Class Actions come to Germany - German Federal Council passes Redress Action

The introduction of the VRUG will simultaneously result in the introduction of the Consumer Rights Enforcement Act (VDuG) as well as modifications to various existing laws such as the Code of Civil Procedure (ZPO), the Courts Constitution Act (GVG) and the Civil Code (BGB). The goal is to improve the collective legal protection of consumers in Germany.

Redress Actions (Abhilfeklagen) as more efficient legal protection for consumers

When the EU Directive on collective redress was implemented, an independent instrument was created, the so-called redress action. This is a collective action for performance, which will provide consumers with a one-step procedure to demand performance directly from the defendant company in the form of payment, subsequent service such as repair, replacement, price reduction, termination of the contract or reimbursement of the price paid. The model declaratory action (Musterfeststellungsklage) introduced in 2018, which already represented a first step toward collective consumer protection, will be detached from the ZPO as an independent instrument and combined with the redress action in the VDuG as so-called representative actions.  

The declaratory action and the action for redress are united by the fact that both can only be brought by qualified entities authorized to bring an action. These are either qualified consumer associations from the fields of environmental protection, consumer protection, data protection and health protection, among others, or qualified entities from other member states of the European Union (Section 2 (1) VDuG). It remains to be seen to what extent consumers will make use of the representative action in the form of an action for redress via the institutions entitled to bring an action. In any case, the areas of application are likely to be diverse: highly standardized contracts (where the question of the validity of specific contractual clauses arises), for example in the banking sector, could be put to the test by means of a redress action. The redress action can also be used to sanction violations of data protection regulations, misleading advertising or poor product quality.

The new redress action goes beyond the previous collective actions in Germany, which were only focused at declaratory and injunctive relief. The lengthy process via the initial collective determination that a company has violated consumer rights and the individual action that must then be brought by the individual consumer is now no longer necessary.

Many aspects have changed since the first draft law was published. As a result, it has become much easier for consumers and small businesses to file their claims:

Period for filing own claims significantly extended

Consumers will be able to register their claims in the collective action register (Verbandsklageregister) for a significantly longer period than initially intended, specifically until three weeks after the conclusion of the oral proceedings (Section 46 (1) VDuG). They can therefore await the outcome of the oral hearing before deciding whether to join. This exposes consumers to minimal risk. They participate in the proceedings at a time when there is often already a prognosis about the prospects of success. For the defendant company, on the other hand, the volume of the claim can only be calculated at a very late stage.

Proof of actual concern no longer a requirement

What remains the same is that at least 50 affected consumers must come together for a redress action. Once this quorum has been reached, other affected consumers can register their claims in the collective action register of the Federal Office of Justice (opt-in). What is new is that the institutions entitled to bring an action now only must “demonstrate in a comprehensible manner” in the statement of claim that at least 50 consumers could be affected (Section 4 (1) VDuG). In the first draft of the law, the entities still had to “establish prima facie evidence” (glaubhaftmachen) that this was the case. With the lowering of this requirement, proof of actual concern is no longer a legal requirement for admissibility.

Circle of eligible small businesses becomes more limited

In addition to consumers, small companies with fewer than 10 employees and an annual turnover or annual balance sheet of less than EUR 2 million (Section 1 (2) VDuG) should also have access to the new collective redress action. Companies exceeding this threshold have sufficient resources of their own to independently enforce claims, according to the legislator's justification. The legislature has thus once again narrowed the circle of eligible persons. In a former draft, companies with 50 employees and annual sales or an annual balance sheet of EUR 10 million were also to be considered consumers within the meaning of the law.

Process of Redress Action

The procedure of the redress action provides for three phases: Decision on the merits, evaluation of settlement and final redress judgment. The court issues a decision on the merits if it considers the redress action to be well-founded on the facts. After passing the decision on the merits, the parties are requested to submit a written settlement proposal to implement the decision on the merits. In the event that the remedial proceedings are not terminated by an effective settlement, the court shall finally decide by final redress judgment. If the redress action does not itself quantify a collective total amount, it is intended that the court will freely determine the amount of the collective total amount, considering all the circumstances. The implementation of the final redress judgment shall be carried out by an administrator appointed separately for this purpose. The administrator sets up an implementation fund and organizes the distribution of the total amount awarded by the court to the consumers who have registered a claim. 

The German “class action” - a move towards US-American standards?

Many companies feared the introduction of a “class action” based on the U.S. model; however, this fear is not justified. On the one hand, the possibility of introducing disclosure obligations for documents relevant to evidence, as provided for in the directive, was dropped. On the other hand, the fact that only certain institutions have the right to sue prevents a single consumer from becoming the representative of a large number of consumers. Only those entities that act in the public interest to protect consumer interests are allowed to bring collective actions. In this way, representative actions should not be able to be instrumentalized as a business model for purely profit-making purposes.

Compensation without assessment of the individual case?

However, the question remains how courts can award damages for a large group of cases without assessing the individual case. The law does not provide an answer to this question, but the reasoning of the lawmaker makes it clear that it is not intended to rely on the specifics of individual cases. Instead, the intention is to enable courts to decide on all cases in bundled form in a single proceeding. In the proposed draft, the cases were still to be characterized by a “similarity”, which would allow a template-like examination of the claim prerequisites in factual and legal terms. Now, the cases only have to be “essentially of the same nature” (“im Wesentlichen gleichartig”). Even though Section 15 (1) No. 1 and No. 2 VDuG specify individual cases, the wording “essentially of the same nature” is intentionally an indeterminate legal term that is meant to enable appropriate results in individual cases. As long as effective litigation is preserved and bundling remains expedient in terms of procedural economy, individual differences between the claims affected by a redress action should not stand in the way of a uniform procedure.

Regulation of third-party funding

Also, in the area of third-party funding, the law that has now been passed has been significantly tightened compared to the first drafts: the possibility of litigation funding remains but is limited to a profit share of 10 % of the service to be provided by the defendant company (Section 4 (2) No. 3 VDuG). In order to make third-party funding more transparent (and thereby less attractive as a result), Section 4 (3) VDuG also states that all agreements between the consumer association and the litigation funder must be disclosed when the lawsuit is filed.

Conclusion: Power of the redress action remains to be seen

Great hopes were already associated with the model declaratory action. Still to this day the number of model declaratory actions filed since its introduction in November 2018 has been in the rather low double digits. This may also be due to the fact that the determination of a legal violation is not very practical for the affected consumers - and above all does not lead to an immediate redress of the consequences of the legal violation. The redress action at the heart of the VDuG may change this. The lowering of the requirements is intended to simplify the possibilities for consumers to actually enforce their rights. Companies will have to be prepared to defend the first cases of the application of the redress action by the entities entitled to bring an action. Only time will tell, however, whether the hopes of consumer advocates will be met and consumers will be able to enforce their rights more quickly in the future, or whether the redress action will remain merely a toothless paper tiger.

To find out more about the Collective Redress Directive and which EU Member States have implemented it click here to access out Tracker