Expert Hearing on May 5, 2021 in the Committee on Legal Affairs and Consumer Protection of the German Bundestag
Statement by Dr. Philipp Plog
The Legal Tech Association has only existed since last year, but already brings together a number of different market players united by the desire to open up the legal market in a fair and reasonable way (including. Flightright, Right-Now, advocado, Allianz, ARAG, Soldan, myRight, Klugo, rightmart, Advocard, help-check, Jurpartner, Fieldfisher and many others) – they are mainly law firms, legal protection insurers, debt collection service providers, lawyer mediation platforms, providers of contract generators and software and media companies. It is the only association in Germany that brings together players in the legal market, regardless of their professional sector, in order to leverage the enormous potential of technology for the further development of legal advice. The members of the Legal Tech Association in particular have significantly improved access to law in some areas of law.
THE FEDERAL GOVERNMENT’S LE-GAL TECH REFORM PROJECT
The association supports the German government’s reform project. It wants to establish a fair playing field between the various providers of legal services in the Legal Services Act, the Federal Lawyers’ Act and the Legal Remuneration Act.
In its statement on the draft bill of December 7, 2020, the Association called for much more far-reaching measures to open up the legal market. However, the current reform package also contains elementary progress (see the statement of January 6, 2021), which must now be implemented – and which can be further developed in future reforms (see the statement of March 24, 2021).
MORE LEGAL CERTAINTY FOR NON-LAWYER PROVIDERS, MORE FREEDOM FOR LAWYERS
The reform brings an urgent improvement in legal certainty for legal tech offerings that operate as debt collection service providers. Some courts of instance had recently denied providers such as myRight, Cartel Damage Claims and financial-right the right to assert the claims of injured parties in their own name in the truck cartel, diesel lawsuits, sugar cartel and other civil law disputes.
The assignment of the claims was deemed invalid by these courts of instance because they were based on a “business model that is not typical for debt collection. Numerous claimants are now left with nothing, even though they have transferred claims to re- gistered and licensed providers. The bill finally clarifies that claims by injured parties may be bundled and financed, and that these business models may not be limited to out-of-court enforcement of claims. This part of the reform is absolutely indispensable, because otherwise hundreds of companies and thousands of German consumers will lose their claims. For the same reason, however, it is also urgently necessary to add one point to the draft law. It must be clear that a future legal deficiency in a business model – for example, exceeding the consulting authority as a debt collection service provider – does not automatically jeopardize the claims of its customers (a suggested wording for this follows in this opinion).
A second important point of the bill is the introduction of success fees for lawyers. They will be able to offer contingency fees and litigation funding up to 2000 euros in dispute value in court proceedings and unlimited in the non-judicial area. This is a first step toward giving lawyers in Germany more freedom to structure their work. Because often the rigid lawyer remuneration rules prevent a reasonable solution for the cost risks of the mandators. The association therefore supports the introduction of contingency fees. However, further steps will be necessary.
BUNDLING OF CLAIMS AND LITIGATION COST FINANCING
Easier access to legal advice is the central social advance embodied by legal tech: Many consumers, but also many companies, do not even assert their claims for damages if they would have to enforce them on their own. They rightly shy away from the cost risk and the uncertain prospects of success (“rational disinterest”, see for example EU Commission, “Study on the current level of protection of air passenger rights in the EU”, MOVE/B5/2018 – 541, page vii). While in the past legal practice was often characterized by a “David versus Goliath situation”, by bundling their claims, the injured parties can act on an equal footing with the opposing parties (cartelists, vehicle manufacturers, lessors, etc.). They benefit from the expertise of legal service providers who bundle numerous cases and create negotiating power. The use of software and the associated evaluation of data is elementary for this.
Legal tech offers and other providers such as Flightright, wenigermiete.de, Deutsche Bahn, myRight or Cartel Damages Claims are pushing into this legal protection gap with commission models. For a compensation claim in the amount of 250 euros due to a delayed flight, no affected person goes all the way to the Federal Court of Justice. This is because his risk of litigation costs in the first instance is more than 500 euros – the costs he would have to pay for lawyers on both sides and for the court in the event of defeat. Flightright has used such models to obtain approx. 180. Flightright has won around 180,000 judgments in favor of passengers before German district courts, and has also driven forward the case law of the highest courts on the issue of “force majeure” in flight delays, in eight ECJ cases (ECJ C-274/16, 32-16, 501-17, 532-17, 130-18, 274-16, 286-19 and 810-19) and a further eight BGH decisions (BGH X ZR 78/15, 128/18, 165/18, 102/16, 106/16, 76/16, 12/18, 93/18, 43/18 and 123/17). Similar successes exist for other legal service providers in other areas of law, for consumers as well as for commercial claimants.
