The enforceability of non-compete restrictions after an agency, distribution, or franchise agreement has come to an end can be an important factor in deciding how to proceed in many situations.
With two recent judgments in the Court of Appeal on the subject, do we now have clear guidance as to what is and what is not reasonable when it comes to the duration and extent of such restrictions?
Credico Marketing Limited v Lambert concerned a marketing company (Credico) entering into a number of agency agreements – known as “Trading Agreements” – with a series of agents who would provide marketing services for customers.
The Credico agreements contained two non-compete provisions. The first restricted the agent (in this case Mr. Lambert) from working for anyone else during the course of the agreement. The second was a post-termination restriction not to work for anyone else for a period of six months after the termination of the agreement.
Credico justified these non-compete restrictions by highlighting the confidential information provided and the time spent training the agents, as well as the money spent assisting the agents in becoming profitable and successful.
The Court of Appeal decided that the post-termination restriction was not enforceable. Essentially, the fact that business support had been provided during the lifetime of the agreement with Mr. Lambert did not amount to a legitimate business interest which needed to be protected after the agreement had ended.
Further, the information gained through the specialist training was deemed not sufficiently special and the Court of Appeal likened the knowledge and skills learned to the position of employees who would be learning and developing skills whilst employed by a company.
Dwyer v Fredbar concerned a franchise agreement for specialist drainage services and in this case the Court of Appeal followed the judgment given in Credico.
In particular the Court of Appeal was concerned with the respective bargaining power between the franchisor and the franchisee and made clear that inequality of power “where it exists is not only relevant but is the significant factor in determining reasonableness”.
In this respect, the Court of Appeal departed from the established position which was that a post-termination non-compete restriction lasting 12 months or less which protected a legitimate business interest would be enforceable. In contrast earlier judgments had not been concerned with equality of bargaining power.
What do these judgments mean for agency and franchise agreements?
Whilst Credico was concerned with agency agreements and Dwyer with a franchise agreement, what is clear from the judgments of the Court of Appeal is that equality – or lack of it – of bargaining power will be a key factor in determining for agents and franchisees alike the reasonableness of post-termination non-compete restrictions and therefore their enforceability provided that there is a legitimate business interest to protect.
Meanwhile for non-compete restrictions operating during the lifetime of an agreement the test remains whether the restriction does no more than is reasonable to protect a legitimate business interest.
However, it should not be forgotten that the starting point at common law is that an agent owes a duty of loyalty to its principal being a duty which attracts fiduciary obligations to put the principal’s interest above its own interest and that of a third party. Curiously the Court of Appeal in Credico failed to consider the common law position.
What do these judgments mean for distribution agreements?
In distribution agreements, the position of common law is that supplier and distributor owe an implied duty of good faith to each other as long as this reflects the presumed intention of the parties and the relevant background against which the agreement was made.
For distributors, this implied duty can in some ways be seen as comparable to the fiduciary duty of an agent. However, will the Court of Appeal’s failure in Credico to consider the common law position also be mirrored in determining the enforceability of non-compete restrictions on a distributor?
In respect of distribution (and franchise agreements), it is also important to bear in mind that following the coming into force on 1 June 2022 of the Vertical Agreements Block Exemption Order; if a non-compete obligation is indispensable to protect know-how, it may be enforceable as a matter of competition law.
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Take home points
- Whilst the Court of Appeal in each of Credico and Dwyer decided that the non-compete provisions which applied whilst the agreements were still operating were enforceable, the onus is still on the principal, franchisor, and, by extension, the supplier in a distributorship agreement to ensure that such non-compete clauses are reasonable and do no more than is necessary to protect legitimate business interests.
- In contrast, the provision of training and business support services provided during the lifetime of an agreement will no longer justify a post-termination non-compete provision. Instead the issue will be equality of bargaining power.
- It is always good for principal, supplier, and franchisor to be confident that non-compete restrictions in agency, franchise, distributorship, and supply agreements will be enforceable. But the tests that will be applied to determine enforceability are different depending on whether the restrictions are to operate during the lifetime of the agreement or after it has come to an end.
- As such non-compete restrictions in agreements used as precedents should be checked and possibly re-written.
- In respect of commercial agency agreements it is important to bear in mind the provisions of the Commercial Agents Regulations which concern the enforceability of post-termination non-compete restrictions. Such non-compete restrictions will only be valid if they are in writing and relate to the geographical area or group of customers and the geographical area entrusted to the commercial agent, and to the kind of goods covered by their agency under the contract.
Stephen Sidkin is a partner and Millie Pierce is a trainee solicitor at Fox Williams LLP (www.agentlaw.co.uk; www.distributorlaw.co.uk; www.foxwilliams.com)
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