The Legal Tech Verband Deutschland (hereinafter “Association”) is 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 legal users, legal transactions and the legal system from unqualified legal services and strengthening the rule of law.
We would like to thank you for the opportunity to comment on the draft bill of the BMJV. In addition, we refer to our statement on the draft bill of the Federal Ministry of Justice and Consumer Protection for a law on the reorganization of the professional law of lawyers’ and tax consultants’ professional practice companies, as well as on the amendment of further regulations in the area of the legal professions, dated December 7, 2020, which is made in connection with the present statement.
Germany has an exciting and dynamic legal tech scene. It has given rise to 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 create effective access to justice (for example, helpcheck for life insurance rescission, myright for diesel plaintiffs, advocado or anwalt.de for brokering attorney services, Flightright for flight compensation, geblitzt.de for speeding tickets, wenigermiete.de for tenants’ claims, etc.). They enforce claims that individual consumers typically do not pursue in the conventional way 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 out of proportion to the amount of the claim (“rational disinterest”).
But it is not only in the area of “consumer debt collection” that innovative offerings 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). In addition, 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 when it comes to tapping the potential for innovation. Law firms have too little entrepreneurial freedom to make large technological investments and to offer certain consulting models at all. This also inhibits cooperation with platform operators who never 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” in December 2019, 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. This leads to considerable legal uncertainty, because the success of the enforcement of rights stands and falls with the permissibility of the business model. Even offerings that have no connection at all to the enforcement of claims, such as contract generators, challenge the current regulatory framework.
Germany is in danger of being left behind by the legal markets in the USA and Great Britain, because targeted scope for new legal advisory models has already been created there. According to the “Legal Technology” study by AGC Partners 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 security (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.). Stanford University’s online geographic overview “CodeX LegalTech” shows the USA as the clear world market leader and the UK as the European number 1.
II. To the draft of the BMJV
The BMJV has presented a draft aimed at promoting consumer-oriented offerings in the legal services market. The association welcomes some of the approaches in the draft bill. According to the plans of the Federal Ministry of Justice, legal tech providers with collection licenses will in future have to explain to consumers how a contingency fee is made up and what that means for them. Litigation funding and settlement agreements must also be explained. If a provider rejects a mandate, he must point out that there are other ways to enforce the claim. We see extending the information requirements for providers on their business models as a step forward. This also applies to the approach of creating more legal certainty for their activity and thus also for the recipients of legal advice in the course of registering non-lawyer providers by examining their business models. These approaches will open the door to a diverse structure of legal advice in which consumers can choose between different lawyer and non-lawyer offerings – depending on what they need.
With the draft, however, the BMJV moves too timidly in the direction of liberalizing the market for out-of-court legal services and leaves essential aspects unregulated, which we point out below.
The association calls for the creation of a new RDG permit for out-of-court legal advice, which can be used to create low-threshold legal advice offers in the out-of-court area that are secured by the proven regulatory mechanisms of the RDG. The association is also committed to freeing lawyers from the constraints of lawyers’ remuneration law and to ensuring a fair competitive relationship between law firms and legal tech companies by completely lifting the ban on the assumption of costs and the agreement of contingency fees for lawyers. Clarifications are needed in the area of debt collection services to clear up legal uncertainties. This concerns the scope of permitted activities under a debt collection permit (admissibility of litigation financing and bundling of receivables; collection of current and future receivables; irrelevance of the prospects of success of debt collection for the admissibility of debt collection). In view of the increasingly automated provision of services, it is also necessary to clarify that legal services provided in a fully or partially automated manner are also legal services and that the powers of the qualified person also extend to these forms of provision.
1. Creation of a new RDG permit for “out-of-court legal advice”.
The association advocates the creation of a new RDG permit term “extrajudicial legal advice” that covers legal services in all areas of the law, insofar as these are not reserved for lawyers.
Offers such as contract generators, which are on the borderline of the legal definition of legal services (OLG Cologne Smartlaw 2020), shed light on the tension between the current legal framework and society’s need for low-threshold and low-cost offers that facilitate access to law.
