Why the legal profession refuses contingency fees

Criminal codes

The German Lawyers’ Association (DAV) rejects the possibility of litigation financing by the mandated lawyer and is critical of the expansion of the admissibility of contingency fees.

(Photo: dpa)

Berlin Digitization has created facts in the legal market: In addition to the legal profession, legal tech companies have appeared that are also allowed to provide legal advice. “This is currently leading to unequal treatment,” says a draft law by Federal Justice Minister Christine Lambrecht (SPD), which is due to go into departmental voting shortly.

Accordingly, there are “considerable concerns” with regard to the “proportionality of prohibitions” in professional law – such as contingency fees. Here, the planned “Law for the Promotion of Consumer-Friendly Offers in the Legal Services Market” is intended to create a “coherent regulatory structure”. This is also required under European law.

Numerous legal tech companies now provide standardized and digital legal services. They enforce passenger compensation, clarify claims from the rental price brake and also dispute complex proceedings such as the diesel exhaust scandal or state liability in the event of the insolvency of the travel company Thomas Cook.

The providers are approved as debt collection companies under the Legal Services Act (RDG). This enables them to agree a contingency fee and even act as litigation financier. Consumers therefore dare to assert their claims against large corporations or the state even with low amounts in dispute – without having to bear a cost risk.

With a landmark ruling – the “Lexfox ruling” – the Federal Court of Justice (BGH) confirmed these remuneration models for debt collection service providers as legal in November 2019 and also approved their legal advisory activities.

Significant competitive advantages

Lawyers, on the other hand, must comply with the Federal Lawyers ‘Act (BRAO) and the Lawyers’ Remuneration Act (RVG) in their professional practice. This means that they are only allowed to agree contingency fees in a few exceptional cases and that they are completely prohibited from litigation funding. “As a result, debt collection service providers currently have considerable competitive advantages, at least in certain areas,” says the draft bill.

The recipe: what debt collection agencies are allowed to do, lawyers should also be allowed in the future. You should therefore agree success fees for object values ​​of up to 2000 euros and then also assume procedural costs. “This is intended to provide incentives for those seeking justice to enforce smaller claims more often with legal help in the future,” said the Federal Ministry of Justice on request.

In return, legal tech providers are to be checked more closely during registration and then subjected to more stringent information requirements. Because the business and remuneration models are “often hard to see through” for consumers, according to the draft.

Lambrecht’s ministry decided to move towards a liberalized legal market. Because – so the argumentation – if success fees were also forbidden for legal tech companies, that would make “their often consumer-friendly offers” impossible in many cases.

But the legal profession doesn’t like this approach at all. In a statement, the Federal Bar Association (BRAK) complains about a paradigm shift – away from the protection of law seekers from “unqualified legal services” towards a “legal services market that is establishing itself below the legal profession”. Instead of regulating legal tech companies, the professional regulation for lawyers will be relaxed. That means “in fact the abandonment of constitutional principles”.

“American” conditions

The professional representation rejects the agreement of success fees as well as litigation financing. “A remuneration system based on the success fee makes the lawyer the investor of the mandate and thus, as it were, a party”, it says in the BRAK statement. He is no longer the “independent body of justice”.

The German Lawyers Association (DAV) also rejects the possibility of litigation financing by the mandated lawyer and is critical of the expansion of the admissibility of contingency fees. It is not only about the concern to get “American” conditions and to leave law enforcement only to economically strong law firms.

Founder Daniel Halmer, who once won the BGH judgment for his legal portal Lexfox – meanwhile Conny – affirmed, however: “All successful legal techs are largely led by experienced lawyers.” Stronger supervision would be required, nor would “perceived” competitive disadvantages of the legal profession be abolished. The proposed law is therefore “not a great hit to bring the legal services market into the 21st century”.

The regulation of the legal profession and legal tech companies is likely to lead to harsh debates in the parliamentary process. However, the modernization has simply become necessary – if only through the case law of the BGH.

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