Competition Authority Decision of 21 March 1996 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/392/92 - Premier Dairies/City distributors

Decision No. 461

Introduction

1.	Notification was made of a standard agreement with distributors by Premier Dairies Group (Premier) on 30 September 1992 with a request for a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal to issue a certificate, a licence under Section 4(2) of the Act.  Notice of intention to issue a certificate in respect of the agreement, as amended, was published in the Irish Times on 12 January 1996.  No submissions were received from interested parties.

The Facts

(a)  The Subject of the Notification

2.	The notified agreement provides for the appointment by Premier of distributors of its liquid milk and other products to doorstep customers and certain smaller retail outlets.  The agreement relates to Dublin city and county and dormitory towns in north Wicklow and Kildare.

(b)  The parties involved

3.	Premier is involved in the business of purchasing, processing and selling milk and related products.  It is a wholly owned subsidiary of Waterford Foods plc.  The latter's trading subsidiaries are Premier, Hughes Dairy Ltd, Dealgan Milk Products Ltd and Midland Dairies Ltd.  It also owns Snowcream Milk, which sells milk in certain areas of the south east.  Premier distributes liquid milk primarily in Dublin and surrounding areas, where it has a large market share.  The distributors, who were originally employees of Premier, or their successors, are independent contractors who undertake doorstep delivery in specified areas of Premier products.  

(c)  The product and the market

4.	The main product involved is liquid milk, which is sold to doorstep consumers and to retail outlets.  Among the other products involved are butter, cream, eggs, yogurt, cheese and fruit juices.  The service involved in this agreement is the doorstep delivery of these products to consumers.  The relevant geographical area is that in which the service is being provided.  Within this area, these same products are also distributed by Premier to retail outlets for resale to consumers.  Such outlets also compete in the relevant market.

(d)  The notified agreement

5.	The distributor is appointed as a contracted distributor of the products in the area set out in the agreement (clause 1).  The distributor is granted an exclusive licence of the goodwill of Premier, subject to the over-riding right of Premier to ensure that a proper service is provided (clause 2(a)).  The distributor is required to avail of a billing preparation service to be provided by Premier at a reasonable charge; the distributor must inform Premier of the amount due by each customer; and bills must make it clear that payment is due to the distributor, not to Premier (clause 2(b)).  Premier reserves the right to alter the prices of products (clause 3).  The distributor is required to make minimum daily purchases of milk, and reasonable amounts of other products.  If average daily sales fall below 90% of this amount, the agreement may be reviewed, and possibly terminated (clause 3).  The distributor is permitted to sell the products only in the area, which may be redefined by agreement (clause 5).  The distributor must pay for the products on a weekly basis, but receives three week's credit (clause 6).  He must not interfere with the products or their packaging, and must not deal in similar products during the term of the agreement (clause 7).  The appointment does not apply to any existing or future wholesale, contract or catering customers in the area, though the distributor may be required to deliver to them, in return for a fee (clause 8).  The distributor must observe the terms and covenants in the third Appendix (clause 9) (see below).  The distributor agrees that he shall not, for a period of 12 months after the termination of the agreement, engage in or be associated with, either directly or indirectly, the distribution of any competing products in the area (clause 9).  On termination, the distributor is entitled to nominate his successor, subject to certain conditions (clause 10(d)) (see below).  The distributor is not entitled to act as legal agent for Premier (clause 14).  During the term of the agreement, neither party may canvass the customers of the other, including shops and other outlets serviced by Premier (clause 16).

6.	The terms and covenants in the Third Appendix require the distributor to provide a proper service, to promote sales, to maintain the vehicles properly, to carry a sufficient range of products, to be bound by the conditions of sale of Premier (see below), not at any time to reveal confidential information, to distribute advertising and promotional material, to attend at training and promotional programmes, and to permit Premier to nominate a person to accompany the distributor to ensure that the agreement is being complied with and to assess Premier's goodwill.  In addition, under clause 8, the distributor is required to pass on to customers the full benefit of all special offers, price reductions, competitions, gifts, prices, coupons and other sales incentives offered by Premier.

