On 1 November 2018, a new legislation enabling model declaratory actions on behalf of consumers against companies came into force. The recent so-called “Dieselgate affair” and other commercial activities and trends over the past few years have called on authorities and legislators to reconsider the continental laws on consumer protection and in particular the enforcement of consumer rights. Other than for example in the U.S., German consumers in the past have been forced to bring individual actions against companies in order to recover their damage. However, in particular in low value and mass damage cases, consumers often have refrained from bringing lawsuits due to the effort and the litigation cost risk being too high. At the same time, the Dieselgate affair has produced 23,800 suits before German courts and about 6,000 judgments according to a statement of VW AG. Legal service providers and special litigation vehicles such as MyRight have been attracting consumers to assign their (alleged) claims to them to be brought in court. In response to the Dieselgate affair and the procedural situation, the German legislator has introduced a new representative action in the form of a model declaratory action in the Civil Code of Procedure by which consumers are to pursue their claims.
Existing representative action mechanisms under German law
German procedural law already provided for special forms of collective redress before the new law was enacted. As such, the German Unfair Terms and Conditions Act (Gesetz über Unterlassungsklagen bei Verbraucherrechts- und anderen Verstößen, UKlaG) enables consumer associations to bring action against companies for inadmissible general terms and conditions or practices violating consumer rights.
In addition, investors who have incurred a damage as a result of false, misleading or omitted public capital markets information may bring an application with the competent court for the establishment of model case proceedings in order to clarify legal questions or establish the existence or nonexistence of conditions justifying or ruling out the claim under the German Capital Investors’ Model Proceedings Act (Kapitalanleger-Musterverfahrensgesetz, KapMuG). If at least nine further applications are filed in similar cases within a six-month period, the Higher Regional Court will admit model case proceedings in which it will select one of the claimants as the model case claimant. The model case is then publicly announced in the complaint registry subsequent to which all other cases pending are suspended until the final decision on the model case has been rendered. The decision of the court on the legal questions at issue will then become binding for the courts of first instance that are trying the individual cases. These model proceedings are limited to a narrow scope of application and not suitable for providing collective redress in most cases. In addition, the cases brought under the Act in practice have proven to be slow and ineffective, such as in the Deutsche Telekom case in which 17,000 small investors individually filed claims against Deutsche Telekom AG arguing that the defendant had concealed significant risks in its prospectus. At the same time, however, proceedings under the KapMuG recently have gained relevance in view of the Dieselgate and have been brought by investors against VW AG and its mother company Porsche SE involving alleged damages in the amount of EUR 9.5 billion. In addition, two investors have brought damage claims in the court of Stuttgart against Porsche SE including an application for model proceedings under the Act. While the Stuttgart court has awarded damages in the amount of EUR 47 million to the investors, the decision on the opening of such proceedings and the claims of the remaining investors is still pending with the higher court.
The new general model declaratory action pursuant to § 606 et seq. Code of Civil Procedure
Other than the model proceedings for claims of investors under the KapMuG and the UKlaG, the German Code of Civil Procedure (ZPO) traditionally does not provide for group or representative actions. The new law aims to change that by implementing the possibility of a representative action in Sections 606 to 615 ZPO.
The declaratory action does not grant the consumers a direct right to sue the company, but allows qualified institutions, such as the consumer associations registered pursuant to Section 3 para. 1 sentence 1 UKlaG, which fulfill certain eligibility criteria, to bring an application for a model declaratory action. In order to qualify as claimant, the association must have a minimum of 350 individual (or 10 union) members, have been registered for at least four years, advice consumers on a non-profit basis as its statutory function and not bring declaratory actions for the purpose of making a profit. In addition and in order to prevent an abuse of the model declaratory action, the association must demonstrate that it is not funded for more than 5% of its financials by companies.
