Competition Heats Up Between German Legal Tech Companies and Law Firms for Consumer Claims

06th Oct 2021

The legal tech industry in Germany is reportedly booming – allowing consumers with low-value claims a “risk-free” way to pursue their cases, something that German law firms could not do until now. In order to level the playing field between legal tech companies and law firms, the German Bundestag passed a legislative reform in June 2021, which revises the Legal Services Act to allow law firms to work on a contingency fee basis for low-value claims – a move that is being criticized in legal and business circles.

German legal tech service providers are companies registered to collect debts. They are not regulated as law firms; however, they have evolved to become online platforms to enlist claimants for consumer lawsuits. Under this German “assignment” model, claimants assign their claims to legal techs, which then can bundle these consumer cases together (using technology) and pursue claims in their own name.  A legal tech earns money by taking a share of the total awards/pay-outs if the claim is successful. Companies like LexFox (focused on tenants’ rights, employment claims, and consumer contracts) myRight (VW diesel claims), and Flightright (passenger rights), work off of this business model, according to the German legal newsletter Anwaltsblatt.

Instead of addressing the questionable business model of legal tech companies, the German government decided instead to deregulate law firms and allow them to work on contingency fee basis for low-value claims of up to EUR 2,000. It is expected that it will generate more consumer claims in Germany as lawyers can now offer these services for comparable terms.

The German Federal Bar (BRAK) as well as the Institute for Procedural Law and Attorney Regulations (IPA) at the University of Hannover criticized this reform, which they said should have instead regulated the legal tech industry.

On the positive side, the legislative reform takes a step towards more transparency over third party litigation funding (TPLF). The terms of TPLF contracts with legal techs will now have to be disclosed to claimants so that they can, for instance, evaluate possible undue influence of third parties. The law reform enables the consumers to read and check the terms between funders and legal techs for possible risks.

The revised law went into effect on 1 October 2021.