Managing litigation risks: Assignment models and litigation funding make it possible

Enforcing damage claims in court is often associated with a high financial risk and organisational effort, even for institutional investors and companies, which is why injured parties often refrain from doing so. In such cases, assignment models and litigation funding can be the solution: injured parties can enforce their claims cost-effectively in court - sometimes even without being a party to the proceedings themselves. 

Assignment models: passing on your own claims

In the context of mass proceedings, an assignment is understood as being the bundling of claims of various injured parties for their joint assertion by a single claimant. For this purpose, the injured parties assign their claims to an authorised legal service provider (collection service provider) or to a litigation company (litigation vehicle) established for the respective bundling of claims. These then assert the claims in court in their own name.

The German Legal Services Act (Rechtsdienstleistungsgesetz - RDG) imposes certain requirements on the legal service provider bringing the action: The legal service provider must be registered as a collection service provider and must at least be financially able to cover all possible cost reimbursement claims of the other party (see Section 10 (1) sentence 2, (2) RDG).

Practical significance of the assignment models

The advantage of such assignment models for injured parties is that the collection service provider assumes the entire litigation risk (court and legal costs). The injured party can utilise the capital "saved" in this way elsewhere within its business and thus maintain its liquidity. This is particularly attractive for damaged companies.

In many cases, the injured party also receives a direct purchase price in return for the assignment of the claim, regardless of the outcome of the proceedings. In return, the litigation vehicle (or the legal service provider behind it) is entitled to the damages won as a success fee.

The German Federal Court of Justice (Bundesgerichtshof – BGH) has recognised assignment models as permissible (judgement of 13 June 2022, case no. VIa ZR 418/21). It has also approved "class action collection" (judgement of 13 July 2021, case no. II ZR 84/20) and ruled that the activity of the legal service provider is still covered by the definition of collection in Section 10 (1) sentence 1 No. 1, Section 2 (2) sentence 1 RDG. In general, such business models are covered by the concept of collection that are aimed exclusively or primarily at the judicial collection of the claim. This also applies in the case of so-called "class action collection".

The BGH emphasises that the specific assignment models and their contractual form are fundamentally subject to judicial review, which can lead to risks in individual cases. If a court considers the assignment to be invalid, then the action is inadmissible. Depending on the structure of the assignment model, this may be to the detriment of the injured party. There are open questions that have not yet been clarified by the Supreme Court, such as the compatibility of assignment models with European law.

Litigation funding: no own costs in legal disputes

In the case of litigation funding, the claim remains with the injured party: they bring the action in their own name and are a party to the legal dispute. The litigation funder assumes the costs of the proceedings and legal advice without the injured party having to make any advance payments. The injured party only has to pay the litigation funder a success fee if they win in court. As a rule, this fee is calculated as a percentage of the damages won or a multiple of the capital contributed by the litigation funder.

Positive aspects of litigation funding

The advantages of litigation funding are similar to those of the assignment models. In particular, the injured party bears no or, depending on the structure, only a very low risk of legal costs in the event that the claim is ultimately lost.

As litigation funders "invest" in the case, they subject the claims to a careful "purchase check". The injured party therefore benefits from an assessment of the prospects of success of the legal dispute, which allows for a reliable risk assessment. If the injured parties are companies, the litigation funder is usually the point of contact for the legal representatives. This relieves the burden on the company's legal department. In addition, litigation funding offers the advantage that the dispute between the injured party and damaging party is conducted on an equal footing, thanks to a comparable use of resources.

Pure litigation funding is particularly suitable for the enforcement of claims outside of mass proceedings, as the special features of the individual case can be better taken into account.

Outlook

Mass proceedings are becoming increasingly important. It is not only in connection with the well-known diesel proceedings that injured parties are taking legal action via so-called mass proceedings.

Mass proceedings will also be the future in other cases in which numerous injured parties assert similar claims against the same debtor. Regardless of whether this involves mass individual claims or the bundling of claims in one action: assignment models and litigation funding are practical options for injured parties to effectively enforce their claims in court - in some cases even without having to use their own capital.

Read more regarding this topic here:

• Mass litigation as opposed to individual lawsuits: opportunities and risks of collectively enforcing claims
• Class actions: cross-industry risk for companies
• Mass actions: dealing with mass individual lawsuits
• The reform of the KapMuG: phoenix from the ashes?

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