Statement on the draft law of the parliamentary group of the FDP for the modernization of the legal services law (BT-Drucks. 19/9527)

I. Introduction

Germany has an exciting and dynamic legal tech scene. It has spawned novel, innovative legal services that lead to faster and more effective results in certain areas. Non-lawyer providers that specialize in enforcing consumer rights and take the cost risks off their shoulders on a commission basis to do so are creating effective access to justice (for example, helpcheck for life insurance rescission, myright for diesel plaintiffs, advocado or anwalt.de for brokering attorney services, Flightright and others for flight compensation, geblitzt.de for speeding tickets, wenigermiete.de for tenant claims, etc.). They enforce claims that individual consumers typically do not pursue with lawyers because they are dealing with seemingly overpowering opponents (e.g., airlines, landlords, government agencies, etc.) or because the cost risks of legal proceedings are disproportionate to the amount of the claim (“rational disinterest”).

But it is not only in the field of “consumer debt collection” that innovative offers are emerging. Law firms are also turning to the use of technology (e.g., in handling mass legal proceedings, increasing efficiency in law firms, dealing with redundant legal issues, and developing innovative advisory products for clients). And completely new providers are entering the legal services market (e.g., providers of mediation platforms for legal services and operators of “self-service offerings” such as contract generators).

Both groups – lawyers and non-lawyer legal tech companies – face enormous regulatory hurdles in Germany in tapping the potential for innovation. In law firms, there is too little entrepreneurial freedom of movement to be able to handle large technological investments and offer certain consulting models at all (no third-party participation opportunities, no commission models, no success fees). This in turn also inhibits cooperation with platform operators, who are never allowed to appear in court themselves. And “outside”, in the non-lawyer structures, there is a lack of legal certainty in the question of what legal tech is actually allowed to do. It is true that in the dispute over “wenigermiete.de “1 in December 2019 – and thus after the FDP bill – the Federal Court of Justice confirmed that with a debt collection permit, far-reaching legal services are possible in the enforcement of monetary claims, including litigation financing. However, it is unclear which specific business models are permissible.2 This leads to considerable legal uncertainty, because the success of the enforcement of rights stands and falls with the permissibility of the business model.3 Offers that have no relation to the enforcement of claims at all, such as contract generators4 , also challenge the current regulatory framework.

Germany is in danger of being left behind by the legal markets in the United States and the United Kingdom, where targeted scope has already been created for new legal consulting models. According to AGC Partners’ “Legal Technology” study from April 2017, around USD 750 million has been invested in legal tech in the USA since 2012, partly because the business models described here have the necessary regulatory certainty (Legalzoom: USD 100 million, most recently financed with a further USD 500 million in July 2018, Avvo USD 132 million, Rocket Lawyer USD 72 million, and most recently United Lex with a USD 500 million investment from CVC). By comparison, the three largest recent investments in Germany were Medienunion’s acquisition of Flightright (transaction amount unknown) and the funding rounds of German providers Advocado (2018), wenigermiete.de/Lex Fox (2019) and rightmart/Atornix (2019), each under €10 million, according to market data. The market is also much more developed in the UK, especially since the Legal Services Act greatly liberalized the legal framework for law firms back in 2007 (participation rights for non-lawyers; IPOs for law firms, etc.). The geographic online overview “CodeX LegalTech” by Stanford University shows the USA as the clear world market leader and Great Britain as the European number 1.

The Legal Tech Verband Deutschland is therefore committed to shaping a progressive and innovation-friendly regulatory environment that creates legal certainty for legal tech ventures inside and outside law firms. In doing so, the association is guided by the goal of protecting law seekers, legal transactions and the legal system from unqualified legal services and strengthening the rule of law.

The association welcomes the initiative of the FDP parliamentary group to take legislative measures to modernize the law on legal services.

II. On the regulations in detail

Article 1 – Amendment of the Legal Services Act

The Legal Tech Association Germany is in favor of introducing a statutory provision in the Legal Services Act (RDG) for legal tech services. However, the offence should not – as the FDP proposes – be linked to the “automation” of service provision, but to safeguarding the quality of legal services and improving access to justice. This may often be accompanied by gradual automation of processing, but it is not a prerequisite for the business models.

