European Court Rules on Enforceability of Real Estate Non-compete Covenants
In an important case for real estate developers and landlords, the European Court of Justice clarified the relationship between EU competition law and non-compete clauses in commercial leases. It held that a non-compete clause is not a restriction by object and therefore not automatically anti-competitive. Instead the anti-competitive effect of the clause has to be reviewed in the context of the individual facts of the case to ascertain whether it has an appreciable effect on competition.
A similar stance will be taken under UK competition law when reviewing these types of clauses as UK competition law has to be interpreted in light of the case law of the European Court.
As a result of this ruling, developers and landlords can still continue to use non-compete clauses in their commercial leases but should take legal advice before doing so to minimize the risks of a competition law challenge to the enforceability of the clause.
On 26 November 2015, the European Court of Justice (ECJ), handed down its judgment on a case referred to it by the Latvian Supreme Court. The case concerned a non-compete clause in a commercial lease and whether an existing tenant could rely on the clause and refuse the landlord and competitors permission from opening rival shops within the shopping centres. The question was whether this restriction should be considered a restriction of competition by object.
The importance of this question is the fact that if a restriction is considered a restriction of competition by object under Article 101 of the TFEU, there would be no need by a rival to prove any effect of anti-competitive harm when suing the beneficiary of the non-compete restriction. Therefore they would have a simpler case upon which to claim compensation. The current case was referred by the Latvian Supreme Court after a national supermarket in Latvia sought to annul the 2013 decision of the Latvian Competition Council which held the supermarket guilty of restricting competition by operating the non-compete clause, and fined the supermarket. The Latvian Supreme court referred the case to the ECJ as a matter of a EU-wide importance, since little case law exists on this issue.
In short, and in answer to the Latvian Supreme Court, the ECJ held that whilst it not a restriction by object, the restriction was capable of breaching competition law, but an aggrieved party would need to evidence the effect of the anti-competitive harm rather than just rely on the existence of the clause in question. The ECJ did not consider it a restriction by object because the nature of the restriction meant that there were still evidential factors that would sway whether the restriction would have an anti-competitive effect. Examples of such factors were the duration of the clause, the amount and size of the local competition to the party seeking to rely on the non-compete clause, the catchment area of the shopping centre and whether there were other barriers to entry for new participants.
Whilst many would acknowledge that the factors stated by the ECJ would indeed have a significant bearing on the potential anti-competitive effect, a reasonable bystander may argue that the clear intention of these non-compete clauses is to limit the amount of local competition and to encourage certain shops to quite literally ‘set up shop’ in a facility, safe in the knowledge that they could block any competitors likely to cause them trouble on price, quality, service or any other grounds. The intention behind the clause would lead many to believe that it was in fact a restriction of competition by object.
However, regardless of that opinion, this recent ruling by the ECJ brings clarity to this area of law and shows that if a party wishes to challenge the use of one of these non-compete clauses, they must prove the anti-competitive effect with evidence. Retailers and landlords should continue to use such clauses to their benefit, but they should take detailed legal advice when doing so and tailor the clause carefully so as to reduce the risk of challenge.
Case C-C345/14 SIA Maxima Latvija v Konkurences padome
Sporting goods company bends the knee on marketplace distribution
On 18 November 2015, the French Competition Authority (“FCA”) issued a press release announcing that it was putting an end to its investigation of the contractual practices of Adidas, one of the largest sporting goods manufacturers, as a result of Adidas’s change in its online sales policy. The FCA investigation, (which was carried out in coordination with its German counterpart), centered on the company’s 2012 prohibition for its selective distributors to distribute Adidas France products. These products would be distributed through multi-brand online “marketplaces” where numerous retailers offer goods for sale on major websites such as ebay, or PriceMinister-Rakuten.
The FCA indicates that it contacted both Adidas France and the selective distributors which were affected by the contractual prohibition to use online marketplaces as one of their sales channels.
The FCA action follows a similar decision rendered by the German Competition Authority which had conducted, and dropped in July 2014, administrative proceedings against Adidas AG after the latter modified its policy so as thereafter to allow its selective distributors to create shops at online marketplaces. We commented on this German case in our March 2015 webinar on distribution agreements in Germany, Italy and the UK.
In our February 2015 webinar on French and EU distribution agreements and product pricing, we had highlighted the risk run by suppliers in France which indiscriminately ban online marketplace sales by their selective distributors and completely exclude such marketplaces from their permitted channels of distribution. The Adidas withdrawal of the offending clauses, thus obviating an FCA decision, confirms this concern.
In its press release, the FCA reiterated the conclusions drawn from its own opinion of 18 September 2012: “as far as online sales are concerned, the conditions imposed by manufacturers to their distributors should not hinder this types of sales in an unnecessary way and it is prohibited to ban online sales as a matter of principle”. Thus, although the prohibition of using marketplaces does not amount to an all-out prohibition to online sales, the FCA took the view that the online marketplace ban constituted an unnecessary impediment of online distribution, which was disproportionate to the goal of protecting the brand image of Adidas.
