Post-term non-compete and confidentiality clauses - the Areva - Siemens case
Non-compete clauses in joint ventures and other transactions are of considerable commercial and practical importance, but they need careful review for compliance with EU and national competition laws.
A recent decision of the European Commission (June 2012), in relation to post-term non-compete and confidentiality clauses in a joint venture between Siemens and Areva, gives helpful clarification of the approach to these sometimes tricky provisions and provides guidance on the circumstances in which post-termination restraints might be justified.
In 2001, Siemens and Areva created a full-function joint venture, Areva NP ("the JV"), which combined their respective business activities in relation to nuclear power plants. Siemens was the minority shareholder, holding 34%, while Areva held the remaining 66%. The JV was cleared by the European Commission under the EC Merger Regulation in December 2000.
The Shareholders' Agreement included a non-compete clause which covered not only the lifetime of the JV but also, in its original form, a period of 8 to 11 years after loss of joint control by Siemens over the JV. The post-JV duration of this clause was later reduced by an arbitral award to four years. The Shareholders' Agreement also contained a confidentiality clause for the same duration as the non-compete clause.
In its decision in December 2000, the Commission expressly cleared, in accordance with its then-current practice, a pre-termination non-compete clause preventing the parties from competing in the exclusive scope of activities of the JV as being ancillary to the creation of the JV. However, the Commission required the parties to limit the duration of this clause to a maximum of 30 years. The post-termination non-compete and confidentiality clauses were not specifically cleared in the 2000 decision.
In 2009, Siemens exited the JV and exercised a put option to sell its shares to Areva. All assets, know-how and personnel that was provided by Siemens to the JV at its creation, and gained during the lifetime of the JV, remained with the JV. As a result, Areva acquired sole control of the JV and this was cleared by the Commission under the ECMR in June 2009. Siemens nevertheless remained (subject to competition law) bound by the post-termination non-compete and confidentiality clauses of the original Shareholders' Agreement for a period of four years.
In the light of concerns about the compatibility of the post-termination non-compete and confidentiality clauses with EU competition law, the Commission, in May 2010, opened formal proceedings against those restrictions. Those proceedings were closed by way of a decision of 18 June 2012 making binding commitments given by Siemens and Areva to withdraw or amend the post-term restrictions.
The standard approach to non-compete and related clauses (ancillary restraints)
In order to ensure the successful implementation of mergers and joint ventures, certain restrictions on competition between the parties are often necessary. Such restrictions, to the extent that they are directly related and objectively necessary (ancillary) to the implementation of the transaction, are automatically covered by any merger clearance and are not caught by the prohibition of restrictive agreements in Article 101 of the Treaty on the Functioning of the European Union (TFEU).
In the case of joint ventures, an obligation not to compete with the joint venture is considered to be necessary to ensure good faith during negotiations, to fully utilize the joint venture's assets and to enable the joint venture to assimilate the know-how and goodwill transferred to it. These types of obligation are only considered ancillary for the lifetime of the joint venture. According to the Commission's long-standing practice, post-termination non-compete clauses can never be regarded as ancillary to the creation of a JV.
In relation to other types of transaction involving a change of control of an undertaking (eg an asset sale), non-compete clauses binding the vendor are usually regarded as ancillary for a period of 3 years after completion where goodwill and know-how are transferred and for a period of 2 years when only goodwill is transferred.
Confidentiality clauses (to the extent that they have similar effect to a non-compete clause) are evaluated in a similar way.
Non-compete and similar clauses that are not considered to be ancillary need to be analysed in under Article 101(1) TFEU to determine whether they may have the object or effect of restricting competition and, if so, whether they produce sufficient objective benefits to justify exemption under Article 101(3) TFEU.
Issues in the Siemens/Areva case
- Whether the post-term non-compete was ancillary to the original creation of the JV
The Commission took the view, following its normal practice, that the post-term non-compete could not be regarded as ancillary to the original creation of the JV. However, it did accept that such a clause might necessary for its dissolution.
- Whether the post-term non-compete was ancillary to the acquisition of sole control of the JV by Areva following its dissolution
Applying similar principles to those that would apply in the case of a straightforward acquisition of an undertaking, the Commission accepted that a post-term non-compete might be objectively necessary to ensure a smooth transition to a new corporate structure following the exit of one of the parents and to ensure that the seller (exiting parent) is not in a position to compromise the transfer of the full value of its share in the JV to the remaining parent
The Commission thus took the view that a post-term non-compete was in principle ancillary to the acquisition of sole control by Areva over the JV. However, the Commission continued to have concerns over the objective necessity and proportionality of the specific restrictions on Siemens following its exit.
