European Court of Justice clarifies scope of post-term non-compete obligation in franchise agreement

In its judgment of 7 February 2013, the European Court of Justice ("ECJ") ruled (Case C-117/12) that a post-term non-compete obligation in a franchise agreement could only benefit from the old vertical block exemption regulation (old "VBER") if its geographic scope is restricted to the physical space from which the contract goods or services were sold. The old VBER does therefore not extend to non-compete clauses covering the entire territory that is assigned to the franchisee. The case is relevant since the current vertical block exemption regulation contains a similar provision and identical wording as the one that is subject of the ECJ's clarifications.

On 11 November 2004, La Retoucherie de Manuela, S.L. ("franchisor") and La Retoucherie de Burgos, S.C. ("franchisee") entered into a five-year franchise agreement concerning the provision of clothing repairs and other related services. The agreement contained a non-compete obligation that was valid for the duration of the agreement and extended to one year after the termination of it. The non-compete clause covered the entire territory assigned to the franchisee under the agreement.

After the unilateral termination of the agreement by the franchisee, the franchisor initiated proceedings in which he claimed compensation for the early termination of the contract and breach of the non-compete clause. One of the questions that the courts had to decide on was whether the non-compete clause was exempted under the old VBER.

Article 5 of the old VBER exempts a post-term non-compete obligation provided that certain conditions were met. These included the requirement that was subject to debate in the present case that the non-compete obligation should be limited to "the premises and land from which the buyer has operated during the contract period".

The Court of Appeal of Burgos considered that it was unclear whether the words "premises and land" only referred to the place or physical space from which the franchisee operated or whether they could be interpreted as to include the entire territory assigned under the franchise agreement.

In its ruling, the ECJ considered the literal meaning of the words "premises and land" and the objective of the old VBER, to conclude that Article 5(b) of the old VBER could not be interpreted as referring to an entire territory. The Court therefore rejected an extensive interpretation of those words and explained that a restrictive interpretation is appropriate when applying an exception to the general rule as the one provided in Article 5(b) and in particular when doing so within the context of a block exemption regulation.

The ECJ therefore answered that a post-term non-compete clause that prohibits the franchisee to sell goods or provide services outside the physical point of sale from which it operated under the franchise agreement is not exempted under the old VBER.