A dispute arose over a contract by which Claimants agreed to purchase businesses belonging to Respondents. The contract was governed by French law and the parties on both sides were companies from various European countries. Claimants allege that Respondents violated clause 11 of the contract, by agreeing upon a merger with a third party. Amongst other things, this clause forbade the seller to engage in competitive acts for a period of seven years.

<i>Second Partial Award</i>

'The Tribunal refers to and incorporates herein its First Partial Award dated September 2000.

In that Award the Tribunal declared that the non-competition clause 11.3 in the [contract] was unenforceable under EU Competition Law due to its seven year duration. . . .

In the First Partial Award the Tribunal set out the terms of clause 21 of the [contract] which obliged the parties to negotiate a valid term if any term in the contract was declared invalid and unenforceable. . . .

Since the date of the First Partial Award the parties have, consonant with their obligations under clause 21, been attempting to agree the terms of a newly written clause 11.3 but unfortunately have failed to do so. . . .

It is common ground that the validity of clause 11.3 of the [contract] falls to be considered under the three heads of duration, subject matter and geographic scope. . . .

•Duration

The starting point has to be the Commission Notice 90/C203/05 dated August 14, 1990 entitled "Commission notice regarding restrictions ancillary to concentrations". In dealing with non-compete clauses on a sale of an enterprise the Commission set out some general principles in order to give guidance to parties. It stated:

In order to take over fully the value of the assets transferred, the acquirer must be able to benefit from some protection against competitive acts of the vendor in order to gain the loyalty of customers and to assimilate and exploit the know-how. . . . However, such a prohibition on competition is justified…..only when its duration, its geographical field of application, its subject matter and the persons subject to it do not exceed what is reasonably necessary to that end.

With regard to the acceptable duration of a prohibition on competition, a period of five years has been recognized as appropriate when the transfer of the undertaking includes the goodwill and know-how, and a period of two years when it includes only the goodwill.

The 1990 Notice was in force at the date of the [contract]. The Notice specifically provides that it is subject to the interpretation which may be given by the Court of Justice of the European Communities (ECJ).

By 1999 the Commission felt that the 1990 Notice needed to be updated to reflect the Commission's current practice in the field. Accordingly a Draft Notice was circulated which amended the periods stated above up to three years with goodwill and know-how and up to two years when it includes only goodwill. The Draft Notice set out the same principles as those in the 1990 Notice quoted above but this clearly illustrates that the Commission now adopts a more restrictive approach to the appropriate duration of non-compete clauses.

The 1999 Notice is not a legislative or judicial text, rather it is a statement of the Commission's policy in relation to these matters which is not binding on a court. However the Tribunal has had regard to the Commission decisions and ECJ case law cited by the parties and their experts.

It is clear that if [Claimants] could establish that know-how was involved it would have been able to justify a five year non-compete as the Commission's practice stood at the date of the [contract]. However the Commission's view has changed and under French and EU law the new guidelines would be enforced notwithstanding that they were not in force at the date of the [contract]. This is because this is a matter of "ordre public".

Accordingly the Tribunal considers itself bound to have regard to the Draft Notice which sets out the Commission's current position pertaining to non-competition clauses on the sale of an enterprise.

The Tribunal would have been very sympathetic to [Claimants]' predicament had they, in accordance with the 1990 Notice, negotiated a five year non-compete provision. However the seven year clause which the Tribunal has struck down did not comply with the 1990 Notice.

The Tribunal now has to consider whether a two year or three year restriction is appropriate. As submitted by both sides the result of this enquiry depends upon whether the sale of the enterprises included know-how.

A threshold issue at this juncture is whether it is permissible for the Tribunal to construe the ten agreements as one. The reason for this is because it is common ground that the [contract] does not itself transfer to [Claimants] any know-how. True it is that clause 8.1.18 (h) and (i) mention title to know-how but there is no specific transfer.

However the [research and development] agreement and the supply agreement both provide for the transfer of know-how . . . Respondents submitted that contrary to what was stated in these agreements no know-how, properly defined, was transferred. The Tribunal disagrees. Again the Tribunal is prepared to accept the definitions used by the parties themselves. Furthermore there was evidence before the Tribunal that know-how was to be provided to [Claimants]. It may well be correct that know-how was not transferred in the strict sense but the continuing provision of know-how was an essential and integral part of the agreement between the parties.

Having concluded that know-how was an essential element of the sale the Tribunal now has to consider whether the fact that know-how is dealt with other than in the [contract] is fatal to the argument that the non-compete should be based on the three year know-how guideline.

Any argument that under French civil law the doctrine of the indivisibility of contracts should apply to this case has to be rejected simply because under EU law the entire economic context of the operation has to be taken into account for the purposes of considering the legality of a non-compete clause under Article 81 of the EC Treaty. As Bellamy and Child on Common Market Law of Competition, 4th ed., p. 70, states in relation to anti-competitive "object or effect":

The fact that these are not cumulative but alternative requirements, indicated by the conjunction "or", leads first to the need to consider the precise purpose of the agreement, in the economic context in which it is to be applied.

Thus the Tribunal sees no reason to depart from what was stated in the First Partial Award . . ., namely,

The Tribunal cannot ignore the existence of the other agreements, including the [research and development agreement], which form part of the economic factual matrix in which this contract was negotiated and executed.

In the light of all of the above the Tribunal is satisfied that a three year non-compete clause on the special and particular facts of this case is lawful under EU law.

•Subject matter

. . . . . . . . .

The Tribunal is satisfied that non-competition clauses must be limited to products and services which formed the economic activity of the undertaking sold and which by the terms of the sale contract were in fact transferred to the buyer. The non-compete clause in the [contract] is contained in a contract for the sale of businesses and it would be impermissible for it to be extended to the . . . which were dealt with by way of a licence agreement and a supply agreement. Accordingly clause 11.3 has to be limited to end products.

•Geographic scope

. . . . . . . . .

Having considered the submissions the Tribunal sees no reason to accept Mr . . .'s invitation to re-visit this issue. Furthermore the Tribunal, consonant with its duty under clause 21 of the [contract] to replace the illegal portions with valid provisions the economic effect of which comes as close as legally possible to that of the invalid, illegal, unenforceable or deleted provision, should not be over astute in redrafting the parties' contract save where clearly required under EU and French law.

In the light of all of the facts and submissions the Tribunal remains of the view expressed in the First Partial Award and accordingly declares that the geographic scope of clause 11.3 should remain as drafted.'