Businesses that work together or enter into a joint transaction sometimes agree not to compete with each other for a certain period of time. This might take the form of a non-compete or an exclusive purchase obligation in a distribution agreement or on the acquisition of a business, whereby the seller undertakes to refrain from competing activities.
Under certain circumstances, non-competes may be in violation of the cartel prohibition set out in Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Article 6 of the Dutch Competition Act (Mededingingswet). This may lead to invalidity of the provision or even the entire agreement (see this blog). Businesses furthermore run the risk of being fined by the Netherlands Authority for Consumers and Markets (“ACM”) or the European Commission (the “Commission”).
When using non-competes, it is therefore important for businesses to be well informed about when such clauses are and are not permitted. In this blog, we address three types of non-competes: between competitors, in distribution, and in mergers and acquisitions. We also address recent Dutch case law.
Non-compete between competitors
It follows from established case law (Remia and Pronuptia) that non-competes between competitors may be permitted, provided that the restriction is objectively necessary for the implementation of legitimate cooperation and is proportionate to its objectives. Such an agreement then constitutes what is known as an ‘ancillary restraint’ that falls outside the cartel prohibition. That may be permitted, for instance, in the case of joint production or distribution, provided that it does not amount to a sales cartel.
Non-competes that are not directly related to cooperation or are not necessary are assessed on the basis of the cartel prohibition. It depends on the circumstances of the case whether a non-compete is prohibited. The economic and legal context, including the market position of the businesses involved, must be taken into account.
A non-compete between competitors outside legitimate cooperation is likely to be deemed anticompetitive. In effect, it constitutes an agreement as to which markets or customers will or will not be approached. Market or customer sharing agreements between competitors are contrary to the cartel prohibition.
Non-compete in distribution
In a distribution relationship, it is not unusual to agree on a non-compete or an exclusive purchase obligation. These agreements are exempt from the cartel prohibition under the Vertical Block Exemption Regulation if the market share of the supplier and the buyer is less than 30% and the clause is limited to a maximum period of five years. Non-competes that are automatically renewed after five years may also be exempt from the cartel prohibition. However, that is subject to the condition that the distributor can renegotiate the distribution agreement or terminate it after five years.
An additional exception is a non-compete or purchase obligation under a franchise agreement. These are usually necessary for the franchise formula and permitted for the duration of the cooperation. In the case of franchises, a non-compete may also be exempted for a maximum period of one year after the end of the agreement. A case in point is the judgment in the Multicopy case, in which the Amsterdam District Court ruled that the post-contractual non-compete fell outside the cartel prohibition.
Non-compete in M&A transactions
In the context of M&A transactions, it is also customary to agree on a non-compete or non-solicitation clause to protect the buyer (see also our earlier blog on this subject). These agreements constitute ancillary restraints and are therefore permitted if they are directly related to and necessary for the transaction. The most important condition here is that the clause does not go beyond what is necessary. In the case of a non-compete, this means that it must be limited in terms of activity, geographical scope, and duration.
Limitation in scope (activity and geographical scope)
With regard to the activity, non-competes must be limited to the products and services that currently constitute the target’s economic activity and the products and services that are at an advanced stage of development. In principle, the geographical scope of the non-compete must be limited to the target’s existing catchment area and, under certain conditions, to areas where there are concrete expansion plans and in which the target has invested in that step.
Limitation in time
With regard to the duration of non-competes, the basic principle is that, according to the Commission’s Notice on Ancillary Restraints, they are justified for a period of three years in the case of the transfer of goodwill and know-how, and for a period of two years in the case of the transfer of goodwill alone. A longer period may be permitted if that is justified in individual cases.
The Overijssel District Court, for instance, ruled that a three-year non-compete in an acquisition agreement may be reasonable, regardless of whether a transfer of goodwill and know-how is involved. In a case before the Amsterdam District Court, a non-compete was also upheld, because it had been insufficiently substantiated that competition had been appreciably distorted. In that case, the court found that the mere reference to the Notice on Ancillary Restraints and the argument that a non-compete may not last langer than two years if (only) goodwill is transferred is insufficient in itself. Another example is the ruling of the Gelderland District Court on a non-compete in a dispute between oral surgeons. The court ruled that the mere fact that a non-compete applies for one year longer than the “safe harbour” provided by the Commission’s Notice on Ancillary Restraints is insufficient to assume a violation of the cartel prohibition.
Joint ventures
Different rules apply to joint ventures that operate independently on the market. Parent companies are permitted to agree, during the lifetime of the joint venture, that the parent companies and the joint venture will not compete with each other. However, this applies only between the individual parent companies and the joint venture: non-competes between the parent companies themselves are not considered exempt ancillary restraints and must be assessed independently.
Conclusion
In light of the varying rulings on the admissibility of non-competes, the safest option for businesses is to remain within the above framework when formulating a non-compete. If they do decide to deviate from that framework, a sound substantiation and documentation of the necessity of the non-compete or exclusivity in advance, and a clear description of the product scope and geographical scope, may ultimately make the difference in practice.
Watch this video briefing for a summary of all the information on non-competes. Information on dawn raids by ACM and the Commission can be found at invalacm.nl.
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