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10.01.2024 | KPMG Law Insights

The new class action as an alternative to mass proceedings

In some cases, defective products, data protection violations or breaches of antitrust law lead to mass lawsuits. The many proceedings challenge the courts, which have to decide on each claim individually. A lawsuit is often a financial risk for consumers. The legislator had already reduced this risk with the model declaratory action. Consumer associations can assert the determination of the existence or non-existence of factual and legal prerequisites for the existence or non-existence of claims or legal relationships (declaratory objectives) between consumers and a trader. Nevertheless, individual victims must subsequently sue for damages individually. This is now changing with the class action.

On July 7, 2023, the Bundestag passed the Act on the Implementation of EU Directive 2020/1828 on representative actions for the protection of the collective interests of consumers(Representative Actions Directive Implementation Act – VRUG). The centerpiece of the law is a new Consumer Rights Enforcement Act (VDuG), which came into force on October 12, 2023 and was announced on October 13, 2023 has come into force.

With the newly introduced redress action, qualified consumer associations and consumer centers can bring similar performance claims by consumers against a company directly before the courts. The redress action is intended to relieve the burden on the judiciary, the economy and consumers and avoid millions in legal costs.

These are the key points of the new form of action:

 

These associations are entitled to sue

Pursuant to Section 2 VDuG, the bodies that have been designated by the Member States are entitled to bring an action. These include consumer associations that are entered in the list in accordance with Section 4 of the Injunctions Act and do not receive more than 5% of their financial resources from donations from companies. In addition, qualified entities on the European Commission’s list pursuant to Art. 5 para. 1, p. 4 of the EU Directive on representative actions.

It is not only the interests of consumers that can be asserted, but also those of small businesses. These are companies that employ fewer than ten people and whose annual turnover or annual balance sheet does not exceed two million euros.

 

Then a class action is admissible

Pursuant to Section 4 VDuG, the body entitled to bring an action must credibly demonstrate that the redress action affects the claims of at least 50 consumers or that the claims or legal relationships of at least 50 consumers depend on the objectives of the declaratory judgment. This is because the subject of the representative action is the interests of the affected consumers who actively participate in the representative action (opt-in procedure). Consumers can still join the class action up to two months after the first date of the court proceedings.

Pursuant to Section 3 VDuG, the Higher Regional Court in whose district the general place of jurisdiction of the defendant company is located is responsible for the representative action.

 

Consumers’ claims must be similar

Pursuant to Section 15 VDuG, a class action is only admissible if the claims are of a similar nature. This presupposes, firstly, that the claims are based on the same facts or on a series of comparable facts and, secondly, that the same questions of fact and law are relevant to the decision. The question of whether claims can be assessed as similar is already being discussed. The explanatory memorandum speaks of the similarity of consumer claims in factual terms. Examples of this are the cancellation of a specific flight or the conclusion of contracts with the same general terms and conditions.

If, on the other hand, the facts of life differ considerably, the claims are not of the same nature. This is the case, for example, if not all products in a series are defective and it must be clarified in each individual case whether the specific product purchased is actually defective or not. The same applies if it is important whether the consumer was aware of a certain circumstance when the contract was concluded. Claims are not similar even if different legal issues need to be clarified for the decision, for example whether claims are time-barred or not.

The three phases of the court proceedings

The court proceedings are divided into three phases:

In the first phase, the association entitled to bring an action can obtain a basic remedial judgment that declares the liability of the company sued to be justified on the merits and sets out specific parameters for calculating consumer claims.

In the second phase, the so-called settlement phase, the parties should seek an amicable agreement on the settlement of the legal dispute.

If the parties do not reach a settlement, the third phase follows, which ends with a remedial judgment by the court. A trustee is appointed to implement the remedial judgment. If the action for redress is upheld, the consumers affected by the action receive the amount of money to which they are entitled directly from the administrator. It is then generally no longer necessary to file an additional individual action.

 

Implementation is carried out by a trustee

The trustee appointed to implement the remedial judgment sets up an implementation fund into which the convicted company must pay the amount determined by the court. The trustee checks the individual eligibility of the consumers concerned and is entitled to request evidence and explanations in this regard. Justified consumer claims shall be satisfied by him or her. If the trustee determines that the amount awarded by the court is not sufficient to satisfy the justified claims, the court may subsequently increase the total collective amount appropriately upon application.

Consumers may appeal against the decision of the administrator within four weeks. The objection must be addressed to the custodian in text form and must state the reasons. The objection decision is not subject to judicial review. However, if it rejects the claims of consumers, they still have the option of bringing an individual action against the company.

The implementation procedure ends with a final invoice or a final report, which is reviewed by the court. Any judicial objections must be rectified. Only then does the court determine the termination of the transposition procedure.

The class action can also end with a settlement

The representative action can also end with a settlement that has effect for the consumers registered in the register of representative actions. A settlement requires the approval of the court in accordance with § 9 VDuG. However, consumers can declare their withdrawal from the settlement within a period of one month after notification of the settlement in the class action register.

 

Suspension of the limitation period only for claims registered in the register of collective actions

The provision on the suspension of the limitation period for redress and model declaratory actions corresponds to the previous provision for model declaratory actions. The representative action has the effect of suspending the statute of limitations, but only for those persons who have effectively registered their claims or legal relationships in the register of representative actions. The limitation period is always suspended for the entire claim, irrespective of whether the claims are asserted in full or only in part by the action for redress.

 

What the representative action means for companies

Compared to mass actions, class actions are much more efficient for the defendant companies and can save costs. At the same time, however, the hurdle for individual consumers to assert their claims is also being lowered. It remains to be seen to what extent consumer associations will make use of the new form of action and whether mass proceedings can actually be avoided.

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