They Are Everywhere, But How Effective Are Non-Compete Restrictions?

Image: Matchesfashion


They Are Everywhere, But How Effective Are Non-Compete Restrictions?

Last month, Kenzo made headlines when it revealed that it had appointed streetwear design pioneer Nigo to the role of creative director. “The arrival of an extremely talented Japanese designer will allow us to write a new page in the history of the house that Takada Kenzo ...

October 13, 2021 - By Stephen Sidkin

They Are Everywhere, But How Effective Are Non-Compete Restrictions?

Image : Matchesfashion

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They Are Everywhere, But How Effective Are Non-Compete Restrictions?

Last month, Kenzo made headlines when it revealed that it had appointed streetwear design pioneer Nigo to the role of creative director. “The arrival of an extremely talented Japanese designer will allow us to write a new page in the history of the house that Takada Kenzo founded,” LVMH fashion group chairman and CEO Sidney Toledano stated at the time. In other majority industry shakeups, London-based fashion retailer Matchesfashion has since announced the appointment of Paolo de Cesare as its new CEO, while British online fashion retailer ASOS parted ways with Nick Beighton, following his six year tenure as CEO. All the while, Burberry announced in June that it will part ways with Marco Gobbetti this December, with the CEO leaving the British brand to help revamp Italian label Salvatore Ferragamo.

It is inconceivable that the agreements recording these deals and the various other ones that unfold within the fashion industry would not include non-compete restrictions, as the use of non-compete restrictions in the fashion industry is commonplace – and unsurprising – given the fierce competition which exists between brands. To address the risk of competition either during or after the agreement in question ends, it is often the case that parties will agree that a non-compete restriction be included in the agreement.

But employment agreements are not the only place where non-compete restrictions come into play. Manufacturing and distribution deals – whether it Fendi and eyewear licensee Thélios’ recently-announced partnership for the design, development, production and distribution of the LVMH-owned brand’s eyewear category or Boohoo’s contract with Alshaya Group to operate its newly-acquired Debenhams stores and a local e-commerce platform in Kuwait, Saudi Arabia, UAE, Bahrain, Egypt, Oman and Qatar – similarly come with limitations that apply both during and after the parties go their separate ways.

While fashion deals are rife with limitation provisions, to what extent are the non-compete restrictions that entities across the fashion and luxury goods industries include in agreements actually effective, is a question worth asking, especially given that whether or not a non-compete restriction will be enforceable can be a somewhat hazy area of law that often depends on the nature of the relationship between the parties and the facts surrounding the specific underlying transaction. 

Generally speaking (and looking beyond the non-competes that correspond with individuals’ employment contracts), some of the most common non-competes come in the form of direct restrictions on entering into another collaboration with; taking a license from; and/or acting as an agent, distributor, or franchisee for certain named brands. Other non-competes will restrict a service provider in terms of its ability to act in the same market as the service recipient in respect of the same or similar goods or services; and its ability to solicit employees or customers of the paying party.

With the foregoing in mind, the first question to consider when seeking to include non-competes in agreements is whether the non-compete amounts to a restraint of trade. There is no specific threshold that can be used to evaluate whether a non-compete is or is not a restraint of trade, and where the line falls between coming within the restraint of trade doctrine is flexible. What does need to be considered, however, is whether the restriction is part and parcel of the underlying transaction so as to be considered acceptable and necessary. Various factors play a part in that assessment, including whether the restriction applies during the lifetime of the agreement or after it terminates, and whether the parties enjoyed equal bargaining power when putting in place the non-compete.

If the non-compete does amount to a restraint of trade, it must be “reasonable” in order to be legally enforceable. In order to assess the reasonableness of a restraint of trade, it is necessary to consider a few factors, including: (1) What interest is being protected by the non-compete and is it a valid interest; (2) Does the non-compete only go so far as to cover what is reasonable in order to protect that valid interest? This question in turn raises questions of geographical scope and the scope of the products or services covered by the non-compete, in addition to its duration. The bargaining power of the parties and whether the terms form part of a standard form non-negotiable agreement can also be relevant to the assessment; and (3) Whether the non-compete would be considered contrary to the public interest.

It is also important to bear in mind that not everyone’s objective in including a non-compete restriction in an agreement is for the non-compete to be enforceable. In contrast, it may be the case that a restriction is merely included: as a feint – a sacrificial pawn to be negotiated away; or for deterrent purposes. However, this highlights a critical issue with the drafting of non-competes. It is crucial that non-competes are drafted carefully and separately to other terms of the agreement (and separate to other restrictions if some of those restrictions are to apply during the term of the agreement and some are to apply post-termination). 

A party wanting to include a non-compete restriction in an agreement will want to avoid a situation in which other terms, or even the entire agreement, are found to be void because of an unenforceable non-compete. 

Three things to consider

Against that background, there are three key considerations to keep in mind. First, the breadth and specificity of the non-compete provision. To be in the best position as possible in terms of enforceability, the party seeking a non-compete should ensure that the non-compete is as narrow and specific to the underlying interest that it is seeking to protect as possible. This, of course, will need to be balanced against the need to impose the necessary restrictions so as to protect its commercial interest. Non-competes that apply during the term of the agreement are generally more acceptable than those that restrict a party’s commercial freedom following the ending of the relationship.

Second, duration. Restrictions must be limited both in terms of the length of time at issue, as well as in geographic scope. As distinct from other types of non-compete agreements, post-term non-compete clauses in distribution contracts, for instance, which are often found in agreements between businesses at different levels of the supply chain, generally need to be limited to five years during the term of the relevant agreement and one year following its expiry, under European Union law, subject to narrow exceptions and also certain conditions.

And finally, commercial agents and principals would be wise to give consideration to agency law, including, among other things, a time limit of two years for post-termination restraint of trade clauses.

Stephen Sidkin is a partner at Fox Williams, where he leads the firm’s commerce and technology department. 

Lucy Coffey is an associate at Fox Williams, where she advises on commercial contracts, performance management, termination events (including pre-litigation stage disagreements) and intellectual property license agreements. 

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