EDP – Energias de Portugal and Others (Case C-331/21): Court of Justice Clarifies the Treatment of Non-compete Clauses Between Potential Competitors Under Article 101 TFEU

By Julia Blanco, Aleksandar Jevtic & Antti Kunnari on October 26, 2023

On October 26, 2023, the European Court of Justice issued a preliminary ruling in EDP – Energias de Portugal and Others,[1] upon request from the Lisbon Court of Appeals, which had asked for clarification on how to assess non-compete clauses under Article 101(1) and (3) TFEU and whether these could constitute “by object” restrictions. The Court of Justice clarified the standard of assessment of such non-compete clauses, confirming that they can be categorized as restrictions by object if they display a sufficient degree of harm to competition.

Background

On May 4, 2017, the Autoridade da Concorrência (“AdC”) fined Energias de Portugal (“EDP”), part of EDP Group, a large Portuguese electricity producer and distributor, and Modelo Continente(“MC”, together the “Parties”), a Portuguese food and consumer products distributor and part of Sonae Group, a Portuguese conglomerate that was previously part of a joint venture active in electricity production and supply, for infringing the national law equivalent of Article 101 TFEU.[2] The Parties had concluded an association agreement under which MC issued discount cards to its customers under a loyalty programme, entitling them to a price reduction for electricity provided by EDP.[3] The agreement included an exclusivity clause under which both undertakings agreed to refrain from: (i) entering the other’s market in mainland Portugal; and (ii) concluding an association agreement to create a discount program with a third party.[4]

According to the AdC, the non-compete clause could be equated to a market-sharing arrangement, the illegal nature of which was strengthened by the fact that it was implemented at a crucial time of the liberalization of the national electricity market. Importantly, the AdC considered the association agreement neither as an agency agreement nor as a vertical agreement. Instead, it classified it as horizontal cooperation, assessing the non-compete clause as a restriction by object.[5]

Upon appeal from the Parties, the Portuguese Competition, Regulation and Supervision Court confirmed the AdC’s findings.[6] The Parties appealed that judgment to the Lisbon Court of Appeals, which referred the matter to the Court of Justice for a preliminary ruling.

Judgment

Following the approach suggested by Advocate General Rantos,[7] the Court of Justice examined the 11 questions referred by grouping them into four categories:[8] (i) the assessment of whether undertakings present on separate product markets are potential competitors; (ii) the legal characterization of an association agreement aimed at promoting the activities of the contracting parties, and in particular whether it can be considered a vertical or agency agreement; (iii) whether a non-compete clause in such an agreement is ancillary in nature; and (iv) whether such a clause can be characterized as a restriction of competition by object.[9]

The Parties can be considered potential competitors if there are “real and concrete” possibilities for market entry. Regarding the first issue, the Court of Justice held that undertakings that are a party to an association agreement are potential competitors if there are “real and concrete possibilities” for them to enter each other’s markets and compete with the other.[10] This means that the prospect of market entry could not be “purely hypothetical” or a “mere wish.”[11] On the other hand, it is not necessary to establish that an undertaking has a “firm intention” to enter the market or that it has taken concrete preparatory steps to enter. This distinguishes the general case from the specific requirements set out in the Generics judgment, which the Court of Justice clarified is confined to the specific context of the pharmaceutical industry.[12] The fact that Sonae Group was active on the same market as EDP prior to the conclusion of the association agreement, as well as the mere fact that the Parties had desired a non-compete clause, could be taken into account by the evaluating court.[13] The Court of Justice left it to the referring court to establish whether the “real and concrete” standard was met, stressing the importance of accounting for “the structure of the market, and the economic and legal context within which it operates.”[14]

Association agreements promoting the activities of contracting parties are unlikely agency agreements if the parties share implementation costs. Regarding the second issue, the characterization of the agreement as both a vertical and an agency agreement—as opposed to a horizontal agreement—could bring it into the scope of the Vertical Block Exemption Regulation[15] and the Vertical Guidelines,[16] and therefore Article 101(3) TFEU. The Court of Justice held that the agreement could only be categorized as a vertical agreement if the parties operate within the same distribution chain for the purposes of the agreement or concerted practice. Moreover, an association agreement where each party bears part of the costs, and thereby the risk, required for its implementation could not be considered as an agency agreement under the Vertical Block Exemption Regulation.[17]

