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Germany: Federal Court of Justice Rules on Legal Tech

(Dec. 23, 2019) On November 27, 2019, the German Federal Court of Justice (Bundesgerichtshof, BGH), Germany’s supreme court for civil and criminal cases, held that the services provided by the company Lexfox, which is registered as a legal services provider for collection services, did not violate the German Legal Services Act. The decision was highly anticipated because it clarifies rules for legal tech companies and legal service providers.

Applicable Law

The Legal Services Act defines a legal service as “any activity related to the concrete affairs of others as soon as it requires a legal assessment of the individual case.” (Legal Services Act § 2, para. 1.) The objective of the Act is to “protect the consumers of legal services, legal relations, and the legal system from unqualified legal services.” (§ 1.) Any provision of legal services must be authorized by the Legal Services Act or other laws. (§ 3.)

As an exception, certain legal services may be provided by non-lawyers on the basis of their special expertise in that area. Among those services are collection services. The person or company must register with the competent authority. (§ 10.)

Facts of the Case

The plaintiff is the company Lexfox, which is registered with the District Court of Berlin as a legal services provider for collection services. It operates the website “wenigermiete.de,” where tenants may check for free, among other things, whether the rent they pay is too high and violates rent control laws. The online software compares the tenant’s rent with the local reference rent. If the online tool finds that the tenant has grounds for any claims, these claims can be assigned to the plaintiff, which will enforce them against the landlord. If the out-of-court enforcement is unsuccessful, Lexfox will hire an attorney to enforce the claims in court. The plaintiff will receive one third of the yearly saved rent as payment if the enforcement of the claims is successful. The tenant will not incur any costs if the enforcement is unsuccessful. (BGH paras. 1, 3–5.)

The defendant is a landlord in Berlin who rented his apartment to the tenant starting on December 1, 2015. The apartment is located in an area that Berlin has designated as a “tight housing market” according to section 556d of the Civil Code, meaning in an area in which landlords are prohibited from charging rent that is more than 10% of the local average rent for a new lease (“rent brake”). He charged rent of €371.57 (about US$411.08), whereas the local reference rent plus 10% is €346.81 (about US$383.68). (Para. 2.)

The tenant assigned his claims to the plaintiff after using the online tool in question. On March 20, 2017, the plaintiff sent a letter to the defendant, stating that he was in violation of the rent control regulation of Berlin and demanding reimbursement of the overpaid rent, as well as that the future rent would be reduced to the maximum allowed level. (Paras. 7, 8.)

The district court ruled in favor of the plaintiff. The appeals court reversed the decision and held that the focus of the company was not the provision of collection services but the general provision of legal services via their online tool and therefore found a violation of the Legal Services Act. The plaintiff appealed the case on questions of law to the Federal Court of Justice. (Paras. 9–17.)

Decision

The Federal Court of Justice annulled the decision and remanded the case to the appeals court, holding that the enforcement of claims for tenants is covered by the plaintiff’s authorization to perform collection services according to the Legal Services Act. As the plaintiff is registered with the competent authority, the assignment of the claims and the subsequent enforcement were valid. (Para. 38.)

The Court recalled that the objective of the Legal Services Act to “protect consumers from unqualified legal services” can be achieved only when the provision of legal services is limited to the ones authorized by the Legal Services Act or other laws. The Legal Services Act defines “collection services” as “legal services.” The Court pointed out that section 10 of the Legal Services Act allows persons with special expertise to perform collection services when they register with the competent authority. (Paras. 39, 40.)

Furthermore, the Court emphasized that the objective of the Legal Services Act was to liberalize and deregulate out-of-court legal services and that the Federal Constitutional Court had adopted a broad interpretation of the term “collection services.” In addition, the Court referred to the deregulation efforts of the European Commission for the freedom to provide services. The legislative material makes clear that the German parliament’s aim was to allow new professions and make the Legal Services Act viable for future developments. It therefore held that neither the use of the rent control online calculator before the collection agreement is concluded and the claim assigned nor the plaintiff’s nor the tenant’s agreement on a contingency fee constitutes a breach of the plaintiff’s authorization to provide collection services. The fact that attorneys are prohibited from concluding a contingency fee agreement does not change that outcome, in the opinion of the Court. Registered persons have been explicitly exempt from the stricter professional rules applicable to lawyers. (Paras. 99–101, 133, 173, 176.)

The Court held that the question whether a certain activity of a registered collection services provider violates the Legal Services Act must be answered on a case-by-case basis. The decision must be based on the objective of the Legal Services Act, taking into account the values of the German Basic Law—in particular the freedom to pursue the occupation of collection services provider and the guarantee of property for the benefit of the client—and the changing circumstances of modern life. It pointed out that the courts as well as legal literature nowadays generally agree that a collection services provider must be able to assess whether a claim exists and advise the client, and not just enforce undisputed claims. The exception for collection services providers to provide legal services in that area must include legal advice. The permission to provide collection services is granted only to people who possess specific expertise. In the opinion of the Court, the provision of specific legal advice by such qualified people is therefore unlikely to pose a risk to the consumer or the legal system. (Paras. 109–124.)

In the opinion of the Court, the highly debated question whether using a software-based, automatic calculator constitutes providing legal advice is irrelevant in the case at issue. The online tool in question is used to provide collection services that always qualify as legal services. However, the Court pointed out that it is unlikely that the online calculator would otherwise qualify as a legal service. The information that the online calculator provides could have been obtained by the tenant in an analog manner by looking up the relevant information in the publicly available rent index. (Paras. 147–152; Legal Services Act § 2, para. 2.)

 Related Developments

A similar case regarding legal tech was decided by the Higher Regional Court of Cologne on October 8, 2019. The Court held that the services provided by a legal contract generator platform violated the German Legal Services Act. It instructed the owner of the contract platform to cease its operations and stop advertising it.