New law on representative actions in Germany
Report 18 October 2023 18 October 2023
UK & Europe
On 8 October 2023, the German Federal Council (“Bundesrat”) approved the law on the implementation of the Directive (EU) 2020/1828 on representative actions for the protection of consumers' collective interests.
The so-called law on representative actions (“Verbandsklagengesetz”) had already passed the German Parliament (“Bundestag”) in July this year. The law aims for regulations that go beyond the minimum standard provided for in the directive. The following key aspects are therefore summarized as follows:
- Introduction of a representative action for performance (“Abhilfeklage”).
- The existing declaratory representative action (“Musterfeststellungsklage”) remains in place.
- All civil disputes can be subject to the declaratory representative action and the representative action for performance. Both actions are referred to under the generic term “representative actions” (“Verbandsklagen”).
- Small companies shall benefit from the representative actions alongside consumers
- Parties have to opt-in to the representative actions. For this, they must register their claims in the register of representative actions (“Verbandsklageregister”) as is already required for the declaratory representative action.
- Funding of the representative actions by third parties is possible within narrow limits.
- In a representative action for performance, a collective total amount may be awarded even if the amount is still to be estimated.
In the following, we will first briefly present the past legal situation (see 1), before summarizing the new legal situation under the now implemented provisions of the law on representative actions (see 2). We then explain the procedure for bringing a representative action for performance (see 3) and discuss the provisions on the statute of limitations (see 4) before concluding (see 5).
1 Past legal situation
The declaratory representative action is and was generally used to bindingly determine the claims and/or legal relationships of a group of consumers in the event of mass damage. A qualified entity (cf. section 606 para 1 sentence 2 of the German Code of Civil Procedure (ZPO)) assumed responsibility for bringing and performing the action on behalf of the consumers. Usually, this qualified entity was a consumer association.
During this declaratory representative action, the first step was that a court determined the legal relationships or claims of a large group of consumers. Based on this binding determination, each consumer individually had the option to bring an action for performance in a second step. Only after this two-fold process the consumer had an enforceable title.
In addition to the general declaratory representative action, there is also a special representative action for capital investment disputes under German law. Whereas the general declaratory representative action is geared exclusively to consumers, the special representative action for capital investment disputes is not restricted to consumers.
2 Current legal situation according to the newly issued law
The newly issued Consumer Rights Enforcement Act (“Verbraucherrechtedurchsetzungsgesetz” hereafter: “VDuG”) changed the (formal) requirements regarding the existing declaratory representative action and introduced the new representative action for performance. Both actions, are referred to as representative actions (“Verbandsklagen”).
In particular, the representative action for performance requires a detailed analysis. In contrast to the previously applicable declaratory representative action, the representative action for performance allows for more comprehensive legal protection. This is because the qualified entity can directly assert payments or other benefits for the consumers without the consumers having to pursue their claims for performance individually in a two-fold process. A positive aspect to be emphasized is that all claims are covered by the representative actions. They therefore enable actions in all legal disputes, insofar as they are civil disputes. However, conflicts under labour law are not falling into the scope of the law.
Furthermore, small businesses are treated equal to consumers. Small businesses are those that employ fewer than 10 people and whose annual turnover or annual balance sheet do not exceed EUR 2 million. If those requirements are met, small business are considered for the quorum and may opt-in to the representative actions.
Under the newly enacted law, the legislator has aimed to establish the same requirements for the admissibility of both representative actions. It is necessary to comply with formal (see 2.1) and substantive requirements (see 2.2).
2.1 Formal requirements
2.1.1 Entities entitled to bring an action, section 2 VDuG
Entities which are already entitled to bring a declaratory representative action under the former section 606 para 1 sentence 2 ZPO will be entitled to bring the new representative actions as well.
In addition to qualified consumer associations (section 2 para 1 no. 1 VDuG), expressly qualified entities from other Member States also remain entitled to bring representative actions, section 2 para 1 no. 2 VDuG, which will be subject to less stringent requirements in the future.
