Briefing

Competition
May 2013

Non-compete obligations: when are they lawful?

The purpose of competition law is to ensure that companies

obligations or covenants, but also other obligations with

compete with each other: in a market economy, this is the

equivalent effect that restrict a companys ability to compete,

best way of ensuring that consumers benefit from competition

including: cover pricing, bid-rigging, customer and employee

between suppliers, in terms of lower prices, improved product

non-solicitation obligations and restrictions on the use of

quality, innovative new products and greater choice. Therefore,

confidential information.

companies that agree not to compete with each other will

usually be regarded as engaging in cartel behaviour and face
heavy fines for anti-competitive market sharing. That said,
in certain circumstances, non-compete obligations (and
other obligations with a similar effect) are regarded as being
objectively justifiable and even, for a period, pro-competitive,
and therefore lawful, for example in the context of a merger or
the formation of a joint venture.
In this briefing, we examine, by reference to recent decisions
of the European Commission, when non-compete obligations

Such agreements will generally be considered as hard core

cartels and parties to them will be punished accordingly, with
companies facing heavy fines and, in some countries (including
the United Kingdom), individuals being at risk of criminal
prosecution.1 In the European Union, this approach is clearly
exemplified by very heavy fines imposed for bilateral noncompete agreements in the gas and telecoms sectors, under
which the parties essentially agreed not to compete in each
others home markets.

competition law concerns. The dividing line between what is

E.ON/Gaz de France: very heavy fines for

market sharing as part of pipeline project

and is not lawful is not always clear and expert legal advice

In 2009, the European Commission imposed fines of 553

should be sought, both to protect against the risk of serious

million on each of E.ON and Gaz de France for illegally agreeing

fines and to ensure that, whenever possible, your commercial

not to compete with each other in their respective domestic

interests and objectives are protected to the maximum extent.

markets. In the 1970s, the companies had jointly constructed a

will be lawful and when, conversely, they will give rise to serious

If you would like to discuss any of the issues raised in this

briefing, or to obtain legal advice on any specific concerns,
please contact one of the members of our Competition Unit or
your usual Burges Salmon contact.

The basic position: non-compete agreements

Competition laws, including Chapter I of the UK Competition
Act 1998 and Article 101 of the Treaty on the Functioning of the
European Union (TFEU), prohibit anti-competitive agreements
and practices.

pipeline to import gas from Russia to Germany and France, but

also agreed not to compete with each other in their respective
countries. Once European gas markets had been liberalised, this
agreement infringed competition law. On appeal, the General
Court confirmed that the agreement was anti-competitive,
albeit for a shorter period than that found by the Commission. It
therefore reduced the fines to 320 million each.

Telefnica/Portugal Telecom: significant fines

for non-compete on termination of joint venture
In 2010, two telecoms operators, Telefnica and Portugal

It is therefore prohibited for companies that are actual or

Telecom, ended a mobile joint venture in Brazil, Vivo, with

potential competitors to agree not to compete with each other,

Telefnica acquiring Portugal Telecoms shareholding in Vivo.

including by sharing geographic markets or customer groups.

However, the companies inserted into the sale and purchase

This does not just cover express (or implied) non-compete

agreement a clause by which they agreed not to compete with

For proposals to revise the UKs criminal cartel offence, see our briefing of May 2012, Government announces reform of UK competition law and
establishment of a new competition authority and OFT consults on revising its enforcement procedures.

each other in their respective home markets of Spain and

It is important to note that, in assessing a merger or joint

Portugal (in which each was the largest operator) between

venture, the Commission will not conduct a separate

September 2010 and the end of 2011.

assessment of whether any contractual provision (such as a

The Commission subsequently became aware of this

agreement and started an investigation on its own initiative.
In January 2013, even though the companies had voluntarily
terminated the non-compete agreement in February 2011, after
the Commission had started its investigation, the Commission
imposed substantial fines for illegally partitioning the Iberian
telecoms markets for a four month period: Telefnica was fined
66.9 million and Portugal Telecom 12.3 million for a serious
infringement of the competition rules. These fines would have
been even higher but for the companies cooperation with the
Commission and voluntary termination of the non-competition
pact. Both companies have appealed to the General Court.

Exceptions to the basic position: non-competes

in the context of mergers and joint ventures
under the ancillary restraints doctrine
Non-compete covenants (and those of similar effect, such
as non-solicitation obligations and prohibitions on acquiring

non-compete obligation) is within the scope of the ancillary

restraints doctrine: it is for the parties to themselves assess
whether restrictions, such as non-compete clauses, are
ancillary to their transaction. The only exception is where
a case gives rise to novel or unresolved questions such
that there is genuine uncertainty as to the application of the
law: however, we are not aware of any case in which the
Commission has given such guidance. Furthermore, where
the ancillary restraints doctrine is not applicable, the provisions
must be self-assessed for legality under Articles 101 and 102
TFEU (and national equivalents).

