oral hearing on 6 February 2020, the Regional Court of Braunschweig stipulated that it did not consider the landmark ruling of the Federal Court of Justice to be applicable if the claims assigned to myRight originally belonged to Swiss consumers.16 The Regional Court of Munich ruled on 7 February 2020, that it was unlawful for myRight to bundle claims in a case about damage that related to purported infringements of EU competition law.17
The goals of the following means of collective redress available under German law partly resemble the objectives of class actions.
i Model Case Proceedings
Model Case Proceedings allow registered consumer organisations to bring an action that bindingly determines legal issues or contested facts. As opposed to regular actions, which only have effect inter partes, these determinations have binding effect for other court proceedings.
The Model Case Proceedings bind the decisions of all individual claims that meet the requirement that the claimant made a valid registration for the Model Case Proceedings. Thus, the Model Case Proceedings do not themselves provide any relief for the injured class and there is no payment that follows directly from the proceedings. Rather, following the Model Case Proceedings, each individual party has to bring an individual claim before a court, which is then bound by the determinations of the proceedings. This is one of the reasons why the introduction of the Model Case Proceedings has not resulted in consumers no longer filing individual law suits in the Dieselgate matter, as they believe they are better off in a lawsuit directly aimed at obtaining compensation in the form of damages.
A payment only arises from the Model Case Proceedings themselves if the parties agree upon a class settlement. Commentators have therefore continued to call for further expansion of collective redress mechanisms.
The actions under the new law may be brought by 'qualified entities'. These entities must (1) have a certain minimum number of members, (2) have been registered for at least four years, and (3) focus on helping consumers by way of advice and education. They must not (1) pursue claims in Model Case Proceedings for purposes of making profit, and (2) receive more than 5 per cent of their funding from private sector companies. As mentioned above, the specific make-up of consumer organisations eligible to initiate Model Case Proceedings has already become a decisive issue in early Model Case Proceedings cases.
Once Model Case Proceedings are pending, no further Model Case Proceedings are permissible in respect of the same motions and the same subject matter. There are no safeguards to ensure that the first proceedings to be initiated are in fact pursued by organisations that are actually well adapted to the task. Quite simply, it is a first come, first served approach.
Model Case Proceedings are permissible if (1) they have been initiated by a qualified entity, (2) it has been demonstrated that the motions for a declaratory judgment are relevant for the claims or legal relationships of at least 10 consumers, and (3) at least 50 consumers registered their claims or legal relationships within two months of the court publishing the matter in the registry of the Federal Office of Justice (the Registry).
In principle, Model Case Proceedings follow the general rules of civil procedure. The most notable exception is that the court of first instance is the higher regional court, which usually only acts as a court of appeal.
To participate in Model Case Proceedings, consumers must enter their claims or legal relationships in the Registry. This can be done only up until the date prior to the first hearing of the case, to prevent free-riding on proceedings the hearings for which hold promising prospects for claimants. The registration may be revoked up until the close of the day of the first oral hearing.
The registration of a claim or legal relationship triggers a number of legal consequences: (1) the lapse of the relevant limitation period is suspended; (2) registrants are no longer in a position to initiate an individual lawsuit for as long as the Model Case Proceedings are pending and individual actions pending at the time the claim is registered must be suspended; (3) only registered consumers will participate in the binding effect of the facts and legal views established by rulings in the Model Case Proceedings.
Model Case Proceedings end with either a judgment or a settlement. A judgment has the binding effect outlined above, irrespective of whether the ruling is in favour of the plaintiff or the respondent. It can only be challenged in the Federal Court of Justice, which, in principle, is bound by the factual findings of the court of first instance and will review the case only from a legal perspective.
A settlement needs to contain stipulations on the compensation payable to the registered consumers, when these payments are due and also how the individual claimants need to verify their claims. The settlement is also subject to approval by the court. The court must evaluate whether the proposed settlement is adequate for the claims at hand. Despite these in-built protections against the misuse of settlements, consumers may still choose to opt out of the settlement within one month. The settlement only becomes effective if no more than 30 per cent of claimants choose to opt out of the settlement. This, in turn, is determined by a court decision, which is the final requirement for the effectiveness of a settlement.
ii Capital Markets Model Case Act
The Capital Markets Model Case Act (KapMuG) facilitates the establishment of factual or legal aspects of claims on behalf of a group of plaintiffs in capital market mass disputes. It became known to the public because of several proceedings against Deutsche Telekom AG concerning stock market flotations of Telekom shares in 1999 and 2000 that resulted in plaintiffs filing lawsuits against Telekom alleging prospectus errors.