Consumers remain barred from bringing and performing the representative actions on their own.
2.1.2 Quorum, section 4 para 1 VDuG
Regarding the quorum, it is no longer necessary that at least 50 consumers have registered their claims in the register of representative actions within a certain period. This requirement has been waived, cf. previously section 606 para 3 no. 3 ZPO.
However, the entity must now credibly demonstrate that the representative action for performance concerns the claims of at least 50 consumers or that the claims or legal relationships of at least 50 consumers (before: ten consumers, cf. section 606 para 3 no. 2 ZPO) depend on the declaratory representative action.
In the case of joint litigation pursuant to section 7 para 1 VDuG, the total number of consumers affected by the joint action is decisive.
This shift from the former requirement of 50 consumers having filed their claims to whether the entitled entity can establish credible claims of 50 consumers eliminates the potential for abuse that currently exists.
2.1.3 Third party funding, section 4 para 2, 3 VDuG
Finally, provisions on the financing of the representative actions were included. Formerly, it was only regulated that the declaratory representative action may not be brought for the purpose of making a profit and that the entities entitled to bring an action may not obtain more than five percent of their financial resources through contributions from companies, cf. former section 606 para 1 sentence 2 nos. 4 and 5 ZPO. This provision is now reflected in section 2 para 1 no. 1 lit. b) VDuG.
In addition, pursuant to section 4 para 2 and 3 VDUG, explicit provisions are made for litigation funding. Third party funding remains possible. However, the representative actions are inadmissible if they are financed by a third party, who
- is a competitor of the company sued,
- is dependent on the company sued,
- who is promised an economic share in the performance to be rendered by the company sued of more than 10 per cent, or
- can be expected to influence the conduct of the lawsuit by the entitled entity, including decisions on settlements, to the detriment of the consumers or small businesses.
2.2 Substantive requirements
At the material level, the following requirements must be considered:
2.2.1 Declaratory representative action
On the substantive level, the legislator did not introduce any changes for the declaratory representative action.
2.2.2 Representative action for performance – same kind of claims (“Gleichartigkeit”), section 15 para 1 VDuG
With respect to the new representative action for performance, the legislator requires that the claims affected be of the same kind.
Consumer claims are of the same kind, if
- they are based on the same facts or on a series of comparable facts, and
- the same factual and legal issues are relevant for the decision.
This same kind of claims exists, for example, if a “template-like” examination is possible in legal and factual terms. As a point of reference for a possible same kind of claims, the explanation of the draft refers to claims for compensation under the Air Passenger Rights Regulation (EC) No. 261/2004, since these generally involve the same preconditions for a claim and can be based on the same facts relevant to the decision.
However, insofar as the amount of similar consumer claims varies individually, it must be possible to calculate the respective claim amount using the same formula.
In this context, it is obvious that the test of similarity will be the subject of discussions in the future.
3 Course of the procedure for representative actions
With regard to the procedure, the following changes were implemented:
3.1 Declaratory representative action
The procedure for the declaratory representative action is not supposed to change.
3.2 Representative action for performance
If the formal and substantive requirements (see 2.1 and 2.2) of the representative action for performance are met and the representative action for performance is therefore admissible, the further proceedings before the competent Higher Regional Court are as follows:
3.2.1 Phase 1: judgement on the grounds of performance, section 16 para 1 VDuG
The first phase of the representative action for performance ends with a judgment on the grounds of performance (“Abhilfegrundurteil”), provided that the court considers the representative action for performance to be admissible and justified on the merits. If the court considers the action to be inadmissible or unfounded, it dismisses the representative action for performance through judgment.
3.2.2. Phase 2: settlement, section 17 VDuG
After rendering the judgement on the grounds of performance, the court shall invite the parties to submit a written settlement proposal regarding the implementation of the judgement and thereby shall initiate the settlement phase (“Vergleichsphase”).
3.2.3 Phase 3: closing judgement, section 18V DuG
If the proceedings do not come to an end by way of an effective settlement, the court shall continue the proceedings once the judgement on the grounds of performance becomes binding.
