Can non-compete restrictions be effective?

The use of non-compete restrictions in the fashion industry is unsurprising given the fierce competition which exists between brands. But to what extent are the non-compete restrictions which are included in an agreement effective?

Earlier this month Billabong and Wrangler announced an unexpected collaboration whilst Safilo won a new licence for Carolina Herrera eyewear. Boohoo granted Alshaya Group exclusive rights to operate the Debenhams stores and a local ecommerce platform in Kuwait, Saudi Arabia, UAE, Bahrain, Egypt, Oman and Qatar. It is inconceivable that the agreements recording these arrangements did not include non-compete restrictions. Similarly, this month’s new overseas partnerships in central and eastern Europe signed up to by Mamas & Papas.

To address the risk of competition either during or after the agreement in question ends, it is often the case that parties will agree that a non-compete restriction be included in the agreement. However, whether or not a non-compete restriction will be enforceable is a somewhat hazy area of English law that often depends on the nature of the relationship and the facts surrounding the underlying transaction.

Some of the most common non-competes are direct restrictions on:

1. entering into another collaboration with; or
2. taking a licence from; or
3. acting as an agent, distributor, or franchisee for,  

certain named brands.

Other non-competes will restrict:

• a service provider acting in the same market as the service recipient in respect of the same or similar goods or services; and

• the ability for a service provider to solicit employees or customers of the paying party.

The first question to consider when seeking to include non-competes in agreements is whether the non-compete amounts to a restraint of trade. There is no specific threshold that can be used to evaluate whether a non-compete is or is not a restraint of trade, and where the line falls between coming within the restraint of trade doctrine is flexible.

What does need to be considered is whether the restriction is part and parcel of the underlying transaction so as to be considered acceptable and necessary.  Various factors play a part in that assessment, including whether the restriction applies during the lifetime of the agreement or after it terminates, and whether the parties enjoyed equal bargaining power when putting in place the non-compete.

If the non-compete does amount to a restraint of trade, it must be reasonable in order to be enforceable. In order to assess the reasonableness of a restraint of trade, it is necessary to consider.

1. What interest is being protected by the non-compete and is it a valid interest?
2. Does the non-compete only go so far as to cover what is reasonable in order to protect that valid interest? This question in turn raises questions of geographical scope and the scope of the products or services covered by the non-compete, in addition to its duration. The bargaining power of the parties and whether the terms form part of a standard form non-negotiable agreement can also be relevant to the assessment. 
3. Whether the non-compete would be considered contrary to the public interest.

It is also important to bear in mind that not everyone’s objective in including a non-compete restriction in an agreement is for the non-compete to be enforceable. In contrast, it may be the case that a restriction is merely included:

• as a feint – a sacrificial pawn to be negotiated away; or

• for deterrent purposes. However, this highlights a critical issue with the drafting of non-competes. It is crucial that non-competes are drafted carefully and separately to other terms of the agreement (and separate to other restrictions if some of those restrictions are to apply during the term of the agreement and some are to apply post-termination). A party wanting to include a non-compete restriction in an agreement will want to avoid a situation in which other terms, or even the entire agreement, are found to be void because of an unenforceable non-compete!

Three top considerations

1. Narrow and specific non-competes: So as to be in the best position as possible in terms of enforceability, the party seeking a non-compete should ensure that the non-compete is as narrow and specific to the underlying interest that it is seeking to protect as possible.
   This of course will need to be balanced against the need to impose the necessary restrictions so as to protect its commercial interest. Non-competes that apply during the term of the agreement are generally more acceptable than those that restrict a party’s commercial freedom following the ending of the relationship.
2. A five year non-compete duration: Restrictions of this nature are often found in agreements between businesses at different levels of the supply chain. One key area is the rules on the duration of non-compete restrictions set out in EU competition law. Subject to narrow exceptions and also certain conditions, generally non-competes need to be limited to five years during the term of the relevant agreement and one year following its expiry.
3. Think about agency law: For commercial agents and principals, consideration should be given to agency law which includes, among other conditions, a time limit of two years for post-termination restraint of trade clauses.

Contact us

If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.