German civil courts enjoy a sterling reputation worldwide. According to the 2022 World Justice Project Rule of Law Index, for example, the German civil justice system ranks 4th out of 140 countries.Footnote 1 However, beneath the surface is growing cause for concern: For more than two decades, the number of cases newly submitted to German civil courts has been decreasing. This holds particularly true for the first instance local courts (Amtsgerichte)Footnote 2 that hear civil cases with a disputed value up to €5,000 (approx. 5,300 USD).Footnote 3 In these yeoman courts of the German system, annual filings have declined by almost 1 million cases over the past twenty-five years, from roughly 1.7 million in 1995 to some 700,000 in 2021,Footnote 4 most of them contract claims (notably construction, insurance, sales, and lease contracts).Footnote 5
Is this a problem? At first glance, one might be inclined to say no. Arguing that fewer cases mean less work for courts, one could think that declining case numbers are a good thing. A closer look, however, reveals that the story is more complicated: Fewer court cases probably mean that fewer claims are being enforced. To be sure, it could be that the number of cases before German courts has fallen because people have fewer legal problems and, therefore, do not need to seek assistance from the court. Or it could be that more cases are being settled through alternative dispute resolution mechanisms such as arbitration or mediation. But these reasons, even if they are true, cannot explain the staggering loss of one million cases per year.Footnote 6 Instead, chances are that a significant number of lower-value claims simply go unenforced, suggesting that Germany – like the United States – has an access-to-justice problem, albeit one with different contours: In the United States, financially distressed, self-represented individual defendants do not know how to navigate the court system when sued by highly professional institutional plaintiffs.Footnote 7 In Germany, by contrast, individual plaintiffs (very often, consumers) are refraining from pursuing their claims in court.
On closer inspection, however, things might not be as bad as they appear. In fact, like in the United States, a growing cast of nonlawyer, technology-fueled service providers have entered the German legal services market in the past ten or so years. Commonly referred to as “legal tech companies,” they use digital technologies to automate, simplify, and thus improve the enforcement of lower-value, especially consumer claims. More specifically, they take easily standardizable, well-structured claims, check their legitimacy (largely) automatically with the help of algorithms and, in close cases, enforce them in return for a contingency fee.
Probably the best-known German legal tech company of this sort is the company Flightright.Footnote 8 It enforces passengers’ rights under the European Air Passenger Rights RegulationFootnote 9 – a European Regulation that requires airlines to pay passengers compensation in case of cancellation, denied boarding, or long delays. According to Flightright, it has helped more than six million air passengers (Europe-wide) receive compensation, amounting to €430 million over the past ten years.Footnote 10 The secret of Flightright’s success includes the following:
▪ a database with over eighty million records, fed daily with flight data from all over Europe as well as information on strikes and weather conditions;
▪ an algorithm that can (allegedly) determine within seconds, by means of data matching, whether a specific passenger is entitled to compensation;
▪ and, finally, an attractively designed website that allows passengers to check the legitimacy of a claim within a few seconds with the help of a structured questionnaire.
Flightright, however, has not only developed a very profitable business model and helped air passengers to enforce their rights. It has also revolutionized the out-of-court enforcement of lower-value claims, notably consumer rights, and offers a showcase for how consumers can benefit from digitization to enforce their legal rights. In fact, following in Flightright’s footsteps, a large number of legal tech companies are now active in Germany. According to a recent tally on the website “future-law.eu”Footnote 11 there are now more than twenty companies actively contributing to the enforcement of consumer rights. These include companies dealing with the enforcement of tenants’ rights against landlords, and companies dealing with policyholders’ rights against insurance companies. All these companies are now well-known to large parts of the population and have become extremely popular: They are easily accessible via the internet, offer fast and unbureaucratic processes, and – most importantly – exempt consumers from any cost risk.
