Non-compete clauses: permissible between potential competitors?

Non-compete clauses are nothing new and common business practice to ensure the necessary fulfilment of agreements and to protect common interests. Such clauses are compatible with competition rules so as long as their duration, subject matter and geographic scope do not go beyond what is reasonably necessary.  A recent judgment from the Court of Justice of the European Union (the “CJEU”), provided additional clarification concerning the compatibility of non-compete clauses with EU competition rules contained within cooperation agreements.

On the 26 October 2023, the CJEU delivered a very much awaited preliminary ruling in Case C‑331/21 - EDP and others v Autoridade da Concorrência (“EDP”),[1] shedding light on the necessary assessment and categorisation of non-compete clauses in cooperation agreements between undertakings operating in different markets (potential competitors), specifically whether such clauses amount to a restriction “by-object” (i.e., those restrictions that by their very nature have the potential of restricting competition) under Article 101(1) TFEU.

In essence, the EDP judgment underlines the requirement for companies to assess and evaluate whether they may be viewed as being potential competitors (i.e., companies operating in different markets and without having even taking “preparatory” steps to enter the marketplace), when constructing non-compete clauses in cooperation agreements and the necessity for doing so.

The judgment confirms such clauses face a rebuttable presumption by the undertakings to the agreement and therefore hard evidence concerning the necessity of including such a clause is required.  Liberalised sectors with little or no entry barriers are markets in which undertakings (including, within a group) are more than likely to be viewed as potential competitors.

It is therefore imperative undertakings to such agreements carry out the necessary legal due diligence when incorporating non-compete clauses in agreements to avoid potential investigations by competition authorities and as a result, potential penalties.

  1. Brief factual background

By way of brief background, the EDP preliminary ruling stems from a dispute originating in Portugal between Energias de Portugal SA and the Portuguese Competition Authority (Autoridade da Concorrência).  Back in 2012, during the energy market liberalisation process, Energias de Portugal SA (producer and supplier of electricity and natural gas in Portugal) entered into an association agreement between Continente (a large food and consumer products retailer in Portugal and at the time a part of the Sonae Group).[2]

The agreement between the parties essentially was a discounting scheme whereby Continente customers would be provided with a loyalty scheme in which they would receive a 10% discount on their electricity bills in the form of vouchers which customers could use for purchases at Continente stores.[3]  To give effect to the loyalty scheme, a two-way non-compete clause between the parties was included.  Continente agreed not to: (a) participate in any activities concerning the supply of electricity and natural gas in Portugal; and (b) enter into any discounting agreements with any other competing  electricity and natural gas suppliers in Portugal.[4]  In turn, Energias de Portugal SA agreed related commitments in the market for the retail distribution of products in Portugal.

Following the investigation carried out by the Portuguese Competition Authority into the aforementioned non-compete clause within the agreement, by way of a decision on 4 May 2017, the Portuguese Competition Authority imposed fines of EUR 34.5 million and concluded the non-compete clause was a form of market sharing (i.e., a by-object restriction) in those markets between Continente and Energias de Portugal SA.[5]

  1. The findings of the CJEU

Continente and Energias de Portugal SA subsequently appealed the fine and the Lisbon Court of Appeal requested a preliminary ruling from the CJEU essentially seeking clarification on the following four points:

(a) should Article 101(1) TFEU be interpreted as meaning that undertakings entering into a non-compete clause operating and active in different markets (consumer product retail and the electricity market) are considered as potential competitors;

(b) whether the agreement falls within the category of a vertical agreement and/or an agency agreement under Article 101(3) TFEU and the Vertical Agreements Block Exemption Regulation (the “VBER”);

(c) should Article 101(1) TFEU be interpreted as meaning that the non-compete clause in this context may amount to an ancillary restriction; and

(d) whether the non-compete clause in this context amounts to a by-object restriction under Article 101(1) TFEU?[6]

On the first point, the CJEU underlined that in accordance with existing case-law to be considered potential competitors “it must be determined whether there are real and concrete possibilities of the former joining that market and competing with one or more of the latter”,[7] even in the absence of the agreement.  Hypothetical possibilities are therefore not something which falls within the CJEU’s test.  The evidence therefore should be primarily objective and not entirely subjective. The CJEU also underlined the need to assess the non-compete within the realms of perception.[8]   Essentially, why would parties enter into such a non-compete if they did not perceive themselves as being competitors in the future?  Therefore, such a clause in of itself can be used as evidence to paint the picture that there are real and concrete possibilities of being potential competitors.  Notably, one should consider the barriers to entry into the marketplace, low or no barriers to entry decreases the threshold. The CJEU also further highlighted that the activities of the entities within the group are an important evidence trail and relevant as to whether the undertakings concerned would viably be able to enter the marketplace at different levels.  Finally, the CJEU underlined that actual preparatory steps of entering the marketplace are only relevant for demonstrating the real and concrete possibilities for entering the marketplace.[9]

