Stock purchase agreement between US and Italian parties concerning an Italian company / Alleged breach of non-competition clauses in violation of Articles 85 and 86 of the Rome Treaty / Jurisdiction of Arbitrators, sitting in Paris / Arbitrability of the dispute / Application of French and Italian laws / Jurisdiction of arbitrators to decide that an agreement does not violate Articles 85 and 86 of the EEC Treaty, yes / Appearance that there is no violation of EEC Law / Arbitrability, yes

An agreement was entered into between Claimant (a US Company) and Defendant (from Italy), in 1984, concerning the purchase of shares of an Italian company manufacturing disk brakes. The agreement, together with an earlier purchase agreement, brought the total of shares owned by Claimant to a majority holding. The agreement provided for a non-competition clause. The dispute arises from an alleged breach by Defendant of said competition clauses. Defendant is said to have managed another company, a competitor which manufactures spare parts of brake-discs, only one month after the signing of the agreement.

'The arbitrability of the case and hence the arbitrators' jurisdiction

I. Do the Arbitrators have the competence to decide upon their own jurisdiction and determine the issue of arbitrability?

It is generally recognised that the competence-competence theory encompasses not only the arbitrators' authority to rule upon their own jurisdiction but includes also the authority to determine the issue of arbitrability. Now, it is a fact that certain issues cannot be decided by arbitrators because their substance is reserved exclusively to State courts. In some jurisdictions, it is the case of disputes involving public policy issues. However, whether such a prohibition applies in a given case is a question of law which the arbitral tribunal must solve when such an issue is raised by a party or even ex officio.

In the instant case the arbitrators are facing a public policy issue since the Defendant contends that jurisdiction related to a non-compete covenant (Art. 7) is exclusively reserved to Italian State courts and that it is a prohibited agreement under Art. 85 of the EEC Treaty.

Consequently, the arbitrators have authority to decide upon their own jurisdiction and hence to determine the issue of arbitrability. They have to determine preliminarily and in concreto the issues raised by the Defendant (B. Goldman, "The Complementary Roles of Judges and Arbitrators in Ensuring that International Commercial Arbitration is Effective", in Sixty Years of ICC Arbitration, p. 271-272).

II. Which laws are governing the issue of arbitrability?

The question is a very disputed one. Stating that "to decide the issue of arbitrability, the arbitrator will look to the law determining the validity of the arbitration clause" is only one of the possibilities offered to the arbitrators (W.L. Craig, W.W. Park and J. Paulsson, ICC Arbitration, Paris 1984, part II, 5.07, p. 23).

Arbitrators must also consider the arbitrability in the light of the law of the place of arbitration where an action could be brought for setting aside the award.

However, it would be an impossible and sterile task for the arbitrators to determine the issue of arbitrability according to the various laws where an award may be enforced, since enforcement may take place at any place where assets of the condemned party are located. Such location of assets needs not to be permanent and therefore is, in theory at least, unpredictable.

In the instant case, none of the parties has raised any doubt as to the applicability of Italian law to the arbitration clause. It is therefore primarily under Italian law that the issues of arbitrability must be determined. As the arbitration procedure takes place in Paris, the Arbitral Tribunal will also have regards to the solution of French law.

III. Is the alleged violation of Articles 85 and 86 of the Rome Treaty arbitrable?

French law

It appears that under French case law, up until the fifties, a dispute was not arbitrable when an agreement was governed by public policy rules such as exchange control, foreign trade, prices, etc. (B. Goldman, J. Cl. Dr. int. Fasc, 586-3; No. 48 ff).

In a second less restrictive phase, the Cour d'Appel of Paris declared that: "La nullité du compromis ne découle pas de ce que le litige touche à des questions d'ordre public mais uniquement du fait que l'ordre public a été violé" (Paris 15.6.1956, JCP 1956, II, 9419; D. 1957.587; Note Jean Robert, comp. également Paris 14.6.1962, Rev. arb. 1962, 107. Cass. Civ. 2 déc. 1964: YCP 1965, II, 14277 bis).

It appears that, according to French case law, a dispute remains arbitrable even though the main contract comes under public policy rules and even though certain contract clauses are violating public policy, provided, however, that the subject matter of the action is not contrary to public policy (B. Goldman, "L'arbitrage international et le droit de la concurrence" in Bulletin de l'Association suisse de l'arbitrage, 1989, p. 273).

