courting trouble

How Germany's version of the class-action lawsuit functions

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If the suit fits. Source: AFP

Germany is agog as VW shareholders sue the company for failing to disclose its Dieselgate misdeeds sooner. To many abroad, that could look a bit like a class action. It isn’t, though Berlin is gradually moving to allow these, due to Dieselgate and the number of European consumers who haven’t been compensated.

But in the US, for 50 years, class actions have allowed a group of consumers to sue companies in a single legal proceeding brought by one or several plaintiffs. The resultant judgment or settlement then becomes valid for all members of the group or class.

But in Germany, there’s no way a group of consumers can sue a company. While VW has paid billions to settle class actions brought by angry car-owners in the US and Canada, 2 million German owners of the dirty diesels are fuming, empty handed. That is set to change in fall but until then, only investors get their day in court.

That’s because in the German legal system, the only group that can sue a company collectively is shareholders, thanks to a case involving Deutsche Telekom’s misbegotten IPO and a hoard of infuriated investors, in 2004. That led to a cumbersome process that bears only a limited resemblance to the US: plaintiffs can only sue as individuals and must demonstrate and prove their cases.

Back in 2004, 17,000 people sued Deutsche Telekom, the former monopolist provider of telecom services after its IPO failed to deliver. The company’s share price fell 78 percent and many lost cash they are still trying to recoup. The Frankfurt Regional Court was overrun as plaintiffs demanded compensation for what they felt was a misleading description in the prospectus.

That led to a change in the regulations, as lawmakers introduced the Lex Telekom, whose real name is the Capital Investor Model Procedure Act, or KapMuG. It gave investors a form of class action, though unlike in the US, each affected party must file a suit in their own name in order to benefit from the proceedings’ outcome.

Here, an investor, or model plaintiff, clarify a controversial question on behalf of others. That might be whether a statement in a sales prospectus for an IPO is incorrect or, as in the current VW case, whether the company informed capital markets too late about its cheat devices. If the court determines wrongdoing, then other investors can refer to that in their own cases. But each time, a judge must determine whether an individual plaintiff meets the necessary criteria to receive compensation.

If a large number of complaints are submitted to a regional court, the plaintiffs can apply for proceedings according to the KapMuG. If at least 10 plaintiffs want to pursue that model, they’re directed to a Higher Regional Court which appoints a model plaintiff and one or more model defendants.

All of the other plaintiffs who weren’t selected become joint plaintiffs in the main, “model” proceedings. That also means all of the proceedings at the initial regional court are suspended – including those involving plaintiffs who didn’t opt to be part of the group.

For the next six months, other shareholders who haven’t yet filed a lawsuit with the regional court can join the model proceedings by simply entering their names in a register. For this group, the statute of limitations is suspended, but they don’t have to file a suit.

Even after six months are over, shareholders can join the case by filing a complaint at the Regional Court, so long as the initial case isn’t statute-barred. The VW shareholders in Braunschweig have until year-end to do so. Such claims are then suspended until the model proceeding is concluded.

David, Goliath and bureaucracy

Germany’s model may seem cumbersome but one advantage is that in addition to the initial plaintiff, others involved can also submit information to the model proceedings, and contribute their own findings. That evens out the balance of power against a mighty opponent like a large corporation. Costs for the individual plaintiffs are also low. And while each only pays the fee for the first instance, they benefit from the judgement from the highest court.

Happily, for everyone in Braunschweig, the current VW case is less complicated than the Deutsche Telekom precedent, though it’s still expected to drag on for many years. That’s partly because the legal system doesn’t make enough people available to handle such complex proceedings, says Christian Wolf, professor of law at the University of Hanover.

The good news is that thanks to an amendment to the KapMuG, a settlement can also be concluded in the proceedings.

That doesn’t necessarily mean everyone can go home happy with a wad of cash. While the final decision is binding for all shareholders, that doesn’t spell a decision for the individual investor. Each plaintiff must prove their own individual loss and could also go home empty-handed, even if the investor who brought the suit wins the case. Even though those who joined in the six-month period benefit from the ruling, they still have to file a suit at the regional court level to prove to a judge they suffered similar damages.

Feel sorry for them? Recall the German owners of diesels cars. Only on November 1, the Bundestag will pass an act to introduce class-action style litigation. That’s more than three years after Dieselgate. The justice ministry expects 2 million claims against VW. But many more people may press suits related to other companies too.

Here too, though, the situation won’t match the US. Eager to avoid what Berlin sees as excesses in the system in the United States, under the new German law, plaintiffs must be represented by consumer protection associations.

The law requires such groups to have at least 350 members, and have been registered for at least four years. It would have to process 10 cases, then present a lawsuit to the court. Within two months, 50 people affected would have to sign up in order for the case to proceed.

Consumer watchdogs are already preparing accordingly, even if it is a class action suit with the brakes on.

Laura de la Motte covers finance for Handelsblatt. To contact the author: delamotte@handelsblatt.com

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