The court decides by way of a closing judgment (“Abhilfeendurteil”). The closing judgement shall contain, if applicable, the order to pay a collective total amount (see a)) and inter alia the order to commence the implementation procedure (sog. “Umsetzungsverfahren”) (see b)).
(a) Collective total amount, section 19 VDuG
The collective total amount shall be estimated by the court in accordance with section 287 ZPO. The court may, in accordance with its judgement on the grounds of performance, assume that all claims are justified in full. After issuing the closing judgement, the court has the option to increase the collective total amount if the previously determined amount is not sufficient to satisfy all consumer claims, cf. section 21 VDuG.
(b) Implementation procedure
The implementation procedure ensures that the closing judgement is implemented by a custodian (“Sachwalter”) appointed by the court, section 23 VDuG.
Among other things, the custodian establishes an implementation fund for the collective total amount and distributes the money to the consumers, section 25 VDuG.
In addition, it is the task of the custodian to examine, based on the judgement on the grounds of performance, whether the consumers, who registered their claims in the register of representative actions, are entitled to payments. The custodian may also decide that the claims are not or only partially payable to the respective consumer. In this case, individual actions by the consumer remain permissible, section 39 VDuG.
As the implementation and the custodian's examinations may become very complex, lawyers, tax advisors, business economists, insolvency administrators or auditors, for example, may be considered for the role as custodian.
4. Limitation / opt-in model, section 46 para 1 VDuG
The provision on the suspension of the statute of limitations for the representative action for performance corresponds to the provisions of the current declaratory representative action. The limitation is only suspended if the respective consumer effectively registered the claim or the legal relationship in the register of representative actions and thus participates. If the consumers do not register the claim, they will benefit neither from the suspension of the limitation period nor – in the event of a successful claim – from the implementation procedure, section 26 VDuG. This expressly means that consumers must register their claims in the register of representative actions within a period of three weeks after the conclusion of the oral proceedings.
With the new representative action for performance, the legislator is creating a novelty. For the first time, consumers – via entitled entities – can bring an action for performance collectively without following a two-step process. This strengthens consumer protection.
It is currently unclear what scope of application remains for the declaratory representative action now that the representative action for performance has been introduced. If the claims are not of the same kind, the question arises as to which declaratory goals can be pursued with the declaratory representative action. Practical applications are not yet apparent. Since, according to the explanatory memorandum to the draft bill, both representative action for performance as well as declaratory representative action are intended to cover infringements of the EU General Data Protection Regulation (Regulation (EU) 2016/679 - GDPR), the demarcation could be as follows using the example of claims for damages under Art. 82 GDPR: If the alleged data protection infringement at hand affects all data subjects with regard to the same categories of personal data and if the data subjects have also actually suffered at least non-material damages as a result of the data protection infringement, the representative action for performance would be relevant due to similarity of the consumer claims based on the same facts. In a constellation where different but similar categories of data have led to at least immaterial damages, there would be a “series of comparable facts” that would also lead to the option of a representative action for performance.
However, since the existence of non-material damage within the scope of Art. 82 GDPR is already a question of the preconditions for a claim and not only of the amount of the claim, the declaratory representative action could still have a scope of application if it is already unclear whether all affected consumers have suffered immaterial damage at all due to different categories of personal data affected and personal situation. Here, the declaratory representative action, directed solely at establishing that the defendant has violated the GDPR, could still have a scope of application. In this scenario, the representative action for performance could not be utilized for lack of same or comparable facts.
In addition, it must be critically questioned to what extent business interests have been considered in the law. In particular, the possibility of subsequently increasing the collective total amount will not contribute to legal certainty for the companies sued. That any remaining amount will be refunded to the companies after the collective total amount has not been exhausted is not convincing. In this respect, it remains to be seen whether collective total payments could threaten the solvency of the companies sued. On the positive side, if the action is dismissed, the judgment will be binding on those consumers (and small businesses) who have registered their claims in the register of representative actions.