New class action – Act on representative actions now in force
Update on 13 October 2023
The Representative Actions Directive Implementation Act (Verbandsklagenrichtlinienumsetzungsgesetz – the “Representative Actions Act”) was announced in the Federal Law Gazette on 12 October 2023 and came into force on 13 October 2023. Germany has thus completed the long-overdue transposition of the EU Representative Actions Directive 2020/1828 (the “RAD”).
The core of the Representative Actions Act is the introduction of a collective action for redress in addition to the model declaratory action already available since 2018. Due to the changes proposed by the judiciary committee of the Bundestag (BT-Drs. 20/7631), the final version of the Representative Actions Act that came into force differs in important points from the ministerial draft and the government draft (BT-Drs. 20/6520) (see for the two drafts our articles on 16 February 2023 and 31 March 2023 (see also Schläfke/Schmitt-Lampe, DATEV magazin, 18 August 2023 and the recording of our Noerr webinar).
Scope of application
Representative actions for redress cover all civil law disputes regarding claims and legal relationships of a number of consumers against an undertaking (section 1(1) of the Consumer Rights Enforcement Act – “CREA” (Verbraucherrechtedurchsetzungsgesetz)). This means that the area of applicability is significantly broader than that required by the RAD, i.e. with provisions related to not only consumer protection but also, for example, general tort law. The action for redress could become important in Germany, particularly when it comes to claims for damages under data privacy law, product liability cases, claims for antitrust damages, capital investment cases and the enforcement of the Digital Markets Act. The Federation of Consumer Organisations (Verbraucherzentrale Bundesverband) has already told the FAZ newspaper that it will use the new action for redress against energy suppliers, telecommunication companies and financial services providers.
Companies with fewer than ten employees and an annual turnover or an annual balance of not more than €2 million (small-sized enterprises) are considered equivalent to consumers and will also be permitted to join actions for redress (section 1(2) CREA). In this respect, too, the RAD’s requirements are being exceeded in the implementation. However, fewer companies are covered than initially planned in the government draft.
Standing to bring an action
Consumers themselves are not authorised to bring an action, but rather only eligible (German) consumer associations named in the list in section 4 of the Act on Prohibitory Actions (Unterlassungsklagengesetz) that do not receive more than 5% of their funding from companies (section 2(1) no.1 CREA). The requirement that an association has been on the list for one year makes it seem possible that associations are also founded ad hoc in order to bring actions for redress. Also, associations from other EU Member States can bring actions in Germany (section 2(1) no. 2 CREA). The lowered threshold for the associations to bring an action means that representative actions are more likely to be brought in future.
Representative actions are also appealing because the fairly low cost risks for associations eligible to bring an action are fairly reasonable – the value in dispute is capped at €300,000 (action for redress) or €250,000 (model declaratory action) irrespective of the actual economic importance of the case.
Pooling similar types of claims
Compared to the government draft, the requirement of similarity of the claims is less strict, allowing for an action if the action concerns “materially similar” claims (section 15(1) sentence CREA). This is the case when the claims are based on the same facts or on a set of materially comparable facts and essentially the same factual and legal issues are decisive for the claims (section 15(1) sentence 2 CREA). The broad wording gives the courts a lot of flexibility in handling actions for redress. Whether the claims at hand are similar enough will most likely be one of the most controversial issues.
Consumer quorum: claims by at least 50 consumers affected
Contrary to the government draft, claimants no longer have to provide evidence that claims by at least 50 consumers are affected by the representative action. Claimants only need to “reasonably demonstrate” that 50 claims are affected (section 4(1) CREA).
How the new representative action for redress works
The action for redress, which must be brought before the Higher Regional Court at the defendant’s place of business, is available in three models:
In the first model, the association is aware of the identity of the affected consumers and seeks performance directly to the consumers (section 16(1) sentence 2 CREA). If the action is successful, the company is ordered to make a payment directly to the consumers. In practice this model will probably not be used often because an association usually does not know the affected consumers by name.
