CA Paris 21-10-2021 20/09921, S. c/SA Novarc

A company has sold its shareholding in two other companies to a purchaser. At the time of the transfer, the director of the sold company signed a non-compete clause to the benefit of the purchaser, prohibiting him from directly or indirectly carrying out a competing activity, i.e. the sale of chemical products in the field of cleaning to professionals (solvents, detergents and degreasing agents), as well as all activities related to the direct sale to professionals of chemical specialties intended for maintenance services. The clause also prohibits him from taking any direct or indirect shareholding in any new or existing company carrying out a competing activity. This commitment was made in consideration of the share transfer price received by the former manager. 

A while after the transaction, the ex-manager took an indirect shareholding in a company manufacturing detergents for professionals and was therefore sued for breach of the non-compete clause, the validity of which he challenged in court. He argued that the clause was disproportionate and infringed his right to pursue a professional activity in his field of expertise.

In the present case, the judges of first instance, supported by the Court of Appeal, considered on the contrary that the disputed clause was proportionate to the legitimate interests to be protected under the contract. The Court maintained that the geographical restriction of the clause concerning the whole territory was not challengeable in view of the specificity of the companies' activity and that the duration of the restriction (5 years) was in line with customary practice, in particular to allow an external development strategy in a restricted sector of activity. 

Regarding the impossibility for the manager to carry out a professional activity in his field of competence, the Court maintained that the manager had entered into a commitment with full knowledge of the facts as it was due to his great expertise in this field and his professional experience that such a clause had been provided for. 

As a reminder and in a nutshell, in order to be valid, a non-competition clause must not be disproportionate to the purpose of the contract or to the protection of the legitimate interests involved (the activity subject to a non-competition clause must be precisely determined) and above all, the clause must be limited in time and space. These conditions are cumulative.

When the clause is included in an employment contract, the financial compensation is also a condition for its validity. While on the contrary, when the clause is included in a corporate mandate contract, commercial law does not oblige to provide for a financial consideration, but this is highly recommended by the doctrine.