In the wake of the introduction of model declaratory action in Germany, both business people and consumers are struggling with its meaning.
Mass claim, collective claim, and class action are often associated with and mentioned in the same breath as class action in the US. However, model declaratory action as introduced in Germany on November 1 is different from US class action, and no one is expecting an explosion of claims to result. Which begs the questions: Why won't this new form of action led to more claims? What will change with model declaratory action? How will the new law help consumers? And do companies have anything to fear?
"Lex VW": Ambit of the model declaratory action
It is no coincidence that model declaratory action entered into force before the end of 2018. The timing was deliberate so that consumer "diesel drivers" who have suffered damage are now able to register their claims in a model declaratory action before the end of the year – the expiry of the limitation period for many of the consumer claims. Because the Consumer Advice Centre Federal Association indicated it will file a model declaratory action against VW on 1 November 2018, the law creating this action has been called "Lex VW". However, also other automobile manufacturers could become the target of similar claims over the diesel issue.
Whether there will be mass claims outside of the diesel controversy is doubtful. In many industries, such as pharmaceuticals or travel, cases of liability are based on individual considerations, and liability is difficult to clarify for a large number of claims.
In other cases, where mass claims are possible in principle the damage suffered by consumers tend to be low, and it is questionable whether the required 50 consumers can be found to register for a model declaratory action. Examples of such cases include the collecting of impermissible processing fees for consumer loans, price surcharges in the late stages of online purchases and using invalid standard business terms to raise claims in phone, electricity and gas contracts.
In addition, such cases are unlikely to receive the same attention in the media as "Dieselgate", which will temper the enthusiasm of authorised institutions to file and conduct actions. Further, claims that lack publicity potential are unable to pressure an affected company to agree to a settlement. Consequently, in these cases, a simple rule may apply: where there is no accusation, there is no action.
Representing the class: Qualified institutions
The big difference between US class action and model declaratory action is that the latter action is not made by a group of affected consumers acting as a class, but rather by a qualified institution.
What makes a qualified institution qualified? It must be an association that legally fulfills certain conditions (see cf. § 606 para. 1 no. 1-5 German Procedural Code or GPC). In particular, the institution cannot pursue any commercial goals and may only receive at most 5% of its financial resources from company contributions. As a result, it likely that only consumer advice centres (which are publicly financed) and large consumer associations will initially be claimants.
It is doubtful that other institutions have sufficient financial means to initiate a model declaratory action and effectively conduct litigation. Hence, more and more associations will likely appear to file these actions. If this occurs, the upper regional courts where actions are brought will have to review each association and determine if it meets the requirements of a qualified institution.
The transfer of authorisation to a qualified institution benefits a consumer claimant in that he is not liable for the costs of the action and need not take an active role other than registering a claim (see below). In fact, he is not a party to the proceeding. Through the registration of a claim, a consumer is dependent on the qualified institution and cannot influence the litigation.
Consumers, however, are not dependent on qualified institutions to bring a claim. They are free to pursue their claims individually. They can file individual claims or they can assign claims to legal services provider pooling those claims and pursuing them as a bundle sin one action. Consumers who have suffered damages have both the choice and burden of choosing one of three possible paths.
Consumer class: Mass filing of claims
If a consumer decides to pursue a model declaratory action, he must register his claim with the Federal Justice Office (see cf. § 606 para. 3 no. 3 GPC), which consumers can do free of charge. In terms of registration content, there are few requirements. The claim does not have to be described in detail other than stating the subject matter and reason for the filing. No review is made of the content (see cf. § 608 para. 2 sentence 3 GPC).
It is a mistake, however, to assume – as frequently done in connection with the diesel issue – that the registration of a claim will result in the suspension of the limitation period. Registered claims that do not need to be further specified may not lead to such a suspension. Pursuant to § 204 para. 1 no. 6a German Civil Code, the limitation period is only suspended as far as the claims are based on the same circumstances as the declared goals pursued by the model declaratory action. Whether this is the case is often uncertain at the time of registration. Since no review is made in this situation, consumers who register claims in a model declaratory action face the risk that the limitation period is already expired when it comes to a follow-up proceeding over the claim.
Limited returns: The goals of the model declaratory action
At the end of a model declaratory action, the most that can be determined is whether the "facts and legal requirements for the existence or non-existence of claims or legal relationships" are fulfilled ("declaratory goals", § 606 para. 1 sentence 1 GPC). No judgment for performance (e.g. ordering a company to pay damages or to discontinue certain conduct) can result other than an unenforceable declaratory judgment (e.g. the determination that the company committed a breach of duty.)
Does this mean that a model declaratory action is a dead end? The answer is: yes and no. Yes, because a positive declaratory judgment alone offers little tangible help to a consumer. In order to obtain an enforceable judgment for performance, a consumer must individually pursue action after the final judgment in the model declaratory action.
On the other hand, such an action is not necessarily a dead end because consumers pursuing further actions will probably benefit from a positive judgment in the model declaratory action since these decisions are generally binding.
Settlements: Another route
A model declaratory action can also result in a settlement, but since settlements involve substantial legal uncertainty for companies, few are willing to go this route.
If struck, a settlement should contain provisions for payments to claimants. The problem is, it is not always certain how many of the registered consumer claims are based on the facts underlying the model declaratory action. In addition, the payment amount is difficult to determine and assess, which means that any settlement would be "haphazard" and clearly something no management board would enter into, especially since it would expose the company to civil and criminal liability.
On the other hand, consumers who have filed claims can withdraw their action within one month after the court settlement has been served. If more than 30% of consumer claimants withdraw, the settlement will not come into effect (see cf. § 611 para. 5 sentence 1 GPC) and the model declaratory action is continued. Affected companies, however, have no guarantee that consumers will defeat a settlement after the fact. In addition, a group of 30% of consumers can "co-dictate" the content of a settlement. For these reasons, companies – as a rule – are unlikely to accept settlements.
Settlements become much more viable where there is substantial public and media interest in a case. Such as in "Dieselgate", publicity can bring pressure to bear against a company, and force it to enter into a settlement in order to avoid a loss of reputation.
Not a (first-) class mass action, rather a mere mass action
In conclusion, this new law is not "first-class", meaning, it is not a triumph for advocates of class action. Apart from the "Dieselgate" cases, this law will likely have an uneventful existence. Companies can endure a model declaratory action with relative calm. In contrast to what was possible in the past, these actions allow for "more mass" – a larger number of consumers – behind a claim, but this consumer mass will have a hard time building pressure against a company since a proceeding can only end in an unenforceable declaratory judgment. Consumers must pursue their claims individually if they wish to receive actual payments. Due to these restrictions, e.g. no punitive damages and no (pre-) trial discovery, the model declaratory action is not at all comparable to US class action.
A model declaratory action can only be effective if an elaborate media and press campaign accompanies it, producing heightened public interest. Unfortunately, in such cases, companies are reluctant to enter into settlements, mainly from the risk of liability.
This situation may change. On 11 April 2018, the EU Commission proposed an EU directive to permit association claims against companies across Europe, which goes substantially further than German model declaratory action. If this directive is adopted, German lawmakers will have to enforce it.
In addition, German lawmakers may opt to amend model declaratory action. The current law in many respects is not fully developed, which is no surprise since the legislation was fast-tracked due to the diesel issue.