Traditionally, collective actions have not been part of the civil law litigation landscape. However, the landscape for collective redress in Europe has evolved over the last few years and collective action mechanisms have become more available throughout the region.
While the international financial crisis and the connected individual losses can be regarded as a starting point for the increased demand for collective actions in Europe, other factors have contributed to the establishment and the design of such collective redress mechanisms.
In Germany, the most prominent is the "Dieselgate" scandal. In September 2015, the United States Environmental Protection Agency found that Volkswagen had intentionally programmed diesel engines to activate emissions controls only during laboratory emissions testing. A (German) consumer lobby has been pressing for the availability of collective redress. In addition, plaintiff firms have geared up, and new firms (particularly from the U.S.) have entered the market together with litigation funders. As lawyers in Germany may, in general and subject to narrow exceptions, not operate under a contingent fee basis, litigation funding (or third-party funding) has become an increasingly popular way for plaintiffs and their law firms to obtain the money they need to pursue claims. Litigation funding has not been commonly used across Europe, but this is beginning to change as international litigation funders are entering the market and new funders are setting up shop throughout Europe. Another driving force for the establishment of collective redress mechanisms has been the introduction of the new European data protection regime on 25 May 2018, when the General Data Protection Regulation (GDPR) took effect across EU Member States. Following this, individual data subjects may bring claims against companies and their directors and officers in the event of a data protection breach. The European collective redress mechanism is specifically drafted to apply, inter alia, to claims under GDPR.
Against this backdrop, there has been a rising call for collective redress mechanisms in Germany and across Europe. However, a major concern in many jurisdictions has been to avoid a mass litigation business model for a plaintiffs' bar of the sort that can be found in the U.S. Legislators in Europe, and especially in Germany, bearing this concern in mind, have drafted the available collective redress mechanisms accordingly so as to preclude a perceived risk of misuse.
Collective redress in Germany
In Germany, for the most part, two collective actions are currently available, one mechanism allowing for collective shareholder actions and another for collective consumer claims.
Collective shareholder actions
In 2004, 17,000 individuals filed a suit against Deutsche Telekom, the former monopolistic provider of telecommunications services. The company's share price had fallen significantly. The Frankfurt Regional Court ("Landgericht") was overrun when plaintiffs claimed damages for what they considered to be a misleading description in a Telekom prospectus. The Capital Markets Model Case Act (KapMuG) was introduced by the legislature shortly thereafter in response. KapMuG gives investors a form of class action as it allows parties who choose to take part in the model proceedings to receive a preliminary ruling on legal or factual questions that are significant beyond their individual cases.
Each party must file a lawsuit in its own name to benefit from the outcome of the proceedings. If at least 10 plaintiffs apply for proceedings under the KapMuG, they will be referred to the competent Higher Regional Court ("Oberlandesgericht"), which will then appoint a model plaintiff and one or more model defendants. If the court in the model proceedings finds misconduct, other investors can invoke this finding in their own cases. Shareholders who have not yet filed a complaint with the District Court are able to participate in the model proceedings by simply registering the claims in a register within six months, as long as their original case is not time-barred.
In the current VW investor case related to the "Dieselgate" scandal, the Higher Regional Court (Braunschweig) has been asked to admit a class action under KapMuG to determine whether the company informed the capital market too late about the manipulated software. Hearings began in September 2018 with the German investment firm Deka Investment GmbH acting as the appointed model claimant.
Consumer class actions
In light of the disadvantageous position of German car owners affected by the manipulated diesel software as compared to those in other countries, the German "Bundestag" revisited a draft for collective class actions which had been dormant for several years and passed the "Law on Introduction of a Class Action for Civil Declaratory Judgment" ("Gesetz zur Einführung einer zivilprozessualen Musterfeststellungsklage"), which took effect on 1 November 2018.
It allows qualified bodies, such as consumer associations, to request a declaratory judgment to determine central claim-relevant conditions for the benefit of at least ten affected consumers. The law requires qualified institutions to have at least 350 members and to have been registered for at least four years (though not with the sole intention of serving as a qualified institution for model declaratory actions).