Substantiation:

The way extrajudicial legal services are regulated in Germany dates back to a time when only lawyers were trusted to provide advice. It no longer does justice to the technical possibilities with which access to low-threshold advice can be provided today. However, the legal framework does not have to be reinvented. It can be

It can be adapted with a few tweaks to leverage the development potential of the new, non-lawyer counseling models.

The FDP’s draft law chooses the debt collection offense of the Legal Services Act (RDG) as a model for the legal framework of any legal consulting outside of law firms. This approach is correct, because the RDG provides for a number of measures that are already used to adequately regulate legal advice (mandatory liability insurance of the provider, requirements for training of the provider, requirement of a “qualified person” as a liability subject, administrative law instruments of the supervisory bodies). The set of instruments has proven itself overall, but needs to be expanded in individual places.

Permission for Automated Legal Services

Despite the Federal Court of Justice’s decision on wenigermiete.de, legal tech companies registered as debt collection service providers do not have a secure legal basis for providing their legal services today. It is unclear, for example, whether claims may be asserted and negotiated in bundled form; whether this may be combined with litigation funding; and what the scope of the collection authorization is in connection with the exercise of structuring rights and the defense against unjustified claims. From the point of view of those seeking legal services, it makes no difference whether a claim only needs to be enforced – or whether it is created by the legal service provider (for example, consumer revocation) or even whether a claim against the consumer is to be defended against (for example, in the case of cosmetic repairs). And even forms of offering that cannot be reliably classified under one of the permissible categories according to the current legal situation need legal certainty in the provision of their services. This applies, for example, to providers of contract generators that generate standard contracts for specific use cases on the basis of user input.5

The association is convinced that it can in fact make no difference to the admissibility of non-lawyer legal advice whether a legal service concerns the enforcement of a claim (“debt collection”) or completely different legal services. It can only matter whether the quality of the legal service is guaranteed by adequate safeguard mechanisms. Therefore, the draft law is welcomed.

However, the RDG permit should not – as proposed by the FDP – be linked to the degree of automation of the offer (“automated legal services”, Section 10 (1) sentence 1 number 4 RDG-E). Legal tech companies (and law firms) hardly ever offer fully automated services, but predominantly partially automated services. If one considers the protective purpose of the RDG (“protection of the law-seeker”, Section 1 (1) sentence 2 RDG as well as the explanatory memorandum to the RDG, BT-Drs. 16/3655), it is also not the degree of mechanization that matters – rather, the quality of the legal service must be guaranteed by adequate security mechanisms and access to justice must be facilitated. This may often be accompanied by gradual automation of processing, but it is not a prerequisite for the business models.

The clarification in the draft bill that RDG violations by registered persons do not affect the validity of the legal service contracts concluded by them (Section 13a (5) RDG-E) is justified for the protection of legal seekers. In the defense of claims asserted by legal tech companies, there are increasing disputes about the business models of legal service providers (for example, alleged conflicts of interest in the combination of debt collection and litigation financing)6. In order to be able to guarantee legal certainty for legal tech companies and legal seekers, any transgressions of the permission and violations of the provisions of the Legal Services Act must not lead to the invalidity of the contractual basis with the legal seeker. It is true that the Federal Court of Justice clarified in its decision on wenigermiete.de that only significant RDG violations should lead to a nullity of the contractual agreement. However, it has not yet been clarified when an RDG violation is significant. The competent RDG supervisory authority has an effective set of instruments at its disposal for taking action against legal violations, including the prohibition of offers (Section 13a RDG).

Article 2 – Amendment of the Federal Lawyers’ Act

The Legal Tech Verband Deutschland supports the FDP’s proposed amendments to the Federal Lawyers’ Act.

Justification:

The proposed amendments address the current unequal treatment between lawyers and collection service providers. Lawyers are subject to considerable restrictions in the design of their remuneration models and in the acquisition of mandates. This puts them at a competitive disadvantage compared to debt collection companies, which pay commissions for identifying clients and are also allowed to make so-called “no win, no fee” promises,

with which legal seekers are enabled to pursue legal action without cost risks in return for a share of the proceeds. The proposed new version of Section 49b BRAO strikes a balance by also offering lawyers the opportunity to act in return for a contingency fee, to assume the costs of legal prosecution for clients and to pay referral commissions in the run-up to the award of a mandate.