Legal tech companies, however, have not been uniformly met with joy and excitement. To the contrary, the legal profession has, over the past years, turned out to be skeptical – and at times even hostile – to the growing presence of legal tech companies. Some lawyers and lawyers’ organizations (including bar associations) have identified legal tech companies as rivals in the legal services market and initiated a discussion about whether legal tech companies should be allowed to do what they do – and whether they are illegally providing legal services. These discussions have since led to various rulings of the German Federal Court of Justice (Bundesgerichtshof – BGH) as well as the adoption of a new federal law that specifically targets legal tech companies, the so-called Legal Tech Act 2021.Footnote 12
In the following chapter, I critically engage with these developments and their implications for access to justice in Germany. I start in Section 13.1 by outlining the regulatory environment for the provision of legal, and legal tech, services in Germany. In Section 13.2, I turn to the case law of the Federal Court of Justice, followed by a discussion in Section 13.3 of the Legal Tech Act of 2021. In the final Section, I offer some conclusions and an outlook on the future of legal tech. Overall, I hypothesize that access to justice in Germany has benefitted from legal tech companies but that important issues remain to be addressed.
13.1 Provision of Legal Tech Services: The Regulatory Environment
As in many other countries, including the United States, Germany’s legal services marketplace is heavily regulated. At the heart of the regulatory landscape are two statutes: the Federal Code for Lawyers (Bundesrechtsanwaltsordnung – BRAO)Footnote 13 and the Act on Out-of-Court Legal Services (Rechtsdienstleistungsgesetz – RDG).Footnote 14 As in the United States and elsewhere, these laws essentially reserve the right to provide legal services to formally admitted attorneysFootnote 15 – that is, to professionals who are subject to strict rules on education and professional conduct. However, unlike in the United States, attorneys do not enjoy a complete monopoly.Footnote 16 Instead, the Act on Out-of-Court Legal Services allows certain groups of nonlawyers to provide legal services out of court under certain conditions.Footnote 17 According to section 10(1) of the Act, for example, registered debt collection services (Inkassodienstleister) may collect outstanding payments out of court and may offer associated legal services without an attorney’s license (so-called debt collection license, or Inkassolizenz).Footnote 18 The provision has long been part of the German regulation of the legal services market. And for the better part of its existence, it did not receive a lot of attention: It was broadly accepted that debts can be collected with the help of nonlawyer, specialist debt collection agencies that are subject to much less regulation than attorneys.Footnote 19 Nobody argued that debt collection was something that needed to be accomplished by attorneys.
In recent years, however, section 10(1) no. 1 of the Act on Out-of-Court Legal Services has become the focal point of a heated debate. That is because legal tech companies like Flightright resort to the debt collection license under the Act on Out-of-Court Legal Services to offer their services, even though these companies are run by persons who qualify as attorneys.Footnote 20 More specifically, some lawyers have initiated a debate about whether section 10(1) no. 1 of the Act allows legal tech companies to do what they do – or whether these companies are illegally providing legal services.Footnote 21
The opponents of a liberalized approach to the provision of legal services make two points. First, they claim that the offerings of legal tech companies take on work that exceeds the scope of classic debt collection services because they do not only focus on the collection of undisputed claims but also take on cases that are difficult and unclear (and, hence, would otherwise be prone to end up in court). In addition, they argue that legal tech companies offer services that are only loosely associated with the collection of debt.