The situation under French law has been recently clarified, at least as far as domestic arbitration is concerned. A fair picture of the situation has been given by L. Idot, in the Revue de l'arbitrage, 1989, p. 300: "Deux situations peuvent se présenter. Soit l'examen des comportements litigieux révèle que ceux-ci sont conformes aux règles du droit de la concurrence. Il n'y a donc pas violation de l'ordre public. L'investiture du tribunal arbitral est confirmée et l'examen de l'affaire au fond peut se poursuivre. Soit il y a infraction au droit de la concurrence, donc violation de l'ordre public. Le tribunal arbitral doit se déclarer incompétent, car il ne peut 'prononcer la sanction des violations qu'il viendrait à constater'. Dans ce deuxième cas, 'la nullité du compromis ne découle pas de ce que le litige touche à des questions d'ordre public, mais uniquement de ce que l'ordre public a été violé' (Paris, 15 juin 1956, J.C.P., 1956, II 9419, note Motulsky, Rev. arb. 1956.97). Or l'arbitre est incompétent pour sanctionner la violation de l'ordre public."

The solution under French law on domestic arbitration is thus that the arbitral tribunal has jurisdiction to state that an agreement does not violate competition law but has no jurisdiction to draw any consequences from a violation of competition law. As EEC law is part of the French legal order, this solution applies to the alleged violation of Articles 85 and 86 of the Rome Treaty as well as to violation of domestic French competition law.

It is not clear whether that solution applies also to international arbitration. However, there is no doubt that while a more liberal solution could be accepted in that case, a more restrictive solution is to be excluded.

Italian law

According to one author: "The parties must have the capacity to dispose of the rights which are the subject matter of the dispute. Amongst the 'exceptions' to this principle, mention is made of disputes touching upon the interpretation and/or implementation of Articles 85 and 86 of the EEC Treaty as well as Articles 65 and 66 of the ECSC Treaty, inasmuch as they refer to matters falling within the exclusive jurisdiction of the European Commission or the European Court of Justice, or else within the concurrent jurisdiction of the Commission, and of the Judiciary of Member States, insofar as the application of the sanction of nullity is concerned" (Bernini, "Italy" in Yearbook Commercial Arbitration, Vol. VI 1981, p. 33).

In reality, this last exception is not embodied in any particular provision of Italian law, but "seems to be tied up with the more general problem of limits on arbitrability imposed by public policy" (B. Goldman, op.cit., p. 268).

The parties to this arbitration did not quote any case law supporting Bernini's opinion.

In any case, even if Bernini's opinion was to be followed, it will amount to a solution similar to that of French law: only the consequences of a violation of Articles 85 and 86 of the Rome Treaty would not be arbitrable.

This appears to be the more restrictive solution under Italian law.

As a matter of fact, there is a growing tendency of international arbitrators to take into account the antitrust laws and other mandatory legal rules expressing public policy enacted by a State that has a significant relationship to the facts of the case, even though that State's law does not govern the contract by virtue of the parties' choice or applicable conflict rules (Derains, "Arbitrage et droit de la concurrence", 14 Revue suisse du droit international de la concurrence, 39, 56-57 (1982)).

As seen above, there is no doubt that, under both French and Italian law, arbitrators have jurisdiction to decide that an agreement does not violate Articles 85 and 86 of the EEC Treaty. It is only when the arbitrators are convinced that there is a violation that the matter may cease to be arbitrable. Although such restrictive solutions of the two national laws applicable to the matter of arbitrability are not really satisfactory from an intellectual point of view, since they make the jurisdiction of the arbitrators dependent upon the solution to be given on the substance, the Arbitral Tribunal considers it safer to respect what appears to be French and Italian law at present. Therefore, before deciding whether the alleged violation of Articles 85 and 86 of the Rome Treaty is arbitrable in the instant case, it must first check whether the alleged violation actually took place.

EEC competition law:

Contrary to the plea from the Claimant, the fact that the Defendant as an `inventor' is engaged in trading and manufacturing his 'invention' raises basically the issue of Art. 85 EEC Treaty.

The Stock Purchase Agreement dated 21st November 1984 involved the sale of a business containing a non-competition clause (non-compete agreement ancillary to the sale of a business).

