A bad deal for consumers - German Bundestag passes implementation of collective redress directive


On Friday, 7 July 2023, the Bundestag, Germany’s lower house of Parliament, passed the bill on the implementation of the collective redress directive (Link). It will still need approval from the Bundesrat to enter into law, but this will most likely be a formality in this case. The act has seen quite a troubled development, from leaked preliminary drafts that created quite some media attention, to Germany missing both European deadlines, for passing the implementation law (25 December 2022) and the new rules to enter into force (25 June 2023), and finally, the significant changes that were implemented on the last day before the parliamentary summer break.

All in all, the new regime leaves much to be desired from a consumers’ perspective, and we predict that particularly certain last-minute changes will drastically limit the practical use of the new mechanism, the so-called Abhilfeklage. It is to be feared that, after the limited effect of the Musterfeststellungsklage, the lawmaker – again – missed its chance to create a level playing field for consumers who still often find themselves in a situation of “David vs Goliath”.

Consumer rights

Below, we will present some of the key elements of the new regime with a particular focus on the latest changes which were implemented based on recommendations from the Bundestag’s sub-committee on legal affairs and explain why we do not believe that it will significantly ease consumers’ pains in pursuing collective claims against corporations who caused them significant (financial) harm.

1.    What’s new?

Technically, the new Abhilfeklage is a real novation for German law. For the first time in this traditional civil law country, a regime for collective redress will enter into force that can lead to a final court decision ordering the defendant(s) to pay a monetary compensation to a group of individuals who have suffered from the same type of wrongdoing, whose claims are defined by certain mutual criteria, and who have registered to participate in the action. This last element is crucial: The law does not allow for a so-called “Opt-out” mechanism with binding effect for the whole group of affected individuals unless they withdraw from the action. Each individual that wants to participate and benefit from the action needs to actively sign up (so-called “Opt-in” mechanism). 

So far, the only codified collective redress scheme, the Musterfeststellungsklage, which had hastily been created in the wake of the Volkswagen Diesel Scandal, had only allowed the court to make a binding finding on certain key facts that are relevant for the individual consumers’ claims – but if defendants refused to provide compensation based on these findings, damaged consumers still needed to file individual suits for relief. This was highly unsatisfactory for both, consumers and courts. And while much was written about the regime, its practical use remained limited. Between 2018 and 2022, a total of 30 Musterfeststellungsklagen were filed. A clear sign that the mechanism did not live up the needs of practitioners or the lawmaker’s initial expectations of 450 suits per year.

On paper, the mechanism of the new regime has the potential to change this. The court can order the defendant to pay a certain sum into a compensation fund, which is then, in an (overly) complex mechanism, distributed to the affected and registered consumers by a sort of trustee.

2.    Assessment of the last-minute changes

The new regime entails some positive changes for consumers. It is noteworthy that the German lawmaker has decided to go beyond the minimum level of implementation required by the directive. 

This begins with the admissible subject matter of claims to be brought: While the directive only requires the collective regime to be available for breaches of provisions of European law, or such that have been enacted based on European law, the German implementation is significantly broader and basically covers all relevant legal areas of typical potential consumer claims.

Also, it was decided to broaden the scope regarding the required comparability of the individual claims that can be bundled in an Abhilfeklage from “identical” to “essentially identical” claims. It can be interpreted as a positive signal that the lawmaker listened to the broad criticism against the narrow wording after the first draft of the Abhilfeklage was leaked. The question of whether or not the respective claims are sufficiently identical in this sense will certainly be a main procedural battleground between plaintiffs and defendants. But the softened wording will allow courts to be more flexible and pragmatic in their assessment, relying on factors such as procedural efficiency. Similarly, in contrast to the previous drafts, plaintiffs do not need proof that at least 50 individuals are affected by the subject matter, but rather show to the court that such a number could be affected (§ 5 Sec. 1 No. 2 VDuG).

Another issue that has been discussed intensely in the lawmaking process, the latest point in time for a consumer to register for and join the action, has significantly been pushed back (§ 46 Sec. 1 VDuG). The initial draft had provided that registration must happen until before the first day of oral hearings – so typically, before there is any indication whatsoever on how the court views the particular claim. Now, in the passed law, consumers can register until three weeks after the last oral hearing. A judgment can only be ordered as from six week after the last oral hearing. This way, consumers can decide whether they wish to join the action based on the oral hearings – and, in high profile cases, news reports about those. The defence bench and corporate lobbying institutions had, on multiple occasions, lamented the lack of foreseeability of the potential financial risk they could be facing.

Group of people

At the same time, the scope of potential parties eligible to join has been reduced (§ 1 Sec. 2 VDuG). Initially, besides consumers, also SMEs with a staff of up to 50, and an annual turnover of up to EUR 10 million were suggested to be eligible to join an action. This was now reduced to SMEs with a headcount of less than 10, and an annual turnover of up to EUR 2 million, which limits the group of potential applicants joining an action. It is hard to find the rationale for this reduction, other than to protect potential defendants, as also an SME with, for example, 30 employees and a turnover of EUR 5 million usually does not have an own legal department, the financial power and stamina to pursue an action against a huge multinational corporate by themselves. Since the directive only obliges the member states to make the new mechanism available to consumers, also this narrower solution is, however, fully in line with European law.

