The Court of Justice of the European Union (CJEU) recently delivered a judgment[1] in which it addressed certain questions regarding the application of Article 101(1) TFEU[2] to a cross-sector non-compete clause in an association agreement between a supermarket retailer and an electricity supplier (the "Agreement").

The questions arose in the context of appeals brought before the Court of Appeal in Lisbon (the "Referring Court") in relation to a decision by the Portuguese Competition Authority (the AdC).

In 2017, the AdC concluded that the cross-sector non-compete clause was a market-sharing pact, and constituted a restriction of competition "by object". The AdC held that the non-compete clause infringed Portuguese competition law, and imposed fines totalling €38.3 million for this infringement.

The AdC's decision was upheld on appeal by the Competition, Regulation and Supervision Court in Portugal, with a modest reduction applied to the fines. This outcome was appealed to the Referring Court by both the parties, and the AdC.

The questions referred to the CJEU by the Referring Court sought to clarify the application of Article 101 TFEU to the cross-sector non-compete clause, and included the following issues:

  • Can a supermarket retailer be regarded as a potential competitor of an electricity supplier with which it concluded an agreement containing a non-compete clause?
  • Can a non-compete clause agreed between two parties active on different product markets be regarded as an ancillary restraint, where the main agreement is intended to increase the parties' sales through a promotion and cross-discounting mechanism?
  • If a non-compete clause prevents a party from entering a market on which the other party is active, does the clause constitute a restriction of competition "by object"?

In answering these questions, the CJEU provided guidance in relation to the circumstances in which non-compete clauses agreed between parties active in different sectors may fall within the scope of Article 101(1) TFEU.

The judgment therefore highlights the need for parties to carefully assess the extent of any competition law risks arising from the inclusion of non-compete clauses in commercial agreements, even if the parties are not competitors when concluding their agreement.

Background to the Agreement

Discount scheme introduced by the Agreement

In January 2012, a supermarket retailer and an electricity supplier entered into the Agreement, which was implemented in Portugal.

The Agreement was intended to attract customers and increase the parties' sales by offering discounts to consumers under a discount scheme.

The discount scheme enabled consumers to benefit from a 10% reduction to their electricity bills. To receive this reduction, consumers had to: (i) hold the supermarket retailer's loyalty card; and (ii) enter into a contract with the electricity supplier for the supply of low-voltage electricity.

The reduction was then provided to consumers by loading vouchers for the value of the discount onto the supermarket retailer's loyalty card, with consumers able to spend these vouchers in certain stores and outlets operated by the supermarket retailer and its corporate group.

Cross-sector non-compete clause

The Agreement included a non-compete clause, whereby during the term of the Agreement, and for one year after its expiry:

  • the supermarket retailer agreed that it would not:
    • engage directly or indirectly (i.e. through any group companies) in supplying electricity and natural gas in mainland Portugal; nor
    • negotiate or conclude with any other energy supplier any arrangements with the object or effect of granting discounts or other monetary benefits relating to electricity or natural gas; and
  • the electricity supplier agreed to corresponding obligations in relation to the retail sale of food products in Portugal (the "Non-Compete Clause").

At the date of the Agreement, the parties were not competitors on any markets in Portugal.

However, prior to entering into the Agreement, the supermarket retailer's corporate group had been party to a joint venture with an electricity supplier in Spain, and the joint venture had supplied electricity in Portugal.

In addition, during the Agreement: (i) the supermarket retailer was party to a similar discounting arrangement with a supplier of liquid fuels, which also supplied electricity in Portugal; and (ii) the supermarket retailer's corporate group produced electricity using photovoltaic panels installed on the roofs of various premises.

Timing of the Agreement

The Agreement was in force from 5 January to 31 December 2012, with consumers able to join the discount scheme for a period of around two months (from 9 January 2012 to 4 March 2012).

The total value of the vouchers redeemed under the scheme was c. €6 million, and c. 137,000 customers were under contract with the electricity supplier when the scheme ended.

Importantly, the Agreement coincided with a "crucial phase"[3] in the liberalisation of the market for the supply of electricity in Portugal, with regulated tariffs for low-voltage electricity expiring at the end of 2012.

