On 31 July 2017, the German Federal Ministry of Justice and Consumer Protection, still under the leadership of Heiko Maas, submitted a discussion draft law to introduce the option of a model declaratory lawsuit. This draft law had previously run aground in cabinet voting due to the opposition of the ministries led by members of the CDU/CSU. Businesses, practitioners and academia then publicly analysed this draft critically and controversially well into the new legislative period. Driven by pressure from media reports on the “diesel affair”, the CDU/CSU consented after all to the introduction of a model declaratory lawsuit in this form in the coalition agreement. Meanwhile, a draft proposed three times in the Bundestag parliamentary body by the Greens for a “group action” for consumers was unanimously rejected by the coalition parties as “going too far”.
On 9 May 2018, after having overcome the last weak opposition from her coalition partner, Federal Justice Minister Barley presented a revised government draft for the new Book 6 of the German Code of Civil Procedure (Zivilprozessordnung – ZPO) to the cabinet, which then passed it. The first reading in the Bundestag is slated for June, so the law can take this important hurdle before the summer break and enter into effect on 1 November 2018 as planned.
Binding declaratory judgment for a claim’s substantial and legal basis
Taking its cues from the German Capital Investors’ Model Case Act (Kapitalanleger-Musterverfahrensgesetz – KapMuG), the model declaratory lawsuit constitutes a simplification: after a declaratory judgment on the merits of a claim, only the amount of the claim has to be decided in each consumer’s individual proceedings. However, it places companies under additional pressure from lawsuits because now consumer protection associations can bundle complaints and conduct a model lawsuit on matters regarding which there would previously have only been a few individual lawsuits at the most. The Federal Government estimates that around 450 model declaratory actions per year could be initiated, which would mean an estimated decrease in court case load of around 11,250 individual lawsuits; however, it must be kept in mind that this will cause a substantial increase in the number of consumers who will ultimately assert specific claims.
Restricted litigation authorisation prevents a “litigation industry”
Nevertheless, the draft relieves companies of an essential worry: the new law will not give rise to a “litigation industry à la USA”. The authorisation to litigate in draft section 606 (1) of the German Code of Civil Procedure is even more restrictive than in the discussion draft. Now, only associations will be authorised to litigate that (1) have as their members at least ten associations working in the same area of responsibility or at least 350 members who are natural persons, (2) have been on the list pursuant to section 4 German Act on Injunctive Relief (Unterlassungsklagengesetz – UklaG) for at least four years, (3) do not defend consumers’ interests for commercial gain, (4) will not achieve any profit from the model declaratory lawsuit and (5) do not receive more than 5% of their financial means from company donations.
Quorum of 50 consumers necessary
These qualified consumer protection associations can conduct a model lawsuit on behalf of consumers if a company has caused a large number of consumers to suffer damage or loss in a similar way. If an association can designate ten verifiably affected consumers, it can file suit at the competent regional court to issue a declaratory judgment regarding the substantial and legal prerequisites that apply to all of the consumers and are determinative for the consumers’ claims against the company (draft section 606 (2) ZPO). The consumers can join this lawsuit by enrolling in a claims register kept by the Federal Office of Justice (draft section 608 ZPO) which has the previously unheard of effect of retroactively suspending expiry of their claims under statutes of limitations to the date on which the model declaratory lawsuit was filed (draft section 205 (1) no. 1a German Civil Code (Bürgerliches Gesetzbuch – BGB)). If at least 50 consumers have their claims enrolled in the register within two months, the model declaratory lawsuit is admissible (draft section 606 (3) ZPO). However, in contrast to the discussion draft, the consumers cannot wait to see how the proceedings progress; they must make a final decision before the first court hearing takes place and are then bound by their enrolment (draft sections 608 (1), (3) and 613 (1) ZPO).
“Pilloried” by the claims register
An important change in contrast to the discussion draft is that the lawsuit is published in the claims register within 14 days without previous hearing of the defendant if an association that is authorised to litigate can provide information and evidence that at least ten consumers have claims based on the objects of the declaratory judgment (draft section 607 (2) ZPO). This makes it impossible for the company to check whether the information and evidence regarding the affected consumers is correct, a mutilation of the principle of due process that does not seem justified merely by restricting litigation authorisation to particularly qualified associations. Due to the fact that at least a conclusive demonstration of the consumers’ possible claims will have to be required before publication, it may be advisable, depending on the circumstances of an individual case, to submit a pre-emptive brief (Schutzschrift) if there is a justified expectation that an association could incorrectly slant the facts of the matter in the consumer’s favour in its petition.
“First come, first served”
In cases that attract a large amount of publicity, a “race to the finish line” among associations authorised to litigate is inevitable because only one model declaratory lawsuit can be conducted based on one set of circumstances, regardless of how the petition for a declaratory judgment is worded (draft section 610 (1) ZPO). This makes it probable that cases with a large scope will rapidly enter the litigation phase.
Efficiency gains for individual consumers remain to be seen
Based on experience with the KapMuG, it remains to be seen if an efficiency gain – especially in respect of time – will be involved here. In contrast to the KapMuG, the first instance remains a regional court with not even necessarily a panel of judges but an individual judge as in any other case (draft section 71 (2) no. 6 German Court Constitution Act, Gerichtsverfassungsgestz – GVG). Due to the fundamental significance of a model lawsuit, it is not improbable that in complex cases not only two but three instances will be necessary. The KapMuG, which was created in light of the Telekom case, has shown that especially in controversial cases the German Federal Court of Justice may have to be called upon to reach a decision more than once. In any case, it is not likely to be different for the “diesel affair”, to which the new law is a response.
Settlement “for everyone”
As before, the amount of each claim is adjudicated in an individual lawsuit after the model declaratory judgment has been issued. This, along with draft section 611 ZPO, provides an indication of the lawmakers’ preferred solution: a court settlement that becomes binding for and against the registered consumers and that establishes the performance to which the consumers are entitled. Consumers who believe they are entitled to more can reject a settlement before it becomes binding and either initiate their own lawsuit or even initiate a new model declaratory lawsuit if they have the support of another consumer protection association that is authorised to sue (draft sections 611 (4) and 610 (1) sentence 2 ZPO). Companies will not be (financially) forced to enter into a settlement because litigation costs in Germany will remain far below those in the U.S.A., where the defending company is under severe cost pressure due to the exhaustive pre-trial phase with its extensive obligations to disclose documents and any correspondence that could possibly be related to the case. The model declaratory lawsuit constitutes a substantial cost savings compared to defending against the same number of individual complainants. Plaintiffs’ law firms that have enjoyed the synergy effects of conducting a large number of parallel lawsuits and have had a rich source of income despite German statutory fee scales will not be particularly happy with the new law. Companies, on the other hand, will have the benefit of being able to concentrate on one case before their own regional court.
It is questionable whether the model declaratory lawsuit will enjoy a long life. The current draft law lags far behind the intentions of the EU Commission as seen in its latest efforts to introduce a “representative action for the protection of the collective interests of consumers”. Although the “European class action suit” will likewise only be open to qualified consumer protections associations, its content could point to compensation for damages, contract termination, reimbursement, replacement, repair or price reduction. However, until implementation of this planned European directive becomes mandatory, controversial debates in practice and in scholarly publications will surely arise regarding the German law, which has been rammed through legislative procedures in such a hurry without any further public discussion, specifically regarding how to apply it in concrete situations and how to resolve conflict situations. Just one example is that the draft law does not address how to deal with more than one petition covering the same situation submitted on the same day. On the other hand, this provides an opportunity to gain experience that will be helpful when implementing the bolder move that the EU directive will necessitate.