What is a non-compete agreement?
A non-compete clause in a distribution agreement is an agreement pursuant to which the supplier restricts the distributor as to the goods or services it may offer. A non-compete clause exists in the following two cases:
- If, during or after the end of the agreement, the distributor may not produce or (re)sell goods or services that compete with the goods or services it purchases from the supplier; or
- If the distributor must purchase more than 80% of its total requirements of the goods or services to be purchased from the supplier (excluding off-take clause).
This provision protects the supplier's position, since it then does not have to compete with its own distributors. A non-compete provision often specifies which products or services the non-compete relates to, but may also impose geographic restrictions.
When does a non-compete agreement violate competition law?
At the European level, specific agreements are exempted from the prohibition of cartels and other anti-competitive activities. This is also known as the block exemption. These exemptions exist because the adverse effects of the restriction of competition in that situation outweigh the economic benefits of these agreements.
In principle, a non-compete clause falls under one of these block exemptions. However, the condition is that a clause is not indefinite, with the maximum duration set at five years. In practice, it may happen that a distribution agreement stipulates that the agreement, including the non-compete clause, is tacitly renewed at the end of its term. These non-compete clauses may also be covered by the block exemption, provided the distributor has the option to terminate the distribution agreement after five years or at least to renegotiate the terms of the agreement. Other agreements made between the parties should not thereby impose such pressure that the distributor does not feel free to terminate the agreement or renegotiate the terms. Tacit renewals for a longer period of five years - since the new 2022 legislation regarding block exemptions - are thus no longer automatically an excluded restriction.
Specifically, this means that every five years, a distributor must again have the choice to continue cooperation with the current supplier, or to switch to another supplier no later than the expiration of the five-year period.