As outlined before, it may be doubtful that the arbitrators have the authority to decide the issue of arbitrability if there exists a violation of Art. 85 EEC Treaty, since they are not competent to sanction any such violation. This is of course the most restrictive solution since it would also be possible for the arbitrators to interpret a non-compete agreement even without determining any sanctions arising from such violation assuming that sanctions are within the State courts' or State or EEC authorities' jurisdiction.

If we were to choose this very restrictive solution, we may refer to I. Van Bael/J.-F. Bellis, Competition Law of the EEC, 1987, p. 218, No. 605:

"As the Court said in Remia (Case Remia BV and others v. Commission, 42/84, judgement of July 1lth, 1985): 'In order to determine whether or not such clauses (i.e. non-competition clauses) come within the prohibition in Art. 85(1), it is necessary to examine what could be the state of competition if those clauses did not exist.'

If that were the case, and should the vendor and the purchaser remain competitors after the transfer, it is clear that the agreement for the transfer of the undertaking could not be given effect.

The vendor, with his particularly detailed knowledge of the transferred undertaking, would still be in a position to win back his former customers immediately after the transfer and thereby drive the undertaking out of business. Against that background, non-competition clauses incorporated in an agreement for the transfer of an undertaking in principle have the merit of ensuring that the transfer has the effect intended. By virtue of that very fact, they contribute to the promotion of competition because they lead to an increase in the number of undertakings in the market in question.

Nevertheless, in order to have that beneficial effect on competition, such clauses must be necessary to the transfer of the undertaking concerned, and their duration and scope must be strictly limited to that purpose. The Commission was therefore right in holding that where those conditions are satisfied such clauses are free of the prohibition laid down in Article 85(1).

It is clear from the cases that a non-compete clause will escape the prohibition of Art. 85(1) only when the following conditions are met:

1. The assets transferred must involve the transfer not only of material assets but also of goodwill and clientele. When the sale is restricted to material assets, a non-compete clause is not necessary to ensure the performance of the seller's obligation to transfer the full commercial value of the business.

2. The obligation not to compete must be limited in time. In Nutricia, the Commission referred to the following factors as relevant pointers for determining the term which is objectively necessary for non-compete clauses:

a) the time it will take the purchaser of a business to build up a clientele;

b) how frequently consumers in the relevant market change brands and type (in relation to the degree of brand loyalty shown by them);

c) how long it takes before new products entering the market or new trademarks are accepted by the consumer;

d) for how long, after the sale of the business, the seller, without a restrictive clause, would be able to make a successful comeback to the market and regain his old customer.

In the Thirteenth Report on Competition Policy, the Commission said that as a general guide, where the transfer of a business also involves the transfer of goodwill and know-how, a period of approximately five years will normally be acceptable, whereas a period of approximately two years will normally apply if the sale involves only the transfer of goodwill (para. 88 of Report). This two-year period can be adjusted if necessary in the light of particular circumstances.

3. The obligation not to compete must have a limited geographical scope. As a rule, it should cover only the markets where the products concerned were manufactured or sold at the time of the agreement.

4. The obligation not to compete must be limited to activities which have a direct effect on competition, such as manufacturing, application and sale. For instance, a noncompete clause covering non-commercialised research and development goes beyond what the Commission considers to be necessary for the acquisition of a business."

The covenant not to compete was concluded for a period of five years (Art. 7 of the Agreement of November 21st, 1984), which would be a time limit within the criteria of the Thirteenth Report on Competition Policy.

As to the other criteria (3), the parties did not provide enough information and evidence about "the markets where the products concerned were manufactured or sold at the time of the agreement". Anyway, the markets in braking systems are worldwide which justifies including the EEC, the USA, Canada and Mexico.

On the other hand, the covenant not to compete (Art. 7) covers non-competition including "the study, design, application, production and sale of brakes and braking systems of any kind and components of parts thereof."

The criteria applied by the Commission are concerned with "[t]he obligation not to compete . . . limited to activities which have a direct effect on competition, such as manufacturing, application and sale".

The covenant is in our opinion well within the realm of these criteria since the study, design, application, production and sale . . . are the necessary steps toward the production of brakes and braking systems.

In conclusion, since no violation of Articles 85 and 86 of the Rome Treaty appears to have taken place, the Arbitral Tribunal is satisfied that the matter is arbitrable.

On the basis of the above, the Arbitral Tribunal's decision is that the plea of unarbitrability raised by the Defendant must be rejected.'