Short Reads

Court of Justice dismisses appeal by Telefónica on non-compete clause in telecoms transaction

Court of Justice dismisses appeal by Telefónica on non-compete clause in telecoms transaction

02.01.2018 EU law

On 13 December 2017, the Court of Justice dismissed the appeal brought by Telefónica against a judgment of the General Court (GC) regarding a non-compete agreement [see our July 2016 Newsletter]. The judgment confirms the finding of the GC that the non-compete clause agreed upon between Telefónica and Portugal Telecom (PT) amounted to a market sharing agreement with the object of restricting competition.

In 2010, Telefónica and PT concluded a share purchase agreement by which Telefónica acquired sole control over the Brazilian telecom company Vivo. Telefónica and PT had previously jointly held the shares of Vivo. That agreement included a non-compete clause prohibiting the companies from conducting business in the telecommunications sector that "can be deemed to be in competition with the other in the Iberian market", excluding economic activities already performed by the companies. The clause also contained the wording "to the extent permitted by law".

In 2013, the Commission found that the non-compete clause amounted to a market sharing agreement with the object of restricting competition and fined Telefónica and PT EUR 67 million and EUR 12 million respectively. The GC upheld this finding, but found that the Commission erred in calculating the fine.

Telefónica appealed this judgment and argued, among other things, that its right of defence had been breached and that the GC erred in law in finding that the non-compete clause amounted to a by object infringement. The Court firstly established that the GC had in fact examined the evidence brought forward by Telefónica and its right of defence had not been breached. As to classifying the non-compete clause as an by object infringement, the Court acknowledged that it is well established that market sharing agreements constitute a particularly serious breach of competition law. This finding was not affected by the fact that the clause contained the wording "to the extent permitted by law".

Telefónica also argued that the GC's assessment of the circumstances surrounding the adoption of the non-compete clause should have been called into question. The Court, however, held that these claims were based on a misreading of the judgment under appeal. The GC did not find that the clause was not essential for PT because it did not qualify as an ancillary restriction under competition law. It simply found that Telefónica had not submitted any evidence to demonstrate the essential character of the non-compete clause.

The judgment confirms that the non-compete clause entered into by the parties qualified as an by object infringement. Non-compete clauses agreed upon in the context of a transaction could qualify as ancillary restraints only if they are essential for the implementation of that transaction.

This article was published in the Competition Law Newsletter of January 2018. Other articles in this newsletter:

1. Court of Justice: Suppliers of luxury goods may prohibit their authorised distributors from selling on third party internet platforms
2. Court of The Hague confirms that the ACM can copy mobile phones during an inspection

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