A prominent example that illustrates the first point is Lexfox (now active under the name CONNY), a legal tech company that helps tenants navigate the German federal rent control scheme adopted in 2015 (the so-called rent brake – Mietpreisbremse).Footnote 22 Under the rent control scheme, the rent that landlords can charge when renting out apartments must not exceed a certain threshold. However, the rent control scheme only kicks in under certain (substantive and formal) conditions. In addition, it can be rather difficult to assess the permissible rent in an individual case because various factors have to be taken into account. Lexfox, therefore, must check the availability of the “rent brake” by collecting information from the landlord, and then it must calculate the permissible rent before it can actually ask for payment. Accordingly, Lexfox offers services much closer to those of an attorney than to those of a classic debt collection service. Indeed, Lexfox’s website frames its services as “reduction of rent” and not as “collection of outstanding payments.”Footnote 23
The second point raised by opponents of a liberalized approach is closely related to the first: While legal tech companies offer services that resemble the services offered by attorneys, they are subject to much less regulation. Under the Federal Code for Lawyers (Bundesrechtsanwaltsordnung – BRAO)Footnote 24 and the Act on the Remuneration of Lawyers (Rechtsanwaltsvergütungsgesetz – RVG)Footnote 25, for example, attorneys are subject to a number of restrictions: They must not take on financial investors;Footnote 26 they must not take over legal costs, especially litigation costs for clients;Footnote 27 and they may only agree on contingency fees or other forms of payment based on success under very strict conditions.Footnote 28
Debt collection services, in contrast, are not subject to any of these rules. Just as any other company, they can take on investors, finance legal costs (including litigation costs) for their clients, and offer their services on a contingency fee basis.Footnote 29 In addition, debt collection services are subject to much more lenient rules with regard to regulation of conduct: While attorneys have to follow strict rules relating to, among others, the handling of conflicts of interest,Footnote 30 client information,Footnote 31 and third-party funds,Footnote 32 debt collection services are under no comparable regulation.Footnote 33 Finally, the requirements for admission are much different. While becoming an attorney in Germany takes two state exams and at least six years of training (four years of law school; two years of practical training),Footnote 34 debt collection service providers must only provide proof of expertise (Sachkundenachweise),Footnote 35 which can be obtained through participation in a 120-hour training course (Sachkundelehrgang), including a written test.Footnote 36 Other than that, they are not subject to any regulation.Footnote 37
Thus, opponents of a liberalized approach protest that legal tech companies, in practice, offer services that are similar to (or identical to) the services traditionally offered by lawyers but that they are not able to ensure the same kind of quality as lawyers. As a consequence, they conclude that, in the interest of consumer protection, legal tech companies should not be allowed to offer services under the debt collection license of the Act on Out-of-Court Legal Services.
13.2 Legality of Legal Tech Services: Case Law
The above discussion shows that legal tech companies in Germany face similar opposition from lawyers and lawyers’ organizations as they do in the United States. And, as in the United States, the legality of legal tech companies and their business models has been challenged in the courts.Footnote 38 However, so far, all attempts to strike down the business models of legal tech companies in Germany have been unsuccessful. Notably, the German Federal Court of Justice has turned out to be very legal tech-friendly and has held, starting with the pioneering Lexfox I judgment, that the Act on Out-of-Court Legal Services allows legal tech companies to do what they do.
13.2.1 The Lexfox I Judgment of the Federal Court of Justice
The Lexfox I judgment, rendered in 2019, revolved around a Berlin tenant who had used Lexfox’s online services to check whether his rent was in line with the German federal rent control scheme (the so-called rent brake).Footnote 39 When Lexfox’s online rent calculator indicated that his rent was too high, he assigned all his rights and claims under his tenancy agreement (including any right to repayment of overpaid rent) to Lexfox, which promised to enforce the tenant’s rights and claims for a contingency fee. Lexfox reached out to the landlord, made a formal complaint about the rent brake violation, and asked for additional information in order to determine the permissible rent, to demand repayment of the overpaid rent, and to request that the landlord agree to charge only the permissible rent in the future. The landlord, however, refused to cooperate, and Lexfox took the case to court (along with the help of an attorney).Footnote 40 Lexfox was successful before the local court (Amtsgericht – AG) of Berlin.Footnote 41 On appeal, however, the regional court (Landgericht – LG) of Berlin rejected Lexfox’s claim, holding that the assignment of rights and claims under the tenancy agreement had been invalid because the enforcement of the “rent brake” required the provision of fully fledged legal services – not those covered by the debt collection license under section 10(1) no. 1 of the Act on Out-of-Court Legal Services.Footnote 42 Lexfox appealed to the highest German civil court, the Federal Court of Justice (Bundesgerichtshof – BGH), teeing up a ruling on the appropriate reach of the debt collection license and, incidentally, on the permissibility of Lexfox’s business model.Footnote 43
In its eighty-page judgment, the Federal Court of Justice reversed the regional court’s decision.Footnote 44 It held that the services offered by Lexfox were covered by the debt collection license, and thus lawful, and also that the tenant’s assignment of rights and claims had been fully valid. According to the court, section 10(1) no. 1 of the Act on Out-of-Court Legal Services not only allowed for the classic collection of (undisputed) outstanding payments but also included more complex tasks, such as the collection of information about a claim and taking steps to meet the requirements to bring a formal claim, including through letters of complaint.Footnote 45 Pointing out that the Act on Out-of-Court Legal Services was meant to liberalize and hence, to open, the market for out-of-court legal services to nonlawyers, the court held that the Act allowed nonlawyers with sufficient expertise in a certain area to offer legal services. For this reason – and in light of the basic right to freely choose a profession enshrined in Article 12 of the German ConstitutionFootnote 46 – the Act’s exceptions, including the provisions encompassing debt collection in section 10(1) no. 1 had to be interpreted broadly, not narrowly, and with reference to the legislature’s intention to protect consumers from unqualified legal service providers.Footnote 47 Since Lexfox possessed the required expertise, there was no reason to assume that it should not be allowed to offer its services. There was, in other words, no need to protect consumers from Lexfox.
