In practice, businesses regularly make arrangements not to compete with one another. But not all non-compete clauses are the same. Think, for example, of exclusive purchasing obligations in distribution contracts, agreements between employers not to recruit each other’s staff (a no-poach clause), or a prohibition on a seller starting a competing business after an acquisition. Such non-compete provisions are entirely understandable from a commercial point of view, but they also carry legal implications.
In this blog we discuss the legal implications of three variants of non-compete clauses that we regularly encounter in our practice.
1. Mergers and acquisitions.
When acquiring a business, it is logical that the buyer wants to protect itself against competition from the seller. After all, as a seller you have the knowledge and network to mount a serious competitive challenge, and as a buyer you pay handsomely for that. Non-compete clauses in mergers and acquisitions are therefore often permitted, but the clause must be directly related to, and necessary for, the transaction. For that reason, the activity, geographic scope and duration of the clause must be limited.
For example, the prohibition may not be broader than the activities of the acquired business, and must remain limited to its service area or concrete expansion plans. As for duration, the main rule is that the prohibition may not last longer than two years if only goodwill is being transferred. The duration may be three years if know-how is also being transferred.
2. Competition law and the cartel prohibition.
When two competitors agree to temporarily not compete with each other, there is a good chance this conflicts with the cartel prohibition. The cartel prohibition is enshrined in Article 101 TFEU (Treaty on the Functioning of the European Union) and Article 6 of the Dutch Competition Act, and prohibits agreements between undertakings that negatively affect or distort competition within the internal market.
There are exceptions, but they are fairly limited. Only if the non-compete clause is objectively necessary for legitimate cooperation (such as joint distribution or production) and is also proportionate to its objectives, can this clause possibly fall outside the cartel prohibition. A non-compete clause outside legitimate cooperation is quickly deemed to restrict competition because it effectively determines which markets or customers may or may not be approached.
Another common arrangement between undertakings that disrupts the (labour) market is the agreement not to recruit and/or hire each other’s staff (a no-poach clause). Here too, the authorities are increasingly taking action.
3. Distribution agreements: room within certain limits
In distribution agreements, a non-compete clause occurs regularly and the rules are somewhat more lenient. The non-compete clause then often takes the form of an obligation for the distributor to purchase exclusively from the supplier. Such agreements between undertakings are permitted under the Block Exemption Regulation, provided that the market share of both the supplier and the distributor remains below 30% and the clause is limited to a maximum of five years.
Even more room applies to franchise agreements. A non-compete clause may also remain in force during the term and up to one year after termination of the agreement, provided this is necessary to protect the franchise formula.
Conclusion.
Non-compete clauses can be useful and legitimate, but they also form a legal minefield. They are, not infrequently, deemed impermissible and void because the clause does not meet the conditions or was not formulated in the right way. And that can have unpleasant consequences. Want to prevent that? Our corporate lawyers specialise in contract law and corporate law and are happy to assist you. Contact us directly via info@thelegalcompany.nl or call 020 345 0152.
