German Supreme Court 'strengthens business model of claims management companies'

The ruling of Germany’s Federal Supreme Court (BGH) could have major implications for the already growing mass litigation movement in the country, according to experts at Pinsent Masons, the law firm behind Out-Law.

Air Berlin filed for insolvency on 15 August 2017. Customers had booked and paid for flights with the airline between May and July 2017, but the airline became insolvent and the flights never took place. Some of the affected customers assigned their possible claims for damages to a debt collection service provider, which plans to assert their claims in court at no upfront cost to the customers. Instead, the collection service provider would receive 35% of the net proceeds from the claims in the event of success.

The BGH’s decision centred on the question of whether the assignment to the debt collection service provider was in line with Germany’s professional law for legal services, the Legal Services Act (RDG). The Regional Court and the Berlin Court of Appeal had dismissed the action previously, as they considered the business model of the debt collection service provider to be contrary to the RDG and the assignments therefore to be null and void.

The BGH did not agree with this. It decided that the activities of the debt collection service provider were covered by the law, even though the provider sought judicial enforcement right from the outset. According to the BGH, the concept of debt collection provided for under the RDG includes business models that are exclusively or primarily aimed at collecting claims in court. This also applies in the case of so-called "Sammelklagen-Inkasso" (bundled debt collection) as offered by the debt collection service provider in question, it held.  The BGH considered that the professional freedom of the debt collection service provider under Article12(1) of the German Constitution was relevant in this regard.

The fact that lawyers must be involved in the court proceedings also adequately protected customers from unqualified legal advice, the BGH said. It also considered the fact that debt collection service providers have to prove sufficient expertise in the relevant field of law prior to their registration. The BGH said that "indications that the debt collection service providers could initiate unjustified legal proceedings to a considerable extent from the outset [...] have not been presented and are also not obvious with regard to the mandatory involvement of lawyers".

Another argument raised which challenged the admissibility of the bundling of claims was possible conflicts of interest on the part of the service provider. The BGH acknowledged that risk, but said it did not mean the assignments of the claims to such providers were necessarily invalid.

It said a conflict of interest could lie in the fact that the service provider agrees on a contingency fee and at the same time on keeping the aggrieved parties free from any costs of legal enforcement. In such cases, the court considered that the service provider has an interest in keeping the costs of legal action as low as possible and may therefore be more inclined to agree to an early settlement.

Another conflict could arise from the fact that the business model is geared towards the bundling and collective assertion of claims. According to the BGH, the risk that a single potentially injured party might receive lower proceeds than by asserting claims individually is offset by various advantages that result from bundling the proceedings: lower fees or a cap on fees, a spreading of the cost risk for takings of evidence and a considerable strengthening of the negotiating position. The risk could also be counteracted by grouping similar claims. In addition, if a debt collection service provider should pursue its interests selfishly and thus disadvantage its clients, the individuals would be entitled to damages, the court said.

As a result, the BGH concluded that the debt collection service did not infringe professional law and that the assignment agreed between Air Berlin's customers and the debt collection service was effective. It referred the matter back to the competent court to decide whether the customers are entitled to damages.

Johanna Weißbach, litigation law expert at Pinsent Masons, the law firm behind Out-Law, said: "Numerous German courts had found similar assignments null and void in recent years which led to significant legal uncertainty. With its ruling, the BGH now provides clarity. Class actions, collective redress and effective access to justice are undergoing major changes in Germany and the European Union. Jurisprudence, legislators and politics are driving this change on an almost weekly basis. The issue is certainly far from being solved."

Among other things, a new procedure for preliminary rulings by the BGH in collective actions is being discussed. The EU has also introduced new rules for representative actions, which must be implemented and applied throughout the EU by mid-2023.

Only recently, the German parliament also passed a reform of lawyers' fees and litigation funding, which is intended to put lawyers on an equal footing with debt collection service providers in the area of out-of-court debt collection. However, to protect consumers seeking justice, debt collection service providers will also be subject to stronger requirements.

"The BGH's decision will accelerate the already rapid change in the legal services and legal advice market," said Martin Eimer, litigation law expert at Pinsent Masons. "With the judgment being positive for legal service providers, the much debated question of the role of lawyers in the business of mass litigation becomes even more urgent. It is foreseeable that with the need for mass claims, the models will also adapt. The topic remains red-hot both for consumers and businesses."