The Class Actions Law Review: Germany
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 meaningfully changed with the introduction of the Model Case Proceedings in November 2018. 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 by means of a declaratory judgement for future proceedings between myriad claimants. However, it is not possible to directly file for damages (or another specific remedy).
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. Moreover, all of them have specific drawbacks that decrease their efficiency compared to class actions.
The year in review
Last year, new case law regarding mass litigation emerged, dealing with attempts to mimic class actions directly aimed at obtaining damages. Courts also decided on various issues arising under the relatively new Model Case Proceedings Act.
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. As procedural or substantive law do not per se enjoin a party form the pursuit of claims which it acquired from other parties, the dispute mainly circles around rather technical issues associated with this approach. These issues arise under specific rules on the rendering of legal services.
At the end of 2019, in a landmark case concerning a company seeking to enforce tenancy law, the Federal Court of Justice allowed the pursuit of claims acquired by fiduciary assignment against payment of a success commission of 30 per cent.2 Whereas some commentators and market players praised this decision for paving the road for the assignment model, in subsequent decisions of lower courts legal tech providers suffered setbacks with regard to the legality of business models based on the assignment model.
The Regional Court of Munich I found an assignment model to be in breach of the German Legal Services Act.3 In this specific case, a legal tech provider, financially supported by a litigation financing entity, bundled cartel damage claims that a number of truck owners had assigned to him, and brought them against the cartel members before the court. The legal tech supplier was supposed to receive a success commission of 33 per cent.
In contrast to the case decided by the Federal Court of Justice, the legal tech provider's business model did not foresee an out-of-court enforcement of the claims in a first step but the pursuit of the claims directly in court. The Court found that this legal service was no longer covered by the legal tech provider's debt collection licence. The Court also considered the bundling of the claims to be unlawful because it resulted in a conflict of interest. This was because settlements did not require the prior consent of the initial owners of the claims, who in the case of a settlement were to participate proportionately in the settlement payment (i.e., irrespective of the chances of success in the individual case). The Court discarded this concept as it favoured hopeless cases to the detriment of more promising cases. Moreover, the Court held that the provider's dependence on a litigation financing entity could lead to a conflict of interest in such a way that the legal tech provider placed the economic interests of the litigation financing entity above those of the initial claim owners.
The Regional Court of Braunschweig considered an assignment model to be unlawful in certain cross-border constellations.4 In this case, a legal tech provider used a similar model as in the Munich case to pursue claims of Swiss customers who had bought cars equipped with diesel engines and had allegedly been harmed in the Dieselgate matter.
Although the Court did not follow the rationale set out by the Regional Court of Munich, denied a violation of the German Legal Services Act and found a mechanism to deal with potential conflicts of interest, it eventually concluded that a debt collection company must not provide legal services regarding foreign law. Under the Rome II Regulation, the asserted claims in tort were subject to Swiss law, and their pursuit was not covered by the provider's debt collection licence.
These decisions show that there still is significant uncertainty as to the permissibility of bundling claims for the purposes of mass litigation, and it is quite likely that the Federal Court of Justice will have to deal with the issue again, which can be of existential importance, especially for – mostly foreign – litigation financing entities and their business models. In the meantime, in order to overcome the aforementioned concerns, legal tech providers have set up new vehicles that purchase the claims that shall be pursued (rather than agree on a fiduciary assignment) and, thus, bear the full litigation risk. So far, court rulings regarding this new business model are not available. Eventually, the issue may become moot by Directive (EU) 2020/1828 on representative actions for the protection of the collective interests of consumers, which came into force at the end of 2020 and must be transposed by the Member States within 24 months with effect as per 25 June 2023 at the latest.
