File Sharing

File sharing: suspected illegal fee arrangements leaked

The Pirate Party in Germany has leaked secret documents detailing suspected illegal fee arrangements between the law firm notorious for sending file sharing warning letters, U+C, and its clients.

File sharing fee arrangements

The Pirate Party in Germany has leaked secret documents detailing suspected illegal fee arrangements between the law firm notorious for sending file sharing warning letters, U+C, and one of its clients.

Lawyers at WILDE BEUGER SOLMECKE were asked to provide an assessment of the secret retainer.

According to WBS lawyers, the agreement between U+C and its client contains an illegal success fee model and a fraudulent “debt collection” model.

The structure of the retainer between U+C and The Archive AG and which is behind the recent streaming warning letters remains unknown.

Background

Recipients of file sharing warning letters are often requested to pay the copyright holders’ legal fees for having to instruct a lawyer. In thousands of recent streaming warning letters sent by U+C lawyers’ fees of €169.50 have demanded.

Under German law, the reimbursement of fees can only be demanded if they have been paid in advance or if there is an intention to pay.

Due to the sheer volume of warning letters that are sent, it is clear that the fees, which can be in their millions, are not paid up front by copyright holders. However, if the copyright holders have no intention at all of paying the fees, then the recipients of the file sharing warning letters are under no obligation to “reimburse” them. If charges are levied in such a case, then it is fraud.

The same scenario applies when the matter is transferred to debt collection agencies. It is alleged that these agencies make claims for payment from recipients of warning letters even though the agencies have not yet received payment from the copyright holders.

The suspicion arose that the firms that send the warning letters were collecting all income in a pot and then apportioning it. The firms would then claim that the fees payable by the copyright holders had been waived.

The problem arises if there is agreement in advance that the fees will be waived in the case that warning letter recipients don’t pay up. Here, it can hardly be asserted that the warning letter recipient must “reimburse” fees already paid.

Industry problem

To avoid this problem the German law firms that send file sharing warning letters have devised a number of payment models in order to optimise cash flow and avoid criminal sanctions.

However, it seems that not all law firms are successful in balancing their interests.

A claim for the reimbursement of legal fees from the law firm Kornmeier was rejected by a Frankfurt court after its fee structure agreement was leaked and two criminal cases were dropped only after the payment of high fines in the region of five figures.

Now WILDE BEUGER SOLMECKE has concluded in a legal assessment for the Pirate Party, that the fee arrangement between U+C and one of its clients is illegal.

Illegal fee structure

The agreement contains an illegal success fee model which provides that lawyers’ fees are only payable by the client if the recipients of warning letters pay the sums demanded. Furthermore, the agreement contains a percentage model for the division of payments received, with 30% going to the client, 60% to U+C and 10% towards a pool to cover court fees. This means that the more people who pay, the more money the firm makes.

Success fee models are permitted only in restricted circumstances under the German Lawyers’ Fees Act. However, the exceptions do not apply here.

Debt collection

U+C also operates, what it calls, a “debt collection phase”. There are indications that his too is illegal. Here is an example of how the model works:

A recipient of a file sharing warning letter does not make any payments upon first demand. As part of its “debt collection phase”, U+C then sends a second letter demanding inter alia €911.80 in lawyers’ fees as calculated under the Lawyers’ Fees Act. However, under the percentage division mentioned above, U+C does not charge its client €911.80, but receives 60% of this sum (€772.08).

The client together with U+C have deceived the recipient of the warning letter as to the sum of lawyers’ fees that is payable. The requirements of fraud under § 263 German Criminal Code are fulfilled. If the warning letter recipient does not pay, U+C and its client commit an attempted fraud.

Conclusion

There is therefore strong evidence that the U+C payment model as agreed with its client in this case is illegal. It contains an illegal success fee model and a fraudulent “debt collection” model.

You can find the WBS legal opinion here.

Christian Solmecke is a partner at the law firm WILDE BEUGER SOLMECKE. He is the author of numerous legal publications in the area of internet and IT law. He is also an associate lecturer for social media law at the Cologne University of Applied Sciences.

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