7.	On termination of the agreement, according to the Fourth Appendix, the distributor is entitled to nominate a person to be appointed distributor by Premier, subject to the approval of Premier, and subject to certain conditions.  Failing nomination, Premier may nominate another person to act as distributor, at the maximum possible payment, which shall be paid to the distributor whose agreement is terminated or his personal representatives.

8.	The conditions of sale of Premier relate to such matters as delivery of the goods, complaints, liability of the seller, prices and payment, reservation of ownership until the seller is paid, right to use goods before payment and supply of quantities required.  It is stated that the risk in the goods shall pass to the buyer when the seller delivers the goods.  It is also stated that prices shall be charged according to the seller's prevailing price list, with distributors being supplied at prices set out in the distributor's price list, and all other buyers being supplied in accordance with the seller's standard price list.  Provision is also made for discounts and rebates on sales of the goods.

(e)  Submissions of Premier

9.	In support of its arguments for a certificate, which accompanied the notification, Premier stated that the purpose of the agreement was to establish procedures whereby, through the use of distributors, Premier achieved an efficient, consistent and timely delivery service for its products to doorstep customers.  Prior to 1984, doorstep delivery functions were carried out by employees of Premier.  It was then decided that this service could best be provided by independent contractors.  Premier therefore provided many of its employees with substantial financial assistance to set up their own businesses.  The object and effect of this reorganisation was to create an efficient incentivised distribution network of independent distributors to replace services provided by a fully integrated single company.  Therefore the object and effect of these arrangements was to introduce a new economic entity, namely the independent distributors, to the chain of distribution.  The restrictions on these distributors were significantly less than restrictions which a company placed on their employees.  Premier strongly suggested that these arrangements were not anti-competitive.  Premier also presented arguments in support of its request for a licence which are not relevant to this decision.

(f) Subsequent developments

10.	Following publication of the draft category licence for exclusive distribution agreements, the Authority enquired about the status of the distributors.  Premier responded to the Authority on 9 September 1993 stating that its agreements involved the purchase and resale of goods.  It stated that it believed that the doorstep delivery agreements did not fall within the class of agreements to which the category licence should apply and that they should be dealt with on an individual basis, for the following reasons:
`Premier's argument that its relationship with its doorstep distributors is one more analogous to that with an employee or agent rather than with a distributor, and therefore not within the draft Category Licence, is not grounded simply in theoretical analysis or academic speculation but rather arises out of the specific historical background of the doorstep delivery agreements.  Up to 1984, all doorstep delivery of Premier's  products was undertaken by Premier employees.  In 1984 the status of these employees was effectively transformed to that of independent contractors for purposes of rationalising Premier's labour relations, incentivising its delivery network and providing an efficient means of collecting payment from consumers without the need for independent monitoring.  This was managed without any change in the quality of service and the public was not aware of the change in the legal status of the doorstep deliverer.  In fact, the changeover was implemented in such a way so as to prevent any weakening in the relationship between Premier and its residential customers.  This rationalisation has been quite successful and has been followed by many companies in Ireland across many industrial sectors. 

Therefore, today, as in 1984, the doorstep deliverer effectively manages a route which has been organised and developed by Premier.  He delivers product and he collects payment from residential customers on foot of invoices prepared by Premier.  The doorstep delivers are not distributors as understood for purposes of European law and consequently the individual routes are owned by Premier and serviced by the door step deliverers.
 
Both the amount and quality of investments made by Premier in its doorstep deliverers is consistent with our characterisation of such deliverers as agents or employees for Competition Law purposes.  Premier provides these deliverers with clothing with the Premier insignia.  It subsidises their vehicles which bear the Premier logo.  It takes out life assurance policies on these deliverers.  Responsibility is divided so that the deliverer devotes his efforts to delivering the product and collecting payment from residential customers while all product promotion and advertising is undertaken by Premier.  Such investment in product promotion by Premier fluctuates year by year consistent with a dynamic market but averages upwards £1.5 million per year.
 
The net result of this distribution arrangement, which has been verified by independent marketing research, is a strong consumer awareness that the doorstep delivery is made by Premier.  This is essential to ensure consumer confidence in both the regularity of delivery and, most critically, in the reliable and accurate calculation of bills.  Doorstep delivery represents a traditional service which has promoted a positive image of Premier with the public.
 
