Germany adopts new mass actions regime

The German law transposing the directive became effective on 13 October. However, certain features of the national mass actions regime may dampen interest from commercial litigation funders, according to an expert in defending businesses against mass claims.

The RAD requires EU member states to put in place at least one procedural mechanism which meets minimum standards for consumers to seek collective redress when they claim to have been harmed by a business through breaches of certain European consumer laws. Effective procedures must be established for both domestic and cross-border infringements.

The new German regime, as set out in the new Consumer Rights Enforcement Act (Verbraucherrechtedurchsetzungsgetz) (link in German), allows so-called ‘qualified entities’ to bring a representative action – known as a ‘redress action’ (Abhilfeklage) - against a business on behalf of not only impacted consumers but also small businesses. ‘Small’ businesses are those with fewer than 10 employees and annual turnover of no more than €2 million. Redress actions are available for any breaches of civil law, not just European legislation covered by the RAD.

Mass claims expert Johanna Weißbach of Pinsent Masons said: “The German legislator has gone beyond the requirements under the RAD in some aspects. For example, the scope has been broadened to cover any civil law disputes and not only breaches of European law. Also, small business may profit from the new redress action.”

Only those entities registered as ‘qualified entities’ in a public list held by the Ministry of Justice will be permitted to bring redress actions. Under the previous Declarative Model Action (DMA) regime, these entities included consumer protection agencies, tenant associations, associations for the protection of investors and environmental aid agencies. Redress actions will only be admissible if the qualified entity can set out that at least 50 consumers might be affected by the action, similar to the position under the DMA.

For a redress claim to proceed, the competent court must first establish that the consumer claims bundled by the action are “essentially similar”. Once this has been established, the claim will proceed in four steps: a basic redress judgment (‘Abhilfegrundurteil’), rendered if the court considers the case admissible and the defendant liable on the merits; settlement proposal; final redress judgment (‘Abhilfeendurteil’), rendered if no settlement is reached; and final implementation phase (‘Umsetzungsverfahren’), during which the amount payable by the defendant is distributed among the registered consumers.

The new regime also contains rules on third party funding. It not only incorporates a general requirement to disclose whether a third-party funder is involved in the action, but also provides that if the disclosure reveals the involvement of a third-party funder, any funding agreement must be disclosed. There are also several restrictions on third party funding.

“Very importantly, the legislator has limited the proceeds for funders to 10% of the amount to be paid by the defendant. This makes these cases highly unattractive for funders who often are the drivers of mass actions”, Weißbach said.

Other restrictions mean that a party providing third-party funding must not be a competitor of the defendant, or in any way dependent on the defendant. An action is also inadmissible if the funder is expected to influence the action to the detriment of the registered consumers.

The RAD came into force on 24 December 2020 following years of discussions at EU level, driven by a view that only a handful of member states had adequate regimes for collective claims by consumers. The transposition deadline originally expired on 25 December 2022, but the German law transposition was delayed due to a disagreement between the German Ministry of Justice and the Ministry of Consumer Protection over the shaping of the now-passed bill.