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Freshfields Risk & Compliance

| 5 minutes read

A new Collective Action Regime in Germany – Draft Bill on the Implementation of the EU Directive on Representative Actions

The eagerly awaited first draft of the legislation to implement the EU DIRECTIVE (EU) 2020/1828 on representative actions for the protection of the collective interests of consumers (“Representative Actions Directive – RAD”) into German national law is now available.

The draft enables consumers to take action against companies by way of a new collective action for redress (Abhilfeklage; “Redress Action“). This will be in addition to the current procedures of  injunctions (Unterlassungsklagen) and model actions for a declaratory judgment (Musterfeststellungsklage; “MDA“). The introduction of the Redress Action represents a genuine novelty in German civil law, in particular, as it constitutes the first collective action mechanism allowing for the recovery of damages and specific performance. 

In this post, we highlight the key points of the draft bill and focus on the issues that contain new provisions on previously known mechanisms. We will go into more detail in our upcoming posts on the implementation of the Directive in Germany and in Continental Europe in general.

The draft bill states that a new Act on the Enforcement of Consumer Rights (Verbraucherrechtsdurchsetzungsgesetz) will be introduced in which both the existing MDA and the newly created Redress Action will be incorporated. The plaintiff will be able to choose between the two options.

Procedural requirements 

As with the current MDA, individual consumers themselves do not have the right to bring an action for redress. Instead, only specific entities which have been designated by the German government and meet certain criteria are entitled to bring a redress action on behalf of the consumers. What is new is that qualified entities from other EU Member States, which meet the requirements there and are registered in a new European register, are now also entitled to bring a Redress Action (or a MDA) in Germany.

As expected, the German legislator has provided for an opt-in model. This means that an affected consumer does not automatically become part of the collective action, but rather must actively sign up to it. This is done by subscribing (free of charge) to the register of collective actions.

The draft provides that not only consumers but also small businesses, i.e. businesses that employ fewer than 50 employees and with an annual turnover not exceeding 10 million euros, can sign up to the collective action.

In order to be able to benefit from the binding effect of the judgment, consumers and small businesses must register, at the latest, by the end of the day before the first oral hearing of the action.

Redress Action for claims of same nature

All claims brought by the relevant consumers must be of the same nature. Otherwise, an uniform evaluation of the claims and an uniform judgment is not possible. Claims are of the same nature if they are based on the same or a comparable set of facts and the same questions of fact and law are decisive for them.

However, this definition is not very clear and leaves a lot of room for argument. Therefore, the question of whether all individual claims brought in a Redress Action are, in fact, of the same nature, is likely to prove to be a crucial and hard-fought issue in most proceedings.

The course of the proceedings 

The draft bill provides the following means of enforcing the court’s decision:

  1. The “traditional” court proceedings end with the basic redress judgment, in which the court determines whether the defendant company is liable on the merits of the claim or whether the claim should be dismissed.
  2. If the court finds that the company is liable on the merits, it will ask the parties to discuss settlement options and provide a settlement offer to implement the basic redress judgment.
  3. If a settlement cannot be reached, the court issues a final redress judgment. In this judgment, the court determines the collective total amount to be paid by the defendant, which is then distributed among the registered consumers and small businesses during the subsequent implementation phase. This collective total amount is determined by the court by way of an estimate, taking into account all the circumstances of the case. In doing so, the court may assume that the claims of all registered consumers are justified in their entirety.
  4. Finally, in the implementation phase, the collective total amount awarded by the court is distributed among the registered individual consumers and small businesses. An administrator is appointed by the court (e.g. a lawyer, tax advisor, business economist, insolvency administrator or auditor), who verifies the merit and amount of each consumer's claim and then distributes the total amount to the consumers. Any residual amount remaining after all consumers have been compensated will be returned to the defendant company. However, if the collective total amount proves to be too low to satisfy all individual claims, the court may increase the collective total amount upon request.
    Essentially, in the implementation phase, the administrator makes numerous individual decisions on the claims of individual consumers and small businesses. As a means of reviewing these individual decisions, the draft law provides for an objection procedure. If either the registered consumers (respectively small businesses) or the defendant company files such an objection, the administrator will re-examine the individual case and confirm or adapt his original decision. No further legal remedies are available within the implementation mechanism against this decision of the administrator. Instead, registered consumers or small businesses, as well as defendant companies, must appeal the administrator's decision in the common courts. Depending on the court's decision, the defendant company would then have to make an additional payment or would be reimbursed the amount paid or part of it.

Evaluation & Outlook

The current draft by the German Ministry of Justice will now have to go through the formal legislative process and has to be approved by the other ministries. Therefore, there are likely to be further changes before the implementation deadline of 25 December 2022.

One aspect of the draft that deserves critical attention during this process is the fact that even the final redress judgment only provides an estimate of the final amount to be paid to the registered consumers or small businesses. The result is a twofold risk for defendant companies:

  1. In actions involving a large number of consumers, there is a considerable risk that the court, when estimating the collective total amount, will assume that all claims are justified in their entirety. If it subsequently turns out that a large number of the registered consumers or small businesses did, in fact, not have any or only smaller claims than had been asserted, this can lead to a significantly inflated collective total amount. In this case, the company would be forced to set aside funds that could well exceed the actual amount to be paid by a multiple. Since the implementation phase is likely to take a long time in practice, the refund will be burdensome and be delayed for a considerable time.
  2. There remains also a risk for the defendant company that it has to pay out an additional amount in order to satisfy all claims.

Moreover, the implementation phase appears to be rather claimant friendly. For example, by allowing the individual consumer or small business to bring an individual action after having undergone the objection procedure, the intended binding effect of the decision on the Redress Action could largely be invalidated. As a result, every consumer or small business who is dissatisfied with the amount of the claim awarded by the administrator or with the denial of a claim by the administrator, would be able to file a subsequent individual action against the defendant company. This would counteract the draft's objective of providing a timely and legally binding resolution of the matter for all parties involved and reducing the courts' caseload.

Finally, a reminder that the proposed Redress Action is only an addition to the existing legal actions and mechanisms in the field of mass claims. Therefore, consumers and small businesses who have not joined the Redress Action will still have the option of enforcing their claims by way of bringing individual claims. Plaintiffs' law firms and litigation funders will continue to have sufficient incentive to bring these in parallel, thereby jeopardising the aim of the draft bill, which is to reduce the caseload of the courts.


class actions, europe, litigation