The Agreement therefore enabled the electricity supplier to win a significant number of customers for low-voltage electricity at a time when the market "had not yet seen the peak in transition of low-voltage customers".[4]

Issues addressed within the CJEU's judgment

Can a supermarket retailer be regarded as a potential competitor of an electricity supplier with which it concluded an agreement containing a non-compete clause?

The CJEU confirmed that a supermarket retailer must be regarded as a potential competitor of an electricity supplier for the purposes of Article 101(1) TFEU where, taking into account the structure of the market (and the economic and legal context in which the market operates), it is demonstrated on a body of consistent facts that there are real and concrete possibilities for the supermarket retailer to enter the market and compete with the electricity supplier.

In so doing, the CJEU observed that:

  • the requirement for "real and concrete possibilities" means that a purely hypothetical possibility of entry, or a mere wish or desire to enter, would not give rise to a finding that an undertaking was a potential competitor;[5]
  • any assessment of potential competition must be substantiated by a "body of consistent facts",[6] taking into account the market structure (and the economic and legal context within which the market operates), which necessarily requires a case-by-case analysis of the relevant facts;
  • the concept of potential competition previously considered by the CJEU in Generics[7]"cannot be regarded as being of general application",[8] as the economic and legal context of the markets for medicines in Generics "cannot be compared" to a liberalised market for the supply of low-voltage electricity;[9]
  • for an undertaking to be regarded as a potential competitor for the purposes of Article 101(1) TFEU, there is no need to demonstrate with certainty that the undertaking will enter the market, and remain on the market post-entry;
  • while it is for the Referring Court to assess the relevance of the available information, the following guidance may be of assistance:
    • subjective evidence (e.g. of an intention to enter) may be taken into account to support "consistent objective evidence" of the real and concrete possibilities of an undertaking entering the market;[10]
    • if an agreement operates to prevent an undertaking from entering a market upon which the other undertaking is active, "the conclusion of such an agreement is a strong indication that there is potential competition", on the basis that "[i]f the parties …did not perceive themselves as potential competitors, they would, in principle, have no reason to conclude such an agreement";[11]
    • the activities of an undertaking upon the relevant market and/or any upstream or related market(s) prior to entering into the agreement (or the activities of entities within the corporate group of which the undertaking forms part in the same time period) may be taken into account for the purposes of identifying potential competition, given that such activities may provide relevant evidence of:
      • the market structure;
      • the extent of any barriers to entry; or
      • potentially viable economic strategies for market entry - e.g. the supermarket retailer's corporate group had previously entered a market by forming a joint venture with an electricity supplier in Spain, with the joint venture supplying electricity in Portugal; and
    • the relevance of any preparatory steps taken with a view to entering a market will depend upon the structure of the market (as well as the economic and legal context in which the market operates), and it is therefore not necessary to establish that an undertaking actually took preparatory steps to enter in order for that undertaking "to be regarded as a potential competitor on the market concerned".[12]

Can a non-compete clause agreed between two parties active on different product markets be regarded as an ancillary restraint, where the main agreement is intended to increase the parties' sales through a promotion and cross-discounting mechanism?

The CJEU held that such a non-compete clause cannot be regarded as an ancillary restraint, (whereby it would fall outside of the application of Article 101(1) TFEU), unless the restriction resulting from the clause is "objectively necessary for the implementation of [the main agreement] and proportionate to its objectives".[13]

In the context of the Agreement, the CJEU observed that:

  • when determining whether a restriction falls outside of Article 101(1) TFEU because it is ancillary to a main activity that is not anti-competitive, it is necessary to assess whether that main activity would be "impossible to carry out in the absence of the restriction"[14] – the fact that the main activity would simply be more difficult to carry out, or less profitable, does not mean the restriction is objectively necessary;[15]
  • the Non-Compete Clause was for a period of approximately two years (i.e. the term of the Agreement, and one year after its expiry), and during this time neither party could engage directly or indirectly in any activity on any market on which the other party was active;
  • in the specific context of the supply of electricity, the Non-Compete Clause was not limited to the supply of low-voltage electricity (which was relevant to the discount scheme under the Agreement), but also covered the supply of medium-voltage and high-voltage electricity to industrial customers;
  • the Non-Compete Clause also prevented the supermarket retailer from negotiating or entering into any other arrangements with an energy supplier that granted discounts or other monetary benefits in relation to the supply of electricity; and
  • in assessing whether the Non-Compete Clause was objectively necessary for the implementation of the Agreement, and proportionate to its objectives, the Referring Court:
    • will need to ascertain whether there was "any solution less restrictive of competition"[16] that the parties could have used at the time of the Agreement, in order to achieve those objectives; and
    • may take into account the scope of the Non-Compete Clause to ascertain whether it corresponds with the purpose, duration, and geographic aspects of the Agreement.