The European Commission notice on commercial agency agreements distinguishes between agents and distributors on the basis of financial responsibility and economic risk.  The agent is not at economic risk in the relevant transactions whereas the distributor does assume such a risk.  It is quite clear from the operation of the doorstep delivery agreements that the doorstep deliverer is not a true distributor.  He obtains product on a daily basis sufficient only to service pre-existing rounds.  He is not in any economic sense at risk in the distribution of milk as he only takes on products he anticipates will be sold according to pre-existing arrangements.  In this sense, economically and commercially he is not a distributor under European law.
 
For these reasons, we believe that the doorstep deliverer should not be treated as an exclusive distributor under Irish law and therefore these doorstep delivery agreements should not fall within the draft Category Licence as issued by the Competition Authority.'
 
Premier subsequently stated that support by way of providing deliverers with clothing and subsidising vehicles is not always provided to current distributors, and that the life assurance policy is for the benefit of the distributor’s estate.

11.	In response to questions from the Authority, Premier, in a letter dated 7 July 1995, stated that the distributor was free to set his own resale price for milk and other products.  The reference in clause 3 of the agreement to Premier reserving the right to alter the prices of products referred to the price at which Premier sold to the distributor.  Premier also stated that, when drafted, the agreement obliged the distributor to avail of a billing preparation service which Premier provided.  However, Premier now waived this condition and would not enforce it against a distributor.  
12.	On 26 October 1995, the Authority wrote to Premier indicating that it considered that it could not issue a certificate or grant a licence to the notified agreement.  It stated that it considered that the second sentence of clause 3 was ambiguous - the reference to Premier altering the prices of the products.  It also stated that there was no indication that distributors had been informed that they were free to set their own resale prices, nor that the agreement had been amended to delete the obligation on distributors to avail of the billing preparation service.   It stated that, should its concerns be satisfied by means of suitable amendments, it would be possible to issue a certificate in respect of the amended agreement.

13.	Premier replied to the Authority on 6 December 1995.  Premier stated that, while it did not agree that the second sentence of clause 3 was ambiguous, it would have no difficulty in notifying the counterparties that they were free to set their own resale prices.  It was also prepared to address the issue of the billing preparation service.  While this was no longer mandatory, Premier would wish to have an input in  the  presentation  and  content  of  bills issued  by  distributors  which  it  did  not generate. 

14.	Premier enclosed a draft letter to be sent to each of the distributors, as follows:
`We wish to confirm as follows in relation to the agreement:-
 1.	Without prejudice to our respective obligations pursuant to the Restrictive Practices (Groceries) Order, 1987, nothing contained in our Agreement nor in our Conditions of Sale, shall limit or affect your ability to set your own resale prices (i.e. we do not have or seek any control over the price at which you sell milk and other products after you have bought them from us).
 
 2.	(a)	We will continue to make available a billing preparation service to you, but you shall not be obliged to avail of the service.  The service will be offered at a weekly charge to be agreed in writing from time to time between us.
  	(b)	All bills prepared by us on your behalf shall clearly state that payments are due to you and not to the Company.
  	(c)	If you do not avail of the billing service, you shall nevertheless be required to operate an accounting and billing service to a standard and level of accuracy capable of ensuring that all of your customers receive regular, prompt and accurate bills itemising all categorised Products sold to them on a daily basis, the aggregate quantities and prices thereof, and identifying you as the seller thereof in your capacity as a contracted distributor of the Company.
  	(d)	We shall not be obliged to provide the billing preparation service for products which have not been sourced from us.
 
As you will see, these confirmations (which are given in response to representations made by the Competition Authority) do not diminish in any way your rights under the Agreement, but are intended merely to state the way in which certain of the Company's rights under the Agreement will be exercised in future.  Accordingly, there is no need for you to respond to this letter unless you feel that clarification of any of its contents is required.’

15.	In a letter to the Authority dated 29 February 1996, Premier enclosed a copy of a letter dated 20 February 1996 in the above terms to a distributor, Mr Kevin Fitzpatrick of Ballybrack, Co Dublin.

