It took longer than expected, although not primarily because of the COVID-19 pandemic. More than two years after the EU Commission submitted its first proposal, the Directive on representative actions was adopted by the European Parliament on November 24, 2020. Even if not everything will change overnight, one thing seems quite clear: the "Directive on representative actions for the protection of the collective interests of consumers, and repealing Directive 2009/22/EC" (hereinafter referred to as the "Directive"), will have a lasting impact on, and change the legal protection system in Germany over the coming years.
German civil procedural law, up to now essentially designed to provide individual legal protection, will have to open up to collective legal protection mechanisms more than ever before. Initially, collective actions were permitted only in very limited exceptional cases and in special areas of the law (e.g. the German Injunctive Relief Act (UKlaG), the German Capital Markets Model Case Act (KapMuG)). Even after the introduction of the model case declaratory action (§ 606 et seq. of the German Code of Civil Procedure (ZPO)) in 2018, much less use was made of opportunities to seek collective redress than had been expected. While the German government's forecast for the 2018 legislative process predicted "an estimated 450 model case declaratory actions annually, the reality today is quite different. So far (as of December 6, 2020), just 13 model case declaratory actions have been published in the litigation register. The reasons for this are complex, starting with the lack of enforcement power of model case declaratory actions because it is only possible to obtain a declaratory judgment (§ 606 para. 1 ZPO) and ending with the fact that collective redress mechanisms are largely unknown in German procedural law, in contrast to US law, and that there are certain reservations in Germany as regards this new type of action. Another important factor has always been the high costs that such types of action entail, not only as regards to legal work but considerable administrative costs as well, which will also be the case in the future. However, when litigation funding providers and legal tech companies join forces, the administrative costs will be significantly lower from the plaintiff's point of view. Companies must prepare themselves for this.
Above all, however, like the other collective redress mechanisms available in Germany, such as the German Capital Markets Model Case Act, the model case declaratory action failed to deliver the hoped-for effective and speedy protection of the collective interests of consumers. Model proceedings have a reputation for being extremely lengthy.
The EU legislator now wants to provide EU consumers with more effective collective redress, among other things, by making actions for specific performance admissible and by emphasizing the principle of speed. This means that in order to implement the Directive, the German legislator must, within the next two years, significantly expand the possibilities of access to the German judicial system based on domestic and cross-border EU representative actions seeking not only injunctive measures but also redress measures in the form of actions for specific performance or damages (Article 9 of the Directive). A minimum standard for collective redress is to be created, in particular with regard to the 66 specific provisions of EU law listed in Annex I to the Directive. In the following, we present the key points of the Directive and analyze their impact on German procedural law.
Contents of the Directive:
1. Scope: Article 2 of the Directive
The new EU Directive is designed to protect the collective interests of consumers by providing for representative actions against national and cross-border infringements by companies comprising (at least) 66 legal acts (provisions of EU law). This catalog covers in particular the relevant areas of data protection, financial services, travel, tourism, energy, environment and telecommunications. The aim is to create a comprehensive and, above all, uniform (minimum) level of consumer protection in the European Union to support the proper functioning of the internal market. The EU legislator emphasizes that the introduction of European representative actions must not result in a lower level of consumer protection than currently existing in a Member State. For Germany, this clarification is arguably irrelevant, because the currently available collective redress opportunities are by no means as extensive as those provided for by the new EU representative action.
The key message coming from the EU legislator is that the Directive is intended to merely supplement the existing procedural opportunities and specifically not to change applicable national substantive law. It should only be possible to bring a representative action if Union law or national law actually provides for the substantive claim to be asserted. The Directive is specifically not intended to enable the imposition of punitive damages on any infringing company. Nor does the Directive contain more detailed provisions with regard to the (international) jurisdiction of the courts over cross-border representative actions; such jurisdiction is to be determined in accordance with the EU law already in force, i.e. Regulation (EC) No. 44/2001 (Brussels I Regulation).
Further, existing national procedural law is not to be replaced, but merely supplemented by adding the possibility of a European representative action. Although the Directive is not intended to abolish already existing national collective redress actions, a harmonization with collective redress opportunities in place would seem recommendable in Germany in order to prevent a superfluous and complicated coexistence and competition of different collective redress mechanisms.