The Directive states that – similar to the German model declaratory proceedings – qualified entities (irrespective of their domicile throughout the European Union) may file actions on behalf of consumers. However, the requirements for these entities are (at least for cross-border actions) less strict than those provided for in the German model declaratory proceedings; for example, no minimum number of members is required. Furthermore, the action may not only be for declaratory relief but directly aimed at an injunction or remedy. Thus, consumers will no longer have to pursue their claims individually in court after the issuance of a declaratory judgment on their claims' legal basis. Moreover, commercial third-party funding (i.e., the involvement of litigation financiers) is explicitly provided for as long as the independence of the qualified entity is preserved, conflicts of interest are prevented and the collective interests of consumers remain in focus. Another special feature of the representative action is the disclosure of evidence. If the qualified entity has provided all reasonably available evidence sufficient to support the representative action and has indicated that additional evidence is subject to the order of the defendant or a third party, the court may, upon request of the qualified entity, order that the defendant or third party disclose evidence.
With regard to the Model Case Proceedings Act already in effect as per 10 January 2021, 14 cases were listed in the registry of the Federal Office of Justice (the Registry). The most prominent case, initiated by a consumer association against Volkswagen in regard of Dieselgate, was terminated in 2020 by a settlement providing for payments by Volkswagen of an estimated total amount of up to €830 million. It is noteworthy that the parties chose not to enter into a court-approved settlement as foreseen in the Model Case Proceedings Act but an out-of-court settlement resulting in the withdrawal of the claim by the claimant.
The most recent decision by the Federal Court of Justice regarding Model Case Proceedings dealt with the prerequisites that a model case claimant must fulfil to constitute a qualified institution allowed to bring a case. Once again, the Court applied rather strict standards, setting out that the institution must not only have a minimum number of members (at least 10 associations or 350 individuals), but that these members must hold a full membership giving them the opportunity to take influence on the institution's business. A mere pro forma (internet) membership does not suffice. The Court also held that the institution must demonstrate that it has got the required minimum number of members by disclosing the identity of its members. Finally, the Court concluded that in order to constitute a qualified consumer protection institution, the claimant's main purpose must be to inform and advise consumers on a not-for-profit basis, whereas the pursuit of consumers' claims in or out of court should be of a subordinate nature. This assessment follows the law makers' intention to prevent a 'claim industry'.5
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 on all individual claims that meet the requirement that the claimant made a valid registration for the Model Case Proceedings. The Model Case Proceedings do not themselves provide any relief for the injured class and there is no payment that follows directly from a ruling in 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. A payment only arises from the Model Case Proceedings themselves if the parties agree upon a class settlement. This is one of the reasons why the introduction of the Model Case Proceedings has not resulted in consumers no longer filing individual lawsuits even if a large number of similar cases is given, for example, in the Dieselgate matter, as they believe they are better off in a lawsuit directly aimed at obtaining compensation in the form of damages.
The actions under the new law need to 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, or (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.
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; and (3) only registered consumers will participate in the binding effect of the facts and legal views established by the rulings in 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 claimant 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 German Capital Markets Model Case Act (KapMuG) facilitates the establishment of factual or legal aspects of claims on behalf of a group of claimants in capital market mass disputes. This 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 claimants filing lawsuits against Telekom for alleged 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 pursuant 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 Capital Markets Model Case Proceedings. 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 Capital Markets Model Case Proceedings, unless a claimant withdraws from the action within a month.
In the second stage, the higher regional court appoints a model case claimant. 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 claimant litigating the case compared to the other claimants, (2) an agreement of the claimants regarding the appointment, and (3) the amounts claimed by each claimant. The remaining claimants 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 Capital Markets 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 Capital Markets Model Case Proceedings. Rather, the registration serves the purpose of suspending the limitation period of the claim.
The Capital Markets 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 Capital Markets Model Case Proceedings. The judgment obtained in the continued proceeding can again be appealed for reasons that were not the focus of the Capital Markets Model Case Proceedings.
As for the aforementioned Telekom trials, two Capital Markets Model Case Proceedings were concluded by the Higher Regional Court of Frankfurt in 2012 and 2013.6 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 claimants more than 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 claimants 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, claimants 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 claimants 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 claimant's claim separately. Therefore, the higher the number of claimants, 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 claimants to resort to a joinder of parties to bring similar claims against one defendant.
iv Bundling of claims
Another way of allowing claimants to partly emulate the effect of class actions is the bundling of claims. Potential claimants 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.