It is only fair that legal service providers receive a provisi-on from claim holders in the event of success in court. In the case of a claim in the amount of EUR 250 and a contingency fee of 30 percent, the claim holder will receive a claim reduction of EUR 75 in the event of success – but only then. This is economically more sensible than accepting a litigation cost risk of EUR 500.
In recent years, the realization that there are enforcement deficits has also become more firmly established at the political level. Against this background, measures to improve access to justice for consumers were set out in the coalition agreement. These include the introduction of a model declaratory action (Koaliti-onsvertrag für die 19. Legislaturperiode, p. 124 ff.). But this instrument is not a panacea for the far-reaching problems of law enforcement. Firstly, because it is not suitable for similar but not identical factual constellations (such as rent control, flight delays, life insurance, regulatory offenses, traffic accidents, etc.); and secondly, because consumers are left to fend for themselves financially in the second stage of this procedure, when they have to sue for payment following the judicial determination.
In addition, neither the model declaratory action nor the consumer association action are available to injured entrepreneurs. But companies are also in need of protection, as the current disputes in the truck cartel, the sugar cartel or the roundwood cartel show (Frankfurter Allgemeine Zeitung, March 5, “Cartel suits against Daimler expanded”). If the bundled assertion of such claims before German courts is not provided with legal certainty, they will increasingly migrate – as is already the case – to Holland and Great Britain, where German companies will then have to defend themselves.
THE DANGEROUS SITUATION OF LEGAL TECH PROVIDERS IN GERMANY
Recently, the German civil courts have frequently rejected the business and remuneration models of legal tech companies. They argue that the most diverse business models are “no longer typical of debt collection” (§ 3 RDG) because they are not limited to out-of-court efforts to enforce claims. Or it is claimed that a provider is already subject to a “conflict of interest” because of the involvement of external litigation financiers or because of the bundling of different claims (§ 4 RDG). This is where the biggest problem lies in dealing with the diesel complex, the truck cartel, the sugar cartel and generally in disputes involving a large number of injured consumers or companies in Germany (LG München I, judgment of February 7, 2020 – 37 O 18934/17; LG Augsburg, judgment of October 27, 2020 – 11 O 3715/18; LG Han-nover, judgment of October 27, 2020 – 11 O 3715/18; LG Ingolstadt, judgment of August 07, 2020 – 41 O 1745/18). For example, in the truck cartel, the Regional Court of Munich has put forward the thesis that the provider Financialright, which represents around 3,500 aggrieved companies in Europe against one of the largest European cartels of all time, is subject to a “conflict of interest” because it does not work “efficiently” due to the bundling of claims (LG München I, loc. cit., p. 142 of the reasons for the judgment). It is possible that the courts, which have reached their limits in terms of personnel and organization due to the number of cases, sometimes see the assumption of an alleged construction error as a way out in order to let court proceedings fail due to the active legitimacy of the plaintiffs – and without consideration of the individual claims.
This case law has created a conflagration in numerous areas of law because many consumers and entrepreneurs have previously transferred their claims to registered and licensed legal service providers. The bill now finally clarifies that claims by injured parties may be bundled and financed, and that these business models are not limited to out-of-court enforcement of claims. How strong the position of a litigation financier may be in an individual case rightly remains a judicial question of the individual case. The legal clarity that the bill would bring about is absolutely elementary in order to get a grip on the current legal uncertainty – especially for the numerous injured parties. This reform is therefore indispensable.
LEGAL CONSEQUENCES OF RDG VIOLATIONS BY LEGAL ADVISORS LIMITED (§§ 4 RDG, 134 BGB AND 13 F PARAGRAPH 1 RDG-E)
However, there is one adjusting screw that still needs to be tightened. The draft law should clarify that any deficiencies in the business models do not automatically jeopardize customers’ claims. This is because, according to the case law of the German Tax Court, violations of the RDG can jeopardize the existence of the claims of the injured parties (§§ 3, 4 RDG, 134 BGB). This imposes the risk of a third-party business model on consumers in particular who seek legal assistance. Their claims may be time-barred, for example, if a civil court comes to the conclusion in the course of the proceedings that the business model is open to challenge. This has dramatic consequences for the aggrieved parties: If the assignment of their claims fails after the fact, the consumers and companies affected face total economic loss due to the statute of limitations.
