Introduction / overview
Germany has long been known as a premier venue— one of the most important in the world—for patent and other intellectual property litigation. With four offices in Germany, Quinn Emanuel has been a major presence there, assisting U.S. and international clients in a variety of German litigation matters, including, in particular, IP cases in which the firm has a leading practice. With its efficient court system, and comparatively low overall litigation costs, Germany has now emerged as an ideal venue for non-IP matters including private antitrust actions, capital markets, arbitration, and even class actions. Germany is the European Union’s largest economy. Cartels targeted by the Commission of the European Union typically have a German presence and such investigations present a wide range of issues spanning from white collar to mass torts. When German companies engage in corporate misconduct, the size and liquidity of Germany’s capital markets can amplify the consequences of that misconduct. This article provides an overview of recent developments that impact Germany as a venue for litigation, arbitration, and regulatory disputes.
Private Antitrust Litigation
The European Court of Justice’s holding that anyone who sustains losses from a violation of European Union and member state-level cartel laws has a right to full compensation, and that national procedures must ensure the practical effectiveness (“effet utile”) of this right has led to an avalanche of private antitrust enforcement actions for damages in Europe. “Anyone” in this context includes direct/indirect purchasers and suppliers, umbrella customers, end consumers, and others. The European Union legislature encouraged this development by issuing a directive on antitrust damages actions (“Directive”), which codifies the case law and removes further obstacles to compensation.
This new antitrust environment has not been without controversy, with some commentators characterizing the newly-issued rules authorized by the Directive as game changers that introduce, de facto, a U.S. style litigation system. Others point out that, although often described as plaintiff-friendly, the Directive holds equal promise for defendants, and thereby ensures an even playing field for all stakeholders in private antitrust enforcement litigation. Either way, this debate underscores the need for experienced representation in such matters.
Some of the most significant changes imposed by the Directive include:
- Limited discovery is now permitted: One of the most significant developments is the introduction of a limited disclosure regime. Unlike the U.S., discovery is generally not a viable option in German civil procedure. Until now, litigants could only ask the civil judge to apply a very general provision of the German Code of Civil Procedure to require production of documents in the possession of the opponent or third parties. However, such requests were rarely successful, as they were subject to the Court’s discretion, with “no fishing expeditions under German law” serving as the governing principle.
This bias against discovery no longer applies in competition cases. The German Act against Restraints of Competition now requires anyone in possession of relevant evidence to produce it upon request. This demand for evidence may be brought as a standalone claim and need not be combined with an action for damages. While some documents may be withheld as privileged (especially leniency statements and settlement submissions), the interests of the parties will be balanced. Because the legislature left it to the courts to implement protections for confidential information, the practicalities of this new process will evolve over time. Whether Germany will opt to permit discovery in non-antitrust cases remains to be seen. In any event, the ability to obtain discovery in German antitrust actions is a substantial change that is likely to impact the selection of Germany as a forum for such disputes.
- Burden of proof: The new law also introduces a rebuttable presumption that cartels lead to higher prices in the affected market, and therefore, will typically have an effect on purchases. As a consequence, the burden of proof that the cartel did not cause any damages, or otherwise affect the purchases in question, now rests with the defendant.
- A new statute of limitations: The new law now provides considerably more time for those harmed by anti-competitive conduct to bring their claims. The usual three years short-stop limitation period—starting from the end of the year in which the plaintiff knew, or should have known, of the facts giving rise to the claim—has been extended to five years, and only begins to run after the antitrust violation has ceased. For example, in the event of a dawn raid, the short-stop limitation period will not begin to run until the end of the year after the raid has taken place. While the so-called existing ten-year long-stop limitation period, which is calculated regardless of any knowledge or grossly negligent lack of knowledge, remains unchanged, it now will also not commence until the antitrust violation has ceased. But unlike the short-stop limitation period, the long-stop limitation period does not begin at the end of the year, but runs immediately when the violation ceases. These changes to the statute of limitations dramatically benefit plaintiffs.
