Legal Tech further on the advance - BGH upholds "" business model

With its decision that the business model underlying the portal "" is to be qualified as a (still) permissible collection service and thus not illegal, the German Federal Court of Justice (BGH) is strengthening the digitalization of legal work. This is causing cheers from the legal tech community, and a mixture of restlessness and incomprehension among a whole range of legal professionals. The following article attempts to briefly describe the content of the decision of the highest German court and the deviating opinion of the lower court.

What were the issues at stake in these court proceedings?

Exactly EUR 23.49. Lexfox GmbH intervened on behalf of a tenant for this amount. For Lexfox GmbH as operator of the platform "", however, it was about much more - about the legality of its business model with regard to the Legal Services Act (Rechtsdienstleistungsgesetz, RDG). The decision of the BGH became a fundamental ruling for the entire industry.

The Lexfox business model

"Simple. Online. Risk-free." This is how the Berlin legal tech start-up and registered collection service provider Lexfox, formerly Mietright, advertises on its website. Tenants can use this website to check, without obligation, whether their respective landlords are adhering to the current rent brake. With the help of a rental price calculator, the data entered by the tenant on the apartment and rental agreement are compared with the Berlin rent index. If a violation of the rent brake is established, the tenant can instruct Lexfox to enforce his rights. For this purpose, the tenant assigns his claims against the landlord to Lexfox. If this has been done, Lexfox will request information from the landlord and, if necessary, rebuke the excessive rent. Only after successful enforcement of the rent reduction and repayment will a fee be payable, amounting to one third of the annual savings achieved. Lexfox will invoice the landlord for the expenses incurred in making such claims. For the tenant, this is a welcome opportunity to sue for even small amounts at low cost.

So what is the problem? The grey area again.

The core of the proceedings was - from a legal point of view - the controversial question of whether the Lexfox business model (still) represents a permissible collection service or (already) an inadmissible legal service in the sense of the RDG and thus the assignment of the claims to which the tenant is entitled is ineffective or void. Legal advice may only be offered by a debt collection service provider to a limited extent and only in the area of debt collection services, which in simple terms means (only?) the collection of third-party claims. This means that (at least) legal advice that is completely separate from debt collection is not permitted. Welcome to the well-known grey area. Already in the run-up to the BGH decision, four different chambers of the Berlin Regional Court dealt with this core legal issue and assessed the legal problem differently. From an economic point of view, the focus of the proceedings was elsewhere - namely the viability of the business models resulting from digitalization, which are based on scalability and mass business, and thus in the end the question of whether the providers of such services have backed the right horse and can survive in the market. - Still debt collection or illegal legal services?

The 63rd Civil Chamber decided, as did the 67th Civil Chamber of the Berlin Regional Court, that the focus of Lexfox's activities was not on the provision of debt collection services, but rather on legal advice with associated debt collection services. The business model was therefore considered inadmissible and the assignment void. The reason given for this view was that data reconciliation by means of a rent calculator is not merely the arithmetic operations of a computer-based system, but already constitutes a legal service which the tenant makes use of. The classification in the current Berlin rent index, it was argued, requires a classification of the special features of the apartment characteristics under the respective criteria of the rent index and the orientation guide. Whether an examination of difficult legal questions or a simple data comparison is necessary for this purpose was considered to be irrelevant. Lexfox itself stated in the trial that the tenant was not able to enforce his rights in view of the difficult and extensive examination.

Too little knowledge of the matter?

In addition, the judges dealing with the case denied Lexfox the necessary expertise. Although Lexfox could prove the expertise required for registration as a collection service provider - a 120-hour training course in the field of collection services - such a course alone was not sufficient, however, as such course would have to provide knowledge in all areas of the law and in particular in the area of residential tenancy law, the complexity of which was considered to be above average. Without training received in university studies, it was not possible to provide qualified legal advice in this field. One chamber confirmed this view by pointing out an "accumulation of particularly gross and serious errors" in the application and enforcement of the law in dispute.

Claim? What claim?

