Restrictions on competition through prohibitive non-compete clauses have become par for the course in most commercial agreements. These clauses are designed to protect the business interests of the party or parties, as the case may be, and corporates do indeed get very creative and the non-compete often becomes the subject of a thorough and substantial redline, especially between businesses involved in a similar vertical.
While all contractual rights are primarily dependent on the parties' mutual understanding, the exception to Section 27 of the Indian Contracts Act, 18721, delineates the extent to which businesses may be subjected to restrictions under a contract. Any restriction sought to be imposed on another entity's operations has to be reasonable, with specific regard to the nature of the business. It is but apparent that such concerns come into greater focus during transactions involving mergers & acquisitions (M&A). M&A in India is broadly scrutinised by a few regulatory authorities, with one such authority being the Competition Commission of India (“CCI“) and since it is the CCI's role to keep anti-competitive practices in check, non-compete clauses are one of the express parameters to which it pays close attention in any purported transaction or combination.
To that end, the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (“Combination Regulations“)2 contained a provision for reporting any non-compete obligations under the proposed combinations, including details on the duration and scope (in terms of persons, products/services and territories), along with a requirement of justification for the same3. However, the CCI invited public comments regarding the examination of non-compete restrictions of combinations on May 15, 20204. The notice made reference to the guidance note, which was issued by the CCI in 2017 (“Guidance Note“)5 and observed that a general set of standards for assessment of non-compete restrictions may not be appropriate in modern business environments. It further stated that doing away with such requirement would impart a certain flexibility to the parties in determining non-compete restrictions. Therefore, pursuant to the same, the obligation to furnish non-compete obligations has been omitted, by way of an amendment dated November 26, 2020, to the Combination Regulations (“Amendment“). It is, however, pertinent to note that the CCI is nowhere stating that non-compete clauses would cease to form part of the assessment pursuant to the Amendment.
Prior to the Guidance Note, as discussed below, the CCI first dealt with the ambit of anti-competitive elements of non-compete restrictions in Orchid Chemicals6, wherein it opined that non-compete obligations, if deemed necessary to be incorporated, must be reasonable, so as to ensure that such obligations do not result in an appreciable adverse effect on competition. The CCI reiterated the same position in later cases, including in Mylan Inc7. In Mylan Inc, it further observed that the non-compete covenant should only cover those products which are either being presently manufactured/sold or are under development by the target enterprises8. However, owing to the uncertainty surrounding the non-compete obligations, the CCI thereafter issued the Guidance Note.
Since the Amendment effectively shifts the onus of ensuring that the non-compete arrangements are competition compliant over to the parties from the CCI, it is beneficial to analyse the standards enshrined in the Guidance Note which were utilised to define the scope of the non-compete clauses for the purpose of competition compliance. At the outset, the Guidance Note stated that only those restrictions would be deemed to follow the CCI's guidance where such restrictions are directly related and necessary to the implementation of the combination. In the event the non-compete clause did not adhere to the principles set out in the Guidance Note, it would be simply be declared ‘non-ancillary' in the eventual CCI order. Paragraph 5 of the Guidance Note stated that for a restriction to be ‘directly related', it must be connected and closely linked to the combination, but ancillary or subordinate to its main object. On the point of necessity, the Guidance Note elaborated that a restriction would be necessary if in the absence of the same, the combination could not be implemented or could only be implemented under more uncertain conditions and with considerably higher difficulty. Further, the Guidance Note also clearly laid down the principles for determining the necessity and proportionality of any non-compete restriction by taking into account: (i) the duration; (ii) subject matter; (iii) geographic field of the application; and (iv) scope of application, with due regard to the nature of the business9. The Guidance Note has however reiterated that a ‘non-ancillary' remark on the CCI order, while implying that the non-compete restriction does not align with the Guidance Note, would not lead to a presumption that such restriction is in contravention of the provisions of Competition Act, 2002 (“Act“).
The Amendment has removed the safety nets, having vested the responsibility of drafting a balanced non-compete clause in the hands of the parties, and it will be up to them to self-assess whether a certain clause would fall foul of the Act. That said, the Amendment has been welcomed as a progressive step towards lending commercial parties more autonomy in their transactions.
3 Paragraph 5.7, Schedule II, From I, Combination Regulations 2011
6 Combination Registration No. C-2012/09/79, https://www.cci.gov.in/sites/default/files/C-2012-09-79_0.pdf
7 Combination Registration No. C-2013/04/116, https://www.cci.gov.in/sites/default/files/C-2013-04-116%281%29.pdf
8 Paragraph 20, ibid
9 Paragraph 6, Guidance Note
Originally Published by Obhan & Associates, January 2021
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