The new class action is on its way: draft law on the implementation of the EU Directive on collective redress in Germany has been presented by Federal Ministry of Justice
In just a few months, consumer associations will be able to bundle the claims of many affected consumers and enforce them against businesses with a single action for redress. This is envisaged in the long-awaited draft legislation to implement the European Directive on representative actions, which the German Federal Ministry of Justice submitted for departmental coordination within the German government on September 22, 2022. Such representative actions for performance (e.g., damages) by qualified consumer associations and other qualified entities were previously foreign to German law. This reorientation of German collective redress provides entities entitled to sue with new fields of action. As experience shows, the entities will make good use of it. Particularly companies in the B2C business should therefore be aware of what they will be facing at an early stage.
Reorganization of collective redress: Model declaratory action and action for redress in the new Consumer Rights Enforcement Act
The core of the ministerial draft is the establishment of a stand-alone Consumer Rights Enforcement Act (Ger.:“VDuG”), which will implement the requirements of the Directive on the introduction of the European representative action adopted at EU level at the end of 2020. It was only in 2018, under the impression of the Volkswagen diesel incidents, that the instrument of the model declaratory action was hastily introduced, with which qualified entities can apply for the judicial determination of claim prerequisites or legal relationships, but not of claims themselves. This instrument is now to be retained and supplemented by the newly introduced action for redress. In the future, the VDuG will contain the regulations on the model declaratory action as well as the action for redress.
With the representative action for redress, entities entitled to sue will now be able to directly bring an action for performance claims by a large number of consumers. The performance sought may consist of a payment (e.g., damages, repayment of interest), but also of a payment in kind, such as repair or subsequent delivery of a purchased item. Payment claims can be directed at performance directly to consumers named in the claim, but also at payment of a so-called collective total amount to an implementation fund. The implementation fund is administered by a court-appointed administrator whose main tasks include examining the individual claims of consumers in a downstream implementation procedure in accordance with the redress judgment and then fulfilling or rejecting them.
The prerequisite for redress actions is always that the claims of the affected parties are similar. This is the case if they can be examined by the court in a “template-like” manner without regard to the individual case. The ministerial draft itself mentions air passenger compensation, but also claims for subsequent payment of interests from savings agreements, which can be calculated according to certain formulas, albeit from individually different amounts and time periods, as examples of the new action for redress. Companies still do not need to fear “punitive damages”, as is particularly known from US law, when applying German law. German substantive law still does not provide for such under the ministerial draft.
Which disputes are possible?
The German implementation defines the range of possible subjects of a representative action much more broadly than specified by the Directive on representative actions. Whereas the Directive only stipulates representative actions for infringements of certain EU provisions listed in the Directive, representative actions in Germany can relate to all claims by consumers against businesses and legal relationships with them that are to be classified as civil disputes. The ministerial draft thus also allows for representative actions for antitrust damages directed at consumers (and/or equal small businesses).
Who can sue?
Only “qualified entities”, national or from other member states of the European Union, that are subject to certain requirements are entitled to sue. Compared to the previous model declaratory action, the group of entities entitled to sue is expressly expanded to include qualified entities from other EU member states. In the case of consumer advice centers and other consumer associations that are predominantly funded with public funds, the existence of the prerequisites is legally presumed.
The representative action is only admissible if the entity entitled to sue credibly demonstrates that the claims of at least 50 consumers are affected by the action for redress or the model declaratory action. Small companies that employ fewer than 50 people and whose annual turnover or annual balance does not exceed EUR 10 million are equal to consumers within the meaning of the VDuG – as envisaged in the coalition agreement of the German government.
The funding of a representative action by a third party will generally be possible. Only (third-party) financing by, for example, competitors of the defendant company is to be excluded, or if it is to be expected that the (third-party) financing will influence the conduct of the lawsuit by the entity entitled to sue to the detriment of consumers. In the future, litigation funding agreements will regularly have to be disclosed in court in representative actions.