13.2.2 Further Judgments of the Federal Court of Justice
With its Lexfox I judgment, the Federal Court of Justice established a very broad scope of debt collection under section 10(1) no. 1 and allowed substantial overlap between the services of legal tech companies and the services traditionally offered by attorneys. At the same time, the court interpreted the Act on Out-of-Court Legal Services in a very liberal way prohibiting the provision of legal services by nonlawyers only where such a prohibition is necessary to protect consumers.
In subsequent judgments, the court confirmed and applied an equally liberal approach to other legal tech companies.Footnote 48 In July 2021, for example, the court held that the business model of Airdeal was covered by the debt collection license of section 10(1) no. 1 of the Act.Footnote 49 Airdeal had collected claims by way of assignment from Air Berlin customers whose flights had been canceled as a result of the company’s insolvency.Footnote 50 Airdeal’s detractors argued that this service exceeded Airdeal’s rights as a debt collection service, pointing out that Airdeal did not even attempt to collect the claims out of court, but instead sought court enforcement right away (with the help of an attorney).Footnote 51 The Federal Court of Justice, however, held that the debt collection license did not require debt collection services to enforce claims out of court first before seeking enforcement in court. Rather, the license also covered business models that primarily (or exclusively) envisioned court enforcement of claims (with the help of an attorney).Footnote 52 In a similar vein, the court decided, in June and October, 2022, that a debt collection license gives legal tech companies the right to collect damages claims from a large number of consumers (including claims that were subject to foreign law) in order to enforce them in court.Footnote 53 It is, therefore, fair to conclude that legal tech companies enjoy great freedom to offer their services under the debt collection license of the Act on Out-of-Court Legal Services.Footnote 54 In fact, as of today, every business model premised on a debt collection license and considered by the court has been upheld and considered to be in line with the Act.Footnote 55
13.3 New Rules and Regulations: The Legal Tech Act 2021
The above-described judgments of the Federal Court of Justice have answered a number of pressing questions revolving around the legality of legal tech companies. However, they did not end the discussion about the regulation of legal tech companies. In fact, the very liberal approach of the Federal Court of Justice – and the ongoing criticism by lawyers and lawyers’ organizations – sparked a discussion about an adjustment of the applicable legal framework. This discussion eventually led to the adoption in 2021 of the Act for the Promotion of Consumer-oriented Offers in the Legal Services Market (Gesetz zur Förderung verbrauchergerechter Angebote im Rechtsdienstleistungsmarkt), commonly known and referred to as the Legal Tech Act.Footnote 56
13.3.1 Main Thrusts and Noteworthy Changes
The Legal Tech Act has two main thrusts:Footnote 57 First, it is meant to mitigate the earlier described imbalance between the regulation of attorneys, on the one hand, and the regulation of debt collection services, on the other, thus leveling the playing field between the two. Second, it is intended to provide consumers with better protection when they make use of debt collection services.
To reach these goals, the Legal Tech Act first loosens some of the traditional legal restrictions for attorneys. Most importantly, it allows lawyers to charge a contingency fee where three conditions are met: (1) where a plaintiff asserts a monetary claim up to a limit of €2,000;Footnote 58 (2) where the attorney provides out-of-court debt collection services, typically in payment order or enforcement proceedings;Footnote 59 and (3) where the client would otherwise be deterred from pursuing legal action.Footnote 60 In addition, the Act allows attorneys to take over the costs associated with enforcing the client’s rights, notably the costs of litigation, where the attorney provides out-of-court debt collection services, provided that the attorney charges a contingency fee at the same time.Footnote 61 It follows that attorneys engaged in debt collection are largely put on par with legal tech companies.
