Contractual penalty for unintentional breaches – abuse of rights?

The Higher Regional Court (OLG) Hamm had to decide whether the recipient of a cease-and-desist letter could demand from the recipient that, within the framework of a binding and penalty-backed declaration of cessation, in addition to the customarily required intentional breaches, the recipient of the cease-and-desist letter could also demand that the recipient of the cease-and-desist demand be liable for non-culpable violations.

Companies A and B are direct competitors in the sale of wet and dry vacuum cleaners on the Internet. Due to various competition law violations in the implementation of information obligations and revocation instructions on the competitor's website, Company A initially sent an unsuccessful cease-and-desist letter to Company B. It formulated as an annex to the cease-and-desist letter a declaration of cessation, which reads as follows:

"The debtor hereby undertakes to refrain from, under penalty of a contractual penalty of EUR 5,100 for each instance of non-culpable violation…"

Company B considered the entire cease-and-desist letter from the other side to be abusive and did not submit a declaration of cessation. It argued that the legal representative of Company A issued cease-and-desist letters as a matter of business. The clients represented by him consistently demanded declarations of cessation with a contractual penalty of EUR 5,100.00, even though the alleged competition law violations would ordinarily have, and also in the present case had at most only minor effects for the party sending the cease-and-desist letter. Furthermore, the contractual penalty was, as in the present case, provided for each non-culpable violation. This was contrary to the system and made it clear that the cease-and-desist letters served merely to generate costs and fees. Company A, naturally, vigorously disputed this.

Court Decision
The Higher Regional Court (OLG) Hamm decided in itsjudgment of 29.06.2010 – Az. I-4 U 24/10in favour of the recipient of the cease-and-desist letter and found the cease-and-desist letter to be abusive.

The express extension of the contractual penalty promise also to non-culpable violations showed that Company A's primary concern was the generation of fees and contractual penalties. Furthermore, the clause was surprising to the recipient of the cease-and-desist letter and easy to overlook. In addition, the contractual penalty in the amount of EUR 5,100.00 was set very high for the type of competition law violations alleged to have occurred (information obligations, revocation instructions).

Overall, the court gained the impression that the maintenance of fair competition had not been the primary interest of the applicant.

Conclusion

The decision of the OLG Hamm marks another judgment on the abuse of rights in cease-and-desist letters. As soon as a cease-and-desist letter is evidently serving only the financial interests of the party sending it, there is the possibility of defending against it on the grounds of abuse.

Even in the area of copyright law, such as in file-sharing cases, an extension of the contractual penalty promise also to non-culpable violations might possibly constitute an abuse of rights. However, as always, this must be examined on a case-by-case basis.