The class action for declaratory judgment is litigated exclusively between the association and the responding party. However, any consumer has the opportunity to register their claims with the Federal Office of Justice ("Bundesamt für Justiz") without the need for an attorney, and thus to suspend the limitation period. Any decision in the class action for declaratory judgment then creates a binding effect for the registered consumers for any subsequent actions brought by them.
Should the association and the defendant decide to settle, such settlement has to be approved by the court before it becomes binding. Since the model decision is limited to the basis of the claim, consumers have to initiate separate individual proceedings regarding their individual claim (dealing with the amount of damages, for example).
In the notes on the draft legislation, the Federal Government assumed that roughly 450 class actions for declaratory judgment would be submitted annually and it forecasted a success rate of about 50 percent. To date, only five model proceedings have been commenced.
The first proceedings which were initiated were against Mercedes Benz Bank AG, based on alleged unclear wording of revocation clauses in consumers' car loan contracts. The Higher Regional Court Stuttgart ("Oberlandesgericht") dismissed the claim as inadmissible. The litigation of consumer interests may only play a subordinate role in the daily practice of the institution to be regarded as a qualified institution and this requirement was not fulfilled by the association representing the class, according to the deciding court.
The second model declaratory action filed is the one against Volkswagen AG, connected to the "Dieselgate" allegations. More than 400,000 German car owners have signed up to this landmark model declaratory action so far. Hearings in the Higher Regional Court Braunschweig started at the end of September 2019. The court found the model declaratory proceeding to be admissible but suggested that the plaintiffs may be limited to claims made under tort law and could have difficulties proving actual losses.
Further model declaratory proceedings have been initiated against a rating agency for misleading ratings, a residential apartment complex owner for raised rent and a local German bank for incorrect interest adaptation in consumers' savings accounts.
Despite the relatively slow start, a significant increase in the number of proceedings is expected in the future and consumer protection associations have been announcing that they intend to pursue lawsuits in various fields
The EU's approach to collective redress
On an EU-level, the European Commission has drafted a directive on collective redress under its "New Deal for Consumers". The Commission's press release when presenting the draft stated that "Recent cross-border consumer cases, such as the 'Dieselgate' scandal which affected consumers all over the EU, have confirmed that European consumer law should be strengthened." In addition to consumer protection, a number of other areas of law are also supposed to be subject to this new mechanism, including data protection, financial services, travel and tourism, energy, telecommunications, environment and health. The EU Parliament adopted the Commission's proposal in March 2019. The proposal plans to establish collective rights for consumers. It only allows "qualified entities" (designated by the Member States or even created ad hoc for a specific action) to bring representative actions. These associations must be properly established, not act for profit and have a legitimate interest in ensuring compliance with EU law in order to be regarded as a "qualified entity". The entities will be required to disclose their financial capacity and the source of their funding to the courts. In particular, law firms are not eligible to be qualified entities so as to prevent a plaintiff industry developing.
The proposal provides a variety of measures for which qualified entities may apply. In addition to declaratory decisions, the available measures also entail injunctions and redress orders, especially calling for reimbursement, monetary compensation, price reduction, repair, replacement, contract termination and prohibitions on a trader's practice.
The draft EU proposal goes beyond the German model as the associations may, subject to certain requirements, claim for damages directly (though punitive damages are not available). In contrast, in Germany, the Model Declaratory Proceedings are limited to the ascertainment of facts in order to create a binding effect for subsequent individual proceedings in which the amount of damages to be payable to the respective consumer is determined.
The European proposal leaves it to the Member States to establish opt-in or opt-out mechanisms for redress orders. Regarding injunction orders, the proposal foresees an opt-out mechanism. The proposal also aims for an EU-wide reach for collective actions initiated in any one Member State:
- Within the same Member State, the final decision of the deciding court will create a binding effect and be considered as irrefutable evidence that an infringement occurred;
- For actions relating to the same matter but brought in other Member States, these findings would create a rebuttable presumption that an infringement had occurred
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.