Maxim Ali told Advokatskaya Gazeta whether the rights holder can recover a fine for violating the non-competition clause after terminating the commercial concession agreement

In 2019 LaserLov LLC and individual entrepreneur Damir Khusainov entered into a commercial concession agreement, under the terms of which if a user violated the obligations to restrict competition, the right holder was entitled to unilaterally terminate the agreement and also to recover a fine for each violation. In July 2020, the company notified the individual entrepreneur of the termination of the document and also filed a lawsuit in court to obtain compensation. Khusainov, in turn, brought a counter-claim to the court to invalidate the non-competition clauses of the contract. The courts of three instances dismissed both claims, finding the commercial concession agreement terminated as of July 2020 and adding that the user’s breach of contractual obligations was committed after its termination, thus precluding the recovery of sanctions. LaserLov Ltd. appealed to the Supreme Court of the Russian Federation, which concluded that the right holder was entitled to recover a fine from the user after the termination of the commercial concession agreement if the user’s obligation was not the subject of the agreement and, by its nature, implied its performance even after the termination of the document.

Maxim Ali, Partner and Head of the Intellectual Property and Information Law Practice at Maxima Legal, stressed that the problem of non-competition is always acute in commercial concession agreements. “The right holder at the start of the contractual relationship discloses important information to the user about the conduct of the business, processes, know-how, etc. Therefore, users are tempted to withdraw from such a relationship and continue operating independently or, for example, to open additional outlets for front persons without paying remuneration to the right holder. Accordingly, economically, the presence of conditions to restrict competition in the agreement is justified. It is not without reason that the Civil Code of the Russian Federation expressly provides for possibility of their inclusion in the contract, which is actually a rarity for this Code,” the expert explained to Advokatskaya Gazeta.

In the case at hand, according to Maxim, the position of the lower courts that the non-competition clause terminates with the contract looks farfetched. “There are quite a few conditions in a contract which continue to apply after the contract has terminated (e.g. conditions on jurisdiction, applicable law, warranty obligations, etc.). Most surprisingly, the courts have ignored the existing eight-year Ruling of the Plenum of the Supreme Arbitration Court of the Russian Federation of 6 June 2014 No 35 “On the consequences of the termination of a contract”. In this regard, the ruling of the Supreme Arbitration Court is correct and more than justified,” said the specialist.

However, a number of questions remain open on this topic. “First, there are still disputes as to whether it is possible to introduce non-competition clauses in other types of contracts where, unlike in the contract of commercial concession, it is not directly provided for by the rules of the Civil Code. This is a crucial issue because the use of a “franchise” is often formalised by a licence agreement (for logo and know-how) – it turns out that in economically the same relations the right holder is much less protected. Secondly, there is still no understanding of the limits to which the rights holder may restrict competition. Unlike in foreign countries, in Russian practice there are no rules about the proportionality and reasonableness of the restrictions imposed on the user. This can already be a cause of abuse by the rights holder. The rule of law should hardly allow the limitation of competition in all possible forms by all affiliates of the user for 25 years throughout Russia. These issues are still waiting to be resolved in new cases,” summarised Maxim Ali.

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