In contrast to the new Model Case Proceedings, the scope of the KapMuG is limited to (1) claims for damages on account of false, misleading or omitted public capital market information, (2) claims for damages arising from the use of such capital market information or the omission of necessary clarification, and (3) contractual rights to performance resulting from an offer of shares according to the German Securities Acquisition and Takeover Act.
The first stage of the proceedings takes place before the trial court and starts with the request of one litigant to execute Model Case Proceedings under the KapMuG. The request must aim to establish a certain fact or legal aspect that is decisive for the alleged claim. If admissible, the trial court will suspend the proceedings and publish the request in the litigation register of the Federal Gazette. Provided that at least nine further similar requests are published within six months, the trial court refers the matter to the higher regional court. The decision has the effect that further pending proceedings with trial courts concerning the same subject matter are also suspended, and that the parties to those proceedings will be involved in the Model Case Proceedings, unless a plaintiff withdraws from the action within a month.
In the second stage, the higher regional court appoints a model case plaintiff. This is in contrast to Model Case Proceedings, which follow a first come, first served approach. The court must take into account (1) the suitability of the plaintiff litigating the case compared to the other plaintiffs, (2) an agreement of the plaintiffs regarding the appointment, and (3) the amounts claimed by each plaintiff. The remaining plaintiffs may take part in the proceedings as third parties with limited rights. As such, they are entitled to avail themselves of means of contestation or defence independently. There is no model case defendant. Instead all defendants of the initial proceedings are considered defendants in the Model Case Proceedings.
Subsequently, the case is published in the litigation register of the Federal Gazette once again. Third parties have the opportunity to register their claims within six months of this publication. While the parties registering must be represented by a lawyer, they do not become involved in the Model Case Proceedings. Rather, the registration serves the purpose of suspending the limitation period of the claim.
The Model Case Proceedings are then concluded either by a decision of the higher regional court or by settlement. The decision by the court is binding for all suspended cases, but may be appealed to the Federal Court of Justice on points of law. The validity of a settlement depends on the approval of the court and the participants. The latter have the right to withdraw from the court-approved settlement within a month of service of the written settlement. If less than 30 per cent of the registered claimants declare their withdrawal, the settlement becomes effective for all parties who have not opted out of the settlement.
During the third and final stage, the suspended proceedings before the trial court are continued and concluded by judgment or settlement, including a decision on the costs of both the initial and the Model Case Proceedings. The judgment obtained in the continued proceeding can again be appealed for reasons that were not the focus of the Model Case Proceedings.
As for the aforementioned Telekom trials, two Model Case Proceedings were concluded by the Higher Regional Court of Frankfurt in 201218 and 2013.19 However, despite some back and forth between that Court and the Federal Court of Justice, the matter has not been comprehensively resolved by a final and binding judgment even to the present day. Under the KapMuG, therefore, no relief has been provided to the plaintiffs 18 years after the incurrence of the alleged damage and even this fact alone shows that the KapMuG has not lived up to the expectations many had for it. This is because, among other things, the relevant cases are conducted not by one or more plaintiffs on behalf of others in a single trial but essentially by way of two trials, the individual and the Model Case Proceedings – each with the possibility of appeal.
iii Joinder of parties
Beyond specific forms of collective redress, German law provides some instruments that may be used to try to mimic some effects of class actions. Several litigants may, or in certain cases must, sue or be sued as joined parties. For purposes of procedural economy, the courts tend to interpret the requirements liberally insofar as the suitability of joint proceedings and decision-making are alone considered sufficient to justify a joinder of parties.
In essence, plaintiffs asserting a similar cause of action are able to jointly bring a lawsuit in the same court. In this respect, the possibility of joinder resembles class actions. There are, however, significant differences that make it generally unattractive for larger groups of plaintiffs to bring a joint lawsuit. Most importantly, even though only one proceeding takes place, each litigant must obtain his or her own judgment and the court must rule on each case individually and determine the merits of each plaintiff's claim separately. Therefore, the higher the number of plaintiffs, the greater the difficulties in handling the case. Moreover, a (voluntary) joinder of parties may result in inconsistent decisions in terms of procedural law (for instance, if a default judgment is rendered against one party but not another) and does not prevent the court from coming to different conclusions on the merits of the individual cases under substantive law. Finally, it is in the court's discretion to separate the joint lawsuits as it sees fit. In short, there is little incentive for plaintiffs to resort to a joinder of parties to bring similar claims against one defendant.
iv Bundling of claims
Another way of allowing plaintiffs to partly emulate the effect of class actions is the bundling of claims. Potential plaintiffs may assign their claims to an institution or entity, or may give them the authorisation to assert such claims on their behalf. In this way, multiple claims can be concentrated in one proceeding. The myRight action chose this approach to assist a large number of multiple claimants.