The declaratory action is only admissible in cases in which the claimant can establish a minimum of ten claims depending on the findings in the declaratory proceedings. The consumers affected by the findings will be able to opt in by registering their claims in a public register. The registration is free of charge so that the consumers do not face any litigation costs with regard to the model proceedings. The model proceedings will then be admitted by the court in case at least 50 potential claimants register their claims within two months as of public announcement of the action. In that case, the court will decide on the existence of the facts and/or legal grounds justifying the claim. The court’s declaratory ruling will then be binding on the registered claims unless the consumers make use of their right to withdraw. If the court confirms the liability of the defendant company, as a next step, the consumers concerned will have to bring individual damage claims or seek a settlement with the defendant company. However, the courts trying the individual claims will be bound by the first court’s declaratory findings and will not be able to rule again on the question of liability.
The law does not limit the scope of application of the model declaratory action to certain areas of law or legal grounds for claims. While the model action has been introduced in particular with view to the Dieselgate and the affected consumers, consumer associations may make use of it in order to pursue claims under the GDPR or cartel damage claims so that it will have to be observed to what extent it will prove useful in practice and whether consumer associations will make use of it. However, it is to be presumed that the declaratory action may rather serve standardized cases and claims the basis of which can be decided uniformly, such as cases involving mass warranty claims. In contrast, the action may not be suitable for claims that require an individual assessment of the circumstances (such as e.g. causation) and the damage claims raised on a case-by-case basis. The new law further does not determine the relationship between the general model declaratory action and other representative actions such as under the KapMuG or the UklaG. However, the latter laws should have priority als lex specialis.
Section 611 ZPO allows for a settlement in the model proceedings with an effect also for the consumers who have registered their claims. The settlement must be approved by the court and becomes effective in case less than 30% of the consumers with registered claims opt out of it. However, the practicability of a settlement in a suit directed at a declaratory relief without specification of the amount of damage may prove difficult and hinder defendant companies from settling the case at an early stage.
As regards the costs of the proceedings, defendant companies should note that the amount in dispute for the model declaratory action is limited to EUR 250,000. This on the one hand means that the attorney fees to be reimbursed to the defendant in case of a victory are capped and a substantial portion will have to be born by the defendant. In addition, the limitation of the amount in dispute and the associated reduced litigation cost risk lowers the burden for claimants to initiate model declaratory proceedings.
A first model declaratory action already has been filed against Volkswagen AG in connection with the Dieselgate affair by a consumer association and the German automobile club (ADAC) in order to clarify whether the company intentionally harmed consumers when it deployed manipulated software in certain cars.
Other developments towards a “European” representative action
In addition to the new German legislation, the European Commission has presented in its so-called “New Deal for Consumers” of 11 April 2018 a draft Directive on representative actions for the protection of the collective interests of consumers, and repealing Directive 2009/22/EC (Directive) by which it inter alia introduces representative actions for the protection of consumers. Contrary to the German approach, the current proposal enables qualified entities to seek collective remedy, that is compensation, replacement or repair, on behalf of a group of consumers that has been harmed by illegal commercial practices. The European representative action would therefore not be limited to a declaratory relief, but grant direct damage claims against the defendant company. With regard to the reasons and objectives of the Directive, the Commission in its proposal refers to the necessity for a harmonized system of collective redress for consumers within the EU with currently differing national redress mechanisms for mass harm situations and better protection for consumers against unfair or even illegal commercial practices. The Commission’s proposal must be approved by the European Parliament and the Council of the European Union in order to come into effect which presumably will not happen prior to the next parliament elections in May 2019.
Conclusion and outlook
In view of the actual format of the new model declaratory action, defendant companies do not have to fear the establishment of a real collective redress mechanism or even U.S.-style class action in Germany introducing discovery proceedings, punitive damages or similar procedural principles unknown to civil law jurisdictions. As a core principle and difference to class actions in the U.S., the consumers are not remedied damages directly, but have to bring individual suits subsequent to a model declaratory action having affirmed the defendant’s liability. It is also questionable whether the action can and will serve as a real redress in sectors other than the Dieselgate in the automotive sector for which it has been introduced and whether actions will be brought against financial institutions, insurance companies or to pursue claims under the GDPR. Thus, the business community should be alerted in view of the increased litigation risks connected with their business practices and expect that the new representative redress regime under German and ultimately European law may lead to consumer associations increasingly observing business practices and bringing respective actions where consumer rights are at risk.