With the transposition of the EU Directive on representative actions into the German national law, a true class action will for the first time be added to Germany's litigation landscape. The introduction of the “redress action” (“Abhilfeklage”) poses an increased risk to companies of having to go to great lengths to defend themselves against claims by consumer protection associations.

The German Consumer Rights Enforcement Act (Verbraucherrechtedurchsetzungsgesetz - Gesetz zur gebündelten Durchsetzung von Verbraucherrechten – VDuG) (BGBl I No. 272/2023) transposes the EU Directive on representative actions (EU Directive 2020/1828) into German civil procedural law. Accordingly, consumers in Germany will be able to bring collective claims against companies pursuant to section 1 (1) no. 1 VDuG. The redress action will enable associations to claim damages or remedies such as repair, contract termination, price reduction or a refund of the purchase price (section 14 VDuG). The existing similar provisions on the model declaratory action (Musterfeststellungsklage) will be included in the German Consumer Rights Enforcement Act as a further instrument of collective litigation (section 1 (1) no. 2 VDuG).

Scope of application

The redress action comprises all civil disputes concerning the claims and legal relationships of a large number of consumers against a company (section 1 (1) VDuG). The statutory scope of application thus reaches beyond the Directive and includes not only consumer protection provisions, but also, for example, general tort law.

Companies are thus likely to face an even greater litigation risk, as redress actions may in future be considered, in particular, for data protection damages claims, product liability cases, antitrust damages claims, investment cases, and the enforcement of the Digital Markets Act. 

Right to sue

The bill grants the right to sue to qualified entities from other EU Member States and consumer protection associations. Unlike in the US, class actions cannot be brought by individual consumers. Qualified consumer protection associations may not receive more than 5 % of their finances from corporate entities and must be registered pursuant to section 4 of the German Act on Injunctive Relief (Unterlassungsklagegesetz). The suing entity must publicly report on redress actions and inform consumers how they can join the class action.

The qualified consumer protection association must demonstrate that at least 50 consumers are affected (section 4 (1) VDuG).

Irrespective of the individual case's value, the amount in dispute is limited to € 300,000 in a redress action and € 250,000 in a model declaratory action (section 48a (1) sentence 2 VDuG, as amended). As cost risks ought to be moderate, suing associations are likely to be less reluctant to file a lawsuit.

Pooling similar claims

The claims concerned must be of an “essentially similar nature” (section 15 (1) sentence 1 VDuG). This broad definition gives courts more flexibility in dealing with redress actions. However, the question of similar claims is likely to remain a major issue, particularly in cases where redress actions concern small businesses and consumers at the same time, who may not be equally affected by an infringement.

If a redress action or a model declaratory action is already pending against a company on the basis of the facts concerned, the first representative action pending before the court blocks other representative actions of the same kind (section 8 VDuG).

Opt-in model

Consumers wishing to join a representative action must register with the register of actions at the Federal Office of Justice (section 46 VDuG). Small businesses having less than 10 employees and an annual turnover or balance sheet of less than EUR 2 million are also considered consumers. Registration must be made by the end of a three-week period after close of the hearing and thus prior to a judgment (section 13 (4) VDuG).

With this provision, the legislator allows consumers to opt in at a very late stage. For companies, this will often make reasonable settlement negotiations prior to a judgment more difficult because it will not be known until late how many persons have joined the action.

Litigation funding

Third-party litigation funding is generally permissible under certain conditions (section 4 (2) VDuG). The litigation funder must, however, not be a competitor of, or controlled by, the company being sued. The litigation funder must not be offered an economic share exceeding 10 percent in the performance to be made by the company being sued. When lodging the statement of claim, the claimant has to disclose to the court the funds' origins and, if applicable, any agreements made with the litigation funder (section 4 (3) VDuG). The intent of the legislation is that, in the case of profit-sharing, payment is always to be made to the consumer, who then pays the litigation funder.

No profit sharing cap applies to litigation-funded profit skimming actions (Gewinnabschöpfungsklagen) according to section 10 of the German Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb - UWG). However, before legal proceedings can be initiated, the terms of financing must be approved by the Federal Office of Justice (section 10 (6) of the German Unfair Competition Act). In future, wilful misconduct will no longer be a prerequisite for profit skimming, so that even grossly negligent violations of the German Unfair Competition Act will suffice. As the amount in dispute is capped at € 410,000 (section 51 (2) of the German Court Fees Act, as amended), profit skimming actions are likely to become an attractive business model for litigation funders.

Course of proceedings

The redress action is divided into three stages. First, the competent higher regional court examines the admissibility of the action and the merits of the claim. The court may then issue a basic redress judgment (Abhilfegrundurteil) setting forth the specific criteria and evidence of consumer eligibility. It is possible to lodge an appeal to the Federal Court of Justice.

In the settlement stage, the parties are to negotiate an amicable agreement on the settlement of the legal dispute on the basis of the basic redress judgment (section 17 VDuG). If the suing entity and the company agree on a settlement, the settlement requires the approval of the court in order to be effective, provided that the settlement is deemed reasonable under the circumstances and in the interests of the consumer (section 9 of the German Consumer Rights Enforcement Act).

In the third stage, if no agreement is reached, the court issues a final redress judgment (Abhilfeendurteil) and determines the “collective total amount” (section 19 VDuG) that the company has to pay to the affected consumers. This amount is paid into a redress fund (“implementation fund”, section 26 of the German Consumer Rights Enforcement Act) and may be increased later if the amount is not sufficient to compensate consumers (section 21 VDuG). Due to this unlimited obligation to make additional payments, companies are exposed to a particular financial risk also if, in a favourable case, excess monies are to be repaid to the company at a later date, as no punitive damages are to be imposed on the company.

Distribution by court-appointed trustee

For the subsequent implementation proceedings (section 22 et seqq. VDuG), the court appoints a suitable trustee (Sachwalter) who is independent of the parties and pays the total amount to the individual consumers according to a distribution plan. Consumers must register their claims with the trustee within a certain deadline. The trustee then verifies the eligibility of consumers participating in the implementation proceedings and draws up a distribution plan (section 27 VDuG). The distribution plan may be contested by the company affected or the consumers affected within a period of four weeks. The objection is to be addressed to the trustee in text form stating the reasons for the objection (section 28 (2) VDuG). A review by the court of the trustee's decision on the objection is possible within strict limits and must be applied for within two weeks of receipt (section 28 (4) VDuG). This could lengthen the proceedings and make it more expensive.

The costs of the implementation proceedings are borne solely by the convicted company (section 20 of VDuG) and comprise the expenses incurred by the trustee and his fee. They include, in particular, liabilities incurred by the trustee when exercising their powers, such as setting up and operating an on-line portal or using third parties to perform tasks, e.g. in order to ensure swift settlement.

Conclusion

The redress action generally increases the risk that companies will have to go to great lengths to defend themselves, possibly also against unjustified claims and lawsuits from other EU member states. In this context, the representative action is only one option from several alternative instruments of collective redress. In addition, consumers who do not join a redress action may still seek individual relief. Business models of commercial service providers collecting a large number of consumer claims and enforcing them from assigned rights in a uniform procedure will continue to exist.

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.