In September 2015, the German automaker Volkswagen (VW) admitted that it had manipulated software in around eleven million diesel vehicles worldwide to cheat on emissions tests. As more and more details emerged in the ensuing weeks and months, VW’s share value rapidly declined by 30 percent. U.S. regulators levied heavy fines of up to US$15.3 billion on the carmaker. In addition, a criminal investigation and civil penalties assessed under the Clean Air Act are pending in the U.S. In the European Union (EU), the power to impose fines for violating consumer laws lies with the individual national regulators. Commenting on this situation, the EU Commissioner for Justice, Consumers, and Gender Equality, Věra Jourová, stated that the EU should look into ways to expand its legal options to enforce consumer interests.
VW has been named as a defendant in hundreds of lawsuits filed by consumers, institutional investors, non-governmental organizations, U.S. local and state governments, and U.S. government agencies. In the U.S., most consumers have joined their lawsuits into class action litigations. In Germany, institutional and private investors have filed over 1,400 lawsuits with the Regional Court of Braunschweig (LG Braunschweig), Lower Saxony, which is the court that has jurisdiction for lawsuits against VW. The Regional Court of Braunschweig has granted a motion from institutional investors to establish a “model case”. Model cases are collective actions which share some characteristics with class actions but are not equivalent. The following remarks will describe the model case in Germany and point out its differences from a class action.
Consumer Lawsuits in the U.S.
In the U.S., most consumers did not file individual lawsuits against VW, but filed collective lawsuits called “class actions“. In a class action litigation, one or more plaintiffs can act as representatives for a larger group with similar interests, if (1) the class is “so numerous that joinder of all members is impracticable”, (2) there are “questions of law or fact common to the class”, (3) the representative’s claims or defenses are “typical of the claims or defenses of the class”, and (4) they “will fairly and adequately protect the interests of the class”. The first class action against VW was filed in September 2015 on behalf of owners and lessors of affected VW vehicles by a consumer-rights class action law firm in the District Court for the Northern District of California. Within days, at least twenty-five additional class action lawsuits were filed. The U.S. class actions have been consolidated in the Northern District of California before Judge Charles R. Breyer. On October 25, 2016, the proposed settlement of US$14.7 billion received final approval from Justice Breyer who stated that “[g]iven the risks of prolonged litigation, the immediate settlement of this matter is far preferable.”
Institutional Investor Lawsuits in Germany
In German civil proceedings, there are generally two opposing parties. Procedural law does not allow for U.S. class action litigations. As an exception, in 2005, the Capital Markets Model Case Act (KapMuG) was enacted which allows for the bundling of parallel cases and a uniform decision for common issues in a so-called “model case”. The Act is applicable when a plaintiff claims (1) compensation for damages directly resulting from false, misleading, or omitted public capital markets information, (2) compensation for damages for the use of false or misleading public capital markets information or for failure to offer clarification about the false or misleading nature of public capital markets information (e.g., resulting from investment advisory contracts), or (3) fulfillment of a contract based on an offer under the Securities Acquisition and Takeover Act. The model case proceedings are limited to these capital market disputes, unlike class actions which can be brought in any type of civil law proceeding that fits into one of three categories set out in Rule 23(b) of the Federal Rules of Civil Procedure.
The motion to establish a model case can be made by the plaintiff or by the defendant. (KapMuG, § 2, para.1). The applicant must demonstrate that the decision will have significance for similar legal disputes. (Id. § 2, para. 3). The court announces the establishment of a model case in the Federal Gazette under the title “Complaint Registry pursuant to the Capital Markets Model Case Act” (Complaint Registry). (Id. § 3, para. 2). If the court receives at least ten related applications for the establishment of a model case within six months after the first announcement of an application, it will refer the matter to the next higher court. (Id. § 6). The referral decision must contain a brief summary of the legal questions in common (establishment objective) and of the essential content that the applications have in common. (Id. § 6, para. 3). The lower court referring the model cases will stay the individual proceedings. (Id. § 8, para. 1).
The Higher Regional Court has discretion to pick a model plaintiff from among the plaintiffs whose proceedings have been stayed. Consideration is given to the suitability of the plaintiff to conduct the model case proceedings in the interests of the parties involved, an agreement among several plaintiffs designating a single model case plaintiff, and the amount of the claim. (Id. § 9, para. 2). By contrast, in a U.S. class action, the class representative is self-nominated or sought out by a lawyer who specializes in class actions, and the law sets out specific requirements for the appointment of a class counsel by the court. (Code of Civil Procedure, rule 23(g)).
The Higher Regional Court announces the selection of the model case plaintiff in the Complaint Registry. (KapMuG, § 10, para. 1). Claimants who have not filed suit may register a claim with the Higher Regional Court within six months of the announcement in the Complaint Registry. (Id. § 10, para. 2). The plaintiffs who are not selected as the model case plaintiff are automatically summoned as interested parties to the model case proceeding. (Id. § 9, para. 3, § 12). They may not opt out to pursue individual litigation, because their individual proceedings are still pending at the lower court. The interested parties are entitled to undertake all relevant procedural acts as long as their statements and actions are not contrary to the statements and actions of the model case plaintiff. (Id. § 14).
In a U.S. class action litigation on the other hand, it is quite the opposite. The consumer will be automatically included in a class, but generally has a due process right to opt out of the class action and file an individual claim. If the class member chooses to participate in the class action, he or she loses the right to pursue individual litigation. The class representatives are the only ones who actively participate in the class action. Unnamed plaintiffs have no right to undertake procedural acts.
The Higher Regional Court issues a model case ruling which can be appealed to the German Federal Court of Justice. The common issues of law and fact that have been decided by the court are binding on the lower court and on the claimants whose lawsuits had been suspended. (Id. § 22). The individual cases are resumed at the lower court to be decided based on the ruling in the model case.
The model plaintiff and the model defendant also have the option of settling the case. The interested parties may comment on the settlement but do not need to agree to it. The settlement will become binding if it is approved by the court and if less than thirty percent of the interested parties opt out. (Id. § 17, para. 1). Interested parties may only opt out within one month after the settlement has been announced. (Id. § 19, para. 2). The settlement becomes binding for the participants that have not opted out. In a U.S. class action, only the class representative and the court have the authority to accept or reject a settlement offer. An accepted offer will be automatically binding on all other class members and there is no possibility of an opt-out at this stage.
In the VW litigations that are pending in Germany, the institutional investors are alleging that VW breached its capital market disclosure obligations by failing to inform shareholders in a timely manner of the emission manipulations and its relevance for the stock price. Volkswagen submitted that it “considers the shareholder lawsuit to be without merit” and that “its management board duly fulfilled its disclosure obligation under German capital markets law”. In August 2016, the Regional Court of Braunschweig decided to refer the model cases to the Higher Regional Court of Braunschweig (OLG Braunschweig). The announcement of the model case plaintiff and the start of the litigation at the OLG Braunschweig will commence at the earliest in the last quarter of 2016. It will most likely take at least several years before a decision is reached in the model case. The only other comparable model case, the Deutsche Telekom litigation in which 1,700 prospectus liability claims were filed, took twelve years.
In 2014, the German party “Alliance 90/The Green Party” submitted a bill to the German parliament that proposed integrating the Capital Markets Model Case Act into the general German Code of Civil Procedure to make collective actions available for all civil law actions and not limited to capital markets law. The bill was rejected, but the VW scandal has revived the issue. In April 2016, the German State Ministers for Consumer Protection proposed that collective actions should be made generally available in consumer litigations.