True to its name, however, the Legal Tech Act does not just regulate attorneys. It also takes on the regulation relating to legal tech companies. To begin with, the Act tightens the requirements for admission as a debt collection service under section 10(1) no. 1 of the Act on Out-of-Court Legal Services. According to section 13(2) of the Legal Tech Act, applicants must now describe in their application for registration what they plan to do and in which legal areas they will operate. This requirement allows the competent registration agency to check the admissibility of the respective business model at the time of registration, thus avoiding the uncertainty that results if admissibility can only be checked later during civil proceedings (as in the Lexfox case).Footnote 62 The registration agency may also, at the time of registration, ask for proof of expertise in addition to participation in the previously mentioned 120-hour training course (Sachkundelehrgang).Footnote 63 Finally, the Act establishes new disclosure obligations that debt collection services must fulfill toward consumer-clients. In particular, it requires debt collection services to inform consumers about (1) alternative options to ensure the consumer’s rights if the company wishes to charge a contingency fee; (2) the details of any agreement with a third-party litigation funder; and (3) the details of the legal tech company’s right to enter into settlement agreements.Footnote 64 Additional disclosure obligations relate to situations where a debt collection service declines to enforce a particular claim, and require the debt collection service to inform the consumer why it declined to pursue their claim.Footnote 65 The company must indicate whether it inquired into the legal legitimacy of their claim, and if so whether this has been done automatically, such as with algorithms. Consumers must be further informed that the decision not to enforce the claim does not affect other forms of enforcement, whether in-court or via alternative dispute resolution mechanisms.
13.3.2 Consequences for the Legal Services Market
As evident above, the Legal Tech Act has brought about some key changes to the regulatory landscape relating both to attorneys and to legal tech companies that offer their service under section 10(1) no. 1 of the Act on Out-of-Court Legal Services. Overall, however, the changes are rather limited.Footnote 66 In the literature, they have rightly been described as a “small step”Footnote 67 and mere “cosmetic correction.”Footnote 68
To begin with, the Act loosens restrictions for attorneys only with regard to debt collection services – that is, with regard to the area where there is immediate competition from nonlawyers like Lexfox and Airdeal. It does not, however, loosen the restrictions for any other kinds of services attorneys offer – areas where competition from legal tech companies may emerge. In particular, the Legal Tech Act does not touch upon the “big” issues of lawyer regulation, notably the general ban on attorneys working on a contingency fee basis, the general bans regarding litigation funding, and, most importantly, the general ban on seeking outside financial investment from nonlawyers (fee-splitting). As a consequence, the Act essentially sidelines attorneys from any substantial use of legal technology beyond debt collection, and it prevents them from providing the same kind of consumer-friendly and efficient services that legal tech companies offer. Thus, it fails to actually create the intended level-playing field.Footnote 69
The Legal Tech Act applies an equally cautious approach to the regulation of legal tech companies. In particular, it does not specifically say that legal tech companies may offer their services under the Act on Out-of-Court Legal Services. It leaves courts to decide the permissibility of other legal tech business models under the Act on a case-by-case basis.Footnote 70 Thus, it fails to provide prospective legal tech companies with much-needed legal certainty.Footnote 71 In addition, the Act only requires debt collection services to make certain disclosures to consumers. While this may theoretically increase transparency it is more than likely that most consumers will fail to read or take note of the information provided.Footnote 72
Against this background, the debate about the regulation of legal (and tech) services will have to go on. Among the issues to be considered is whether the above-mentioned restrictions that continue to apply to attorneys should be abandoned.Footnote 73 In particular, the debate will consider whether attorneys should generally be allowed to work on a contingency fee basis, to fund litigation, and to take financial investors on board.Footnote 74 In addition, the evolving legal tech scene will have to be monitored to determine whether further legislative action is needed, and in particular whether legal tech companies should be required to prove their legal competence beyond current requirements. To be sure, legal tech companies have – thus far – only improved the enforcement of consumer claims. However, since there is virtually no regulation in place that could ensure quality – for example in the form of regulation relating to legal expertise – there is a potential risk that the situation may change in the future.Footnote 75 In the best interest of consumers, it is therefore necessary to remain careful and to react should regulation become necessary.
