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NON-COMPETITION CLAUSES UNDER TURKISH COMPETITION JURISPRUDENCE

January 2009 - EU & Competition. Legal Developments by Cerrahoglu Law Firm.

More articles by this firm.

Any concentration between the parties may also include certain restrictions. Especially, restrictions are imposed on the vendor if the vendor has substantial know-how, customer portfolio and distribution network in the market and the purchaser is new to the market in question. In such situations, non-compete and non-solicitation clauses, restrictions on intellectual property rights and supply and purchase agreements may be imposed on the vendor in order to protect the business and the goodwill of such business acquired by the purchaser. Such restrictions are generally defined as “ancillary restrictions” under competition legislation. Under normal circumstances they would be considered as restricting competition in the market; however, in case of implementation of a concentration, they are not considered as anti-competitive but necessary if the scope, duration and the geographical area of such restrictions do not exceed what the implementation of the concentration reasonably requires.

 I. INTRODUCTION

Any concentration between the parties may also include certain restrictions. Especially, restrictions are imposed on the vendor if the vendor has substantial know-how, customer portfolio and distribution network in the market and the purchaser is new to the market in question. In such situations, non-compete and non-solicitation clauses, restrictions on intellectual property rights and supply and purchase agreements may be imposed on the vendor in order to protect the business and the goodwill of such business acquired by the purchaser. Such restrictions are generally defined as “ancillary restrictions” under competition legislation. Under normal circumstances they would be considered as restricting competition in the market; however, in case of implementation of a concentration, they are not considered as anti-competitive but necessary if the scope, duration and the geographical area of such restrictions do not exceed what the implementation of the concentration reasonably requires.

 

Under EC Merger Regulation, the Commission provided guidelines with regard to “ancillary restrictions” with its Notice on Ancillary Restraints published in 1990[1]. In 2001, the Commission published the Notice on Restrictions Directly Related and Necessary to Concentrations. Such notice was superseded by the Commission’s Notice on Restrictions Directly Related and Necessary to Concentrations dated 05.03.2005[2]. Under the new Notice, the Commission states that restrictions must be “necessary to the implementation of the concentration”, which means that, in the absence of those agreements, the concentration could not be implemented or could only be implemented under considerably more uncertain conditions, at substantially higher costs, over an appreciably longer period or with considerably greater difficulty. Restrictions necessary to the implementation of a concentration are typically aimed at protecting the value transferred, maintaining the continuity of supply after the break-up of a former economic entity, or enabling the start-up of a new entity. In determining whether a restriction is necessary, it is appropriate not only to take account of its nature, but also to ensure that its duration, subject matter and geographical field of application does not exceed what the implementation of the concentration reasonably requires. If equally effective alternatives are available for attaining the legitimate aim pursued, the undertakings must choose the one which least objectively restricts the competition.

 

II. NON-COMPETITION CLAUSES UNDER TURKISH COMPETITION LAW a.    

General Principles of Non-Competition Clauses   

It has to be pointed out that unlike EC Competition Law, there is no specific legislation with respect to ancillary restraints under Turkish Antitrust Legislation. Communiqué on the Mergers and Acquisitions Calling for the Authorization of the Competition Board does not include any provisions referring to ancillary restraints. Indeed, in one of the decisions, one of the Board members dissented a Board decision stating that the Board has not yet established guiding principles with respect to the conditions under which a non-compete or confidentiality obligation in a share transfer agreement or a similar agreement is considered as an ancillary restraint.



 OG – 12.08.1997, 23078.

 See the decision of the Board dated 27.05.2003 and numbered 03-35/414-181.

 

Instead of guiding principles, the decisions of the Board give guidance with respect to the implementation of ancillary restraints in concentrations. The decision of “SKW/Ercan Group” dated 19.11.1998 and numbered 91/736-153 is the first decision whereby non-compete restrictions were considered as a conduct prohibited under Article 4 of the Law No. 4054 on the Protection of Competition; however, the Board held that such restrictions may qualify for individual exemption provided that its duration was limited to a certain period of time.

 

The Board for the first time assessed non-compete restrictions as ancillary restraints in its decision of “PGI/Vateks” dated 03.03.1999 and numbered 99-12/94-36 by giving reference to the decisions of the European Court of Justice. In such decision, the Board stated that limitation of duration of non-compete restriction in the agreement to 3 years is an objective and reasonably necessary ancillary restraint.

 

In its early decisions, the Board stated that both the European Commission and the European Court of Justice limited the duration of non-compete restrictions for a reasonable period of time although such period varied depending on the circumstances of each event, it was evaluated that such period could change from two to five years: in case of transfer of customer portfolio, the duration was limited to two years, whereas, in case know-how, license, reputation of the company were also transferred in addition to the customer portfolio, the reasonable period could increase up to five years.

 

The Board seeks three conditions while evaluating the non-competition restrictions as ancillary restraints:

1. Restrictions Imposed Solely on Parties of Concentration 

In its decisions, the Board held that restrictions should not impose obligations on third parties other than the contractual parties. Any agreement imposing restrictions cannot be considered as an ancillary restraint even if such restrictions constitute an inseparable aspect of the transaction and thus such conducts shall be subject to Article 4 and Article 6 of the Law No. 4054 on the Protection of Competition. It is concluded by the Board that covenants regarded as ancillary restraints should only restrict the freedom of parties in the market but it should not affect economic conduct of third parties or undertakings unless it is an inevitable result of the transaction.  

