Collective redress in Germany: The new Model Declaratory Action (Musterfeststellungsklage) - What you need to know

On 1 November 2018, the so called model declaratory action (Musterfeststellungsklage) entered into force in Germany. The model declaratory action is intended to facilitate collective redress for consumers in cases of mass damages caused by large companies.

The model declaratory action was introduced in the wake of the so-called Diesel emissions issue involving Volkswagen and other car manufacturers which became public for the first time in September 2015. Some commentators, thus, have already called the model declaratory action "Lex Diesel" or "Lex Volkswagen". In the view of the German legislator a large number of Diesel car owners hold claims against the relevant car manufacturers due to the Diesel emissions issue. The German legislator takes the opinion that so far there have not been effective procedural means for Diesel car owners to successfully assert and enforce their claims in court against the Diesel car manufacturers. The newly introduced model declaratory action is intended to change this.

1. Where are the new rules for the model declaratory action to be found?

The new rules for the model declaratory action can be found in the 6th Book of the German Code of Civil Procedure (ZPO) in sections 606 – 613.

2. What is the so called model declaratory action (Musterfeststellungsklage)?

The model declaratory action is a (purely) civil procedural law tool providing a new form of collective redress in Germany. It does not create any substantive rights or claims for consumers.

The model declaratory action cannot be initiated by individual consumers, but only by so-called qualified institutions. The model declaratory action follows a so-called "opt-in" approach: the initiation and conduct of the model declaratory action is the sole responsibility of the qualified institutions. The individual consumer is not (directly) involved in the initiation and conduct of a model declaratory action. The individual consumer can only apply for registration in the so-called register of action (Anmeldung im Klageregister) if he or she wishes to benefit from the effects of the model declaratory action.

The model declaratory action is – as its name already shows – designed as a declaratory action. The action's subject matter is the determination of the presence or non-presence of factual and legal prerequisites for the existence or non-existence of a claim or (another) legal relationship between a consumer and a company (so-called declaratory targets, Feststellungsziele). The court decision taken in a model declaratory action does not provide for an enforceable title against the defendant company. In order to obtain an enforceable title, the individual consumer must assert any of his or her claims against the defendant company in a separate subsequent dispute on the basis of the binding determinations made in the model declaratory decision.

3. Which institutions can take action?

Only so-called qualified institutions can initiate a model declaratory action. The aim of this limitation is to avoid a "lawsuit industry" like in the US.

Qualified institutions are mainly consumer associations. A total of 78 facilities are currently registered at the Federal Office of Justice (in a list introduced for the first time in 2007 as part of another law, the Act relating to an action for injunction, the UKlaG). These facilities include, for example, the consumer centres organised at state level and their federal counterparts (Verbraucherzentrale Bundesverband). Associations such as the ADAC, the Deutsche Mieterbund, the Bund der Energieverbraucher, the Bund der Versicherten and (Verbraucherschutz-)Vereine, as well as several tenant associations, the Verein Pro Rauchfrei and the Schutzvereinigung für Anleger are registered as well. The registration in the list held at the Federal Office for Justice alone does not confer to the institutions the right to bring a model declaratory action. In order to be allowed to raise a model declaratory action, the institutions must have in particular at least 350 individual members or 10 member federations and be registered for four years in the list held at the Federal Office of Justice.

The first model declaratory action against Volkswagen in connection with the Diesel issue has already been announced for 1 November 2018. It is the Federal Association of German Consumer Organisations (Verbraucherzentrale Bundesverband) in cooperation with the ADAC (German Automobile Club) who announced to initiate such model declaratory action.

4. What other requirements need to be fulfilled?

Moreover, a model declaratory action is only admissible if the qualified institution can substantiate that the claims or legal relationships of at least ten consumers depend on the so-called declaratory targets (Feststellungsziele) which are the subject matter of the model declaratory action and at least 50 consumers have effectively registered their claims within two months as of the official public notice of the action.

5. In which constellations could a model declaratory action be considered?

The filing of a model declaratory action could be considered in various different constellations. The model declaratory action is not limited to specific consumer-protective or consumer-law related claims.

A conceivable constellation – as for instance in the Diesel emissions issue context – could be that car owners may have claims against car manufacturers due to allegedly defective cars. It appears also possible, for instance, that a model declaratory action could relate to claims tenants may have against a landlord for e.g. unjustified rent increases; to claims insured persons may have against insurance companies, e.g. for unauthorized premature termination; to claims bank customers may have against banks, e.g. for unjustified account fees; to claims consumers may have against energy companies, e.g. due to an unauthorised increase of energy prices; to claims consumers may have against pharmaceutical companies, e.g. due to defective medical products; to claims consumers may have against telecommunication companies, e.g. if the download speed is not delivered as promised. On the basis of the General Data Protection Regulation (GDPR), which entered into force in May 2018, (immaterial) claims for damages by consumers directed against data protection infringements by companies could also be a potential subject matter of a model declaratory action.

