Adoption of the Act implementing the EU Directive on representative actions - a belated compromise?
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Following the first reading of the Government Draft for an Act implementing the EU Directive on representative actions (Verbandsklagenrichtlinienumsetzungsgesetz - "VRUG") in the Bundestag in April 2023, it took a further three months before the second and third parliamentary readings were completed and the bill was put to a final vote in the Bundestag. The legislative process, however, is not expected to be fully completed before autumn 2023 – once the Bundesrat has returned from summer recess. The VRUG will, in particular, introduce the Consumer Rights Enforcement Act (Verbraucherrechtedurchsetzungsgesetz - "VDuG"), and although the version that was passed in the Bundestag with the votes of the governing coalition tries to be balanced and includes several consumer-friendly changes to the Government Draft, these are juxtaposed with provisions giving priority to business interests.
Small businesses
The first change to the Government Draft can be found in Sec. 1 para. 2 of the Committee Recommendation. Whereas the Government Draft proposed treating small companies with up to 50 employees and an annual turnover or annual balance sheet of up to EUR 50 million in the same way as consumers, this is now limited to companies employing fewer than 10 people whose annual turnover or balance sheet does not exceed EUR 2 million. The limitation is intended to ensure that only companies with interests that are genuinely comparable to those of consumers will be able to benefit from the action for redress (Abhilfeklage).1 The concern here is thus in line with the original aim of the action for redress: protecting consumers and not putting business interests first.
Consumer quorum
In contrast, Sec. 4 of the Committee Recommendation would make things easier for consumer associations regarding the requirements for a consumer quorum. While under the Government Draft the associations would have had to provide evidence showing to the satisfaction of the court that the representative action would affect at least 50 consumers, under the new proposal they will only have to present a reasonable case showing that 50 consumers might be affected. This will make the work of the plaintiff associations considerably easier. The Committee on Legal Affairs had earlier rejected the proposal made by various sides to reduce the consumer quorum to just 10 or even abolish it entirely.2
Third-party funding
Since the very beginnings of the legislative process, there has been agreement across all political camps that the emergence of a US-style litigation industry in Germany needs to be avoided – which is unsurprising given that representative actions are completely new to the German law of civil procedure.
This concern with protection and defensive aspects also played a decisive role in the committee's deliberations and helps to explain the insertion of a new No. 3 in Sec. 4 para. 2 VDuG, which provides that a representative action shall also be inadmissible "if it is funded by a third party that has been promised an economic share of more than 10 per cent of the benefit to be provided by the defendant entrepreneur". In addition, Sec. 4 para. 3 VDuG requires disclosure of the origin of the financial means used to fund the representative action not only when ordered by the court, but without prompting at the time the action is filed. In other words, the idea is that third party litigation funding should be as transparent as possible and that it should not be a commonplace occurrence. Whether these changes can actually prevent the emergence of a US-style litigation industry remains to be seen. We are after all already witnessing the first indications for its emergence, in particular consumer law firms specializing in mass litigation.
Similarity of consumer claims
The amendment to Sec. 15 para. 1 VDuG, which had already been proposed by the Bundesrat,3 means that the consumer claims concerned will no longer have to be of identical nature (gleichartig) but merely of "essentially identical nature" ("im Wesentlichen gleichartig"). It is aimed primarily at reducing the bureaucratic overheads that the associations are facing while at the same time easing the courts' workload. This amendment, too, was met with general political support.4
Extension of the deadline for registration
The most far-reaching change can be found in Sec. 46 para. 1 VDuG, which would allow consumers to register up to three weeks after the conclusion of the oral hearing. The version of the VRUG passed by the Bundestag thus extends the registration deadline for consumers a second time. The Government Draft had already extended the deadline of up to one day before the start of the oral hearing5 which was originally proposed in the Ministerial Draft and would have made it possible to register up to two months after the first hearing.6 The dispute over the time limit for registration has a decisive impact on consumers' ability to access the procedure as well as on the degree of legal uncertainty facing the sued businesses.7 The longer the deadline for registration is pushed back, the greater the time available for consumers to learn about the action for redress and assess its prospects of success, and the greater the likelihood that they will do so. At the same time, the possibility of registering very late leaves businesses facing a high degree of legal uncertainty, as it remains very difficult for defendants to estimate the number and amount of claims involved. At the same time, there is a danger of the first instance proceedings degenerating to become merely "pro forma" and of the incentives for reaching a settlement before the end of the registration period tending towards zero.8 The renewed extension of the deadline is meant to enhance the level of consumer protection still further – but this would be achieved at the expense of the defendant businesses. This in itself is enough to call into question whether the proposed legislation is properly balanced.
