was made with a request for a certificate under Section 4(4) of the CompetitionAct, 1991 or, in the event of a refusal by the Competition Authority to issue a
certificate, a licence under Section 4(2), by Mr. Nallen and Mr. O'Toole,
Belmullet, on 21 November 191 in respect of an agreement to transfer a business
of intention to take a favourable decision was published in 'The Irish Times'
on 12 March 1992. There were no submissions from interested parties.
subject of notification
notification concerns an agreement between the vendor and the purchaser of an
interest in a business in which they had previously been partners. In the
agreement the vendor agrees, as part of the arrangements in selling his share
of the business to his partner, to refrain from engaging in the business
concerned for a specific period in a defined geographical area.
parties to the agreement are Mr. Thomas J. Nallen and Mr. Edward O'Toole who
had carried on business in partnership with one another in the town of
Belmullet, Co. Mayo.
products and services concerned
business carried on was the sale, repair and provision for rent of televisions,
video recorders and hi-fi equipment, commonly referred to in the electrical
trade as 'brown goods'. They also provided video films for rent and there was
particular emphasis on providing televisions, video recorders and video films
for rent. They were engaged in this business for a period of three years.
While in partnership both serviced the business more or less equally, with no
staff being employed, and they therefore both knew their customers and dealt
with them on a personal basis. They travelled around the area collecting rents
and had a premises in the town of Belmullet where they stored equipment,
carried out repair work and provided products for sale and rent. They dealt
with customers who were resident in the town of Belmullet or who lived in the
surrounding rural area.
market can be seen as sub-dividing into three elements, the sale of brown
goods, the provision of the same goods for rent, and the provision of video
tapes for rent. Consumers face a choice between buying and renting certain
brown electrical goods such as TVs and video recorders. The purchase of such
goods is a one-off transaction involving a substantial outlay for most
consumers. Renting may represent a more viable option for those unable to
undertake such a large outlay. The choice between purchasing and renting,
however, involves a choice between consuming different types of product. A
rental agreement includes repair and service of the goods. An individual who
purchases a TV or video recorder must purchase such services separately. Thus
the sale and rental of brown electrical goods constitute two separate but
related markets. The rental of video tapes is a third distinct market.
are three other undertakings carrying on the same business in Belmullet. The
four undertakings are each estimated to have a market share in the range of
twenty to thirty per cent. They deal in the same range of products and engage
in the same three function, i.e. sale, repair and rental, except that one
undertaking does not provide goods for rent. The list of licensed video rental
outlets in the office of the Film Censorship Board indicates that Mr. Nallen is
licensed in respect of two such outlets in Belmullet, Belmullet TV in Upper
Barrack Street and Video City in Main Street. In addition to Nallen/O'Toole,
one of the other undertakings is a relatively recent entrant to the market,
having replaced another undertaking which left the market. Consumers in the
area also have access to the same products and services in other towns close to
the area concerned, in Crossmolina, Ballina and Castlebar which are
respectively thirty one, thirty nine and forty seven miles from Belmullet.
Nallen and O'Toole did not have exclusive distribution rights with respect to
particular brands and did not confine themselves to dealing in particular
brands of products.
effect from 1 October, 1991, Mr. Nallen purchased Mr. O'Toole's interest in the
business. As part of the arrangements associated with the transfer of Mr.
O'Toole's interest to Mr. Nallen, the parties made the agreement, which is the
subject of this notification, on 1 November 1991.
the agreement, Mr. O'Toole undertook not to engage in the relevant business
within a radius of twenty miles of the town of Belmullet for a period of three
years commencing on 1 October, 1991. He would not directly or indirectly
solicit any such business from the public on his own behalf or on behalf of any
other party. Clause 3a of the Agreement states:-
O'Toole hereby undertakes and covenants with Mr. Nallen, that he will not, for
a period commencing on the 1st October, 1991, and terminating three years
thereafter, be engaged in the relevant business in any capacity whatsoever, and
without prejudice to the generality of the foregoing, that he shall not be
engaged, either as principal, partner, agent, servant, employee, director
(including shadow director) or otherwise howsoever, whether directly or
indirectly carry on, help, or assist in carrying on or be associated with the
relevant business within a radius of 20 (twenty) miles, of the town of
Belmullet, in the County of Mayo, and that during the same period, within the
same area, Mr. O'Toole shall not directly or indirectly solicit from the
public, any business connected with the relevant business, nor shall he solicit
or endeavour to obtain business for any other party, carrying on the same or
similar business in the same area, during the same period."