Mergers and acquisitions

The ancillary restraints doctrine applies to non-compete obligations
accepted by the seller in an M&A transaction. This recognises that
the purchaser must have sufficient time (but no more) to assimilate
and exploit the goodwill and know-how of the acquired business
before it is subject to competition from the seller.

interests in competitors) are common in M&A transactions and

Non-compete clauses restricting the sellers ability to compete

joint venture agreements. Indeed, without them, transactions

with the divested business will generally be classed as

would often lose their entire economic rationale.

ancillary restraints (and thus permitted) for a duration of up

The purchaser of a business will usually have paid a significant

sum for goodwill and often also technology and know-how.
The purchaser will, self-evidently, wish to protect the value of its
investment by preventing the seller from immediately competing
with the business that it has just sold and about which it will
have commercially valuable knowledge and information. From
the sellers perspective, giving a non-compete covenant can
increase the sale price.
In some cases, the business being sold may possess
commercially valuable information about the businesses being
retained by it the seller, which may wish to prevent the buyer
using this information.

to three years where goodwill and knowhow are transferred

and two years where only goodwill is transferred. Only in truly
exceptional circumstances may a longer duration be objectively
justifiable and in view of the European Commissions general
approach to non-compete obligations, it should be assumed
that three years is the maximum permissible duration. In
addition, the obligation must be limited to the product and
geographic areas in which the acquired business was active or
was intending to enter.
The ancillary restraints doctrine does not apply to restrictions
accepted by the buyer. However, in rare occasions, noncompete provisions accepted by the buyer for the benefit of
the seller might be considered as objectively justified (and thus

In the case of joint ventures, each parent company will wish

lawful), albeit for a more limited scope and/or duration, for

to protect its investment in the joint venture and also sensitive

example to prevent solicitation of the employees or customers

commercial information and know-how it contributes to the

of a retained business or the use of confidential information

joint venture, as well as to prevent free riding by its partners

about the retained business that unavoidably must be

unfairly using this information.

transferred to the buyer as part of the business being sold.

Competition law takes account of these commercial realities

through what is known as the ancillary restraints doctrine.
This applies to contractual restrictions, such as non-compete
obligations, that are directly related to and necessary for the
successful implementation of a merger or joint venture. Guidance
on the application of this doctrine is provided in the Commissions
Ancillary Restraints Notice, which applies irrespective of whether
the merger or joint venture is required to be notified to the
Commission under the EU Merger Regulation.

Joint ventures
The EU Merger Regulation applies to full-function joint ventures
which are set up on a lasting basis as an autonomous economic
entity active on a market. However, the principles of the ancillary
restraints doctrine are equally applicable to partial function joint
ventures which are assessed under Article 101 TFEU. In a joint
venture scenario, non-compete provisions may apply to the
parent companies and/or to the joint venture itself.

Obligations accepted by the parent companies (provided

The Commission considered that post-dissolution non-compete

that they have a controlling interest in the joint venture) not to

restraints were not relevant to the creation of the joint venture

compete with the joint venture in its specified areas of activity

and so could not be ancillary to that transaction. However, it

(in terms of products and geographic area) are normally

did accept that the restraints could, in principle, be ancillary to

ancillary for the lifetime of the joint venture. This is also the

Arevas acquisition of sole control of Areva NP, given Siemens

case for restrictions on the parent companies use of knowhow

privileged access to Areva NP confidential information during the

and intellectual property that has been licensed to the joint

lifetime of the joint venture. However, it considered the duration

venture. However, restrictions on the ability of the parents to

and scope of the restraints were excessive, infringed Article

supply inputs (such as raw materials or content in broadcasting

101(1) and not capable of exemption under Article 101(3) TFEU.

markets) to competitors to the joint venture may be ancillary

It therefore required significant modifications to the obligations

only for a shorter period (typically three years), where this

to make them compatible with Article 101. Areva and Siemens

would be sufficient to enable the parties to recoup their initial

offered commitments to do so, in order to avoid potentially

investments and a longer period would foreclose rivals from the

significant fines. The Commission accepted these commitments,

markets on which the joint venture is active.

which were made legally binding in June 2012.

It is usual for the parent companies, in establishing the joint

The Commission was only prepared to accept the following

venture, to define the scope of its products and geographical

post-termination restraints on Siemens:

area of activity, thereby restricting its activities. This is inherent in

the creation of the joint venture, so is unlikely to raise competition
concerns. Agreements between the parents not to compete with
each other in products or geographic areas that are outside of
the scope of the joint venture will not be ancillary and are likely to
be regarded as anti-competitive market sharing.

