Companies that work together or enter into an (M&A) transaction sometimes agree not to compete with each other for a certain period. They may do so in the form of a non‑compete clause or an exclusive purchase obligation in a distribution agreement or franchise agreement. In M&A transactions, a non-compete may be agreed in the form of an undertaking by the seller to refrain from competitive activities. Such agreements may be in breach of the cartel prohibition (Section 6 of the Dutch Competition Act or Article 101 of the TFEU) if the non-compete clause unnecessarily restricts competition.
To avoid the risk of a non-compete clause being void or the risk of a competition authority, such as the Netherlands Authority for Consumers & Markets (ACM), imposing a fine, it is important to ensure that a non-compete clause does not go beyond what is strictly necessary and that it is restricted in terms of its duration and scope (both geographical and in terms the product or service involved). A case in point is the EUR 79 million fine imposed by the European Commission in respect of the non-compete clause on the acquisition of Vivo, a Brazilian telecom company, by Telefónica (until that time a joint venture between Portugal Telecom and Telefónica). The European Court of Justice recently confirmed that there was no justification for that clause.
This blog addresses several Dutch judgments on non-compete clauses and the cartel prohibition from which it is apparent that a proper substantiation of the relevant market and of the parties’ market shares can make all the difference.
Non-compete clauses between competitors
A non-compete clause between competitors is more likely to be regarded as restricting competition than a non-compete clause between a supplier and a customer. That was the case in a dispute between travel agent ML Tours and Nuhr regarding an agreement to allocate flights to Turkey and Morocco. Nuhr argued that that agreement was a prohibited market allocation agreement. ML Tours acknowledged that, but argued that the market allocation agreement came under the de minimis regime (Section 7 of the Competition Act), because the market share involved was less than 10%. The Amsterdam Court of Appeal rejected that argument on the grounds that ML Tours had not clarified the relevant market and proven that the joint market share was less than 10%. In another case, the Court of Appeal of Den Bosch found that it was the claimant that had insufficiently clarified the market and the parties’ position on that market to allow the court to assess whether the agreement might (appreciably) restrict competition (see this blog and this blog regarding the burden of proof).
Non-compete clauses in distribution agreements
It is not unusual to agree on a non-compete clause or an exclusive purchase obligation in a distribution or franchise relationship. Such agreements are exempt from the cartel prohibition if the market share of the supplier and buyer is less than 30% and the clause is limited to a maximum period of five years. It is apparent from case law that agreements with a longer term are not necessarily in breach of the cartel prohibition. An example is the legal action between a café operator and beer brewery Grolsch regarding a long-term exclusive beer purchase obligation. The café operator argued that the purchase obligation was in breach of the cartel prohibition. The sub-district court judge found that the clause did not have the restriction of competition as its object and that insufficient arguments had been presented to conclude that the clause restricted competition. Similar cases concerned a dispute between a café operator and beer supplier Warsteiner, and the action between an intermediary and wholesaler Hanos.
The situation is different if a purchase obligation has the restriction of parallel imports as its object, as apparent from a dispute between a trade association and healthcare insurer VGZ regarding the permissibility of a clause under which suppliers were obligated to purchase products from one party. The Court of Appeal of Arnhem-Leeuwarden found that competition was being restricted to a sufficient extent because the clause covered at least 6% of the market. The (block) exemption did not apply, because there was no vertical agreement and the purchase obligation had the object of prohibiting parallel trade (hard-core restriction).
Retail exclusivity provisions
Agreements regarding the products or services that a retailer may or may not offer are regularly made in retail leases (retail exclusivity provisions). An example is a tenant of a shopping centre that agrees with retailers that they may not undertake any activities that compete with those of other retailers. A statutory exemption applies in that regard in the Netherlands.
Retail exclusivity provisions are regularly the subject of debate. An example is the legal action between Jumbo, a chain of supermarkets, and a property company regarding their agreement that no other supermarket would open a branch in the shopping centre. The Court of Appeal of Den Bosch found, in keeping with European case law, that this retail exclusivity provision did not have the restriction of competition as its object and that it had not had any other appreciable impact on competition. The Court of Appeal of The Hague reached a similar conclusion in a legal action on retail exclusivity in the Ypenburg shopping centre, and the Court of Zeeland-West Brabant did the same in respect of a retail exclusivity clause regarding a shopping centre in Breda.
Non-compete clauses in mergers and acquisitions
In the case of M&A transactions it is also customary to agree on a non-compete clause in order to (temporarily) protect the buyer. Such a non-compete clause is permitted if it is directly related and essential to the transaction (Section 10 of the Competition Act). This is also known as an ancillary restraint. It is subject to the condition that the non-compete clause does not go beyond what is necessary. The clause must therefore be restricted in terms of product, territory and duration. The European Commission has stated in the Notice on Ancillary Restraints that a non-compete clause is justified for a period of three years on the transfer of goodwill and know-how and for a period of two years on the transfer of goodwill only.
A non-compete clause for a longer period is not necessarily prohibited. An example is the recent judgment of the Court of Appeal of Arnhem-Leeuwarden on a non-compete clause on the sale of Cordial. The parties agreed that the seller could not compete with the buyer and the target for a period of five years. The Court of Appeal found that insufficient arguments had been presented to find that the clause was in breach of the cartel prohibition.
But there are also non-compete clauses related to M&A transactions that are rejected in court. An example is the judgment on the sale of Thermagas, in which the Court of Appeal of Arnhem-Leeuwarden found that, also in light of Thermagas’s market share (12%), a non-compete clause for a period of five years after the sale was in breach of the cartel prohibition because it lacked a justification ground.
Another example is the sale of Wandflex. The Amsterdam Court found that the non-compete clauses in the purchase agreement (for a period of ten years) and in the management agreement (for a period of five years) went beyond what was strictly necessary for the sale. The court nevertheless allowed the clauses, because it had been insufficiently substantiated that Wandflex’s market share was more than 10%; it was therefore not an established fact that the market share threshold of the de minimis provision (Section 7 of the Competition Act) had been exceeded.
These judgments demonstrate that a proper substantiation of the relevant market and the parties’ market share can make all the difference in court.