The introduction of the offence can also overcome the difficulties that have arisen when legal tech consulting models have overstretched the status of debt collection service provider. In recent years, non-lawyer actors working with client receivables have turned to the status of collection service provider because it is the only relevant alternative to providing legal services outside of law firms. The activities go beyond the actual enforcement of claims because they also include the issue of their origination, financing and strategic enforcement, and thus constitute a full range of consulting services. The Federal Court of Justice did, in the wenigermiete.de decision of November 2019, describe the combination of debt enforcement and litigation financing as “still” compatible with debt collection status. However, the ruling has also raised a number of questions that have caused legal uncertainty (for example, on the question of whether legal tech providers such as myright may bundle claims in the truck cartel or diesel complex via an assignment model by way of debt collection, how far their obligations to external financiers may go, and how the contractual options for enforcing settlements can also be structured vis-à-vis clients; see LG München I, final judgment of 7. 2.2020 – 37 O 18934/1; LG Hannover, judgment of 4.5.2020 – 18 O 50/16 “Zuckerkartell” (Kaufland); LG Ingolstadt (4th Civil Chamber), final judgment of 07.08.2020 – 41 O 1745/18; LG Braunschweig (11th Civil Chamber), judgment of 24.04.2020 – 11 O 3092/19). Legal certainty is needed here, which does not exist in particular in the combination between enforcement of claims and litigation financing.
Lawyers should reserve the right to take legal action in court. And legal acts that are subject to a certain form under German law anyway (e.g.: notarial form for the purchase of real estate, divorce by judgment, etc.) and thus serve to protect consumers are excluded from out-of-court legal advice anyway. Contract generators and individual contractual advice, on the other hand, are covered by the required permission. This achieves two goals. We are thus liberalizing and regulating out-of-court advice within the current legal framework. It does not have to be reserved for lawyers, but can also be opened up to other providers of legal advice (e.g. legal tech companies, legal protection insurers or providers of contract generators) and already takes place, although not in a regulated form so far (for example, online dispute resolution with Paypal, Moria).
The required changes to the RDG could read as follows (insertions highlighted):
“§ 10 Rechtsdienstleistungen aufgrund besonderer Sachkunde
(1) Natürliche und juristische Personen sowie Gesellschaften ohne Rechtspersönlichkeit, die bei der zuständigen Behörde registriert sind (registrierte Personen), dürfen aufgrund besonderer Sachkunde Rechtsdienstleistungen in folgenden Bereichen erbringen:
- Inkassodienstleistungen (§ 2 Abs. 2 Satz 1),
1a. Rechtsdienstleistungen in sämtlichen Gebieten des Rechts, soweit diese nicht Rechtsanwälten vorbehalten sind (außergerichtliche Rechtsberatung),
2. Rentenberatung auf dem Gebiet der gesetzlichen Renten- und Unfallversicherung, des sozialen Entschädigungsrechts, des übrigen Sozialversicherungs- und Schwerbehindertenrechts mit Bezug zu einer gesetzlichen Rente sowie der betrieblichen und berufsständischen Versorgung,
(3) Die Registrierung kann, wenn dies zum Schutz der Rechtsuchenden oder des Rechtsverkehrs erforderlich ist, von Bedingungen abhängig gemacht oder mit Auflagen verbunden werden. Im Bereich der Inkassodienstleistungen und der außergerichtlichen Rechtsberatung soll die Auflage angeordnet werden, fremde Gelder unverzüglich an eine empfangsberechtigte Person weiterzuleiten oder auf ein gesondertes Konto einzuzahlen. Auflagen können jederzeit angeordnet oder geändert werden. Ist die Registrierung auf einen Teilbereich beschränkt, muss der Umfang der beruflichen Tätigkeit den Rechtsuchenden gegenüber eindeutig angegeben werden.
§ 11 Besondere Sachkunde, Berufsbezeichnungen
(1) Inkassodienstleistungen erfordern besondere Sachkunde in den für die beantragte Inkassotätigkeit bedeutsamen Gebieten des Rechts, insbesondere des Bürgerlichen Rechts, des Handels-, Wertpapier- und Gesellschaftsrechts, des Zivilprozessrechts einschließlich des Zwangsvollstreckungs- und Insolvenzrechts sowie des Kostenrechts.
(1a) Außergerichtliche Rechtsberatung erfordert besondere Sachkunde in den für die beantragte Tätigkeit bedeutsamen Gebieten des Rechts.
The new legal service type of “out-of-court legal advice” should follow the proven regulatory framework of the RDG for debt collection service providers – albeit with stricter requirements with regard to the required expertise in the RDV. Particularly with regard to the requirements for liability protection under insurance law and conflicts of interest, it is possible to fall back on the regulatory regime already laid down in the RDG. However, higher requirements must be placed on proof of expertise than is currently the case for debt collection service providers in order to ensure the quality of legal advice outside the core area of debt enforcement.
Alternatively, we suggest that the establishment of so-called reallabs be made possible: In this way, the legislator could allow business models in the legal market – as is already the case today in other strictly regulated sectors nationally and internationally, including financial services, air transport or the medical professions – that are not permitted under current law or operate in gray areas to be tested under supervision. In this regard, the European Council recently published conclusions under the presidency of Germany that mention the legal market as an example of reallabs, cf. Council Conclusions on Reallabs and Experimentation Clauses as Instruments for an Innovation-Friendly, Future-Proof and Resilient Legal Framework to Address Disruptive Challenges in the Digital Age (Ref. 13026/20), https://data.consilium.europa.eu/doc/document/ST-13026-2020-INIT/de/pdf.
