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Arnhem-Leeuwarden Court of Appeal rules on duration of a non-competition clause in SPA

Arnhem-Leeuwarden Court of Appeal rules on duration of a non-competit

Arnhem-Leeuwarden Court of Appeal rules on duration of a non-competition clause in SPA

01.09.2017

On 10 August 2017, the judgment of the the Arnhem-Leeuwarden Court of Appeal (Court of Appeal) was published which held that a purchaser of all the shares in a Dutch company, Thermagas, could not rely on a non-competition clause with a duration of 5 years in a share purchase agreement (SPA). This decision quashes an earlier District Court judgment, which had allowed the purchaser to invoke this clause against one of the sellers that had gone on to continue business in the same market with a different company.

The Court of Appeal assessed the clause as an "ancillary restraint" necessary for the realisation of the concentration [see the European Commission Notice on ancillary restraints]. As the non-competition clause exceeds the maximum period allowed when transferring customer loyalty in the form of both goodwill and know-how (3 years), the Court of Appeal considered whether special circumstances were present that were not foreseen in the Notice, but that may justify the 5 year duration.

Here, the Court of Appeal's reasoning diverged from the District Court. In reaching its conclusion that there were special circumstances, the District Court relied on a 2014 precedent of the same appellate court (with the same presiding judge). In that case, the Court of Appeal found that a 5 year term was acceptable considering the following circumstances: (i) a high degree of customer loyalty, (ii) a long lifespan of the products concerned, (iii) specific knowledge of the seller regarding procurement and sales channels, and (iv) the (low) speed at which that industry knowledge becomes outdated. The purchaser put similar arguments on the table in the Thermagas case, but to no avail: the Court of Appeal discarded them one by one.

The Court of Appeal held that the judge in the proceedings on the merits was likely to declare the non-competition clause in the SPA null and void. As a result, the purchaser could not rely on the Dutch statutory conversion mechanism to secure the effective application of competition law.

Whilst the outcome is not surprising, the judgment does confirm that Dutch courts are willing – even in summary proceedings – to consider whether special circumstances allow for a non-competition clause in an SPA to exceed the 3 year maximum.

This article was published in the Competition Law Newsletter of September 2017. Other articles in this newsletter:

  1. Dutch Competition Authority publishes market study into online video streaming platforms

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