Non-compete clauses between potential competitors can be considered ancillary only if they are objectively necessary and proportionate for achieving the objectives of the overall agreement. The third issue regarding the analysis of the ancillary nature of the restriction was left to the national court under the standard that the restriction must be objectively necessary for the implementation of the association agreement and proportionate to its objectives. The Court of Justice identified factors that speak against the standard being met: (i) the restriction period exceeded the length of the agreement; and (ii) the restriction covered industrial customer segments which were outside the scope of the rebate scheme.[18]

Non-compete clauses between potential competitors can constitute by-object restrictions if they display a sufficient harm to competition. Finally, regarding the fourth issue the Court of Justice held that non-compete clauses could constitute restrictions by object even if they provide consumers with a benefit and are limited in time.[19] The Court recalled the judgment in Super Bock Bebidas, in which it had held that once it is established that an agreement pursues an anticompetitive object, it is not necessary to examine its effects on competition.[20] The Court of Justice specified in the present case that procompetitive effects would have to be taken into consideration for the purposes of categorizing the agreement as restrictive by object. However, once the analysis of the content of the clause—and its economic and legal context—display a sufficient harm to competition, the referring court would not have to assess the precise effects on competition.[21]

Discussion

The ruling of the Court of Justice was anticipated for its implications on the definition of potential competition between entities bound by a non-compete clause when they are not active in the same market, and for the clarification on whether proof of anticompetitive effects is needed for declaring a non-compete agreement between potential competitors illegal under Article 101(1) TFEU.[22] The preliminary ruling confirms that companies should not only carefully review contracts entered into with current competitors, but they need to be equally vigilant when reviewing non-compete clauses in agreements with potential competitors. Agreeing with the argument of Advocate General Rantos, the Court of Justice even held that the mere existence of a non-compete clause constitutes“a strong indication that there is potential competition.”[23] This will not, however, give rise to a presumption on its own. The assessment has to be context-specific and take into account the economic and legal context of the market in question.

[1] EDP – Energias de Portugal and Others (Case C-331/21) EU:C:2023:812.

[2] Ibid., paras. 11–12, 30, 27, and 73.

[3] Ibid., para. 14.

[4] Ibid., paras. 18–19.

[5] Ibid., paras. 31–32.

[6] Ibid., para. 33.

[7] EDP – Energias de Portugal and Others (Case C-331/21), opinion of Advocate General Rantos, EU:C:2023:153, paras. 2, and 33–34.

[8] EDP – Energias de Portugal and Others, (Case C-331/21) EU:C:2023:812, Court of Justice judgment, paras. 57–58.

[9] Ibid., para.57.

[10] Ibid., para. 77.

[11] Ibid., para. 62.

[12] Generics (UK) and Others (Case C-307/18), EU:C:2020:52, para. 43, and 58. In confining the necessity for identifying concrete preparatory steps to the pharmaceutical industry, the Court of Justice, at paras. 64, 69, and 75-76 of EDP – Energias de Portgual and Others confirmed the approach suggested by Advocate General Rantos in para. 69 of his opinion, supra, n 7.

[13] Ibid., paras. 71and 74.

[14] Ibid., paras. 63 and 69.

[15] Commission Regulation No. 2022/720 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, OJ 2022 L 134/4. The case was analyzed under the old regulation (Commission Regulation No. 330/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, OJ 2010 L 102/1) and guidelines.

[16] Commission notice regarding guidelines on vertical restraints, OJ 2010 C 130/1, para. 18: “[a]ll obligations imposed on the agent in relation to the contracts concluded and/or negotiated on behalf of the principal fall outside Article 101(1).”

[17] EDP – Energias de Portugal and Others, supra, paras. 84–86.

[18] Ibid., paras. 91, 93, and 105.

[19] Ibid., para. 106.

[20] Ibid., para. 97; and Super Bock Bebidas (C‑211/22 P), EU:C:2023:529, para. 31.

[21] Ibid., paras. 104–106.

[23] EDP – Energias de Portugal and Others, para. 71.