Federal Ministry of Justice presents first draft law on new German class action - Does this open Germany's dreaded Pandora's box?

The Federal Ministry of Justice has recently presented a first draft bill which will implement the EU Directive on collective redress (Directive (EU) 2020/1828 of the European Parliament and of the Council of 25 November 2020). The new law, titled Verbandsklagenrichtlinienumsetzungsgesetz (VRUG), looks to markedly strengthen consumer protection, with virtually all current consumer regulations coming under its ambit, spanning from the Consumer Rights Directive to the Money Market Fund Regulation and the General Data Protection Regulation.

The draft gives an insight into the proposed new German class action. The novelty of this class action will be the so-called “redress action”: a collective action for performance, providing the means through which consumers, via a qualified entity, can directly demand performance from the defendant company in a one-step procedure in the form of either payment, subsequent performance (such as repair, replacement, price reduction or termination of the contract), or by reimbursement of the price paid.

This new redress action therefore goes far beyond the previous collective actions available in Germany, which were only aimed at declaratory or injunctive relief. The lengthy diversions that occurred via the initial collective determination will now be a thing of the past, where a concerned individual consumer had to bring an individual action in relation to a company that had violated consumer rights. The draft law does however provide for the integration of the model declaratory action into the VRUG. The consumer, or the association suing on their behalf, will therefore have the choice in the future as to whether to sue for performance with a redress action or for a declaratory judgment with a model declaratory action. However, the practical scope of application for the model declaratory action will presumably be significantly reduced.

Jurisdiction for the new German class actions will lie with the Higher Regional Courts in whose district the defendant company has its registered office. Thus, the draft law follows the allocation of jurisdiction established for other types of class actions already existing in Germany (e.g., actions under the Kapitalanleger-Musterverfahrensgesetz (KapMuG) as well as the model declaratory action newly introduced in 2018).

Unfortunately, the redress action will import many of the difficulties associated with US class actions. The question arises as to how the courts should award damages for a multitude of cases without an assessment of the individual case. The three-phase procedure (preliminary redress judgment, settlement, and final redress judgment) clearly shows that, as in the USA, it will ultimately come down to settlement negotiations. Presumably in the majority of cases the proceedings will therefore also be terminated by way of settlement.

Note however that the draft seems to reject the introduction of US class action, a proposition which many German companies feared prior to the bill. To give an example, the possibility of introducing disclosure obligations for documents relevant to evidence, a key component of US class actions and as provided for in the Directive, has been abandoned. Another new feature is a sanctions mechanism by which a fine can be imposed if a court order to produce certain documents is not complied with.

Unlike the US, in Germany only certain associations are authorised to enforce consumer interests. An individual consumer cannot set themselves up as the representative of a large number of consumers (i.e., the “class”). This regulation is presumably intended to prevent the German class action from being abused as a business model. Furthermore, at least 50 affected consumers must come together to form a redress action. Once this threshold is reached, other affected consumers can register their claims in the collective action register of the Federal Office of Justice (so-called “opt-in”). Additionally, in addition to consumers, small businesses with fewer than 50 employees and an annual turnover of less than EUR 10 million may assert their rights via the redress action.

The cases must be “of the same kind”, so that the court can decide on all cases bundled in a single proceeding without having to take individual peculiarities into account. The draft states that the court should be able to decide on all consumer claims asserted with the action in a “template-like” manner, so to speak. Ultimately, this is likely where the difficulty of the redress action will lie in practice and will be a significant point of contention. If, for example, not all products of a series are defective, so that it has to be clarified in each individual case whether the specifically purchased product is actually defective or not, the redress action would not come into consideration on current drafting.

If the plaintiff and the defendant company have not been able to settle the claims, the court will issue the aforementioned final redress judgment. It is envisaged that the court may freely determine the amount of the collective total amount, taking into account all of the circumstances. The more cogent the evidence of the plaintiff association, the more estimable the amount payable becomes for the company concerned.

Once the defendant company is sentenced for a specific redress, the redress must be paid into a so-called “implementation fund”. The court will appoint a custodian to ensure that consumers are compensated by dividing the money between them or arranging for other forms of redress to be implemented.

The redress action will also be possible across borders within the EU. Thus, qualified entities from other member states that meet the requirements there and are registered in the new European register will also be entitled to sue in Germany; if necessary, even as cross-border litigants with associations from other member states.

Registration in the collective action register is free of charge. Consumers and small businesses therefore bear no litigation risk of their own. In order for the qualified association to nevertheless be able to finance the lawsuit, litigation financiers are expressly permitted. This applies at least as long as the litigation financier is not in competition with the defendant company.

Has Germany opened the dreaded Pandora's box on representative actions with its implementation of the EU Directive? Or will the new action for redress prove to be more of a paper tiger? In fact, it seems unlikely at present that this feared litigation industry will be able to develop in such a strictly regulated area. Not only is the restriction of the right to sue limited to qualified entities (i.e., independent, non-commercial consumer protection associations with corresponding state authorisation and control), but also the requirement of similarity of claims will presumably prevent companies from being flooded with class actions in the near future. It remains to be seen what changes will be made to the VRUG by the end of the legislative process. Looking further, in the future, it is highly likely that the German courts will also shape this new instrument of legal enforcement through subsequent case law.

We are tracking the implementation of the Directive and have mapped the current European collective action landscape it is updating. To find out more click here