O'Toole also agreed to pay, by way of damages, specified sums of money to Mr.
Nallen in the event of any breach of the agreement by Mr. O'Toole.
O'Toole is now engaged in the repair and sale of general and specialist radio
and audio equipment, especially in connection with the fishing industry in the
Belmullet area, ship to shore radio, sonar, depth finders and the like. Mr.
Nallen and Mr. O'Toole consider that this does not compete with the relevant
business as defined in the agreement.
4(1) of the Competition Act states that 'all agreements between undertakings,
decisions by associations of undertakings and concerted practices which have as
their object or effect the prevention, restriction or distortion of competition
in trade in any goods or services in the State or in any part of the State are
prohibited and void'.
this is the first notification on which the Authority has taken a decision some
general outline of the Authority's views on Section 4(1) might be appropriate
at this stage. Both the European Commission and the Court of Justice have
decided against interpreting Article 85(1) literally. If Section 4(1) were to
be interpreted literally then virtually every form of business agreement could
be argued to prevent, restrict or distort competition because any agreement
effectively prohibits others from concluding the very same contract with the
original parties. Such an interpretation would render it virtually impossible
for business to operate.
present notification concerns arrangements whereby an individual has bought out
his former partner's interest in a business and is seeking to impose
restrictions designed to prevent his former partner setting up business in
competition with him for a period of time, by means of what may be best
described as a 'non-competition clause'. In deciding whether the agreement is
in breach of Section 4(1) of the Competition Act, the Authority first of all
examines its overall economic impact and then considers the specific question
of the non-competition clause.
Undertakings and the Agreement
3(1) of the Competition Act defines an undertaking as 'a person being an
individual, a body corporate or an unincorporated body of persons engaged for
gain in the production, supply or distribution of goods or the provision of a
service'. The Section explicitly states that individuals may come within the
definition of undertakings if they are 'engaged for gain in the production,
supply or distribution of goods or the provision of a service.'
to the conclusion of this agreement Mr. Nallen and Mr. O'Toole as business
partners were engaged for gain in the supply and distribution of goods, namely
televisions, videos and hi-fi equipment, and in the provision of a service,
namely the rental and repair of televisions and rental of video films in the
town of Belmullet and its environs. Having bought out Mr. O'Toole, Mr. Nallen
has continued to trade in the same business. Mr. O'Toole has continued in
business in his own right repairing and servicing radio, radar and navigation
equipment on fishing vessels.
European Commission has ruled on the definition of an undertaking in a number
of cases under Article 85(1) of the Treaty of Rome on which Section 4(1) is
word "undertaking" is a wide term which extends to almost any legal or natural
person carrying on activities of an economic or commercial nature including,
for example, limited companies, partnerships, trade associations, agricultural
co-operatives, sole traders and State Corporations. Whether the undertaking is
profit-making is immaterial, provided it carries out economic or commercial
Commission ruled in the Reuter/BASF case
that an individual could be regarded as an undertaking by virtue of engaging in
economic activity through firms which were under his control, by exploiting the
results of his own research and as commercial adviser to third parties.
Similarly in the Nutricia case
the Commission decided that individuals were undertakings by virtue of their
being the future proprietors of a business.
is a difference between Irish and EC legislation in that the Irish Act defines
an undertaking as being "engaged for gain". In practice, this appears to
differ very little from the EC view that an undertaking carries out economic or
Nallen and Mr. O'Toole were and are engaged for gain in the provision of
services and are therefore, undertakings within the meaning of Section 3 of the
Act. The arrangements notified to the Authority in this case are concerned
with the acquisition by Mr. Nallen of Mr. O'Toole's share in what had been a
jointly owned business and various undertakings given by Mr. O'Toole. The
arrangements constitute an agreement between undertakings which applies to a
part of the State.
