The Competition prohibition Redux

Earlier this year our firm´s website published a newsflash entitled "The prohibition to compete… is a feast better than enough after all?". It was prompted by a decision of the Court of Cassation (Dutch-language division) which decided that judges do have the power to mitigate a contractual clause prohibiting competition.

In practice this decision was experienced as a respite. The drafting of non-compete clauses  - and above all the period that is attached to them - no longer appears to be a game of all or nothing. Through the combination with a mitigation clause, one can count on a judge who will reduce the clause as necessary to whatever is reasonable. One therefore looked forward with great interest to further case-law, something that in the meantime has arrived in the form of a new Court of Cassation decision (25 June 2015).

This decision was pronounced in full divisions, meaning that magistrates from both the Dutch-language and the French-language divisions jointly deliberated on it, thus limiting the risk of conflicting case-law.

A first difference with the earlier decision resides in the factual basis. This time the issue did not have to do with the term of the clause, but the material scope:

• Firstly, the limitation apparently applied for the "current activities of the company". This description is naturally open to interpretation, and one of the parties had a go at it by pointing to the specific activities that the company engaged in. However, the Court of Appeal decided that even this sensible interpretation would go further than allowed.
• Secondly, the limitation applied in "Belgium and abroad". That too is quite broad. Once again, the purchaser asked for this to be read as the area where the company was genuinely active, but the Court of Appeal found it unnecessary to interpret what was a clear clause differently.

On both points, the Court of Cassation has decided otherwise. Strikingly, the Court chose not to interpret the clauses, instead seizing the occasion to confirm its earlier case-law that the judge must mitigate if that corresponds to the intent of the parties. Thus the maxim “don´t nullify, mitigate“ applies for the material scope as well.   

Given the earlier decision, this is a logical step. To bend a clause’s scope of application when the term is involved, but  to break it when the material scope is questioned wouldn’t make much sense. Yet in practice one is going a step further. While there exists a certain consensus about a reasonable period (3 to 5 years), the imposition of a territorial and a material border will inevitable be custom tailored to the case at hand. In so far as appears from the decision, in this case there also was no so-called severability clause revealing the “parties´ intent” to preserve their agreement. 

This concern was already expressed after the first decision: for lawyers, it is sometimes already difficult to describe what activities are being aimed at. A judge who has to perform the same exercise in a conflict situation is faced with a difficult weighing exercise. If he must judge a single concrete and limited violation, he can reach a decision as before. By contrast, if the claim deals with a whole series of violations, because the (alleged) competition occurs from abroad with (specific) clients (or online), it will be more difficult to draw a line.

The ruling of the Court of Appeal also harbours another striking difference with the earlier decision. That one was based on the limitations on non-compete clauses deriving from the European competition law. An intense discussion is going on in the legal doctrine as to whether this analogy is justified. However, the Court of Cassation did not address this point, so the debate continues. Also unclear is whether mitigation is possible when the non-compete clause violates European or Belgian competition law.

So the conclusion to be reached after these Court of Cassation decisions is not unambiguously positive. The possibility of mitigation most likely does more justice to the intent of the parties.  However, ´falling back´ on the judge can give rise to legal uncertainty and a proceeding that will drag on for years. The watchword remains: look for what is reasonable in advance and improve the chances of avoiding legal proceedings.

For more information on this topic, you can consult Joost van Riel and Dave Mertens (the authors) and Gwen Bevers (unit head).