6. How can individual consumers join the model declaratory action?

Any model declaratory action shall be made public in the so-called register of action (Klageregister). This public notice serves the purpose of informing consumers about the initiation of a model declaratory action. The individual consumer can "join" the action (albeit not directly) by registering his or her claims in the register of action. Legal representation by a lawyer is not required for the registration of a claim in the register of action. The model declaratory proceedings are conducted exclusively between the institution entitled to bring an action and the defendant company. The registration does not lead to a direct involvement of the consumer in the litigation and, thus, does not bear any costs risk for the consumer.

7. Which legal consequences does the registration of claims have?

The registration of the claims by the individual consumers has the consequence, in particular, that the statute of limitations of the claim is suspended and that the decision within the declaratory proceedings, i.e. the determinations made in respect of the relevant declaratory targets (Feststellungsziele), becomes binding in a subsequent action for damages.

8. Can damages be awarded in model declaratory actions?

Only certain factual or legal questions, which can be generalized, i.e. which are relevant for a large number of consumers, can be the subject matter of the model declaratory action. Individual questions, such as the causality or the damage of an individual consumer, must be clarified in a separate subsequent action after a final decision in the model declaratory proceedings. Therefore, no damages can be awarded in a model declaratory action. The consumer, who has registered his or her claims, must take separate action for performance against the defendant company after the completion of the model declaratory procedure. The determinations made by the court decision in the model declaratory action in respect of the relevant declaratory targets (Feststellungsziele) have binding effect in such a subsequent legal action.

9. Is the model declaratory action comparable to a US-style class action?

The model declaratory action is not a US-style class action. In a class action a person (class representative) sues in his own name for a whole group (class) of claimants (class members). The class representative claims a violation of his or her own rights as well as the violation of the class members' rights. The decision is binding for the individual members of the group, even if they have no knowledge of the proceedings (unless they have declared their withdrawal from the class (opt-out)). The individual members of the group participate in a potential award even if they have not actively participated in the proceedings. After the class action is completed, no further claims can (or need to) be asserted in individual follow-up proceedings. All this distinguishes a class action from a model declaratory action (as described in more detail above).

German law also differs from US law in other relevant respects: In particular, under German law no punitive damages are possible. Furthermore, there is no pre-trial discovery. It is precisely the possibility of punitive damages and the existence of discovery rules that make class actions in the US such a real threat for companies.

10. Are there other forms of collective redress in Germany?

German civil procedural law is tailored to a two-party proceeding. In order to involve third parties in the two-party proceedings, the German Code of Civil Procedure (ZPO) provides, among others, the joiner of parties (Streitgenossenschaft), the secondary intervention (Nebenintervention) and the procedural connection of proceedings (Verfahrensverbindung). For all practical purposes, however, these are not procedural instruments that would allow for a genuine form of collective redress.

In addition, in Germany and Europe the so-called assignment model is increasingly used as a form of collective law enforcement. Under such assignment model, potentially injured parties assign their claims to a special purpose litigation vehicle (often funded with litigation financing). The litigation vehicle – often in return for a profit-sharing bonus – then asserts the claims in its own name based on the assigned claims.

Outside the German Code of Civil Procedure (ZPO), German civil procedural law knows special forms of collective redress. These are the model investor proceedings under the so-called KapMuG and the association actions under the Act relating to an action for injunction (UKlaG) and the Act against Unfair Competition (UWG).

11. Is it possible to take separate individual actions in parallel to a model declaratory action?

In principle, separate individual actions by individual consumers may be brought in parallel to a model declaratory action.

Individual actions brought by a consumer prior to a model declaratory action will only be suspended by the court if the consumer registers his claim in the register of actions. If the consumer does not make use of the registration option, an individual action already filed does not need to be suspended if a model declaratory action is subsequently filed.

During the legal pendency of a model declaratory action a registered consumer may not bring an individual action against the defendant company. However, the consumer may withdraw his or her registration. Such an opting-out of the registration gives the consumer the right to bring an individual action. A prior suspension of an individual action will be reversed and the individual action will be continued.

12. Has the model declaratory action been subject to criticism during the legislative process?

The model declaratory action has been harshly criticized. Some criticize that there is no need at all for the introduction of the model declaratory action because there are no clearly identifiable deficits in legal protection for consumers. Conversely, supporters of the model declaratory action criticize that the model declaratory action does not offer sufficient legal protection for consumers. In particular, the admissibility threshold is criticized as being too high, as is the requirement for the right to bring an action or the number of persons that need to be affected. In addition, the design of the model declaratory action as a declaratory action and the need for separate subsequent damage actions by the individual consumers after completion of the model declaratory action is viewed to be problematic.

13. Will the model declaratory action change the landscape for collective redress in Germany?

It remains to be seen whether the model declaratory action will be a success. The first model declaratory action in matters of the Diesel emissions issue has already been announced for early November 2018. However, the criticism already expressed by some commentators during the legislative process about the effectiveness of the model declaratory action is justified in many respects. It, therefore, cannot be ruled out that the model declaratory action will turn out to be an ineffective tool for the protection of consumers.

The model procedure for investors under the so-called KapMuG – introduced in 2005 (and revised in 2012) – has also not been perceived as a success so far – particularly because of the long duration of individual proceedings.

Possibly the focus will soon be on Brussels. The EU-Commission's proposal for a directive to introduce a model performance action (instead of a model declaratory action) already goes well beyond the rules laid down in sections 606 ff. of the German Code of Civil Procedure.