Non-competition clauses in the Dominican Republic: how to protect your investment and avoid legal risks

In the complex world of corporate transactions and long-term commercial agreements, ancillary restraints—such as non-compete clauses—are a fundamental tool. They apply both to mergers and acquisitions (including the purchase of shares or equity interests, the purchase of assets or production units, and the transfer of goodwill) and to vertical relationships (exclusive distribution, franchising, brand or technology licensing).

Its purpose is clear: to protect the value invested—goodwill, know-how, customer base, assets, infrastructure, and intellectual property—by preventing appropriation or misappropriation, free-riding on the investment, misuse of confidential information and know-how, opportunistic re-entry by the seller, and channel blocking that erodes brand value.

Sale of a business

Imagine purchasing a local food brand with its own recipes, loyal suppliers, and shelf space in supermarkets. Without a non-competition clause or agreement, which would prevent the seller from participating in the same market for a certain period of time, the seller could simply open another plant a few blocks away, replicate the formulas, call the same buyers, and take the customers away, leaving the buyer with an empty label.

Here, the clause acts as a dam: it contains the flow of reputation, sales channels, clientele, relationships, and know-how that you acquired with the purchase of the asset.

Exclusive distribution agreements

Let's consider a European cosmetics company that enters the Dominican Republic market through an exclusive distributor. The brand invests capital and years of work in advertising, promotions, and securing strategic spaces—shelves, planograms, and pharmacy chains—to build prestige and trust.

Now, what prevents that distributor, taking advantage of the reputation that the brand has built, from promoting rival lines or its own brand, diverting customers, and blocking access to those sales channels? Without a non-competition clause, that risk is real: the distributor turns the brand's investment into its own competitive advantage.

The danger is multiplied if the agreement is covered by Law 173-66, which protects the local distributor. In that scenario, a proportional non-competition clause is not just a commercial safeguard: it is an indispensable legal shield to protect the investment. Without proportionate ancillary restrictions—a short fence, limited in time, product, and territory—the effort and capital invested can evaporate in a short time.

Despite its benefits, in the world of competition law, the lock that secures your investment can become a shackle that stifles competition. This article will guide you through the principles that define the fine line between legitimate protection and anti-competitive behavior.

The Pillars of Analysis: Accessory Nature and Proportionality

The validity of a non-compete clause is based on two universal principles.

• Real Accessoriness: The restriction must be directly linked to the main transaction. Its sole justification is to protect the value of the business, not to eliminate competition in general.
• Necessary Proportionality: The prohibition must be the minimum effective restriction to achieve its objective. This is strictly evaluated in three dimensions:
  • Time: The timeframe must be reasonable, linked to the nature of the assets transferred or the type of business.
  • Geographical and Product Scope: The prohibition must be limited to the products and services and the territory where the company operated.
  • Subjects: Should only apply to parties directly involved, allowing passive investment without influence (e.g., ≤ 5%).

Global Analysis: Incidental Restrictions and the Rule of Reason

Competition law is governed by the Rule of Reason, which assesses whether the pro-competitive effects of an agreement outweigh the anti-competitive effects. This doctrine, based on the principle of ancillary restraints (established in the landmark U.S. case U.S. v. Addyston Pipe & Steel Co., and later reinforced in non-price vertical agreements by GTE Sylvania), clearly distinguishes between a legitimate restraint and an illegal agreement.

The line is drawn strictly: agreements that are considered harmful are presumed to be illegal per se (by object). Clear examples are price fixing or customer allocation. These criteria, with their nuances, are used in different jurisdictions in the field of competition law globally.

The Rule of Reason and Non-Competition Agreements

The legality of non-compete agreements is analyzed under different criteria depending on the jurisdiction, but they all have a similar basis. In the United States, the jurisdiction that gave rise to competition law with the enactment of the Sherman Act, the Rule of Reason is used, which validates a restriction if its pro-competitive benefits outweigh the harm to competition.

In the European Union, the basis is Article 101 of the Treaty on the Functioning of the European Union (TFEU), which evaluates agreements based on their purpose or anti-competitive effects.

In both systems, the fundamental principle is that of ancillary restraint: a non-compete clause is only legal if it is necessary and proportionate to a legitimate main transaction, such as the sale of a business.