13.4 Conclusion
Legal tech companies have thus far enriched the German legal services market and have helped to mitigate the access-to-justice problem that Germany faces.Footnote 76 They have also, so far at least, survived attempts from the organized bar to narrow or even terminate their business models. Thanks to both the German courts, in particular the Federal Court of Justice, as well as the German legislature, legal tech companies are allowed to offer their services under the debt collection service exception of the Act on Out-of-Court Legal Services. Without openly admitting it, the courts and the federal legislature have recognized that legal tech companies make a positive difference for consumers who wish to enforce lower-value claims.Footnote 77 In addition, these actors have made clear that they are not willing to let legal tech companies – particularly those devoted to enforcing lower-value, mostly consumer, claims – fall prey to the kind of “lawyer protectionism” that underlies much of the criticism voiced against digital legal service providers. For champions of liberalization, these are welcome developments.
It is regrettable, however, that the German federal legislature has – so far – refrained from taking a closer look at the overall regulatory landscape for the provision of legal services and notably the strict regulation of the legal profession. With the Legal Tech Act, it has only loosened, and not eliminated, some of the restrictions that attorneys currently face. And it has done so in a very limited fashion, namely with regard to the collection of debt. In contrast, it has not analyzed whether the remaining restrictions – especially those relating to the admission of financial investors, the funding of litigation, and the use of contingency fees – are actually necessary in order to protect consumers. Since the German legislature has also refrained from subjecting legal tech companies to stricter regulation (beyond the minimal regulations in the Legal Tech Act), the German legal services market will remain bifurcated, with heavily regulated attorneys and lightly regulated legal tech companies. In the years to come, we will, therefore, need to better understand the benefits and costs of that bifurcation – whether it resulted from a clear-eyed assessment by legislators and courts, or whether it is instead just the result of path dependency and muddling through. If the latter proves to be the case, which seems more than likely, Germany will have to completely overhaul its legal services market in order to regulate attorneys and other legal services providers, including legal tech companies in essentially the same – and most likely, a more liberal – way. In particular, it will have to introduce rules that allow legal service providers across the board to resort to outside funding, to finance litigation via equity or other sources, and to work on a contingency fee basis, at least under certain conditions.
However, even if the German legal services market is ultimately liberalized along these lines – which is, in the end, a political and thus unpredictable process – the access-to-justice problems that Germany is facing will most likely remain. In fact, a recent study, commissioned by the Federal Ministry of Justice (Bundesjustizministerium – BMJ) concluded that the dramatic loss of cases that German courts have experienced during the past twenty-five years can be attributed in significant part to features of the German civil justice system.Footnote 78 In particular, the report found that the relatively high costs of pursuing a claim, the complexity and the length of civil proceedings,Footnote 79 and uncertainty regarding case outcomes lead many people not to seek justice in the courts.Footnote 80 It is, therefore, to be welcomed that efforts are currently being made to improve the German court system. In fact, a Working Group commissioned by the German judiciary submitted a number of proposals for the modernization of the German civil justice system in 2020.Footnote 81 Since then, the German Federal Ministry of Justice has been intensively gathering and discussing ideas for how to make the German court system more appealing and more accessible for consumers and nonlawyers in general.Footnote 82 And while nothing has been decided or implemented yet, it has become clear that any reform package will set out to improve not only access to courts but also the conduct of court proceedings through the use of digital technology, notably self-help systems that use guided interviews or chatbots inspired by legal tech companies. In addition, it is noteworthy that some German Federal States are currently experimenting with the use of artificial intelligence to deal with assembly-line claims that have reached German courts in recent years as a result of legal tech companies’ efforts to bring and enforce lower-value claims.Footnote 83 While these experiments are still in an early stage and limited to certain types of claims, they show where the path is leading. One may, therefore, hope that – in conjunction with the top-down attempts to modernize and digitalize the German court system – German courts will soon adopt the measures necessary to increase the attractiveness of the German civil justice system, thereby furthering the delivery of justice.
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