The German Federal Parliament (Bundestag) adopted the Act Implementing the European Directive on Representative Actions for the Protection of the Collective Interests of Consumers (Verbandsklagenrichtlinienumsetzungsgesetz) on 7 July 2023. As the Federal Council (Bundesrat) will deliberate on the act after the summer recess, it is expected to enter into force in autumn.
The new type of representative action for performance (known as action for redress measures – Abhilfeklage), which is to be implemented according to the Representative Actions Directive, will be introduced in a new Consumer Rights Enforcement Act (Verbraucherrechtedurchsetzungsgesetz) together with the already existing model declaratory action (Musterfeststellungsklage). This will allow an association to assert claims, regardless of subject, on behalf of a large number of consumers and small businesses, provided that the claims are “essentially of the same kind”. The action for redress measures will be the first redress mechanism under German law enabling collective actions for damages.
The key aspects of the new act, as well as the changes made to the ministerial and government bill, can be summarised as follows:
Key aspects
The new action for redress measures may be used for any claims that consumers (and small businesses) may have against companies. This means that the act goes further than the directive, which only requires that claims for violations of certain EU consumer protection rules (including national provisions for the implementation of these EU rules) be covered.
- Entities with standing to sue are qualified consumer associations from the list published pursuant to section 4 of the Injunctions Act (Unterlassungsklagengesetz) which are subject to only minor restrictions and those listed in the register kept by the European Commission. The ministerial bill was based on the considerably stricter requirements for model declaratory actions.
- Claims must be “essentially of the same kind”. How this criterion is interpreted will be decisive for determining how broad or narrow the scope of actions for redress measures will be in the future. The restrictive addition “essentially” was only added in the course of the legislative process.
- The act specifies an opt-in model for actions for redress measures, as already required for model declaratory actions. Claim holders must therefore actively join the action. Their claim is not automatically covered as it would be in an opt-out model similar to a US class action.
- The deadline for opting to participate in an action for redress measures and suspend the statute of limitations is three weeks after the conclusion of the last hearing. A judgment may be issued no earlier than six weeks after the conclusion of the hearing. A decision on whether to register a claim or withdraw such registration will therefore have to be made without knowing what the outcome of the proceeding will be, but can take into account a preliminary assessment made by the court in the course of the hearing.
- A court can order the defendant company to pay a collective total amount, which it can determine at its discretion after assessing all the circumstances. A trustee (Sachwalter) will be appointed to distribute the total amount to the consumers who have joined the action. The defendant company must bear the costs incurred by the trustee.
- The act imposes restrictions on permissible third-party funding in order to prevent abuse. Whether or not these will be sufficient to avoid the rise of a litigation industry remains to be seen.
- All in all, the action for redress measures the implementation of which was imposed by the directive involves a considerable risk that companies will face high-volume, bundled claims for damages.
- It will still be possible to bring collective actions in which claims are assigned to a special litigation vehicle, as well as mass individual actions. They are not excluded by this new action for redress measures and will very likely remain relevant.
Scope of the action for redress measures
Under the directive, the representative action mechanism only needs to be available if certain EU consumer protection provisions (including national provisions for the implementation of these EU rules) are violated. The act does not provide for this restriction, but allows for actions for redress measures in all civil litigation cases between consumers and businesses. This means that actions for redress measures can also be filed for antitrust damage claims, as well as for general claims in tort. The act now makes it possible for actions to be brought jointly by multiple entities or against multiple businesses.
However, an action for redress measures is only admissible if the claims asserted are “essentially of the same kind”. According to the explanatory memorandum, the claims must be so similar that a court can perform a standardised review of the factual and legal prerequisites for the claim. In the legislative process, the criterion “of the same kind” was relaxed by the restrictive addition “essentially”.
The court should not have to deal with several different legal issues that give rise to different individual scenarios. The explanatory memorandum cited liquidated damages claims of air passengers for the delay or cancellation, where the individual circumstances of passengers on the same flight are irrelevant, as one example of claims of the same kind. For claims to be of the same kind, it should also be possible to calculate their amount using a specific formula (e.g. for invalid interest rate adjustment clauses in savings contracts, already a frequent subject of model declaratory actions). The claims must essentially be based on comparable facts and essentially the same factual and legal questions must be relevant to the decision. Individual differences between the claims affected by an action for redress measures should not prevent their enforcement in a single procedure as long as it is ensured that the proceedings are conducted effectively and it makes sense to bundle them in the interests of procedural economy.
The criterion “essentially of the same kind” leaves a lot of room for discussion. At the same time, it is decisive for determining how broadly or narrowly actions for redress measures will be used in future.
Actions for redress measures extended to small enterprises
If an action for redress measures is brought on behalf of consumers, it can be joined by small enterprises as well, provided they are equally affected. Small enterprises have less than ten employees and an annual turnover or annual balance sheet total of no more than EUR 2 million. The law therefore deviates considerably in scope from the government bill, which had still set the limit at 50 employees and a maximum annual turnover/balance sheet total of EUR 10 million. In addition, the law goes further than the provisions of the directive. This could become relevant in antitrust damages actions, which in certain cases can affect both consumers and small enterprises. In such cases, it will be particularly important to determine whether the claims involved are of the same kind, because businesses and consumers are often likely to be affected at different market levels.
