German Federal Court of Justice facilitates bundling of claims

The Federal Court of Justice (Bundesgerichtshof – “BGH”), Germany’s highest civil court, recently upheld a mass claims collection model that bundled the claims of several parties into one action by way of assignment to a legal services provider (Inkassozession). In doing so, it has removed a number of stumbling blocks for these “claims vehicles”, thereby legitimising an extremely controversial practice that has become very important for the bundled assertion of claims for damages in the absence of an efficient class action system in Germany. In parallel, the German legislature also addressed certain aspects of this business practice.

Lack of class actions led to rise of “debt collection model”

Generally, German law does not allow for “US style" class actions, meaning an action where one lead claimant pursues the claim on behalf of other claimants from the class, which remain idle and nevertheless benefit from a judgment or a settlement. In contrast, every claimant in German proceedings must have an active role in fostering the outcome of the case.

In November 2018, the German legislator made a cautious step towards mass litigation when it implemented the so called "model action for a declaratory judgment" (Musterfeststellungsklage). However, this type of action is limited in scope: exclusively qualified associations are entitled to act on behalf of consumers and the action only leads to a declaratory judgment, meaning that each claimant must initiate individual litigation for damages once common issues of fact and law have been resolved by the model action.

These shortcomings led claimant law firms and third-party funders to use individual legal entities as “claims vehicles" to initiate collective actions for various cases of mass damage (e.g. flight rights, Diesel or cartel damage cases). This “claims vehicle" then files the lawsuit in its own name after having been assigned the damage claims by each individual claimant. In return, the assignors have traditionally received a remuneration dependant on the outcome of the litigation.

This business model is admissible if the claim vehicle is sufficiently funded to pay the costs of the defendants in case of defeat pursuant to established case law. In addition, the use of the claim vehicle must not conflict with the rules of the German Legal Services Act (Rechtsdienstleistungsgesetz – “RDG”) that aims to protect clients seeking legal advice, but also the legal profession from unqualified legal services. Under the RDG, to be allowed to pursue the claims that have been assigned to them, the “claims vehicles" are obliged to obtain a license for debt collection (Inkassolizenz). Apart from this non-controversial requirement, there has been a heated debate in recent years as to whether the business model violates the RDG, both in general or in some individual cases.

The latest case law

The BGH now had the opportunity to clarify some issues in this context (BGH, judgment of 13 July 2021, II ZR 84/20).

Facts of the case

Due to Air Berlin’s insolvency, its customers’ tickets had become worthless. They assigned their claims for insolvency delay against a manager of Air Berlin to a legal services provider, for the purpose of bundled assertion in court in return for a share in the profits. In contrast to the lower instance courts and following its own, more generous case law, the BGH held that the debt collection model at stake is permissible under the RDG.

Scope of the debt collection licence

It has been intensely debated whether such assignments are void, particularly in case of a mass collection for the purpose of a bundled assertion in court. The majority of the lower instance courts have affirmed this so far, holding that the in-court assertion of such claims does not constitute a debt collection service (Inkassodienstleistung) within the meaning of the RDG and is therefore not covered by the debt collection licence (Inkassolizenz) under the RDG.

Whilst taking these discussions into account, the BGH took a more liberal stance and rejected a narrow reading of the RDG. The court held that the debt collection model is compatible with the RDG, even if the debt collection primarily or exclusively aims at going to court and regardless of whether individual or group actions are concerned. According to the BGH, no such restriction can be inferred from the wording and the systematics of the RDG. In addition, limiting debt collection licenses to out-of-court debt collection would have disproportionately curtailed the debt collectors’ fundamental freedom to conduct business. Given that legal services providers must prove professional legal qualifications to obtain a licence and involve qualified lawyers if the case goes to court, the BGH did not see any significant legal risks for the assignors or the legal system as such.

No conflict of interest

The BGH also rejected the argument that the assignments were void due to a conflict of interest. According to the BGH, neither the contingency fees nor the fact that the plaintiff is entitled to enter into an irrevocable settlement with the defendant led to a conflict of interest.

The new Legal Tech Debt Collection Act

The judgment is also in line with the recently adopted reform of the RDG, the so-called Legal Tech Debt Collection Act (Legal-Tech-Inkasso-Gesetz) that will come into force on 1 October 2021 and aims to create a regulatory framework for legal services providers and to eliminate inconsistencies in legal services law (e.g. by allowing contingency fees and litigation funding to a greater extent than before). This will, in particular, have an impact in consumer law cases, which is why the law also imposes new duties of notice and information on debt collection service providers vis-à-vis consumers. However, it remains to be seen (and will be discussed at a later stage in this blog) in how far B2B proceedings will be affected.

Comment

With this landmark ruling, the BGH has created legal certainty for many debt collection cases. However, it mainly concerns relatively simple cases and is primarily aimed at consumer protection. It remains to be seen whether the BGH will come to the same conclusion in complex B2B cases such as cartel damages claims, where the debt collection model is often used to bundle very different individual claims which could have an impact on the finding of a conflict of interest. Moreover, the question of independence from the litigation funder may gain momentum in such high-profile cases. It therefore remains the case that each debt collection model must be assessed individually.