Non-compete clauses within various types of business agreements: their forms and key considerations

In commercial contracts, such as distribution, franchise, or rental agreements, one party often suggests including a non-compete clause, which can go by various names like “non-compete,” “exclusivity,” or “conflict of interest.” It’s crucial to approach such proposals with care, taking into account relevant competition regulations.

Several factors merit close scrutiny when evaluating such clauses:

1. Duration: The longer the non-compete clause or the contract it’s part of (if the clause lacks a separate duration) – typically, exceeding five years – the more problematic it becomes.
2. Scope: This includes aspects like purchase volumes or geographic limitations. Vaguely defined clauses can lead to diverse and possibly unfavorable interpretations by competition authorities.
3. Market Shares: Parties’ market shares in the relevant segment matter. A market share above 30% necessitates individual assessment and often involves higher risks when including a non-compete obligation.

Below, we outline categories of contracts where these clauses frequently arise, along with specific observations:

Purchase/Distribution Contracts: For these agreements, obligations to purchase more than 80% of goods or services from a supplier can align with competition rules if they don’t exceed five years and if there are no barriers to terminating the non-compete obligation at the end of this period.

Recommendations by Competition Authorities: In certain industries (e.g., brewers and their HoReCa contracts), competition authorities suggest contract amendments to eliminate clauses that restrict competition. Examples include limiting draft equipment placement contracts to a maximum of five years with potential extensions through renegotiation.

Commercial Lease Agreements: Noteworthy here is the economic and legal context justifying clauses that prevent lessors from renting to tenants’ competitors or engaging in similar activities. A five-year maximum duration (without automatic extensions) is usually considered acceptable, with a defined geographical area.

Franchise Agreements: Certain restrictive clauses deemed essential to franchising, like safeguarding know-how and brand identity, might not face antitrust restrictions. Still, the necessity of such clauses should be the guiding principle. Post-contract non-compete clauses are assessed case by case, often limited to specific locations for one year post-termination to protect the franchisor’s legitimate interests.

In conclusion, the complexity of this analysis varies by contract type. Conducting such an evaluation helps parties identify what’s genuinely essential to safeguard their businesses. Additionally, it safeguards against potential fines from competition authorities, ensuring that a contract can bring long-term benefits to both parties.