On 7 February 2013, the Court of Justice of the European Union ("ECJ") handed down its ruling in response to a preliminary reference from a Spanish court that had questioned the meaning of the phrase "premises and land from which the buyer has operated during the contract period" in Article 5(b) of the 1999 Vertical Agreements Block Exemption Regulation (the "1999 VABER") in the context of a franchise agreement.
Article 5 of the 1999 VABER identified a number of obligations that, while not hardcore restrictions of competition, would fall outside the scope of the block exemption even where the market share threshold set by the Regulation was not exceeded. More particularly, Article 5(b) provided that the block exemption would not apply to any direct or indirect obligation preventing the buyer, after termination of the agreement, from manufacturing, purchasing or distributing goods or services, unless the obligation (i) related to goods or services that competed with the contract goods or services; (ii) was limited to the premises and land from which the buyer had operated during the contract period; and (iii) was indispensable for protecting substantial and necessary know-how transferred by the supplier to the buyer. In addition, the obligation was required to be limited in duration to a period of one year after termination of the agreement.
In the proceedings at issue, La Retoucherie de Manuela, SL (the franchisor) and La Retoucherie de Burgos, SC (the franchisee) had entered into a five-year franchise agreement in 2004 concerning the provision of clothing repairs and alterations services. Clause III.2 of the franchise agreement contained a non-compete obligation pursuant to which the franchisee agreed not to directly or indirectly develop identical or similar activities to the activity covered by the contract in competition with that activity. The non-compete clause was stated to be valid for the duration of the contract and to be motivated by the need to protect know-how and expertise and maintain the identity, image and reputation of the franchise network. Clause III.2 extended the validity of the non-compete clause for one year after termination of the contract, in order to protect know-how and expertise. If the franchisee failed to comply with the provisions of the non-compete clause, the franchisee was required to pay the franchisor € 90,151.82 by way of penalty. Finally, Clause VII.B of the franchise agreement allowed the franchisee to terminate the agreement if the franchisor filed an application for voluntary bankruptcy, was declared bankrupt or was otherwise dissolved.
On 29 April 2009, the franchisee unilaterally terminated the franchise contract arguing that the reduction of the franchisor's equity to less than half of its share capital was a legal cause for termination and that the franchisor had breached the technical assistance and commercial obligations contained in the franchise agreement.
The franchisor brought an action before the Spanish court claiming compensation for the damage allegedly caused by the early termination of the contract and payment of € 90,151.82 for breach of the non-compete clause. Both claims were rejected and the franchisor appealed. In reply, the franchisee claimed that the non-compete clause was invalid as being contrary to the Spanish Competition Law 15/2007, unless exempted by the 1999 VABER. The appeal court decided to stay the proceedings and refer a question to the ECJ for a preliminary ruling. It asked whether the phrase "premises and land from which the buyer has operated during the contract period" contained in Article 5(b) of the 1999 VABER meant only the place or physical space from which the franchisee operated while the agreement was in effect or whether it extended to the entire territory assigned in the franchise contract.
In its ruling, the ECJ considered that the words "premises" and "land" should be given their common sense meaning in the context of Article 5(b). Accordingly, "premises" referred to a part of a building and "land" should be understood as referring to a parcel of land. "Territory" should be understood in the sense that it refers to a geographical area. The words "premises" and "land" could not be interpreted as referring to a designated territory. The ECJ rejected the suggestion that the use of the word "and" in the phrase "premises and land" was ambiguous and could be interpreted as extending the meaning of the phrase to a territory. In this respect, it was relevant to the ECJ's assessment that a clear distinction was made between premises and territory elsewhere in the 1999 VABER, including in Article 4(b), which referred to restrictions on the "territory" into which the buyer or seller may sell the contract goods or services. In the ECJ's view, it was intended that, for post-term non-compete clauses to benefit from the block exemption, they must have a limited geographic scope, i.e., be restricted to the premises and land from which the contract goods or services were sold.
Accordingly, pursuant to Article 5(b) of the 1999 VABER, a non-compete clause prohibiting the buyer, after the expiry of the contract, from selling the contract goods or services away from the site and land from which it has operated during the contract period does not benefit from block exemption. It is for the national court to examine whether the restriction would amount to a breach of Article 101(1) TFEU outside the scope of the block exemption.
The findings of the ECJ summarised above on post-term non-compete obligations are also of relevance for agreements subject to the 2010 Vertical Agreements Block Exemption Regulation, whose Article 5(3) contains the equivalent provision to Article 5(b) of the 1999 VABER.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