Effects of the Agreement
present notifications involves an agreement between two quite small
undertakings. Following the Court of Justice decision in the Volk v. Vervaecke
the European Commission has taken the view that undertakings below a certain
size are not subject to the competition rules on the grounds that they cannot,
by virtue of their small size, be regarded as having any significant impact on
This 'de-minimis' provision was an administrative response to the Court's
decision in the Volk case that
agreement falls outside the scope of Article 85 when it has only an
insignificant effect on the markets, taking into account the weak position
which the persons have on the market of the product in question.'
is no provision in the Competition Act which would exclude small undertakings
from the provisions of the Act. Section 4(1) of the Act prohibits agreements,
decisions and concerted practices 'which have as their object or effect the
prevention, restriction or distortion of competition in trade in any goods or
services in the State or in any part of the State'. Given the size and
distribution of population in Ireland it is possible that a number of
relatively small undertakings could, by acting together, prevent, restrict or
distort competition in a part of the State. The exclusion of small
undertakings from the provisions of the Act could deny consumers in parts of
the State the protection against anti-competitive activities which the Act
provides. The present agreement cannot, therefore, be regarded a outside the
scope of the Act on the grounds that it concerns undertakings which are so
small that they cannot have any significant effect on competition.
are currently four undertakings engaged in the retailing and rental of brown
electrical goods in Belmullet. One of these, the ESB is a large State company
has a nationwide chain of stores retailing white and brown electrical goods.
Apart from the ESB, the undertakings concerned are also engaged in the rental
of brown electrical goods and of video films. Mr. Nallen operates a separate
video rental business in Belmullet. In many areas garages, grocers and various
other outlets compete in the market for video film rentals. The number of
competitors and the level of competition in the brown electrical goods market
in Belmullet will remain unchanged as a result of this agreement.
partnership arrangement between Mr. Nallen and Mr. O'Toole, which had ceased to
operate prior to the coming into force of the Competition Act, may itself have
reduced the number of competitors in the market. The Authority was not
concerned with examining the partnership agreement in this case and, to date no
partnership agreements have been notified to it. The Authority does not regard
as being in contravention of the Act. In certain circumstances, however,
partnership agreements may be in breach of Section 4(1) by virtue of certain
restrictive clauses contained in them.
the Authority is primarily concerned in this case with the market in the town
of Belmullet and its environs, competition is not confined to this area.
Traders based in Belmullet cannot prevent consumers from purchasing such goods
elsewhere. There are undertakings engaged in this business in a number of
nearby towns, namely; Crossmolina, Ballina and Castlebar. Many electrical
discount stores based in Dublin advertise the prices of such appliances
extensively in the national newspapers, so that there is no reason to suppose
that consumers would be ignorant of the prices pertaining elsewhere.
as pointed out, one of the undertakings located in Belmullet operates on a
nationwide basis. There is anecdotal evidence that consumers were in the past
prepared to travel long distances to avail of cheaper prices for such items in
Northern Ireland. An important consideration here is the fact that most of
these items are relatively expensive and constitute 'one-off' purchases for
households. It could not, for example, be reasonably argued that consumers in
Belmullet have the option of going to Dublin or elsewhere to purchase bread.
located in Belmullet may face less competition from suppliers outside the area
in the rental market as it may not be possible to rent brown electrical goods
from suppliers outside the area. While the ESB is not involved in the rental
of such goods it does sell them on attractive credit terms. It is claimed that
the purchase of electrical goods on such terms from the ESB represents an
alternative to renting for low income households and that there is some overlap
between the retail and rental market as a result.
European Commission has interpreted the term 'competition' to refer not only to
actual competition but also to potential competition.
In the case of joint ventures the Commission has stated that 'the degree of
potential competition depends largely on the nature of the product manufactured
or the services offered by the joint venture.
In general a restriction of competition arises if, in the absence of the
restriction, there would have been a real likelihood of the restricted party
engaging in the activity in question
The restraint placed on Mr. O'Toole by this agreement may be viewed as
preventing a new competitor from entering the market.
