Antitrust authorities get tough on non-compete clauses in M&A transactions

 

Yesterday, the European Commission imposed large fines on Telefónica and Portugal Telecom for entering into an illegal non-compete clause as part of a transaction.

 

Recent European Commission enforcement action in relation to non-compete clauses demonstrates the importance for companies to check carefully that non-compete obligations in transaction documents comply with competition law.

 

What happened to Telefónica and Portugal Telecom?

 

In 2010, Telefónica acquired sole control of the Brazilian mobile operator, Vivo, which was previously jointly owned by Telefónica and Portugal Telecom. In the context of this transaction, the parties inserted a clause in the purchase agreement indicating that Telefónica and Portugal Telecom would not compete with each other in Spain and Portugal as between the end of September 2010 and the end of 2011. The European Commission opened an investigation in January 2011, and the parties terminated the non-compete agreement in early February 2011.

 

The European Commission held that, by virtue of the non-compete agreement, Telefónica and Portugal Telecom had deliberately agreed to stay out of each other's home market. The European Commission considered that this preserved the status quo in Spain and Portugal, which hindered the integration process of the EU telecoms sector and prevented the parties from competing with each other for offering clients the most advantageous conditions. Despite the short duration of the infringement, which was only 4 months, the European Commission fined Telefónica €66,894,000 and Portugal Telecom €12,290,000.

 

Strikingly, the investigation and yesterday's decision did not originate from a third party complaint. The European Commission investigated the case on its own initiative. This demonstrates that the European Commission is willing to take action even in the absence of a complaint where they believe non-compete agreements may reduce competition. 

 

Other recent European Commission action taken against non-compete obligations

 

In June 2012, the European Commission accepted commitments from Siemens AG and Areva SA to reduce the product scope and duration of a non-compete obligation.

In 2001, Siemens and the legal predecessor of Areva established a joint venture in which they combined their respective activities in relation to nuclear power plants. The Shareholders' Agreement between the parent companies included a non-compete obligation which applied not only for the life of the joint venture but also for 11 years following the withdrawal of a shareholder. The non-compete obligation covered both the core products and services of the joint venture as well as other products for which the joint venture was not active and/or acted only as a reseller of Siemens. In 2009 Siemens withdrew from the joint venture, and filed a complaint to the European Commission regarding the non-compete obligation.

 

The European Commission adopted a preliminary assessment which stated that the non-compete obligation might breach Article 101 TFEU due its excessive product scope and duration. The European Commission accepted commitments from Siemens and Areva which reduced the duration of the non-compete obligation relating to core business to a period of three years, and which provided a total release from the non-compete obligation in relation to the non-core business of the joint venture.

 

Similar enforcement by the U.S. antitrust agencies

 

In the United States, the Federal Trade Commission and the Antitrust Division of the Department of Justice have aggressively pursued non-compete obligations, both in the acquisition and joint venture context and generally between competing firms. For example, in November 2012, the Antitrust Division filed a civil lawsuit against Ebay Inc., alleging that it violated the U.S. antitrust laws by entering an agreement not to recruit or hire employees of Intuit Inc. The Antitrust Division settled similar lawsuits in 2010 against Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc., Lucasfilm, and Pixar. And, most recently, in January 2013, the Federal Trade Commission required two sellers of bulk bleach to terminate an agreement, that was part of a 2010 transaction, by one seller not to sell bulk bleach in a specific geographic region for a period of time.

 

Key message

 

These recent European Commission and US cases underline the importance for companies involved in acquisitions and joint ventures to check carefully the scope and duration of any non-compete obligations to confirm that they comply with competition law. This is a global exercise. Telefónica's fine concerned a non-compete obligation in a transaction document related to a Brazilian aquisition. Any non-compete obligation must be directly related to and reasonably necessary for the implementation of a transaction, or risk investigation and potential fines from antitrust authorities worldwide.

 

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