- Two recent decisions: There are two recent decisions of which practitioners should be aware. In June 2018, the German Federal Supreme Court permitted a provision suspending the statute of limitations during the pendency of competition proceedings to be applied retroactively to claims that accrued before the provision was introduced in 2005, thereby reviving damages claims worth billions of Euros which otherwise would have become time-barred—a result that Nadine Herrmann of Quinn Emanuel’s Hamburg office helped to obtain. In addition, in late 2018, the Federal Supreme Court issued another opinion called the “rail-track cartel decision,” imposing certain complications on standing and damages assumptions for private cartel enforcement.
- Indirect purchasers: Unlike in most U.S. states (see e.g., Illinois Brick v. Illinois), indirect
- purchasers in Germany have standing to bring damages claims for passed-on overcharges. At the same time, the passing-on defense against claims of the direct purchaser is available. With respect to proof of active passing-on of overcharges to indirect purchasers, the indirect purchaser now need only demonstrate that the defendant violated competition law resulting in an overcharge for a direct purchaser from whom the indirect purchaser acquired goods or services impacted by the violation. The indirect purchaser, however, must still prove the quantum of damages resulting from the passing-on.
- Settlements of German cartel cases: When settling a German cartel case, it is imperative that a party which drops a viable defense and pays money to settle a claim include adequate safeguards to prevent a later demand that the party pay the full amount as recourse/contribution to other cartel members (e.g., joint and several liability). Under the new law, contribution claims are no longer automatically time-barred, but rather are subject to a complicated mechanism to protect the settling party against double-dipping. The basic idea is that the plaintiff must reduce the action against the remaining jointly and severally liable defendants by the amount of the settling party’s liability share. This requires settling parties to establish the liability share of the settling defendant, which can be difficult in practice, as the other defendants will rarely agree on the calculation. For this reason, settlements can be combined with an indemnity agreement to protect the settling defendant. Such indemnities can also protect against damages actions by other market levels if the settlement was concluded with a market level that supposedly did not suffer the damages, but rather passed them down.
- Capital Markets
- Corporate scandals in Germany, and a wave of privatizations in the public banking sector have led to the filing of an unprecedented number of significant capital markets cases that routinely exceed one billion Euros (USD 1.2bn) in value.
- Model case proceedings: Long before a comparable tool became available for consumer actions, Germany implemented so-called “model case proceedings” (discussed below) to ease the judicial case load for information-based market manipulation cases. These model case proceedings are now a viable enforcement mechanism for international investors when combined with sound trial advocacy and international evidence gathering tools.
- S. discovery to support German litigation: Section 1782 of the United States Code permits discovery in support of foreign proceedings. As many capital markets cases have an international (i.e. U.S.) angle, it is often vital to take advantage of U.S. style pre-trial discovery by submitting a § 1782 application to a U.S. court in support of German model case proceedings. Because defendants often fiercely oppose such applications, experienced German and U.S. counsel must work together to obtain the desired discovery.
- Disclosure requirements for multi-step processes: Recently, German defendants in a high profile case asserted that corporate wrongdoing need not be disclosed under E.U. ad-hoc publication rules if the ex-ante risk that such wrongdoing would be uncovered remained slim. This concept, if accepted, would create incentives for the most sophisticated corporate culprits to keep their fraudulent acts secret. The more sophisticated a fraud, the less likely the corporation would have an obligation to disclose it. To see that capital markets remain robust, Quinn Emanuel is at the forefront of the efforts to ensure that this inequitable doctrine is not implemented.
- German Class Action – Musterfeststellungsklage
- Prompted by Volkswagen’s diesel emissions scandal, on November 1, 2018 the German legislature passed a new Model Claim Proceedings Act as a tool to litigate mass torts more efficiently and facilitate collective redress for consumers in Germany, an idea that has been publicly debated for many years. The emissions scandal provided the final traction for this initiative, with the legislature having had to hurry to introduce the new law before claims against Volkswagen became time-barred at the end of 2018. This rush, however, impacted the quality of some of the provisions of the new law.