In this way, a protective provision for consumers and those seeking justice – the provision on conflict of interest in Section 4 RDG – is reinterpreted as a protective provision for cartelists and other infringers of the law. This cannot be correct. It violates the principle of abstraction, is disproportionate especially in the case of § 4 RDG and may violate the property guarantee of the injured party under Article 14 GG (Stadler: Verbrau-cherschutz durch die erneute Reform des Rechtsdienstleistungsgesetzes? VuR 2021, 123, 126 f.; cf. also Grunewald, in: BeckOK RDG, Status 01.04.2020, § 4 Rn. 31 m. w. N.; Morell, NJW 2019, 2574, 2576 et seq.; Skupin, GRUR-Prax 2020, 116). myRight alone represents around 35,000 consumers who are seeking damages for the purchase of a car with pollutant software or thermal windows before German courts and are now threatened – overnight, so to speak – by the statute of limitations for their claims. The same applies to companies that have been damaged by cartels that have already been established by the authorities and are now demanding economic compensation in so-called follow-on proceedings (sugar cartel: CDC approx. 300 million euros, Kaufland approx. 15 million euros in damages; truck cartel: myRight approx. 900 million euros, Elvis approx. 89 million euros in damages, plus Deutsche Bahn and others; air freight cartel: Deutsche Bahn approx. 3 billion euros in damages; log cartel: approx. 830 million euros in damages from various plaintiffs – all figures from market data and rounded).
Thus, the concern of protecting consumers and injured companies is turned upside down. The drastic legal consequence is inappropriate, because “[the] function of the debt collection permit to create clarity in legal dealings would be endangered if [inadmissible] legal advice could result in the invalidity of the assignment” (BVerfG in NJW 2002, pp. 1190, 1192). However, nullity is also unnecessary because it is possible to limit the impact of any deficiencies in the business models on the remuneration of the providers of legal services. In addition, the German government’s draft bill now introduces an administrative law instrument for the supervisory authorities that can be used to get a grip on legal advice providers and their business models (Section 13 RDG-E).
SUGGESTED WORDING FOR THE LEGAL CONSEQUENCES OF RDG VIOLATIONS
The Association therefore proposes a legislative clarification in the third section of the RDG (for example as a new § 15 RDG) that RDG violations (in particular due to conflict of interest according to § 4 RDG) do not lead to the invalidity of the assignment of the claim or to the loss of the active legitimation in the process. The wording reads:
“(1) Violations of this Act by registered persons shall not affect the validity of any assignments of legal claims to the registered person in connection with his activity for the legal claimant. The same shall apply to the registered person’s right to conduct legal proceedings and to be an active participant in legal proceedings.
(2) The services rendered by the registered person shall not be credited in the event of rescission of void contracts. The registered person’s objection to the discharge pursuant to Section 818 (3) of the Civil Code shall be excluded.”
The wording would prevent claims of injured parties from being lost (for example, due to the statute of limitations). At the same time, however, the wording also avoids registered providers profiting financially from violations of the RDG. Therefore, the invalidity of the assignment remains possible (and with it the loss of remuneration claims of the provider).
Insofar as the provider duly fulfills the information requirements vis-à-vis the person seeking legal assistance, a conflict of interest, e.g. due to the agreement of a contingency fee, the involvement of a litigation financier or the regulation on the conclusion of settlements, should be ruled out anyway. This is because it is precisely these performance characteristics that come to the attention of both the supervisory authority and the purchaser of the service in the course of the initiation of the mandate and the administrative review of the business model (“registration”) (Section 13 (5) RDG-E), with binding effect for subsequent civil law disputes (“effect of the facts”, Item II.2.c of the explanatory memorandum to the draft bill).
INTRODUCE A SUCCESS FEE FOR LAWYERS (§ 4A RVG-E)
The draft law wants to open up the BRAO and the Lawyers’ Remuneration Act a little in view of the strict ban on contingency fees at this point. Lawyers are to be allowed to offer contingency fees and litigation financing in out-of-court mandates; and in court proceedings up to a threshold of 2,000 euros. This is an important step toward relaxing the strict prohibition on lawyers sharing their clients’ risks and improving clients’ access to justice in a meaningful and manageable way. It creates a fair playing field for the first time, particularly in the out-of-court area.
