Information for Germany last updated 5 April 2023.
The current mass actions landscape
Whilst there are no US-style class action proceedings in Germany, there are three main mechanisms for the pursuit of claims by numerous claimants.
The first is Association or Interest Group Complaints (Verbandsklagen) brought by associations and groups acting in the interest of a group of affected individuals or entities. There are currently three prominent examples of these types of complaints or claims. First, the 2002 Injunctions Act (UKlaG), provides for consumer associations, across sectors, to require the removal of offending contract terms, in particular in areas such as consumer credit arrangements and part-time workers' contracts, and to seek an order prohibiting the use of infringing practices.
Second, the Unfair Competition Act (UWG), which enables consumer associations to bring claims to restrain improper conduct in the context of business competition. Third, the Act against Restraint of Competition (GWB), which authorises specified interest groups, who promote commercial or independent professional interests, to file a complaint against breaches of competition law and market abuse.
The second main mass actions mechanism is Model Case Litigation (Musterklageverfahren). This is designed to bundle identical or similar cases into a streamlined process to ensure that they can be decided swiftly and coherently, without creating a "class action"; individual claims remain separate. A prominent example of model case litigation in Germany is litigation under the Act on Master Proceedings in Disputes Relating to Capital Markets Law (KapMuG).
The KapMuG is available for securities litigation and certain mis-selling claims, for example against brokers. Under KapMuG, parties request the trial of a lead case where the resulting model decision may be significant for other cases of which there must be at least nine. The model ruling is generally binding on all parties who have become part of the model action or registered their interest.
In addition to the KapMuG, in 2018 the German legislator introduced the Declaratory Model Action (DMA). Claims under this new law can only be brought by qualified consumer associations who meet certain criteria. Once a DMA claim has been launched, it will be published in a claims register where claimants can register their cases electronically; a DMA requires at least 50 registrations to proceed. Once a DMA has been started, additional DMAs regarding the same facts will be inadmissible.
The bundling of claims is also possible based on general rules of the German Code on Civil Procedure. These rules permit multiple parties to sue jointly in certain circumstances involving similar claims and allow the court to join together different actions which are legally connected or could have been asserted in a single claim.
Finally, law firms and funders make use of so-called assignment models where hundreds or thousands of claims are assigned to a SPV which then pursues the claims in one single proceeding. The lower courts initially were reluctant to accept this tactic and repeatedly held that the assignments were null and void, among others based on conflicts of interests on the part of the assignee. Yet, recent judgments by the German Federal Court of Justice confirmed the validity of the assignments and strengthened the position of the SPVs.
In recent years a large share of mass actions has been brought in cartel damages litigation, securities, banking and insurance litigation, product liability, the transport sector and the energy sector. All the procedural options identified above are limited in some way, and so mass actions are not generally seen as particularly promising in Germany. The number of KapMuG cases to date is low, and proceedings take extraordinarily long. The restrictions on bringing a DMA and the fact that it only gives rise to a declaratory judgment limit its impact.
The absence of a single streamlined process has also led to a significant mass claims industry, with law firms, legal tech providers, claims management companies and third-party funders often teaming up in attempts to enforce consumer rights in an efficient manner or to force a settlement on the defendants.
The impact of the RAD
On 29 March 2023, the German government formally published a draft Bill for the transposition of the RAD. The deadline to transpose the RAD originally expired almost four months earlier on 25 December 2022, but transposition was delayed due to a disagreement between the German Ministry of Justice and the Ministry of Consumer Protection. Therefore, at the end of January 2023, the European Commission had announced that it would send a letter of formal notice to Germany and many other member states which failed to meet the deadline.
The Commission requested the member states to complete transposition by the end of March. If this deadline is not met, the Commission could initiate the next step of the procedure. It remains to be seen whether the Commission will continue to take action against Germany in light of the published draft Bill.
With the published draft Bill, the German government aims to create a “balanced and fair legal framework for all parties involved”.
With the draft Bill, the legislator is introducing a new legal instrument called the “redress action” (Abhilfeklage) by way of a new Consumer Rights Enforcement Act (CREA, Verbraucherrechtedurchsetzungsgesetz) into which the existing regulations on the DMA will also be integrated. Claimants will be able to choose whether to sue for a declaration via the DMA or for actual redress. The KapMuG and the other methods of bundling mass claims discussed above will remain available as additional options for claimants. As a result, the tech providers and law firms specialising in pursuing consumer interests are unlikely to end their activities once the new representative action is in place.
