The German Capital Markets Model Case Act as a Functional Alternative to the US-Style Class Action for Investor Claims?

In 2001 some 17,000 shareholders of Deutsche Telekom filed roughly 2,500 individual lawsuits as plaintiffs against the company at the Frankfurt trial court, involving more than 700 attorneys. The single judge having competence over the actions calculated that he would need decades to handle the claims – and that would solely be at the first instance level. The Retail investors who had lost most of their investments due to a dramatic drop in the company’s share price claimed the relevant prospectus had been false.

The German legislature reacted by enacting a special law in 2005, the so-called 'Kapitalanleger-Muster­verfahrensgesetz (KapMuG)'. The Act’s name usually translates into English as the ‘Capital Markets Model Case Act’. The aim of the Act is to provide a means for collective redress for investors, especially retail investors, who have suffered damages because of faulty capital markets information. The KapMuG is designed as a regulatory tool to overcome the rational apathy of retail investors who are not willing to bear the high costs of lawsuits involving complex legal and factual questions. The Act is a unique piece of legislation that tries to chart a middle way between the traditional German system of individual claims based on the principle of party disposition and the US-style class action. Simultaneously, it tries to provide an efficient means for the courts to handle cases of mass investor damages and in this way strengthen private law enforcement in the German capital markets. The proceedings under the KapMuG are limited to claims for damages in the form of securities lawsuits.

The aim of the model case proceeding is the issuance of a ‘model case ruling’ by the competent Higher Regional Court that resolves all factual and legal questions of general relevance for all and not only for individual cases pending before the courts trying the matter. The result is a proceeding that consists of different layers. It starts with individual lawsuits filed by aggrieved investors at a district court, acting as trial court, where a petition for a model case proceeding is filed; this is followed by a procedure at the Higher Regional Court where the general legal issues of the case are resolved; the matter then goes back to the trial courts which hand down a final decision on each individual case.

The application for the establish­ment of a model case may be made by either the plaintiff or the defendant in a first instance court proceeding. A minimum of ten applications is a necessary for opening a model case. If there is a sufficient number of applications, the trial court presiding over the proceeding which produced the first announced application has the obligation to refer the decision on the establishment objective to the corresponding Higher Regional Court, ie a court of higher instance. Upon public announcement of the model case, the trial courts suspend ex officio all pending proceedings whose determination is dependent upon the ruling in the model case.

The Higher Regional Court designates a ‘model case plaintiff’ from among the plaintiffs whose proceedings have been suspended. The Court decides those factual and legal questions that are of general relevance for all cases pending before the trial courts by way of a ‘model case ruling’. This ruling is binding on the courts trying those proceedings that have been suspended because of the model case proceeding. It has effect for and against all parties to the model case proceedings.

The model case ruling becomes final if no appeal on points of law is directed against the ruling within one month of its having been served on the model case plaintiff and model case defendant. All parties, including the parties summoned, are entitled to appeal. But the appeal on points of law may not allege that the trial court wrongfully sought a model case ruling. In this way, an abuse of the appeal shall be avoided. But, nevertheless, a central shortcoming of model case proceedings is their long duration.

This post is based on the paper, ‘The German Capital Markets Model Case Act – A Functional Alternative to the US - Style Class Action for Investor Claims?’.

Harald Baum is a Senior Research Fellow at the Max Planck Institute for Comparative and International Private Law, Hamburg; a Professor at the University of Hamburg; and a Research Associate at the European Corporate Governance Institute, Brussels.