Disagreement rather than consensus: The concrete implementation of the Directive on representative actions remains unclear
10 min read
When two people quarrel, someone else has the last laugh. It remains to be seen whether this saying proves true in the case of the transposition of the EU Directive on representative actions (EU 2020/1828) ("the Directive") into German law. What is already clear, however, is that third parties are going to have to solve the problems and help settle the political controversies involved. If previous reports are to be believed, the ministerial draft bill for an Act to implement the Directive on representative actions (the "Ministerial Draft") which was published on February 16, 2023, almost two months after the deadline for implementing the Directive, at best represents the bare minimum on which the governing coalition could reach a consensus. The Ministerial Draft has been the subject of bickering between the coalition parties for many months and the decisive factor that led the Federal Ministry of Justice ("BMJ") to allow it to proceed to the so-called "association hearing" stage may well have been the growing threat of an EU infringement procedure.
The former Hamburg Senator for Justice and current Bundestag member Till Steffen, who is the Green Party parliamentary group's spokesman for the subject, confirms that important points still remain unanswered: "As no agreement was reached during the interministerial consultation stage and given the time pressure, the decision has now been made to move the draft forward and explicitly open up the main points for debate."
This means that it is still doubtful whether the Ministerial Draft's moderate approach (that does not go far enough in the eyes of consumer advocates) will prevail. This is because protection for consumers envisaged in the Ministerial Draft barely goes beyond the minimum standard of the Directive and is extended to include small businesses in certain cases.
It is already apparent that the transposition of the Directive will turn various principles of the German law of civil procedure on their heads. German law is designed to protect individual rights. Actions brought collectively by a class or association, on the other hand, are largely alien to German civil procedure. The model declaratory action (Musterfeststellungsklage), actions under the German Act on Injunctive Relief ("UKlaG") and actions under the Capital Markets Model Case Act ("KapMuG") are exceptions to this rule.
The type of action envisaged now, which consumers can use to directly sue for performance in the context of an action brought by an association, breaks new ground in German civil procedure law. So far consumers seeking to obtain an enforceable title have had to bring an additional individual action once the model declaratory action has been completed. The new collective action for redress (Abhilfeklage) now enables consumers to assert their claims in a single action. This reduces the overall duration of the proceedings and the cost risk no longer affects the individual consumer.
As a result of these significant changes, the Ministerial Draft also provides for a new law separate from the Civil Procedure Code ("ZPO"), the so-called Consumer Rights Enforcement Act ("VDuG").
The Draft is aimed at regulating the action for redress and the model declaratory action together as representative actions under the VDuG and in this context also aims to completely carve out the model declaratory action from the ZPO. This will introduce general, uniform rules for representative actions, leading to a synchronization of the model declaratory action and the action for redress and thus also to a uniform level of protection for both types of action, although an independent scope of application of the model declaratory action – not one of the legislator's best efforts – seems highly unlikely following the introduction of the collective action for redress.
Content of the Act
Scope
According to sec. 1 para. 1 VDuG, representative actions are to be available in all civil-law disputes. The German legislator has chosen not to limit the scope of application to the provisions on consumer protection listed in Annex 1 of the Directive. Instead, the provisions are based on the scope of application of the model declaratory action (which is applicable to all civil disputes as well) so as to avoid lowering the already existing level of consumer protection.
In addition, the action for redress is only admissible if the claims are congruent, i.e. based on comparable facts of the case and the same factual and legal questions are relevant for decision, sec. 15 para. 1 VDuG.
Qualified entities
The approach the German legislator has adopted with regard to those eligible to bring an action is much more restrictive (and thus more business-friendly) than is required by the Directive. According to the German draft (which imposes identical requirements on those with standing as the model declaratory action), the entity seeking to bring an action must, among other things, have been registered in the list referred to in sec. 4 UKAG for at least four years and must not receive more than 5% of its financial resources from businesses, sec. 2 para. 1 VDuG.
In contrast, the Directive only provides that the respective association must demonstrate twelve months of actual public activity in the protection of consumer interests and that independence must be guaranteed (from businesses who have an economic interest in the bringing of any representative action / from third parties funding representative actions), Article 4(3) of the Directive. These stricter requirements under national law mean that when a representative action is filed by a domestic qualified entity the strict provision of national law in sec. 2 para. 1 No. 1 VDuG must be observed, whereas foreign associations bringing representative actions in Germany are only required to satisfy the lower requirements that apply under the Directive.
As a result, the stricter national regulations will place German associations at a disadvantage compared with associations from other EU countries. This means that German businesses have reason to be wary of actions brought by foreign associations.
