Can you say class action in German? Nein.

VW Litigation Shows How the U.S. System Is Better for Plaintiffs

EghtesadOnline: Andreas Tilp was born in Plochingen, Germany, studied law a short train ride away in Tübingen, and works in the neighboring town of Kirchentellinsfurt. In what could be the biggest case of his decades of practice, he’s representing hundreds of clients in a lawsuit against that most German of companies, Volkswagen, which will be heard in a courtroom in Braunschweig, a 45-minute drive from VW’s headquarters.

News ID: ۷۷۲۵۸۳

25 December 2016

Sometimes, Tilp wishes he were American. “The German system is totally hostile to plaintiffs,” he says in the converted 1920s textile mill that serves as his office. “It’s no surprise that investors sue in the U.S. whenever they can.”

Tilp represents shareholders seeking damages of €5.2 billion ($5.4 billion) from Volkswagen. They say the company was late in disclosing a U.S. probe into cheating on emissions tests, an allegation VW denies. If the case were brought in the U.S., it would likely be easier to reach a settlement, as American attorneys did when they sued VW on behalf of car owners. Eight months after the emissions scandal broke, VW agreed to a $10 billion deal that provided U.S. buyers with as much as $10,000 each—and the plaintiffs’ attorneys with $175 million, Bloomberg reported.

For Tilp, it won’t be that quick, and it will probably be far less lucrative. In the U.S., lawyers can file a suit for one client and ask that it be certified as a class action for everyone in a similar situation. Attorneys typically finance cases themselves, and most members of the class never see a lawyer (let alone a legal bill) but can get a check if the case is won or settled. In Germany, by contrast, each plaintiff must file individually and pay legal fees upfront. Investor suits—but not other kinds of claims—can be bundled for gathering evidence. If plaintiffs get a favorable ruling, though, they must resume their individual cases to determine damages.

German plaintiffs who lose must pay their legal bills—and those of the defendant, because of a loser-pays-all rule. Lawyers can’t finance lawsuits and usually are barred from getting a share of money they recover, rules designed to keep attorneys from taking only the most lucrative cases. Germany does allow third parties to shoulder the risk of such cases, and Tilp is working with Irish and British firms to cover some of the costs of the VW litigation. “Attorneys could handle cases here much more efficiently if they could take contingency fees or finance their litigation,” Tilp says. “German law cripples lawyers.”

For previous suits, Tilp worked around some obstacles by setting up sister law firms in Switzerland and on the Portuguese island of Madeira, where rules are less strict. He did the same in the U.S., after a prospective client joined a class action against Deutsche Telekom there that was later settled for $112 million. That road is blocked for holders of VW’s Frankfurt-traded shares: A 2010 U.S. Supreme Court ruling makes it harder to sue companies in the U.S. when their shares aren’t directly listed there.

The VW scandal has given new life to a German government proposal to allow more joint actions. Under the plan, certified consumer associations and trade groups—but not lawyers representing individual clients—could file collective lawsuits. Claimants would sign up for only a small fee and avoid hiring their own attorney until the damages phase. That still won’t mean U.S.-style payouts, because Germany doesn’t allow punitive damages, and there are no jury trials, which critics say lead to bigger awards.

The BDI, the main lobbying group for German companies, frets that the proposal could pave the way to what it calls “abusive excesses.” The group says any move in that direction opens the door to other elements of U.S. litigation, such as discovery, in which plaintiffs’ attorneys gain access to a company’s internal information. That could unduly pressure companies to settle cases rather than fight them in court, says Heiko Willems, BDI’s head of legal policy. “There’s the danger of abuse,” he says. “Companies shouldn’t be named and shamed.”

Tilp well knows the frustrations of the German system. In 2001 thousands of shareholders sued Deutsche Telekom claiming they were misinformed in a stock sale, a case related to the 2005 U.S. settlement. Tilp has been involved in the suit for more than 15 years and the plaintiffs’ lead attorney for a decade. A Frankfurt court in November finally ruled in their favor—several months after Tilp’s primary client died. Although that doesn’t affect the outcome, it’s unclear whether the client’s heirs or other plaintiffs will see any money. The court found only that Deutsche Telekom made an error in its sales prospectus. Shareholders now must resume their individual suits, and the company might try to show that losses didn’t result from that error.

Tilp is optimistic the VW case won’t take that long. He predicts the Braunschweig judges will minimize delays and rule by the end of 2018. After all, he says, in a globalized economy it’s important for Germany to offer investors protection that’s as robust as that available elsewhere. “The VW litigation,” Tilp says, “is the last chance for the German capital market to show it’s a worthwhile place to invest.”

The bottom line: The VW emissions scandal has spurred Germany’s government to speed up rule changes that would allow more collective lawsuits.