- Objective necessity of the restrictions
The Commission considered that the restrictions were not objectively necessary to assimilate the know-how and goodwill of the JV to Areva, because the majority of this had been contributed by Areva from the outset as the industrial leader and assimilated to Areva throughout the lifetime of the JV. In terms of goodwill, it was considered unlikely that customers would be inclined to immediately switch back to Siemens as it was exiting the nuclear business.
However, the restrictions were objectively necessary protect the JV from facilitated competition by Siemens, i.e. competition where Siemens exploits the JV's confidential information to which it previously had access.
- Proportionality of the restrictions
The Commission considered that the post-term non-compete was proportionate insofar as it covered confidential business information (as opposed to technological know-how), was limited to markets in which the JV was active with its own products (as opposed to being a reseller of Siemens products), and was limited to three years in duration. A worldwide geographic scope was accepted as proportionate.
In relation to technological know-how the Commission considered that the Areva's interests were adequately protected by confidentiality clauses preventing the use and disclosure of such information acquired by Siemens during its participation in the JV. The Commission accepted, however, that a mere confidentiality clause would not be sufficient to protect Areva from facilitated competition using confidential business information of the JV: Siemens could not avoid taking into account the confidential information of the JV in its future business decisions.
The three year limitation is in line with the Commission's normal practice in relation to vendor non-compete clauses involving the transfer of know-how.
- Application of Article 101 TFEU to those elements not considered objectively necessary and proportionate to the acquisition of sole control
Insofar as the post-term non-compete clause covered markets in which the JV was not active with its own products, the Commission considered the application of Article 101 TFEU and concluded that the clause served no purpose other than to prevent Siemens competing with the JV and hence was a restriction of competition by object.
Further, given the importance of the parties on the markets concerned, the post-term non-compete had an appreciable effect on competition. No objective benefits or efficiencies arose from the clause that would justify exemption under Article 101(3) TFEU.
Hence the clause infringed Article 101 to the extent that it was not objectively necessary and proportionate to the acquisition of sole control by Areva.
- Application to confidentiality clauses
The Commission considered that the confidentiality clause amounted to a non-compete obligation insofar as it included a non-use obligation in relation to confidential business information. This is on the basis, as above, that Siemens could not avoid taking into account the confidential information of the JV in its future business decisions. This was analysed in the same way as the express non-compete obligation.
However, insofar as the confidentiality clause related to the non-use of technological know-how and to the non-disclosure of all types of information, it was not considered to be a non-compete clause at all.
The parties' commitments
The following commitments were agreed by the parties to remedy the competition concerns identified by the Commission in relation to the post-term non-compete and confidentiality clause:
- to set aside the post-term non-compete clause as it was agreed in the Shareholders' Agreement;
- to allow Siemens to compete against the JV without restriction from the date at which it lost joint control of the JV, with the exception of certain activities directly related to the markets in which the JV was active;
- competition by Siemens would only be prevented for a duration of three years following its exit from the JV;
- Siemens would be prevented from using any confidential business information in relation to the JV's core products and services which it may have had access to during the lifetime of the JV until the date three years from its exit from the JV.
This is the first case for a number of years in which the Commission has considered the application of the doctrine of ancillary restraints to non-compete clauses in a joint venture agreement. As such it provides a helpful reminder and clarification in a practical context of the Commission's approach to such restrictions.
It is notable for the fact that the Commission accepts that a post-term non-compete clause may be necessary for regulating the parties' interests on the dissolution of a JV where one party buys the other(s) out. Considerable care will, however, be needed in framing such clauses to ensure that their scope and duration is objectively necessary and proportionate to the foreseeable interests of the remaining party at the time of dissolution.
The Commission's approach to confidentiality clauses is also instructive. Whilst the Commission's practice has for some time been to treat confidentiality clauses as having a similar effect to non-compete clauses, the reasoning behind this has not been clear. The recognition in this case that a non-disclosure obligation is not equivalent to a non-compete clause is clearly correct. The approach to non-use restrictions is, however, potentially complex since their effect (or not) as a non-compete clause appears to depend on the nature of the protected information and how it might be used by the receiving policy.
Less helpful is the treatment of technological know-how. It is not at all clear why the Commission considers that technological know-how, which by definition is secret and useful, is sufficiently protected by non-use obligations on the departing parent, as opposed to a non-compete clause.
Finally, the case is an important reminder of the risks that parties run by including non-compete provisions in JV agreements that are not ancillary to the creation (or dissolution) of the JV. By categorising the non-ancillary elements of the non-compete clause as restrictions by object that do not produce objective benefits justifying exemption, the Commission effectively condemns all non-ancillary non-compete clauses except in the most clearly de minimis cases.