Competition exercised by a former partner or manager in a company, according to the practice of the Bulgarian Commission for Protection of Competition

It is common practice for company managers to be required, either with the contract for management and representation, or with later declarations or agreements, to undertake the obligation not to exercise competitive activity after they no longer occupy their position. Similar obligations and prohibitions may also be directed at the company partners or at the members of the board of directors or the management board. It is usual for a penalty to be provided for non-compliance with the ban on competition exercised by a former partner.

The commercial law prohibition of competitive activity of partners (Article 83 of the Commerce Act), managers (Article 142 of the Commerce Act), and members of the board of directors or the management board (Article 237, para. 4 of the Commerce Act) is usually in force only while the persons occupy the position. Still, case law accepts that if they of their own accord bind themselves before the company “for a defined and acceptable in terms of length period” following the termination of their legal relationship with the company, then a possible violation would give rise to an obligation to pay the penalty. For example, a period of one year has been deemed acceptable by the Supreme Court of Cassation.

From the point of view of competition law, however, the Commission for Protection of Competition has repeatedly noted that the prohibition of unfair competition of employees, which existed under the 1991 Competition Protection Act (repealed), is in conflict with constitutional provisions, and therefore such a prohibition is not included in the present legal act. The text, which is no longer in force, forbade persons in management or control bodies, as well as persons in an employment relationship, to carry out competitive economic activity for three years after leaving the company.

In practice the above means that penalties, which have been agreed upon between the outgoing partner, manager or member of a management or control body and the company and are owed due to exercising prohibited competitive activity, may be claimed in court. In such cases the main factors to be considered are the fairness of the specific commitments and the amount of the penalty.

On the other hand, if the same agreement is referred to the Commission for Protection of Competition, the Commission has no jurisdiction to impose sanctions for such a breach of contract, but would instead analyse whether the actions of the person constitute an infringement of competition rules. In this light some of the main conclusions of the case law of the Commission are examined below.

First, the Commission considers that establishing a company carrying out competitive activity by persons, who were connected by employment or civil law relationships with another company, cannot in itself be definitively regarded as conduct contrary to fair trade practice. Generally speaking, each business entity may and should freely choose not only the type of activity they exercise, but also the territory where they exercise the activity, as well as their future partners. 

If the establishment of the new business is accompanied by bad faith behavior, consisting of actions which may harm or create a risk of harm to the interests of the competing company, then this may lead to a breach of competition rules.

In cases of competition exercised by a former partner or manager the typical bad faith behavior will consist of unfair attraction of customers of the previous company. This does not concern cases of routine distribution of offers or advertisements, which present the goods or services provided by the outgoing partner or manager or his new company. Culpable behavior is such through which the person consciously and in bad faith causes the termination of existing contractual or pre-contractual relationships with customers, by relying on specific inside information, which became known to him earlier, about the way these clients work or their needs, and actively and purposefully influences their choice of business partner.

Unfair behavior also occurs when the person incorrectly creates the impression that his new business venture is in some way connected with the company which he left, or that he continues to represent said company. Other cases include use of misleading trademarks, names, domains and even visual layout of documents, forms and websites, connected in the mind of clients with the former company, as well as dissemination of false and harmful information about the same.

Yet another problem in cases where a partner or manager leaves a company is how to treat the future use (including the disclosure) of information, which became known to him during or in connection with his previous activity. Often the company will attempt to completely ban the use of any know-how acquired while working together and of all established business contacts and factual relations. Their use may indeed breach the prohibition for disclosure of manufacture or trade secrets under the Protection of Competition Act, but only when the requirements laid down in the consistent practice of the Commission are in place.

Not every use of information is liable to be punished. Protection is provided to those manufacture or trade secrets, which represent facts, information, decisions and data related to the business activity, the confidentiality of which is in the interest of the company and for which the necessary measures have been taken. Therefore, no breach can be found, if the confidential information is not labelled as such, or is formulated vaguely, instead of detailing the data and information included, or no appropriate measures for its protection have been undertaken by the company.

Each interpretation whether certain information is protected should conform to the notion of the Commission that the aim of the prohibition for disclosure of manufacture or trade secrets is not to provide employers with unlimited and indefinite opportunity to impede the professional realization of their employees in another company or when starting their own business. The aim is to provide an instrument, whereby to punish such acts of bad faith, which actually harm the interests of the company by disclosing specific facts or information constituting a secret.

In conclusion, it should be emphasized that every attempt by a former partner or manager to take advantage of the esteem of someone else’s established business and reputation, or to harm them, is liable to be punished by the Commission for Protection of Competition, regardless of the agreements reached between the parties upon leaving the company concerning the competition exercised by a former partner or manager. Most importantly, fair trade practice requires that when becoming a competitor with one’s previous company, the former partner or manager should form an independent trade policy and use his own funds, information and partners to start and develop the business

Reviewed practice:

Decision No. 668/22.06.2017 of the Commission for Protection of Competition

Decision No. 568/16.05.2019 of the Commission for Protection of Competition

Decision No. 655/06.06.2019 of the Commission for Protection of Competition

Decision No. 1020/17.12.2020 of the Commission for Protection of Competition

Decision No. 2236/18.02.2009 in administrative case No.13653/2008, 5-member panel of the Supreme Administrative Court

Decision No. 193/12.02.2018 in commercial case No. 2303/2016, Commercial College, First Commercial Department of the Supreme Court of Cassation

Decision No. 144/28.02.2020 in commercial case No. 167/2019, Commercial College, First Commercial Department of the Supreme Court of Cassation