2. Types of Action and Redress Opportunities: Article 7, Article 8 and Article 9 of the Directive
The main innovation compared to the model case declaratory action is the introduction of a representative action for specific performance which can be brought as well as representative actions seeking injunctive measures.
What is new and particularly noteworthy is that representative actions are based on the premise of the requirement of speed. While collective redress actions in Germany typically take several years, the aim is to provide consumers with speedy redress measures at the European level. In addition to definitive measures to cease or prohibit a practice, a provisional measure to cease or prohibit a practice is to be introduced in order to bring unlawful practices to an end, which is a procedural novelty in Germany. According to Article 17 of the Directive, the requirement of speed applies in particular to injunctive measures. In order to obtain such measures, qualified entities do not have to prove that individual consumers suffered any actual loss or damage or any intent or negligence on the part of the trader. This is a clear example that the barrier to access to collective redress opportunities is opening very quickly.
However, under the aspect of speeding up proceedings, courts should be able to dismiss manifestly unfounded cases or cases where the subject-matter is not suited for a representative action at the earliest possible stage of the proceedings, insofar as this is provided for under national law (Article 7 (7) of the Directive). From the point of view of companies, this is a very important aspect.
3. Bringing of Representative Actions: Article 4 and Article 6 of the Directive
The legal standing of qualified entities to bring representative actions is regulated in Article 4 and Article 6 of the Directive. According to Article 4 (1) of the Directive, representative actions may only be brought by qualified entities. The term "qualified entity" is legally defined in Article 3 (4) of the Directive and means any organization or public body representing consumers' interests which has been designated by a Member State as qualified to bring representative actions in accordance with this Directive. In addition to bringing representative actions in the Member State where they are domiciled, qualified entities may bring cross-border representative actions in all other Member States (Article 6 of the Directive). A list of all qualified entities designated for the purpose of cross-border representative actions is to be compiled and made publicly available by the EU Commission. For the purposes of cross-border representative actions, qualified entities are subject to the same criteria for designation across the Union. These criteria can also be used to designate qualified entities for the purpose of domestic representative actions.
However, in principle, Member States should be able to freely establish and monitor the criteria for designating qualified entities for the purpose of domestic representative actions. Member States must then only ensure that the criteria they use to designate an entity as a qualified entity for the purpose of bringing domestic representative actions are consistent with the objectives of the Directive. For entities to be designated as qualified to bring cross-border representative actions, the criteria set in the Directive are more specific. Thus, an entity requesting to be designated for the purpose of cross-border representative actions must inter alia:
- be a legal person duly organized under the national law of the Member State;
- be able to demonstrate 12 months of actual public activity in the protection of consumer interests prior to its designation;
- have a statutory purpose that demonstrates that it has a legitimate interest in protecting consumer interests as provided for in the provisions of Union law;
- have a non-profit-making character;
- be independent and not influenced by persons other than consumers who have an economic interest in the bringing of any representative action;
- be solvent, which means that the entity may not be the subject of insolvency proceedings;
- publish information that demonstrates that the entity complies with the listed criteria as well as information about the sources of its funding, its organizational, management and membership structure, by any appropriate means, in particular on its website.
These criteria are significantly less strict than the requirements which must be met by entities in order to be qualified entities for the purpose of bringing a model case declaratory action. In contrast to currently applicable national provisions, the Directive does not require, for example, a minimum number of members or a specific financing mechanism. If the German legislator were to maintain these stricter requirements also for entities to be designated as qualified for bringing domestic and/or cross-border representative actions, relatively few qualified entities could be designated for such purposes in Germany. As mutual recognition of the legal standing of qualified entities designated for the purpose of cross-border representative actions is to be ensured, a representative action concerning primarily German consumers and aimed at a German company could be brought by qualified entities from other Member States, provided they meet the minimum standards under the Directive, which are, however, actually lower than the relevant German law requirements. Whether the German legislator will take this as an opportunity to introduce less stringent requirements for qualified entities in Germany remains doubtful, specifically as the aim is to ensure protection against abuse. In the absence of less stringent requirements for national qualified entities, there is a potential risk that qualified entities domiciled in Germany will have to overcome greater hurdles than entities from other Member States in order to be able to bring a representative action in the same matter before the same court. It should also be kept in mind that many companies have branches, subsidiaries or affiliates in multiple Member States so that representative actions could possibly be "shifted" to Member States with less stringent requirements. The result will be forum shopping and public targeted calls for representative actions.
