The French Supreme Court has confirmed that the non-competition clause in a “location gérance” contract must be limited to the premises from which the business was conducted during the term of the lease and must not exceed one year after its termination.
It also states that if a practice is not prohibited by EU law, it may be prohibited by national law.
In 2018, in order to operate a general grocery shop under a local supermarket brand, a company signed a “location gérance” contract, a franchise agreement and a supply agreement with a market leader.
The “location gérance” contract included a clause stipulating that on expiry of the contract, the manager was prohibited from operating a business of the same type for a period of five years from the date of termination, within a radius of 5 km as the crow flies from the leased business in urban areas and 15 km in rural areas.
In 2021, the lessor terminates the management lease.
In 2022, the manager set up a new company in order to operate a competing store in the same street and only a few numbers away from his former shop.
The lessor applied to the urgence judge to have work on the shop stopped, arguing that the opening of this business constituted a clear breach of the non-competition clause in the location gérance contract.
The interim relief judge heard the lessor’s arguments and prohibited the former lessee-manager from opening his business until the judge on the merits could rule on the matter.
However, the Nancy Court of Appeal overturned this ruling in a decision dated 5 October 2022, holding that:
“The legality of the clause, in the light of the provisions of articles L 341-1 and L 341-2 of the French Commercial Code, does not appear with the evidence required before the interim relief judge“.
In a ruling dated 15 May 2024, the Court of Cassation upheld the position adopted by the Nancy Court of Appeal.
While the solution is not new, the arguments put forward are more so, as it is argued that European competition law takes precedence over national regulations, taking the view that:
“The non-competition clause included in a vertical agreement between the franchisor and the lessee-manager was [not] clearly lawful in the light of the prohibition set out in Article L. 341-2, I, of the French Commercial Code, the Court of Appeal infringed Article 101(3) TFEU, Article 3 of Regulation (EC) No 1/2003 of 16 December 2002 and Articles 2, 3 and 4 of Regulation (EU) No 330/2010 of 20 April 2010, together with the principle of primacy of EU law“.
The Cour de Cassation responded that:
“The fact that, because it does not fall within the scope of Article 101 of the TFEU, which is limited to agreements that are capable of affecting trade between Member States, a practice does not fall within the prohibition laid down by that article in no way prevents that practice from being considered by the national authorities from the point of view of the restrictive effects that it may produce in the domestic context and does not prevent them from applying to such agreements provisions of domestic competition law that may be stricter than Union law in this area“.
The Court of Cassation then concluded that the plea raised by the franchisee, which was new and mixed fact and law, was inadmissible and that there was therefore no need to refer the question suggested by the franchisor for a preliminary ruling.
On the lawfulness of the non-competition clause, the Cour de Cassation then ruled that:
“After stating that legally implemented competition is not such as to cause damage to competitors, it held that the common purpose of the lease-management, franchise and supply agreements was to allow the operation of the shop located at [Address 3] at [Location 5] and noted that the non-competition clause stipulated in the lease-management agreement, invoked by Carrefour Proximité, prohibited the lessee from operating a business of the same kind for a period of five years from the date of termination, within a radius of five kilometres as the crow flies of the leased business in urban areas and fifteen kilometres in rural areas, the Court of Appeal, which did not interpret the intention of the parties, was able to deduce, without exceeding its powers, that this non-competition clause was lawful, which was not limited to the land and premises from which the operator carried on his business during the term of the contract and exceeded one year after the termination of the contract, was not established with the evidence required in summary proceedings with regard to the provisions of Article L. 341-2 of the French Commercial Code, so that Carrefour Proximité did not demonstrate the existence of either imminent damage or a manifestly unlawful disturbance that had to be stopped“.
It is interesting to note that this ruling has been published in the Bulletin, as the Court of Cassation no doubt wishes to draw the attention of legal experts to its position in this respect.