COMPETITION AUTHORITY

Competition Authority Decision of 14 September 1992 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/1/92 ‑ Phil Fortune/Budget Travel Limited

Decision No. 9

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Competition Authority Decision of 14 September 1992 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/1/92 ‑ Phil Fortune and Budget Travel Limited

Decision No. 9

Introduction

1.	An agreement for the sale by Budget Travel Limited of their shares in Budget Travel Schools Abroad Limited (hereinafter referred to as BTSA) to Phil Fortune, a former  employee of BTSA, was notified to the Competition Authority on 17 January, 1992 for the purposes of obtaining a licence under Section 4(2) of the Competition Act, 1991.  It was subsequently stated by the Company that "if the Authority considers that it is in a position to issue a certificate that the agreement in this instance does not offend against sub‑section 4(1) of the Competition Act, 1991, we are more than satisfied to accept such a certificate."

2.	Notice of intention to take a favourable decision was published in the Irish Times on 24 July, 1992.  No submissions were received from interested parties.

The Facts

The Subject of the Notification

3.	This decision concerns the transfer of ownership of BTSA from Budget Travel Ltd. to Phil Fortune, an employee of BTSA up to the time of the agreement.  The sale of business agreement includes a non competition clause.

The Parties Concerned

4.	The vendor, Budget Travel Limited, is a subsidiary of the UK publicly quoted Granada group.  It is one of the largest tour operators and travel agents in Ireland.  Budget Travel Ltd. has been in operation since 1975.  It acquired the Aer Lingus Holiday travel companies at the end of 1990.

5.	The purchaser, Phil Fortune, was a senior employee in BTSA up to the time of the agreement.

6.	BTSA is the subject of the agreement.  The company organises overseas tours for school and adult groups.  It has six employees.  Prior to the agreement Budget Travel Ltd. owned the entire issued share capital of BTSA. 

The Products

7.	The service provided by BTSA involves organising accommodation as well as travel arrangements directly with carriers and hotels and through various agents for groups (10 or more people) wishing to travel abroad.

The Market

8.	The Irish holiday travel industry is estimated to cater for 250,000 people travelling abroad each year.  The majority of such travellers avail of an inclusive tour package marketed by a tour operator or travel agent which relieves them of the burden of arranging the many details associated with going on a foreign holiday.  Tour operators pre‑book airline flights and accommodation at 'sun holiday' destinations and then attempt to sell these as 'package holidays'.  Package holidays normally cater for individuals or small family groups.  The service provided by BTSA is for groups of 10 or more people.  Many of these would be school groups.  Normally such a group will approach the tour operator and ask them to arrange a group tour, perhaps indicating particular extras.  Generally such tours do not go to 'sun holiday' locations and such groups do not go on 'package holidays'.  The services offered by BTSA are the arranging of tours to meet the requirements of the specific groups.  Accordingly, the market in which BTSA is involved ‑ the market for group tours ‑ is a niche market within the overall holiday travel industry.  It is a separate and distinct market from the overall holiday travel market.

9.	The market for group tours in which BTSA is active caters for between 20,000 and 25,000 passengers per year.  BTSA has a substantial share of this market.  Its main competitors are Student and Group Travel Limited, Group and Educational Travel Limited, Funtrek and Campotel.

The Agreement

10.	The agreement for the sale and purchase of BTSA was made on 7 November, 1991.  Under the agreement, Budget Travel Ltd. agreed to sell BTSA to Phil Fortune and to accept a number of restrictions on their future activity in the market for group tours.  Specifically, Budget Travel Ltd. gave undertakings in Clause 13(b) of the Agreement not to:

(i)	For a period of two years from Completion be directly or indirectly interested or concerned in or assist in carrying on any business, undertaking, company or firm actively marketing, promoting, or selling, tours or holidays catering for school or academic institutions, PROVIDED ALWAYS that nothing in this clause shall prevent the Vendor from accepting group bookings from school and other academic institutions for holidays the nature of which the Vendor presently promotes, or
 
(ii)	For a period of four years from Completion either on their own or each of their own account or on behalf of any person, firm or company solicit the employment of or enter into partnership with or appoint as consultant any person who is at Completion or who has within the six months prior to Completion [been] an officer or employee of the company or,

(iii)	At any time hereafter make use of or disclose or divulge to any third party any information of a secret or confidential nature relating to the business of the Company.

