ECJ considers post-term non-compete obligations in franchise agreements - Retoucherie de Manuela

17 June 2013

Richard Eccles

The ECJ has ruled in Case C-117/12 La Retoucherie de Manuela v La Retoucherie de Burgos, on the interpretation of the Vertical Agreements Block Exemption Regulation, in relation to a post-term non-compete obligation in a franchise agreement.

It concluded that, to benefit from the Vertical Agreements Block Exemption Reputation, a post-term non-compete obligation in a franchise agreement must be limited to a particular building or parcel of land used during the franchise agreement, and cannot extend to the whole territory covered by that agreement.

The Exemption

This ruling related to the old block exemption Regulation, but the new version is on similar terms. Article 5(b) of Regulation 2790/1999 applied to a post-term non-compete only to the extent that it was limited to the premises and land from which the buyer had operated during the contract period (and additionally was limited to one year in duration and was intended to protect confidential information).

The Dispute - Background

La Retoucherie de Manuela (the franchisor) and La Retoucherie de Burgos (the franchisee) entered into a five-year franchise agreement for clothing services.

The agreement contained a non-compete clause, under which the franchisee was prohibited from undertaking identical or similar activities to the contract activities, in competition with the franchiser anywhere in the contract territory. This stood both for the duration of the contract and for one year after its termination, for any reason.

The clause's purpose was the protection of know-how and expertise, and breach of it triggered a penalty payment of more than EUR90,000. After the franchisee unilaterally terminated the contract and sought to disregard the non-compete, the franchisor had its claim seeking to enforce the penalty payment thrown out at first instance on the basis that the clause was anti-competitive and therefore unenforceable.

It appealed to the provincial court of Burgos, who referred the question of validity of the non-compete obligation to the ECJ.

The question centred on the meaning of "premises and land". The Spanish court asked the ECJ whether the phrase referred only to the physical space within which the franchisee operated while the agreement was in effect, or whether, on the grounds that the word "and" led an ambiguity as to whether "land" could be extended to mean "territory", a broader meaning should prevail.

ECJ's Order

The ECJ ruled that the common-sense, obvious meanings of the words should apply, so that "premises" refers to part of a building and "land" is just a parcel of land.

Specifically, because the word "territory" is used elsewhere in the Regulation, it was clearly the intention of the legislators to distinguish between the two. For a non-compete clause to benefit from the protection of the block exemption, it should be limited in geographic scope and can only apply to the specific premises, for one year after termination.

This restrictive interpretation, limited to the actual point of sale, means a post-term non-compete clause prohibiting the buyer from selling the contract goods or services away from the site and land from which he operated during the contract, does not come under the block exemption Regulation.  Instead, the national court must decide if the non-compete individually meets the exceptions criteria of Article 101(3), and if therefore there has been a breach of Article 101 TFEU.