Furthermore, it is not clear from the Directive whether qualified entities should have legal standing to bring a representative action only if they have been given a mandate or whether they may also act on their own initiative. As regards the consumers concerned, the Directive provides that it should be for the Member States to decide on the minimum number of consumers who must be concerned by a representative action. This form of open regulation would in any case not prevent qualified entities from bringing an action on their own initiative, which would be a considerable extension of their legal standing compared to currently applicable national provisions. As many other things provided for in the Directive, this will, however, depend on its transposition into national law. Inevitably, there will be considerable differences between the individual Member States. The way the Directive is designed leaves so much open that it seems conceivable that qualified entities will be allowed to act on their own initiative or not, depending on what each Member State decides.
It is also noteworthy that, according to the wording of the Directive, several qualified entities may bring parallel representative actions with the same cause of action. The Directive clearly assumes that there will be such parallel actions: According to Article 6 (2) of the Directive, national law may provide that several actions with the same cause of action may be combined, but this is not mandatory.
Individual consumers may, however, join in a representative action with the same cause of action only once and, after having explicitly or tacitly expressed their wish to be represented in such representative action, are no longer able to bring an action individually with the same cause of action (Article 9 (4) of the Directive). The purpose is to ensure that consumers do not receive compensation more than once for the same cause of action. However, as with so many other things, the Directive does not specify how a review mechanism for this purpose could be designed. While the Directive does not explain how the consumer's "tacit" wish would have to be understood or whether this could possibly concern only the opt-out mechanism, given the high number of consumers concerned in each case, specific review mechanisms will have to be implemented.
4. Consumer Participation: Article 8 (3) and Article 9 of the Directive
In principle, according to the wording of the Directive, Member States are able to freely decide whether consumers will automatically be registered for a representative action and, if they do not wish to participate, must actively opt out (opt-out mechanism) or whether – as implemented in Germany for model case declaratory actions – consumers can decide if they wish to participate in a representative action and must then actively opt-in (opt-in mechanism).
Such an opt-in mechanism is only mandatory for consumers who are not residing in the Member State of the court before which the representative action is brought (Article 8 (3) of the Directive). If some Member States should decide in favor of an opt-out mechanism, this could increase the risk that a consumer is unintentionally (which is not allowed under the Directive) represented in several representative actions with the same cause of action. Thus, a consumer could register for a representative action with opt-in mechanism even if he or she is already represented in another representative action with the same cause of action. While the Directive provides that information must continuously be provided to consumers, the implementation of simultaneous control measures throughout the EU will arguably be a challenge for the national legislators. Moreover, the Directive does not specify what the legal consequences of a "double representation" should be, which would then have to be established in accordance with the national procedural law of the respective Member State. Under German law, the consumer would arguably be deemed to be represented only in the initial representative action, as provided for in the German lis pendens rules, and would therefore be unable to effectively join any other representative action with the same cause of action.
5. Settlements: Article 11 of the Directive
In order to support the conclusion of settlement agreements, courts and administrative authorities should be able to propose settlements to the parties involved; the Directive even explicitly provides that courts and administrative authorities may "invite" the parties to reach a settlement (Article 11 (1) of the Directive). Similar to the German rules on settlements in models case declaratory actions, jointly proposed settlements by the parties must be approved by the court or administrative authority in order to become binding. In addition, Members States may provide for a further review by the court and allow the court to refuse to approve a settlement which is deemed unfair (Article 11 (2) sentence 2 of the Directive). A similar provision was implemented when the model case declaratory action was introduced in Germany (§ 611 of the German Code of Civil Procedure). The rule that individual consumers may opt out from a settlement reached in model case proceedings is also contained in the Directive (Article 11 (4) sentence 2 of the Directive).
