Non-compete and the cartel prohibition: high evidentiary standards apply

Companies that enter into transactions or work together sometimes agree not to compete with each other, for instance when a company is sold and the seller promises to refrain from competing activities. Another example is a non-compete or an exclusive purchase obligation in a distribution or franchise agreement. It is apparent from established case law (Remia and Pronuptia) that such agreements are permitted if they are essential to the conclusion of the contract and do not go beyond what is necessary. The main condition is usually that the duration and scope of a non-compete must be limited (in terms of both the territory and the product or service). Siemens and Areva, for instance, were forced by the European Commission to amend a non-compete clause in the context of a joint venture, not only because the duration of the clause was too long, but also because it unnecessarily restricted Siemens’s activities. The guidelines of the European Commission are based on the principle that in the case of an acquisition a non-compete is permitted for two years (for goodwill) or three years (for goodwill and know-how). In a distribution agreement that period is five years; in a franchise relationship a non-compete is permitted for the duration of the franchise agreement.

It is also possible that companies later argue about the non-compete clause on which they agreed. An example is a recent judgment passed by the Court of Gelderland on an exclusive purchase clause between a producer and a buyer of compost for mushroom cultivation. The party that wishes to be rid of the non-compete clause then often invokes the prohibition on anti-competitive agreements (the cartel prohibition) recorded in Section 6 of the Competition Act and Article 101 of the Treaty on the Functioning of the European Union (TFEU). The party that is held to the clause then argues that the agreement is void because it restricts competition. Dutch judges often reject that claim because the claimant has presented insufficient arguments for the judge to conclude that the clause does indeed restrict competition. Berkhof & Partners/X is a case in point.

On the other hand, Dutch judges are very strict nowadays. The assessment to be made by a judge is whether the clause has (i) the object or (ii) the effect of appreciably restricting competition. A non-compete between competitors is more likely to be qualified as an object restriction than a non-compete between non-competitors, such as a supplier and a distributor. Examples are the Mantje B.V./Rab and the Top 1 Toys/Vedes cases. A party that wants to be rid of the non-compete clause has an interest in the agreement being regarded as a “restriction by object". In that case the specific effects of the agreement need no longer be investigated – in theory, at least. In practice, the situation is more complex, as the case law addressed below demonstrates.

In theory, the qualification of a restriction by object also offers a claimant another advantage. The European Court of Justice ruled in its Expedia judgment in respect of Article 101 of the TFEU that an agreement that has the object of restricting competition and that affects trade between Member States is appreciable by its nature. The applicability of Article 101 of the TFEU is then beyond dispute. In response, the European Commission decided to amend the Notice on agreements of minor importance (De Minimis Notice). Competition lawyers are still in debate on the consequences of that decision for the application of Section 6 of the Competition Act.

Nevertheless, the general trend in Dutch (civil) case law – also when Article 101 of the TFEU is applied – is still that even with regard to agreements that have the object of restricting competition it must be assessed whether the restriction is “appreciable”. Judges usually sidestep the Expedia judgment (Batavus/Vriend) or fail to (correctly) apply it (IVM/BVIN). The same mistake (albeit in an obiter dictum) was made in the recent judgment of the Court of Appeal of Arnhem-Leeuwarden on the breach of a (worldwide) non-compete between two (potential) competitors. The Court of Appeal first of all found that, in light of the high degree of customer loyalty and the long lifespan of the products (sorting systems), a five-year non-compete is proportional and necessary (and therefore qualifies as an ancillary restraint). The Court of Appeal then found that the question whether a clause has the object of restricting competition and the question whether an “appreciable” restriction is involved must be assessed on the basis of the economic and legal context. For that purpose a claimant must provide an accurate market definition and clarify the relevant market structure and market characteristics, the actual functioning of the market and even the “effect” that the clause has on the market. That requirement had not been met.

It appears to follow from this case law that the difference between restrictions by object and restrictions by effect in the Netherlands is becoming smaller. This may be due to the fact that civil judges principally approach contract disputes from the perspective of freedom of contract. A party that wishes to withdraw from a voluntary agreement by invoking competition law usually cannot rely on a great deal of sympathy from a civil judge. In order to successfully invoke the nullity of a non-compete clause in Dutch civil proceedings, the claimant will have to substantiate his argument with sufficient evidence, such as a market definition.

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