Draft legislation from the European Commission and the German government for representative actions for the protection of collective interests
By Dr. Hanns Christoph Siebold and Dr. Mark C. Hilgard
Over the past few years, there have been developments like the Dieselgate scandal and other commercial activities and trends, which have called on authorities and legislators to reconsider the continental laws on consumer protection and in particular the enforcement of consumer rights. One of the questions that arises is whether the European Union needs uniform collective redress in order to facilitate the enforcement of consumer rights in cases of unfair or illegal commercial practices such as, for instance, class actions under US law. With its New Deal for Consumers of April 11, 2018, the European Commission has presented draft legislation by which it inter alia introduces representative actions for the protection of consumers, but in a more moderate way than class actions under US law. The legislation will be a directive to be implemented in the national laws of EU member states. At the same time, the new German government has presented draft legislation establishing representative actions in the form of a model declaratory action in order to protect German consumers who have suffered damage in cases like the Dieselgate scandal. The German act is supposed to come into force in November 2018 but it may have to be amended subsequently on the basis of the final provisions of the EU directive.
What are the plans of the European legislator?
On April 11, 2018, the European Commission presented its proposal for a draft directive of the European Parliament and the Council on representative actions for the protection of the collective interests of consumers, and repealing Directive 2009/22/EC. The proposal is not an entirely new development. The Commission had already recommended to EU member states common principles for injunctive and compensatory collective redress mechanisms in 2013. The current proposal will enable qualified entities, such as consumer associations and other qualified organizations, to seek collective remedy, that is compensation, replacement or repair, on behalf of a group of consumers that has been harmed by illegal commercial practice. With regard to the reasons and objectives of the directive, the Commission in its proposal refers to the necessity for a harmonized system of collective redress for consumers within the EU with currently differing national redress mechanisms for mass harm situations and better protection for consumers against unfair or even illegal commercial practices.
As a first and important principle, redress actions will only be available to certain qualified plaintiffs and not individuals. The criteria for the plaintiff organizations’ standing will be a proper constitution under the national law of the member state, their legitimate interest in compliance with EU law as well as their nonprofit status. In addition, entities must be transparent about their source of funding to ensure that there is no conflict of interest or misuse of representative actions, e.g., actions being funded by competitors.
Under the directive, plaintiffs will be able to seek both injunctive relief stopping the defendant’s violation of EU law as well as redress aimed at eliminating the continuing effect of the violation. This means that the court could grant recovery and damages on behalf of classes of consumers.
No US-style class actions under the directive
However, the Commission at the same time emphasizes in its proposal that the model will have strong safeguards in order to avoid any kind of misuse and will be distinct from US-style class actions. To this end, representative actions will not be available to law firms or individuals, but only to nonprofit organizations that fulfill the aforementioned strict eligibility criteria. The new law will furthermore not establish any kind of punitive or extensive damages for the benefit of the plaintiffs or ultimately the consumers.
When and how will the directive come into force?
The Commission’s proposal must first be approved by the European Parliament and the Council of the European Union in order to come into effect. As an EU directive, the legislation will not be applicable directly in the member states but will have to be implemented in national laws.
Existing mass action mechanisms under German law
As regards the situation in Germany, German procedural law already provides for special forms of collective redress. As such, the German Unfair Terms and Conditions Act (Gesetz über Unterlassungsklagen bei Verbraucherrechts- und anderen Verstößen, UKlaG) enables consumer associations to bring actions against companies for inadmissible general terms and conditions or practices violating consumer rights. In addition, investors who have incurred damage as a result of false, misleading or omitted public capital markets information may bring an application with the competent court for the establishment of model case proceedings in order to clarify legal questions or establish the existence or nonexistence of conditions justifying or ruling out the claim under the German Capital Investors’ Model Proceedings Act (Kapitalanleger-Musterverfahrensgesetz, KapMuG).