Cap on the amount in dispute
Finally, the cap on the amount in dispute under Sec. 48 para. 1 GVG has been reduced from EUR 410,000 to EUR 300,000. This is another highly controversial move towards greater consumer-friendliness by minimizing the cost risk facing the plaintiff associations.
Suspension of limitation periods
No changes have been proposed as regards the much-discussed subject of suspension of limitation periods. Contrary to the demands put forward by consumer associations9 and the judiciary10 the provisions will not be extended to include consumers who have not (yet) registered their claims in the representative action register. In this case – although not in general – business interests have been given priority.
Outlook
In view of the very far-reaching and consumer-friendly changes on the one hand, but also of the very limited possibility of litigation funding on the other, the question of whether the action for redress really will turn out to be a "sharp sword" enabling the interests of a collective of consumers to be asserted effectively in the context of an action for performance remains exciting. As far as consumer law firms are concerned it will probably continue to be more lucrative to file large numbers of individual lawsuits. Nevertheless, socio-politically motivated "leading cases" as well as collective actions brough by associations from other EU countries should be expected. In addition, actions involving a large number of concerned consumers and the prospect of a high overall payout are likely to be attractive to litigation finance providers, even with a profit share of just ten per cent. Businesses should therefore remain vigilant and develop cross-border litigation strategies.
1 Committee Recommendation of 05 July 2023, explanatory statement relating to § 1 VDuG, p. 109, available here.
2 See, comments made by the consumer association, Verbraucherzentrale Bundesverband, (pages 8, 18 et seqq.), available here; comments made by the consumer association, Verbraucherzentrale Sachsen, (pages 8 et seqq.), available here; contributions to the debate made by Luiza Licina-Bode, MdB (SPD), Dr. Petra Sitte, MdB (Die Linke), Nadine Heselhaus, MdB (SPD) and Linda Heitmann, MdB (Bündnis 90/Die Grünen) on 27 April 2023, available here.
3 Bundesrat Opinion on the VRUG dated 12 May 2023, p. 2, available here.
4 See, for example, contribution to the debate by Martin Blum, MdB (CDU) on 07 July 2023, available here.
5 § 46 para. 1 of the Ministerial Draft for the VDuG dated 16 February 2023, available here.
6 § 46 para. 1 of the Government Draft for the VDuG vom 29 March 2023, available here; see, Sonja Hoffmann, Alexandra Diehl and Carolin Kühner in our Client Alert „Regierungsentwurf zur Verbandsklage: Für den Verbraucherschutz über das Ziel hinausgeschossen?" of May 2023, available here.
7 See, Sonja Hoffmann, Alexandra Diehl and Carolin Kühner in our Client Alert „Regierungsentwurf zur Verbandsklage: Für den Verbraucherschutz über das Ziel hinausgeschossen?" of May 2023, available here.
8 Comments made by the CDU/CSU parliamentary group in the report by the Committee on Legal Affairs dated 5 July 2023, p. 109, available here.
9 Comments made by the consumer association, Verbraucherzentrale Bundesverband, p. 38 et seqq., available here.
10 Comments made by the German association of judges, Deutscher Richterbund, p. 6, available here.
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