2. Exemption of lawyers from the restrictions of the law on lawyers’ remuneration
The draft bill provides for a limited opening of the legal remuneration law for lawyers. However, the proposed regulations are not sufficiently suitable to counteract the unequal treatment between lawyers and legal service providers in the design of their remuneration models. Only full equality of legal service providers and lawyers in the remuneration of legal services will make it possible to eliminate the regulatory asymmetries and the associated competitive disadvantages to which only lawyers are subject.
Since the Federal Court of Justice’s ruling on wenigermiete.de in November 2019, it is clear that legal tech providers operating as debt collection service providers and competing directly with law firms are not subject to any restrictions with regard to remuneration models vis-à-vis clients (contingency fee, commissions, litigation financing and borrowing). They often operate in the same market as lawyers, but have completely different economic conditions. This imbalance represents a considerable distortion of competition that lawyers do not have to accept. The resulting disadvantages for law firms ensure that attractive offers, especially for consumers, regularly arise outside of law firms, thus depriving lawyers of large portions of value creation.
The opening provided for in the draft bill is too timid and incomprehensibly denies lawyers access to economically attractive mandates due to the amount in dispute limit of EUR 2,000. Especially for amounts in dispute up to EUR 2,000, the litigation cost risk is disproportionately high and thus litigation financing is unattractive in many areas, especially since the determination of the amount in dispute is always associated with uncertainty from the lawyer’s point of view and is often only clarified subsequently by a court. In addition, the BMJV is torpedoing its own intention to achieve equal treatment between lawyers and non-lawyer providers (“coherence requirement”) by limiting the amount in dispute. 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.
3. Clarification of the scope of “debt collection
The draft bill does not affect the definition of debt collection. However, the Association sees the need to clear up the legal uncertainties presented in the area of debt collection. It should be clarified that both “present and future claims” are covered by debt collection; furthermore, that the bundling of claims for their enforcement is permissible in the context of debt collection; and finally, that the prospects of success of the out-of-court enforcement of claims are irrelevant for the permissibility of the legal service. This creates a consistent system of non-lawyer advice on monetary claims and overcomes the patchwork of the wenigermiete.de ruling.
An adaptation of Section 2(2) of the RDG could read (insertions highlighted):
“(2) Rechtsdienstleistung ist, unabhängig vom Vorliegen der Voraussetzungen des Absatzes 1, die Einziehung gegenwärtiger oder zukünftiger fremder oder zum Zweck der Einziehung auf fremde Rechnung abgetretener Forderungen, wenn die Forderungseinziehung als eigenständiges Geschäft betrieben wird (Inkassodienstleistung). Abgetretene Forderungen gelten für den bisherigen Gläubiger nicht als fremd. Mehrere Forderungen desselben Forderungsinhabers gegen denselben Forderungsgegner oder mehrere Forderungen verschiedener Forderungsinhaber gegen denselben Forderungsgegner, können, auch wenn sie auf verschiedenen Gründen beruhen, verbunden werden und gegen den Forderungsgegner zusammen geltend gemacht werden. Für die Annahme einer Rechtsdienstleistung nach diesem Absatz sind die Erfolgsaussichten der außergerichtlichen Forderungsabwicklung unbeachtlich.”
4. Clarification of the legal consequences of RDG violations for consumer protection
If legal tech companies are subjected to official scrutiny, this creates trust with users. The draft bill proposes to minimize disputes about legality by allowing the business models of legal tech and other non-lawyer providers to be legally examined by the RDG supervisory authority of the judicial administration – in contrast to the current practice – in order to take pressure off the judicial disputes about the business models. Up to now, the RDG supervisory authority has been limited to examining a few formal requirements (reliability, liability insurance, training), but is not allowed to examine business models substantively. The approach of relieving the burden of civil disputes in the enforcement of claims is correct. However, the decision of the RDG supervisory authority must be more closely interlinked with the providers’ duty to provide information than has been the case in the draft bill so far (only “secondary duties” are mentioned here, and the concept of a “factual effect” of the RDG registration does not appear at all in the draft bill). In addition, the RDG supervisory structures (i.e., in particular the judicial administration) must be unified and strengthened with resources and legal and technical know-how so that they can fulfill this task.
