Hailed as a revolution in the post-Dieselgate landscape, in 2018, Germany introduced a new collective action system for consumer claims.
Now, top German lawyers are readying themselves as Germany’s approach to collective actions is poised for yet another shake-up.
With the December deadline for the implementation of the European Union directive on collective redress edging closer, many lawyers anticipate that the changes will overhaul the current system in Germany, by which rulings are made only on points of fact or law and each consumer needs to pursue a stand-alone claim for damages before the German courts. But the EU directive will require member states to enable processes whereby individuals and entities can seek damages, among other forms of redress—something the German system isn’t yet set up for.
Lawyers say that it will be a key development in cross-border actions that will create fresh opportunities, as well as significant challenges, with some expecting new international players to enter the German litigation arena.
What the change means
Henner Schläfke and Dieter Hettenbach, partners and specialists in dealing with mass claims at Noerr, agreed that it would be fair to say that Germany will face some “teething problems” with the introduction of its first collective action for damages under the EU directive.
“Under our current declaratory model, only a legal question is decided, there’s no claim for damages or payment in the collective action model itself,” Schläfke said. “This will change.”
Noerr has represented major firms such as German banking giant Deutsche Bank in model proceedings under the new Capital Markets Act and Mercedes Benz Bank in model declaratory proceedings.
Hettenbach said the general idea in Germany has been that companies would simply settle cases if a legal question was not decided in their favour.
It will, therefore, take time to adapt to a new regime, he said.
“Different groups of people might have suffered harm differently,” Schläfke said. “New questions will arise compared to current proceedings, which only establish liability or provide a declaratory statement by the court.”
Lawyers from Freshfields Bruckhaus, a major player in Germany’s fledgling collective action scene having represented Volkswagen, Facebook, Marriott, and Germany’s national railway, Deutsche Bahn, among others, said the introduction of a performance award would necessitate a “fundamental change” in substantive civil law.
Hans-Patrick Schroeder, a partner in disputes, litigation and arbitration at Freshfields said that the problem with introducing a collective action “aimed not at declaratory relief but at the actual payment of money as damages is that it is supposed to handle individual claims on a mass basis, yet at the same time, you have to assess each person’s actual damage”.
“That would run counter to the bundling effect you want in a mass claim.”
One potential approach may be for a new mass claims law to allow the court to “assume” damages, paid into a pool and divided among mass claimants, Schroeder said. But the current German system provides only for damage claims where actual damages can be proven and doesn’t, in principle, include non-material damages, and also has a rule against overcompensation.
“This might necessitate a fundamental change in our substantive civil law,” said Schroeder. “Because we cannot reconcile the procedural mechanism of bundling with the rule against overcompensation and need for actual damages with the need for individual compensation.”
Christina Valdini, a principal associate at Freshfields in disputes, litigation and arbitration, said that the German requirement to prove actual damages is one reason why mass claims can be so time-consuming.
“That is why our courts in Germany, as well as lawyers, are extremely busy.”
Another potential hurdle for the desired bundling effect in Germany is the prevalence of insurance. According to public data on Statista, 46% of Germans had legal insurance in 2019.
“Almost every second private person has insurance for legal costs,” Valdini said. “That makes it a lot easier for people to commit to filing individual claims, because the costs are covered, and the risk is therefore effectively lower.”
As such, there remains the possibility that consumers will continue filing individual parallel claims alongside mass claims, leading to overburdened courts.
Even the consumer action body which represented German consumers against Volkswagen in the diesel affair, while praising the development as “a significant step forward”, also warned of teething problems.
The Federation of German Consumer Organisations welcomed the directive’s need to create an action for performance.
“Such an action for performance allows consumers to obtain damages as a result of the consumer association’s action without having to sue the company themselves,” it said. “In practice, however, the implementation and application of the regulation is likely to be associated with challenges.”
The organisation also said there could also be issues around whether procedural costs will be limited for consumers, whether Germany decides if affected consumers can be represented without express registration (opt-out) or not, and how an EU-wide implementation will play out in practice when operating across differing legal systems and languages.
Another major change introduced by the directive will be the entitlement of foreign representative bodies to bring a claim in Germany’s, until now strictly controlled, mass claims market.
“We will see international players entering the German litigation arena,” Noerr’s Schläfke said. “This will be something to watch.”
“Whether we will see Dutch, French, or other associations and entities allowed to file in Germany, it will be interesting to see how things develop once the market opens for such litigation,” he said. “And what potential conflicts of interest could arise… because they will all have their own interests and motivations for bringing claims for damages.”
Valdini and Schroeder at Freshfields said the EU directive, allowing “qualified entities” to commence representative actions irrespective of location, will see “forum shopping” become an increasing trend once the directive is implemented EU-wide.
“The directive allows picking the most attractive forum for the respective claim,” the Freshfields lawyers said. “It remains to be seen whether some jurisdictions will try to attract mass claims by implementing claimant-friendly provisions into their legal system.”
They added that it remains to be seen where the local implementation of the directive will stand in terms of “attractivity” for mass claims in comparison to other jurisdictions in Europe.
No Draft Law
Despite these key questions facing lawyers, the government has not yet issued a draft law despite an approaching implementation deadline of December 25.
“We don’t yet receive any clear public statements from the Ministry of Justice on what’s going to be in there,” Hettenbach said. “They might add the minimum required to fulfil the requirements of the EU directive. Or they might create a new form of ‘German collective action’.”
Though Hettenbach said that past efforts indicate that Germany is reluctant to create a means of collective redress, he said that, even if the government should only add the action for performance, this will nevertheless be a “major change”.
How firms are approaching the changes
At Freshfields, mass claims are driving changes in the firm’s organisation, specifically around its legaltech developments. Valdini said there had been a rapid development over the last few years.
Indeed, last year it emerges that the firm was establishing a special unit in Germany to deal with mass ‘dieselgate’-style claims that will entail four new office openings and potentially hundreds of new hires across the country.
“When I started working on mass claims, we started with manually-updated excel lists, now we have specialised software to handle and exchange the data quickly and securely,” she said. “When it was done manually, it may have needed almost half an hour per case. Now it’s less than five minutes.”
Schroeder added: “If you had small claims in the past with about one to 2,000 claims, you could handle those internally. You cannot handle 10,000.
“It’s not possible to grow such a system indefinitely. You have to adapt,” he said. “You have to bring in other firms. You have to utilise other forms of recruitment. You have to devise a system that can deal with the incoming flow of cases.”
At Noerr, the partners felt the new directive could provide an opportunity for the German parliament to broaden the scope of collective actions beyond just “consumers.”
“The current EC regulation focuses on consumers. However, there are a lot of problems where non-consumers might suffer the same kind of damages as well,” Hettenbach said. “It will be interesting to see whether the German Parliament decides to expand it.”
Failing to expand the regime would be unwise, Schläfke said.
“If not, the market will just create workarounds, which are not regulated by procedural law.”