On the other hand, the FCA, consistent with its previous opinions, has left open the possibility for retailers to impose valid qualitative criteria which must be satisfied by their selective distributors when operating through such online marketplaces. However, it promises to ensure that selective distributors are allowed to have effective access to online marketplaces.
The Italian Competition Authority Clears Digital Information Acquisition
On 11th November 2015, the Italian Competition Authority (the “ICA), after the conclusion of an in-depth investigation, decided to clear the proposed acquisition of the Italian company Seat Pagine Gialle S.p.A. (“Seat”) by Libero Acquisition S.à. r.l. (“Libero”).
Pursuant to Section 16 (1) of Law No. 287 of 1990, all mergers and acquisitions in Italy, which fall within certain thresholds must be notified to the ICA for approval.
In particular, the approval shall be denied or subject to certain commitments depending on whether the acquisition or merger is capable of creating or strengthening a dominant position in the relevant market.
In the present case, Seat is a public company operating in the internet advertising sector (including digital services and directory assistance) and Libero is the holding company of a Group of companies also operating into the digital services and directory assistance markets.
The ICA identified four main markets on which the proposed acquisition may have negative effects in the national market from a competition law point of view.
The first was the subscribers’ information services (directory assistance). In this market, the ICA found that Seat is the larger operator holding approximately 65% of the relevant market share, with Libero at approximately 30%.
In light of that, the ICA held that the proposed acquisition may create or strengthen a dominant position in the relevant market, making it potentially more difficult for other operators to offer the same prices and services to the general public.
The second market taken into account by the ICA was the online advertising sales. According to the ICA after the proposed acquisition the resulting entity would have approximately 10% to 15% of the relevant market share, with no chance to create or strengthen a position of dominance.
The Third market considered by the ICA was the direct marketing services. In the ICA’s view the entity arising from the proposed acquisition would hold an insignificant market share of approximately 1% to 5%.
Finally, the ICA examined the web services supply which also appeared not to be affected by the proposed acquisition as the resulting entity would have approx. 1% to 5%.
In light of the above, and the potential for the strengthening of a dominant position in the directory assistance business, the ICA decided to clear the proposed acquisition on the condition that Libero would sell part of the business related to the directory assistance to a third competing operator within a determined period of time after such authorization. The other areas of business crossover were not of a size as to attract remedies.
New EU Procurement Thresholds Published
On the 25 November 2015, the European Commission published new thresholds, over which, the EU public procurement rules on advertising and the award of relevant contracts apply to a contractor sought by the public sector purchasers.
The thresholds are amended every two years, this latest amendment will affect all three of the main procurement Directives, Directive 2014/23 (Concessions Directive), Directive 2014/24 (Public Sector Directive) and Directive 2014/25 (Utilities Directive).
The thresholds have been revised slightly upwards, meaning no seismic change has been made, the same size contracts (given inflation) will be caught by the rules as previously, the same smaller contracts will escape the requirements.
The new thresholds are set out below and come into force on 1 January 2016:
Directive 2014/23 – Concessions Directive
Current Threshold: EUR 5,186,000 New Threshold: EUR 5,225,000
Directive 2014/24 – Public Sector Directive
Supply and services contracts – central government authorities
Current Threshold: EUR 134,000 New Threshold: EUR 135,000
Supply and services contracts – non-central contracting authorities
Current Threshold: EUR 207,000
New Threshold: EUR 209,000
Current Threshold: EUR 5,186,000
New Threshold: EUR 5,225,000
Directive 2014/25 – Utilities Directive
Supply and services contracts and design contracts
Current Threshold: EUR 414,000
New Threshold: EUR 418,000
Current threshold: EUR 5,186,000
New Threshold: EUR 5,225,000
The French Competition Authority : An Outstanding Record for Punitive and Preventive Measures
In July 2015, the French Competition Authority (“FCA”) took a look back at the year 2014, in a published Report, and pinpointed the magnitude of its powers to curb anti-competitive practices.
As evidenced below, the data reported by the FCA testifies to the efficiency of less adverse and more preventive tools favored by the FCA such as the leniency programme -- pursuant to which partial or total immunity may be granted to a company which comes forward to report an anti-competitive practice it took part in -- and of the “commitment procedure” -- a procedure whereby a company under investigation commits to put an end to abusive practices in order to avoid or alleviate a finding of liability and the corresponding fines and penalties, by issuing a series of proposed undertakings that may be accepted by the FCA.
Top decisions imposing penalties reported by the FCA for 2014 include:
The record-breaking penalties for price-fixing schemes conducted by suppliers in the household (€ 345.2 Million total fine) and personal care products (€ 605.9 Million total fine) industries (FCA Decision 14-D-19 of 18 December 2014, see our February 2015 edition of the Bulletin). This decision ranks among the top three anticompetitive agreements ever uncovered through the leniency programme.
