The Legal Tech Verband Deutschland comments on the reform laws passed by the Federal Cabinet on January 20, 2021

Today, the German government passed draft legislation to promote consumer-friendly offerings in the legal services market and to revise the professional law governing legal and tax consulting firms. These bills deal with the regulation of the legal advice market.

The Legal Tech Association Germany: a first step into the future of the legal market!

  • More legal certainty for legal techs working with collection registration
  • other legal tech providers are left out (contract generators, lawyer referral platforms) – we need a factual basis for out-of-court legal advice
  • Lawyers only get a small contingency fee – that’s good, but it’s just the beginning for new fee and financing models!

More legal certainty for legal techs working with collection registration

The bill is an important step for more legal certainty for legal tech providers operating with a debt collection registration. Some courts of instance (Munich, Augsburg, Ingolstadt, Hanover) had recently denied the right to represent consumers to litigation vehicles such as myright and financialright in the truck cartel and diesel cases, citing the lack of a “collection-type” approach.

The bill now clarifies that legal techs may bundle claims by way of assignment as litigation vehicles and that their business models are not limited to out-of-court enforcement of claims. It is also now clear that they may bundle litigation financing with claims enforcement if they keep external financiers out of actual litigation management.

The bill also aims to prevent business models from failing in the civil enforcement of consumer claims, thereby jeopardizing the rights of claim holders. For this reason, the judicial authorities are to examine the providers’ business models, and this examination can have a binding effect (“factual effect”) in subsequent civil proceedings for the enforcement of claims. This is also a step forward, because it creates legal confidence in the business models. In practice, the judicial supervisory authorities will have to adjust to the task of adequately examining the business models. And an overly administrative supervisory structure that creates more legal certainty but inhibits innovation through cumbersome auditing must be avoided. Supervision must be limited to the core elements of the business model and must not jeopardize business secrets.

The definition of “debt collection

One sticking point in the Lexfox ruling of the Federal Court of Justice (wenigemiete.de) of November 2019 is the question of what else can be defined as “debt collection” – and thus also permitted for non-lawyers. The draft law aims to reduce this legal term to the actual enforcement of claims, and to allow advice beyond this as an ancillary service (Section 5 RDG) to be examined by the supervisory authority. The draft thus relaxes the legal concept, which today must be used for almost everything that is not legal advice from a lawyer. However, the amendment must not lead to the restoration of the “old regime” between lawyers and the rest of the world.

Because from the client’s point of view, it makes no difference whether their legal advisor enforces a claim (permitted in the future), participates in its creation (ancillary service?) or, for example, merely defends third-party claims (not permitted) – what matters is whether the quality of the legal advice is assured and the financial outlay is in reasonable proportion. In some areas of law, non-lawyer players have proven that they have a firm place in the German consulting landscape for years (air passenger compensation, rent brake, speeding violations, Hartz IV notices, protection against dismissal, diesel compensation, etc.). It is often small claims that lend themselves to scaled processing.

Legal tech without collection registration?

The draft has no answer for new providers on the legal services market that have nothing to do with “debt collection,” i.e., the enforcement of monetary claims. For example, providers of mediation platforms for legal services such as advocado or operators of “self-service offerings” and contract generators (for example, Smartlaw). But they also need a reliable legal framework. They serve a social need for low-threshold, low-cost services that facilitate access to justice. There is a need for a new legal services act (RDG) that regulates legal services in all areas that are not reserved for lawyers.

Lawyers get a contingency fee

And the lawyers? They will be able to offer contingency fees of up to EUR 2,000 for court proceedings and unlimited fees for out-of-court cases. This is a first step toward finally giving lawyers in Germany the freedom to set their own fees. This is because the rigid statutory rates of remuneration often do not bear a reasonable relationship to the clients’ cost risks or to the opportunities for a more flexible distribution of risk in the mandate. The association therefore welcomes the introduction of contingency fees.

However, the opening provided for in the draft law is too timid. It denies lawyers access to economically attractive mandates in legal disputes because of the threshold of EUR 2,000. Particularly for amounts in dispute up to EUR 2,000, the litigation cost risk is comparatively high, making litigation financing unattractive in many areas. In addition, from a lawyer’s point of view, the determination of the value in dispute is always associated with uncertainty and is often only clarified subsequently by a court. In addition, by limiting the amount in dispute, the German government is torpedoing its own intention to achieve equal treatment between lawyers and non-lawyer providers (“coherence requirement”). This is because legal techs – unlike lawyers – are also allowed to act as litigation financiers in court disputes without a limit on the amount in dispute, and of all things use lawyers for their own business there. Why does the draft bill trust lawyers with less professionalism in dealing with litigation financing than debt collection service providers?

The Association is of the opinion that this unequal treatment can only be resolved by a complete deletion of the ban on the agreement of contingency fees and the assumption of costs.

We also call for law firms to be opened up to external investors – an issue that the draft law does not address and which must be added in the course of parliamentary referral. The development of legal tech business models involves significant investment. Raising capital is therefore a key factor. However, lawyers are still not allowed to take on third parties as shareholders under the major BRAO draft. Instead, pure professional practice companies without the possibility of third-party participation will be retained. Third-party investors, however, will not agree to invest in companies in which they do not have a stake and whose entrepreneurial orientation they cannot help shape. Under the conditions of the draft presented, innovative legal service offerings could be developed primarily outside of law firms, and large portions of value creation would not be opened up to lawyers or would be lost.

Comments Off on the November 2020 Consumer Propositions Act: https://www.legaltechverband.de/2020/12/07/stellungnahme-zum-referentenentwurf-eines-gesetzes-zur-foerderung-verbrauchergerechter-angebote-im-rechtsdienstleistungsmarkt/

Statement on the BRAO reform of November 2020: https://www.legaltechverband.de/2020/12/07/stellungnahmezum-referentenentwurf-eines-gesetzes-zur-neuregelung-des-be-rufsrechts-der-anwaltlichen-und-steuerberatenden-berufsausuebungsgesellschaften-sowie-zur-aenderung-weiterer-vorschriften-im-b/

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