Collective redress in Germany for cartel damages claims

With its recent decision in the financialright case[1] the highest German civil court, the Federal Court of Justice (Bundesgerichtshof, “BGH”), clarified that the bundling of claims through an assignment to a legal service provider, the so-called assignment model, is allowed under German law. The importance of this judgment cannot be overstated as it finally ends a legal battle over the legality of the assignment model that has dragged on for years, and provides for the assignment model as a way of collective redress in Germany.

I. Assignment model

Germany still lacks a general system of collective legal redress. Both the German legislator and the German courts have historically been opposed to provide for real collective redress out of fear of importing “US style class actions,” which were deemed incompatible with the fundamental principles of German law.

Only relatively recently were certain model proceedings for aggrieved consumers or certain investors who have suffered financial losses introduced in German law, but these procedures still have considerable room for improvement in terms of efficiency and clout.[2] In particular, the model declaratory action that was introduced in 2018 has proven highly ineffective because (i) only consumers can join such an action and (ii) because it is only a declaratory action, consumers still would have to bring individual claims for payment.[3]

Thus, in recent years, the bundling of claims by way of assignment has increasingly become a workaround to provide for collective redress in the absence of (opt-in) class actions.[4] Under this model, individual claimants assign their damages claims to a specialized legal service provider. The legal service provider then bundles the claims and pursues them in its own name. In doing so, the provider bears all costs associated with the enforcement of the claims and, in return, receives a success fee. Particularly in larger cases, the legal service provider enters into a funding agreement with a litigation funder which in turn receives a share of the potential earnings. In addition, the plaintiff side not only pools their claims, but also gains expertise, extensive data and negotiating leverage with the help of scaling effects.

On this basis, legal service providers have brought very large lawsuits in Germany against VW in the emissions scandal, as well as against producers of trucks for their involvement in the trucks cartel.[5] In the VW emissions scandal, the legal service provider financialright bundled the claims of about 45,000 consumers. In the trucks cartel, financialright brought cartel damages claims in two lawsuits involving 200,000 trucks and about 8,500 assignors.

The popularity of these assignment model cases has shown that there is a real need for collective redress in Germany as aggrieved parties otherwise very often do not have a way of enforcing their claims – in particular given the (high) costs of litigation that often are disproportionate to the damage suffered. The cost (risk) of asserting even a substantial claim can quickly far exceed the amount claimed, especially with respect to cartel damages claims. Consequently, it can be rational to refrain from individually asserting even a six- or seven-figure claim (so-called rational disinterest).[6] This applies all the more since the defendants, as so-called repeat players, can scale very efficiently in such a mass damage matter, and can thus make an effort in each individual case that would be unreasonable for an individual plaintiff to match.

II. Challenges

Whereas the admissibility of the assignment model as such previously was not called into question (provided that the legal service provider had adequate funding),[7] this changed with financialright’s case against VW. As was revealed by the German newspaper DER SPIEGEL, VW had retained numerous German law professors to write scholarly papers setting out why a litigation model such as financialright’s allegedly violated the German Legal Services Act.[8] Some of these law professors – in violation of scientific standards – did not disclose that they had been retained by VW.

Largely based on these scholarly papers, a number of German lower courts held that the assignment model was invalid, dismissing the claims brought by financialright as well as by other legal service providers.[9] Specifically, the courts ruled on the basis of differing reasoning that the assignment model violated the German Legal Services Act:

• Some courts reasoned that the bundling of claims was an atypical activity compared with traditional debt collection and thus not allowed under the Legal Services Act.[10]
• Other courts held that a legal service provider was not allowed to bring claims in court if it was clear from the outset that the claims could not be enforced out-of-court.[11]
• A number of courts held that a legal service provider was not allowed to enforce claims governed by foreign law, or claims in specific areas of the law such as cartel damage claims, as these claims were considered too complex to be enforced by legal service providers.[12]
• Finally, courts also found a conflict of interest on the part of the legal service provider – either because customers would not receive individualized legal advice or because the legal service provider might favor itself or certain assignors, even though there was no actual evidence of such behavior.[13]

Some courts gave the impression that they were looking for an easy way out to a potentially burdensome case with thousands of transactions at issue. Other courts were sceptics of anything that deviated from a traditional two-party trial or involved legal tech and/or litigation funding.

Despite this resistance, however, those that considered the assignment model to be permissible were always predominant. The latter were able to rely not least on the case law of the Federal Constitutional Court (Bundesverfassungsgericht, “BVerfG”).[14]

III. BGH judgments in Lexfox and AirDeal cases

The BGH had already clarified in a number of decisions between 2019 and 2021 in the so-called Lexfox and AirDeal cases that legal service providers could bring cases in court, work on a contingency basis, and bring bundled claims.[15]

In particular in the AirDeal decision, the BGH acknowledged the advantages of bundling claims.[16] Customers could profit from the fact that their provider handled a large number of similar cases and gained from the resulting economies of scale and increased professionalism. In addition, the pressure on the opponent to enter into negotiations increased. The court declared that theoretical disadvantages of such bundling – such as the individual case enjoying somewhat less weight or attention – would not justify a prohibition of this approach. This was especially the case because many injured parties would otherwise not have exercised their rights at all.

