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A cautionary tale: the use of cross market non-compete clauses

On 26 October 2023, the Court of Justice of the European Union (CJEU) issued a preliminary ruling dealing with the treatment under Article 101 TFEU of non-compete clauses in agreements between parties active in different product markets. 

Background

On 5 January 2012, EDP Commercial (EDP), a Portuguese energy supplier, and Modelo Continente (Continente), a retail food distributor, entered into an association agreement. The agreement allowed customers holding a Continente discount card to benefit from electricity price reductions and, subject to signing up to the “EDP Continente Scheme”, enabled them to secure a 10% discount on their electricity consumption. The agreement also contained a non-compete clause providing that the parties would not enter each other’s respective markets in Portugal for two years. Following an investigation, the Portuguese Autoridade da Concorrência (AdC) ruled that the non-compete clause amounted to a “by object” infringement and therefore breached the Portuguese equivalent of Article 101 TFEU. The AdC imposed fines of €38.3m on EDP and Continente (reduced to €34.4m by the Portuguese Competition, Regulation and Supervision Court in a September 2020 ruling). EDP and Continente appealed the decision, and the Lisbon Court of Appeal requested a preliminary ruling from the CJEU.

Potential competition 

The CJEU considered whether Continente, by managing a network of consumer product retailers, may be regarded as a potential competitor on the electricity market of electricity supplier EDP. Consistent with its rulings from the “pay for delay” case law, the CJEU confirmed that potential competition exists where the relevant undertaking has “real and concrete possibilities of entering the market concerned”, especially in circumstances where the potential entrant has been active in the market previously (as Continente had via a previous joint venture). Accordingly, potential competition does not result merely from the hypothetical possibility of entry (or even the desire of the relevant undertaking), but it need not be demonstrated with certainty that that undertaking will in fact enter. 

By object restrictions

A restriction “by object"  is a restriction which, by its very nature, is regarded as harmful to competition such that it is not necessary to assess its effects. While noting that “by object” restrictions should be interpreted restrictively, the CJEU held that an agreement restricting the Parties’ from entering each other’s markets could amount to market sharing or market exclusion, and therefore could be a “by object” infringement. Whilst consideration of the legal and economic context of an infringement must be taken into account, including any procompetitive effects resulting from such an agreement, the mere existence of procompetitive effects does not rule out the characterisation of an agreement as a “by object” infringement.

The CJEU left it to the Lisbon Court of Appeal to consider the legal and economic context of the agreement, in particular: (i) the relevance of Portugal’s liberalisation of its electricity sector (which the CJEU noted had lowered barriers to entry); and (ii) whether the consumer benefits were specific to the clause or merely connected to the broader agreement. 

Conclusion

While the Lisbon Court of Appeal will now have to determine whether the agreement infringed Article 101(1) TFEU, the CJEU’s ruling suggests there is a high burden to overcome when arguing that non-compete clauses between potential competitors do not have the object of restricting competition. This means that parties should very carefully consider the use of cross-market non-compete clauses in commercial agreements. 

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competition, commercial contracts, blog