Analysis by jurisdiction

Below, we detail how this criterion is applied in different jurisdictions, focusing on deadlines and legal practice.

United States

• Criterion: The validity of a clause depends on its reasonableness. There are no strict federal deadlines. Courts analyze each agreement based on its duration, geographic scope, and purpose. It is important to note that there are significant differences in state law, especially in labor contracts, although the exception for the sale of businesses is common.
• Practical Terms: In the sale of a business, the guiding practice is that courts tend to accept non-compete clauses of 2 to 3 years. In some specific cases, terms of up to 4 or 5 years have been validated when the scope is very limited.

European Community

• Criterion: The restriction must be ancillary to the main agreement, which means that it must be necessary and proportionate. The assessment is carried out under Article 101 TFEU.
• Regulatory Deadlines: Sale and purchase of businesses: Communication 2005/C 56/03 establishes safe periods of 2 years (if only goodwill is transferred) and 3 years (if know-how is included). In vertical agreements: Regulation VBER 2022/720 allows for non-competition for up to 5 years, but this is conditional on the market share of none of the parties exceeding 30%. In addition, post-term non-competition is only allowed for up to 1 year and only to protect know-how.

Ibero-American countries

• Criterion: Competition authorities in the region, such as INDECOPI in Peru and the Superintendency of Industry and Commerce (SIC) in Colombia, analyze non-competition agreements on a case-by-case basis based on the nexus, necessity, and proportionality of the agreement. This analysis is based on general competition laws (such as the Law on the Suppression of Anti-Competitive Conduct in Peru) and is developed through administrative resolutions and doctrinal guidelines issued by the authorities themselves in their rulings on specific cases.
• Approximate Timeframes: Although there are no fixed timeframes in the regulations, practice and doctrine have established 2 to 3 years as a reasonable standard for the sale of businesses.

The Legal System in the Dominican Republic: Law 42-08 and Ancillary Restrictions

In the Dominican Republic, the validity of a non-competition clause is analyzed under the criteria of Article 7 of the General Law on Competition Defense (Law 42-08).

In this context, Article 5 of the aforementioned law prohibits cartels, i.e., agreements whose purpose is to fix prices, divide markets, limit production and marketing of goods, among others. However, the aforementioned Article 7, in accordance with international standards, establishes that the conduct listed in Article 5 shall be prohibited, unless it is ancillary or complementary to an agreed integration or association that has been adopted to achieve greater efficiency in productive activity or to promote innovation or productive investment.

The Implementing Regulations of the Competition Act (Decree 252-20) complement this criterion, requiring that efficiencies be necessary, passable on to consumers, and that the clause not eliminate effective competition.

De minimis rule in the assessment of non-competition clauses: thresholds and exceptions

A fundamental principle in the context of non-competition clauses is the de minimis criterion. This establishes that an agreement will not be evaluated as irrelevant if its impact on the market is so small that it does not represent a real threat to competition. It is a way of recognizing that not all restrictive agreements have an appreciable effect.

Key thresholds and exceptions

To determine whether a transaction is "too small" to be sanctioned, competition authorities use market share thresholds. For example, the European Commission, in its Notice on agreements of minor importance (Notice 2014/C 291/01), sets the following limits:

• 10% combined market share if the companies are direct competitors (horizontal agreement).
• 15% combined market share if the companies are at different levels of the production chain (vertical agreement).
• 5% market share if there are networks of similar agreements covering more than 50% of the market.

The notice also includes a tolerance of 2 percentage points for two years if the thresholds are slightly exceeded. However, there is a golden rule: the de minimis criterion does not apply to agreements that are illegal by their nature, such as price fixing, market sharing, or bid rigging. A cartel is always a crime, regardless of the size of the companies involved.

Judicial control vs. administrative sanction

It should be noted that ProCompetencia's sanctioning power is independent of the judicial process. If a non-competition clause is not considered unreasonable, given its limited impact on the relevant market, this does not prevent the competent jurisdiction (for example, a civil judge or a labor judge, etc.), in the context of a dispute between parties, from declaring it null and void or reducing its scope, based on criteria such as violations of the fundamental right to work, free enterprise, etc., guaranteed by the Constitution.

Practical Examples of Non-Competition Agreements in the Dominican Context