Can the non-competition agreement with a partner, who will eventually leave the company, be unlimited?

A new perspective in view of a very recent Judgment of the Provincial Court of Madrid. 

Sometimes in the heat of the transaction, some aspects of the negotiation of an agreement can be overweighed. Either by stubbornness; by vehemence; by lack of prudence and professionalism… the negotiation can end with the validity and effectiveness of what, apparently, has been agreed. 

Non-competition clauses are usually agreed with a partner leaving the company. Even more so if he has held an important position and is aware of the company’s know-how. 

This practice is usually imposed to prevent the partner leaving the company from incurring in competitive or concurrent practices. For example, using the knowledge and even the clientele of his former company. 

Such agreement is covered by the will of the parties: the non-competition clause is imposed by one party and accepted by the other. Therefore, it might seem that it is a valid contract  since it has consent, object and cause. 

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 Is a post-contractual non-competition agreement, whatever its limit is, always valid by its mere acceptance?

 Despite having a justified cause and being accepted by both parties: is a post-contractual non-competition agreement, whatever its limit is, always valid by its mere acceptance? 

No, the Defense of Competition Act and the Madrid’s Court of Justice Sentence of July 11, 1985 require that: 

“Non-competition clauses, even if they are not intended to prevent; restrict; or distort competition in all or part of the national market, since their consequence, at least apparently, is to eliminate a competitor from the market, should be considered prohibited”. 

This debate is once  again  in the limelight after the sentence of the Provincial Court of Madrid on December 4, 2015. 

In the case of the indicated sentence, the former partner signed a contract of sale where there are 3 parties: (i) him, as the seller; (ii) another partner of the company, as the buyer; (iii) and the company. In exchange for such shares, the seller receives an amount corresponding to the nominal value of the shares. He also receives an amount from the company in consideration of a 10 years non-compete clause. 

According to the sentence, the seller started to exercise the activity after 4 years. Consequently, his former company sued him for breach of the post-contractual non-competition clause, claiming back the amount paid. 

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Jurisprudence on Exclusivity Pacts, non-concurrence and permanence in Spain. Limits and requirements

Exclusivity, non-concurrence and permanence pacts have limits and requirements. The Supreme Court has issued jurisprudence on Exclusivity Pacts, clearly defining both the nature and limits of this institution.

This ruling indicates that the duration of this clause is excessive for several reasons: 

1. Following in the wake of the sentence of the Provincial Court of Barcelona of May 9, 2008 which limited it to 3 years.
2. Because it has certainsimilarity with the agency agreements,  in  20 of the Agency Agreement Act is established that the non-compete clause cannot be longer than 2 years. This time limitation is the result of a weighted judgment made by the legislator of the 2 interests at stake: 
   1. To ensure the clientele.
   2. To preserve the freedom of competition. In this case, the legislator considers that the term of 2 years is sufficient to consolidate the clientele.
3. Violation of the principle of freedom in the workplace as enshrined in Article 4.1 of the Workers’ Charter. It is justified by the fact that it violates public order by rendering the clause null and void. At least, for the period exceeding 2 years.

Conclusions

In view of the above, we can indicate that the time limit of the non-competition agreement required from a former partner could not be more than 2 years. This limit could be extended to 3 in exceptional cases. For example, if there is a close link or relationship with customers. 

If this article has been of interest, we also suggest you to read the following article published on our website:

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