Decision on cease-and-desist declarations according to the ‘Hamburg custom’

In its judgment of December 1 2022 (Case No. I ZR 144/21), the German Federal Court of Justice (FCJ) clarified several important points. Firstly, that the delivery of a cease-and-desist declaration with a penalty clause can also be made after a second infringement by means of a contractual penalty promise in accordance with the so-called Hamburg custom. Secondly, that receipt alone of a cease-and-desist declaration with a penalty clause does not lead to the cessation of the danger of a repetition if the plaintiff declines to accept it.

Through an informal warning letter, the offending party in disputes relating to industrial property rights is given an opportunity to avoid legal proceedings by signing a so-called cease-and-desist declaration, which eliminates the danger of a repeat of an infringement that is required in order for a claim for injunctive relief to succeed.

However, the promise to cease and desist can only eliminate the danger of a repeat of the infringement if it is subject to contractual penalties. This can be agreed by means of a fixed amount (a so-called fixed contractual penalty) or in such a way that in the event of a breach, the plaintiff determines the amount of the contractual penalty using their reasonable discretion (the Hamburg custom).

Under previous practice, it was assumed that a breach of an existing cease-and-desist declaration establishes a new danger of a repetition, which can generally only be eliminated by providing a further cease-and-desist declaration containing a significantly higher contractual penalty promise than the first declaration. Up to now, it has been a matter of dispute as to whether a cease-and-desist declaration in accordance with the Hamburg custom satisfies the requirements of a significantly higher penalty (rejecting, for example, the Higher Regional Court of Cologne’s judgment of July 11 2013, Case No. 14 O 61/13).

Furthermore, according to earlier case law of the FCJ, receipt of a cease-and-desist declaration with a penalty clause alone also led to the cessation of the danger of repetition if the plaintiff refused to accept it from the defendant (for example, FCJ judgment of May 31 1990, file No. I ZR 285/88). The Senate no longer adheres to this case law.

In the case in question, which concerned a trademark dispute about car door lights, the defendant, after receiving a warning letter from the plaintiff, initially provided a cease-and-desist declaration according to the Hamburg custom – i.e., without a fixed contractual penalty – which was accepted by the plaintiff.

Three years later, after the plaintiff discovered that the defendant was again marketing such products, it issued a further warning to the defendant. The defendant then signed another cease-and-desist declaration in accordance with the Hamburg custom, which was rejected by the plaintiff because in its view it was not suitable to eliminate the renewed danger of a repeat of the infringement due to the lack of a fixed contractual penalty. The plaintiff therefore pursued its claim for injunctive relief in court.

In a departure from its previous case law, the FCJ clarified on the one hand that in order for the danger of a repetition to be eliminated, a cease-and-desist declaration containing a penalty clause is only sufficient if it manifests a serious intention to cease and desist. For this to be the case, the cease-and-desist declaration with a penalty clause must be binding until it is accepted or rejected by the plaintiff, so that the latter can accept it at any time and thus establish the contractual penalty obligation. Only then is the necessary deterrent effect achieved, which justifies the cessation of the danger of a repetition already at the time of receipt of the cease-and-desist declaration with a penalty clause.

In the present case, however, the FCJ ultimately rejected the notion that the danger of a repetition ceased to exist, as the plaintiff refused to accept the cease-and-desist declaration from the defendant.

On the other hand, even in the case of repeated infringement, a further cease-and-desist declaration according to the Hamburg custom is sufficient for the risk of repetition to cease. According to the FCJ, the unlimited right of determination hereby established gives the plaintiff the decisive advantage in serious cases of infringement of being able to determine a contractual penalty of an amount that may be considerably higher than that which would have been appropriate for an agreement on a fixed amount regarding the previously committed act of infringement.

Therefore, the higher penalty required for a repeat offence was also inherent in a contractual penalty promise according to the Hamburg custom. In the case of a repeat offence, the Hamburg custom would have the necessary deterrent effect on the defendant because of the impossibility to predict the amount of the penalty.

The dispute about whether a contractual penalty promise according to the Hamburg custom requires a fixed contractual penalty in the event of a repetition is clarified by the above ruling. This will probably appear advantageous from the defendant’s point of view, as a fixed contractual penalty is no longer required, even in the event of a breach of a cease-and-desist declaration. However, this ultimately makes the cessation of the danger of repetition dependent on a decision made solely by the plaintiff.