The non-competition clause is a well-known contractual mechanism, often associated with employment law or business transfers. However, its analysis does not stop at simple contractual validity; it must also be scrutinised under competition law, which aims to protect the proper functioning of the market. A clause that is perfectly legal on one level may in fact constitute a prohibited anti-competitive practice. Understanding this duality is essential if you are to secure your commercial transactions. This subject is part of a wider framework that we explore in our complete guide to the non-competition obligation in commercial law. While conditions and limits of general validity The first step is to analyse the effects of the clause on the market from the point of view of competition law. Our firm, which has a recognised practice in the field of law of unfair competition and non-competition obligationsThis link is often a source of risks that companies underestimate.
General principles governing the validity of non-competition clauses in competition law
In competition law, a non-competition clause is not assessed solely on the basis of contract law criteria. The analysis shifts from the simple balance between the parties to the impact of the restriction on the competitive structure of the market. To be considered admissible, the clause must be directly related and necessary to the performance of a principal transaction which is not anti-competitive. Two fundamental principles guide this assessment: the necessity and the proportionality of the obligation.
The necessary nature of the obligation
The first criterion is necessity. The restriction of competition must be indispensable to the legitimate objective of the main agreement. For example, in the context of the sale of a company, a clause prohibiting the seller from recreating an identical activity is deemed necessary to guarantee the buyer that he will be able to fully enjoy the intangible assets he has acquired, such as clientele or know-how. Without this clause, the sale transaction could be rendered meaningless. On the other hand, a non-competition clause inserted into a simple contract for the provision of services without any transfer of substantial know-how would probably be deemed unnecessary and therefore potentially unlawful.
Strict adjustment to the function performed (principle of proportionality)
The second criterion, proportionality, requires the clause to be limited to what is strictly necessary to achieve the objective pursued. Proportionality is traditionally assessed in three ways:
- Duration: The prohibition of competition must be limited in time. The acceptable duration depends on the nature of the transaction. For the transfer of a business, it is often two to three years, the time deemed sufficient for the purchaser to consolidate the customer base acquired.
- Space : The geographical restriction must correspond to the territory in which the business being sold was operating at the time of the sale. A ban extending to the entire national territory for a company that only operated locally would be considered disproportionate.
- The material field : The prohibition may only apply to activities that are genuinely in competition with those that are the subject of the main transaction. A clause prohibiting the transferor from carrying on any commercial activity, including in sectors in which it did not operate, would be manifestly excessive.
Failure to comply with these principles of necessity and proportionality means that the clause is no longer a legitimate accessory but an unjustified restriction of competition.
Non-competition clauses and anti-competitive agreements
One of the main risks is that the non-competition clause may be reclassified as an anti-competitive agreement or cartel. Such a situation exposes the companies concerned to particularly heavy penalties. This issue is at the heart of the regulation of anti-competitive agreements and their risks.
The European framework (exemption regulation 330/2010)
In the European Union, Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition. Non-competition clauses are particularly closely monitored in vertical agreements (between a supplier and a distributor, for example). Block Exemption Regulation 330/2010 (and its successor, the Regulation (EU) 2022/720) allows certain agreements to benefit from a presumption of legality if they meet certain conditions, in particular market share thresholds. However, this regulation excludes agreements containing "hardcore restrictions", which include certain non-compete obligations. For example, a non-competition obligation imposed on a distributor for a period of more than five years is generally considered to be a hardcore restriction, which deprives the entire agreement of the benefit of the exemption.
The national framework (article L.420-1 C. com.)
In French law, Article L. 420-1 of the Commercial Code contains a prohibition similar to that in Article 101 of the TFEU. A non-competition clause may be the very object of an unlawful agreement, particularly in horizontal agreements (between competitors). Companies that agree not to compete with each other on certain markets or not to poach each other's employees would be entering into an agreement by object, i.e. an agreement whose sole purpose is to restrict competition, which is prohibited per se, without the need to demonstrate its concrete effects on the market.
Possible exemptions (legal and individual)
A clause that restricts competition is not always unlawful. It may escape prohibition if it benefits from an exemption. In addition to block exemption regulations such as the one on vertical restraints, an individual exemption may be granted. Under Article L. 420-4 of the French Commercial Code, a restrictive practice may be justified if it meets four cumulative conditions:
- It contributes to economic progress (improvements in production and distribution, technical progress, etc.).
