New type of class action in Germany – Update
Federal Ministry of Justice publishes ministerial draft and starts public consultation procedure
On 27 January 2023, the European Commission initiated infringement proceedings against Germany and 23 other Member States because the Representative Actions Directive (RAD) was not transposed into national law by the due date of 25 December 2022. Germany now plans to transpose the RAD until the application deadline on 25 June 2023 the latest.
On 16 February 2023, the Federal Ministry of Justice (BMJ) published its ministerial draft of the RAD which has already been in the interdepartmental consultation procedure since mid-September 2022. Some key points of the ministerial draft continue to be fiercely discussed within and outside the Federal Government. In order to accelerate the implementation process, a public consultation procedure is conducted in parallel to the interdepartmental consultation. The deadline for submitting comments in the public consultation procedure is 3 March 2023.
Procedure for the new representative action
The core of the ministerial draft is the introduction of a collective action for redress next to the model declaratory action (cf. already our news article of 18 September 2022 and Schläfke/Lühmann/Stegemann, PHi 2022, 138).
According to the ministerial draft, a qualified association may bring an action for redress if at least 50 persons register similar claims in the register of representative actions. Registration is possible until the day before the first oral hearing. Germany will thus keep the opt-in model already used for the existing model declaratory action. What is new is that smaller companies (those employing fewer than 50 people and with annual turnover or an annual balance sheet below €10 million) can also register their claims. Since the ministerial draft does not contain a limitation to original claims, there is a considerable potential for circumvention and abuse inter alia because litigation-funded claim vehicles may register multiple claims previously assigned to them.
The material scope of the representative action goes beyond the RAD as it covers any civil claim and not only claims based on an infringement of provisions of Union law referred to in Annex I of the RAD. Representative actions could therefore become relevant in a variety of areas, such as claims for breaches under the law on data privacy, product liability cases, cartel damages, capital investment cases or the enforcement of the Digital Markets Act.
The procedure following an action for redress will be divided into the following stages:
Estimation of damages and determination of a collective total amount
The qualified entity bringing a collective action for redress has to provide sufficient facts in order to establish to the satisfaction of the court the amount of damages claimed. Based on those facts, the court is authorised to estimate damages pursuant to Section 287 of the German Code of Civil Procedure.
In the final redress judgment, the court will determine a collective total amount. When doing so the court can under certain circumstances assume that all claims are justified. Whether the registered consumers are entitled to demand compensation on the basis of the final redress judgment will only be examined in the implementation proceedings. Any excess awarded has to be refunded.
Litigation funding possible
Litigation funding will generally be possible. There are certain admissibility requirements to avoid conflicts of interest between consumers and the litigation funder. Since qualified entities often have limited financial resources, litigation funding can give them significantly more room for manoeuvre. However, the question is what motivation litigation funders would have to fund a representative action, since generally the entire amount claimed must be paid to consumers and practically a profit-sharing-agreement with the individual (often unknown) consumers cannot be concluded.
Litigation funding of disgorgement proceedings possible
It is planned to allow litigation funding in case of actions for skimming off profits under section 10 of the Law against Unfair Competition (UWG). One condition is that the competent public authority approves the financing (in particular the success fee) in advance. Until now, such litigation funding was not possible. In addition, actions for skimming off profits will not require an intentional infringement any longer but only gross negligence. These amendments are likely to increase the number of actions for skimming off profits in the future.
While the general model of the collective action for redress is agreed upon, , there are several important aspects which are still under discussion within the Federal Government. The aspects include in particular:
Timing of the opt-in: Contrary to the ministerial draft, the Green-led Federal Ministry for the Environment and Consumer Protection (BMUV) as well as consumer associations are in favour of consumers being able to register until after a judgment has been issued (post judgment opt-in). However, it is questionable whether such a late opt-in is possible for reasons of the rule of law.
Suspension of limitation period in the case of a collective action for redress: The ministerial draft correctly provides that the limitation period is suspended only for claims by registered consumers. The BMUV and consumer associations, however, favour a suspension independent of a prior opt-in. In this case, collective actions for redress would suspend the limitation period of claims of all affected consumers for the duration of the proceedings. Such an effect is already necessary for actions for injunctive measure where consumers do not have to participate. It is not clear why this should also apply to actions for redress if consumers have the possibility to suspend the limitation of their claims by registering for the action.
Requirements for legal standing of qualified entities: While the ministerial draft retains the requirements of section 606 (1) of the German Code of Civil Procedure for legal standing, the BMUV and consumer associations advocate for less strict requirements. According to press reports, the BMJ is now prepared to meet these demands. For example, the threshold of 350 members relevant for legal standing is to be lowered to only 75 members and the minimum registration period for qualified entities is to be reduced from four to one year.
Burden of proof: It is also being discussed whether there is the need to amend provisions regarding the burden of proof in such a way that it is easier for the qualified entity to provide evidence when a fact to be proved by the is known only to the defendant company.
Additional introduction of a group action: Finally, although not required by the RAD, the BMUV and consumer associations advocate for the introduction of a group action procedure. In such a collective procedure, the affected consumers can initiate the procedure themselves; legal standing for collective actions would then no longer be limited to qualified entities. A corresponding bill by the Green party failed in 2017.
Noerr is a pioneer in defending against collective and mass actions. With a specialised team of over 50 lawyers 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.