One particular subject matter will, in our opinion, strictly reduce the number of collective claims that will ever be filed under the new regime even more than the abovementioned drawback. This is the regime on access to Third Party Funding for the pursuit of those claims. The initial draft had explicitly permitted the commercial Third Party Funding of Abhilfeklagen, and envisaged certain transparency duties to make sure the funder cannot unduly influence the proceedings, act against the interest of the class, or be a competitor of the defendant. Although some of the rules and their legal consequence in case of non-compliance (inadmissibility of the claim) seemed odd and against the interest of the injured parties, the draft did not intervene in the commercial relation of funder, plaintiff association, and class. Unfortunately, this line has been crossed in the latest changes to the law. 

There are four last-minute changes which are problematic in itself; in combination, they will strongly deter Third Party Funders from investing in a collective mechanism in the form of an Abhilfeklage

The final law strictly limits the share a Third Party Funder may agree to receive from the proceeds of the successful claim to 10 % (§ 4 Sec. 2 No. 3 VRDuG). Notably, an agreement promising a funder’s share of more than 10 % does not lead to the invalidity of the contract with the Third Party Funder, or cuts down the funder’s share to 10 % - or eradicates it. The surprising legal consequence if a funder’s share is in excess of those 10 % is that it will render the claim inadmissible. The class members therefore might lose the chance to recover their damages when, after years, the action is declared inadmissible, and the individual claims become time-barred. A 10 % cap on the funder’s return is unwarranted. It is not in line with reasonable market standards and will make it extremely hard for Third Party Funders to support a claim. The funder completely assumes the risk of losing the case, and that the whole investment is lost if a case is lost for good. Not every case will succeed, so successful investments will always also need to blend out lost investments.   

Additionally, the explanatory memorandum of the lawmaker makes clear that the trustee tasked with the distribution of the proceeds must under no circumstances pay the funder’s share to the funder directly. He remains fully obliged to pay the whole recovery amount to the respective registered class members. Therefore, a Third Party funder would need to conclude individual contracts with the class members signing up for the action, and individually collect the funder’s share from potentially hundreds to thousands members

Postdamer Platz Berlin

The obligation of the trustee to make the direct payment to the registered class members in full obviously makes it extremely effortful and unattractive for the funder – for practical and commercial reasons. Concluding individual funding contracts with each class member, and then invoicing and requesting the respective share from each individual registered class member does not only create an enormous amount of administrative work. It also shifts the liquidity and solvency risk of each class member to the funder. Many beneficiaries will simply forget this and spend the money, may refuse to pay, or be faced with financial struggles that limit enforceability. It is also completely unclear how this could be done in practice, particularly as the plaintiff does not need to agree to individuals registering for the action, so why would the consumers be incentivised to agree on a funder’s share, if they can, without any strategic downside, simply register and free-ride a positive decision?

The reduced statutory limits to the legal claim value are relevant for the calculation of court and attorneys’ fees. For the Abhilfeklage, the threshold is EUR 300,000, for the Musterfeststellungsklage, it’s EUR 250,000 (§ 48 Sec. 1 GKG). At first glance, this cap is a positive sign for the financial exposure and adverse party risk for the association serving as plaintiff, which could otherwise easily discourage potential plaintiffs from sourcing a large class of damaged individuals.  However, it will be difficult for to find a suitable law firm that will handle potentially complex class actions for statutory lawyer fees that are based on a legal claim value of EUR 300,000. In practice, it can be expected that the lawyers will be paid on the basis of an hourly rate while, in the case of success, the plaintiff association will only be able to recover the capped statutory fees. Theoretically, this financial gap can be closed by a Third Party Funder that pays the lawyer fees as a part of the investment risk. But taking into account the limitation to a 10% share and the unfavourable distribution mechanism, it seems unlikely that a Third Party Funder will agree to such an investment. 

Finally, the Litigation Funding Agreement must be fully disclosed to the court (§ 4 Sec. 3 VRDuG).

3.    Conclusion: No money more problems  

Why is this so relevant for the practical scope of the new regime? Is this simply the Litigation Funder self-centring the debate? We think this is not the case. 

Many in the collective redress industry, on the plaintiffs’ and defendants’ side, agree that accessibility of Third Party Funding is a key factor in whether or not collective redress mechanisms can be successful. A Third Party Funder will not only cover the statutory court and attorney’s fees, but can – and will, in practice, often – agree to insure the adverse party risk, and cover expenses for potential expert opinions. Also, in complex cases, there will usually be a budget to pay the own attorneys based on hourly rates that are market level, not just the statutory minimum, so the plaintiff can choose to work with commercial law firms that can deliver comparable depth of analysis, access to resources, and quality of submissions at level playing field with the classic defence firms.

The typical plaintiffs, namely the consumer protection agencies, do not have the necessary funds available to financially equip such an action in a way that a commercial Third Party Funder can. To conclude, the last second revisions made the Abhilfeklage become a nice theoretical idea, which will fail the reality test of who is going to pay for the collective enforcement of the consumer’s losses. 


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