Standing to sue – funding – protection from abuse
The requirements for associations to have a standing to sue as set out in the government bill were still based on those applying to the model declaratory action. Associations had to be registered for four years and were not allowed to operate commercially or bring actions with the intention of making a profit. These requirements were greatly relaxed in the course of the legislative process.
Under the act, a consumer association has standing to sue if it is included in the list published pursuant to section 4 of the Injunctions Act and does not obtain more than 5% of its funding from contributions from companies. The origin of the funds used to finance the action or any agreements on these funds with third parties must be disclosed to the court.
Third-party funding, while generally permissible, is prohibited if the litigation funder (a) is a competitor of the defendant company, (b) is dependent on the defendant company, (c) has been promised an economic share of more than 10% in the payment to be made by the defendant company or (d) can be expected to influence the litigation of the entity with standing to sue, including settlement decisions, to the detriment of consumers. The maximum share of 10% was inserted late in the legislative process. Despite respective comments submitted by litigation funders, the act does not specify the basis on which a funding provider may get a share in the proceeds at all, since it needs to be ensured that the consumer receives the full payment awarded. Moreover, there is no basis for the defendant company to assume the funding costs as part of the costs of litigation.
The act does not contain any new provisions on the disclosure of evidence similar to US discovery rules. Although the options for ordering disclosure which already exist under current law can now also be enforced against the parties by means of sanctions, this will most likely not change the restrictive handling of such orders by the courts.
Opt-in and statute of limitations
In order to join an action for redress measures and benefit from its suspensory effect, consumers must register their claims with the register of representative actions by no later than three weeks after the last hearing.
While an opt-out model was not seriously proposed, the timing of the opt-in was the subject of heated debate. The ministerial bill still required an opt-in on the day before the first hearing at the latest, which was in line with the model declaratory action introduced in 2018. The government bill proposed an opt-in no later than two months after the first hearing. Some legal authors proposed a later opt-in, even only after a settlement or judgment – which, when combined with a suspension of the limitation period for all consumers affected by the action for redress measures, would ultimately be tantamount to an opt-out model. Consumers would then have been able to wait for a final decision on the action for redress measures and then assert their claims, even years later, without any risk of their claims becoming statute-barred. While the act does not follow this approach, the fact that it extends the deadline for the opt-in until three weeks after the conclusion of the last hearing will significantly increase the risk for companies. If the court provides a preliminary legal assessment in favour of the consumers at the hearing, this may result in further claims being registered. The suspensory effect of the registration applies retroactively from the date on which the action for redress measures was brought.
Unlike with the existing model declaratory action, it is not necessary for at least 50 consumers to register for the action for redress measures to be admissible. Rather, it is sufficient to demonstrate plausibly, instead of providing prima facie evidence – as required by the government bill – that 50 consumers may be affected. There is also a very low threshold for registering claims with the Federal Office of Justice (Bundesamt für Justiz): no lawyer is required, text form is sufficient, and there are no costs involved.
Judgment and implementation
The act sets out a three-stage process. First, the court can issue a redress judgment on the grounds if it considers the action to be justified on the merits. The judgment may not be handed down earlier than six weeks after the conclusion of the last hearing. Settlement talks can then be held on this basis. If a settlement is not reached, the court can issue a final redress judgment in which a collective total amount can be awarded for all of the claim holders. The company must pay this amount into a fund, and a trustee will be appointed to implement the judgment by distributing the amount to the claim holders. If both parties request it and settlement efforts appear futile, a final redress judgment will be issued immediately instead of a redress judgment on the grounds.
The court can determine the collective total amount at its discretion considering all the circumstances. The court may also estimate the amount based on the possible maximum amount. From the defendant company’s point of view, it is important to know that the adjudicated amount is provisional only, so paying this sum will not automatically resolve the matter definitively. If the amount is not sufficient, it can subsequently be increased upon application. Should it emerge after the justified claims have been satisfied that the amount paid was too high, the remaining amount will be returned to the defendant company. But even a collective total amount that is merely provisional can still have a significant impact on the liquidity of the defendant company.
The court will appoint a trustee to distribute the total amount among the claim holders. According to the explanatory memorandum to the ministerial bill, lawyers, tax advisors, economists, insolvency administrators and auditors could be appointed as trustee. The trustee will then review the entitlements of the individual claim holders and satisfy their claims out of the total amount. The defendant company must bear the costs of the implementation process, including the trustee’s fees.
If the company has specific objections concerning the asserted claim which were not recognised by the trustee, it may raise objections to the trustee’s decision and if necessary bring an action. The same applies to consumers.
Conclusion
Since the act enables collective actions for damages for the first time in German law, it creates a litigation model that will be more attractive to (allegedly) injured consumers and their service providers than the current statutory redress mechanisms.
However, it will still be possible to bring parallel collective actions in which claims are assigned to a special litigation vehicle, as well as mass individual actions. They are not excluded by this new action for redress measures and will very likely remain relevant. In any event, the Federal Government’s view that the action for redress measures will eliminate mass individual actions on a larger scale seems too optimistic.
The new action for redress measures is not a replacement but an additional instrument open to plaintiffs. The number of lawsuits and the risks to companies can therefore be expected to increase.
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