Following the AirDeal judgment, numerous Courts of Appeals ruled that the assignment model was valid and did not violate the Legal Services Act.[17] However, some courts did not relent and dismissed bundled claims, deeming the assignments to be null and void. These courts deemed the BGH decision in AirDeal to be limited to the circumstances of that case and did not allow for the bundling of hundreds or thousands of claims,[18] and determined that the bundling of such cartel damages claims was too demanding and complex to be handled by a legal service provider.[19]

IV. Financialright decision – finally, all settled

With its recent financialright decision, the BGH has now settled all outstanding questions regarding the permissibility of the assignment model.[20] Indeed, the BGH made it clear that it considered the permissibility of the assignment model to be "beyond doubt."[21]

The case only caught the attention of the highest German court because the approximately 2,000 bundled claims belonged to assignors from Switzerland. Until the financialright decision, the BGH had not considered whether debt collection provider could also enforce claims governed by foreign law. The BGH answered this specific question in the affirmative, and also opined on all other reasoning that courts have relied upon in dismissing claims brought under an assignment model.

A. Bringing claims in court allowed.

The BGH started by declaring that an assignment model was allowed under German law regardless of whether the claims were to be enforced predominantly or exclusively in court.[22] The court thus rejected the reasoning by some lower courts that a legal service provider had to try to settle claims out-of-court before being allowed to bring claims in court.

B. Bundling of a large number of claims.

In the financialright case, the legal service provider had bundled around 2,000 claims. The BGH made it clear that legal service providers were also allowed to bundle large numbers of claims, so there is no upper amount of claims that can be brought.[23]

C. Special areas of law and foreign law.

The BGH also held that legal service providers were allowed to enforce claims based on foreign law (such as Swiss law in the case at issue). The BGH then went even further, making it clear that legal service providers are not limited to bringing cases only in certain areas of the law. According to the BGH, legal service providers can bundle and enforce all claims, regardless of whether the assessment of the claim is based on foreign law or any other law foreign to classical debt collection providers.[24] With this clarification, the BGH has dismissed the reasoning by some German courts[25] that legal service providers cannot bundle cartel damages claims for lack of specific knowledge of antitrust law.

D. No conflict of interest.

The BGH also held that there was no conflict of interest between the legal service provider’s obligations towards the assignors on the one hand and the litigation funder on the other.[26] The BGH acknowledged that all involved parties have similar interests – namely to recover as much money as possible. A structural conflict of interest could only arise if the litigation funder had significant influence over the litigation. Mere information obligations on the part of the legal service provider did, however, not lead to a conflict of interest.

Finally, the BGH emphasized that the mere fact that multiple claims were bundled did not lead to a conflict of interest as regards a legal service provider’s obligations towards an individual assignor. In particular, the BGH dispelled the idea that the bundling of allegedly heterogeneous claims would create such a conflict of interest.[27] The BGH stressed that while it cannot be excluded that a joint settlement would lead to the individual claimant getting less than otherwise, this possibility is outweighed by the fact that bundling the claims increases the likelihood of successful enforcement of the claims by significantly lowering the costs and increasing the bargaining power of claimants.[28] In fact, even if the claims at issue were heterogeneous, it would not lead to a conflict of interest because the legal service provider had undertaken contractually only to group similar claims together.

V. Summary

The BGH’s recent financialright decision is a welcome resolution for the assignment model under German law. While the favorable judgment was not a surprise, in view of previous decisions of the BGH, it was much needed as a number of lower courts seemed to have misunderstood – or perhaps disregarded – the BGH’s earlier decisions in this respect. The financialright judgment is particularly helpful, however, because it speaks in very clear language, and unambiguously dispels the last remaining arguments against the assignment model.

The assignment model will most likely play a much more important role in the future than it has so far. This means that the German courts will have to embrace this model and embrace ways to deal with the large number of claims that can be bundled in such an assignment model action. While the German Rules of Civil Procedure already now provide courts with the procedural means to deal with a large number of claims, many German courts so far have exhibited a rather conventional approach to these cases. It remains to be seen whether the courts will finally embrace the options they have effectively to handle such mass actions or whether the legislator will need to step in to simplify the practical handling of such large cases.

Either way, the BGH’s financialright judgment has made it clear that collective redress is here to stay in Germany.

*Dr. Alex Petrasincu is Managing Partner in Düsseldorf and Berlin and Dr. Christopher Unseld is Senior Associate in Berlin.