The new redress action under the CREA would be available not only to consumers – as required by the RAD – but also to small businesses with fewer than 50 employees and annual turnover of no more than €10 million. It would operate on an opt-in basis and cover not only the particular legislation listed in the RAD but any civil law disputes.
Similar to the position under the DMA, a qualified entity then requires at least 50 affected consumers, with sufficiently similar claims, for filing an action under the CREA. Competent court for actions under the CREA is the Higher Regional Court at the seat of the defendant.
Criteria for qualified entities
The criteria which associations need to fulfil in order to register as qualified entities were and are highly disputed in Germany. According to the draft Bill, a qualified entity shall (1) be registered as a qualified entity in a public list by the Ministry of Justice; and (2) not obtain more than 5% of their financial resources through contributions from companies.
The list of requirements has been reduced compared to the previous version of the draft Bill. Unsurprisingly, the Ministry of Consumer Protection criticised the earlier draft as too corporate-friendly, as was already the case when the DMA was introduced back in 2018. Presumably in response to this, the requirements were amended in the current government draft.
Examples of entities entitled to bring a DMA under the current regime include consumer protection agencies, tenant associations, associations for the protection of investors and environmental aid agencies.
Timing for claim registration
The earlier draft Bill stated that consumers who want to register for an action under the CREA would need to do so no later than on the day before the first court hearing. This as well was particularly challenged by the Ministry of Consumer Protection as well as numerous consumer associations who suggested a latter point in time. The draft Bill now stipulates that claims can be registered up to two months after the first oral hearing. This means that consumers can take into account the court's position during that hearing.
To avoid a situation in which consumers can even register to participate from a favourable settlement or judgment, the draft Bill foresees that a judgment may only be rendered and a settlement may only be reached after the two month registration deadline has expired.
Finally, the draft Bill also contains rules on third-party funding. It not only incorporates a general disclosure requirement as to whether a third-party funder is involved in the action, but also provides that an action is deemed inadmissible if a party providing third-party funding is either a competitor of the defendant or in any way dependent on the defendant or is expected to influence the action to the detriment of the registered consumers.
Course of Proceedings
The competent court must first establish that the consumer claims bundled by the action are similar. Similarity shall be tested by a template-like analysis of the claims by the competent court.
Once similarity has been established, the proceedings would then be divided into four steps:
- basic redress judgment, rendered if the court considers the case admissible and the defendant liable on the merits (Abhilfegrundurteil);
- court invites parties to submit a settlement proposal;
- final redress judgment (Abhilfeendurteil), rendered if no settlement is reached. The court can estimate a collective total amount and assume that all claims are fully justified. On request, the court is free to increase the collective total amount if its first estimation turns out to not satisfy all claims. If payment to specifically-named consumers is sought, the court shall decide by regular judgment - thus accelerating the proceedings in these more clear-cut cases;
- implementation phase (Umsetzungsverfahren), in which a court-appointed administrator handles the distribution of the collective amount to claimants they deem to be entitled. Any remaining balance is returned to the defendant.
As it was already the case under the DMA, the parties may conclude a settlement with effect for all the consumers registered in the register of collective actions (Verbandsklageregister). Such settlement would need to be approved by the court and would be published in the public register. Any registered consumer may, within a period of one month, request to withdraw from the settlement.
Pitfalls regarding mass actions
The landscape of mass actions and collective redress mechanisms in Germany has been rather corporate-friendly compared to other jurisdictions in Europe, given limitations as to who can bring these actions and the relief that can be obtained.
In turn, however, this has fuelled the claimant industry's activity. There is an increasing acceptance and use of third-party funding and intensified involvement of international players in German litigation. The pursuit of individual claims in high volumes poses a considerable challenge to businesses' defence logistics and strategy as it requires an enormous effort, and high costs, to coordinate ongoing proceedings and maintain a sound and consistent strategy whilst having to appropriately address individual peculiarities of cases.
Overall, the implementation of the RAD in Germany is likely to make it easier for consumers and small businesses to obtain a remedy from infringing businesses. The draft Bill is rather consumer friendly. However, there may also be benefits: both for the German courts, which in recent times have been groaning under the burden of mass proceedings brought by way of multiple claims; and for businesses facing claims, who may be able to resolve disputes in a more streamlined and potentially more cost efficient way.
For queries related to Germany, contact Johanna Weißbach and Christian Schmidt of Pinsent Masons.
Class actions and multi-party proceedings in Germany
German Bundesrat debates proposals to streamline mass proceedings (pinsentmasons.com)
German court rules on admissibility of claims bundling for foreign law claims (pinsentmasons.com)
Futile lawsuits: Legal expenses insurers 'may be entitled to damages' (pinsentmasons.com)