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One year of Model Declaratory Action in Germany – taking stock and outlook

13 November 2019 | Germany
Legal Briefings – By Tilmann Hertel and Mathias Wittinghofer

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Fuelled by revelations consequent of the Volkswagen diesel emissions technology cases, the German legislator hastily introduced a new law on Model Declaratory Action (Musterfeststellungsklage). This denotes an important step by the German legislator into the direction of collective redress in B2C relationships. The Model Declaratory Action entered into force one year ago, on 1 November 2018. Its first anniversary warrants a first review.

Following a reminder of the essential elements of the Model Declaratory Action, Tilmann Hertel from our Frankfurt office will take stock of cases that have been brought to date, noting their key elements. It transpired that the Model Declaratory Action is no lex Volkswagen but instead has a wider remit of application and claimants are likely gearing up for further actions, as will be laid out in an outlook of what companies may potentially expect in the future.

The main features of the Model Declaratory Action

By way of reminder, here is a snapshot of the main features of the Model Declaratory Action:

  • B2C relationship: the Model Declaratory Proceedings are only available in business to consumer scenarios.
  • Limited group of potential claimants: in order to pre-empt a potential misuse of the Model Declaratory Action for the own financial interest of those bringing the claim, the group of potential claimants is restricted to so-called qualified institutions, such as consumer associations. These have to fulfil a number of requirements such as, amongst others, that the claimant organisation does not pursue its own financial interest but rather serves the consumer's interests. Only qualified institutions are allowed to bring a Model Declaratory Action.
  • Low thresholds for bringing a claim: the thresholds for bringing a claim are low. A qualified institution has to substantiate that 10 consumers are affected and within two months following the registration of the Model Declaratory Proceedings, a minimum of 50 have to register their alleged claims in a claims register.
  • Consumers can register their claims: consumers are not directly involved in the proceedings, they have no standing and will not be heard. Consumers however benefit from the Model Declaratory Action by registering their claims online. Provided that the consumer's claim rests on the same grounds as that of the Model Declaratory Action, this has mainly two effects: firstly, the limitation period is suspended for the duration of the Model Proceedings and secondly, the declaratory judgment is binding between the consumer and the defendant company.
  • No award of damages: As indicated by its name, the Model Declaratory Action is not aimed at awarding damages to the individual consumer. It rather aims at bringing about a decision on overarching issues of fact and/or law which are relevant in a multitude of cases. This is done by way of a declaratory judgment. In order to be awarded damages, each consumer stills needs to bring a stand-alone claim before the German courts.

Cases within the last 12 months

One year later, where is this new form of collective redress now? Did it fulfil expectations? Have any major issues been revealed? By now, five Model Declaratory Actions have been brought:

