On Friday, 1 October 2021, the German Act to Promote Consumer-Oriented Offers in the Legal Services Market [Gesetz zur Förderung verbrauchergerechter Angebote im Rechtsdienstleistungsmarkt – so called "Legal Tech Act"] enters into force. It brings changes for lawyers, consumers and the Legal Tech industry.
Over the last few years, the German litigation landscape has seen an uptick in legal tech offerings that operate as debt collection service providers. Offerings include, e.g. contingency fee-based collection of claims, typically arising from issues such as delayed flights and trains, rent control or claims in connection with defective (mass) products. In Germany, the legality of legal tech debt collection models, which eventually work with commercial litigation financiers, has long been controversial.
German lawyers, on the other hand, have historically essentially been prevented from agreeing contingency fees or assuming their clients' legal costs with some exceptions under specific circumstances. This factual existing "vacuum" of someone who assumes in particular consumers' cost risk e.g. in areas where the single amount in dispute was low in exchange of a part of the winnings upon success had been recognized and partially filled by legal tech companies offering debt collecting services.
Following decisive case law, in particular by the German Federal Court of Justice, the new Legal Tech Act at least creates clarity about the legality of legal tech debt collection models, provides specific regulations and, in particular, aims at increasing protection of consumers in this context.
Background – Need for legal clarity
Since legal tech offerings that operate as debt collection providers have gradually departed from the traditional understanding of the activities of a mere debt collection agency within the meaning of section 2 of the Legal Services Act [RDG - Rechtsdienstleistungsgesetz], the question was raised as to whether the offerings of such legal tech companies can be considered debt collection services in the sense of the Legal Services Act at all.
During the course of 2019 and 2020 some of these questions were answered by the German Federal Court of Justice [BGH, Urteil vom 27.11.2019 – VIII ZR 285/18; BGH, Urteil vom 08. April 2020 – VIII ZR 130/19]. These rulings clarified that Legal Tech companies are not automatically excluded from representing allegedly affected parties and can cooperate with commercial litigation financiers in certain situations. However, growing demand from consumers and lawyers as well as concerns about a lack of consumer protection demanded clarification of the legality of the offerings of legal tech companies, leading to the new Legal Tech Act.
Legislative certainty for the legal tech debt collection model and some "softening" for lawyers
The new Legal Tech Act takes up on the aforementioned German Federal Court of Justice's rulings to create a clearer framework for dept collection providers.
On the one hand, the New Legal Tech Act strengthen the position of debt collection providers, as it
- clarifies the legality of the services provided by debt collection services even if it includes a legal assessment and advice associated with the collection;
- clarifies that debt collection providers can cooperate with litigation financiers as long as their influence is limited to the passive provision of funding and information rights.
On the other hand, the Legal Tech Act however
- imposes more stringent requirements for the registration of a company offering debt collection services;
- introduces a variety of new disclosure requirements in particular to consumers, but also to the debtor if the debtor is an individual. Debt collection service providers must, for example, disclose to the consumer what alternative means of enforcing the claim exist, if a contingency fee has been agreed, whether a litigation financier is involved and what has been agreed with him. They must also indicate whether a settlement can only be concluded with the consumer's consent and whether and under what conditions the settlement can be revoked;
- foresees an increase of supervisory measures. Authorities now have the clear mandate to stop legal services that they deem to be in violation of the Legal Services Act.
Despite these stricter requirements, companies operating in Germany should be aware that a further influx of debt collection service providers can also be expected in areas of law other than those previously established for themselves by legal tech companies.
However, some of the foreseen changes for lawyers, especially regarding litigation funding options, that the initial Legal Tech Act draft provided for, have not been implemented.
So far, according to the recent changes the final Legal Tech Act provides for, lawyers may as of now agree upon contingency fees without the need for specific circumstances (I) in legal proceedings for claims under EUR 2,000 and (II) when they provide a dept collection service out-of-court, (III) in dunning proceedings or (IV) when they provide petitions for a declaration of enforceability in compulsory enforcement proceedings against movable property for monetary claims. In addition, lawyers can according to the new Legal Tech Act assume legal costs under limited conditions (dunning proceedings and out-of-court debt collection).
Against this background, it has to be seen, if and how lawyers will continue and/or start to cooperate in particular with external litigation financiers.
Though the new Legal Tech Act has created some clarity about the legality of the legal tech debt collection service model in Germany, the German Parliament has called on the Federal Government to examine whether further adjustments are necessary for lawyers. This indicates that the last word e.g. re remuneration models and litigation funding by lawyers themselves might not be spoken yet.
In addition, litigation funding by third parties has recently also come into focus at union level. In this respect, a first initiative originating from the Committee on Legal Affairs of the European Parliament calls for a regulation via a new EU-directive.
We will follow these developments on German an Union level closely and update you accordingly.
Authored by Nicole Boeck and Katrin Weixlgartner