6. Avoidance of Abusive Litigation
In addition, the Directive attempts to focus strongly on creating measures to avoid abusive litigation. But this is only an attempt: It seems doubtful whether the measures will be sufficient to actually avoid abusive litigation. One point that can be criticized from the point of view of companies is that the Directive provides that an assessment of the criteria to be complied with by qualified entities will be made only every five years. In addition, the Directive establishes the "loser pays principle" with regard to the payment of court costs (Article 12 (1) of the Directive), which is the same in German procedural law, but not common practice in all Member States. Moreover, explicitly referring to funding by third parties paves the way for outsourcing the risk of the litigation costs to litigation funding providers that have an economic interest in the bringing of a representative action as long as such funding does not divert the representative action away from the protection of the collective interests of consumers (Article 10 (1) of the Directive), which would, for example, be the case in the event of a conflict of interest.
When exactly this would be the case remains unclear and difficulties in interpretation can be expected for the future. Moreover, the Member States may implement their own safeguards to avoid abusive litigation, such as requiring the qualified entity to refuse or change the relevant funding, which raises concerns that the safeguards will vary greatly EU-wide. The Directive merely proposes the introduction of a non-binding limitation of fees to help the funding of qualified entities (Article 20 (2) of the Directive). Such limitation of fees has already been implemented for the model case declaratory action. Whether the limitation of fees will actually promote a level playing field between consumers and traders is currently a hotly debated issue. In addition, the Member States must ensure that actions against traders will not be funded by their competitors (Article 10 (2 b)) of the Directive). To what extent this will actually help to avoid abusive litigation remains to be seen.
7. Request for Disclosure of Evidence: Article 18 of the Directive
The Directive expressly states that Member States shall ensure that each party may request the disclosure of evidence by the other party, provided that the plaintiff has provided reasonably available evidence sufficient to support the representative action. The reasons for the Directive reflect that the purpose of this procedural rule is to remove "information asymmetries" between consumers and traders. The Directive provides that this requirement is to be implemented in accordance with national procedural law. In Germany such a request based on § 142 of the German Code of Civil Procedure had been highly controversial for quite some time, as it was deemed to be a deviation from the principle that facts and evidence must be presented by the parties and not be ordered by the court. The previous judicial opinion had been that only the party having the burden of proof was required to disclose evidence if so requested by the court. However, the German Federal Court decided in several cases, most recently in 2017, that § 142 of the German Code of Civil Procedure had to be broadly interpreted and that the party not having the burden of proof may also be requested to disclose evidence (German Federal Court, decision of March 16, 2017 - I ZR 205/15). Based on such a broad interpretation, it seems likely that this rule will meet the requirements of Article 18 of the Directive and that there will be no material amendments to § 142 of the German Code of Civil Procedure.
It remains to be seen how the German legislator will integrate the provisions of the Directive into the German law of civil procedure. The EU representative action is only intended to provide minimum standards for the protection of the collective interests of consumers. Any further-reaching or alternative collective redress opportunities for consumers can either remain in place alongside such minimum standards or be included in the design of the European representative action at the national level. The Member States are expressly free to expand the scope of the European representative action. It is to be expected (and hoped) that the German legislator will decide in favor of a harmonization of the collective redress opportunities and that a co-existence of different types of action will be avoided so as to ensure legal clarity.
Moreover, at first glance the Directive provides only for an expansion of the national law of civil procedure, and consistently emphasizes that its provisions should be implemented subject to and in accordance with national law. This could lead to competition among the Member States to provide the "best forum for representative actions". Germany in particular faces a conflict between maintaining its conservative collective redress mechanism and getting a portion of a lucrative litigation industry. The transposition of the Directive could therefore have an important impact on the extent to which companies based in Germany will find themselves increasingly exposed to representative actions, including representative actions by qualified entities domiciled in other Member States, of a kind previously unknown in German law, which will entail considerable financial risks for such companies.
In the medium term companies in Germany must be prepared to be confronted with a new type of action and, consequently, consumer claims in court which would previously not have been asserted as the cost of litigation would have been out of proportion ("rational disinterest"). Since the funding of litigation is expressly permitted, models entailing considerable risks for companies would appear conceivable: lawyers acting for "qualified entities" could join forces with one of the many providers of litigation funding currently pushing into the market and try to pressurize companies into agreeing to costly settlements. It will be exciting to see whether German law firms representing plaintiffs will now increasingly rely on representative actions or whether individual actions will remain the preferred choice, as has been the case to date in respect of claims in the automotive sector. There will not be any sudden change, but we will be seeing a gradual revolution, driven by digitalization and legal technology.
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