Maxima Latvija: Non-Compete Clauses Inward Commercial Lease Agreements Are ‘By Object’ Contest Restrictions
November 25, 2018
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Michele Giannino (Italian qualified lawyer: LL.M. Leicester, Ph.D London)
In a preliminary reference judgment late handed downward inwards the Maxima Latvija case, the Court of Justice of the European Union (CJEU) has ruled out that commercial lease agreements amongst a clause conferring on the tenant the correct to approve the lease agreements that the belongings possessor may conclude amongst 3rd parties is a competition restraint past times object. Therefore, a total analysis of the economical effects of the agreements inwards interrogation is necessary to flora whether they breach competition. The CJEU has together with hence start the criteria to endure applied to examine the competition impact of the agreements. This blogpost reviews the trouble of reasoning followed past times the CJEU together with also gives an insight into the implications of the judgment for belongings owners together with retailers.
The legal issues
As is known, Article 101 TFEU prohibits agreements betwixt undertakings that receive got every bit object to trammel competition or receive got restrictive effects on competition. The distinction betwixt anti-competitive agreements that are infringements past times ‘object’ together with those that are infringements ‘by effect’ is relevant for the resources allotment of the burden of proof betwixt the acting competition ascendancy together with the parties to the agreements. Where a given understanding is found to receive got every bit an object to trammel competition, a competition infringement is established, provided that the other requirements start inwards Article 101(1) TFEU are met. In club to escape the ensuing competition liability, the parties receive got to apply for the exemption inwards Article 101(3) TFEU together with testify that all the weather set downward inwards this provision are fulfilled. On the contrary, where an understanding is categorized every bit a restriction past times effect, the acting competition ascendancy has the evidentiary burden to demonstrate the negative effects of the understanding on competition. When the anti-competitive effects are proved, the evidentiary burden is shifted to the parties that, to their defence, tin submit the economical efficiency declaration inwards Article 101(3) TFEU[1].
Though horizontal agreements to cook prices or cut capacity are to a greater extent than probable to endure considered every bit restrictive past times object (European Night Services), also vertical agreements receive got been found to autumn inside the category of object restraints. This was the instance of resale cost maintenance arrangements (Binon v AMP) and distribution agreements that accolade distributors an absolute territorial protection (Costen together with Grundig). It was, however, uncertain whether commercial lease agreements that comprise covenants limiting the liberty of belongings owners to rent to the tenant’s competitors could endure considered every bit a competition restraint past times object or past times effects. The Maxima Latvija judgment deals amongst this issue.
Facts
Maxima Latvija is a major retailer inwards Republic of Latvia where it runs a chain of large shops together with hypermarkets. It concluded a number of commercial lease agreements amongst owners of shopping centres to rent commercial spaces inside such malls. Some of these agreements included a non-compete clause inwards favour of Maxima Latvija. As ‘anchor tenant’, Maxima Latvija was awarded the correct to concur to the lessors letting 3rd parties other shops than those rented to Maxima Latvija inwards the same shopping centres where the tenant was already present. In essence, the belongings owners undertook an exclusivity obligation inwards favour of the anchor tenant, non beingness allowed to conclude a lease understanding amongst the competitors of Maxima Latvija without its consent.
Unsurprisingly, this exclusivity organisation attracted the attending of the Latvian Competition Authority (LCA). The LCA believed that the agreements containing the non-compete clause infringed Article 11(1)(7) of the Latvian Competition Law, which corresponds to Article 101 TFEU. Considering the marketplace powerfulness of Maxima Latvija inwards the retail market, the LCA took the sentiment that the contested agreements were anti-competitive inwards nature. According to the LCA, the role of the contested understanding was to restrain competition past times undermining the powerfulness of competing retailers to motility into the market. Therefore, the LCA made an infringement decision, imposing on Maxima Latvija a fine of nearly € 35,000.00, without beingness necessary to flora whether the contested clauses had whatever restrictive effects on competition.
Maxima Latvija appealed the infringement determination of the LCA earlier the regional administrative courtroom together with and hence earlier the Republic of Latvia Supreme Court. Given the similarities betwixt Article 11(1)(7) of the Latvian Competition Law together with Article 101 TFEU together with beingness uncertain whether the contested agreements should endure categorized every bit past times object or past times final result competition restraints, the Latvian Supreme Court stayed proceedings together with referred the affair to the CJEU for a preliminary ruling pursuant to Article 267 TFEU.
Analysis
In practice, what the Republic of Latvia Supreme Court asked the CJEU was whether the commercial lease agreements including a non-compete clause inwards favour of the tenant amounted to an object restraint of competition; if it was non the case, the Republic of Latvia Supreme Court asked whether such agreements constituted a competition restraint past times final result together with which essay should endure employed to ascertain whether the agreements had negative effects on competition.