However, the law should also provide greater protection for the interests of consumers. Violations of the RDG by legal service providers must not result in such serious consequences for consumers as total loss of rights or litigation. The formula developed by the Federal Court of Justice in the decision on wenigermiete.de that only “clear and not merely minor” violations of the Legal Services Act should result in the nullity of the legal transaction (Section 134 of the German Civil Code) leads to difficulties of interpretation and, as a result, burdens the consumer with the risk that legal services are provided in violation of the provisions of the RDG. Consumers are often unable to judge whether or not a registered legal service provider is operating within the boundaries of the Legal Services Act. If business models change after registration or if the accusation of a violation of the Legal Services Act relates to the specific application of individual general terms and conditions, the factual effect of the registration procedure could also fail to adequately protect consumers.
However, this problem can be solved by the legislative clarification that RDG violations do not lead to the invalidity of the assignment of the claim or to the loss of the active legitimation in the process. A corresponding new regulation should read:
“§ 13f Rechtsfolgen von Verstößen
(1) Verstöße registrierter Personen gegen dieses Gesetz lassen die Wirksamkeit etwaiger Abtretungen von Rechtsuchenden an die registrierte Person im Zusammenhang mit dessen Tätigkeit für den Rechtsuchenden unberührt. Das gleiche gilt für die Aktivlegitimation der registrierten Person.
(2) Eine Anrechnung erbrachter Leistungen findet bei der Rückabwicklung nichtiger Verträge nicht statt. Der Einwand der Entreicherung ist ausgeschlossen.”
This prevents consumer claims from being lost (for example, due to the statute of limitations). At the same time, registered providers can be prevented from profiting from infringements. Therefore, the invalidity of the assignment itself, and the resulting loss of remuneration claims, if any, remains quite possible.
5. Admissibility of the combination of litigation financing and legal services
The assumption of cost risks by the legal service provider and the agreement of success-based remuneration are important and legitimate elements of a consumer-friendly legal market. So-called “no win, no fee models” help consumers overcome a central obstacle to the use of legal services, create equality of arms vis-à-vis economically overpowering opponents, and thus make a significant contribution to improving access to justice or making it possible in the first place.
However, the assumption of cost risks has met with criticism in the case law of the courts and is attacked with the argument that the simultaneous provision of legal services and the assumption of cost risks may constitute a conflict of interest within the meaning of Section 4 RDG.
The Association believes it must be made clear that such a contractual arrangement does not create a conflict of interest as long as the interests of the individual seeking justice are adequately considered.
A corresponding clarification in Section 4 RDG should read (insertions highlighted):
“§ 4 Unvereinbarkeit mit einer anderen Leistungspflicht
Rechtsdienstleistungen, die unmittelbaren Einfluss auf die Erfüllung einer anderen Leistungspflicht haben können, dürfen nicht erbracht werden, wenn hierdurch die ordnungsgemäße Erbringung der Rechtsdienstleistung gefährdet wird. Die Übernahme von Kosten, die Vereinbarung eines Erfolgshonorars und die gemeinsame Geltendmachung oder Abwehr von Forderungen mehrerer Forderungsinhaber gelten nicht als Gefährdung der ordnungsgemäßen Erbringung der Rechtsdienstleistung, solange die Interessen des einzelnen Rechtsuchenden angemessen berücksichtigt werden.”
6. Automated legal services
The added value of legal tech business models often lies in the fact that legal services are provided in a fully or partially automated manner. The association sees a need to reflect the increasing degree of automation of legal services in the regulations of the Legal Services Act in two respects:
The definition of legal services in Section 2 (1) RDG does not apply to automated forms of offers. It is conceivable, however, that the admissibility of highly technical offers could be attacked with the argument that the subsumption required for the individual case examination within the meaning of Section 2 (1) RDG could only be provided by humans. To counter this danger, the admissibility of automated legal services should be clarified by the legislator.
A correspondingly new § 2 para. 4 RDG could read (insertions highlighted):
(4) Eine vollständige oder teilweise Automatisierung steht der Annahme einer Rechtsdienstleistung nicht entgegen.
In addition, it should be clarified in the Legal Services Act that the powers of the qualified person as well as their independent status also extend to automated legal services.
For this purpose, Section 12 (4) RDG could be amended as follows (insertions highlighted):
“(4) Juristische Personen und Gesellschaften ohne Rechtspersönlichkeit müssen mindestens eine natürliche Person benennen, die alle nach Absatz 1 Nr. 1, 1a und 2 erforderlichen Voraussetzungen erfüllt (qualifizierte Person). Die qualifizierte Person muss in dem Unternehmen dauerhaft beschäftigt, in allen Angelegenheiten, die Rechtsdienstleistungen des Unternehmens betreffen, einschließlich der Rechtsdienstleistung nach § 2 Absatz 4, weisungsunabhängig und weisungsbefugt sowie zur Vertretung nach außen berechtigt sein. Registrierte Einzelpersonen können qualifizierte Personen benennen.”