Concept and Definition of the Litigation Industry
The litigation industry is a term describing the systematic and partly profit-oriented pursuit and organization of mass lawsuits within a national or international legal framework. The term is especially used where private-sector actors, such as companies or investors, intentionally initiate or promote lawsuits and develop a business model from them. This includes, among other things, opening up new markets and legal fields by coordinated action using modern technologies and business structures.
The term is controversial in legal scholarship and is often used critically in connection with so-called mass or class actions, as it suggests that the main objective of filing lawsuits is economic gain and not primarily the legal protection of individual claimants.
Emergence and Development of the Litigation Industry
Historical Background
The roots of the litigation industry lie in the development of collective legal protection, notably class action instruments in the USA (“Class Action”) and the increasing professionalization and commercialization of legal services. With the spread of legal tech companies and litigation funders in Europe and Germany, the term has gained significance in recent years, particularly in connection with mass damage events (e.g., diesel scandal, data protection violations).
Technologization and Commercialization
Through the digitalization of the legal market and the use of automated processes (Legal Tech), legal enforcement actions can now be organized efficiently, scalably, and comprehensively on behalf of a large number of claimants. This lowers the threshold for asserting claims, underlining the concept of the litigation industry. Central to this are often portals or platforms that bundle claims and serve as interfaces for litigation funders, legal service providers, or law firms.
Legal Classification and Structures
Civil Procedural Principles
At the core of the litigation industry are regularly large numbers of individual lawsuits, often related to similar factual situations and claim scenarios. In Germany, the relevant provisions of civil procedure law (§§ 253 et seq. ZPO) apply. With the introduction of the model declaratory action (§§ 606 et seq. ZPO) and other collective legal protection instruments, the enforceability of mass claims has been further facilitated.
Collective Legal Protection and Model Proceedings
The core of the litigation industry consists of collective and model proceedings, enabling the joining of numerous claimants against one or more defendants. In Germany, since 2018, the model declaratory action and, in some cases, pooled collection procedures have been available for this purpose. Comparable mechanisms exist in other EU countries, while in the USA, the class action is the dominating model.
Litigation Funding and Debt Collection
Funding for mass lawsuits is one of the most important legal aspects of the litigation industry. Litigation funders or service providers under the Legal Services Act (RDG) assume—often in return for a success-based fee—the financing of court and attorney costs. This can be done either through classic litigation funding or as part of commercial debt collection (Legal Tech debt collection). The legal admissibility and limitations of commercial legal services and litigation funding are subject to strict regulation by the RDG and adjacent legal frameworks.
Limits and Admissibility of Litigation Funding
According to established case law, litigation funders are permitted as third parties in the legal process, provided that conflicts of interest are avoided and consumers’ interests are protected. However, agreements for pure success-based remuneration are, for example, reserved exclusively for debt collection service providers under the RDG and are subject to statutory restrictions to prevent undue disadvantage.
Critical Assessment and Legal Policy Discussion
Opportunities and Risks
The litigation industry is, on one hand, seen as a driver for collective legal protection and enforcement of consumer rights. It can contribute to more effective consumer relief and legal certainty, particularly when individual damages would otherwise not be litigated due to high costs or risks.
On the other hand, the commercialization of claims is criticized for bearing the potential for abuse, as it allows the deliberate generation of disputes for profit motives (“warning letter waves,” “lawsuit waves”). Companies and associations in particular fear an increase in legal proceedings that focus less on legal enforcement than on economic pressure for rapid settlement.
Legal Policy Responses
The legislator has responded to the development of the litigation industry by, among other things, reforming the law on litigation funding and the admission of model actions. Amendments to the RDG and the discussion about EU-wide collective redress are also aimed at ensuring a balance between effective legal protection, consumer protection, and prevention of abuse.
In particular, the Federal Ministry of Justice continuously evaluates the existing instruments and examines potential needs for regulation, for example concerning transparency and disclosure obligations for litigation funders.
International Aspects and Outlook
European Legal Developments
Directive (EU) 2020/1828 on representative actions for the protection of the collective interests of consumers provides for the harmonization of collective legal protection in the European single market and will further promote the development of the litigation industry. Member States are obliged to establish transparent, balanced structures to ensure both legal certainty for mass victims and the prevention of abuse.
Future Prospects
The significance of the litigation industry will continue to grow given increasing digitalization, globalized markets, and the rising complexity of mass damage events. From a legal policy perspective, the challenge remains to create fair and efficient mechanisms for handling mass loss enforcement without creating incentives for systematic abuse of the law. Transparency, regulation, and adaptation of procedural rights will therefore be central to the further development of this legal field.
References and Further Sources For more in-depth information, articles on the model declaratory action, legal tech debt collection, litigation funding, and international class action proceedings are recommended. Federal ministries, relevant academic publications, and case law practice provide further material.
Frequently Asked Questions
What legal conditions must be met for a successful lawsuit within the so-called litigation industry?