Commission view is in accord with modern economic theories of competition which
stress the importance of potential as opposed to actual competition in a
The main conclusion of such theories is that, provided it is relatively easy
for new competitors to enter and leave a market, this will be sufficient to
produce competitive behaviour within that market. As the US Federal Trade
Commission pointed out:
threat of new entry can be as potent a procompetitive force as its realisation.
threat of potential competition does not apply in all cases. Experience has
shown that some markets where such considerations were thought to apply and
which were thought to be 'contestable' are not in fact. The main advocates of
'contestability theory', as it is known in the economics literature, have
themselves indicated that 'before anyone can legitimately use the analysis to
infer that virtue reigns in some economic sector and that interference is
therefore unwarranted, that person must first provide evidence that the arena
in question is, in fact, highly contestable.
incumbent firms perceive that new entry is unlikely and act with disregard for
potential competitors, then it is not to the point that new entry is feasible.
It follows that if the threat of potential entry is sufficiently strong to
deter anti-competitive behaviour by undertakings in a particular market, the
existence of restrictive practices such as price fixing or market sharing is,
an indication that the threat of entry is unlikely or perceived to be unlikely
by existing firms, and that the market is therefore not a contestable one.
research has indicated that the prospect of entry is considerably reduced if
entry costs are high and it is believed that such costs will not be recovered
if a new entrant is forced to leave the market.
arguments would not apply were:
imposed by law or convention limited the scope for potential entry;
existed which would prevent a potential new entrant from obtaining supplies
required by them in order to enter the market.
costs of entry and the risk of losses entailed in having to withdraw from the
market effectively deterred potential new entrants;
behaviour of undertakings within the market indicated that they regarded the
threat of entry as unlikely.
the case of this agreement the Authority is concerned with the market for the
sale and rental of brown electrical goods and video films in the Belmullet
area. This is a market where there appear to be few if any barriers to entry.
There are no legal impediments which would prevent new competitors from
entering the market. Mr. Nallen has indicated that he does not have any
exclusive distribution rights over particular brands. The costs of entry would
appear to be relatively low. An undertaking need only rent relatively small
premises and purchase a limited number of appliances for sale or rental. The
bulk of such costs could be recouped relatively easily by selling the
appliances somewhere else, so that the risk of suffering a major loss through
having to withdraw from the market is slight.
would appear therefore that anyone who wants to could enter this market
relatively easily. Such a view of the business is supported by frequent
references in trade journals complaining about the constant inflow of new
entrants who are alleged to undermine the position of incumbent undertakings
The only apparent reason why additional competitors have not entered the market
in Belmullet is that it is already regarded as operating competitively, and
there is perceived to be no scope for a new competitor to enter the market by
undercutting those already there. One undertaking has ceased to operate in
Belmullet within the past three years, but it has been replaced by a new entrant.
agreement will have no effect on the actual level of competition within the
market as the number of competitors in Belmullet and adjacent towns will not be
affected. The exclusion of Mr. O'Toole may appear to involve some reduction of
potential competition but only for a limited period. Indeed the longer term
effect may be to increase the level of competition in the market if Mr. O'Toole
decides to re-enter the business in his own right at the end of three years.
In the absence of barriers to other new entrants the agreement cannot be
regarded as having any real effect on competition in this market.
Authority now turns to the specific issue of the
clause which is a key element of the present agreement. There are a series of
EC cases dealing with similar agreements under Article 85(1)
The Commission view, which has been confirmed by the European Court of Justice,
is that arrangements of this type are essential to secure the transfer of the
goodwill of a business to a new owner. They are regarded as not involving any
restriction on competition but as essential to allow the full transfer of
ownership, provided their duration and extent is only that which is necessary
to secure the full transfer of the goodwill. If an agreement satisfies these
criteria it has been found not to be in breach of Article 85(1).
the Nutricia and Reuter/BASF cases the Commission ruled that the agreements
were in breach of Article 85(1) of the Treaty of Rome. The Commission decision
was, however, based on the view that the duration of the non-competition clause
was longer than was necessary for the proper transfer of the goodwill of the
business to the new owner. It is clear from both decisions that a shorter
non-competition clause would have been acceptable. Indeed in the Nutricia
case, although the agreements had operated since 1979, the Commission ruled
that the infringement only dated from 1983, four years after the agreement came
into effect. The Commission decision in this case was upheld by the Court of
Justice. In the Mecaniver-PPG case the Commission granted a negative clearance
to the agreement for a specified period of time.
is clear from the Commission's decisions that the length of time necessary for
the full transfer of the goodwill of a business will vary from industry to
general, the assessment under Article 85(1) of the non-competition obligations
imposed on sellers of businesses will depend on the particular circumstances of
each individual case and no universal rule can therefore be established as to
the permissible duration of such clauses.'