For at the moment, there is an imbalance in the entrepreneurial structuring options in the market for German legal services. At the latest since the ruling of the Federal Court of Justice on wenigermiete.de in November 2019 (ruling of 27.11., Ref. VIII ZR 285/18), it is clear that legal tech providers who operate as debt collection service providers and compete directly with law firms are not subject to any restrictions with regard to remuneration models (contingency fee, commissions, litigation financing) and borrowing outside capital. They often operate in the same market as lawyers (rent control, protection against dismissal, antitrust damages, flight delays, traffic accident settlement, Hartz IV appeals, etc.), but have completely different economic conditions. This imbalance means a considerable distortion of competition, which lawyers do not have to accept and which is also not compatible with the coherence requirement under European law (cf. the explanatory memorandum of the draft law, section A.I and A.II.1. .b: “unequal treatment” and “lack of coherence”; cf. also the Communication of the European Commission on Recommendations for Reform of Professional Regulation, COM(2016) 820 final, p. 23: “Facilitate the provision of legal advice services by other service providers, in particular for online services”).
But also for consumers and businesses seeking legal advice, the current legal situation, which regulates lawyers very heavily, is not acceptable. Clients who do not have legal expenses insurance currently have no opportunity to take advantage of a lawyer’s services without incurring an economic risk (no win, no fee offer). The group of lawyers in particular, who enjoy a high level of trust among consumers and companies alike as an elementary pillar of an effective constitutional state, must not be categorically excluded as providers of such offers on the legal market. Protection against conflicts of interest, errors in advice and breaches of confidentiality can be provided – as is already the case today – by the law governing the legal profession. This is because it regulates what lawyers are allowed to do and what is contrary to their professional ethics.
STATEMENT OF THE FEDERAL COUNCIL AND RESPONSE OF THE FEDERAL GOVERNMENT
Nevertheless, in a statement on March 5, 2021, the Bundesrat (upper house of the German parliament) called for a cap on contingency fees for attorneys, to make it more difficult for debt collectors to finance litigation, and to completely exclude certain areas of law from being handled by these players. The German government convincingly countered almost all of the Bundesrat’s demands in a counterstatement dated March 10, 2021. It clarified there, also with regard to its own draft law of January 20, 2021, that debt collection service providers can act as a party to court proceedings and that the RDG does not provide for any restrictions in this regard, neither now nor in the future (“The admissibility of judicial activities of debt collection service providers is governed exclusively by the ZPO.”, counterstatement of the Federal Government of March 10, 2021, p. 20 f.). The Federal Council’s demand that “complex legal matters” should not be permitted for assignment models at all (antitrust law, nature conservation law, actions for avoidance) is rightly described by the Federal Government as wrong (Federal Government’s counterstatement of March 10, 2021, p. 6). What is complex depends on the specific case and the facts of life, and even non-lawyers have proven in recent years that they can deal with it. The Federal Constitutional Court and the Federal Court of Justice have long since clarified that debt collection service providers are also permitted to advise on legally complex issues in the area of debt enforcement (BVerfG NJW 2002, 1190; NJW-RR 2004, 1570; most recently BGH BeckRS 2019, 30591 marginal no. 116).
GERMANY IN INTERNATIONAL COMPARISON
Failure of the draft law, as sought in particular by the German Federal Bar Association, would set Germany further back in comparison with countries that – such as the USA, Great Britain, but also Switzerland and many Scandinavian countries – opened up the legal market to a large number of providers years ago, thus creating the conditions for simple and inexpensive advisory services without destabilizing or weakening the legal profession (cf. the European Commission’s Communication on Reform Recommendations for Professional Regulation, COM(2016) 820 final).
Germany is in danger of being left behind by the legal markets in the U.S. and the U.K., because they have deliberately created free space for new legal consulting models. According to AGC Partners’ “Legal Technology” study of April 2017, some US$750 million has been invested in legal tech ventures in the U.S. since 2012, in part because the business models have regulatory certainty (Legalzoom: US$100 million, most recently funded with another US$500 million in July 2018, Avvo US$132 million, and Rocket Lawyer US$72 million). And CVC invested about $500 million in UnitedLex as recently as 2018. By comparison, some of the largest recent investments in Germany were the funding rounds of lawyer referral platform ad-vocado (€4.5 million, 2018) and providers atornix (2019), Conny (2019), Legal OS (2019), and RightNow (2020), which were all under ten million euros. The market in the UK is also much more developed than in Germany, especially since the Legal Services Act liberalized the legal framework considerably back in 2007.
Germany has a very lively and innovative legal tech scene, but it is still small by comparison, and it urgently needs a legal framework that unleashes more forces and encourages investment.