Maxima Latvija: Non-compete clauses in commercial lease agreements are ‘by object’ competition restrictions

Michele Giannino (Italian qualified lawyer: LL.M. Leicester, Ph.D London)

In a preliminary reference judgment recently handed down in the Maxima Latvija case, the Court of Justice of the EU (CJEU) has ruled out that commercial lease agreements with a clause conferring on the tenant the right to approve the lease agreements that the property owner may conclude with third parties is a competition restraint by object. Therefore, a full analysis of the economic effects of the agreements in question is necessary to establish whether they breach competition. The CJEU has then set out the criteria to be applied to examine the competition impact of the agreements. This blogpost reviews the line of reasoning followed by the CJEU and also gives an insight into the implications of the judgment for property owners and retailers.

The legal issues

As is known, Article 101 TFEU prohibits agreements between undertakings that have as object to restrict competition or have restrictive effects on competition. The distinction between anti-competitive agreements that are infringements by ‘object’ and those that are infringements ‘by effect’ is relevant for the allocation of the burden of proof between the acting competition authority and the parties to the agreements. Where a given agreement is found to have as an object to restrict competition, a competition infringement is established, provided that the other requirements set out in Article 101(1) TFEU are met. In order to escape the ensuing competition liability, the parties have to apply for the exemption in Article 101(3) TFEU and prove that all the conditions laid down in this provision are fulfilled. On the contrary, where an agreement is categorized as a restriction by effect, the acting competition authority has the evidentiary burden to demonstrate the negative effects of the agreement on competition. When the anti-competitive effects are proved, the evidentiary burden is shifted to the parties that, to their defence, can submit the economic efficiency argument in Article 101(3) TFEU[1].

Though horizontal agreements to fix prices or reduce capacity are more likely to be considered as restrictive by object (European Night Services), also vertical agreements have been found to fall within the category of object restraints. This was the case of resale price maintenance arrangements (Binon v AMP) and distribution agreements that award distributors an absolute territorial protection (Costen and Grundig). It was, however, uncertain whether commercial lease agreements that contain covenants limiting the freedom of property owners to rent to the tenant’s competitors could be considered as a competition restraint by object or by effects. The Maxima Latvija judgment deals with this issue.

Facts

Maxima Latvija is a major retailer in Latvia where it runs a chain of large shops and hypermarkets. It concluded a number of commercial lease agreements with owners of shopping centres to rent commercial spaces within such malls. Some of these agreements included a non-compete clause in favour of Maxima Latvija. As ‘anchor tenant’, Maxima Latvija was awarded the right to agree to the lessors letting third parties other shops than those rented to Maxima Latvija in the same shopping centres where the tenant was already present. In essence, the property owners undertook an exclusivity obligation in favour of the anchor tenant, not being allowed to conclude a lease agreement with the competitors of Maxima Latvija without its consent.

Unsurprisingly, this exclusivity arrangement attracted the attention of the Latvian Competition Authority (LCA). The LCA believed that the agreements containing the non-compete clause infringed Article 11(1)(7) of the Latvian Competition Law, which corresponds to Article 101 TFEU. Considering the market power of Maxima Latvija in the retail market, the LCA took the view that the contested agreements were anti-competitive in nature. According to the LCA, the purpose of the contested agreement was to restrain competition by undermining the ability of competing retailers to enter the market. Therefore, the LCA made an infringement decision, imposing on Maxima Latvija a fine of about € 35,000.00, without being necessary to establish whether the contested clauses had any restrictive effects on competition.

  

Maxima Latvija appealed the infringement decision of the LCA before the regional administrative court and then before the Latvia Supreme Court. Given the similarities between Article 11(1)(7) of the Latvian Competition Law and Article 101 TFEU and being uncertain whether the contested agreements should be categorized as by object or by effect competition restraints, the Latvian Supreme Court stayed proceedings and referred the matter to the CJEU for a preliminary ruling pursuant to Article 267 TFEU.

Analysis

In practice, what the Latvia Supreme Court asked the CJEU was whether the commercial lease agreements including a non-compete clause in favour of the tenant amounted to an object restraint of competition; if it was not the case, the Latvia Supreme Court asked whether such agreements constituted a competition restraint by effect and which test should be employed to ascertain whether the agreements had negative effects on competition.

