Contractual Limits on Competition and Competition Law in Spain
Spanish (and EU) Competition regulations prohibit the restrictive clauses on Competition in distribution (and similar) agreements, if the duration is superior to five years. BY SANTIAGO NADAL
1.- Prohibition of competition and Labor Law
Employment agreements, especially those referred to senior managers, use to include a clause to prohibit competition. The employee cannot work for the competitors of the company once he has terminated his employment agreement.
Spanish laws allow these clauses, but with limitations. The company must have a legitimate interest in the prohibition: immediate competition would harm it business interests. Secondly the employee must receive an economic compensation proportional to his salary. And, the prohibition can last only 2 years for technicians or managers, and 6 months for other employees.
In any event, the prohibition is only valid, if it is agreed in written in the employment contract, specifying the economic compensation he will receive.
2.- Restrictions on competition and Company Law
These competition prohibitions are also admitted in Spanish Company Law. It forbids managers and partners in limited (ie, small) companies to participate in activities which are in competition with the company.
The manager of (big) Public Limited Companies shall inform about his stake in the capital of any company which has a similar or complementary activity to the one in which he works.
In addition, Spanish Companies by-laws often include stricter rules. They may include competition prohibition after managers or partners have finished their relation with the company: limiting competition in the future.
3.- Commercial agreements limiting competition and Competition law
3.1 Many commercial agreements in Spain also include competition limitations, in particular regarding companies acquisitions. This is permitted in Spain, if the limits are: necessary and accessory (included, as means to guarantee the main agreement).
However, the Spanish Competition Authorities have a restrictive position about these clauses.
Spanish (and EU) Competition regulations prohibit the restrictive clauses on Competition in distribution (and similar) agreements, if the duration is superior to five years.
3.2 Any person with interest in the case can serve a claim against a non competition clause, when it is against the Spanish Competition Law or the EU Treaty.
3.3 In this case the Spanish Competition authorities (and Courts) can grant precautionary measures.
Precautionary measures may be cessation, or obligation to comply with some requirements, in order to avoid the damages that those behaviors may cause. These measures can also be the payment of a bank guarantee, to cover in the damages and losses that it may cause. The authorities may charge additional fines to assure the fulfillment of the measures.
3.4 If the non competition clause is valid, the company may claim the respect of such clause before the commercial courts. The action to bring before the Court is the fulfillment of a contractual obligation. The defendant may counterclaim before the same Court: claiming the invalidity of the clause, as the case may be.
4.- Court Actions and Competition Law
Companies that have signed a non competition clause with their employees, directors, managers or partners, may bring different actions with a double base: ex contractu or ex lege (Unfair Competition).
4.1 Section 13 of the Unfair Competition Law
The Spanish Unfair Competition Law protects the right of businessmen to keep secrets, knowledge, information, techniques or ideas, which have a value in the market.
The Law prohibits revealing, or taking advantage of industrial or business secrets.
The main question is: what is covered by secrecy? Generally speaking secrets, know-how, knowledge and contacts acquired from a company, however, case law acknowledges to the employee the use of the knowledge or contacts if the performance of his profession justifies it.
4.2 Section 14 of the Unfair Competition Law
It is unfair induction: to breach contractual obligations by employees, suppliers, clients, etc. The activity will be unfair if both parties are competitors. It is necessary that the activity causes a prejudice to competitor; or causes deception in the market; or aims to eliminate a competitor.
In principle, these activities, contrary to the Unfair Competition Law, cannot be submitted to the arbitration. This is not a subject in which the parties can freely decide. Competition Law limits the free will of the parties: it is a matter of Public Order.
Unfair Competition cannot be submitted to arbitration, because this is not a contractual but a non contractual claim. Nonetheless we understand that the parties may agree to submit to arbitration the discussion, once the discussion has arisen.
Any discussion arising from these agreements and all claims referred to unfair competition are, in Spain, subject to the Commercial Courts.
In these Courts, the claiming party can request precautionary measures (court rulings to stop an activity, or seize of goods, or deposit of the income) to insure the final decision of the court ruling. The precautionary measure can be requested before the claim on the merits is submitted to the Court.
Claimant must prove the urgency or necessity of the measure; and the claim on the merits has to be submitted within the term of 20 days after the adoption of the injunction.
About the Author
Santiago Nadal holds a degree in Law from the Universidad de Barcelona in 1982 and Master in Comparative Law from the University of Lewven and Strasburg and in Community Law from the University of Dundee. He specializes in Competition Law, Unfair Competition, Intellectual Property Law, also in Copyright and Distribution and Franchise Agreements.
He is the author of many articles published in Spanish and English in national and international magazines relating to different matters. He speaks Spanish, Catalan, English and French.