There is no reason to deny lawyers success-based remuneration models due to their prominent position as “organs of the administration of justice”. In particular, there is no

the danger that lawyers advise against the interests of their own clients on the basis of their own economic interests. In the case of “no win, no fee” models, the interests of both the lawyer and the client are equally focused on the successful enforcement of the claim.

The law governing the legal profession also offers a high level of protection to ensure independent and high-quality legal services (law firm organization, independence requirement, duty of confidentiality, prohibition of representing conflicting interests, and much more). For this reason, lawyers are also trusted elsewhere when it comes to reconciling their own economic interests with the interests of the client (e.g. when it comes to assessing the prospects of success of an appeal or concluding a settlement that can earn another fee).

Article 3 – Amendment of the Civil Code

1. adaptation of the law on general terms and conditions (section 309 numbers 16 and 17 BGB-E)

The Legal Tech Verband Deutschland supports the proposed amendments to the AGB law.

Justification:

The amendments address key problems that legal seekers face in enforcing their rights under current law. Smaller consumer claims in particular must be easy to realize. However, companies often rely on clauses that prohibit legal seekers from assigning their claim to a third party or even from being represented by a third party to have a deterrent effect on the enforcement of claims. These measures serve to dissuade claimants from enforcing justified claims. Under German law on general terms and conditions, provisions that unreasonably disadvantage consumers are not permitted. Without an explicit legal clarification, this must be demonstrated in each individual case. The proposed regulations address the structural imbalance.

2. adaptation of the formal requirements (section 174 (2) and section 410 BGB-E) 

Legal Tech Verband Deutschland also supports the proposed adaptation of the formal requirements in the German Civil Code.

Justification:

Legal seekers are looking for an uncomplicated and fast way to assert rights. In order to offer low-threshold access to justice, it must also be possible to commission lawyers and legal service providers online. Typically, the assertion of claims is associated with a power of attorney and, in many cases, the assignment of a claim. However, the electronic form (Section 126 (3) in conjunction with Section 126a of the German Civil Code (BGB)) fails to reflect the reality of life. A qualified electronic signature can at best be used in corporate legal transactions. The security requirements and the costs involved are out of all proportion to the legal transaction in question. Systematic recourse to the addressed formal requirements is often instrumentalized to defend claims. According to an evaluation by the air passenger rights portal Flightright, around sixty percent of the largest air carriers invoke alleged non-compliance with statutory form requirements – both out of court and in civil proceedings.

The proposed regulations solve this problem by allowing text form to suffice in connection with notification of authorization and assignment, thereby promoting access to justice.

Article 4 – Amendment of the Code of Civil Procedure

Legal Tech Verband Deutschland also supports the proposed amendment to the Code of Civil Procedure.

Justification:

The proposed amendments result from the introduction of the new legal service provider type and extend the procedural representation powers already applicable to debt collection service providers in the area of dunning and enforcement proceedings to persons providing automated legal services.

III. Concluding remarks

The FDP parliamentary group’s draft bill addresses key obstacles that legal service providers inside and outside of law firms face in current law and that hinder effective access to justice.

The Legal Tech Verband Deutschland supports the introduction of an RDG permit that would provide legal certainty for providers of innovative legal services and give those seeking justice easy access to the law. However, the offence should not be linked to the “automation” of the service, but to the safeguarding of the quality of the legal service and to an improvement in access to justice.

The draft of the FDP parliamentary group also consistently develops the regulatory framework of the RDG and transfers the proven instruments for ensuring high-quality legal services to the newly created provider form. In addition, the clarification that violations of the RDG do not affect the validity of the contractual agreement between the person seeking legal advice and the legal service provider makes an important contribution to consumer protection and at the same time contributes to legal certainty on the part of the provider.

The proposed adjustments to the attorney compensation regulations are also justified. Allowing commission models and the possibility of cost absorption creates equal opportunities between lawyer and non-lawyer legal service providers. The regulations of the law governing the legal profession provide a guarantee for independent and high-quality legal services.

With the proposed amendments to the law on general terms and conditions and the formal requirements of the Civil Code, the draft law responds to consumer needs and prevents abusive strategies for defending legitimate claims.