On the second point, the CJEU reiterated the scope and application of the VBER specifically that undertakings not operating on different levels of the supply chain are not concluding vertical agreements, therefore the VBER is irrelevant in such a context.  The agreement in question could also not be considered as an agency agreement as both parties shared the risk jointly and operated outside of the same production/distribution chain. In this regard, the CJEU confirmed the application of the existing principles under the VBER cannot apply outside of the context of the definition. [10]

On the third point, the CJEU strictly reiterated from its previous case-law “if a given operation or activity is not covered by the prohibition rule laid down in Article 101(1) TFEU owing to its neutrality or positive effect in terms of competition, a restriction of the commercial autonomy of one or more of the participants in that operation or activity is not covered by that prohibition rule either if that restriction is objectively necessary to the implementation of that operation or that activity and proportionate to the objectives of one or the other”.[11]  Therefore, in this context, the non-compete must be viewed as necessary considering the factual circumstances.  If there are less restrictive means available to undertakings, this should be considered and acted upon.  Undertakings should take into consideration the entirety of objectives sought under the agreement and whether the non-compete is necessary to achieve those underlying objectives.[12]

On the fourth and final point, the CJEU emphasised its previous case-law that market sharing and exclusion agreements can be considered as falling within the by-object category, however, by-object restrictions should be interpreted narrowly.[13]  The CJEU, reemphasised the economic and legal context stemming from such agreements should be assessed: “the mere fact that there are procompetitive effects is not sufficient to rule out such a classification. It is only if those effects are demonstrated, relevant, specifically related to the agreement concerned, sufficiently significant and that they justify a reasonable doubt as to whether that agreement caused a sufficient degree of harm to competition that characterisation as a restriction by object must be ruled out”.[14]  In this specific case, considering the liberalisation of the electricity market was in play at the time it is left to the national court to consider the pro-competitive effects were indeed fact specific to the non-compete clause and not ancillary to the agreement.[15]

  1. Conclusions

This latest judgment delivered by the CJEU has overlapped and developed existing competition law principles requiring an extra level of due diligence from companies when constructing non-competes within their agreements.

Companies should also consider the information sharing restrictions under competition rules in the event they could be viewed as potential competitors, as well as regularly assessing the possibility of becoming a potential competitor (within the group) in a completely different industry where a non-compete is (or to be put) in place.

In light of the above, companies must also diligently reassess and review their existing non-compete clauses to ensure they are compatible with the CJEU’s latest preliminary ruling.

Should you have any questions or clarifications concerning non-compete clauses, or require practical assistance, please reach out to a member of the VILGERTS’ Competition team.

 

 

[1]             Please refer to Case C‑331/21, Autoridade da Concorrência, EDP – Energias de Portugal SA, EDP Comercial – Comercialização de Energia SA, Sonae MC SGPS SA, formerly Sonae Investimentos and Sonae MC – Modelo Continente SGPS, Modelo Continente Hipermercados AS, other party: Ministério Público, 26 October 2023, ECLI:EU:C:2023:812.

[2]             Ibid., at paras. 9-12.

[3]            Ibid., at paras. 13-17.

[4]           Ibid., at para. 18.

[5]           Ibid., at paras. 30-33.

[6]           Ibid., at paras. 34-38.

[7]           Ibid., at paras. 60-63.  Please also refer to Case C-307/18, Generics (UK) and Others, 30 January 2020,              EU:C:2020:52, at para. 36 and the case-law cited therein.

[8]          Ibid., at paras. 67-71. 

[9]          Ibid., at para. 72. 

[10]           Ibid., at paras. 78-85. 

[11]           Ibid., at para. 88. 

[12]           Ibid., at paras. 91-94. 

[13]           Ibid., at paras. 100-102. 

[14]           Ibid., at para. 104. 

[15]           Ibid., at para. 105. 

by Charles Clarke, Expert Counsel, Latvia

Team

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