Finally, the Chamber found that at the time of assignment by the lessee there was no claim for repayment against the lessor which the lessee could have assigned to Lex Fox. This claim would only arise once the landlord had been reprimanded. The complaint, however, was only made after the assignment had already been assigned - namely by Lexfox as assignee. Although the Chamber confirmed that a collection service could also include the provision of substantial ancillary services, such a qualification of the services provided by Lexfox would be inappropriate and would therefore not be considered. With "", the court stated, Lexfox does not primarily provide collection services with permission-free ancillary activities, but primarily provides legal advice in order to assert claims which are assigned only afterwards. In this the chamber saw the substantial difference to a collection service provider, which may express itself legally to a certain extent regarding - already arisen - claims.

In addition, in cases in which, according to the landlord's information, an excess of the permissible rent could not be determined, there was obviously no claim of the tenant at all, the existence of which could be discussed "when collecting the claim". Without collecting claims, Lexfox could only advise against asserting the claims. However, this activity is not a collection service within the meaning of the RDG. Lexfox therefore goes far beyond the permissible activity of a collection service provider with "". The Chamber also took up the argument of Lexfox itself that it would act "in the same way as a lawyer".

BGH - Everything is completely different!

However, the BGH sees things differently and ruled on 27 November 2019: "" is (still) legal! Literally, the chairman of the VIII. Zivilsenat of the BGH already stated in the oral hearing: "The legislator wanted to create a modern, sustainable and liberalized legal services law. The term 'collection service' should not therefore be understood in too narrow a sense. Instead, the concept of collection was to be interpreted broadly; a generous consideration was required. Thus, a debt collection company is always entitled to a legal examination of the claim, including advice as to whether and under what conditions a claim exists at all. The 15th Chamber of the Berlin Regional Court had already issued a similar decision in previous proceedings. In that case, the Berlin Bar Association had taken legal action against Lexfox's business model. Even if the limit is not easy to determine, according to the reasoning of the BGH, all activities of Lexfox are closely connected with the collection of the claim - the reclaiming of overpaid rent - and serve the purpose of collecting this claim, so that all in all it can (still) be assumed that a collection service is being provided.

A narrower view could also not be derived from an alleged contradiction in the assessment. It is true that a lawyer, in contrast to a collection service provider, is not permitted to agree a contingency fee or to assume the costs if the activity is unsuccessful. However, the legislator had intended an exception to these prohibitions for collection service providers. A conflict of interests is not given here. Furthermore, the client is protected by the professional liability insurance of the collection service provider in the event that the collection authority is exceeded. If the latter - in this case Lexfox - also uses the expertise required of him, checked and found sufficient by the court, no danger to the client is apparent. Any risk was thus cut off. Furthermore, the application of the rental price calculator was merely a purely schematic calculation and not a legal examination. Finally, it is acknowledged, to which the BGH pointed explicitly, that in principle an advance assignment of a claim only arising in the future is also effective, provided that this - as in the case of "" - is sufficiently determinable at the latest at the time of its materialization.

A milestone and a decision for the future

It remains to be seen how the decision will affect the development of Legal Tech. In any case, it can be stated that the BGH is pursuing a future-oriented further development of the law. In our view, however, it is important to ensure that consumers are protected from unqualified legal advice.

Fear? Why?!

Legal Tech shows the way forward. Legal Tech opens new spheres in legal work. This goes hand in hand with a simplified enforcement of even the smallest and most minor claims, which have traditionally not been enforced due to the associated nuisance effects and costs. Companies will have to adapt to this and take appropriate precautions.

Will there be a change in the legal department? Absolutely! Digitalization is arriving in the legal department. It is creating new business areas and services. In order to keep pace with these developments, companies and their legal departments will also have to invest - both in digital solutions to ensure compliance and in digital solutions from the field of corporate defense, which enable the (re)establishment of "equality of arms", even in mass proceedings with small amounts in dispute.

LegalTech can unleash considerable potential. Deloitte Legal supports this development and feels more than reaffirmed by the BGH ruling in its strategy of transformation towards a digital law firm. Deloitte Legal accompanies and supports entrepreneurs and companies in their transformation to the digital world. 

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