Submissions of the parties

11.	Phil Fortune was asked to justify the restrictions in Clause 13 (b) of the agreement.

12.	In relation to 13(b)(i), Phil Fortune submitted that it was "entirely justifiable" because it has as its objective "only the transfer of the entire worth of the company".  In addition, the purchaser stated that the ambit of this clause was justifiable "on the grounds that unless such a clause was included in the manner in which same is now included it would be possible for the Vendor to establish a Company either in Northern Ireland or England and retain Sales Persons on a commission or other basis in this jurisdiction to compete directly" with BTSA.

13.	The restriction in 13(b)(ii) was justified by Phil Fortune on the following basis:

	"In order for the Company to succeed, the Company must retain its qualified and trained staff, who constitute one of its principal assets.  The restriction imposed by Clause 13(b)(ii) merely prevents the Vendor Company "soliciting" the employment of certain officers or employees of the Company.  We submit that the restrictions imposed by this clause are justified by Section 4 of the Competition Act 1991, on the same grounds as Vendor and Purchaser covenants are justified in European law, in that same are "essential to the preservation of the transferred worth of the undertaking".  The only rationale behind the "four year" and "two year" terms is that same were so negotiated between the parties."

14.	Following discussions with the Authority, Phil Fortune agreed by letter dated 22 June, 1992, to accept a lesser period of three years for the duration of this clause.

15.	The case advanced by Phil Fortune in support of 13(b)(iii) was as follows:

	"Clause 13(b)(iii) of the Agreement is entirely justifiable on the same grounds as the earlier paragraphs of this clause, namely that they have as their objective only the transfer of the entire worth of the company.  We respectfully submit that it is inconceivable that a vendor of shares in a company should be permitted, after the sale thereof, to disclose business information of a secret or confidential nature to any third party.  Such disclosure would undoubtedly undermine the present stability and future viability of the company.".

16.	Phil Fortune also gave an indication of the type of information that was meant to be covered by the Clause:

	"..it is clear that information pertaining to the business operated by Budget Travel Schools Abroad Limited, relating, for example, to that company's profits, margins, turnover, overheads and other financial information not in the public domain, must be covered by such expressions.  On the other hand, information which is clearly in the public domain, such as accounts disclosed pursuant to the Companies Act, prices and locations disclosed in brochures and other literature, are clearly not included in the aforementioned expressions.".

17.	In a letter dated 22 June, 1992, Phil Fortune stated that "she will not use or attempt to use this clause in any manner which would prevent the Vendor re‑entering the market after the period provided by Clause 13(b)(i) has expired".

Assessment

(a)	Section 4(1)

18.	Section 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'.

(b)	The Undertakings and the Agreement

19.	The Authority is concerned with an agreement between Phil Fortune and Budget Travel Ltd.  Section 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.'

20.	Budget Travel Ltd. is a subsidiary of the U.K. publicly quoted Granada group.  It acts as a tour operator on the Irish market and is clearly an undertaking within the meaning of Section 3 of the Act.  Prior to this agreement Budget Travel Ltd. was the owner of BTSA.

21.	Phil Fortune, a former employee of BTSA, has bought the company  from Budget Travel Ltd.  Section 3 of the Act 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.'

22.	The Competition Authority has decided in previous cases that individuals who either own or control a business are undertakings for the purposes of the Act provided they are engaged for gain in the production, supply and distribution of goods and services through the firms which they control.

23.	In this respect the Authority has followed the approach taken by the European Commission which has ruled in a number of cases under Article 85(1) of the Treaty of Rome, on which Section 4(1) of the Act is based, that individuals can be undertakings in certain circumstances.  In the Nutricia case the Commission decided, and the European Court of Justice agreed, that individuals were undertakings by virtue of their being the future proprietors of a business.  This ruling is of particular relevance to the present agreement as Phil Fortune became the owner of BTSA under the agreement.

24.	For the reasons detailed above, Budget Travel Ltd. and Phil Fortune are considered to be undertakings within the meaning of Section 4(1) of the Act.  The present arrangements constitute an agreement between undertakings which applies within the State as both parties to the agreement operate within the State.

