Coming to Life – Germany ushers in EU class actions directive

The Consumer Rights Enforcement Act (Verbraucherrechtedurchsetzungsgesetz, the (VDuG) was published in the Federal Law Gazette on 12 October 2023 and came into force on 13 October 2023. Germany has thus completed the long overdue implementation of the Representative Actions Directive (EU) 2020/1828.

The VDuG introduces a novelty in the German system of collective redress – a class action which allows consumers, among other measures, to pursue payment claims against companies (cf. our note of 20 February 2023).

Given the amendments proposed by the German Legal Affairs Committee (BT-Drs. 20/7631), the version of the VDuG that has come into force differs in important respects from the draft bills of the German government and the German Ministry of Justice were largely consistent (cf. our webinar of 11 July 2023). The relevant amendments are analysed in more detail below.

Restriction of personal scope

At the eleventh hour, the legislator decided to restrict the personal scope regarding small companies (Kleinunternehmer) which, in addition to natural persons, fall within the scope of the VDuG.

Now only that companies can take part in a class action if they employ fewer than ten people at the time of filing their claim and their annual turnover or annual balance sheet total does not exceed €2 million. The thresholds thus correspond to those of the "micro-entrepreneur" under Art. 2 para. 3 of the Commission Recommendation 2003/361/EC.

Notably, the equal treatment of small companies and consumers does not mean that such companies can rely on substantive consumer rights. Rather, they are treated the same as consumers only in procedural terms.

Only comprehensible presentation of the consumer quorum

In the statement of claim, consumer associations with legal standing only need to present “in a comprehensible manner” that the claims of at least 50 consumers could be affected by the class action. Previously, a prima facie case, ie, an enhanced form of proof, was required.

Relaxation of the similarity criterion

Compared to the government draft bill, the requirements for the similarity of the claims affected by the class action have been lowered.

The claims at issue now only must be “essentially similar” (cf. Sec. 15 para. 1 sent. 1 VDuG). This is the case if the claims are based on the same facts or on a series of essentially comparable facts and if essentially the same questions of fact and law are relevant for the decision on the claims (cf. Sec. 15 para. 1 sent. 2 VDuG). Nevertheless, the similarity criterion will be a key issue in litigating the new class action.

Extension of the opt-in period

As is well known, the legislator has opted for the Opt-in model with regard to consumer participation. This means that affected consumers are not automatically included in a representative action. Rather, they must actively and effectively register in the register of representative actions, thereby expressing their consent to litigation by the entity entitled to bring the action. The consequence of this is that effectively registered consumers are bound by the outcome of the proceedings, including a decision to dismiss.

During the legislative process, the point in time up to which consumer participation should be allowed was hotly debated between pro-business and pro-consumer positions and within the German government.

Finally, the legislator has taken heart and extended the filing deadline in favour of consumers. Affected consumers must register or withdraw their claims in writing (Textform) for entry in the register of collective actions (Verbandsklageregister) by the end of three weeks after the conclusion of the court hearings. As a judgement may be pronounced no earlier than six weeks after the conclusion of the oral proceedings (Sec. 13 para. 4 VDuG), consumers must always register before a judgement is pronounced. The postponement of the Opt-in is a notable change which improves the situation for consumers, consumer associations with legal standing and litigation funders. It allows them to wait for the hearing and assess the merits of the class action based on the court's preliminary assessment before joining or funding the class action.

Stricter requirements for litigation funding

The legislator added the provision in Sec. 4 para. 2 no. 3 VDuG that litigation funding is inadmissible if the funder is promised an economic share of more than 10% of the service to be provided by the defendant. The consumer associations with legal standing must disclose the origin of the funds for the litigation and submit the funding agreement (cf. Sec. 4 para. 3 VDuG). If there is inadmissible third-party funding, the action qualifies as inadmissible.

Relevantly, in national class actions, the third-party funding is additionally limited by the fact that only those German consumer associations that do not receive more than 5% of their financial resources from companies have legal standing. However, consumer associations from other Member States of the European Union registered in the European register of class actions are not subject to the 5% threshold (cf. Sec. 2 para. 1 VDuG).

Litigation-financed action for the skimming of profits

In the case of litigation-financed profit skimming actions under Sec. 10 of the Act against Unfair Competition (UWG), there is no limit to the amount of the profit share. However, it is a precondition that the Federal Office of Justice (Bundesamt für Justiz) has approved the terms of financing prior to the commencement of the action (Sec. 10 para. 6 UWG). Other changes are that in future not only intentional but also grossly negligent violations of the UWG will be sufficient (Sec. 10 para. 1 UWG) and that the amount in dispute will be capped to €410,000. It is to be expected that the action for the skimming of profits will overcome its status as a toothless tiger.

Outlook

It remains to be seen whether the VDuG will be able to stem the tide of individual claims and whether it can be considered as an attractive form for consumer associations compared to the transposition laws of the other member states. However, the German legislator's efforts to make the German class action more attractive, materialised by the last amendments to the draft bill, suggest that the German class action may become a viable alternative to mass individual actions or the phenomenon of a collective action in which a litigation vehicle collects assigned claims and asserts them in pooled form. Whatever the case, consumer associations will soon be filing their first lawsuits.