Government draft on representative actions: A step too far in the interest of protecting consumers?

Alert

09 May 2023

12 min read

"Consumers first" – As things currently stand, that is the motto shaping the German government's draft for an Act to implement the EU Directive on representative actions (EU 2020/1828) ("the EU Directive") as a result of the so-called "association hearing"¹. The likelihood of this coming to pass can be seen not only from the debates in the Bundestag and the Bundesrat, but also in the press announcement released by the Minister of Justice, Dr. Marco Buschmann, on the occasion of the bill's first reading,² stressing that the new collective action for redress" will help "consumers to assert their claims effectively."

Even when the model declaratory action (Musterfeststellungsklage) was introduced (less than five years ago), protecting companies against abusive claims brought by the litigation industry and upholding long established principles of civil procedure were still seen as among the main priorities. This focus now appears to be a thing of the past. The introduction of the collective action for redress (Abhilfeklage) means that German law will for the first time have an instrument for legal protection that allows plaintiffs to bring collective actions directly seeking damages. The bill goes beyond the EU Directive in that the proposed procedure will not only apply to infringements of certain consumer protection provisions under EU law, but more generally to all disputes between consumers and businesses. It is possible that once the legislative process reaches its end, the outcome could well be regulations that favour consumers and consumer associations to an even greater extent.

The pressure of time is immense: many of the provisions of the Act implementing Directive (EU) 2020/1828 on representative actions for the protection of the collective interests of consumers and repealing Directive 2009/22/EC ("VRUG") are scheduled to come into effect on 25 June 2023 – according to the EU Directive, that is the date from which the rules must apply. Following on from the public session of the Bundestag's Legal Affairs Committee on 10 May 2023³ and the submission of the Bundesrat's opinion (expected to be adopted when the Bundesrat meets in plenary session on 12 May 2023)⁴ there will be at least one further reading in the Bundestag in June, and after that the final vote. Given the marked differences between the Government Draft and the Ministerial Draft, it remains unclear what the VRUG provisions will look like in the version that is finally put to a vote and which specific regulations will eventually be adopted. It is unlikely that the draft legislation will move back closer to the Ministerial Draft, which appears almost moderate in retrospect. No one appears to be voicing loud criticism.

Changes of substance compared to the Ministerial Draft

The provisions on the entities that will be eligible to bring an action and the opportunities for consumer participation are especially consumer-friendly.

Widened provisions on qualified entities

The Government Draft relaxes the criteria required to qualify as an entity eligible to bring an action. The proposal now is that, under sec. 2 para. 1 no. 1 of the Consumer Rights Enforcement Act ("VDuG"), all qualified consumer associations are to be eligible to bring an action if they are included in the list referred to in sec. 4 of the Act on Injunctive Relief ("UKlaG") and no more than 5 percent of their financial resources come from corporate donations. The strict requirements envisaged in the Ministerial Draft – which in this respect was in line with the existing requirements applying to model declaratory actions – namely that the associations must:

have a certain number of members (at least ten associations working in the same field or at least 350 individuals),
have been on the list referred to in sec. 4 UKlaG for at least four years,
engage largely in non-commercial educational and advisory activities, and
not bring actions for the purpose of making a profit,
have not been included in the Government Draft.

As the model declaratory action is included in the VDuG and the provisions in the general part apply to both collective actions for redress and model declaratory actions, the requirements in this respect are being lowered as well. As a result, the risk that was discussed when the model declaratory action was introduced, i.e. that of "bogus consumer protection associations" acting essentially as a front for competitors, law firms specializing in collective actions or litigation funders is now more topical than ever.

The protection of companies against abusive actions brought by the litigation industry is thus being relegated to second place behind the interest in strengthening consumer interests and also apparently the interest in strengthening the attractiveness of Germany as a judicial venue and that of the "German representative action" (i.e. making it attractive for litigants to bring representative actions before the German courts). The Government Draft does away with the discrepancy between domestic and foreign consumer associations with regard to standing to bring an action (a discrepancy which the Ministerial Draft still included) and aligns the criteria for qualified entities with the provisions of the EU Directive. Under Article 4(3) of the EU Directive, qualified entities are required only to demonstrate twelve months of actual public activity in the protection of consumer interests and that its independence is guaranteed. The Government Draft thus largely eliminates the disadvantageous position of German consumer associations compared with those from other EU countries and in this way also counters the danger of undesirable forum shopping.

Consumer participation: Extension of the registration period

The biggest and most significant change in the Government Draft is the postponement of the deadline for consumers to register that they are joining an action and that of withdrawing their registration. The Government Draft, like the Ministerial Draft, still provides for a so-called "opt-in" system, i.e. one where individual consumers must actively register as participants in a representative action. However, while the Ministerial Draft had still proposed that consumers would have to register by the end of the day before the start of the first court hearing (the oral hearing), the Government Draft now proposes to allow registration up to two months after the first hearing, sec. 46 para. 1 VDuG-Government Draft.

