New Collective Action Regime in Germany – First draft to implement the EU Directive on Representative Actions

The German Federal Ministry of Justice has presented an initial draft to implement the EU Directive on Representative Actions. The draft bill enables consumers and small businesses to take action against companies by way of a new collective action for redress (“Abhilfeklage”). Since the introduction of the redress action constitutes the first collective action mechanism allowing for the recovery of damages and specific performance, the legislator is creating a genuine novelty in German civil law.

The EU Directive (EU) 2020/1828 on “Representative actions for the protection of the collective interests of consumers” is to be transposed into German law by 25 December 2022, with effect from 25 June 2023. The Directive aims to improve consumers’ access to justice by introducing a standardised EU wide legal mechanism. With the long-awaited draft bill, the German ministry is working on the implementation of the Directive. The key aspects of the draft bill can be summarized as follows:

• Introduction of a “collective action for redress” (“Abhilfeklage”).
• The existing “model declaratory action” (“Musterfeststellungsklage”) remains in place.
• All civil disputes can be subject to the model declaratory action and the collective action for redress. Both actions are referred to under the generic term “representative actions” (“Verbandsklagen”).
• Small companies shall benefit from the representative actions alongside consumers.
• Parties have to opt-in to the representative actions. For this, they must register their claims in the register of representative actions (“Verbandsklageregister”) as already required for the model declaratory action.
• Third party funding is possible within narrow limits.
• In a collective action for redress, a collective total amount may be awarded even if the amount is still to be estimated.

In this update, we will briefly present the current legal situation (see 1.) and summarize the key requirements to bring in a representative action according to the draft bill (see 2.). Further, we explain the planned procedure for bringing a collective action for redress (see 3.), discuss the provisions on the statute of limitations (see 4.) before concluding (see 5.).

1. Current legal situation

In light of the diesel-related claims of Volkswagen customers, in 2018, Germany passed a law that provides for a model declaratory action. The model declaratory action is generally used to bindingly determine the claims and/or legal relationships of a group of consumers in the event of mass damage. The action is only admissible if it is brought by a qualified entity within the meaning of section 606 para 1 sentence 2 of the German Code of Civil Procedure (ZPO)). Usually, this qualified entity will be a consumer association.

During the proceedings of a model declaratory action, in a first step, a court determines the legal relationships or claims of a large group of consumers. Based on this binding determination, each consumer individually has the option to bring an action for redress in a second step. Only after this two-step process the consumer may have an enforceable title.

In addition to the model declaratory action, there is also a special representative action for capital investment disputes under German law. Implemented in 2005, the Act on Exemplary Proceedings in Capital Market Disputes (“Kapitalanleger-Musterverfahrensgesetz”) entitles investors to claim damages arising from false or misleading capital market information through exemplary proceedings (“Musterverfahren”).

2. Key requirements to bring in a representative action according to the draft bill

The draft bill on the implementation of the EU Directive on Representative Actions states that a new Act on the Enforcement of Consumer Rights (“Verbraucherrechtedurchsetzungsgesetz” hereafter: “VDuG-RefE”) will be introduced in which both the existing model declaratory action and the new collective action for redress will be incorporated.

By way of the collective action for redress, a qualified entity can directly assert payments or other benefits for the consumers without the consumers having to pursue their claims for performance individually in a two-step process. Actions in all civil disputes will be covered.

The draft bill provides for an opt-in model. This means that an affected consumer does not automatically become part of the collective action, but rather must actively subscribe (free of charge) to the register of collective actions. Not only consumers but also small businesses may opt-in to the representative actions. Such small businesses must employ less than 50 people and their annual turnover or annual balance sheet does not exceed EUR 10 million.

According to the current draft, the legislator aims to establish the same requirements for the admissibility of both representative actions. It will be necessary to comply with formal (see 2.1.) and material requirements (see 2.2.)

2.1. Formal requirements

The formal requirements for representative actions can be summarized as follows:

2.1.1. Entities entitled to bring an action, section 2 VDuG-RefE

According to the draft bill, individual consumers themselves (still) do not have the right to bring representative actions. Instead, as already provided for the model declaratory action under section 606 para 1 sentence 2 ZPO, specific entities will be entitled to bring representative actions. In addition, the draft bill points out, that specific entities from other Member States remain entitled to bring representative actions, see section 2 para 1 no. 2 VDuG-RefE. The requirements will be subject to less stringent requirements in the future.

2.1.2. Quorum, section 4 para 1 VDuG-RefE

Under the new draft, it is no longer necessary that at least 50 consumers have registered their claims in the register of representative actions within a certain period.

Instead, the entitled entity must credibly demonstrate that the collective action for redress concerns the claims of at least 50 consumers or that the claims or legal relationships of at least 50 consumers (currently ten consumers, cf. section 606 para 3 no. 2 ZPO) depend on the model declaratory action.

2.1.3. Third party funding, section 4 para 2, 3 VDuG-RefE

So far, the existing rules stated that the model declaratory action may not be brought for the purpose of making a profit and that the entitled entities may not obtain more than five percent of their financial resources through contributions from companies remain in force (cf. section 606 para 1 sentence 2 nos. 4 and 5 ZPO and section 2 para 1 no. 1 lit. d) and e) VDuG-RefE).

The new draft bill contains an explicit provision for litigation funding. Third party funding remains possible. However, the representative actions are inadmissible if they are financed by a third party, that

• is a competitor of the company sued,
• is dependent on the company sued, or
• can be expected to influence the conduct of the lawsuit by the entitled entity, including decisions on settlements, to the detriment of the consumers or small businesses.

