A non-compete clause is a contractual restriction by which a party undertakes not to compete with the other party after the contract ends. In our practice, we regularly work with non-compete clauses in distribution, M&A, and cooperation agreements. Strict international frameworks apply — an ill-considered clause can be completely void under European competition law or deemed excessive. When well-drafted, the clause offers genuine commercial protection.
What is the legal problem?
A non-compete clause restricts freedom of action after termination of the contract. It affects fundamental rights such as freedom of entrepreneurship and competition law. Internationally, many countries have strict rules regarding scope, duration, and compensation. In the event of non-compliance with these rules, the clause becomes invalid or only partially enforceable, with significant consequences for your market position.
What does the law say?
Within the EU, Article 101 TFEU applies. The Group Exemption Regulation on Vertical Contracts (Regulation (EU) 2022/720, in force since 1 June 2022) permits non-competes for up to a maximum of five years subject to conditions (Article 5(1)(a)). The Vertical Guidelines 2022 clarify application. For company acquisitions, the M&A Notice (2005/C 56/03) applies — non-competes of two to three years are accepted.
Under Dutch law, a commercial non-compete clause is contractually permitted within reasonable limits. For employment contracts, Article 7:653 of the Dutch Civil Code applies, with a written requirement. In California, Section 16600 of the Business and Professions Code prohibits virtually all non-compete clauses for employees.
What risks do companies face?
An overly broad clause is moderated or declared void. A far-reaching non-compete clause without compensation often does not work internationally. Competition fines under Article 101 TFEU can amount to up to 10 percent of global turnover. For distributors and agents, an awkward non-compete clause leads to additional goodwill payments under Article 7:442 of the Dutch Civil Code. International enforcement of non-compete is expensive and not always successful.
Practical example from our practice
We represented a Dutch software supplier with a SaaS contract with an Italian partner containing a five-year non-compete clause without compensation. The Italian court declared the clause void due to disproportionality and lack of compensation. The partner immediately launched a competing product. Upon renegotiation, we included a clause of two years non-compete with a geographical limitation to Italy, and compensation of 15 percent of the last annual turnover. Under the Italian Supreme Court (Corte di Cassazione, sezione lavoro 19 October 2017 no. 24736), this clause would have been upheld.
What can you do?
Limit non-compete clauses in terms of time, geography, and activity. Include compensation where necessary. Align with Article 101 TFEU and Regulation 2022/720. Combine with confidentiality and non-solicitation for additional protection. Take into account mandatory law in relevant jurisdictions. For M&A: two to three years non-compete is standard under EU law. See also our article on Exclusivity: opportunities and risks.