If at least ten such applications are filed in similar cases within a six-month period, the Higher Regional Court will open model case proceedings in which it will select one of the claimants as the model case claimant. The court will choose the case that best represents the mass claims and best illustrates the factual and legal questions and issues. This model case is then publicly announced in the Complaint Registry. Upon said public announcement of the model case in the Complaint Registry, all other cases pending are suspended ex officio until the final decision on the model case has been rendered. The decision of the Higher Regional Court on the legal questions at issue will then become binding for the courts of first instance that are trying the individual cases. These model proceedings are limited to a narrow application scope and not suitable for providing collective redress in most cases. In addition, the cases brought under the act in practice have proven to be slow and ineffective, such as in the Deutsche Telekom case in which 17,000 small investors individually filed claims against Deutsche Telekom AG arguing that the defendant had concealed significant risks in its prospectus.
Plans of the German government for a more general model declaratory action
Other than the claims of investors under the KapMuG, the German Code of Civil Procedure (ZPO) traditionally does not provide for class or group mass actions. However, this will change in the near future. By the time the aforementioned European directive has come into force, German law will probably already provide for representative actions for consumers. Also, in April of this year, the new German government presented draft legislation for the establishment of a model declaratory action (Musterfeststellungsklage) to protect consumers from detrimental business practices.
As such, the new law will be implementing the possibility of collective redress in paragraphs 606 to 615 ZPO and enable consumers to assert the requirements for a claim to be fulfilled. However, similar to the EU directive, the legislation will not grant the consumers a direct right to sue, but allow certain qualified institutions, that is, registered consumer or trade associations, to bring an application for a model declaratory action. The declaratory action will only be admissible in cases in which the claimant can establish a certain number of claims depending on the findings in the declaratory proceedings. The current draft legislation has not yet determined whether the threshold will be 10, 50 or 100 consumers to assert claims. In that case, the court will decide whether or not the claim exists in general. The consumers affected by the findings will be able to opt in by registering their claims in a public register. The court’s declaratory ruling will then be binding on the registered claims unless the consumers make use of their right to withdraw. If the court confirms the liability of the defendant company, as a next step the consumers concerned will have to bring individual damage claims or seek a settlement. However, the courts trying the individual claims will be bound by the first court’s declaratory findings and will not be able to rule again on the question of liability. As a consequence, the German approach will likewise not be in support of US-style class actions and will considerably differ from such.
The new law is supposed to come into force on November 1, 2018. However, depending on the final provisions of the directive, it may have to be amended or adjusted to the standards provided therein given that it differs in the remedies that can be sought under the current German draft.
Conclusion and outlook
The European approach may facilitate to a certain degree the initiation and bringing of collective actions against companies. Armineh Gharibian, litigator in the Frankfurt am Main office of Mayer Brown LLP, nevertheless holds that “defendants will not have to fear class action in its traditional and common-law sense establishing discovery proceedings, punitive damages or similar principles unknown to European (European Union law).” Gharibian stresses, however, that “the business community should be aware that the new collective redress regime may lead to consumer associations increasingly observing business practices and bringing respective actions where consumer rights are at risk.” The plans of the European Commission as well as the German legislator will certainly be welcomed by claimant attorneys who currently have to solicit consumers and investors and bring individual claims against companies that have allegedly breached consumer rights. However, the question will be whether the envisaged collective redress regime will be suitable and practicable for the different types of lawsuits and breaches. While it may constitute an appropriate regime for typical consumer-harm scenarios with established facts of liability, it may not apply so much to cases that require an individual, case-by-case assessment. In addition, and in particular with regard to the plans of the European legislator, there are many uncertainties and questions, such as the burden of proof and other procedural aspects, which are not being addressed in the draft directive and may be left to the member states to resolve. In any case, it will be important and interesting to observe the implementation of a collective redress regime in times of increasing regulation, such as the new General Data Protection Regulation and other developments imposing more and more duties on companies.