Non-compete covenants are often included in company transactions and may be one of the keys to success for the buyer. Sellers that, after selling a company, set up a new one to compete with the old one, are unlikely to be successful in a business transaction.
Parameters
In the field of employment law, when the seller is bound by an ordinary or senior executive contract, the parameters of a non-compete agreement are clarified by article 2.1.1 of the Workers’ Statute:
In short, a non-compete agreement is similar to paying an idle wage to employees during the period of restriction on competition.
Role of seller and director
Non-compete covenants are also often part of the contractual sale of a company. The inclusion of such covenants is justified if the seller is not a natural person – in which case, it is not bound by labour law – or if the covenant is to be given a wider scope than that regulated by labour law. Moreover, under Spanish law, the directors of a company who have an employment contract may be disassociated from it, by virtue of the so-called “link theory”, which means that their employment contract is subsumed within the commercial relationship, thereby invalidating it.
Justification
It is important to determine the justification for non-compete covenants. Primarily, the justification comes from their use as a defence for the buyer, which may be seriously harmed by the departure of the seller if the seller is aware of important information concerning the business or has industrial secrets at its disposal. The buyer will always want to try to protect its clientele and its goodwill, which are the most valuable things, especially in the service sector.
Use of non-compete clauses in Spain
In certain jurisdictions, including the United States and the United Kingdom, the use of non-compete clauses in contracts has increased. Such clauses have gone from prohibiting the solicitation of clients to the outright prohibition of working for former clients. However, it is considered that the latter clauses are not enforceable against customers, given their right to freely contract with whichever company they consider most convenient.
In Spanish law, the validity period of contractual non-compete agreements has been discussed. The Supreme Court’s ruling of 8 May 2012 confirmed that a non-competition clause was justified:
unless its duration, geographical scope and content exceeded what was reasonably useful or appropriate to ensure that the value of the transfer would not be impaired by the transferor’s actions.
Case law has considered a longer period than three or four years to be excessive.
According to European Law (1) non-compete clauses are justified for a maximum of three years, when the transfer operated by the transaction includes the transfer of goodwill and important knowledge. Where it only includes goodwill, the period is reduced by two years. The European Commission’s communications do not in themselves have any legal value, but they are protected by rulings of the European Court of Justice, and they also serve to indicate the Commission’s authoritative interpretation criteria.
In any case, Spanish law does not protect inhibitions of competition that are not useful or convenient for the buyer’s business.