For several years now, the introduction of class actions into German law has been a recurring theme. At present, there are no general provisions for class actions in the formal sense of the term and a judgment will only bind the parties to the proceedings. Consequently, it is not uncommon to find a group of affected individuals pursuing similar claims against the same entity in multiple proceedings before multiple regional courts. Whilst each regional court may decide to group similar cases into a single set of proceedings, it is not currently possible to join cases from different regional courts.

In light of the mass litigation concerning about 17,000 independent claims brought by disappointed stockholders of Deutsche Telekom AG, the KapMuG was introduced into German law in 2005. The KapMuG provides a mechanism for mass securities litigation and establishes a lead case procedure for handling individual capital market-related actions collectively. In doing so, the German legislature attempted to achieve the delicate balancing act of keeping fundamental German and European procedural law principles intact, whilst at the same time, avoiding the perceived pitfalls of the US class action system.  

The German legislature very recently decided to introduce further amendments to extend the scope of the KapMuG, thus continuing the current trend of moving towards a more claimant-friendly environment. This article will discuss the most important revisions following the new reform of the Act and how they have changed the position of defendants.

The KapMuG's early developments

As mentioned above, the first version of the KapMuG law came into force in November 2005. It was primarily seen as a trial, limited to a five-year period determined by a so-called "sunset clause". The law received positive feedback, particularly from the German Federal Government which considered that the KapMuG should not only be extended in time but also be extended to include other mass civil case proceedings (see 'Capital Markets Class Actions: KapMuG and beyond' in Class Actions Bulletin October 2009).

Indeed, in May 2010, the German Minister of Justice confirmed that the government was considering whether similar mechanisms could and should be introduced into other areas of law, including mass torts in relation to personal injury and/or product liability. The proposal to extend the scope of the KapMuG arose from a report by the Frankfurt School of Finance & Management. Accordingly, the legislature then prolonged the "sunset clause" for two more years, until October 2012, to allow more time for reform (see Germany: Developments in the Collective Redress Mechanism in Class Actions Bulletin July 2010).

A further trial period

The new reform of the KapMuG became effective as of 1 November 2012 and has been extended for a further eight years until 2020. Whilst the German legislature decided to retain the basic concept of the KapMuG and only to revise certain aspects of it, these are still likely to have a major impact (for further details see Draft paper, Bundestag printed paper 15/5091, Page 1).

The KapMuG's main goal remains to ensure availability of lead case procedures in the ambit of securities law. Claims containing similar interests will be brought together to relieve the burden on courts. The individual proceedings are continued only once the legal issue that concerns all claimants has been uniformly answered.

The first change is that the reform extends the scope of application of the KapMuG to include civil law suits where capital market information has been used in the sale and distribution of financial products and/or the provision of investment services. Claims based on a pre-contractual breach of duty are also included where the breach arose, for example, from the presentation of a defective prospectus in the course of the provision of investment services.

Secondly, investors are now given the option of registering their claim and applying for model case treatment before deciding whether to eventually bring a claim. This makes model case proceedings much more accessible for claimants, with the added consequence of suspending the limitation period pending the outcome of the model case proceedings.

A third change is that the process itself is accelerated through the implementation of a deadline within which the application for a model case proceeding must be brought. Additionally, competence for the extension of model case proceedings has been transferred from the district court to the Higher Regional Court.

Fourthly, a settlement between the parties must be accepted by the Higher Regional Court before it can become effective. Once accepted, it binds all parties, unless they decide to opt-out of it within a month of the Higher Regional Court's decision. This is comparable with the settlement procedure adopted in the Netherlands; however, unlike the Netherlands, the settlement would be binding only on those claimants who have already filed an individual claim.

Finally, the admissibility of the legal separation of joinder of claims in individual proceedings has been limited in order to encourage collective legal action of the investors as early as the court of first instance.

Major impact

It appears that, by extending the scope of applicability of the KapMuG and altering the different stages of the procedure itself, the reforms have made model case proceedings even more accessible and will lead to greater time and cost savings for claimants than before.

The most important revision, however, is the ability of claimants to register their claims and apply for model case treatment before eventually bringing the claims.

Claimants must apply within six months of the announcement for model case procedures in the public register of claims, indicating the reason and amount of the claim. Once the claimant has applied for and registered the claim, the limitation period is then suspended and only begins to run three months after the model case proceeding has been concluded.

Simply registering a claim before actually bringing it means that, under the new KapMuG, the claimant benefits from the suspended limitation period and the possibility of seeing the result of the model case proceeding prior to deciding whether to bring a claim. This leads to an inherent risk of abuse of such a system, a risk that has certainly been heightened by the recent reforms. As registration is cheap and generally low-risk, claimants can easily put pressure on defendants by encouraging as many registrations as possible.

The imbalance between claimants and defendants is further emphasized by placing defendants in a weaker bargaining position. Defendants need to act as if the registered claimants have already brought their claims, by checking all registered claims in order to evaluate risks. This task is made more difficult by the fact that the registered claims will only contain short statements; not enough for defendants to make a full evaluation of the merits of the individual claims.

Another important change made by the recent reforms concerns the regulation of settlements in the KapMuG. Until now a settlement was only possible if all parties agreed to the settlement; a requirement that was near-impossible to fulfil. Now, however, the Higher Regional Court must accept the settlement before it becomes effective. Once the settlement has been accepted, it binds all parties to the model case proceedings. Parties can decide to opt-out of a settlement, but must do so within a month of the Higher Regional Court's decision. A maximum of 30 percent of claimants can use their opt-out rights and withdraw from the settlement otherwise the settlement will be rendered ineffective.

The worry for defendants is that, if too many claimants opt-out, they cannot treat a settlement as the definitive end to a dispute. These claimants may decide to register again and bring a claim leading to another identical model case proceeding for the claimant. It will therefore only be advisable for defendants to settle when the effectiveness thereof will be high and will reach a high proportion of registered claimants.

What does the future hold?

The new KapMuG has been limited to the next eight years, and expires on 1 November 2020. This time around the trial period serves as a time of assessment and reflection. It can be expected that by 2020 the legislature will have decided whether or not to fully introduce model case procedures into the German law on civil procedure.

The report by the Frankfurt School of Finance & Management in 2009 stated that the benchmark for extending the scope of the KapMuG would be merely the question whether a cause of action is, at least partly, based on "generalisable" legal pre-requisites. They argued in particular that this allegedly applies best to product liability cases, where a product defect would easily be considered "generalisable". Whether such a development will occur in the future remains to be seen. What can be said with certainty is that the overall trend is moving towards a more claimant-friendly environment. The recent reforms are a further step in that direction.

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