On 13 December 2017, the Court of Justice of the European Union ("ECJ") dismissed the appeal lodged by telecommunications operator Telefónica against the General Court's ("GC") judgment largely upholding a 2013 Commission decision, which imposed a fine on Telefónica for agreeing not to compete with Portugal Telecom on the Iberian telecommunications market, in breach of Article 101 TFEU (see VBB on Competition Law, Volume 2016, No. 7, available at www.vbb.com).
In its judgment, the ECJ rejected allegations that the GC had distorted certain facts when it upheld the Commission's finding that the non-compete clause restricted competition by object (see analysis below).
Non-compete clauses are commonly used in the context of the acquisition of a business to protect a purchaser's investment. They guarantee the transfer to the purchaser of the full value of the assets, for instance, by preventing the seller from opening a new business servicing the customers access to whom was transferred to the purchaser. Under certain conditions, non-compete clauses fall outside the scope of Article 101 TFEU if they are (i) directly related; (ii) necessary; and (iii) proportionate to the implementation of the acquisition. If these conditions are met, the non-compete clause is in principle cleared as part of the merger process as a permissible "ancillary restraint".
In its Telefónica judgment of 28 June 2016, the General Court ("GC") adopted a strict approach to ancillary restraints and dismissed the claims of Portugal Telecom and Telefónica that the Commission had erroneously considered that the non-complete clause in the share-purchase agreement by which Telefónica had acquired from Portugal Telecom the exclusive control of Vivo, one of the main mobile telecom operators in Brazil, amounted to a market-sharing agreement with the object of restricting competition (see VBB on Competition Law, Volume 2016, No. 7, available at www.vbb.com). Under the non-compete clause, Portugal Telecom and Telefónica undertook to refrain "to the extent permitted by law" from competing with each other on the "Iberian market" (i.e., on each other's respective home markets, Portugal and Spain) for a period of 15 months.
In its appeal before the Court of Justice of the European Union ("ECJ"), Telefónica again challenged the characterisation of the non-compete clause as a restriction by object. According to Telefónica, the GC had erred in its assessment of: (i) the context of the negotiations on the non-compete clause; (ii) the content and objectives of this clause; and (iii) Telefónica's efforts to minimise the scope of application of this clause. More precisely, Telefónica asserted that the GC had distorted the content of one of its internal e-mails, in which it had considered the option of proposing an increase in the duration of the non-compete clause. It further argued that the GC had failed to sufficiently take into account the fact that Portugal Telecom had insisted on the essential character of the non-compete clause.
The ECJ rejected these arguments. It held that the GC had properly examined the evidence put forward by Telefónica to substantiate its claim that the Portuguese government had imposed the non-compete clause. However, this examination did not concern Telefónica's interpretation of the hypothetical intention of the Portuguese government, but rather the fact that it could not be inferred from the e-mail in question that the Portuguese government had, in fact, imposed the clause on Telefónica. The ECJ found that Telefónica failed to sufficiently substantiate its other claims.
Further, Telefónica submitted that, in the absence of significant precedents establishing the harmful nature of the agreement at hand, its situation had been treated too strictly. The ECJ rejected this claim, noting that it is well-established case law that market-sharing agreements constitute particularly serious breaches of competition law. The fact that the non-compete clause would apply only "to the extent permitted by law", allegedly imposing a prior obligation to self-assess the lawfulness of the clause, did not affect its qualification as a restriction of competition by object.
The ECJ further clarified that, contrary to what Telefónica asserted, rather than holding that "the non-compete clause was not essential to Portugal Telecom because it was not an ancillary restraint within the meaning of competition law", the GC simply found that Telefónica had failed to demonstrate that the clause was indeed essential.
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