BGH: A managing director is not automatically liable for violations of competition by his company

BGH, judgment of 18 June 2014 (File No. I ZR 242/12 – Liability of Managing Directors)

Head notes:
a) A managing director is only personally liable for the unfair competitive practices committed by the company he represents if he participated in them through his own positive actions or if he was obliged to prevent the violation of competition law under the general principles of tort law based on his status as guarantor.
b) The managing director’s managerial position and his general responsibility for the operation of the company, standing alone, do not establish an obligation on the part of the managing director toward outside third parties to prevent violations of competition law.
c) However, the managing director will be held personally liable if he implements a business model intended to violate rights.

Comment

The legal dispute on which this decision is based involved misleading statements made by independent commercial agents when advertising gas delivery contracts door to door. The particular commercial agents were hired by a direct marketing company which, in turn, was acting on behalf of the gas company, to sell gas delivery contracts door to door. A competitor sued not only the direct marketing company but also its managing director for cease and desist, information and damages. After the direct marketing company acquiesced in the judgment issued against it by the Court of First Instance, the BGH had only to decide on the personal liability of the managing director. The Regional Court of Berlin had sustained the petition against the managing director, since he was aware of the violations of competition law and failed to organize his operations to ensure compliance with the law. When the managing director appealed, the Berlin Court of Appeal modified the judgment of the Court of First Instance and dismissed the complaint against the managing director. The BGH affirmed this decision.

Change in legal precedent

However, prior BGH legal precedent held that the managing director was personally liable for his company’s violations of competition law if he had knowledge of them and failed to prevent them. The BGH has now expressly given up this legal precedent since it is based on the concept of so-called liability for disturbance, which, under the new BGH legal precedent, only applies to the violation of absolute intellectual property rights, such as trademarks, patents, etc., but not to cases of mere bad conduct, such as violations of competition law. Therefore, it is consistent for the BGH to now abandon managing director liability based on merely having knowedge and holding a managerial position.

However, this does not mean that the managing director need no longer fear personal liability when his company engages in conduct that violates competition law. The BGH discussed a whole series of cases in which such personal liability would continue to attach, but found that there was no personal liability in the specific case decided.

Liability of the managing director as perpetrator or participant in the violation of competition law

Thus the managing director is (of course) always personally liable if he personally participates in, supports or orders the violation of competition law (i. e. as perpetrator, accomplice or instigator, in any case based on positive action). In this case, recourse to the traditional principles of liability for disturbance is unnecessary from the outset.

The BGH made an interesting statement in this regard, namely that conduct ”which should be attributed to the managing director based on outward appearances and the lack of any finding to the contrary” is sufficient to find that the managing director is a perpetrator. This would be assumed, e. g., with respect to an infringing use of a particular company name or the company’s “general advertising image”, because decisions on such matters are “typically made at the level of the managing director”. This means that the managing director can e. g. be held liable for misleading advertising messages on his company’s website, unless it is determined that he did not participate in the decisions with respect to website design. In effect, there is a rebuttable presumption, which, at the same time means that the managing director bears the burden of presentation and proof that he did not bring about the relevant measure.

Liability of the managing director based on his status as a guarantor

In addition, the managing director can be held liable for failing to prevent an anti-competitive action by his company, i. e. for failing to act. However, the prerequisite for this is a legal obligation on the part of the managing director toward outside third parties, i. e. an obligation to prevent this conduct. No such obligation arises from merely holding a position as managing director.

An obligation of the managing director toward the company to ensure that the company acts in conformity with the law is all that can be derived from his management position, but no obligation toward outside third parties, such as competitors of the company. Rather, this requires a duty to avert negative consequences in the sense of the managing director having the status of a guarantor with respect to the competitor making the claim under the general rules of tort and criminal law. Such a status can result from prior acts of endangerment (Ingerenz), statute, contract or the taking advantage of special trust. The status as a guarantor based on prior acts of endangerment is of particular practical importance.

In particular: a duty of care to avert the endangerment of third parties under competition law

In a series of decisions, the BGH has recently begun to specify the cases in which there is a so-called duty of care to avert the endangerment of third parties under competition law – which results when the liable party creates or maintains a “source of risk”. This duty of care toward third parties is intended to be the successor to the outdated liability for disturbance. To the extent that liability for failure to act is involved, it relates, in effect, to liability based on prior acts of endangerment. To date, there is no completely clear picture of the prerequisites for a duty of care to avert the endangerment of third parties under competition law. However, with the decision under discussion, the BGH has added some stones to the mosaic: The Court has clarified that a managing director does not incur a duty of care to avert the endangerment of third parties under competition law by merely commencing or engaging in activities that are permissible under competition law (here: direct sales of gas delivery contracts through door-to-door canvassing). It is true that an increased risk of a violation of competition law provisions can result from permissible business models. However, in that case, the duty of care to avert the endangerment of third parties under competition law would generally only be incumbent on the company and not automatically also on the managing director.

The Court may judge differently if the managing director (e. g. by permanently residing abroad) intentionally deprives himself of the opportunity to become aware of and take action against any violations of competition law within his company or by outside companies that have been hired. However, the mere outsourcing of advertising measures to a subcontractor, as in the case under discussion, is not sufficient, despite the managing director’s diminished ability to control the situation associated with the outsourcing, since the decision to outsource is generally an unobjectionable company decision in terms of competition law, which, per se, cannot be considered a source of risk for violations of competition law. However, the case would be different, if a company was hired as a subcontractor that, due to special circumstances, could be expected to engage in violations of competition from the outset. The managing director may also be held personally liable if the violation of rights is intended by the company business model implemented by him. However, there was no evidence of this in the case under discussion.

Conclusion

Under the current legal precedent of the BGH, a managing director is no longer automatically liable if he has knowledge of violations of competition law by the company and does not try to stop them. Rather, one must always examine whether the managing director himself actively participated in the violation of competition law. Otherwise, he will only be held personally liable in special cases. However, there is a (rebuttable) presumption that the managing director personally participated in certain basic measures taken by the company (advertising measures, etc.), which are typically decided upon at the senior management level. In addition to the choice of the company name, this includes the company’s general advertising image, particularly on the company website. In general, in the future, it will not be the practice to automatically sue the managing director in addition to the company responsible for the violation of competition law, which has at times been the case in competition law practice. Of course, there will continue to be cases where this action appears to be likely to succeed, reasonable or even necessary (e. g. if there is a one-person limited liability company, which was only founded to shield a shareholder/managing director with a business model intended to violate rights and which can be given up at any time, or if there is a clear possibility that the anti-competitive conduct will be moved to another company in the same group under identical management). All of this applies to violations of competition law. By contrast, if infringements of intellectual property rights are involved (e. g. infringements of trademarks, patents or design rights), the rationale of the BGH suggests that liability of the managing director for breach of duty under IT law will continue to be assumed as soon as he is aware of the infringement of rights and does nothing to stop it.