NON-COMPETE AGREEMENT/CLAUSE AND ITS

SCRUTINY BY THE COMPETITION AUTHORITIES

PARAM TANDON

A Non-compete agreement has been defined as a contract which restricts participation in a certain market by a business or individual under specific circumstances. Non-competes clauses are generally aimed at protecting the business knowhow which gives an enterprise a competitive edge.

What is a non-compete agreement?

Why to use a Non-Compete Agreement?

They perform several functions:

Protects sensitive information;Defines what is considered confidential;Limits the use of confidential information;Protect the market dominance by competitors;

Forms a record in case of a later dispute.

Requisite to be followedMust be reasonable in terms of:

Nature of the Prohibited Activities “what can’t I do?”

Territory(geographical area) “where can’t I do it?

Duration of the restraint “how long can’t I do it?”

The legal provisions governing non-compete clauses in India under the Competition Act,

2002Section 4 of the Competition Act states that “no enterprise shall abuse its dominant position”. It provides that any condition which limits or restricts production of goods or services or which restricts technical or scientific development would be tantamount to abuse of dominant position. Further, the provision also stipulates that any practice which results in denial of market access or culminates into manifest abuse of position to enter into new markets would also come into the ambit of non-compete clauses.Section 5 of the Act essentially stipulates the procedure employed by the Competition Commission to enquire into the cases of non-compete clauses. However, the Act also stipulates that the non-compete clauses can be incorporated into agreements after suitable modifications have been made such that it does not result in an adverse impact on competition in the market.

Examples where ‘non-compete’ restrictions may be imposed

In a long-term supply agreement, the customer company might seek to restrict the supplier company from providing goods and services of the same or similar type to competitors of the customer.  In reverse, the supplier might seek to restrict the customer from using competing suppliers

In a sale and purchase agreement, the purchasing company might seek to prevent the vendor company from continuing any business similar to the business which is being sold, and might also seek to restrict key staff from setting up in opposition also.  Again, something similar might be seen in a joint venture agreement

Risk factor in imposing “Non-Compete” clause in an agreement

Risk of Investigation by competition law regulators.

Financial penalty for illegal non-compete agreement.

The Proposed combination can be declared void, pursuant to such agreement(s).

The CCI opined that non-compete obligations if necessary to be incorporated should be reasonable, particularly in respect of:The duration over which such restraint is enforceable; and The business activities, geographical areas and person(s) subject to such restraint in order to ensure that such non-compete obligations do not result in an appreciable adverse effect on competition.  

How CCI scrutinizes the Non-Compete clause in Proposed Combinations

(C- 2012/11/92)Orchid Chemicals/Hospira PharmaceuticalsOrder Dated: 29.02.2012

The CCI observed that the “non-compete covenant” should have covered only those products which are either being made or sold or are under development by Agila and Onco. The firms have now reduced the duration of the non-compete obligation to four years besides reworking the scope of the agreement to the products manufactured by Agila and Onco.

How CCI scrutinizes the Non-Compete clause in Proposed Combinations

(C-2013/04/116) Mylan/ Strides AcrolabDated: 20.06.2013

The Commission accepted the modifications offered by the parties (reduction of duration from 5 years to 3 years) and approved the proposed combination under sub-section (1) of section 31 of the Act. The Commission also directed the parties to make necessary amendment(s) in the agreements so as to incorporate the said modifications and submit a copy of such amended agreements along with the relevant documents to the Commission by 5.06.2014.  

How CCI scrutinizes the Non-Compete clause in Proposed Combinations

(C-2014/01/148)Torrent Pharmaceuticals Limited/ Elder Pharmaceuticals LimitedDated: 26.03.2014

The CCI raised objections over the non-compete clause present in the Share Purchase Agreement between Advent International Corporation and MacRitchie Investments Pte. Ltd. The Acquirers offered modifications regarding reduction in the duration of non-compete obligation on Avantha and its affiliates from five years to three years. The Commission considered and accepted the modification.

How CCI scrutinizes the Non-Compete clause in Proposed Combinations

(C-2015/05/270)Advent International Corporation and MacRitchie Investments Pte. Ltd.Dated: 12.06.2015

It was observed that the Proposed Combination imposes certain non-compete restrictions for a period of five years. Accordingly, the parties were required to provide necessary clarification and justification in this regard. The parties, vide their response submitted on 23rd July 2015, have made voluntary submission under Regulation 19 of the Combination Regulations, whereby they have stated that the duration of the Non-Compete would be reduced from a period of 5 years to 3 years through modification in the existing agreement. The Commission accepts the said modification offered by the parties under the provisions of sub-regulation (2) of Regulation 19 of the Combination Regulations and directs the parties to make necessary amendment(s) so as to incorporate the said modifications.

How CCI scrutinizes the Non-Compete clause in Proposed Combinations

(C-2015/06/286)TVS Logistics Services Limited, Omega TC Holdings Pte. Ltd. and Tata Capital Financial Services Limited Dated: 29.07.15

Foreign Jurisdiction’s Competition Authority finding on “Non-Compete Agreement”

The German Federal Cartel Office or Bundeskartellamt held that a non-compete clause with a 150km radius in the leases for a German factory outlet centre as anti-competitive.The German Competition Authority prohibits the operator of factory outlet center to use radius clauses, equivalent to non-compete clauses, in its lease contracts if these extend beyond a 50 km air radius and a term of five years (VR Franconia)The Turkish Competition Authority clears a merger in the GSM market subject to remedies, including limitation of the duration of the non-compete and confidentiality clauses (Alfa Telecom Turkey - Cukurova)The Turkish Competition Authority clears a merger in the of financial services subject to limitation of the duration of the non-compete clause (Dogan-Deutsche Bank) & (Dogan-TBIH) 

Foreign Jurisdiction’s Competition Authority finding on “Non-Compete Agreement”

A Dutch Court holds that a 5 years non-compete clause is disproportional in view of its goal and constitutes a restriction by object (Heijmans beton/Nederveen)The Brussels Court of Appeal rules that a non-compete clause does not qualify as an anticompetitive agreement under Art. 81 EC but constitutes an abuse of a dominant position on the basis of Art. 82 EC(WEX/FEBIAC)The Competition Commission of Singapore ceases investigations into a non-compete clause following a voluntary agreement not to enforce the clause (F&N / Heineken)The Swedish Competition Authority brings proceedings against companies in the removal business for non-compete agreements (Alfa Quality Moving / NFB Transport Systems / ICM Kungsholms).

Points to be considered while executing a Non-Compete clauses in Europe-”A Guideline”

The non-competition clause must be in writing and must be explicitly approved by the employee.Non-competes Must Be Limited in Time, Area or Region.The change of position of the employee does not affect the non-competition clause.The non-compete clause takes effect as soon as the employment agreement has come to an end.The law requires for the validity of the agreement to fix a suitable compensation, otherwise the agreement would be invalid.Once the clause has been agreed none of the parties can unilaterally resign from it.

ConclusionAs the above developments demonstrate, non-compete arrangements are firmly on the agenda of competition authorities both in India and in EU. This serves as a reminder to parties to joint ventures or other M&A transactions to consider both the application of multi-jurisdictional merger control obligations to their deal, and the application of the competition rules worldwide to the related transaction agreements.