However, the Government Draft does not propose to make it possible for consumers to register after a court ruling has been made. Neither a judgment nor a basic ruling on redress (Abhilfegrundurteil) may be given before the deadline (sec. 9 para. 1 sentence 2, sec. 13 para. 4 VDuG-Government Draft)

The extension of the deadline for consumers to join a representative action brings with it a clear amount of legal uncertainty for companies This stems from the lack of clarity about the number and identity of the adverse parties involved in the litigation. It also makes it very difficult to estimate the maximum financial risk and set up reserves.

The consumer-friendliness of this provision is immense. The extended time limit allows consumers to wait until the first oral hearing and to form an initial impression of the chances of the collective action for redress proving successful (according to the assessment made by the court at the first oral hearing) before deciding whether to register. This significantly reduces the risks facing consumers with regard to registration.

In addition, the postponement of the deadline for registering also has an impact on the function and significance of the first hearing. On the one hand, the hearing is given additional relevance in that the presentation of the parties at the hearing could easily have a significant impact on the relevant consumers' decision whether to join the action or not. At the same time, there could be a risk of the first hearing becoming a mere "pro forma hearing"⁵ serving only to set a deadline for consumers to register. This in turn would result in an unnecessary lengthening of the judicial proceedings.

Consumer protection demands that have not (yet) been implemented

Nonetheless, the Government Draft does not follow the "consumers first" motto throughout: some of the demands made by consumer associations have, as of now, not been accommodated:

Possibility of registering after a basic ruling on redress or a settlement

Consumer protection advocates would prefer an even more far-reaching extension of the registration period, namely until after a basic ruling on redress or settlement.⁶ Given the far-reaching nature of such an extension and the significant consequences it would have, it remains to be seen whether this demand will actually be included in the VDuG during the deliberations of the Legal Affairs Committee – although in view of the considerable degree of criticism that has been expressed about the two-month period and the associated legal uncertainty for companies, such an outcome appears doubtful.

Consumer Quorum

The Government Draft continues to provide that a consumer quorum of 50 affected consumers is to be a required criterion for the admissibility of both collective actions for redress and model declaratory actions, sec. 4 para. 1 No. 2 VDuG-Government Draft. Consumer groups have called for this figure to be lowered to just 10 cases, citing a need to keep some in reserve as well as occasionally low rates of participation.⁷ During the first reading in the Bundestag, a lower quorum was also proposed several times so as to reduce the obstacles facing smaller qualified entities in particular.⁸ It is also questionable whether the Legal Affairs Committee will be moved to accommodate the consumer associations even further by lowering the quorum given that the requirements in the Ministerial Draft have already been reduced.

Suspension of prescription

In addition, the Government Draft does not include any changes to the rules proposed in the Ministerial Draft on the suspension of limitation periods for consumer claims. According to the proposed provisions in sec. 204a para. 1 no. 3 and no. 4 BGB-Government Draft, in the case of a collective action for redress or a model declaratory action the limitation period will be suspended only if and when consumers register their claims in the representative action register. During the course of the association hearing, consumer protection groups demanded that prescription should be suspended even in the case of consumers who have not yet registered.⁹ A suspension of the limitation period without registration was also discussed in the Bundestag during the first reading of the VRUG.¹⁰ As the German association of judges (Deutscher Richterbund) pointed out in its opinion, the key issue here is that in the absence of a suspension of the limitation period without registration, each consumer who has not yet registered would have to bring an individual action.¹¹ This would result in an even greater burden on the courts, contrary to the purpose of the law, namely to relieve the courts. For this reason, it is likely that sec. 204a BGB-E will be amended by the Legal Affairs Committee so as to make sure that prescription would be suspended even where consumers have not yet registered.

Outlook

The question of whether the German government's proposed implementation of the EU Directive will prove capable of preventing the number of individual complaints becoming an avalanche cannot be answered at this stage, nor can the question of whether it might make the German implementation regime so much more attractive to consumer associations than those of other Member States that cross-border consumer associations would come to see Germany as an attractive forum. The question of whether this would be a desirable outcome is a completely different matter.

Having said that, the German government's desire to ensure that the "German representative action" is attractive shows how important representative actions will be for companies in the future – regardless of where they are conducted. In the future, collective action can be expected especially in the ESG, tech and retail sectors. In some cases, provisions for such actions have already been explicitly included in EU directives or draft directives. Companies should therefore follow the current legislative processes in Germany and other EU countries very closely in order to strategically make sure they are well prepared to cope with representative actions. Quite apart from the economic risks such actions can involve reputational risks as well, so that litigation PR will gain in importance too.

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}