Exclusivity and non-compete clauses

An exclusivity clause is the provision by which a party undertakes to contract only with its counterparty, or not to exploit a right for the benefit of third parties, in a given territory or for given products. A non-compete clause is closely related and prohibits a party from carrying on a competing activity during the agreement or after it ends. Both are common in licence, franchise and distribution agreements, and are governed by Articles L. 330-1 and L. 341-2 of the French Commercial Code and by Regulation (EU) 2022/720 on vertical agreements.

Exclusivity in intellectual property agreements

Under an exclusive licence, the licensor undertakes not to grant other licences in the licensed territory and, depending on the terms of the agreement, not to exploit itself. Exclusivity usually has a counterpart, the licensee’s obligation to exploit effectively and to pay a guaranteed minimum. Article L. 330-1 of the Commercial Code limits to ten years the validity of any exclusivity clause by which the buyer or lessee undertakes not to obtain supplies from other suppliers, a rule that affects franchise and distribution networks in particular. Beyond that period, the clause ceases to have effect without the agreement itself being void.

Non-competition during and after the agreement

Non-competition during performance of the agreement is inherent in many relationships, notably franchising, where it protects the know-how. Post-contractual non-competition is more strictly regulated. Under the general law, it must be limited in time and space and proportionate to the legitimate interests it protects. Article L. 341-2 of the Commercial Code adds, for distribution networks, that it is valid only if it concerns goods or services competing with those covered by the agreement, is limited to the premises from which the business was carried on, is indispensable to protect substantial, specific and secret know-how, and does not exceed one year. These requirements reflect those of Article 5 of Regulation (EU) 2022/720, which also excludes from the exemption any non-compete obligation during the agreement that is indefinite or exceeds five years.

Limits under competition law and employment law

Absolute territorial exclusivity, which would prohibit the licensee or distributor from making any passive sales outside its territory, is a hardcore restriction and exposes the agreement to nullity. Exclusivities granted by a dominant undertaking are examined as possible abuse. In an employment contract, a non-compete clause is subject to its own regime and is valid only if it is limited, justified by the company’s interests and accompanied by financial compensation, which bears directly on the mobility of employees who hold trade secrets.

Key points

Exclusivity and non-compete clauses are lawful where they are limited in time, space and subject matter and proportionate to a legitimate interest, in particular the protection of know-how. In networks, supply exclusivity is capped at ten years and post-contractual non-competition at one year. Check each clause against Regulation (EU) 2022/720 and, for employees, the existence of financial compensation.

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This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats is a patent litigation firm. Matters outside that field, such as trade marks, designs, copyright and IT contracts, are handled by practitioners the firm works with regularly, and by the firm itself when they arise in a patent dispute.

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