what may be regarded as a reasonable length of time for a non-competition
clause in one case may be regarded as excessive in another. In the former case
such a clause would not be regarded as a breach of Article 85(1) whereas in the
latter it would.
the absence of circumstances which deviate greatly from those in the
Reuter/BASF or Nutricia cases, these decisions, however, indicate as [a]
general guide that where the transfer of a business also involves the transfer
of good-will and know-how, a period of approximately five years will normally
be acceptable, whereas a period of approximately two years will normally apply
if the sale involves only the transfer of good-will.
the Nutricia case the Commission indicated that among the factors to be taken
into account in evaluating the duration of such clauses were:
frequently consumers in the relevant market change brands and type (in relation
to the degree of brand loyalty shown by them),
how long, after the sale of the business, the seller, without a restrictive
clause, would be able to make a successful comeback to the market and regain
his old customers.
European Commission also decided in the Nutricia case that:
geographical scope of a non-competition clause also has to be limited to the
extend which is objectively necessary to achieve the aforementioned goal. As a
rule, it should therefore only cover the markets where the products concerned
were manufacture or sold at the time of the agreements.'
view that such arrangements are essential in order to secure the transfer of
the goodwill of a business and that they do not, therefore, involve a
restriction of competition, appears to be well established under both US
competition law and common law in the UK and Ireland. Such a view has
prevailed in the US for almost one hundred years, following the decision of
Judge Taft in the Addyston Pipe case which stated that:
was equally for the good of the public and trade, when partners dissolved, and
one took the business, or they divided the business, that each partner might
bind himself not to do anything in trade thereafter which would derogate from
his grant of the interest conveyed to his former partner. Again, when two men
became partners in a business, although their union might reduce competition,
this effect was only an incident to the main purpose of a union of their
capital, enterprise, and energy to carry on a successful business, and one
useful to the community ....... For the reasons given, then, covenants in
partial restraint of trade are generally upheld as valid.'
EC competition rules are themselves based on US antitrust legislation.
courts in Ireland and the UK have tended to take a favourable view of restraint
clauses of this nature in the past. Such views were based on common law rather
than competition legislation.
purchaser of a business can restrict the seller from engaging in similar
enterprises in the future. The need to impose such a restriction is accepted
by the courts because the proprietary interest in the goodwill of the business
may be worthy of protection. But such restrictions will not be upheld should
they be deemed to be wider than are reasonably necessary for that protection.'
deciding whether the restraint imposed is reasonable, the courts have regarded
two factors as particularly relevant. Firstly the buyer must establish a
proprietary interest which the clause is seeking to protect. Secondly the
clause must be reasonable in the light of all the circumstances of the case.
In this respect the restraint must not go further than reasonably necessary for
the protection of the purchaser's interest in point of space, time or
is therefore widely recognised in competition law in other countries and in our
common law that some restraint on a party disposing of all or part of his
interest in a business is essential for the proper transfer of the goodwill of
the business to take place, and that without the transfer of such goodwill, the
transfer of ownership would be incomplete. Without such a restraint no proper
transfer of goodwill could take place. The Authority agrees with this view.
The restraint must, however, be limited in terms of its duration, geographical
coverage and subject matter to that which is necessary to secure the adequate
transfer of the goodwill. Provided this is the case, then clearly the
intention of such a restraint is not to restrict competition in the market in
restraint on Mr. O'Toole in this agreement is for a period of three years,
although the agreement involves a transfer of goodwill only. While the
Authority would tend to agree at this stage with the EC view that a period of
two years would generally be sufficient for the complete transfer of the
goodwill of a business, it believes that a longer period is justified in this
case. Consumers tend to purchase the products in question infrequently. In
addition, in this case, close personal contact with customers was a major
factor in the business. This is a small rural community where most consumers
would know, or at least know of, Mr. O'Toole as someone engaged in the
particular business. In addition, Mr. O'Toole is still active in business
within the area. For these reasons it would appear that the period specified
in the agreement is no more than is required to secure the complete transfer of
this case the restraint applies to an area with a radius of 20 miles from the
town of Belmullet and appears to correspond to the area within which Mr. Nallen
and Mr. O'Toole previously carried on their business. Finally the restriction
applies only to the lines of business in which Mr. O'Toole was previously
engaged in a partnership with Mr. Nallen. The restrictions involved are no
more than are necessary to ensure the adequate transfer of the goodwill of the
business to Mr. Nallen and on those grounds are not in breach of Section 4(1)
of the Competition Act.
