Consumer rights: The German class action is coming

Berlin If German companies harm consumers with their business practices, they must expect a class action lawsuit in the future. This is provided for in a draft bill by Federal Minister of Justice Marco Buschmann (FDP), which is available to the Handelsblatt.

In order to protect consumers, it is necessary to end illegal practices across the board and "remedy the situation," it says. Accordingly, the new legal instrument should be called “remedial action”. The goal: Consumers can sue for damages without bringing an individual action. Cross-border lawsuits within the EU are also possible.

The 141-page draft, which was voted on by the departments on Thursday evening, states: "With the remedial action, claims by consumers against entrepreneurs can be enforced directly in court."

The project comes from Buschmann's specifications. Because he has to implement the EU directive on representative actions into national law by December 25th. The regulations must then be applied from June 25, 2023.

Accordingly, the law formally bears the title: Association Actions Directive Implementation Act (VRUG).

Payment, repair, termination of contract

Specifically, only certain associations should be able to assert the interests of consumers, for example those in the areas of environmental protection, consumer data protection or health protection. Consumer protection organizations with a comprehensive approach are also entitled to sue. "Only such a body, not the consumers themselves, is a party to the lawsuit," says Buschmann's draft.

That's the big difference from the US, where individual consumers can bring a class action lawsuit. German entrepreneurs may find that somewhat reassuring. For them, US conditions for class action lawsuits are dreadful because there is potential for extortion and a lawsuit industry is looming.

According to the draft, the threshold for entitlement to sue in Germany should be 50 affected consumers. This is intended to rule out that lawsuits “are conducted with only individual importance”.

In addition to the payment of damages, "remedy" can also mean a repair or a price reduction, termination of the contract or reimbursement of the price paid. It is about the actual damage caused to consumers. "No punitive damages should be imposed on entrepreneurs," says the explanatory memorandum.

So far, there has been no class action in German law in which an individual in a group sues and, if successful, all members of the group receive a benefit.

Since 2018, consumers have been able to join model declaratory actions. The plaintiff is also an association entitled to sue, such as the consumer advice center in the VW diesel scandal. In the case of a judgment, the court makes a binding determination of the facts and legal situation.

The participants in the model lawsuit must then, however, continue to enforce their damages individually in court, albeit with the relief provided by the decided model lawsuit. Only in the event of a settlement do those affected receive direct compensation.

Model declaratory action is integrated

Since 2005, the Capital Investors Model Proceedings Act (KapMuG) has also been applicable in damage claims due to incorrect, misleading or omitted public capital market information – see the Deutsche Telekom case. Here, individual legal issues are bindingly decided for the other lawsuits.

In addition to such instruments of collective legal protection, the services of Legal Tech have recently appeared. For example, in the case of driver and passenger rights or tenancy law. Consumers can assign their claims to these providers, who then sue and collect a contingency fee. In addition, there are mass proceedings with thousands of individual lawsuits.

Justice Minister Buschmann is likely to associate the remedial action with the hope that the number of mass lawsuits will decrease. The draft states: "Bundled enforcement of consumer rights through remedial actions will help to relieve the courts of numerous individual actions."

While the KapMuG is to remain in place, according to the draft law, the model declaratory action will be integrated into the remedial action: the plaintiff can choose whether to sue with a remedial action for performance or with a model declaratory action for declaratory judgment.

If there is a new remedial action, consumers can - as with the model declaratory action - register their claims in the class action register, which is kept at the Federal Office of Justice.

There is therefore an opt-in: the affected consumer is not automatically part of the class action, but must actively opt for it. A late filing, for example at the time of the first oral hearing, is not currently planned. This is important for the companies concerned so that they can assess the extent of the lawsuit.

The procedure should then take place in three phases: In the first phase, the body entitled to sue can obtain a basic remedial judgment that declares the liability of the sued entrepreneur to be justified. A settlement phase follows, in which the parties should strive for an amicable agreement on the settlement of the legal dispute. The third phase occurs when the parties fail to reach an effective settlement. The court makes a final judgment.

Total amount goes into funds

The court then appoints a trustee who sets up an "implementation fund". This is where the "collective total amount" flows in, which the court determined by estimation in the final judgment. The administrator then distributes the money to the consumer – or arranges repairs, replacement services or the termination of the contract.

A special feature: if an action for redress is brought, small companies can join the class action. They therefore benefit from the effects of collective action in the same way as consumers. According to the draft law, small companies are those that employ fewer than 50 people and whose annual turnover does not exceed ten million euros.

And: Third-party financing of remedial actions should be possible – if the third party is not a competitor of the entrepreneur being sued. Litigation financiers and contingency fees would thus be strengthened.

However, the difficulty of the action for redress is likely to lie in the necessary "similarity". The draft states that the court should be able to decide "template-like" on all consumer claims asserted in the lawsuit. Only then is it possible to make a final, uniform decision on all consumer claims asserted.

If the individual circumstances of life differ from each other, the consumer claims are not the same: "This is the case, for example, if not all products in a series are defective and it has to be clarified in each individual case whether the specific product purchased is actually defective or not."

On the other hand, consumer claims for compensation in the event of the cancellation of the same flight would be similar if the same eligibility requirements apply to all claims, such as the EU Air Passenger Rights Regulation.

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