Limits to the exception for ancillary

restraints: the Areva/Siemens case

a worldwide non-compete obligation of three years in

respect of the core products manufactured and sold by
the joint venture: this was, in its view, sufficient to protect
Arevas interests, as after three years the information
to which Siemens had had access would have lost
commercial and strategic relevance
no non-compete obligation at all in relation to other non-core
nuclear-related products that had not been manufactured by

The ancillary restraints doctrine is not unlimited in its application in

the joint venture, even if they had been used or resold by it

terms of the nature, scope and duration of contractual restrictions

(such as components for nuclear plants and the conventional

on a companys ability to compete. In addition, as explained

(non-nuclear) parts of a power plant, which Siemens

above, competition authorities do not themselves apply the

continued to make outside of the joint venture)

doctrine on an ex ante basis when examining a notified merger

and many transactions may not even satisfy the thresholds
for a merger notification. Therefore, parties must self-assess
the application of the doctrine, which, as is clear from a recent
Commission investigation involving Areva and Siemens, exposes
them to a degree of both regulatory and commercial risk.
In 2001, in a transaction approved by the Commission under
the EU Merger Regulation, Areva and Siemens created a joint
venture, Areva NP, to combine their civil nuclear technology
businesses, which would supply nuclear power plants, reactor
services and fuel assemblies. It was agreed that, following a partys
exit from the joint venture, the departing party could not compete
with the joint venture for up to eleven years. In 2009, Siemens

an unlimited obligation not to use confidential

technological know-how of the joint venture or Areva:
this did not restrict competition, as Siemens could still
compete using its own technology
an unlimited obligation not to disclose confidential
information relating to the joint venture or to Areva: this did
not prevent competition by Siemens
The non-compete obligations to which Siemens remained
subject covered not only direct competition, but also:
developing core products, acquiring or holding more than
10% of the capital or voting shares in any entity supplying
core products, and using confidential business information

withdrew from the joint venture by exercising a put option and

relating to the joint venture or to Areva.

selling its stake to Areva. Siemens subsequently announced its

It is notable that the Commission drew a distinction between

intention to re-enter the civil nuclear business in partnership with

restraints on the exiting shareholders post-termination use

a Russian entity. Areva therefore sought to enforce Siemens

of technology and know-how, on the one hand (which do

non-compete obligations. Amongst other defences, Siemens

not restrict competition at all) and of confidential business

complained to the Commission that the obligations infringed EU

information on the other (which do restrict competition and thus

competition law and were thus unenforceable, even after their

can be allowed only for a transitional period). It is also notable

duration had been reduced to four years as a result of arbitration

that the Commission was strict in permitting, as ancillary, a

proceedings between Siemens and Areva.

non-compete obligation only for the products and services

actually made by the joint venture (which were exhaustively set

Particular regard should be had to the duration, product

out in the revised non-compete obligation), even if Siemens

scope and geographical field of application of any restrictions,

also supplied other, complementary products also purchased

to ensure that they are objectively justifiable, necessary and

by the same customers, operators of nuclear power plants.

proportionate to the interests being protected. Whilst restraints

falling outside of the ancillary restraints doctrine can, in

Commentary: are your non-compete provisions

compatible with EU competition law?

principle, benefit from exemption under Article 101(3) TFEU (on

In order to ensure the enforceability of non-compete obligations

in reality non-compete obligations that do not fall within the

and to avoid the potential risk of fines, parties to agreements

ancillary restraints doctrine are extremely unlikely to be

containing non-compete clauses or similar restrictions must

capable of exemption and would therefore be unenforceable.

ensure that these restrictions are directly related to and

necessary for the implementation of their transaction. Equally, a
party bound by a non-compete obligation may wish to consider
whether competition law could provide a basis for to be found
to be the obligation unenforceable.

the basis that they create efficiencies or benefits to consumers),

It is therefore important to conduct a thorough competition law

assessments whenever the inclusion of non-compete clauses
and other restrictions in transaction documents and other
commercial agreements is considered.

Burges Salmon Competition Unit

Burges Salmons Competition Unit is one of the United

the Co-operative Group in its successful appeal to the

Kingdoms leading competition practices. We undertake

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Should you require any further information on the issues

described in this Briefing or on any UK or EU competition
law matter, please contact your usual contact or one of the
members of our Competition Unit.

of the OFT, European Commission and other regulators,

judicial review proceedings, follow-on damages actions and
civil litigation with a competition law element; UK, EU and

Laura Claydon
Partner

international merger control; state aid, procurement and

+44 (0117) 939 2273

related litigation; and the application of competition law to

laura.claydon@burges-salmon.com

commercial agreements and strategies.

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