If a non-compete clause prevents a party from entering a market on which the other party is active, does the clause constitute a restriction of competition "by object"?

For the purposes of applying Article 101(1) TFEU, the CJEU confirmed that such a non-compete clause constitutes a restriction of competition "by object" where it is apparent from an analysis of the clause, and its economic and legal context, that the clause displays a sufficient degree of harm to competition for the view to be taken that it is not necessary to assess its effects.

In the context of the Agreement, the CJEU observed that:

  • while the concept of a restriction of competition "by object" must be interpreted restrictively, there are certain collusive practices which reveal in themselves, and "having regard to the content of their provisions, their objectives, and the economic and legal context of which they form part",[17] a sufficient degree of harm to competition for the view to be taken that it is not necessary to assess their effects;
  • collusive practices that are capable of being categorised as restrictions of competition "by object", include market-sharing agreements, and market-exclusion agreements, with the latter having the object of eliminating potential competition and preventing actual competition "by keeping a potential competitor outside the market concerned";[18]
  • the anti-competitive object of an agreement may be borne out by its economic and legal context, and it was notable that the Agreement was concluded in the context of the liberalisation of the electricity market in Portugal, "which is similar to the dismantling of significant barriers to entry"[19], and would be expected to increase competition in the market;
  • where the parties to an agreement rely upon its pro-competitive effects, these must be taken into account when assessing whether the agreement constitutes a restriction of competition "by object", although the mere fact there are pro-competitive effects is insufficient to rule out such a categorisation;
  • a restriction of competition "by object" can only be ruled out if the pro-competitive effects are:
    • demonstrated;
    • relevant;
    • specifically related to the agreement; and
    • sufficiently significant, so that these pro-competitive effects "justify a reasonable doubt" as to whether a sufficient degree of harm to competition is apparent;[20] and
  • in assessing whether the Non-Compete Clause can be categorised as a restriction of competition "by object", it is for the Referring Court to:
    • take into account the fact that the implementation of the Non-Compete Clause coincided with the liberalisation of the electricity market in Portugal; and
    • ascertain whether the pro-competitive effects asserted by the parties were in fact specific to the Non-Compete Clause, and not simply connected with this.

If you have any questions regarding how UK and/or EU competition law may affect your commercial arrangements, and how your business can engage with these issues, please contact Gowling WLG's EU, Trade & Competition team.

Footnotes

[1] Case C-331/21, EDP – Energias de Portugal SA and Others v. Autoridade da Concorrência, ECLI:EU:C:2023:812.
[2] Treaty on the Functioning of the European Union (TFEU)
[3] Case C-331/21, EDP – Energias de Portugal SA and Others v. Autoridade da Concorrência, paragraph 23.
[4] Ibid.
[5] Ibid, paragraph 62.
[6] Ibid, paragraph 63.
[7] Case C-307/18, Generics (UK) Limited and Others v Competition and Markets Authority, ECLI:EU:C:2020:52.
[8] Case C-331/21, EDP – Energias de Portugal SA and Others v. Autoridade da Concorrência, paragraph 65.
[9] Ibid, paragraph 66.
[10] Ibid, paragraph 70.
[11] Ibid, paragraph 71.
[12] Ibid, paragraph 75.
[13]Ibid, paragraph 94.
[14] Ibid, paragraph 90.
[15] Ibid.
[16] Ibid, paragraph 93.
[17] Ibid, paragraph 99.
[18] Ibid, paragraph 101.
[19] Ibid, paragraph 102.
[20] Ibid, paragraph 104.