The Legal Tech Act literally crossed the finish line at the last minute – on June 10, the Bundestag passed it in second and third reading, after a turbulent expert hearing in which the Legal Tech Association was represented by Philipp Plog, and all this in one of the last sessions of the legislative period. Legal tech has thus arrived in legislation, and is getting more legal certainty!
The Legal Tech Association has supported the reform project from the beginning. In our statement on the draft bill of December 7, 2020, we called for much more far-reaching measures to open up the legal market. But we believe that the current reform package also contains a few good and bold advances for the German legal market (see our statement of January 6, 2021), which must now be implemented – and which can be developed in further reforms.
LEGAL SECURITY FOR LEGAL TECH IN THE “DEBT COLLECTION” MODEL
The reform brings an urgent improvement in legal certainty for legal tech offerings that operate as debt collection service providers. Some courts of instance (Munich, Augsburg, Ingolstadt, Hanover) had recently denied myright, financialright, and Cartel Damage Claims the right to represent injured parties in the truck cartel, diesel lawsuits, and other disputes, citing an allegedly “non-collection-type” approach. This left thousands of injured parties with nothing, even though they transferred claims to registered and licensed providers who are represented by attorneys. The bill now finally clarifies that claims may be bundled and funded, and that these business models are not inherently limited to out-of-court enforcement of claims. In addition, the new version of the draft bill stipulates that the judicial supervisory authority will examine the providers’ business models in advance, and that this examination may have a “factual effect” in subsequent civil proceedings for the enforcement of claims.
Unfortunately, this round failed to better protect consumers and entrepreneurs from legal disputes surrounding legal tech debt collection business models. For example, their claims may be time-barred if, during the course of the appeals process, a civil court concludes that the business model is vulnerable. 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. This reinterprets a protective provision for consumers and those seeking justice – the provision on conflict of interest in Section 4 RDG – into a protective provision for cartelists and other infringers. This cannot be right. However, the nullity is also unnecessary because one can limit the effects of any deficiencies in the business models to the remuneration of the providers of legal services.
A LITTLE MORE FREEDOM FOR LAWYERS
A second important point is the introduction of contingency fees for lawyers. They will be given the opportunity to offer contingency fees of up to EUR 2,000 for legal proceedings (and unlimited for out-of-court proceedings). This is a first step toward giving lawyers in Germany more freedom to structure their work. This is because the rigid statutory rules on remuneration often do not bear a reasonable relationship to the clients’ cost risks and to the opportunities for a more flexible distribution of risk in the mandate. For this reason, the association welcomes the introduction of contingency fees, even though we had expressly demanded that they not be limited according to the amount in dispute or otherwise.
This is because there has recently been an imbalance in the entrepreneurial opportunities in the German legal services market. At the latest since the Federal Court of Justice’s ruling on wenigermiete.de in November 2019 (ruling of Nov. 27, Case No. VIII ZR 285/18), 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 (contingency fee, commissions, litigation financing) and the raising of 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. Clients who do not have legal expenses insurance currently have no possibility of taking advantage of a lawyer’s offer without incurring an economic risk (no win, no fee offers).
This has now been changed, but only very half-heartedly. Lawyers do get the option to offer contingency fees in court proceedings for very small amounts in dispute (and unlimited out of court). But they are not allowed to take any cost risks from the clients (for example, court costs and costs for the opponent’s lawyers in case of defeat in court). The coalition’s parliamentarians got rid of this at the last minute. In the end, lawyers are worse off than debt collectors because they are the only ones who can take on the financial risks of defeat for their clients, for example in the case of rent control, diesel damage compensation or protection against dismissal. This is the predetermined breaking point of this new law, also with a view to EU law, because, on the contrary, this requires a level playing field where, from the point of view of the customer, comparable services are provided (“coherence”). The lawyers have made only a very small step forward here, and that against hard lobbying by the German Federal Bar Association and the German Lawyers’ Association. This does not yet make the lawyers competitive. But at least a paradigm shift has been initiated, because with the contingency fee, the legislator has for the first time created the possibility for lawyers to share risks with clients.
THERE IS STILL MUCH TO DO
There are a number of issues that the legislature has recognized but failed to get to grips with, and which are now unfortunately (only) touched upon in a resolution of the Bundestag, as projects for the future. These include, above all, the urgently needed centralization of supervision of legal tech models, which until now has been exercised more or less haphazardly by the state judicial authorities.
But the law also 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. A new legal services act (RDG) is needed that regulates legal services in all areas that are not reserved for lawyers. And not just patch up the gaps that have arisen with the completely overused legal figure of the debt collection service manager, which has so far had to be used for everything that does not say “law firm” on it.
That is why we will continue to talk about legislation and progress in the legal market in the coming years!