To address the kickoff question, the CJEU followed the same restrictive approach to the concept of competition restraint past times object it had taken inwards its previous judgment inwards Cartes Bancaires. The CJEU reminded that solely arrangements amongst a sufficient flat of competition impairment autumn inside the category of past times object restraint. That said, inwards Maxima Latvija the CJEU noted that the contested understanding was a vertical understanding concluded past times firms, a retailer together with a belongings owner, that did non compete amongst each other. Vertical agreements are non usually considered every bit anti-competitive past times their real nature. Then, the CJEU considered whether the contested agreements could Pb to foreclose the competitors of Maxima Latvija past times impeding the other retailers from having access to the malls where Maxima Latvija was already trading.
The CJEU acknowledged that the agreements could receive got the potential to receive got anti-competitive effects inwards the kind of marketplace foreclosure. Next, however, the CJEU pointed out that the fact that the agreements at mitt mightiness receive got such foreclosing effects, if established, did non imply clearly that the agreements distorted or restricted, past times their real nature, the competition inwards the relevant markets. Therefore, bearing inwards hear the economical context where the lease agreements applied together with their contents, the CJEU concluded that the impairment inflicted past times the agreements to competition was non of such flat to qualify the agreements at mitt every bit an object competition restraint for the role of Article 101 TFEU.
To bargain amongst the minute interrogation pose past times the Latvian Supreme Court, the CJEU applied the essay it had employed inwards the Delimitis case. This essay requires a total analysis of the economical together with legal context of the agreements together with the competition weather inwards the relevant marketplace inwards club to flora whether the agreements receive got negative effects on competition. This is a two-limb test, the kickoff measurement of which consists inwards the exam of all the factors affecting the access to the relevant market. The role of this exercise is to ascertain whether competitors may flora themselves inwards the catchment areas of the malls covered past times the contested agreements, either past times renting a store inwards the nearby malls or inwards premises that are exterior shopping centers. Whether commercial dry ground inwards the catchment areas concerned is available together with whether in that location are economic, administrative or regulatory entry barriers are all factors to endure considered every bit well. As far the competition weather of the relevant markets are concerned, it is necessary to await at the number together with size of the retailers trading inwards the markets, the flat of marketplace concentration every bit good every bit client fidelity to existing brands together with consumer habits.
The minute limb of the Delimitis essay kicks inwards when, amongst the inwards a higher house described thorough analysis of the economical together with legal context where the contested agreements applied, it has been established that the competitors’ marketplace access is frustrated past times those agreements together with similar agreements. Thus, nether this minute limb of the test, the acting competition ascendancy has to assess whether the contested agreements receive got given an appreciable contribution to the cumulative foreclosing final result to the detriment of competitors. In that regard, factors such the marketplace seat of the parties together with the duration of the agreements must endure taken into consideration.
Practical significance
In Maxima Latvija the CJEU confirmed its strict seat inwards Cartes Bancaires every bit for the Definition of the category of competition restraint past times object. Contrary to was found past times the LCA, the CJEU held that restrictive covenants inwards commercial lease agreements, such every bit non-compete clauses inwards favour of the tenant, could non endure categorized every bit object restraints. Arguably, the findings of the CJEU may endure explained amongst the lack of a reliable theory of competition harm. The contested clauses had the legal final result to give ascent to an exclusivity obligation inwards vertical agreements, which were non seen every bit beingness a serious threat to competition. Alternatively, it has been submitted that the CJEU did non part the to a greater extent than stringent seat of the LCA because the restrictive covenants had approximately efficiency-enhancing objectives to the produce goodness of the parties every bit good every bit of consumers (see Pablo Ibanez Colomo, on the 'Chilling Competition' blog).
That said, the ruling inwards Maxima Latvija that commercial lease agreements amongst non-compete clauses inwards favour of the tenants escape the categorization every bit past times object restraints is a welcome evolution for retailers together with belongings owners. Prospective lessors together with lessees tin together with hence concur on similar restrictive covenants without running the conduct chances of the lease agreements beingness considered every bit having an anticompetitive object. Notwithstanding that, however, they should ship inwards hear that such lease agreements may silent endure prohibited past times Article 101 TFEU or corresponding national provisions if it is possible to flora that the agreements receive got negative effects on competition. To preclude this risk, retailers together with belongings owners receive got to assess the competition impact of the agreements employing the criteria start past times the CJEU.
Finally, Maxima Latvija look to endure consistent amongst the position taken inwards the Great Britain past times the Office of Fair Trading, at in i lawsuit Competition Market Authority (CMA). Also for the CMA, lease agreements containing exclusivity clauses inwards favour of tenants, though may receive got the potential to foreclose competitors of the lessee, cannot endure considered to receive got an anti-competitive object. Therefore, inwards club to flora that the lease agreements inwards interrogation infringe competition, an analysis of the economical effects of the agreements receive got to endure conducted. To this end, it necessary to receive got regard to the ambit of the relevant market, the marketplace powerfulness of the parties together with the impact of the organisation on competition.
Barnard & Peers: chapter 17