Non-compete clauses - moves away from standard duration

Recent Swedish court judgement highlights risks involved with non-compete clauses in transaction agreements. Cederquist’s competition experts comment on the case.

On Monday 16 May 2016 the Stockholm District Court delivered its long-awaited judgment in the so-called removal cartel case (case no. T 10057-14). The Swedish Competition Authority (SCA) had sued three companies active in the removal business for fines totalling 42 MSEK, claiming that the defendants had entered into anti-competitive agreements. One of the defendants had purchased the other two defendants’ respective international removal business, and the two respective share purchase agreements (SPAs) contained non-compete clauses prohibiting the sellers from competing with the divested target businesses for five years (in one case however, the clause was, following a sudden termination, considered to have only been in effect for three years).

In order to allow a buyer to obtain the full value of the assets bought, non-compete clauses in SPAs fall outside the general prohibition on anti-competitive agreements as long as the duration is not excessively long. According to European Commission guidance and well-established practice, two years is allowed if the asset transferred contains goodwill and three years if also know-how is included, although longer duration is not excluded depending on the circumstances. In this case, absent transfer of know-how, the SCA claimed that the periods exceeding two years constituted “by object” restrictions of competition and requested the court to impose high fines (considering the size of the defendants and the markets affected, maximum fines were actually pleaded for). “By object” restrictions are the most serious restrictions of competition and those most likely to be penalised with fines. A competition authority does not need to show anti-competitive effects to sanction “by object” violations, as such effects are presumed.

The District Court first found that a three year non-compete was justified in this case, e.g. due to a practice of long customer agreements in the international removal business, meaning that the case against one of the transactions/SPAs was dismissed already at that stage. As for the second, five year non-compete, the court found that the excessive period (two years) did not amount to a “by object” restriction, e.g. due to the fact that it was not obvious that the parties post-transaction were potential competitors (the seller had after all decided to exit the market). If a restriction is not “by object” it must be examined whether it gives rise to appreciable restrictive effects. In this context, the court found that the SCA had not proven such effects, e.g. due to uncertainty about the geographic scope of the market. If the market were wider than Sweden, the parties’ market shares would not have been significant. In light of this, the District Court dismissed the entire case. 

In our opinion, this was a welcome judgment by the District Court. It is not reasonable that a clause that is allowed for two years should be considered a hard-core “by object” cartel infringement (and penalised as such) the minute it exceeds this duration, in particular as two years is not an absolute limit; a longer duration may be motivated (as demonstrated in this case). The end of this case remains to be seen however, as the SCA has stated that it will appeal to the Market Court.

Regardless of the SCA’s loss and what the Market Court may decide, this case highlights the need for caution when entering into non-compete clauses in SPAs already when exceeding two years and always if a longer duration than three years is being considered. It should also be borne in mind that the risk is incumbent on sellers and purchasers alike.

For further information please contact Cederquist’s competition experts  Fredrik Lindblom or Kristoffer Molin.