The European Court of Justice (ECJ) recently ruled on whether a non-compete clause in an Association Agreement between companies operating on separate product markets can constitute an agreement with an anti-competitive object (Judgement of 26 October 2023, Case C‑331/21 – see here). The ECJ decided that a non-compete clause can be a restriction of competition by object and that parties on separate product markets can be potential competitors, based on an analysis of a set of consistent facts, taking into account the structure of the market and the economic and legal context in which they operate. The Court concluded that inclusion of a non-compete clause in such an agreement is in itself a factor indicating that there is potential competition.
EDP Energias de Portugal (EDP) and the shopping centre conglomerate MCH entered into an Association Agreement aimed at attracting customers, promoting sales and offering discounts to consumers. The Agreement included a discount on electricity prices reserved for customers with a discount card issued by MCH as part of a loyalty programme. Customers who joined the loyalty programme and signed a contract for the supply of low-voltage electricity from EDP received a 10% discount on their electricity consumption.
However, the Association Agreement also contained a section on cross-exclusivity, according to which MCH would not enter the electricity and gas markets in Portugal during the term of the Agreement and for a period of one year after its expiry. EDP undertook the same obligations in relation to the retail distribution of food products in Portugal.
The Portuguese competition authority (the Autoridade de Concorrencia, AdC) fined the parties to the dispute 34.5 million euros for restricting competition by object, even though the parties were not actual competitors on the same market at the time of the agreement. Both parties have challenged the Portuguese competition authority’s decision. The Tribunal de Concorrencia, Regulacao e Supervisao de Santarem upheld the charge.
The Lisbon Court of Appeal had doubts about the negative impact of the Agreement on the relevant markets, and asked the European Court of Justice to clarify eleven questions, which can be grouped into four main issues, namely:
On the question of potential competition, the Court referred to its previous case law in Generics(Case C-307/18 – see here), according to which potential competition exists where there are real and concrete possibilities for the undertaking not present on the relevant market, to enter that market and compete with one or more undertakings already present on that market. It is therefore necessary to determine whether, in the absence of the agreement, there would have been real and concrete possibilities of entry. The Court went on to say that there must be a coherent set of facts, taking into account the structure of the market and the economic and legal context in which it operates. However, the Court then stated that the specific conclusions in the Generics case “cannot be regarded as being of general application”, as the structure of the market in the case at hand differs from the market structure in Generics too greatly. In particular, the Court believes that the liberalisation of the Portuguese electricity market in the years prior to the Association Agreement is an important factor to be taken into account, as well as the fact that Sonae group companies have (or have in the past had) activities in the same or neighbouring markets (such as generating electricity from solar panels and a Joint Venture with a competitor of EDP). The Court follows the opinion of Advocate General Rantos, arguing that subjective elements can also be taken into account. At the same time, it is not necessary for establishing a potential competitive relationship, that the potential competitor has already taken specific preparatory steps to enter the market. Finally, the Court highlights the fact that, even if the party was not active on the market at the time the agreement was concluded, the parties would not have entered into a non-compete agreement if they did not consider themselves to be potential competitors. While the ECJ leaves it up to the national Court to apply its guidance to the case at hand, its indications clearly point to the conclusion that the parties could in principle be regarded as potential competitors.
As to whether the agreement was a vertical agreement, the Court concluded on the facts that it was not, as each company bears its own costs and the two companies do not operate in the same production or distribution chain. A restriction which on its face appears to fall within the prohibition rule of Article 101(1) TFEU may, according to the settled case-law in MasterCard and Others v Commission and F.Hoffmann-La Roche and Others, constitute an “ancillary restraint” and as such fall outside the scope of Article 101 (1) TFEU. The conditions for ancillary restraints are that the restriction is objectively necessary for the implementation of that transaction or activity and that the restriction is proportionate to the objectives of one or other of those transactions or activities. Accordingly, one must assess whether that activity would be impossible to carry out in the absence of the restriction in question. In this case, the parties have submitted that this restriction is necessary, so that the parties can not use commercially sensitive information for their own benefit. For this reason, the Court left it up to the Portuguese Court to decide whether this restriction is ancillary to that Association Agreement and proportionate to its objectives.
For an agreement to be considered a restriction of competition by object, the nature of the agreement itself must be anti-competitive. This applies to types of coordination between undertakings which are so harmful to competition that it is not necessary to analyse their effects. The mere fact that there are (some) consumer benefits does not preclude a restriction by object, as the benefits would have to be sufficiently significant to preclude such a classification. In the present case, the Court found it significant that electricity market was in the final stages of liberalisation and that EDP was a major player in this market, thereby indicating that the agreement could be classified as a market-sharing agreement which had as its object the prevention, restriction or distortion of competition.
The most important learning point from the case appears to be that caution must be applied when trying to justify compliance of a contractual non-compete clause with the lack of actual competition. Restricting potential competition may be a by object restriction. Inserting such a non-compete clause may in itself indicate that there is (at least) potential competition and may well have an adverse effect on the compliance of the agreement under Art. 101 TFEU, unless there is another justification for the non-compete clause. Furthermore, the Court seems to lower the standards for the finding of a potential competitive relationship. While the Court first refers extensively to the established case law in Generics, which had set high standards for potential competition, it distances itself from the specific reasoning because Generics concerned a different market.
Companies must therefore be cautious with non-compete clauses, even if they are actually present on very different markets and are therefore unaware of the potential competition. Before jumping to the conclusion that there is no potential competition, they must analyse the full picture, taking into account the full context, including prior activities of group companies in the relevant and neighbouring markets.