“Opt-in” model: Consumers must join representative action at an early stage
Both the model declaratory action and the representative action will only benefit those consumers who have registered their claims with the register of representative actions maintained by the Federal Office of Justice. The ministerial draft thus opts (as was to be expected) for a so-called “opt-in” model, which was already in place for the model declaratory action. In addition, registration must take place at an early stage, namely no later than the day before the first oral hearing before the competent higher regional court. This means that consumers do not have the opportunity to wait for the judgment or a possible settlement to check whether they are satisfied with the outcome before joining the representative action. The filing of a representative action precludes a parallel individual action by the consumer.
Course of the judicial redress procedure
The ministerial draft provides for a 3-phase model for the judicial course of redress procedures, which can be applied in suitable cases:
In the first phase, the court – the Higher Regional Court has jurisdiction in the first instance, as is already the case with the model declaratory action – can decide by means of a basic redress judgment that declares the redress action to be justified on the merits. In addition, the judgment is to specify what evidence consumers must provide to prove that they have been affected.
This is followed by a settlement phase in which the parties are to seek an amicable settlement on the resolution of the legal dispute. Any settlement shall be subject to the approval of the court.
If the parties do not reach an effective settlement, the court shall continue the redress procedures. This third phase ends with a final redress judgment, in which the court can also order the company to pay a collective total amount for the attention of a court-appointed administrator by way of simplified loss assessment (loss assessment pursuant to Section 287 of the German Code of Civil Procedure), who then examines and, if necessary, satisfies the individual claims of the individual consumers in the implementation procedures.
The payment of the collective total amount does not close the matter for the condemned company in all cases: If the total amount initially determined is insufficient, the entity entitled to sue may bring an action to increase the collective total amount during the implementation procedures (increase procedures). Conversely, the entity has a claim for repayment in respect of amounts not distributed to eligible consumers or required for costs by the end of the implementation procedure.
A procedure in the three phases described is not always necessary. In particular, if the representative action is directly directed at payment to specific consumers and the dispute is ready for a decision, the court can decide immediately by way of a final redress judgment (which may be upheld or dismissed).
How do consumers get their money – what do companies have to do?
If the court has decided in favor of the consumer by way of a redress judgment, this is followed by the so-called implementation procedure. In the implementation procedure, the court-appointed administrator independently checks the eligibility of the individual consumers who have joined the redress action. Entitled claims are then met directly by the administrator from the implementation fund set up by him and financially endowed by the convicted company in accordance with the redress judgment. The individual consumers therefore no longer need to bring an individual action to enforce their claims.
The ministerial draft provides for a large number of further regulations, which are summarized here in key words only: The entities entitled to sue must, inter alia, provide information on their website about which representative actions they intend to bring. In this way, companies can see at an early stage whether they are threatened with a lawsuit in the case of certain matters that could give rise to liability, and whether they need to take appropriate precautions. Companies may also be fined in the future if they fail to comply with the court's request to submit certain documents or items.
The Directive on representative actions, which came into force at the end of 2020, must already be transposed into national law by December 25, 2022, with it being possible to bring a representative action from June 25, 2023 at the latest. The fact that a ministerial draft on implementation was not presented until September 2022 does not leave much time for a more intensive discussion of the draft. However, particularly the broad scope of application of the German representative action seems to be certain already. Companies will face new challenges from and in connection with the collective pursuit of claims with the new instrument of redress action.
The authors of this article are Thorsten Bonheur, Jakob Frank, Dr. Martin J. Beckmann and Dr. Roman Dörfler.
One of the focal points of PwC Legal's Dispute Resolution practice is the representation of companies in the defense of collective and mass actions, which also involves the use of state-of-the-art legal tech solutions. In particular, the dispute team has extensive practical experience with the instrument of collective redress already provided for in German law - the model declaratory action. The same applies to the defense of representative actions under the Injunctions Act (Ger.: UKlaG).