The legal service provider Financialright, represented by the US law firm Hausfeld, loses a notable precedent case before the Regional Court of Munich I. Financialright had lodged cartel damage claims (assigned to it by more than 3,000 freight forwarders) against European truck manufacturers in the amount of more than 600 million Euros (plus interests). The European Commission had fined the truck makers in 2016 for anticompetitive agreements. The judgement has obtained high attention in the cartel damages claims community and beyond: The key issue is whether legal tech companies who are collecting claims for the (sole) purpose of taking court action are in breach of the German Legal Services Act wherefore such collection and related assignments may be null and void.
In its judgment of 7th of February 2020 (Case No. 37 O 18934/17), the 37th Civil Chamber of the Regional Court of Munich I (“the Court”) dismissed Financialright’s action in 1st instance. The Court essentially argues that Financial Right acted as a legal service provider without having a sufficient permission to do so under the German Legal Services Act (Rechtsdienstleistungsgesetz - "RDG"). As a consequence, the Court considered the related assignments to Financialright as null and void wherefore Financialright never owned the claims that it lodged.
The RDG essentially prohibits the rendering of legal services by persons who are not qualified lawyers. Its purpose is to protect (i) those seeking legal services, (ii) legal relations and (iii) the legal system in general against unqualified legal services being rendered. A professional claim collector may be granted a permission to collect claims under the RDG and insofar be exempt from the prohibition to render legal services. Financialright had been granted a permission to collect claims. However, the Court judged that Financialright’s actions fell outside its scope: According to the Court, the legal services offered by Financialright to the freight forwarders were from the outset never intended to support out-of court collection activities, but (solely) related to in court action; i.e. all efforts of Financialright were aimed at involving the freight forwarders in the class action at hand. The legal services provided in this context were therefore deemed outside the scope of the permission. Consequently, the assignments made were considered invalid.
The Court also points out that a further infringement of the RDG lies in a potential conflict of interests through the bundling of various individual claims in one action: Under Financialright’s claim collecting model claims with better prospects of success will participate in the risk of less promising claims; for example a claimant with a promising claim may eventually receive a lower settlement payment than appropriate to its prospects of success: According to the plaintiff's general terms and conditions, such payments would be made on a pro rata basis and independent of the (prospect of) success of individual claims, although the prospects of success are usually the essential basis for negotiations on such a settlement.
Furthermore, the Court points out that the involvement and influence of a claim funder may induce a conflict of interests because it considered Financialright economically dependent on the claim funder. The Court fears that it could therefore be the claim funder’s interest to determine the course of the litigation rather than the interests of individual freight forwarders in whose interest Financial rights should act.
The Court asserts its decision to be fully in line with a recent decision of the Federal Court of Justice (27 November 2019 - VIII ZR 285/18) in another case relating to a claim collector model (www.wenigermiete.de / lefox). In that case the Federal Court of Justice had considered the legal services provided by the claim collector to be covered by its collection permission. The Court underlines that the Federal Court of Justice`s decision required an assessment of the circumstances of the individual case based on the protective purpose of the RDG, that it, however, has undertaken.
In conclusion, the activity as a collection company does not in itself result in a "safe harbour" for legal tech start-ups which may (also) provide legal services in connection with the collection of claims. Rather, it is a case-by-case assessment based on the individual circumstances of the case.
While Financialright has already announced to appeal the judgement, future claimants will be well advised to carefully examine assignment models of claim collectors based solely on a collection permission - at least until a binding last instance decision will have been rendered: Assignment models may prima facie appear quite attractive from the customer's point of view allowing claimants to bring a claim without bearing the risk of high litigation costs. The flip side of the coin, however, can be the considerable risk of ending up completely empty-handed due to additional procedural or civil law hurdles caused by the choice of such model: If the decision of the Court should be confirmed, claimants may not be able to bring these claims on their own at a later stage because those claims may meanwhile be time barred. After all, a lawsuit brought by a collection service provider who may never been the owner of the claim will not suspend the statute of limitations.