The German Federal Council (Bundesrat) has finally cleared the path for the German implementation of the European Representative Actions Directive (Directive (EU) 2020/1828). On 29 September 2023 it adopted the implementing act (Verbandsklagenrichtlinienumsetzungsgesetz – VRUG) which introduces the new mechanism into German civil procedural law. The VRUG will enter into force in mid-October, one day after being published in the official Federal Gazette.
The Redress Action (Abhilfeklage) constitutes an important new development in German law by introducing, for the first time, a collective action mechanism. This enables Qualified Entities from any EU Member State to seek either damages or any other specific performance directly from companies for the benefit of consumers and small businesses. This will complement existing collective mechanisms which so far only provide for injunctions (Unterlassungsklage) and declaratory judgments (Musterfeststellungsklage, Kapitalanleger-Musterverfahren).
General process of Redress Action
The graph illustrates the three-fold process:
The main procedural steps include:
- the judicial redress procedure (basic redress judgment on the merits of the case, settlement evaluation phase and final redress judgment, including a total compensation amount);
- the implementation proceedings (distribution of compensation by an administrator who decides on eligibility and individual damage amounts for registered customers and small businesses) with an optional judicial review of the administrator's decision; and
- potential follow-on proceedings.
For further information see our Blog (here) and our German briefing (here).
What has changed since the first draft bill was published?
After many consultations the bill now reflects an even more consumer-friendly approach:
- Requirements for recognition as a Qualified Entity (QE) have been lowered. Now the same rules as for claims under the Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb – UWG) are applicable. A consumer association can bring a claim if they have at least 75 members and have been registered for 1 year.
- The Qualified Entity filing a Redress Action has to “plausibly present” (“nachvollziehbar darlegen”) that claims of at least 50 consumers or small businesses (quorum) may be affected, but no form of evidence needs to be provided.
- Consumers or small businesses can register if their claims are “essentially of the same nature” (“im Wesentlichen gleichartig”). The inclusion of the word “essentially” gives rise to an extremely broad interpretation which will result in significant legal uncertainty. This will potentially lead to Redress Actions with broader subject matters and the number of opt-ins may increase.
- Consumers and small businesses will be allowed to join the Redress Action until three weeks after the conclusion of the last oral hearing in the first instance. This will lead to considerable legal uncertainty for the defendant. Even at the time of the oral hearing, the number of claims the defendant faces remains unclear. In addition, information from the course of the proceedings and the oral hearing(s) might provide an information basis for consumers and small businesses when making their decision to opt-in. This will increase the likelihood of consumers and small business joining a representative action. However, there is no risk of a post-judgment opt-in as the basic redress judgment can only be issued after the deadline for registration.
- Litigation funding will only be allowed if the litigation funding firm’s economic share does not exceed 10 % of the compensation awarded. The claimant is obliged to disclose the origin of the funds used to finance the Redress Action as well as any agreements with the litigation funding firm. Based on previous experiences with the declaratory model action and the time and financial resources spent by law firms representing Qualified Entities, it is likely that these rules will discourage litigation funders - at least in lower volume claims.
Why is this relevant?
The appetite and highly professionalised market for mass claims and collective actions is constantly growing and companies doing business in Germany should be prepared for Redress Actions. The lowered standards for Qualified Entities could lead to more consumer organisations filing Redress Actions for various subject matters.
The changes to the opt-in requirements will allow consumers and small businesses to join a Redress Action with minimum risk at a point in time when the relevant information of the claim and likely prediction on the outcome is in the public domain. This could lead to a significantly increased number of consumers and small businesses opting in.
The defendant, on the other hand, will not be certain about the final number of claims until after the conclusion of the oral hearing. Only at this late stage can the defendant estimate a possible amount at stake and make a plausible risk assumption.
We do, however, expect settlements to remain an interesting option to resolve such disputes to avoid a possibly lengthy and uncertain implementation phase under the court appointed administrator.
Looking ahead
The Federal Council also debated other reforms on civil procedure law such as the law on the introduction of a leading decision procedure (Leitentscheidungsverfahren). The law intends to enable the German Federal Court of Justice to set non-binding guidelines on questions of law if a larger number of cases concerning the same subject-matter is pending at the Federal Court of Justice. It is therefore especially relevant in mass claims. Discussions on the law are still ongoing. Among the issues being raised is that this procedure should require the consent of both parties and the expected length of the proceeding.
This new Redress Action will open up the scope for collective actions. We do not expect this new regime to completely replace the existing large number of individual claims with a similar subject matter in Germany. Handling various proceedings, whether under the new redress regime, under the existing regimes, as a large number of individual claims or as claims in various jurisdictions will remain the key strategic challenge for any potential defendant and will only become more complex.
Read more of our thinking on the continuing challenges of mass claims and get access to our recently updated guide “Class actions and collective claims around the globe” on our webpage here.