A € 3.5 Million penalty to the Amaury Group for pursuing a strategy intended to hinder a competitor’s entrance on the French daily sports newspaper market (FCA Decision 14-D-02 of 20 February 2014, see our April 2014 edition of the Bulletin).
The FCA, with a budget of EUR 20.7 million for 2014, imposed penalties in the amount of EUR 1 Billion that same year.
Further, the FCA also prevented anti-competitive practices without the need to impose any penalties, through the “commitment procedure”, in many instances, such as:
The commitment by Nespresso to make it easier for competitors, even outside France, to produce coffee capsules compatible with its machines (Commitment decision 14-D-09 of 4 September 2014, see our October 2014 edition of the Bulletin).
The launch in December 2014 of a FCA preliminary investigation into the anti-competitive effects of price parity clauses – or most favoured nation clauses – used by online travel agencies in their contracts with hoteliers which led to a series of commitments by BOOKING.COM and to fundamental changes in the hotel industry (see our November 2015 edition of the Bulletin for a summary of the various developments since December 2014).
The FCA was ranked “five stars” by the Global Competition Review, the world's leading antitrust and competition law journal (“GCR”). The FCA is one of the very few agencies worldwide to have received this top score. The GCR referred to the FCA as a “galleon in full sail – fast, powerful, sophisticated and bold”.
The FCA further reported that it had awarded penalties in the total amount of EUR 4.8 Billion in the period from 2004 to July 2015. Since 2004, the FCA has been the most active national competition authority in the EU. The FCA holds a record of 236 launched investigations likely to result in the application of EU competition law, a number remarkably close to that boasted by the European Commission itself (281 investigations launched).
The Italian Competition Authority Opens an In-Depth Investigation into Maritime Transport Acquisition
On 28th October 2015, the Italian Competition Authority (the “ICA) opened an in-depth investigation into the proposed acquisition of the sole control over the Italian companies Moby S.p.A. (“Moby”) and Compagnia Italiana di Navigazione S.p.A. (“CIN”) by Onorato Partecipazioni S.r.l. (“OP”).
Pursuant to Section 16 (1) of Law No. 287 of 1990 all mergers and acquisitions to realize in Italy, which fall within certain thresholds, must be notified to the ICA for approval, which shall be denied whether the acquisition or merger is capable of creating or strengthening a dominant position in the relevant market.
In the acquisition under ICA’s review, Moby and CIN are two leading companies into the market of maritime transport of passengers and goods to and from the Italian and French islands (i.e. Sardinia, Corsica and other minor islands), while OP is the holding companies of the Group of the same name, which also operates in the same sector.
In such a scenario, the ICA identifies two critical points about the proposed acquisition from a competition law point of view:
- After analysing markets data, the ICA found that during summers 2013 and 2014 CIN increased seriously its market share to the detriment of Moby in the maritime transport of passengers, the sector in which Moby was a leading company.
- The average revenues in the abovementioned period showed that Moby changed its commercial strategy to regain the lost market share and improve its profitability.
In light of that, the ICA argued that the proposed acquisition was able to strengthen a position of dominance in the relevant markets represented by the routes Civitavecchia-Olbia (Lazio-Sardinia) and Genova-Olbia (Liguria-Sardinia) and decided to open an in-depth investigation on it.
In our view, the investigation is welcome as it can help keep the maritime transport sector more competitive and discourage the strengthening of a dominant position in a market which, for historical reasons, has already been controlled by only national operators.
German antitrust investigation launched into audiobook agreement
In November 2015 the Bundeskartellamt (German Federal Cartel Authority) has informed that it has initiated administrative proceedings against two major companies which have entered into a long-term agreement on the exclusive purchase of audiobooks.
One of the companies is a seller and producer of spoken audio entertainment, information, and educational programming on the Internet. The Bundeskartellamt considers the company as “a leading supplier of audiobooks in Germany [and] one of the largest producers of audiobooks in Germany and Europe”.
The other one is a leading electronics manufacturers and controls its own download shop for media.
Andreas Mundt, President of the Bundeskartellamt stated: "Both companies hold a strong position in the market for digital audiobooks in Germany. We therefore see ourselves obliged to examine more closely the agreement between these two competitors. The audiobook publishers need to have sufficient alternative channels for the sale of their digital audiobooks. The proceedings were initiated following a complaint by the German Publishers and Booksellers Association (Börsenverein des Deutschen Buchhandels). The Bundeskartellamt is in close contact with the European Commission, which has also received the complaint."
According to the German Publishers and Booksellers Association both companies account together for 90% of the audiobook market revenues in Germany. The claimants allege that the companies use their nearly duopolistic power to make publishers accept unreasonable conditions for the sale of audiobooks. The legal question is whether both companies market position is so strong that it constricts the opportunities of smaller audiobook producer. In this case the long-term agreement between both companies could violate German antitrust laws.