To address the first question, the CJEU followed the same restrictive approach to the concept of competition restraint by object it had taken in its previous judgment in Cartes Bancaires. The CJEU reminded that only arrangements with a sufficient degree of competition harm fall within the category of by object restraint. That said, in Maxima Latvija the CJEU noted that the contested agreement was a vertical agreement concluded by firms, a retailer and a property owner, that did not compete with each other. Vertical agreements are not normally considered as anti-competitive by their very nature. Then, the CJEU considered whether the contested agreements could lead to foreclose the competitors of Maxima Latvija by impeding the other retailers from having access to the malls where Maxima Latvija was already trading.

The CJEU acknowledged that the agreements could have the potential to have anti-competitive effects in the shape of market foreclosure. Next, however, the CJEU pointed out that the fact that the agreements at hand might have such foreclosing effects, if established, did not imply clearly that the agreements distorted or restricted, by their very nature, the competition in the relevant markets. Therefore, bearing in mind the economic context where the lease agreements applied and their contents, the CJEU concluded that the harm inflicted by the agreements to competition was not of such degree to qualify the agreements at hand as an object competition restraint for the purpose of Article 101 TFEU.

To deal with the second question put by the Latvian Supreme Court, the CJEU applied the test it had employed in the Delimitis case. This test requires a full analysis of the economic and legal context of the agreements and the competition conditions in the relevant market in order to establish whether the agreements have negative effects on competition. This is a two-limb test, the first step of which consists in the examination of all the factors affecting the access to the relevant market. The purpose of this exercise is to ascertain whether competitors may establish themselves in the catchment areas of the malls covered by the contested agreements, either by renting a shop in the nearby malls or in premises that are outside shopping centers. Whether commercial land in the catchment areas concerned is available and whether there are economic, administrative or regulatory entry barriers are all factors to be considered as well. As far the competition conditions of the relevant markets are concerned, it is necessary to look at the number and size of the retailers trading in the markets, the degree of market concentration as well as customer fidelity to existing brands and consumer habits.

The second limb of the Delimitis test kicks in when, with the above described thorough analysis of the economic and legal context where the contested agreements applied, it has been established that the competitors’ market access is frustrated by those agreements and similar agreements. Thus, under this second limb of the test, the acting competition authority has to assess whether the contested agreements have given an appreciable contribution to the cumulative foreclosing effect to the detriment of competitors. In that regard, factors such the market position of the parties and the duration of the agreements must be taken into consideration.

Practical significance

In Maxima Latvija the CJEU confirmed its strict position in Cartes Bancaires as for the definition of the category of competition restraint by object. Contrary to was found by the LCA, the CJEU held that restrictive covenants in commercial lease agreements, such as non-compete clauses in favour of the tenant, could not be categorized as object restraints. Arguably, the findings of the CJEU may be explained with the lack of a reliable theory of competition harm. The contested clauses had the legal effect to give rise to an exclusivity obligation in vertical agreements, which were not seen as being a serious threat to competition. Alternatively, it has been submitted that the CJEU did not share the more stringent position of the LCA because the restrictive covenants had some efficiency-enhancing objectives to the benefit of the parties as well as of consumers (see Pablo Ibanez Colomo, on the 'Chilling Competition' blog). 

That said, the ruling in Maxima Latvija that commercial lease agreements with non-compete clauses in favour of the tenants escape the categorization as by object restraints is a welcome development for retailers and property owners. Prospective lessors and lessees can then agree on similar restrictive covenants without running the risk of the lease agreements being considered as having an anticompetitive object. Notwithstanding that, however, they should bear in mind that such lease agreements may still be prohibited by Article 101 TFEU or corresponding national provisions if it is possible to establish that the agreements have negative effects on competition. To prevent this risk, retailers and property owners have to assess the competition impact of the agreements employing the criteria set out by the CJEU.

Finally, Maxima Latvija appear to be consistent with the position taken in the UK by the Office of Fair Trading, now Competition Market Authority (CMA). Also for the CMA, lease agreements containing exclusivity clauses in favour of tenants, though may have the potential to foreclose competitors of the lessee, cannot be considered to have an anti-competitive object. Therefore, in order to establish that the lease agreements in question infringe competition, an analysis of the economic effects of the agreements have to be conducted. To this end, it necessary to have regard to the scope of the relevant market, the market power of the parties and the impact of the arrangement on competition.

Barnard & Peers: chapter 17

Image credit: rus.tvnet.lv