Non-compete clauses form an important part of various corporate transactions. They provide purchasers some protection against competition from sellers so that they may benefit by obtaining the full value of the transferred assets (both tangible and intangible). Such non-compete clauses can be necessary for purchasers to gain the loyalty of customers and to fully utilise the know-how acquired. In the case of Joint Ventures (JV), such clauses can be necessary to ensure that the JV partners are committed to the JV and do not, independently, end up competing with it.
However, these clauses, as they are essentially agreements not to compete, can give rise to competition law concerns and lead to scrutiny by the Competition Commission of India (CCI).
There have been a variety of cases where the CCI has sought clarification and justifications for different non-compete clauses included by the parties in transaction documents. Additionally, where necessary, the parties have also had to modify the scope of their non-compete clauses so as to obtain approval for their transaction.
Having said that, the CCI’s position regarding non-compete clauses in varying transactions has not, as yet, been collated and articulated in a single document. It has instead largely evolved through case-by-case application.
In this context, the CCI has, in line with its continued commitment to achieving necessary legal certainty and predictability in decision making, issued a Guidance Note on Non-Compete Restrictions (Guidance Note) highlighting its “general approach” towards non-compete clauses in various transactions.
Guidance Note: Key Elements
As a preface, the CCI has clarified that the Guidance Note is not binding on the parties to a combination but it is intended to serve as an important tool in drafting non-compete clauses. Additionally, the CCI has clarified that the standards set forth in the Guidance Note would not be applied mechanically but upon consideration of the specific circumstances of each case.
According to the Guidance Note, a non-compete restriction should be “directly related and necessary to the combination” in order to be considered “ancillary” to the combination and, thus, merit approval.
The Guidance Note specifies that in order to be directly related, the non-compete restriction must be connected and closely linked to the combination, but ancillary or subordinate to its main object.
Additionally, a non-compete clause will be considered necessary if, in the absence of such a non-compete restriction, the combination could not be implemented or could only be implemented under more uncertain conditions, at substantially higher cost, over an appreciably longer period or with considerably more difficulty.
The Guidance Note also clarifies, in line with the CCI’s position in the combinations approved by it, that the scope of the non-compete restriction in terms of its duration, subject matter, geographic field of application and scope of application “should not exceed what is reasonably required” having due regard to the nature of the business concerned.Additionally, if equally effective alternatives are available for achieving the same object as the non-compete clause, parties must have chosen one which is the “least restrictive of competition”.
Further, the Guidance Note has provided a variety of specific instances laying down the suitable limits of a non-compete clause in terms of its duration, subject matter, geographic field of application and scope of application.
The Guidance Note issued by the CCI incorporates some of the international best practices laid down in the European Commission’s Commission Notice on Restrictions Directly Related and Necessary to the Concentrations in the EU (EU Commission Notice)[i]. The EU Commission Notice (as amended) is the result of years of experience of a variety of transactions requiring various remedies.
Significantly, when the EU Commission Notice was amended in 2001, it clearly specified that the Commission would no longer assess the ancillary restrictions together with the transaction[ii]. To date, the European Commission does not generally assess individual ancillary restraints in its decision. Notifying companies are required to self-assess the validity of such restraints based on the guidance in the EU Commission Notice. Unless they are permitted by guidelines contained in the EU Commission Notice, the parties risk being unable to enforce the provision if it is subsequently found to be incompatible with EU law. Though the CCI Guidance Note does not expressly state that the CCI intends to quit assessment of non-compete clauses, it would be interesting to see if the CCI intends to follow a similar practice whereby the fate of the transaction is not necessarily hinged on the non-compete clause.
The Guidance Note does clarify that a CCI order approving a combination would not cover a non-compete restriction that is not found to be directly related and necessary to the combination.. However, an order of above nature from CCI would NOT automatically lead to a presumption that such clauses would infringe the provisions of the Competition Act, 2002.
Additionally, it will be interesting to observe if the CCI expands the scope of the Guidance Note to cover other ancillary restraints such as purchase or supply obligations, confidentiality clauses or non-solicitation clauses.
Given the CCI’s proactive advocacy role (best evidenced by the regular release of compliance manuals, booklets, etc), stakeholders may look forward to similar conduct/practice-wise guidance notes regarding issues cropping up in behavioural matters.
[i] Commission Notice on restrictions directly related and necessary to concentrations, (2005/C 56/03) (5 March 2005) available at http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52005XC0305(02) (Last accessed on 30 June 2017).
[ii] Press Release, The Commission changes its policy on “ancillary restraints”, 27 June 2001 available at http://europa.eu/rapid/press-release_IP-01-908_en.htm?locale=en (Last accessed on 30 June 2017).
* The author was assisted by Anu Monga, Director – Competition Practice and Nitish Sharma, Associate