2.2. Material requirements

In addition, the following material requirements need to be considered:

2.2.1. Collective action for redress – claims of same nature (“Gleichartigkeit”), section 15 para 1 VDuG-RefE

With respect to the new collective action for redress, it is required that the claims affected are of “the same nature”.

Claims are of the same nature, if they are based on the same or a comparable set of facts, and the same questions of fact and law are decisive for them. As a point of reference, the explanation of the draft bill refers to claims for compensation under the Air Passenger Rights Regulation (EC) No. 261/2004, since these generally involve the same preconditions for a claim and can be based on the same facts relevant to the decision.

It should be noted that the definition is rather unclear and leaves room for discussions and argument. Therefore, the question whether individual claims are of the same nature will be a crucial factor in upcoming proceedings.

2.2.2. Model declaratory action

Regarding the model declaratory action, the legislator has not introduced any changes under the draft provisions.

3. Course of the procedure for representative actions

Under the new collective action regime, the following course of procedure is planned:

3.1. Collective action for redress

Regarding the collective action for redress, the course of procedure before the competent Higher Regional Court is as follows:

3.1.1. Phase 1: Basic redress judgement, section 16 para 1 VDuG-RefE

The first phase of the collective action for redress ends with a basic redress judgement (“Abhilfegrundurteil”), provided that the court considers the collective action for redress to be admissible and the company to be liable on the merits. Otherwise, the court dismisses the collective action for redress.

3.1.2. Phase 2: Settlement, section 17 VDuG-RefE

If the court finds that the company is liable on the merits, the court will invite the parties to submit a written settlement proposal regarding the implementation of the judgement and thereby shall initiate the settlement phase (“Vergleichsphase”).

3.1.3. Phase 3: Final redress judgement, section 18 VDuG-RefE

In case a settlement cannot be reached, the court shall continue the proceedings once the basic redress judgement becomes binding.

The court decides by way of a final redress judgement (“Abhilfeendurteil”). The final redress judgement shall contain, if applicable, the order to pay a collective total amount and inter alia the order to commence the implementation phase (sog. “Umsetzungsverfahren”):

• Collective total amount, section 19 VDuG-RefE

The collective total amount shall be estimated by the court in accordance with section 287 ZPO. The court may, in accordance with the basic redress judgement, assume that all claims are justified in full. After issuing the final redress judgement, the court has the option to increase the collective total amount if the previously determined amount is not sufficient to satisfy all consumer claims, cf. section 21 VDuG-RefE..

• Implementation phase

The implementation phase ensures that the final redress judgement is implemented by an administrator (“Sachwalter”) appointed by the court, section 23 VDuG-RefE.

Among other things, the administrator establishes an implementation fund for the collective total amount and distributes the money to the consumers, section 25 VDuG-RefE.

In addition, it is the administrator’s task to assess, based on the judgement on the grounds of performance, whether the consumers, who registered their claims in the register of representative actions, are entitled to payments. The administrator may also decide that the claims are not or only partially payable to the respective consumer. In this case, individual actions by the consumer remain permissible, section 39 VDuG-RefE.

As the implementation and the administrator’s examinations may become very complex, lawyers, tax advisors, business economists, insolvency administrators or auditors, for example, may be considered for the role as administrator.

3.2. Model declaratory action

The procedure for the model declaratory action is not supposed to be changed.

4. Limitation / opt-in model, section 46 para 1 VDuG-RefE

The provisions on the suspension of the statute of limitations for the collective action for redress correspond to the provisions of the current model declaratory action.

The limitation is only suspended if the respective consumer effectively registered the claim or the legal relationship in the register of representative actions and thus participates. Consumers must register their claims in the register of representative actions no later than the day before the first oral hearing.

If consumers do not register the claim, they will neither benefit from the suspension of the limitation period nor – in the event of a successful claim – from the implementation phase, section 26 VDuG-RefE.

5. Evaluation and outlook

With the new collective action for redress, the legislator is creating a genuine novelty. For the first time, consumers and small businesses – via entitled entities – can bring a collective action for redress without following a two-step process. This strengthens consumer protection.

It is currently unclear what scope of application remains for the model declaratory action after the collective action for redress will be introduced. If the claims are not of the same nature, the question arises which declaratory goals can be pursued with the model declaratory action. Practical applications are not yet apparent.

Since, according to the explanatory memorandum to the draft bill, both collective action for redress as well as model declaratory action are intended to cover infringements of the EU General Data Protection Regulation (Regulation (EU) 2016/679 - GDPR), the demarcation could be as follows using the example of claims for damages under Art. 82 GDPR: If the alleged data protection infringement at hand affects all data subjects with regard to the same categories of personal data and if the data subjects have also actually suffered at least non-material damages as a result of the data protection infringement, the collective action for redress would be relevant due to similarity of the consumer claims based on the same facts. In a constellation where different but similar categories of data have led to at least immaterial damages, there would be a “series of comparable facts” that would also lead to the option of a collective action for redress. However, since the existence of non-material damage within the scope of Art. 82 GDPR is already a question of the preconditions for a claim and not only of the amount of the claim, the model declaratory action could still have a scope of application if it is already unclear whether all affected consumers have suffered immaterial damage at all due to different categories of personal data affected and personal situation. Here, the model declaratory action, directed solely at establishing that the defendant has violated the GDPR, could still have a scope of application. In this scenario, the collective action for redress could not be utilized for lack of same or comparable facts.

The possibility of subsequently increasing the collective total amount will not contribute to legal certainty for the companies sued. Collective total payments could threaten the solvency of the companies sued.

As a next step, the current draft bill will go through the formal legislative process and has to be approved by the other ministries. There are likely to be further changes before the implementation deadline of 25 December 2022.