For a lawsuit to be successful within the phenomenon of the “litigation industry,” all general requirements for admissibility and merits of a claim under the Code of Civil Procedure (ZPO) must be fulfilled. This includes, in particular, the proper legal capacity and capacity to sue of the claimant side, the presence of a well-founded statement of claim, the subject-matter and local jurisdiction of the court seized, and a legally enforceable claim. In the assertion of mass claims, which is typical for the litigation industry, claims are often made based on performance disruptions, tort law, or data protection—but these must be individually substantiated in each specific case. Litigation funding, assignment of claims, and the prohibition of so-called inadmissible legal proceedings due to abuse of rights (§ 242 BGB) also play a central role, since the purpose of a lawsuit may not be solely the generation of fees or pressure, but a legitimate independent interest of the claimant. So-called “mass lawsuits” are also often subject to increased judicial scrutiny to determine whether there is an abuse of the right to sue.
Are there legal restrictions for litigation funders and debt collection service providers operating in the litigation industry?
Yes, both litigation funders and debt collection service providers are subject to specific statutory requirements. Debt collection services may, according to § 10(1), no. 1 of the Legal Services Act (RDG), only be provided by registered companies that meet strict admission criteria. They may represent clients only in certain matters and must especially comply with the requirements for proper legal service and consumer protection. Litigation funders, on the other hand, typically do not act as a party or representative in court but bear the litigation cost risk in return for a success-based share. So-called “backdoor class actions”—where claims are bundled into a lawsuit and the funding puts commercial interests front and center—are problematic and legally disputed. The Federal Court of Justice (BGH) has clarified in various decisions that such constellations may comply with current law, as long as they do not amount to unlawful exercise of rights or circumvention of the ban on litigation funding by non-lawyers.
To what extent can the “right of access to a court” be restricted or expanded by the activities of the litigation industry?
The right to judicial protection is guaranteed in Article 2(1) in conjunction with Article 20(3) of the Basic Law (GG) and Article 6(1) of the European Convention on Human Rights (ECHR). The litigation industry can, on the one hand, expand this right by enabling even economically weaker or legally inexperienced consumers to effectively enforce their claims. On the other hand, mass filing of lawsuits or strategic abuse of the law pose the risk of overburdening the judiciary, which may affect the actual effectiveness of legal protection for all involved. For this reason, courts are increasingly scrutinizing whether a multitude of similar lawsuits is based on a legitimate interest in legal protection or primarily serves economic interests and fee maximization—the latter may, in individual cases, constitute abusive litigation and thus a limitation of legal protection.
What are the differences between German litigation practice and the US class action in the context of the litigation industry?
The key difference lies in the collective redress procedure. While the US “class action” is a well-established instrument for bundling mass claims, German law continues to rely on the classic individual lawsuit. The German model declaratory action (§§ 606 et seq. ZPO) only offers a middle ground: here, authorized consumer protection associations can bring a model case on behalf of an indeterminate number of affected parties, but only for a declaration—not for direct performance. While in the US, law firms and litigation funders often act as the true “drivers” of the litigation industry, client acquisition and representation in Germany are subject to stricter professional and procedural constraints. Also, punitive damages are generally not allowed under German law (with a few exceptions).
Can affected companies legally defend themselves against mass lawsuits from the litigation industry?
Affected companies have numerous legal options to defend against mass lawsuits. They can, for example, raise objections under procedural law such as abuse of rights, lack of active legitimation, or statute of limitations. Also, collective defense measures such as motions to stay proceedings in parallel cases, admissibility objections, or disputing the proper assignment of claims are available. Furthermore, companies can examine whether the claimant party violates data protection or competition law regulations in its organization and conduct. In individual cases, criminal and professional actions may also be taken against the abuse of procedural law—for example, in cases of commercial fraud or unauthorized legal services.
What is the significance of the prohibition of abuse of rights in the context of the litigation industry?
The prohibition of abuse of rights is a central criterion for the admissibility of claims in the context of the litigation industry. According to § 242 BGB (“good faith”), the exercise of rights is inadmissible if it is obviously abusive—that is, if it is conducted solely for purposes incompatible with the legal system, such as generating artificially inflated claims, overwhelming the opposing party with mass lawsuits, or collecting fees without any substantive legal protection interest. Courts, especially in cases involving large numbers of lawsuits, strictly examine whether a genuine interest in legal protection exists or whether the lawsuit is only being used as leverage with no substantive basis for the claim. If a lawsuit is brought solely as a means for personal profit without a plausible claim, the court may dismiss such cases as inadmissible.
What procedural particularities arise in the mass assertion of claims by the litigation industry?
Specific procedural particularities primarily concern the defendant’s dispute of individual claim requirements, the substantiation requirements for each individual proceeding, as well as possible concentration of proceedings through model declaratory actions or procedural consolidation under §§ 147, 159 ZPO. Since claims in the litigation industry are often based on assignments or partial usage, the parties must prove that the claimant is actively legitimized in the individual case. Courts are increasingly requiring detailed factual allegations, differentiated presentation of each cause of action, and, where necessary, a differentiated cost and value calculation for each individual lawsuit. Procedural costs, judicial duty to provide guidance, and the topic of simplification of proceedings are often the focus of judicial organization and development of the law due to mass parallel proceedings.