The scope of the Model Claim Proceedings Act is broad, subjecting any company with a Business to Consumer (B2C) business model to potential liability. Although the legislature expected about 450 Model Claim Proceedings to be initiated per year, in the five months since the new law came into force, only five proceedings have been initiated, three of which relate to the emissions scandal. Nevertheless, companies with a B2C business model will have to be prepared for the number of pending cases to increase dramatically in the coming months and years, as uncertainty about the implementation of this new mechanism diminishes. For example, it is likely to be used increasingly by consumer protection agencies, as it is the only collective redress scheme available for consumer protection in Germany.
The Model Claim Proceeding Act only provides for declaratory relief and individual consumers do not have standing to sue. Claims must be brought by so-called “qualified entities,” (i.e. consumer protection agencies that fulfil certain requirements regarding their size, financials, and scope of work). The reason behind these strict rules is the legislature’s goal to exclude the possibility of third-party funding. Accordingly, the new law is not a realistic litigation option for the plaintiff side of mass tort cases.
With regard to the affected consumers, the Model Claim Proceeding follows an opt-in model. Affected consumers are not directly involved in the proceedings, but they can register their claims with a public claims register without any costs involved. The Model Claim Proceeding is admissible if at least 50 affected consumers register their claims with the public register. Once registered, consumers can stay the statute of limitations on their claims without having to actively pursue them. In fact, they are barred from pursuing their claims against the company individually outside of the Model Claim Proceeding. Likewise, individual actions filed prior to the initiation of the Model Claim Proceeding will be stayed for the duration of the Model Claim Proceeding.
A judgment in the Model Claim Proceeding binds all consumers whose claims are publicly registered. As the judgments are declaratory in nature, consumers must separately file payment claims on the basis of the final judgments in the Model Claim Proceedings. The German legislature believes that companies will adhere to declaratory judgments and pay consumers what they are entitled to on the basis of their principal liability. In practice, however, the quantum of a claim often is highly contentious. Therefore, with an increasing number of Model Claim Proceedings, Germany is likely to see its courts flooded with thousands of individual payment claims after Model Claim Proceedings have ended.
In sum, the Model Claim Proceeding is a first, but incomplete, step towards mass tort litigation in Germany. However, without providing adequate incentives for large numbers of plaintiffs, it will only help corporate defendants drag out proceedings and, perhaps, escape liability altogether. Practitioners should monitor these developments carefully.
Arbitration – DIS reform of arbitration rules
On March 1, 2018, the new Arbitration Rules of the German Arbitration Institute (“Deutsche Institution für Schiedsgerichtsbarkeit DIS”) came into force. The DIS is the leading arbitration institution in Germany. In the past years, the DIS has seen a steady increase in the number of arbitration proceedings conducted under its rules. But its existing rules, which date back to 1998, were viewed as old-fashioned compared to the rules of other leading European arbitration institutions like the ICC or the LCIA.
To close this gap, the DIS set up a group of approximately 300 stakeholders to redraft the DIS rules, a difficult and at times controversial process. These efforts resulted in a modern set of arbitration rules that will enable the parties to conduct their arbitral proceedings efficiently. To that end, the new rules introduce short deadlines for the parties and the arbitrators. They also call for financial penalties in case the parties, or the arbitrators, do not adhere to these deadlines. To ensure the success of the new DIS rules, it is imperative that the DIS strictly enforce them.
In addition to efficiency, the new DIS rules also enhance transparency through the introduction of a new and independent body called the Arbitration Council whose role is to decide controversial issues, such as the determination of the amount in dispute, arbitrators’ fees, and challenges to arbitrators and their subsequent replacement. The introduction of the Arbitration Council will likely enhance the role of the DIS as the arbitration institution.