- It reserves for users a fair share of the resulting profits.
- The restrictions on competition imposed are essential to achieving this objective of progress.
- It does not give companies the opportunity to eliminate competition for a substantial part of the products in question.
Obtaining an individual exemption requires a solid economic and legal demonstration, for which the support of a lawyer is often decisive.
Non-competition clauses and abuse of a dominant position
The prism of analysis changes when one of the parties to the agreement is a company in a dominant position. In this case, what might be a permissible clause for an ordinary company can become an abusive practice. The concept of abuse of a dominant position is subject to close scrutiny, as detailed in our article on prohibited practices linked to the abuse of a dominant position.
Analysis of clauses imposed by a dominant undertaking
A company in a dominant position on a market has a particular responsibility not to harm competition. Article L. 420-2 of the French Commercial Code and Article 102 of the TFEU prohibit the abuse of a dominant position. The use of non-competition clauses may constitute such abuse. For example, a dominant supplier imposing on its distributors an exclusive supply obligation coupled with a prohibition on selling competing products could be accused of abuse. The dominant undertaking's intention is irrelevant; it is the effect of crowding out competitors, even potential ones, that is punished.
The risks of market foreclosure
The main risk associated with these clauses is foreclosure. By imposing non-compete obligations on a large number of its commercial partners (suppliers, distributors), a dominant company can effectively foreclose the market to its current or potential competitors. The latter find themselves unable to access distribution channels or sources of supply, which constitutes a barrier to entry or expansion. The competition authorities are particularly critical of such foreclosure strategies, which freeze the market structure in favour of the dominant player.
Non-competition clauses and mergers
Mergers and acquisitions are a context in which non-competition clauses are not only commonplace but often necessary. In such cases, they are referred to as "ancillary restrictions" and are exempt from prohibition if they comply with strict conditions.
Clauses ancillary to business transfers
When a company is taken over, the buyer needs to be protected against competition from the seller in order to capture the value of the business. The non-competition clause is therefore considered to be ancillary to the merger. To be valid, it must be necessary to the completion of the transaction and directly linked to it. Its scope (duration, geographical and material scope) must be strictly proportionate to this objective. A duration of three years is often considered reasonable when justified by the transfer of customers and know-how. A period of two years is more usual if the know-how transferred is less important.
Clauses relating to the creation of joint ventures
The creation of a joint venture by two or more parent companies may also be accompanied by non-competition clauses. The parent companies may undertake not to compete with their joint subsidiary in its field of activity. Such a clause is considered ancillary and legitimate if the joint venture performs on a lasting basis all the functions of an autonomous economic entity ("full function"). Here again, the clause must be proportionate in terms of duration, space and scope if it is to be considered essential to the start-up and proper functioning of the joint venture.
Penalties and legal risks
Violating the rules of competition law exposes a company to major financial and legal risks. A non-competition clause deemed unlawful under antitrust law is subject to two main types of sanction. Firstly, the clause itself is null and void. The judge may declare it null and void, depriving it of all effect. Secondly, and this is the biggest risk, the competition authorities (the Autorité de la Concurrence in France or the European Commission) can impose very heavy fines. These fines can amount to up to 10 % of the total worldwide sales of the group to which the sanctioned company belongs. In addition to the fines, the company may be forced to change its contractual practices and suffer significant damage to its image.
The relationship between the contractual validity of a non-competition clause and its compliance with competition law is a complex exercise that requires a case-by-case analysis. The consequences of a poorly drafted clause or one used in an inappropriate context can be disastrous. To assess the validity of your existing clauses or to draft secure agreements, the assistance of an expert lawyer in competition law is an essential precaution. Contact our office for an analysis of your situation.
Sources
- French Commercial Code, in particular Articles L. 420-1, L. 420-2 and L. 420-4
- Treaty on the Functioning of the European Union (TFEU), in particular Articles 101 and 102
- Commission Regulation (EU) No 2022/720 of 10 May 2022 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices
- Commission Notice on restrictions directly related and necessary to concentrations
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