Assessment

(a)  Section 4(1)

16.	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 goods or services in the State or in any part of the State are prohibited and void'.

The undertakings and the agreement

17.	Section 3(1) of the Competition Act defines an undertaking as `a person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of a service.'  Premier is a corporate body engaged for gain, inter alia, in the supply and distribution of liquid milk and other products, and the distributors are engaged in the distribution of goods for gain.  They are all therefore undertakings, and the standard agreement is an agreement between undertakings.  The agreement has effect within the State.

Applicability of Section 4(1)

(i)  The status of the distributor

18.	The agreement relates to the purchase and resale of liquid milk by the distributors.  Clause 14 of the agreement states that the distributor is not entitled to act as legal agent for Premier.  Premier has claimed that the relationship is more analogous to that with an employee or agent rather than with a distributor.  It is clear that the distributors are self-employed persons, and not employees.  Indeed the system was established in order that they would not be employees, as they had been in the past.  The Authority stated in the Conoco case (Decision No. 286 of 25 February 1994) that it considered that a commercial agent was an auxiliary organ, forming an integral part of the principal's business, who could undertake no autonomous commercial behaviour.  It considered that profits or losses essentially accrued to the principal and not to the commercial agent.  The Authority has also indicated that an agent does not buy and resell products.  He sells products, not on his own account, but on behalf of the principal.  The Authority considers that the Premier distributors purchase and resell products on their own account, that they can engage in autonomous commercial behaviour, and that they may not act as agent for Premier.  In its opinion, they are not therefore commercial agents of Premier.

(ii)  The exclusive licence

19.	The distributor is granted an exclusive licence to sell Premier products to doorstep customers within a defined area.  Premier, however, distributes itself to retail outlets for resale and to other large customers in the territory, and the distributor is not permitted to supply such customers.  Such an arrangement is not of a kind which is contemplated in the category licence for exclusive distribution agreements (Decision No. 144 of 5 November 1993), since the supplier supplies the goods to other resellers within the territory and to certain final users.  

20.	There has been considerable debate in the economics literature regarding restrictions in vertical agreements such as distribution agreements.  On the one hand such agreements may, in certain circumstances, be anti-competitive.  On the other hand they may simply constitute a logical and efficient, and in some instances the only, mechanism by which the products concerned can be distributed, in which case they cannot be considered to have either the object or effect of preventing, restricting or distorting competition.  An examination of the facts in each case is necessary to establish whether or not a distribution agreement such as that notified by Premier offends against Section 4(1).  The Authority considers that the arrangements are designed to enhance the efficiency of liquid milk distribution, and to ensure a comprehensive and timely doorstep delivery system.  The attractiveness of doorstep delivery is enhanced by the provision of rapid early morning delivery.  Although the agreement prevents other distributors from engaging in the doorstep delivery of Premier products, customers can obtain them from retail outlets within the territory.  There may also be doorstep delivery of competing products.  The Authority concludes that, in this instance, the Premier distribution arrangements do not offend against Section 4(1).  The agreement as notified, however, contained certain clauses which offended against Section 4(1).

(iii)  Clauses relating to prices

21.	Clause 3 of the agreement provides that Premier reserves the right to alter the prices of the products.  Premier has stated that this clause refers to the prices charged by Premier to the distributor, and not to the distributor's resale prices.  The Authority considered that this clause did not make it clear that it was confined to prices charged to the distributor.  The Authority also considered that it was ambiguous in the light of clause 16 of the conditions of sale, which states that prices shall be charged according to the prevailing price list issued by the seller, and which refers to prices charged to distributors.  Premier had stated that the distributor was free to set his own resale prices.  The Authority was concerned that this was not stated in the agreement, and that there was no evidence that distributors had been informed of this freedom, or that future distributors would be so informed. 

22.	Following the concern expressed by the Authority, Premier has informed its distributors that they are able to set their own resale prices.  In these circumstances, the Authority considers that clause 3 does not offend against Section 4(1).