(c)	Effect of the Arrangements

(i)	The Sale Agreement

25.	The arrangements notified are essentially concerned with the transfer of ownership of BTSA from Budget Travel to Phil Fortune, a former manager in BTSA.  BTSA specialise in organising tours for school and adult groups.

26.	In a previous decision, the Authority indicated that an agreement for the sale and purchase of a business may come within the scope of Section 4(1) of the Competition Act.  The present agreement involves the purchase of a business by an individual who was previously an employee of that business.  The purchaser was not, therefore, in competition with the business concerned prior to this agreement, and the sale of the business of itself cannot, therefore, prevent, restrict or distort competition within the State or any part of the State and does not offend against Section 4(1).  It is possible that competition may become more intense if Budget Travel Ltd. decide to re‑enter the market when the restriction on their participation in it expires.

(ii)	Restraints on Competition

27.	The agreement contains a number of provisions which may be described as non‑competition clauses.  These are contained in Clause 13(b) of the agreement.  In this Clause Budget Travel Ltd. gives undertakings not to:
  (i)	carry on business in competition with the purchaser in the relevant market for a period of 2 years, (13(b)(i))

 (ii)	solicit, appoint as consultants or enter into partnership with employees of BTSA for a period of 4 years, (13(b)(ii))

(iii)	reveal secret or confidential information relating  to the business of BTSA, (13(b)(iii))

28.	The Authority has given its views on non‑competition clauses in Nallen/O'Toole and a number of other decisions.  In these cases the Authority took the view that some restraint on the business activities of the vendors may be necessary to ensure the adequate transfer of the goodwill of the business concerned.  The Authority decided that the restraint must be limited in terms of its scope, duration and geographical coverage to that which is necessary to fully secure the transfer of the goodwill.  Provided this is the case, then such a restraint does not restrict competition in the market in question.  In this respect the Authority has followed the views of the EC Commission in respect of similar agreements under Article 85(1) which have been endorsed by the European Court of Justice.

29.	The Authority accepts that in the present case some restriction on Budget Travel competing in the relevant market is necessary to secure the complete transfer of the goodwill of BTSA .  The issue therefore is whether the restrictions in the notified agreement are limited to what is necessary to secure the transfer of the goodwill.

Clause 13(b)(i)

30.	In Clause 13(b)(i), Budget Travel Ltd. have undertaken not to become involved in the relevant market for a period of two years.  The Authority has indicated in previous decisions that it would normally regard a time limit of two years as being adequate for the transfer of goodwill.  This clause, does not, therefore, offend against Section 4(1) of the Act by virtue of its duration.

31.	On the question of the geographical scope of the non‑competition clause in 13(b)(i), no specific geographical area to which it applies is specified.

32.	The European Commission ruled in the Nutricia case that:

	`The geographical scope of a non‑competition clause also has to be limited to the extent which is objectively necessary to achieve the aforementioned goal.  As a rule, it should therefore only cover the markets where the products concerned were manufactured or sold at the time of the agreements.'
33.	The Authority took a similar view in the Nallen/O'Toole and ACT/Kindle cases.  In the latter case, no specific geographical area was mentioned in the restrictive clauses.  This was found to be acceptable by the Authority given that, prior to the agreement, Kindle was operating on a worldwide basis.

34.	It has been argued that Budget could compete directly with BTSA by establishing a company either in Northern Ireland or England and retaining sales persons on a commission or other basis.  Accordingly, the application of the non‑competition clause in 13(b)(i) was not limited to the Irish market.  The Authority accepts the validity of this argument and does not consider that this restriction offends against Section 4(1) of the Act.

35.	In relation to the scope of the clause, Budget Travel Ltd. are required not to compete in the market for group tours which is the market in which BTSA was involved at the time of the agreement.  Therefore, the scope of the restriction does not restrain the vendors from being active in any market outside of the one served by BTSA.  It is evident that the scope of the restriction does not go beyond what is necessary for the transfer of the goodwill and does not offend against Section 4(1) of the Act.

Clause 13(b)(ii)

36.	This Clause prevents Budget Travel Ltd. from soliciting into employment, entering into partnership with or appointing as consultants employees of BTSA for a period of 4 years.  

37.	The justification advanced for the restriction was that it was essential for BTSA to "retain its qualified and trained staff, who constituted one of its principal assets.", and that it was "essential to the preservation of the transferred worth of the undertaking".

