Missing a Moving Target: Stockholm District Court rules on non-compete clauses

removal

The Stockholm District Court has found against the Swedish Competition Authority (SCA) that a non-compete clause lasting five years did not constitute an infringement of competition rules by object, and has further been unable to identify anti-competitive effects. As a result, the Court has refused to impose the fines of around EUR 5 million that the SCA had requested. The SCA announced on the same day the judgment was published that it will appeal the decision to the Market Court.

Background

The case flows from two acquisitions within the Swedish removal industry, and non-compete clauses agreed by the parties in the context of these transactions.

Alfa Quality Moving AB (Alfa) acquired the international removals operations of its rival NFB under an agreement signed at the end of 2006. A five-year non-compete clause (“Non-Compete 1”) was agreed by the parties in terms of which the seller agreed not to compete directly or indirectly with the business it had sold to Alfa. That non-compete clause expired at the end of 2011, after running for the full five-year period.

Alfa went on to acquire the international removals operations of another rival removal firm, ICM, under an agreement signed in August 2011. A five-year non-compete clause (“Non-Compete 2”) was also agreed upon between the parties in the context of this transaction. ICM, however, unilaterally revoked the non-compete clause in April 2014, after it had run for less than three years.

Neither of the transactions were notifiable for merger control clearance hence the SCA did not have a chance to review the non-compete clauses before the transactions were closed. However, it later found out about the clauses and opened an investigation into their compatibility with competition rules.

The SCA raised a court action against the parties in July 2014. The SCA claimed that the parties had entered into agreements to restrict competition either by object or by effect, since they exceeded the two-year period during which a non-compete obligation could be legitimately considered an “ancillary restraint” to a transaction (it had no objection to the product and geographic scope of the non-compete terms). The SCA requested that the court impose fines on the parties totaling around 42 million SEK (approximately EUR 5 million) (relating to the period by which each non-compete clause exceeded the two-year duration viewed by the SCA as being legitimate).

Court decision

The Stockholm District Court has rendered a detailed judgment, running to almost 100 pages, in which it finds against the SCA on several grounds.  In the judgment the Court considers in detail the guidance in the European Commission Ancillary Restraints Notice, especially the distinction between transfer of goodwill and of know-how, and the particularities of the industry concerned in this case.

Extent to which the non-compete clauses should be viewed as “ancillary”

While the SCA had argued that only a two-year non-compete duration should be considered as “ancillary” in this case, the Court viewed three years as acceptable.

The Court analysed exactly what was included, and not included, in the transactions. In particular, since it was not contractually agreed that any employees would transfer under the sales agreements, the court found that the business transfers included only goodwill, and not know-how. In terms of the European Commission Ancillary Restraints Notice in the case of transfers of goodwill alone a non-compete of two years will be considered as “ancillary”.

However, the court further considered the particularities of the removal branch, in particular the presence of relatively long customer contracts and perceived high customer loyalty, particularly among business customers. It came to the view that these characteristics meant that a longer non-compete term of three years in favour of Alfa could be justified as “ancillary”, even absent the transfer of know-how.

On that basis, the Court found that the SCA’s case should be rejected as concerns Non-Compete 2, which had applied for less than three years before being unilaterally revoked by ICM.

This left the Court to consider a potential infringement caused by the two years during which Non-Compete 1 had exceeded the three-year “ancillary” period.

Extent to which Non-Compete 1 infringed competition rules for the two-year period during which it was not to be considered “ancillary”

The Court analysed first whether the non-compete clause could be considered to have the object of restricting competition. It referred to the European Cartes Bancaires jurisprudence in this regard, and in particular the need to analyse the content of the agreement, its aims, and the economic and legal context as known at the time the contract was entered into.

No object infringement

After a detailed analysis of the contractual content and context, the Court concluded that the non-compete clause should not be considered to have the object of restricting competition.   The Court found that NFB and Alfa were not in fact potential competitors, in particular because of the former losing key personnel in conjunction with the transaction (though not contracted to, certain employees had transferred to Alfa). The Court thus rejected the SCA’s pleading that the mere existence of the non-compete indicated potential competition between the parties. Further, the sanction foreseen in the contract for breach of the non-compete obligation (a maximum of SEK 400,000 – roughly EUR 50,000 – for the two years in question) was, in the Court’s view, not a significant deterrence to NFB from competing in future, if it so chose.

No anti-competitive effects identified

The Court considered, in the alternative, potential anti-competitive effects flowing from the clause for the two years during which it was not to be considered “ancillary”.

However, the Court ruled that market definition was unclear since the SCA and the parties had argued for different product markets, which also led to a lack of clarity concerning the geographic market (in particular if it was Swedish or international). This uncertainty around market definition made it impossible for the Court to take a view on whether or not any anti-competitive effect could have had an appreciable effect on competition (a requirement that is expressly set out in the Swedish Competition Law’s equivalent of Article 101).  On that basis, the Court concluded it could not identify anti-competitive effects flowing from the non-compete clause.

Comment

The question of duration of non-competes is one that practitioners often have to grapple with in the context of transactions. Clients purchasing businesses are naturally interested in having as much protection as possible from future competition by the seller.

While a usual negotiating position is to limit non-compete terms to the two or three years foreseen in the European Commission’s Ancillary Restraints Notice, clients may want a view on the risk of pushing beyond the Notice’s stated time periods (and into the domain of the few “exceptional cases” referred to in the Commission’s Notice, where longer non-compete terms have been found acceptable).

Companies and their advisors should take note of the seriousness with which the SCA views overly long non-compete clauses; the fines sought by the SCA in this case are of the level one might expect in a cartel case. The risk of enforcement action against long non-compete clauses is thus real.

On the other hand, the District Court’s ruling is helpful for parties interested in pushing for increased non-compete protection on the basis of specific features of their industry:

  • A non-compete extending beyond two years may be considered “ancillary”, even in the absence of transfer of know-how, based on specific circumstances of the industry such as long client contracts.
  • A long non-compete term (in this case five years) is not an infringement of competition law by object unless the contractual content and context supports such a conclusion. The extent of potential competition and the actual deterrence effect of the non-compete clause, in particular penalties to be imposed, were especially relevant to the Court’s analysis in this regard.
  • In the absence of an agreed market definition, and in particular when faced with a potentially international market, appreciable effects on competition cannot be assumed to result from a non-compete clause.

Given the setback for the SCA of this ruling it is unsurprising that they will be appealing the decision. The fact this was announced on the very day the ruling was published gives an indication of the strength of feeling within the SCA about this issue. We will watch with interest the SCA’s grounds of appeal and the determination of the Market Court when this issue comes before them.

 

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Grant McKelvey is a Senior Associate in Vinge’s Stockholm office specialising in competition law.

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