First draft for the implementation of the Collective Redress Directive in Germany
Following intense discussions, the German Ministry of Justice has prepared a first draft of an implementation act for the EU Collective Redress Directive (Verbandsklagenrichtlinienumsetzungsgesetz – “VRUG”). The draft has been eagerly awaited since the directive requires Germany to introduce a collective redress action for the first time and contains elements that are rather alien to the German judicial system (read more here). In this blog post, we analyse the main elements of the proposal and provide an outlook on the way forward.
Main elements of the proposal
With the new collective redress action (Abhilfeklage), claimants shall be able to sue for damages, a price reduction, termination of contracts or refunds of the price paid. Punitive damages shall be excluded. While the Capital Markets Model Case Act (Kapitalanleger-Musterverfahrensgesetz - “KapMuG”) is to remain in place, the Model Declaratory Action Act (Musterfeststellungsklagengesetz – “MFKG”) shall be integrated into the VRUG’s centrepiece, the Consumer Rights Enforcement Act (Verbraucherrechtedurchsetzungsgesetz – “VDuG”): The plaintiff should be able to choose whether to sue for redress or for declaratory relief pursuant to the new VDuG.
Conditions for bringing an action
In both scenarios, only qualified entities shall be entitled to sue. Entities registered in other EU member states shall be included as requested by the directive. Other than that, the prerequisites for qualified entities are the same as under the MFKG, amongst others there shall be a minimum number of members and they shall have to demonstrate a legitimate interest in protecting consumer interests without a profit-making character.
The opt-in requirement shall also be retained, i.e. an affected consumer shall not automatically become part of the action, but shall have to register their claims. Interestingly, small companies shall be entitled to register as well, which are defined as companies with less than 50 employees and an annual turnover of less than € 10 million. A late registration, for example after the outcome of the action is known, has been discussed but is not envisaged as things stand. According to the proposal, the registration shall have to take place until the day before the first oral hearing.
Any action shall require a minimum of 50 affected consumers, i.e. the qualified entity shall have to demonstrate that at least 50 consumers may be affected (Glaubhaftmachung). Moreover, in contrast to declaratory actions, actions for redress shall only be admissible if the consumer claims affected by the action are of the same kind (gleichartig). According to the proposal, claims are of the same kind if they are based on the same or a set of comparable facts, and the same questions of fact and law are relevant for the decision. The explanatory memorandum to the proposal states that a degree of similarity of the claims is required which permits a “template examination” (schablonenhafte Prüfung) in legal and factual terms. This shall for example not be the case if not all products of a series are defective and a clarification in each individual case is required (cases are factually not of the same kind) or if some of the claims concerned may already be statute-barred (cases are legally not of the same kind). The “same kind” prerequisite will most probably lead to extensive discussions in many cases.
It is also worth noting that the collective actions shall not be limited to certain areas of law, as foreseen in the directive.
Other elements of the VDuG
The draft also picks up other aspects such as third-party funding and suspension of limitation periods in line with the requirements of the directive. For disclosure (which was one of the most controversial issues), the proposal relies on section 142 of the German Code of Civil Procedure under which a court may order the other party or a third party to produce specific documents only. Thus, taking advantage of the leeway granted by the directive, no comprehensive disclosure rules are envisaged. However, as requested by the directive, the proposal includes provisions on fines in case of failure or refusal to comply with the disclosure order.
Course of the redress proceedings
As for declaratory actions, the Higher Regional Courts shall be competent in the first instance. According to the proposal, the new redress proceedings will be structured as follows:
- In the first phase, the qualified entity can obtain a redress judgment on the ground of claim, i.e. declaring the liability of the company.
- A settlement phase follows, in which the parties shall seek an amicable settlement of the dispute.
- The third phase begins if the parties do not reach an effective settlement. The court renders a redress judgment.
The court then appoints an administrator (Sachwalter) who establishes an "implementation fund". The "collective total amount" determined by the court in the final judgment by estimation is to flow into this fund. The administrator is then to distribute the money to the consumers or to arrange for repair, replacement or termination of the contract. In order to be able to perform his tasks, the administrator shall be given certain competences, such as demanding further information from the parties and setting deadlines. According to the explanatory memorandum to the draft, lawyers, tax advisors, business economists, insolvency administrators or auditors, for example, could be considered as administrators. Particularly in the case of more extensive proceedings and where the implementation of the collective judgment is complex, legal tech tools might play an important role.
The collective redress action will be a huge novelty in German law, but its implementation was imposed by the directive and thus does not come as a surprise. With regard to many details, the draft is rather cautious and makes use of the leeway provided by the directive or adheres to its minimum requirements. It therefore remains to be seen whether the German action for redress, unlike the model declaratory action upon which it is modelled in large parts, will prevail in the market. This will, in particular, depend on the way in which collective proceedings will be handled in practice and how the directive will be implemented in other, possibly more claimant-friendly member states.
Before being referred to the legislative bodies, the draft has to be discussed and approved by the Federal Cabinet, which has not yet set a date for discussion according to publicly available sources. Adoption before the implementation deadline on Christmas still seems possible, but it is to be expected that the various stakeholders will discuss the draft controversially and may make some adjustments.
However, even though amendments are still possible during the legislative process and it will take some time until the new provisions enter into force, companies are well advised to familiarise themselves with the upcoming collective redress system and to adapt their analysis of litigation risks to avoid collective litigation. Watch this space for updates on the implementation process in Germany and elsewhere in the EU.