38.	There is little doubt that BTSA employees who have worked in this area over a number of years have become familiar with the various facets of the business and will be efficient in dealing with them.  However, this knowledge does not constitute technical know‑how as defined by the Authority in ACT/Kindle.  Accordingly, it is the Authority's view that the expertise of the employees of BTSA represents primarily part of the goodwill of the company.

39.	In principle, there is nothing wrong with preventing the vendors from soliciting the services of BTSA employees for a period of time.  Such a restriction ensures that the goodwill of the company being purchased is transferred.  In this case, however, the original clause may have gone beyond what was required to secure the transfer of the goodwill of BTSA because of its duration.  Phil Fortune has agreed to accept a lesser period of three years.  The Authority believes that, given the fact that personal contacts are quite important in this business, Ms. Fortune, despite her background in the business, will need some time to establish a reputation for the newly managed entity, and that the restriction on Budget Travel competing in the group tour market is for only 2 years, the three years duration now proposed for this clause is acceptable and does not offend against Section 4(1).

Clause 13(b)(iii)

40.	This Clause prevents Budget Travel Ltd. from using, disclosing or divulging information of a secret or confidential nature about BTSA.  The restriction is not limited in terms of its duration.

41.	In advancing a case to support this Clause a distinction was made by Phil Fortune between business information in the public domain and other business information such as profits, margins, turnover, overheads and other financial matters not in the public domain.  The intention is to prevent the disclosure and use of the latter type of information.  Phil Fortune's main argument in relation to this Clause was that it was essential to "transfer the entire worth of the company".

42.	Confidential business information may constitute an important part of the value of the transferred undertaking.  The use of such information may confer a competitive advantage on the vendor.  Nonetheless, the value of the type of confidential business information referred to in this case will be eroded over time.  Eventually, it will be worthless and restrictions on its disclosure or use will become meaningless.

43.	The Authority is concerned, however, that such a clause should not be used to impede any possible re‑entry into the market by Budget once the two year non‑competition clause in 13(b)(i) has expired.  In particular, the Authority would be concerned that the effect of this could be to prevent Budget using its knowledge of the market for group tours if they decided to engage in that market in the future.  The Authority accepts Phil Fortune's undertaking not to "use or attempt to use this clause in any manner which would prevent the Vendor re‑entering the market after the period provided by clause (b)(i) has expired".  In the light of this undertaking the Authority considers that this clause does not offend against Section 4(1) of the Act.

The Decision

44.	Phil Fortune and Budget Travel Ltd. are undertakings within the meaning of Section 3 of the Competition Act and the arrangements in question constitute an agreement which applies within the State.

45.	The Authority believes that the agreement for the sale of BTSA does not prevent, restrict or distort competition in the State or in any part of the State.

46.	In the case of a sale of business, some restriction on the seller is essential in order to ensure the complete transfer of the goodwill for which the purchaser has paid.  The Authority believes that the non‑competition clause in the present agreement between Phil Fortune and Budget Travel Ltd. as amended by, and with the undertaking regarding clause 13(b)(iii) given in, the letter of 22 June, 1992, is limited to what is necessary to ensure the complete transfer of the goodwill of BTSA and that it does not offend against Section 4(1) of the Competition Act, 1991.

The Certificate

47.	The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the agreement between Phil Fortune and Budget Travel Limited (CA/1/92) for the sale of Budget Travel Schools Abroad Limited, notified on 17 January, 1992 under Section 7, as amended by, and with the undertaking regarding clause 13(b)(iii) given in, the letter of 22 June 1992, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey
Member
14 September 1992

	Competition Authority

The Competition Authority gives notice under Section 4(6) of the Competition Act, 1991, that it has issued a certificate in respect of the following notified agreement:  Notification No. CA/1/92 ‑ Phil Fortune/Budget Travel Limited.  Copies of the decision may be obtained from the Competition Authority, Baggot Bridge House, 84 Lower Baggot Street, Dublin 2 at a price of £1.40, including postage.

	The Certificate

The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the agreement between Phil Fortune and Budget Travel Limited (CA/1/92) for the sale of Budget Travel Schools Abroad Limited, notified on 17 January, 1992 under Section 7, as amended by, and with the undertaking regarding clause 13(b)(iii) given in, the letter of 22 June 1992, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey
Member
14 September 1992