The second model will probably be the most relevant from a practical point of view. In this model the association requests performance to unnamed consumers who are only identified by common group characteristics (section 16(1) sentence 2 CREA). The main procedural steps are the judicial proceedings for redress (interlocutory judgment on redress, settlement phase and final judgment on redress), the implementation proceedings with an optional judicial review on the trustee’s decision and (in some cases) subsequent judicial individual proceedings:
In the third model, the parties can adapt the second model and apply for a single judgment which contains all decisions otherwise split between the interlocutory and final judgment on redress (section 16(4) CREA).
In the second and third models, within narrowly defined boundaries, consumers and companies can ask the competent Higher Regional Court to review the trustee’s decision on the claims registered (section 28(4) CREA). This opens the door to making an already complicated, tedious and drawn-out process even longer and more expensive.
Late pre-judgment opt-in
Consumers must actively join the action for redress by registering their claims with a public register. The deadline for registration was changed several times in the legislative process. Registration is now possible up to three weeks after the end of the oral hearing in first instance (section 46(1) sentence 1 CREA). Since a judgment must not be issued earlier than six weeks after the end of the oral hearing (section 13(4) CREA), consumers must always register before a judgment.
This late opt-in option will often make it very difficult for defendants to engage in meaningful settlement negotiations prior to a judgment. The reason for this is that companies will not be able to ascertain before the start of settlement negotiations who and how many people have registered their claims and accordingly which claims are covered by a potential settlement.
Strict provisions on third party litigation funding
Third party litigation funding is permissible in principle. The requirements are more precise and stricter than in the ministerial and government drafts.
If the litigation funder’s success fee exceeds 10% of the sum to be paid by the defendant, the action is inadmissible (section 4(2) no. 3 CREA). The association must disclose the sources they use for funding the action as well as the financing agreement to the court (section 4(3) CREA). If the action is successful, the claimed amount must first be paid to the individual consumer. It is not allowed to deduct the success fee from the collective total awarded by the court. This is due to the structure of the implementation proceeding.
Litigation funding of actions for skimming of profits allowed
There is no explicit limit for the success fee in case a qualified entity uses third party litigation funding for financing an action for skimming off profits under section 10 of the German Act against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb – “Unfair Competition Act”). However, a prerequisite is that the Federal Office of Justice approves the financing conditions prior to the fling of the claim (section 10(6) of the Unfair Competition Act). Another significant change is that not only intentional but also grossly negligent violations of the Unfair Competition Act give rise to a claim for skimming off profits (section 10(1) of the Unfair Competition Act). Finally, such actions are more attractive in the future because the value of dispute will be capped at €410,000, limiting the costs of the proceedings considerably.
Suspension of statute of limitations
Bringing an action for redress only suspends the statute of limitations for claims that have been registered by consumers and small businesses (section 204a(1) sentence 1 no. 4 CREA). Suspension of the statute of limitations is thus much more narrowly defined than in the case of an action for an injunction which suspends the statute of limitations for all consumer claims affected by the violation without the need to register claims (section 204a(1) sentence 1 no. 2 CREA).
It should be noted that the suspension of the statute of limitations for actions for redress and injunctive actions does not apply to claims arising out of past infringements (Article 229 section 65 of the Introductory Act to the German Civil Code). Since filing a model declaratory action suspends the statute of limitations even in those cases, it is likely that association will file a model declaratory action alone or in addition to an action for redress (at least in old cases).
To provide detailed insight into representative actions for redress and an outlook as to the litigation landscape once the Representative Actions Act comes into force, we will be holding a webinar in English on 2 November 2023 (Link to the registration)
Noerr is a pioneer in defending against collective and mass actions. With the specialised team in our Class & Mass Action Defence practice group, Noerr regularly advises clients on defending against capital investor model proceedings, model declaratory actions and representative actions as well as on defending against claims through structured litigation vehicles and in mass actions.