Mergers & Acquisitions - Private Equity Newsletter | June 2011

Non-competition clauses: a conflict of principles

The legal system of non-competition clauses was built by judges who had to arbitrate between very strong principles, which however are inexorably opposed. The existence of these clauses is justified by the necessary protection of the business: it has the right to protect itself against competitive machinations which could be the act of former employees, former managers, or former owners. To ignore this right of protection would be profoundly irresponsible. Case law readily talks about the legitimate interests of the business. This consideration has sometimes led the legislator and often the judges to validate the various non-competition clauses. But this clearly shows the strength of the principles which these clauses will put to the test. For salaried employees, it is the freedom of employment, a constitutionally recognised right (Cassation Court, Social Chamber, 19 November 1996). For assignors of businesses or ownership rights, and for former managers, it is the freedom of business, the freedom of trade and industry which are at stake. Now, these freedoms are also constitutionally recognised (decision of the Constitutional Council of 16 January 1982; decision of 20 March 1997). Each time, non-competition clauses limit these freedoms. Not being able to arbitrate in favour of one principle and against the others, judges have constantly sought the balance point. How far was it possible to go in respecting each one without reaching the breaking point of the opposing principle?

First, the judges introduced the idea that the clauses should be limited in space and time. Certain rulings may have seemed less vigilant on this point at certain times, but the requirement is undoubtedly very pressing.

Then their concern has been to ensure that the restriction of freedom had a genuine cause: the fact that the debtor of the non-competition obligation has a new activity could not be criticised whenever the noncompetition clause was not essential for the protection of the legitimate interests of the business. Finally the idea arrived of a necessary financial counter party, a requirement demanded by the Cassation Court, Social Chamber whose scope will be specified in the present article.

The extreme difficulty in finding a fair balance between contradictory principles explains the evolving nature of case law and the need to observe decisions given with some vigilance. A recent ruling of the Commercial Chamber of the Cassation Court has therefore spurred many questions, which are probably exaggerated after all. Practice always dreads the general alignment of case law with the most demanding one, namely social chamber case law. It is however advisable to be able to
remain reasonable in this area, as the basis of the requirements of this chamber are less relevant with regard to other situations of business law.

The lawyer-writer must translate this fair balance when clauses are compiled in terms guaranteeing the security of the various players. The professional writers of the present file have all acquired a real mastery in this area.

Alain Couret, partner

Content

Dossier on Non-competition clauses concentration control field p2

• Right of dismissal over transfer of control: legality of the clause p3
• Employees and shareholders’ agreements: warning – danger! P4
• Are unremunerated noncompetition clauses doomed? p5

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