In some ways this may resemble the effects desired by class actions, given that one plaintiff asserts claims on behalf of multiple others. Those others do not carry the burden of engaging in the litigation, yet benefit if the plaintiff prevails. Potential plaintiffs may be less hesitant to state their claims because the hassle associated with litigation and the risk of bearing the costs in the event of defeat are reduced to a minimum. This method does, however, differ from class actions in one important aspect. While the economic effects for potential claimants may be similar to class actions, the legal structure is not. From a legal point of view, every single claim transferred to the plaintiff must be evaluated by the court individually. Even though only one plaintiff appears in court, it must argue and prove every individual case separately. Unlike in class actions, there is no class certification process that ensures at an early stage of the proceedings that one uniform judgment is appropriate for all class members. The fact that only one judgment is required provides little relief to the court or to trial economics.
A further drawback is that in order to be valid the assignment of claims must comply with the requirements of the Legal Services Act. This law regulates the provision of legal out-of-court services by non-lawyers. Institutions such as consumer organisations and other associations as well as individuals are entitled to provide such services only if they are registered in the legal services register. The registration process sets out high standards on proof of personal suitability and reliability. In addition, theoretical and practical knowledge and professional liability insurance are required. It is for these reasons and for those discussed above that the pursuit of multiple claims by special purpose vehicles on behalf of consumers has been, and still is, highly controversial.
The European Court of Justice recently added another disincentive to the bundling of claims. The Court ruled that a consumer who asserts claims assigned to him or her by other consumers may not rely on Article 18 of the Brussels Ia Regulation. This means the consumer is barred from commencing a lawsuit on behalf of other consumers in the courts of his or her place of domicile.20
v Association or interest group complaints
The Act on Actions for Injunctions (UKlaG) aims at ensuring a comprehensive level of consumer protection and enables private parties to enforce consumer protection laws.
The UKlaG allows qualified representative organisations, such as consumer protection associations and chambers of commerce, to seek injunctive relief against parties that use or recommend the application of certain general terms and conditions. It mainly applies when general terms and conditions are considered to be invalid or a law aimed at the protection of consumers (interpreted in a broad sense) is infringed. While the UKlaG facilitates the enforcement of consumer protection laws, it deviates in important ways from class actions. On the one hand, it allows claims to be brought against illicit practices and standard terms that affect a large number of consumers. By forcing businesses to refrain from using such clauses, relief is provided to a potentially large number of affected claimants. The method is also beneficial from an economic point of view because the trial only involves two parties. On the other hand, unlike class actions, consumers affected by the violation of consumer protection laws are not entitled to receive any further remedy in the course of the lawsuit. If, for example, a consumer feels entitled to compensation in the form of damages, he or she must commence a separate lawsuit.
IV CROSS-BORDER ISSUES
Owing to the fact that there is no general collective redress mechanism in the German legal system, there are no genuine cross-border issues concerning class actions. The aforementioned rules and proceedings are generally applicable to foreigners. With regard to the new Model Case Proceedings, a qualified entity from any EU Member State can register with the European Commission, thus qualifying for standing in Germany.21
Class action judgments by foreign courts are largely recognised in Germany. Issues may only arise if the recognition would violate public policy. The fact that the foreign proceedings are a class action does not itself conflict with German public policy. It is widely assumed, however, that enforcement of a class action may violate public policy if a party domiciled in Germany did not have the option to opt out of the action.22 Enforcement of foreign judgments is also likely to violate public policy if a class action judgment awards punitive or treble damages.23
V OUTLOOK AND CONCLUSIONS
Despite recent developments, means of collective redress are still relatively insignificant in Germany, in particular when compared to the class actions in other countries, such as the United States. The Model Case Proceedings are to be understood as the result of German lawmakers walking a thin red line. On the one hand, recent events have fuelled the discussion that German law should facilitate collective redress, particularly as it is considered to be a burden for individuals and small or medium-sized businesses to pursue potential claims individually against large or multinational corporations. On the other hand, there is also significant concern that an expansion of collective redress might lead to a 'claims industry' or 'conditions like in the United States', where – in the perception of many – highly professionalised plaintiffs' firms have the power to coerce or even blackmail companies with the mere threat of a class action.24 The German government has, therefore, taken a rather cautious approach to the matter. It is an open question whether the new Model Case Proceedings significantly change the landscape of collective redress in Germany.