  • The action against Volkswagen, which was brought on 1 November 2018 before the Braunschweig Higher Regional Court, is the most prominent. The action concerns the allegedly illegal engine management software in particular Volkswagen diesel engines. The Federation of German Consumer Organisations filed a claim on behalf of around 470,000 registered diesel customers who feel deceived by Volkswagen and seek compensation. The first hearing only took place a few weeks ago, which gives an indication that this action will drag on for quite some time in its first instance. We are likely to see this matter last a substantial period of time as VW has already indicated that it is willing to take the case to the Federal Supreme Court. According to press articles, Volkswagen has an interest in prolonging the proceedings since this reportedly reduces Volkswagen's potential exposure (case docket: 4 MK 1/18).
  • The latest registered claim was filed by the Consumer Organisation of Sachsen at the end of October 2019 before the Dresden Higher Regional Court against the credit institution Stadt- und Kreissparkasse Leipzig, a state-owned bank. The subject matter relates to an interpretation of the bank's standard terms and conditions concerning specific fixed income products. According to the claimants, the consumers affected had, on average, suffered damages of up to EUR 6,000 (case docket: 5 MK 1/19).
  • The first judgement in Model Declaratory Proceedings was rendered against Max-Emanuel Immobilien GmbH by the Munich Higher Regional Court on 15 October 2019. A regional tenants association (DMB Mieterverein München) had filed a claim on behalf of more than 130 tenants of a housing estate in Munich in relation to an increase of their monthly rent (case docket: MK 1/19).
  • Schutzgemeinschaft für Bankkunden e.V. has to date been the most active claimant. Its first Model Declaratory Action was brought against Bisnode Deutschland GmbH, a rating agency. The claim is based on the allegation that the defendant misrepresented ratings for a number of registered bonds, profit participation rights and subordinated loans which were the basis for an investment decision taken by consumers. The proceedings are pending before the Frankfurt Higher Regional Court (case docket: 24 MK 1/18).
  • Another action brought by the same Schutzgemeinschaft für Bankkunden e.V. on the revocation of consumer loan agreements with Mercedes Benz Bank was dismissed as inadmissible by the Stuttgart Higher Regional Court after the first oral hearing. The court ruled that Schutzgemeinschaft für Bankkunden e.V. did not comply with the criteria imposed on a qualified institution under the Model Declaratory Action Act. In the court's view, the claimants has not been able to prove that it has the required number of members to be regarded as a representative of consumers, that it performs its statutory tasks, that it pursues consumer interests largely through non-commercial educational or advisory activities and finally, that it does not raise the Action for the purpose of making a profit (OLG Stuttgart, judgment dated 20 March 2019, case docket: 6 MK 1/18).
  • In another action brought by the Schutzgemeinschaft für Bankkunden e.V., that was filed before the Braunschweig Higher Regional Court against Volkswagen Bank, the court declined to even accept the Model Declaratory Action since the claimant failed to demonstrate that it was a qualified institution (OLG Braunschweig, decision dated 12 December 2018, case docket: 4 MK 2/18).

Based on these cases, the following observations can be made:

  • Higher demand was expected: First of all, as matters currently stand, there is relatively little use of the Model Declaratory Action. This is in particular so if one considers that the legislator expected that approximately 450 Model Declaratory Actions would be filed per year, with, on average, approximately 75 consumers participating in a Model Declaratory Action.
  • Registration of claims: It seems as if the online registration of claims is a challenge for consumers. Since a consumer may only benefit if the subject matter in the Model Declaratory Proceedings is aligned with the consumer's alleged claim, a certain level of legal analysis and understanding is required. It appears, though, that more fundamental aspects also cause difficulties: For example, regarding the Model Declaratory Action against the Mercedes Benz Bank AG, roughly 10 percent of the approximately 600 consumers that had registered actually sought to register claims against Volkswagen since they had bought a Volkswagen car. Altogether, the court determined only approx. 140 of the approx. 600 registrations as presumably effective.
  • Admissibility: It seems that German courts carefully consider whether those bringing the claims fulfil the requirement of a qualified institution. Where the courts are not satisfied that the claimant associations truly pursue the rights of consumers, but instead seem to have their own financial interest in the litigation, the Model Declaratory Actions are terminated. This may deter others from pursuing a similar strategy.
  • Strategic tool for consumers: It has been criticised that consumers may exploit the Model Declaration Action by registering claims just to buy time (because of the tolling effect) to prepare their own claim. As a matter of fact, consumers can de-register until the end of the first oral hearing. In the case against Volkswagen, claimant firms were actively encouraging consumers to de-register and pursue their alleged claims individually. This has to be seen against the expected duration of the Volkswagen Model Declaratory Action where it took the court almost one year to hold the first oral hearing. The impression many observers have is that consumers will arrive at a solution quicker in stand-alone claims. In cases of less complexity, like in the case decided by the Munich Higher Regional Court, a judgment can however be expected fairly quickly.

What the future may bring?

While, in terms of numbers of proceedings, the German legislator may have been overly optimistic, it is safe to assume that Model Declaratory Actions will find its place in dispute resolution in Germany. When more judgments are handed down, potential claimants will operate on a more steady ground than today. Moreover, the numerous German consumer organisations that historically have been active in the field of consumer protection will make increased use of the Model Declaratory Action. In doing so, they will likely focus on the enforcement priorities which, for a number of years, have been in the field of banks and financial institutions, insurance, electricity and gas, telecommunication, airlines and the travel industry. According to recent press reports, one of the consumer organisations is assessing a potential claim against Thomas Cook's German insolvency insurer. Companies should therefore keep an eye on the developments in Germany.

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