A few weeks ago, the Regional Court of Hanover dismissed a cartel damage lawsuit by a claims vehicle for lack of legal standing[1]. The judgment deserves scrutiny, as it confirms a trend among German courts to dismiss bundled claims on this basis[2].
1. The incentive for bundling claims
German law knows no class actions, and no specific means of collective redress that would provide cartel victims with payment titles. Therefore, cartel victims sometimes bundle their claims by transferring them to claims vehicles[3]. Doing so carries several legal risks[4], among which is the potential lack of legal standing: If the transfer of claims is invalid, then the claims vehicle is the “wrong” obligor, and none of its lawsuits will suspend the five-year limitation period for cartel damage claims. By the time of the judgment, the limitation period may well have expired. Transferring the claims again – properly this time – and filing anew will not undo the expiry. Hence, errors in the transfer of claims can be disastrous.
2. The Hanover case
The Hanover case provided considerable opportunity for such errors. Over a thousand presumptive victims of the German sugar cartel had transferred their claims, directly or indirectly, to a claims vehicle, Retail Cartel Damage Claims SA (CDC[5]). Assignors included food producers from the first market level and food retailers from the second. CDC claimed more than EUR 186 million plus interest.
CDC had carefully sidestepped certain pitfalls which previous claims vehicles had stumbled into[6]. However, the one it did not sidestep was the German Legal Services Act, the RDG (Rechtsdienstleistungsgesetz), which prohibits the rendering of legal services without proper qualification. Legal actions infringing the RDG are void, which may include transfers of claims. And this, the Hanover court held, was the case with CDC.
3. Pursuing transferred claims as (forbidden) legal service
The court did not reach this decision lightly – the final judgment comprises more than 50 pages. In particular, the court extensively compared and contrasted CDC’s case with recent case law by the Federal Court of Justice, which had held a seemingly similar business model to be “just about” permissible[7].
The Hanover court first reasoned that CDC, although technically the owner of the damage claims, was, even more technically, providing a legal service to the assignors. Most assignors had received no consideration from CDC for the transfer, and the only way for them to obtain any compensation was for the lawsuit to be successful. Therefore, the commercial risk remained with them.
CDC is allowed to provide certain legal services, including the collection of claims, by virtue of its collection license (“Inkassolizenz“). However, the court then held that CDC had gone beyond the limits of this license. First, CDC’s business was focused on court proceedings, rather than on out-of-court collection. (CDC had apparently not even attempted any out-of-court settlement.) Second, the case required an extensive legal and factual analysis. And the legal issues, specifically those pertaining to cartel damage law, were of a complexity exceeding the legal expertise that collection agencies usually have.
4. Conflicting interests
The court also held that CDC had breached the RDG by pursuing conflicting interests. For claims from the first market level (= food producers), CDC had to argue that the cartel damage had not been passed on to the next level. For claims from the second market level (= food retailers), CDC had to argue the exact opposite. Even worse, the court noted that in some cases, CDC was claiming damages for both market levels for the very same production chains – essentially arguing a case of Schroedinger’s pass-on, where cartel damage is simultaneously passed on and not passed on. While CDC averred that this overlap concerned less than 3.5 % of the overall claim, the court held that there is no materiality threshold for conflicts of interest[8].
5. Outlook
CDC have appealed against the judgment. Given their commercial relevance, the matters discussed herein will ultimately lead to an authoritative decision by the Federal Court of Justice, which will delineate the playing field for claims vehicles in Germany. Until that point, the only way to ensure the validity of transfers is for claims vehicles to actually purchase the claims, and pay for them upfront. Otherwise, claims vehicles run the risk that the transfers are invalid, and that their lawsuits will be carried out under the Damocles sword of limitation.
[1] Judgment of 1 February 2021, 18 O 34/17.
[2] LG München judgment of 7 February 2020, 37 O 18934/17; LG Braunschweig judgment of 30 April 2020, 11 O 3092/19; LG Hannover judgment of 4 May 2020, 18 O 50/16.
[3] I.e. an unrelated entity set up for this specific purpose. The issues discussed herein do not arise if the transferee belongs to the same group of companies.
[4] Like the matter of jurisdiction, which the ECJ addressed in CDC Hydrogen Peroxide (decision of 2. May 2015 – C-352/13).
[5] Entirely unrelated, for the avoidance of doubt, to the Centers for Disease Control.
[6] E.g. lack of funding of the claims vehicle, which in 2015 had made the High Regional Court Düsseldorf dismiss a EUR 130 million claim against the cement cartel (VI-U (Kart) 3/14). Here, CDC had put almost four million Euro in escrow to demonstrate that it had sufficient funds.
[7] Judgment of 27 November 2019, VIII ZR 285/18 (“LexFox”). The qualification “just about”, in parentheses – “(noch)” –, comes up no fewer than eleven times in the judgment, emphasizing how close a decision this was.
[8] The Federal Court of Justice has recently permitted a bundling of claims from different market levels, even holding that such bundling excludes the passing on defense (judgment of 19 May 2020, KZR 8/18 – “Schienenkartell IV”). However, unlike in the Hanover case, the claimant there had not provided legal services to the assignors.
