Exclusivity and non-competition obligations

1. Exclusivity and non-competition obligations How far can you go?

2. Motorshoe Company Limited • Producer of motor clothing and shoe • Well-established in the national market, accounting for 19% of the relevant market in Europe • Active US distribution channel • Looking to enter into the EU market, initially in three countries: • Italy • France • Austria • Interested in joining forces with prospective successful franchisees • Entered into negotiation with a potential candidate

3. Moto World S.r.l. • Company incorporated in Italy, with a certain experience in the sale of motorbike accessories • Currently well established in the northern Italian market (directly operated shops in Verona, Milan and Torino) • Now willing to enter into the EU market by establishing wholly owned limited liability subsidiaries in each country through which operate local shops • Initially France and Austria represent interesting targets but subsequently further expansion in the EU will be considered

4. FRANCHISING AND COMPETITION LAW • Characteristics of a franchise contract: • Three traditional components: know-how, trademarks and technical or commercial assistance • A fourth component inherent to franchise contracts: the network • There is a franchise only because the franchisor wants to duplicate their initial success and because each franchisee wishes to profit from the duplication. • The regime of restrictions must be appreciated chiefly from the perspective of the know-how and network concepts. • The European legal framework of franchise contract: • European case law: Yves Rocher, Pronuptia, etc. and Regulation no. 4087/88 of 30 November 1988 relating to franchising, • Regulation no. 2790/1999 of 22 December 1999 on the application of article 81(3) of the Treaty to categories of vertical agreements (Block Exemption Regulation, BER). • Guidelines on vertical restraints (GVR) set out in the Commission Notice of 13 October 2000.

5. EC REGULATION ON VERTICAL AGREEMENTS • The scope of the Regulation: • The type of agreement: • Any type of vertical agreement, whatever the contract type • The BER globalises the regime of non-compete undertakings and territorial restrictions (exclusive supply is likened to a non-compete undertaking) • The importance of the agreement: • The BER does not apply where the agreement is entered into by non-competing parties holding less than 15% of the relevant market (so-called “de minimis agreements”, EC Commission Notice of 22 December 2001) • The BER pertains to vertical agreement entered into by franchisors holding at most a 30% share of the relevant market • The BER does not apply where the franchisor holds over 30% of the relevant market

6. EC REGULATION ON VERTICAL AGREEMENTS • The regime introduced by the Regulation: • Franchisor and franchisee are : • free to negotiate and draw up a franchise contract • not required to declare the franchise contract with the Community authorities • liable to assess their competition-related impact themselves • Agreements falling within its scope are exempted, unless they provide for: • prohibited territorial restriction clauses, • non-compete clauses that do not comply with the conditions set out by BER • Appreciation of the validity of the clauses according to the GVR set out in the Commission Notice of 13 October 2000 • There are 3 types of undertakings that could restrict competition: • Exclusivity and territorial protection for the benefit of franchisee and/or franchisor • Exclusive supply for the benefit of the franchisor • Post-termination non-compete clause for the benefit of the franchisor

7. Territorial Exclusivity • Want to be very successful in the market • Not interested in blocking the doors for other potential franchisees • Want to keep all my options open and therefore not limit my area of action by granting exclusivity to my first franchisee • Want to be very successful in the market and, in order to protect my investments, want to be granted territorial exclusivity • Want to be granted first refusal right to become exclusive Franchisee of Franchisor also for Spain, Portugal and Germany • Aim at avoiding the ban of passive sales in order to organize an e-business activity through my own web site

8. TERRITORIAL RESTRICTIONS CLAUSE • Principle: Article 4(b) of BER prohibits all restrictions of territory or customers aiming at making the market inaccessible; the franchisee is therefore in principle fully free to sell its services or goods to any consumer it may choose • Exceptions: • BER authorises vertical agreements to stipulate the restriction of active sales into the territory reserved to the franchisor or to other franchisees • The Guidelines provide that all the obligations that are necessary for the protection of either the know-how, the intellectual property rights, or the network, do not fall within the scope of Article 81(1). • In Practice: There is a balance to be found between the protection of the know-how, of the intellectual property rights, and of the network, and the weakening of intra-brand competition

9. Exclusive dealing • Need to protect my image and my know-how in every country • Franchisee to buy: • 100% of products sold in its premises from me • 100% of furniture needs for its outlets from me • 90% of shoe care products from me • Contract to include absolute ban for Franchisee to sell anything else than my products • Need to offer my customers the whole range of motorbike accessories (including helmets, gloves, glasses etc.) • Propose to Franchisor: • 100% of motorbike clothing and footwear sold in my premises of Franchisor's production • right to have up to 20% of the surface of my premises furnished with corners of manufacturers of other motorbike accessories • right to sell up to 20% different brands' shoe care products • Contract to include right of Franchisee to sell motorbike accessories not included in Franchisor's current production (limited to motorbike clothing and footwear) and a trademark licence to have part of such accessories produced in the Far East

10. EXCLUSIVE SUPPLY CLAUSE • Definition: • Any obligation laid down on the purchaser to acquire over 80% of their annual purchases from the supplier (or a third party designated by the supplier) amounts to a non-compete undertaking under the Regulation. • Regime: • General regime: The duration must not be indefinite or exceed 5 years. • Franchise-specific regime: • The duration of the obligation is not a relevant factor. • The undertaking is exempted where it is “necessary to maintain the common identity and reputation of the franchised network” (§ 200 GVR). • In practice: • The more important the transmission of know-how, the more the vertical restraints will be eligible for exemption. • The exclusive supply for products ancillary to the transmitted know-how is prohibited (e.g.: installation and equipment of a point of sale or supply of certain products). • The acknowledgment that such a clause is necessary will therefore largely depend on the quality of the know-how and of the network’s maintenance but also on the objective definition of the quality specifications laid down on the franchisees, the number and range of potential suppliers (see the example given by § 201 GVR).

11. Post Termination Non-Competition Restriction • My product is very know-how specific • Worried that franchisee will exploit my know-how once the contract has expired • Contract to include post-termination non competition ban and reaffiliation ban (5 years) • I already have some know-how in the national sale of motorbike accessories, therefore: • I consider a post-term non-competition obligation reasonable, although should be limited to Franchisor's products (motorbike clothing and footwear) and to 6 months duration • I also consider acceptable the prohibition of re-affiliating with any competing network as after contact's termination I will have acquired enough technical and commercial know-how to stand alone!

12. POST-TERMINATION NON-COMPETE CLAUSE • Principle: • This clause is not deemed unlawful per se insofar as it ensures the efficacy of another undertaking : the interdiction to use the franchisor’s know-how after the termination of the franchise contract. • Conditions of validity: • limited only to goods or services competing with the goods or services of the franchise contract, • restricted to the premises and plot of land from which the franchisor has performed the franchise contract, • must be necessary to protect the know-how transmitted by the franchisor, • it must not exceed 12 months. • Alternative clauses: • Clause prohibiting the exploitation of the know-how: no time limit unless the know-how has fallen into the public domain. • Non-affiliation clause: prohibits the former franchisee from joining a network competing with that of its former franchisor; depending on the market’s structure (independents / networks), it can be likened to a non-compete clause, in which case it is subject to the relevant conditions.

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