Nallen and Mr. O'Toole are undertakings within the meaning of Section 3 of the
Competition Act and the arrangements in question constitute an agreement which
applies within a part of the State.
Authority believes that in this case the agreement cannot be said to prevent,
restrict or distort competition as it involves no reduction in the number of
actual competitors in the market in question, and does not reduce the threat of
potential competition within this market.
any case, on the specific issue of the non-competition clause, which is at the
heart of this agreement, the Authority believes that such a clause is essential
in the event of the sale of a business for the transfer of the goodwill of the
business to the purchaser. Without such a restraint the purchaser could not be
sure of obtaining all of the goodwill of the business for which he had paid and
the seller would be unable to benefit by disposing of his share in a business
which he had helped to build up. In the Authority's view therefore, such a
clause is not in breach of Section 4(1) of the Competition Act provided that
the restrictions contained in such a clause or clauses are limited in terms of
time, geographical coverage and subject matter to those which are necessary to
secure the adequate transfer of the goodwill. The Authority believes that the
present agreement between Mr. Nallen and Mr. O'Toole satisfies these criteria
and that it does not offend against Section 4(1) of the Competition Act, 1991.
Competition Authority has issued the following certificate:
Competition Authority certifies that in its opinion, on the basis of the facts
in its possession, the agreement for the transfer of a business interest
between Mr. Nallen and Mr. O'Toole of Belmullet, notified under Section 7, does
not offend against Section 4(1) of the Competition Act, 1991.
the Competition Authority
[ ]1 See
C. Bellamy and G. Child (1987); 'Common Market Law of Competition', 3rd
edition, Sweet and Maxwell, London, para. 2-003.
[ ]2 Case
No. 76/743/EEC (OJ L254, 17.9.76, p. 40).
[ ]3 Nutricia/de
Rooij and Nutricia/Zuid Hollandse Conservenfabriek, case no. 83/670/EEC (OJ
L376, 31.12.83, p. 22).
[ ]5 Notice
on agreements of minor importance, 1986 (OJ C231, 12.9.86, p.2).
[ ]6 This
view is consistent with that expressed in the European Commission's notice on
Agreements of Minor Importance that where the cost of transport is expensive
relative to the value of the product this would tend to reduce the geographic
extent of the market.
[ ]7 On
this point see I. Van Bael and J.F. Bellis (1990); 'Competition Law of the
EEC', 2nd edition, CCH Editions Limited, para. 216.
[ ]8 European
Commission (1983); 'Thirteenth Report on Competition Policy', para. 55.
[ ]12 See
W.J. Baumol and R.D. Willig, 'Contestability: Developments Since the Book' in
D.J. Morris, P.J.N. Sinclair, M.D.E. Slater and J.S. Vickers (eds.), 'Strategic
Behaviour and Industrial Competition', Oxford University Press, 1986.
[ ]13 Reuter/BASF,
Nutricia/de Rooij and Nutricia/Zuid Hollandse Conservenfabriek, and
Mecaniver-PPG (85/78/EEC) (OJ L35, 7.2.85, p. 54). The European Court of
Justice dealt with an appeal in the Nutricia case, see Remia BV and Others v
European Commission, Case 42/84,  ECR 2545.
[ ]14 European
Community (1983); 'Thirteenth Report on Competition Policy', para. 88.
[ ]15 European
Commission (1983); 'Thirteenth Report on Competition Policy', para. 88.
[ ]16 United
States v. Addyston Pipe & Steel Company et. al., 1898. See W. Breit and K.
Elzinga (1989); 'The Antitrust Casebook: Milestones in Economic Regulation',
2nd edition, Dryden Press, New York, pp. 17-23.
[ ]17 B.
Doolan (1989); 'A Casebook of Irish Contract Law', p. 254. See also the
decision of Costello J. in the case of John Orr Ltd. v Orr, High Court 1987.
[ ]18 See
E. McKendrick (1990); 'Contract Law', Macmillan, London.