Stock purchase agreement between US and Italian parties concerning an Italian company / Alleged breach of non-competition clauses / Examination of possible violation of Articles 85 and 86 of the Rome Treaty / No violation

In its interim award (see Related Documents below), the Arbitral Tribunal examined prima facie the applicability of Articles 86 and 86 of the Rome Treaty to determine the issue of arbitrability. It decided that the case was arbitrable. It was held that it may be doubtful that the arbitrators have the authority to decide the issue of arbitrability if there exists a violation of Article 85 EEC Treaty since they are not competent to sanction any such violation. It was held that this is 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.

'As the Defendant rightly pointed out, however, the submission that the Covenant not to compete could be null and void as violating Art. 85 EEC is an issue which must be dealt with "in substance".

According to the Commission's and the Court of Justice's case law, a non-competition clause does not fall under the prohibition of Article 85 (1) insofar as it is a legitimate means of ensuring the performance of the seller's obligation to transfer the full commercial value of the business (see Nutricia/Zuid-Hollandse Conservenfabriek, OJ 1983, L 376/22). The following conditions are to be met:

The assets transferred must involve the transfer not only of physical assets (viz. Nutricia decision) or exclusive industrial and commercial property rights (viz. Commission notice regarding restrictions ancillary to concentrations OJ 1990 C 203/5) but also of commercial know-how, of goodwill and clientele.

In such cases it is essential to prevent a seller from re-acquiring his old customers either directly or indirectly through cooperation with the purchaser's competitors in the period immediately following the transfer. Similarly, where know-how is transferred, the seller must be prevented for a certain time from using such knowledge in a manner which would prevent the purchaser from acquiring the undertaking with its market position undiminished (See, Reuter/BASF, OJ 1976 L 254/ 40).

The obligation not to compete must be limited in time (See I. Van Bael and J.-F. Bellis, Competition Law of the EEC, 2nd ed. 1990, p. 327).

The protection must be kept to the minimum that is objectively necessary for the purchaser to assume, by active competitive behaviour, the place in the market previously occupied by the seller (see Nutricia decision). The Commission referred to the following factors as relevant in determining how long the non-competition covenant should last:

a) Factors concerning the transfer of know-how (viz. Reuter/BASF decision, page 47 and N. Green, Commercial Agreements and Competition Law, London 1986, p. 559):

"a.l. The nature of the know-how transferred; if the know-how is very complex and the buyer will need a considerable amount of time to reach a point of maximum exploitation then this suggests the need for a lengthy non-competition period;

a.2. The opportunities for use of the know-how; if the opportunities for exploitation of the know-how are limited, the buyer will require a longer period of protection from the vendor in order to reach a point of satisfactory return on the know-how;

a.3. The extent of the buyer's knowledge; the time needed to maximise exploitation will also depend upon the expertise of the buyer;

a.4. Whether the non-competition covenant relates to know-how existing at the date of transfer or new developments based upon or connected to the transferred know-how; a non-competition clause extending to new or further development can be of shorter duration".

b) Factors concerning the transfer of goodwill and clientele (viz. Nutricia decision, p. 26):

"b.1. The time it will take the purchaser of a business to build up a clientele;

b.2. How frequently consumers in the relevant market change brands and type (in relation to the degree of brand loyalty shown by them);

b.3. How long it takes before new products entering the market or new trade marks are accepted by the consumer;

b.4. 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 customers".

In the Thirteenth Report on Competition Policy (No. 88), the Commission indicates as a general guide that 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.

This two-year period can be adjusted if necessary in the light of particular circumstances, as was the case in Remia (see Nutricia decision as upheld by the Court in Remia v. Commission, 1985 ECR 2545). Thus limitations of up to five years are admissible in special circumstances, which the arbitrators believe are met in the instant case.

The obligation not to compete must have a limited geographical scope. The non-competition clause must in normal circumstances be confined to those markets in which the undertaking was active before its sale, or in which it may be regarded as a potential competitor on the basis of its relevant and demonstrable commercial activity (viz. Reuter/BASF, p. 47). Thus, depending on the size of the seller, the territorial restriction may be less than the national territory (see Sedame/Precilec, Eleventh Competition Report, para. 95). Conversely, where the seller is a large corporation whose selling area embraced the whole of the EEC, the ban may be EEC-wide (See Mecaniver/PPG, OJ 1985 L 35/54). (N. Green, p. 559).

"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 non-compete clause covering non-commercialised research and development goes beyond what the Commission considers to be necessary for the acquisition of a business." (I. Van Bael and J.-F. Bellis, Competition Law of the EEC, 1987, p. 218) (See Reuter/BASF decision and Sedame/Precilec in Eleventh Report on Competition Policy, para. 95).

Defendant can be regarded as an undertaking for the purpose of Art. 85. As the Commission pointed out in its Reuter/BASF decision, Dr. Reuter was an undertaking, since he engaged in economic activity through those firms of the Elastomer group which remained under his control, by exploiting the results of his own research and as commercial adviser to third parties. A similar conclusion applies to Defendant.

The assets transferred involved the transfer not only of material assets, but also of know-how, goodwill and clientele.

. . . . . . . . .

The Arbitral Tribunal considers that Defendant was the inventor of the brake-discs system as further developed and produced by Company X [third party]. Through buying Defendant's shares, Claimant acquired control over Company X and its goodwill. Therefore, the transfer of Defendant's shares does not amount to a pure transfer of assets, but to the transfer of a decisive stake aimed at acquiring control over Company X and its goodwill.

However, Defendant alleged that "Claimant already knew and possessed all technological information required to build brakes and braking systems and that, in any event, any confidential technology owned by Company X was made available to Claimant upon the initial acquisition agreement".

The Arbitral Tribunal considers that Claimant formally acquired Company X's know-how on . . . 1983. However, the buyer needs a certain amount of time until he can fully exploit the transferred know-how.

Considering that Claimant acquired its stake from Defendant less than one year after the first acquisition, the need for protection of the transferred know-how from outside competition still existed at that time. The covenant not to compete was even more justified in these circumstances by the fact that the second seller was Defendant, the inventor of the brake-disc system, and that by this sale Claimant acquired control over Company X.

Consequently, the fact that Claimant might already have some experience in the field of brake-discs at the time of Defendant's sale must be considered only for determining the duration of the non-compete agreement.

The same reasoning applies to the transfer of goodwill and clientele involved in the transfer of Defendant's shares.

The transfer of Defendant's shares amounted to the acquisition of control over Company X. It also involved the transfer of goodwill and clientele.

Considering that the relevant know-how was made available to Claimant upon the initial acquisition agreement, i.e. one year before Defendant's sale, the five-year terms incorporated in the covenant not to compete appear to be the upper allowable limit given the goodwill and clientele to be protected.

The Arbitral Tribunal in its Interim Award further held that, as to the geographical scope of the obligation not to compete, 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". However, in the arbitrators' mind, Company X is a leader in the world market and 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 and parts thereof".

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

In the opinion of the Arbitral Tribunal, the Covenant is well within the realm of these criteria since the study, design, application, production and sale of brakes and braking systems of any kind and components and parts thereof are activities which have a direct effect on competition.

As far as Art. 86 EEC is concerned, there is no evidence that Claimant has a dominant position in the brake-disc market.

Therefore, the arbitrators, as far as the non-compete covenant is concerned, are satisfied that there is no violation of Art. 85 and 86 EEC Treaty and that said clause is valid also "in substance".'