2. Directly Related and Necessary to the Implementation of the Concentration 

As it concerns the criterion of “direct relation”, such restrictions should arise from the nature of the transaction. Restrictions should be necessary for facilitating the implementation of concentration. However, they are considered secondary compared to the main purpose of the concentration. Contractual arrangements, which create and structure concentrations, are not evaluated within the concept of ancillary restraints. 

 

In order to assess whether a restraint fulfils the norm of “necessary to the implementation of transaction”, the Board maintains that in the absence of such restraint, the concentration must be likely to fail or be implemented under more uncertain conditions with higher costs over an appreciably longer period.    

  

3. Proportionality 

The Board considers that for a restraint to be considered as ancillary to the concentration, not only its characteristics but also its scope, duration and geographical field of application should be assessed as to whether it creates any limitations, which are more than necessary for the legitimate objective of implementing the concentration. If a less restrictive alternative may achieve the same result, parties should opt for the less restrictive one. In cases whereby the non-competition clause is limited to the field of activity of the vendor, such covenant is found proportionate by the Board with respect to the scope of the concentration. Furthermore, the geographic area restricted with the non-competition clause should be limited to those locations where the vendor has activities. The scope of geographic area can only be extended if the vendor has made investments to launch its products and services in such territory.  With respect to the duration, in general, non-competition clauses are justified for periods of up to three years when the concentration involves the transfer of customer loyalty and especially when the goodwill and know-how are transferred together. When only goodwill is transferred, non-competition clauses are justifiable if their duration is up to two years. Nevertheless, the Board also maintains that these periods are not binding and restrictions with longer durations may be evaluated case by case and they may also be considered as ancillary restraints if circumstances in the relevant transaction justify their durations.  

In fact, it is held that non-competition clauses of four years satisfies the criterion of proportionality for protecting the relevant portfolio since the purchased entity was bound by contracts to be terminated within three to four years at time of consummation of the transaction. Similarly, in another decision, the Board took into consideration the aspects of the case at hand and decided that five years of non-competition obligation imposed in the share purchase agreement with respect to a contract executed between the vendor and its related party is justifiable since such period is deemed as necessary given the shareholding relation between the related party and the vendor. In this respect, the Board took into consideration the characteristics of the relevant product market, overlapping activities of vendor and buyer companies in the relevant geographic markets while evaluating a non-competition obligation, the term of which is six years and decided that such period is permissible given that the relevant product market requires vast experience and extensive research for doing business; that there were no overlapping activities of the parties in the relevant product market; that such restriction had no effect in Turkish market (since both parties were not domiciled in Turkey).

 

b. Non-Competition Clauses in Joint Ventures  

Non-competition restrictions between the parent undertakings and the joint venture are considered as directly related and necessary to the implementation of the concentration during the term of the joint venture in order to eliminate the risk of coordination between the parent undertaking and the joint venture. However, term of non- competition restriction should not go beyond the lifetime of the joint venture. In the past the Board stated in its decisions that post-term non- competition restrictions are acceptable if the duration of such restriction is three years in case of existence of know-how and goodwill and two years in case of existence of goodwill. However, in its recent decisions, the Board expresses that such obligations should be evaluated at the time of termination of joint-control and transfer of shares in the joint venture

 

Either in case of a restrictive non-competition clause in a joint venture agreement or in the acquisition of an undertaking, if the Board concludes that the duration of a non- competition restriction is more than what is reasonably required, a conditional approval is granted to the transaction in question provided that the duration of such restrictive clause is reduced according to the above-explained criteria.

III. CONCLUSION 

It should be emphasized that the Board evaluates non-competition restrictions as ancillary restraints provided that they are formulated in compliance with the criteria applied in the relevant jurisprudence of the Board. The Board takes the view that non-competition restrictions are necessary for the real transfer of values targeted with share purchase and/or joint venture agreements and that they are permissible insofar as they are directly related and necessary for the implementation of the concentration.

 



 2001/C 188/03.

 [2005] O.J. C56/24.

 OG – 12.08.1997, 23078.

 See the decision of the Board dated 27.05.2003 and numbered 03-35/414-181.

 Decisions of the Competition Board dated 28.04.1999 and numbered 99-21/170-89, dated 03.06.1999 and numbered 99-27/244-148, dated 06.10.1999 and numbered 99-45/476-301, dated 14.12.1999 and numbered 99-57/612-389 and dated 15.02.2000 and numbered 00-7/62-29.

 Decisions of the Competition Board dated 22.06.2006 and numbered 06-45/578-158, dated 11.01.2007 and numbered 07-01/10-5, dated 20.07.2006 and numbered 06-53/683-190 and dated 02.03.2006 and numbered 06-16/187-47.

 The Board interprets goodwill in a wide sense and trademarks, logos, service marks, trade names, customers’ lists and files and contracts executed with customers, which qualify as non-tangible assets are considered within the scope of goodwill. (Decision dated 19.10.2006 numbered 06-77/998-284).

 Decision of the Board dated 28.06.2005 and numbered 05-41/579-147.

 Decision of the Board dated 26.05.2006 and numbered 06-36/458-120.

 Decision of the Board dated 17.06.2005 and numbered 05-41/581-149.

 Decision of the Board dated 16.03.2006 and numbered 06-19/238-61.

 Decision of the Board dated 08.09.2005 and numbered 05-55/831-224, dated 08.07.2005 and numbered 05-44/629-162 and the decision dated 26.05.2006 and numbered06-36/460-122.  

 Decisions of the Board dated 07.04.2005 and numbered 05-22/261-72, dated 06.05.2005 and numbered 05-31/393-96, dated 23.03.2006 and numbered 06-20/257-64.

 

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