Collective Actions in Europe: Another Small Step in Germany

This alert was also published in Law360 (August 1, 2018; reprinted with permission).

Summary

German consumers will be able to sue manufacturers and service providers by way of representative action starting on 1 November 2018 – just in time to suspend the statute of limitations of consumer claims based on the exhaust emissions scandal. This new law won’t be the last step Germany will take towards allowing “consumer class actions” because it is by no means enough to implement the planned EU Directive on representative actions (2018/089 (COD)).

While large claims are already being aggregated by different law firms and claims vehicles, this new representative action structure may lead to more small claims being filed. Consumers will still need to file individually for damages because the new representative action will only establish liability, not damages.

What German Consumers Need in Order to Sue

In reaction to the emissions scandal, and wide-spread criticism of the lack of effective enforcement measures for German and European consumers, German lawmakers have developed a new type of representative action for consumers who share the same cause of action, the so-called Musterfeststellungsklage (not to be confused with the pre-existing model case proceedings for capital market law claims). It allows consumer protection organisations, under certain circumstances, to file suit against companies, and seek a declaratory judgment with respect to an alleged violation of law. Once the German Federal Council has approved, the law will become effective on 1 November 2018.

Affected consumers can register their interest in a proceeding. Even if an individual consumer does not become a party to the proceeding, the statute of limitations will be suspended for the duration of litigation. In contrast to class actions in the U.S. and the proposed EU Directive, consumers are not awarded damages but are granted only declaratory relief. While the findings of the judgment will be binding in any follow-on litigation, each consumer will still need to file individually for redress (e.g. damages).

A consumer protection organisation can settle the case on behalf of registered consumers with the approval of the court. However, the registered consumer can opt out within one month after service of the settlement. If consumers opt out, the settlement will not affect them and they are not barred from filing a suit themselves. If 30 percent or more of the consumers opt out, the settlement is void.

There are only a handful of existing consumer protection organisations that will be allowed to lodge a collective complaint because of the strict legal requirements. More importantly, the organisations must be registered for at least four years as having protected consumers. In order to prevent competitors from filing or funding such representative actions, the organisation may not receive more than 5 percent of its fundsfrom corporations. It is unclear, however, if this refers to the specific case or the funding of the entity itself. To prevent a plaintiffs’ bar from forming, the consumer protection organisation must not lodge a representative action for the purpose of making a profit.

If it is eligible to lodge a collective complaint, the respective consumer protection organisation must initially represent at least 10 affected consumers to establish legal standing. In addition, the complaint will only be processed if at least 50 consumers register as affected parties for the class action within two months following the public announcement of the class action in the competent registry.

For companies that are the targets of such a representative action, the advantage is that there will be fewer cases to defend against and to coordinate. Depending on the risk assessment of follow-on litigation for damages by individual consumers, it may make sense for the target company to attempt to make a small scale settlement.

Context of This New German Law: EU Initiative on Collective Actions

This German initiative is not part of the EU’s “New Deal for Consumers” and it falls short of the plans for collective redress therein. The EU’s proposal for a Directive on representative actions – if adopted in the current version – provides a framework for Member States to develop:

• Representative actions to eliminate infringement of consumer rights;
• Representative actions to seek redress on behalf of consumers; and
• The possibility to enter into settlements on behalf of consumers (who shall accept or refuse such settlements individually).

Courts may also order evidence to be presented by the defendant, e.g. the infringing company. This is significant given that discovery is essentially non-existent in German litigation. This could potentially bring a noticeable shift in powers to consumer litigation.

Consumer protection organisations hoping for U.S. style class actions (and plaintiff law firms) have criticised the Directive proposal for leaving too many choices to the individual EU Member State. There is no obligation for Member States to create opt-out actions or settlements, due to a conscious decision made by the EU to avoid U.S. style class actions and a U.S.-style plaintiffs’ bar. It remains to be seen which Member State will create the most effective system – and whether European consumers will be as combative as U.S. consumers.