Participation by consumers and small businesses
Unlike the situation under US law (so-called "opt-out" system) where all the affected consumers automatically participate in a class action, German lawmakers have expressly chosen an "opt-in" system. Under this system, only those consumers can take part in the representative action who have registered in the representative action register (Verbandsklagenregister) by the end of the day before the start of the first hearing, sec. 46 para. 1 VDuG. This means that at least from the beginning of the first hearing businesses that find themselves facing a representative action will be able to tell how many people have joined the action. It is precisely this provision that does not go far enough to satisfy consumer protection activists. Seen from the business perspective, the arrangement is to be welcomed as it provides for a time limit on the possibility to join an action, allowing the maximum financial risk to be determined and avoiding the danger of consumers being able to join the action at will at any stage of the proceedings.
However, the requirements regarding the number of consumers affected are less strict. Unlike the old provisions on the model declaratory action, under the new rules it will no longer be necessary for 50 consumers to actually join the action, instead it will be sufficient for the qualified entity to demonstrate (so that the court considers it to be more likely than not) that at least 50 consumers are affected by the claims. According to sec. 1 para. 2 VDuG, small businesses (with fewer than 50 employees and annual turnover or annual balance of less than EUR 10 million) are to be treated as consumers.
Structure of the procedure
The action for redress is to be structured in two stages. The first stage is the redress proceeding (sections 16 et seqq. VDuG), in which the court first decides whether the claim is valid on the merits – but not in terms of the actual amount – by issuing a so-called basic ruling on redress (Abhilfegrundurteil) forming the basis for the parties to then conduct negotiations on a settlement. If no agreement on a settlement is reached, the court will then issue a so-called final ruling on redress (Abhilfeendurteil) (sec. 18 VDuG) to finally decide the dispute and the amount of the claim.
The final ruling on redress is followed by the implementation proceeding, which involves the court appointment of an administrator (Sachwalter) responsible for implementing the decision. The administrator is subject to judicial supervision (sec. 30 VDuG) and has the task of verifying whether the consumers taking part in the enforcement procedure have shown they meet the requirements for being entitled to a claim (sec. 27 No. 3 VDuG). If the administrator rejects a consumer's claim, the consumer has the right to file an objection pursuant to sec. 28 VDuG.1
The introduction of this implementation procedure conducted by an administrator is one of the most radical innovations in German civil procedure, as it takes examination of the individual claim away from the judge and places it in the hands of a third party. Questions about the constitutionality of this arrangement have been raised by some.
Protection against abuse
An important goal of both the Directive and the German draft is to prevent the abuse of representative actions. The draft bill takes this into account – at least in relation to the actions brought by domestic associations – by imposing strict conditions, in particular as regards the financing of the entities eligible to bring an action. In addition, as the number of consumers joining a representative action increases, so too does the value in dispute and thus also the legal fees to be settled according to the Act on the Remuneration of Lawyers (RVG). Beyond that, the circumstance that a representative action has the effect of blocking subsequent actions relating to the same content (sec. 8 VDuG) is meant to ensure that the businesses concerned are protected against repeated claims. Additionally, the consumers registered in the representative action register are barred from bringing a separate individual action in the same case, sec. 11 para. 2 VDuG.
Further – and unlike in the case of individual actions – there is no preliminary conciliation hearing (where possible agreements can be evaluated in advance), instead the court decides whether there is a valid claim or not in the basic ruling on redress. Settlement negotiations can only take place following on from that.
Assessment
The proposed VDuG takes account of the Directive's requirements and integrates a collective action for performance into German law. The more far-reaching provisions (in particular as regards the scope of application and standing) are predominantly oriented towards the conditions already applicable to model case proceedings and offer a certain level of protection against abuse.
Due to the high requirements that apply to the right to bring an action, it is important to bear in mind that German businesses can also be sued in courts of other EU countries where conditions are less strict and that this could lead to a risk of so-called "forum shopping" and that foreign associations could be able to sue under easier conditions in Germany, as an association from another EU country needs to satisfy less stringent conditions (i.e. those applying in the other EU country) to prove standing.
However, there is no reason to fear that the Draft will open the floodgates to successful claims for disproportionately large amounts of damages in line with the US-model, as "punitive damages" are not being introduced in connection with the new provisions on representative actions.
However, it remains to be seen whether the draft bill will retain its current form following the stage of consultation with "interested parties" or whether, given the continued time pressure, more consumer-friendly regulations will (have to) be introduced. It is up to lawmakers to decide on how to deal with the comments which the experts are expected to submit by March 3, 2023. What cannot be ruled out, however, is that, although the involvement of experts is to be welcomed in general, their comments might well serve to further inflame the political differences that have already emerged.
1 The decision on the objection is made by the administrator and cannot be contested. In such cases, the consumer can pursue the claim by bringing a separate individual action, sec. 39 VDuG.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2023 White & Case LLP