No definite inferences can be drawn from the negligible practical application of Model Case Proceedings to date. Recent court rulings show that the requirements for a 'qualified entity' to file suit are not insignificant. It also remains to be seen whether the procedure of publishing Model Case Proceedings and the subsequent registration of claims and legal relationships in the Registry will stand a practicability test. Registering a claim with the action does not require the assistance of an attorney and thus can be achieved by savvy consumers. Yet, as there are certain requirements of substantiation, consumers might be in for a shock if, years after registering their claim, the registration turns out to be invalid on the basis of formal requirements. Finally, a major stumbling block might lie in determining whether Model Case Proceedings and individual claim actions actually pertain to similar facts. The Model Case Proceedings may only bind the court if the case at hand is, in fact, comparable. This, however, opens the door to factual disputes about the nature of the case at hand and its relation to the Model Case Proceedings. Therefore, the proceedings may not in fact substantially alleviate the burden of factual investigation on the courts of the individual claim.
The recent developments may only be the beginning for collective redress in Germany. In April 2018, the EU proposed the creation of a representative action for the protection of collective interests of consumers. Following the agreement by Member States on a number of amendments in a session of the Council of the European Union on 28 November 2019, a directive is expected to be enacted in the course of 2020.25 Under the current proposal and similarly to the German Model Case Proceedings, representative actions can only be filed by qualified entities, such as consumer organisations, designated by Member States for this purpose. Unlike the Model Case Proceedings, the EU proposal enables qualified entities to bring representative actions, not only for declaratory decisions, but also for different types of recourse, including injunctive and redress measures.26
Because of these effects, the Model Case Proceedings could soon become superfluous. The same is true for attempts to circumvent the absence of class actions in Germany by resorting to a joinder of parties or a bundling of claims. These operations are likely to be uneconomical compared to representative actions under the EU proposal, because they do not disburden courts from assessing and deciding on every single claim separately.27
1 Henning Bälz is a partner at Hengeler Mueller.
2 BT-Drucks. 19/2439.
3 Legal Tribune Online, 'Braucht Deutschland die Sammelklage?', 27 May 2016.
4 Handelsblatt Online, 'Die wichtigsten Fragen und Antworten zur Diesel-Klage gegen VW', 22 October 2018.
5 Gängel, NJW 2019, 378, 379.
6 Higher Regional Court of Stuttgart, judgment of 20 March 2019, reference No. 6 MK 1/18.
7 Higher Regional Court of Braunschweig, decision of 12 December 2019, reference No. 4 MK 2/18.
8 Gängel, NJW 2019, 378, 380.
9 See official registry of the Federal Ministry of Justice and Consumer Protection, https://www.bundesjustizamt.de/DE/Themen/Buergerdienste/Klageregister/Bekanntmachungen/Klagen_node.html.
10 BT-Drucks. 19/2507, 18.
11 Higher Regional Court of Munich, judgment of 15 October 2019, reference No. MK 1/19.
12 Handelsblatt Online, 'So wollen Tausende Anleger Milliarden von VW erstreiten', 10 September 2018.
13 Higher Regional Court of Stuttgart ruling of 27 March 2019, reference number No. 20 Kap 2/17; 20 Kap 3/17; 20 Kap 4/17.
14 Legal Tribune Online, 'Klageflut zum Jahresende 2018', 28 January 2019.
15 Federal Court of Justice, judgment of 27 November 2019, reference No. VIII ZR 285/18, ZIP 2019, 2465.
16 Legal Tribune Online, 'LG Braunschweig will tausende Myright-Klagen abweisen', 6 February 2020.
17 Legal Tribune Online, 'Mehr als 3.000 Spediteure verlieren vor LG München I', 7 February 2020.
18 Higher Regional Court of Frankfurt, judgment of 16 May 2012, reference No. 23 Kap 1/06, ZIP 2012, 1236.
19 Higher Regional Court of Frankfurt, judgment of 3 July 2013, reference No. 23 Kap 2/06, ZIP 2013, 1521.
20 European Court of Justice judgment of 25 January 2018, reference No. C-498/16.
21 A list of these entities can be found in the Official Journal 2016/C 361/01.
22 Stein/Jonas/Roth, Commentary on the German Code of Civil Procedure, Section 328 Paragraph 113.
23 Federal Court of Justice, judgment of 4 June 1992, reference No. IX ZR 149/91, BGHZ 118, 312.
24 Tilp/Schiefer, NZV 2017, 14, 18.
25 Prütting, ZIP 2020, 197, 203.
26 Proposal for a Directive of the European Parliament and of the Council on representative actions for the protection of the collective interests of consumers, and repealing Directive 2009/22/EC, 2018/0089 (COD).
27 Börsen-Zeitung Online, 'Entwurf zur EU-Richtlinie ist unmittelbar auf Entschädigung gerichtet – Aus für Musterfeststellungsklage?', 14 December 2019.