White Collar – Competition Register for Public Procurement Wettbewerbsregister
To date, Germany—in contrast to the U.S. and almost all other EU Member States—has not introduced a genuine corporate criminal liability regime, meaning that corporations cannot be held criminally liable. Under the present law, corporations can only be fined up to EUR 10 million for misconduct of managerial staff or deficiencies in compliance, although law enforcement authorities can also order the disgorgement of improper profits–often the primary sanction. Such sanctions had little deterrent effect, because, inter alia, law enforcement authorities had wide discretion as to whether they initiate an investigation against a corporation. But times have now changed. In the wake of the many corporate scandals involving German companies, the German government introduced a corporate criminal liability regime to counter corporate misconduct more efficiently and to increase the sanctions for such corporations. While the general public, corporate managers, and legal counsel eagerly await the new regime (rumors say that a draft bill will be made public in April), the German legislature has introduced relevant new legislation.
Under existing procurement law, enterprises involved in certain misconduct must, or may depending on the type of offense, be excluded from Government
procurement processes. In practice though, it is extremely difficult for public contracting authorities to check whether a bidder should be banned because the relevant information is either not stored, or not readily available. To resolve this problem, the German Federal Cartel Office (Bundeskartellamt) is currently setting up a Competition Register (Wettbewerbsregister), which is expected to become operational next year. The Competition Register is a nation-wide electronic database that will contain non-appealable criminal convictions for specific “economic” offenses (including bribery, money laundering, tax evasion, and fraud to the detriment of the government) as well as fines for violations of competition laws and other administrative offenses. Orders issued against natural persons will only be registered if the misconduct is attributable to a business enterprise. Entries will also be deleted from the registry after three or five years, depending on the type of misconduct. Public contracting authorities will be required to check the database if the government contract to be awarded exceeds EUR 30,000 in value and must clear or ban the bidders based on the information in the database.
An entry in the new register is not a sanction in itself, as the database is only meant to ensure that contracting authorities can efficiently apply already existing procurement laws. Nonetheless, corporations doing business with government authorities should analyze this tool in detail as a ban from public procurement processes can severely damage their business models. Because the best protection is to avoid registration in this database, corporations should ensure that they have a state-of-the-art compliance program. A further incentive to invest early in strengthening a compliance program is that corporations can request that their registration be deleted early if they can demonstrate that they have taken sufficient self-cleaning measures. Corporations that have already built a strong compliance program will generally be able to “clean the house” more swiftly than corporations that first have to set up or reinforce their compliance tools.
First Rulings under the General Data Protection Regulation (“GDPR”)
Although broadly perceived as a sweeping new regime of European Union data protection laws, the GDPR may, in fact, be viewed as an attempt to harmonize the existing data protection regime that was already in place. Before the GDPR, national laws implemented under the European Data Protection Directive, which included a definition for personal data, a requirement to justify processing, a concept of data avoidance, and high thresholds for international data transfers governed data protection. Nevertheless, the increase in potential fines under the GDPR, together with increased activity among data protection authorities, has heightened awareness among controllers and created the perception that the GDPR is a “new law.”
A noteworthy decision involving the GDPR originates in France where the national data protection regulator, CNIL (Commission nationale de l’informatique et des libertés), recently imposed a record fine on Google of EUR 50 million for infringement of data protection rules, including alleged lack of transparency, inadequate information, and not meeting consent requirements for personalized ads. This decision is remarkable because it addresses jurisdictional questions relating to the so-called “one-stop-shop” mechanism. Article 56 of the GDPR provides that the supervisory authority at the main establishment of the controller in the EU shall be solely responsible for cross-border processing activities of the controller. Although Google’s European headquarters are located in Ireland, CNIL ultimately held that the “main establishment” must have effective decision-making powers with respect to the processing of personal data, a requirement that was not met for Google’s Irish establishment. Consequently, the one-stop-shop rule did not apply.
- Although the rules alleged to have been breached were in place for more than a decade, this case serves as a practical reminder that the data protection landscape in the Europe Union has changed. Regulatory authorities are moving swiftly to enforce data protection rules (CNIL conducted its entire investigation of Google in less than four months). As a result, companies must take the GDPR seriously, take proactive steps to ensure compliance, and be prepared to act quickly in response to any investigation.