Footnotes

[1]  BGH Judgment, 13. June 2022, VIa ZR 418/21 – financialright.
[2]  For an overview see Halfmeier, Collective Litigation in German Civil Procedure, in Fitzpatrick, B. & Thomas, R. S. (eds.), The Cambridge Handbook of Class Actions, Cambridge 2021, p. 233.
[3]  It remains to be seen how Germany will implement the Directive (EU) 2020/1828 on collective actions by consumer associations. To date, no draft legislation has been presented. In the government coalition agreement, the German government had also promised to strengthen collective legal protection for companies.
[4]  See Krüger/Weitbrecht, Mass Claims 2021, 37; Petrasincu/Unseld, NJW 2022, 1200.
[5]  In 2016 and 2017 the European Commission (Case AT.39824) had fined Europe’s main truck manufacturers, MAN, Volvo/Renault, Daimler, Iveco, DAF, and Scania, for breaking EU antitrust rules. They colluded for (at least) 14 years on truck pricing and on passing on the costs of compliance with stricter emission rules.
[6]  This was elaborated in Petrasincu/Unseld, NZKart 2021, 280, 281.
[7]  Cartel Damage Claims (CDC) failed with a lawsuit against participants in the so-called cement cartel because - according to an affidavit submitted by the company itself - the claimant was originally not in a position to meet the other party's claims for reimbursement of costs in the event of a defeat in court. See District Court Dusseldorf Judgment, 17 December 2013, 37 O 200/09 (Kart) – Zementkartell (CDC); Court of Appeal Dusseldorf Judgment, 18 February 2015, VI-U (Kart) 3/14 – Zementkartell (CDC).
[8]  See DER SPIEGEL, 6 April 2019, p. 68.
[9]  See, e.g., District Court Munich I Judgment, 7 February 2020, 37 O 18934/17; District Court Hanover Judgment, 1 February 2021, 18 O 34/17; District Court Ingolstadt Judgment, 7 August 2020, 41 O 1745/18; District Court Augsburg Judgment, 27. October 2020, 11 O 3715/18; District Court Stuttgart Judgment, 20 January 2022, 30 O 176/19.
[10]  See District Court Hanover Judgment, 1 February 2021, 18 O 34/17 and District Court Stuttgart Judgment, 20 January 2022, 30 O 176/19.
[11]   District Court Munich I Judgment, 7 February 2020, 37 O 18934/17; District Court Hanover Judgment, 1 February 2021, 18 O 34/17; District Court Augsburg Judgment, 27 October 2020, 11 O 3715/18.
[12]   Court of Appeal Brunswick Judgment, 7 October 2021, 8 U 40/21 (on foreign law); District Court Hanover Judgment, 1 February 2021, 18 O 34/17 and District Court Stuttgart Judgment, 20 January 2022, 30 O 176/19 (on cartel damage claims).
[13]   District Court Munich I Judgment, 7 February 2020, 37 O 18934/17.
[14]   See BVerfG Decision, 20 February 2002, 1 BvR 423/99 – Inkasso I.
[15]   The leading decisions are BGH Judgment, 27 November 2019, VIII ZR 285/18, BGHZ 224, 89 – Lexfox I; BGH, 27 May 2020, VIII ZR 45/19, BGHZ 225, 352 – Lexfox IV; BGH Judgment, 13 July 2021, II ZR 84/20, BGHZ 230, 255 – AirDeal.
[16]  BGH Judgment, 13 July 2021, II ZR 84/20, BGHZ 230, 255 – AirDeal. See also https://www.hausfeld.com/de-de/was-wir-denken/competition-bulletin/the-i-airdeal-i-ruling-german-federal-court-of-justice-strengthens-collective-redress-in-germany.
[17]  This included Courts of Appeals in Munich, Stuttgart, Celle, Dresden Nuremberg, Oldenburg, Cologne, Thuringia and Berlin. For a summary see Petrasincu/Unseld, NJW 2022, 1200.
[18]  Court of Appeal Schleswig Judgment, 11 January 2022, 7 U 130/21.
[19]  District Court Stuttgart Judgment, 20 January 2022, 30 O 176/19 – Rundholzkartell, see Petrasincu/Unseld, WuW 2022, 384 for a critical review of the decision.
[20]  BGH Judgment, 13. June 2022, VIa ZR 418/21 – financialright.
[21]  BGH Judgment, 13. June 2022, VIa ZR 418/21 – financialright, para. 11.
[22]  BGH Judgment, 13. June 2022, VIa ZR 418/21 – financialright, para. 11, referring to BGH Judgment, 13 July 2021, II ZR 84/20 – AirDeal, para. 16.
[23]  BGH Judgment, 13. June 2022, VIa ZR 418/21 – financialright, para. 14.
[24]  BGH Judgment, 13. June 2022, VIa ZR 418/21 – financialright, para. 23 et seq.
[25]  See, e.g., District Court Stuttgart Judgment, 20 January 2022, 30 O 176/19 – Rundholzkartell, Petrasincu/Unseld, WuW 2022, 384 criticizing this approach.
[26]  BGH Judgment, 13. June 2022, VIa ZR 418/21 – financialright, para. 17-8.
[27]  BGH Judgment, 13. June 2022, VIa ZR 418/21 – financialright, para. 50 et seq.
[28]  BGH Judgment, 13. June 2022, VIa ZR 418/21 – financialright, para. 51.