The Court of Justice provides further guidance on long-term exclusive purchase/non-compete obligations

On 4 December 2014, the European Court of Justice (the "ECJ") issued an order addressing two preliminary questions from the Spanish Supreme Court concerning an exclusive purchase obligation, which presumably prevented the party bound by the exclusivity from purchasing the products of competing suppliers and was, therefore, equivalent to a non-compete obligation. This exclusivity obligation was agreed in 1998 between the fuel supplier Galp and the service station operator Pozuelo 4 and applied to the purchase of motor vehicle and other fuels by Pozuelo 4 for a period of, it seemed to the ECJ, 30 years. The exclusivity obligation formed part of a broader arrangement between the parties, which involved Pozuelo 4 granting certain property rights in land it owned to Galp for a fixed period and Galp constructing a service station on the land and leasing it to the service station operator.

The first preliminary question asked whether such a contract can restrict competition within the meaning of Article 101(1) TFEU where the market share of the fuel supplier is only less than 3%, where the combined market shares of three other competitors is approximately 70%, but where the duration of the agreement exceeds the average duration of agreements concluded in the relevant market. The reason for this question appears to have been a potential divergence between the Commission's De Minimis Notice and the case law of the Court concerning the determination of what constitutes an appreciable restriction of competition.

Under the De Minimis Notice, such an exclusive purchase obligation is assumed not to have an appreciable effect on competition, and not to infringe Article 101(1), where the market shares of the parties to the agreement do not exceed 5%, even where the prevalence of such obligations agreed by other parties in the market means that, viewed as a whole, all these obligations have the cumulative effect of foreclosing the market to other competitors and thereby restricting competition. The duration of the obligation is irrelevant to this assessment.

Under the case law of the ECJ, where all the exclusive purchase obligations agreed between suppliers and customers in a market together have the cumulative effect of foreclosing the market to others, an individual exclusive purchase obligation will infringe Article 101(1) where it can be considered to make a significant contribution to the cumulative foreclosure effect. The market share of the parties is one factor to be taken into account in assessing whether an individual contract significantly contributes to this restrictive effect, but it appears (based on the Delimitis and Nesté case law) that, in principle, the duration of the obligation can, in and of itself, trigger the application of Article 101(1) where it is manifestly excessive when compared to the average duration of agreements concluded in the relevant market, apparently even where the individual market shares are very low.

The ECJ reiterated in its order that the 5% de minimis threshold, as set out in the De Minimis Notice, is merely a guideline which ought to be taken into account by national courts in deciding whether an agreement has an appreciably restrictive effect sufficient to trigger Article 101(1), but which does not bind them. The Court emphasised that, in practice, it is necessary to look at all the facts and circumstances of each case to make this determination in accordance with the case law of the Court described above. It therefore held that the obligation in question, taking into account the relevant market shares, would escape Article 101(1) where its duration was not manifestly excessive compared to the average duration of agreements concluded in the relevant market.

Even though it was for the national court to confirm the relevant facts in order to determine whether the duration was manifestly excessive, the Court gave a strong suggestion that a period of 30 years would not be manifestly excessive in this case. This view was influenced by two factors. First, the Court was sympathetic to the argument that, if a supplier with a very small market share was not able to agree to such a long-term obligation, it would be more difficult for it to penetrate a market which was controlled by three competitors with a combined 70% share. Second, long-term exclusive purchase obligations seemed common in the market, as - at least according to Galp - their average duration varied between 20 and 31.6 years.

Overall, this part of the ruling is important as it demonstrates that very long-term purchase obligations may escape Article 101(1) where concluded by parties with very small market shares which face competition from much larger competitors.

The second preliminary question, which was asked in case the agreement would be found to infringe Article 101(1), related to the transitional period between two block exemption regulations concerning the application of the current Article 101(3) exemption to vertical agreements, namely Regulation 1984/1983 and Regulation 2790/1999, neither of which are still in force. Transitional periods are included in block exemption regulations in order to provide temporary relief for pre-existing agreements which may fall foul of a change in the law.

It is important to note that the agreement had satisfied the conditions for an exemption from Article 101(1) under the first Regulation, which exempts non-compete obligations regardless of their duration, but - because the non-compete obligation had an apparent duration of 30 years - not under the second Regulation, which only exempts non-compete obligations with a duration of up to 5 years.

The ECJ was in effect asked whether an agreement containing such a non-compete obligation could benefit from an exemption to Article 101(1) between 1 January 2000 and 31 December 2001 on the basis of the transitional period between the two Regulations in question, and then for a further 5 years until 31 December 2006 on the basis that agreements not exceeding 5 years in duration can benefit from an exemption under the second Regulation.

The ECJ referred to its earlier case law and stated that the maximum period during which a pre-existing contract including a non-compete obligation can be exempted from Article 101(1) under the second Regulation cannot be added to a transitional exemption period such as provided for in the two Regulations. Thus, the agreement in question is only exempt from Article 101(1) by virtue of a block exemption until 31 December 2001.

Based on the facts of this case, the agreement was therefore block exempted for a total period of less than 5 years (i.e., less than the maximum period allowed under even the stricter of the two Regulations viewed separately) as the agreement was concluded in 1998.

Finally, the Court reiterated the basic principle of competition law according to which an agreement that does not fulfil the conditions of an exemption regulation is not prohibited by Article 101(1) unless it has the object or effect of restricting competition. Therefore, at the expiry of the exemption on 31 December 2001, it is for the national court to assess whether the agreement is prohibited by Article 101(1), and if so, whether the agreement can benefit from an individual exemption under Article 101(3).