Managing Directors are not liable for Infringements of Competition Law by their Employees

Managing directors of German limited liability companies (Gesellschaft mit beschränkter Haftung “GmbH”) can breathe a sigh of relief: The managing director of a GmbH is not liable for infringements of competition law by the company solely on the grounds of his position in the company. According to recent case law, this is even the case if the managing director is aware of the unlawful conduct and does not take any action to prevent it. The remaining risks are controllable.

A company operating in direct sales, sold gas supply contracts on behalf of a gas company by way of door-to-door sales in Berlin. The employees conducting those sales committed numerous infringements of competition law by providing potential customers with misleading information, for example concerning the possible cancelation of their existing contracts with a competitor. The managing director of the sales company had no knowledge of the infringements committed by his employees.

A competing company consequently applied to the Regional Court (Landgericht) of Berlin for an injunction against, among others, the managing director, solely on the grounds of his executive position, by virtue of which he was liable for the infringements.

BGH Judgment of 18 June 2014, case no. I ZR 242/12 - "Liability of Managing Directors for Unfair Competitive Practices"

The German Federal Court of Justice (Bundesgerichtshof – “BGH”) rejected an attribution of personal liability to a managing director of a GmbH for infringements of competition law by the company solely on the grounds of his executive position. The BGH ruled that a managing director of a GmbH is personally liable for unfair competitive practices of the company only if he engaged in such practices himself or ordered others to do so. Furthermore, the BGH held that a managing director cannot be held responsible for infringements of competition law by his employees, even if he was aware of such infringements. The BGH based its decision on the fact that a managing director has no obligation vis-à-vis third parties to prevent infringements of competition law against such companies merely because of his executive position in the company and his general responsibility for its business operations. The duty of proper management of the company under corporate law is owed solely to the company itself and not to third parties.

The BGH considered a managing director to be liable for infringements of competition law by the company only where the infringements in question relate to matters the managing director could be held accountable for, such as company advertising, which is usually decided on management level. A managing director would also be liable if he were responsible for the implementation of a business model based on unlawful practices. However, this was not the case in the specific case. The BGH considered both the commissioning of sub-contractors and the payment of performance-based remuneration to be unobjectionable sales methods from a competition law perspective and did not call for any particular duties on behalf of a managing director.

Comment

In its judgment, the BGH expressly set aside its previous rulings on the liability of managing directors for infringements of competition law by their employees. Previously, the BGH had considered the managing director’s knowledge of and failure to prevent the unlawful conduct of his employees to be sufficient for his liability. The BGH now limits the liability of managing directors to those cases in which the infringement of competition law was committed by the managing director himself or based on his instructions. The question of which type of conduct "by all appearances, the managing director could be held accountable for" and the circumstances under which "a business model based on unlawful practices" may be deemed to exist will have to be clarified in future proceedings.
The decision is a welcome development from a legal point of view. If a managing director were liable for every infringement of competition law by his company, this would greatly exceed his duties. Nonetheless, the interests of competitors are sufficiently safeguarded since, pursuant to Section 8(2) of the German Act Against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb – “UWG”) at least the owner of a business is held accountable for any infringements of competition law committed by his/its employees and agents irrespective of his personal fault.