In some ways this may resemble the effects desired by class actions, given that one claimant asserts claims on behalf of multiple others. Those others do not carry the burden of engaging in the litigation, yet benefit if the claimant prevails. Potential claimants 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 claimant must be evaluated by the court individually. Even though only one claimant 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 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.7
v Association or interest group complaints
The German Act on Injunctive Relief (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 unlawful general terms and conditions. It mainly applies if general terms and conditions are considered to be invalid or violate a law aimed at the protection of consumers (interpreted in a broad sense). While the UKlaG facilitates the enforcement of consumer protection laws, it deviates in important ways from class actions. On the one hand, it does allow 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. Yet, 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.
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.8
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. Enforcement of foreign judgments is also likely to violate public policy if a class action judgment awards punitive or treble damages.9
Outlook and conclusions
Despite recent developments, means of collective redress are still relatively insignificant in Germany, in particular compared to the class actions in other countries, such as the United States.
The Model Case Proceedings Act is the result of German lawmakers walking a thin red line. On the one hand, the Act reflects 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 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 claimants' firms have the power to coerce or even blackmail companies with the mere threat of a class action.10 Therefore, the German government has taken a rather cautious approach to the matter. The first available rulings in Model Case Proceedings indicate that courts also tend to carefully assess whether the claimant is indeed a 'qualified institution', which, as foreseen in the Model Case Proceedings Act, acts in the interest of consumers on a not-for-profit basis, and are keen to keep the 'claim industry' out of the game.
Against this background, it is not surprising that approximately two years after its becoming effective, Model Case Proceedings are perceived quite differently. Some praise them and claim that a settlement such as the one that has been reached in the proceedings against Volkswagen under the new law could never have been accomplished without the leverage provided for by mass litigation. Others argue that the Model Case Proceedings Act does not go far enough. In particular, it is criticised because the proceedings do not allow for motions aimed at compensation payments or another specific remedy, resulting in the requirement of two subsequent lawsuits to eventually settle a consumer's claim. This also explains why consumers – supported by legal tech providers – still seek their fortune in actions aimed at mimicking class actions. However, as is shown by recent case law, these approaches bear the risk of failing due to the restrictions applicable to rendering legal services in Germany.
After all, it may be that the Model Case Proceedings will be short-lived and will be regarded as an intermediary step towards more consumer friendly means of collective redress in Germany. The German lawmakers will have to transpose Directive (EU) 2020/1828 on representative actions for the protection of the collective interests of consumers within the next two years. In its realm, the preconditions that a 'qualified institution' must fulfil will be defined anew, and – probably most importantly – different types of recourse will be made available, including injunctive and redress measures.
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 the bundling of claims.
1 Henning Bälz is a partner at Hengeler Mueller.
2 Federal Court of Justice, judgment of 27 November 2019, reference No. VIII ZR 285/18, ZIP 2019, 2465.
3 Regional Court of Munich I, judgment of 7 February 2020, reference No. 37 O 18934/17.
4 Regional Court of Braunschweig, judgment of 30 April 2020, reference No. 11 O 3092/19.
5 Federal Court of Justice, judgement of 17 November 2020, reference No. XI ZR 171/19.
6 Higher Regional Court of Frankfurt, judgment of 16 May 2012, reference No. 23 Kap 1/06, ZIP 2012, 1236, and judgment of 3 July 2013, reference No. 23 Kap 2/06, ZIP 2013, 1521.
7 European Court of Justice, judgment of 25 January 2018, reference No. C-498/16.
8 A list of these entities can be found in the Official Journal 2016/C 361/01.
9 Federal Court of Justice, judgment of 4 June 1992, reference No. IX ZR 149/91, BGHZ 118, 312.
10 Tilp/Schiefer, NZV 2017, 14, 18.