New type of class action in Germany

Consumer Rights Enforcement Act: Ministerial draft passes to the stage of interdepartmental coordination

At the end of this year, a new type of class action will be introduced in Germany, by which associations can collectively file actions for performance for consumers against companies for the first time. This is what the European Directive on representative actions requires of the German legislator. For companies, this creates the risk of being sued collectively by many consumers for compensation, repair or price reduction in the event of breaches of duty.

Last Thursday, the Federal Ministry of Justice submitted a corresponding ministerial draft of the Consumer Rights Enforcement Act for interdepartmental coordination. This draft is likely to provide plenty of material for discussion in the coming weeks.

Procedure for the new representative action

The new representative action enables qualified consumer associations for the first time to sue directly for performance, i.e. obtain a decision on redress. While the model declaratory action can only achieve a declaratory judgment stating that the conditions for claims are in place or are not in place, the new representative action allows companies to be sued directly for payment.

The ministerial draft specifies that a qualified association may bring an action for redress if at least 50 people register similar claims in the register of representative actions. Registration is possible until the day before the first oral hearing. The Federal Ministry of Justice thus proposes an opt-in model. In this respect, the representative action corresponds to 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.

The purpose of the representative action is that all claims by a large number of consumers against a company can be brought. Since the Directive on representative actions only requires that certain consumer rights (e.g. under the law on data privacy) can be enforced by means of representative actions, the ministerial draft represents an implementation that goes beyond this. In Germany, representative actions could therefore also become important in other areas, such as claims for cartel damages, capital investment cases or the enforcement of the Digital Markets Act.

The procedure following an action for redress will be divided into several stages as follows:

 

 

Estimate of damage and determination of a collective total

In the representative action, it will be up to the qualified associations to present specific indications of the amount of damage. The court will then be authorised to estimate the damage pursuant to section 287 of the German Code of Civil Procedure.

In the final redress judgment, the court will award a collective total by assuming all claims filed are fully justified. The individual claims will only be examined in the implementation proceedings and any excess awarded will be refunded.

Litigation funding possible

The ministerial draft states that litigation funding will generally be possible. There are certain admissibility requirements to avoid conflicts of interest between consumers and the litigation funder.

Since qualified associations 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 out to consumers and no profit-sharing can be agreed.

Right of action for foreign associations too

Article 4 of the Directive on representative actions stipulates that qualified associations from other Member States will also be able to bring representative actions in Germany if they meet certain requirements. Companies may therefore face lawsuits from foreign associations, such as those that have operated for many years in Portugal or the Netherlands.

In some cases, companies must raise objections in separate proceedings

Companies might have objections to the claims of individual consumers that they cannot assert in the redress proceedings. For these cases, section 40 of the draft Consumer Rights Enforcement Act states that companies must assert the objections in their own legal proceedings against the consumers and reclaim the amounts paid out on the basis of unjust enrichment.

Next steps

The draft that is now available will first be discussed within the federal government. Next, it must go through the parliamentary procedure. This is a matter of urgency. The Directive on representative actions must be transposed into German law by 25 December 2022, and the new law must be applicable by 25 June 2023 at the latest. It remains to be seen whether and what changes will be made to the draft of the Act during the rest of the procedure.

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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.