Bolstering class actions in Germany – The current state of play

Europe's largest economy unveils plans to meet EU rules to facilitate group consumer claims

In February 2023, the German Federal Ministry of Justice introduced a first draft bill to enact the European Parliament and Council's Directive (EU) 2020/1828 of 25 November 2020 on representative actions for the protection of the collective interests of consumers (the Directive).

The move comes more than a month after a deadline to begin enacting the Directive at national level. The stakes are considerable, the Directive is the first attempt to usher in a region-wide framework for group action claims, a move seen by supporters as a key means of boosting consumer rights. In particular, the draft provides for consumers and small companies represented by certain entities to bring a collective action for payment against companies. This type of class action constitutes a novelty in German Civil Procedure Law and is analysed in more detail below.

The Status quo of collective redress in Germany

Until now, the key mechanism for collective redress in Germany has been the Model Declaratory Action (MDA), which was introduced into the German Code of Civil Procedure in 2018 to allow qualified consumer entities to pursue claims for individuals. The proceeding ends with either a settlement or a declaratory decision, with a declaratory decision being binding on the consumers who joined. However, the MDA has failed to secure the expected take-up. This lack of popularity is probably because the model does not allow damages to be awarded to the individual consumer; to secure damages, each consumer must bring a stand-alone claim before the German courts.

Consumer entities can also in certain cases seek injunctions under the German Act on Injunctive Relief and the Act Against Unfair Competition to enforce consumer rights. However, such injunctions only apply to the parties to the proceedings and therefore do not grant comprehensive consumer protection.

Furthermore, the Act on Exemplary Proceedings in Capital Market Disputes provides for a model proceeding for aggrieved investors, in which legal and factual issues for certain securities law cases are decided with legal effect for similar cases. In practice, however, these proceedings have proven time-consuming and cumbersome.

Against this backdrop, hopes are high that German legislators will grasp the need to transpose into national law the EU's framework directive to address the present regime's shortcomings.

The implementation of the Directive into German law

The cornerstone of the draft bill on the transposition of the Directive is the new Act on the Enforcement of Consumer Rights (Verbraucherrechtedurchsetzungsgesetz, VDuG-E). In this act, the provisions on the MDA and the new collective action for payment are brought together.

Legal standing

As with the MDA, it is not consumers who are entitled to file an action but so-called qualified consumer entities. The criteria that such entities must meet to have legal standing are the same as for the MDA. They must have at least ten associations as members active in the same field or represent at least 350 individuals and also be registered for at least four years. Their activities must also be directed towards educating and advising consumers and they may not receive more than 5% of their financial resources through contributions from companies. It is not permitted to bring an action against a company purely for profit and the courts can demand disclosure of financial resources.

What is new is that qualified entities from other EU Member States that meet the requirements there and are listed in the new European register of consumer representative actions may also bring a group claim for payment in Germany.

The new law's scope

The scope of application goes beyond the requirements of the Directive in two important respects. First, subject to the personal scope of the VDuG-E are not only consumers but also small companies. Such companies are defined as those with fewer than 50 employees and an annual turnover or balance sheet not exceeding €10 million. Second, the VDuG-E applies to imminent violations of specific provisions of European consumer law including their translation into national law and all civil disputes between consumers and companies, for instance, disputes in tort or contract law.

As such it appears likely that significant areas of application of the collective action for payment will also be environmental, social and corporate governance, data protection and antitrust.

Similarity of claims

A requirement for admissible collective action for payment is that the sought-after claims are similar. Under the VDuG-E, claims are similar if based on the same or comparable facts and if the same factual and legal issues are relevant for the court's decision. According to the explanatory memorandum of the VDuG-E, a degree of similarity of the claims is required which allows the courts a "template-like" test. It appears this criterion will raise considerable difficulties in practice and will be key in determining how wide the application of such group claims will ultimately be.

As an example, for relevant facts that are different and therefore preclude the assumption of similarity, the VDuG-E guidance gives the example that not all products of a series are defective, noting that this must be clarified in each individual case. As an example of different legal issues, it is stated that some airline passengers booked directly with the airline while others used a travel agent.

Opt-in only

Crucially for the application of the new regime, the VDuG-E rejects an opt-out model, in which all affected consumers who do not actively opt out would have been covered by the collective action for payment. Opt-out models are touted by some as a key foundation of effective group claim regimes, though their application remains controversial with policymakers wary of importing US-style litigation.

Instead, an opt-in model with a low accession threshold was chosen (no obligation to be represented by a lawyer, text form and no costs). Accession to the action may be affected up to the last day before the oral hearing.

For consumers who joined the collective action for payment, the action will have the effect of suspending the limitation period. In addition, the decision on the collective action for payment will be legally binding, ie, once the action has been dismissed, consumers will no longer be able to assert their claims individually. Individual actions by consumers who have also registered their claims for collective action are also to be suspended.

Competent court

In principle, the Higher Regional Court in whose judicial district the company sued has its registered office, has jurisdiction for the collective action for payment. Aiming to increase the efficiency of proceedings and the quality of decisions, German federal states are empowered to concentrate local jurisdiction for representative actions. If federal state legislators make use of this authorisation, specialised courts for collective actions for payment could be established in response.

Judgment and implementation

The VDuG-E provides that the court's decision is to be split into three phases:

• The first phase ends with an initial judgment, by which the Higher Regional Court can either find that the company's liability is justified or dismiss the action.
• In the settlement phase, the parties shall seek an amicable agreement to implement the first judgment.
• If a settlement is not reached the Higher Regional Court hands down a second judgment. Subsequently the implementation phase begins.

The VDuG-E provides that the court shall determine the collective total amount, considering all circumstances of the case, whereby the entity with legal standing shall provide the court with concrete indications on which it can base its estimate.

The distribution of the total collective amount to consumers and small businesses is then performed by an independent administrator. This can be, for example, a tax adviser, auditor or insolvency administrator. This is the decisive difference compared to the MDA: the collective action for payment is designed in a way that no further individual action is required for distribution.

The administrator must implement the criteria of the eligibility to payment laid down by the court in the second judgment and assess their fulfilment by consumers and small companies. Their role is similar to a settlement administrator in US class action settlements.

Conclusion and outlook

If the VDuG-E is adopted in its current form, it will create a litigation model that is likely to be more attractive to consumers and small companies than the current statutory remedies available. However, the VDuG-E does not take away the national basis for mass individual actions or the phenomenon of a collective action in which a litigation vehicle collects assigned claims and asserts them in pooled form. Such actions will therefore remain relevant.

The draft bill is currently being discussed and reviewed within the German Federal Government. After this legislative step, the bill will be submitted to the German Federal Council, the Bundesrat, before being passed to the German Parliament, the Bundestag. Until the bill is passed, various bodies will therefore review the legislation, which could lead to further changes. It is likely, however, that the legislative process will gain momentum due to the deadline of 25 December 2022 to translate the EU Directive and the infringement proceedings against Germany therefore initiated by the EU Commission at the beginning of February 2023.

For more analysis on moves to bring group claims to Europe, see our briefing The Representative Actions Directive: get set for a new wave of European class actions