Current case law on a non-competition clause in franchises: Protection of the commercial agent in relation to the free performance of his activity
REAL, Avocats à la Cour
In the context of a matter handled by the law firm REAL, Avocats à la Cour, the Court of Appeal of and in Luxembourg, by judgment dated 3 May 2018, handed down decisive case law in the field of non-competition clauses, the nature of which is to protect the commercial agent concerning the free exercise of his activity.
a) The non-competition clause regime under Luxembourg law
The non-competition clause is a contractual stipulation the purpose of which is to prevent one party from competing with another party by exercising a similar professional activity during or after the expiry of the contractual relationship.
Restricting the ability of the person, under the obligation to abstain, from freely exercising an activity, adversely affects fundamental freedoms, the freedom of entrepreneurship and the freedom of work.
It is accepted that in order to be valid, a non-competition clause must be limited either in time or in space (or both), it must be intended to protect the legitimate interests of the beneficiary of the clause, it must not place the person bound by the obligation in a situation which no longer permits him to exercise his profession normally and it must be proportional (Encyclopédie Dalloz. Répertoire de droit commercial, Concurrence, no. 100 et ss).
The requirement of proportionality, which is assessed in relation to the subject matter of the contract, balances the legitimate interest of the creditor of the non-competition clause, exposed to the competitive risks that represent the debtor, and the adverse affect on the free exercise of the debtor’s professional activity, the nature and duration of the relationship between the parties being assessed in this respect.
As regards franchising, the validity of non-competition clauses has been accepted insofar as they are essential to protect the know-how transmitted and the assistance provided by the franchisor and that they are appropriate for preserving the identity and reputation of the network. The creditor may have a legitimate interest in protecting its know-how or confidential information, protecting itself against a risk of misappropriation by its customers or, in the particular case of franchising, protecting the common identity and reputation of the network.
In the absence of specific provisions provided for by our legislation, the Luxembourg courts refer to the French provisions concerning non-competition clauses in the field of franchises, the recent franchise legislation (Law of 6 August 2015, known as the “Macron” law), taking care to specify that the clause must be indispensable for the protection of “substantial, specific and secret know-how transmitted within the framework of the contract”. It is important that the know-how has a certain consistency (Jurisclasseur Concurrence-Consommation, fascicule 111: clause de non-concurrence – validite, no. 49).
b) Overview of the evolution of case law and the current position of the Court of Appeal of and in Luxembourg
The case-law could have held that non-competition clauses “may be regarded as inherent to the franchise insofar as they ensure the protection of the know-how transmitted, which must benefit only the members of the network, and allow the franchisor time to reinstall a franchisee in the exclusive zone; that such clauses must, however, remain proportionate to the objective they pursue” (Cons. Conc., déc. No. 97-D-48, 18 juin 1997).
The non-competition clause must not have the effect of preventing the agent from performing any professional activity (Cass. Com. 4 juin 2002, Bull. civ. IV, no. 98, JCP 2003, II. 10164).
In this respect, French case law had already been able to consider as invalid a non-competition clause preventing a commercial agent, in the event of breach of her contract, from exercising any professional activity, “as long as she has training and professional experience as a medical representative, and that she is prohibited for two years from all activities, whether paid or not, in the field of the manufacture and marketing of dietetic products throughout France”. (Cour d’appel de Rennes, 15 février 2011).
With regard to the case dealt with by the law firm REAL, Avocats à la Cour, it must be noted that Luxembourg case law has aligned itself with French case law by striking out a non-competition clause in the context of a commercial consultancy contract on that basis.
In this particular judgment delivered on 3 May 2018 (CSJ, judgment No. 90/18 – II – CIV), the Second Chamber of the Court of Appeal, sitting in civil matters, found that the non-competition clause, by prohibiting the commercial adviser for a period of 12 months from engaging in any activity as a real estate agent, directly or indirectly, on his own account or through an intermediary, had the effect of depriving the subject of the non-competition clause of the possibility of normally exercising his professional activity and thus constituted an excessive and unjustified restriction on his freedom of work.
In that judgment, the Court also found that the competitive risk was minimal in view of the strong position of the franchisee in relation to the situation of the commercial adviser on the Luxembourg market and in view of the very limited period during which the latter had worked with the company (in this case less than three months).
It also noted that no element of the case had led to the transfer of specific and substantial know-how by the company to the commercial adviser with regard to the exercise of the activity of a real estate agent.
With regard to those elements, it was in view of the disparity between the adverse effect on the fundamental principle of freedom to pursue a professional activity, on the one hand, and the legitimate interests it protects, on the other hand, that the Court of Appeal found that the clause, in this particular case, appeared disproportionate and should be struck out.
The analysis of this judgment handed down by the Court of Appeal of and in Luxembourg on 3 May 2018 (CSJ, judgment no. 90/18 – II – CIV) has made it possible to underline the importance of the role and the necessary intervention of the judge in the fight against unfair contract terms in order to correct the excesses that the principle of the binding force of contracts can generate, for the purpose of protecting the weaker parties to the contractual relationship.