23.	Clause 2 of the agreement obliges the distributor to avail of a billing preparation service to be provided by Premier.  The Authority was concerned that this system could be used by Premier to ensure adherence to resale prices set by Premier.  Premier had stated that it had waived this condition and would not enforce it against a distributor, but no evidence had been submitted that the agreement had been amended to delete this obligation, or that the distributors had been informed of its deletion.  The Authority considered that this clause offended against Section 4(1).  (It also considered that this clause was not indispensable, and so it did not satisfy the requirements of Section 4(2)).  Premier has now informed the distributors that they are free to avail of the billing service or not, as a result of which the Authority considers that the clause no longer offends against Section 4(1).

24.	Under clause 8 of the terms and covenants in the Third Appendix, the distributor is required to pass on to customers the full benefit of all price reductions and sales incentives offered by Premier.  If resale price maintenance had been involved in the agreement, this clause would have assisted in securing adherence to prices set by the supplier.  Since the distributor is free to determine his own resale prices, the clause does not offend against Section 4(1).

(iv)  Post-termination non-compete clause

25.	Clause 9 of the agreement provides that the distributor shall not, for a period of 12 months after the termination of the agreement, distribute competing products in the area.  The Authority has indicated that post-term non-compete obligations in exclusive distribution and other distribution agreements generally offend against Section 4(1).  It is clear from the Fourth Appendix, however, that the distributor may sell the round to another person, or that Premier may appoint another distributor, at the maximum possible payment which is paid to the distributor.  The Authority considers that these features represent arrangements for the sale of a business, and that clause 9 represents a non-compete obligation following the sale of a business.

26.	The Authority has accepted non-compete clauses in the case of agreements for the sale of a business as not offending against Section 4(1), provided that they are limited in scope and duration to what is necessary to transfer the goodwill of the business.  While the Authority has indicated that a period of two years after the sale of a business is generally acceptable for the duration of a non-compete clause, it has stated in previous decisions that the length of period which is necessary would vary, and that it would depend upon such factors as the frequency of purchase of the products in question.  Given that milk is delivered to the customer on a daily basis, the Authority considers that the 12-month period specified in clause 9 of the agreement is the maximum that could be justified for a non-compete clause after the sale of such a business, and that this clause does not offend against Section 4(1).  (In the case of another agreement notified by Premier, the Authority indicated that a 5-year non-compete clause offended against Section 4(1), and did not satisfy the requirements for a licence.  At a late stage in the proceedings, having agreed to reduce the duration to 12 months, Premier informed the Authority that that other agreement had been superseded and withdrew the notification).

(v)  Other clauses

27.	Under clause 5, the distributor is permitted to sell the products only in the defined area.  A provision of this kind normally operates as a ban on both active and passive sales of the products, since it restricts the distributor from canvassing for business outside his area and also from responding to requests from customers outside the area, and the ban on passive sales usually restricts or eliminates intra-brand competition and offends against Section 4(1).  For the reasons given in para 20, however, the Authority considers that clause 5 does not restrict intra-brand competition in the circumstances of the notified agreement, and that it does not offend against Section 4(1).

28.	Generally, the distributor is charged with servicing doorstep customers, while Premier is responsible for supplying retailers and other large customers.  Under clause 16, neither party may canvass the customers of the other, including shops and other outlets serviced by Premier.  The Authority considers that this restriction allows more efficient systems of delivering to different types of customer, and that the clause does not offend against Section 4(1).
The Decision

29.	Premier and its distributors are engaged in the supply and distribution of liquid milk and other products and they are undertakings within the meaning of the Competition Act.  The notified standard form agreement is an agreement between undertakings.  The Authority considers that the agreement, as amended by the letter of 20 February 1996 to Mr Kevin Fitzpatrick of Ballybrack, Co Dublin, does not offend against Section 4(1) of the Act..

The Certificate

30.	The Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the standard form agreement between Premier Dairies Group and its City distributors, notified on 30 September 1992 under Section 7 (notification no. CA/392/92), as amended by the letter of 20 February 1996 to Mr Kevin Fitzpatrick of Ballybrack, Co Dublin, does not offend against Section 4(1) of the Competition Act, 1991.
	
This certificate shall also apply in respect of the Premier Dairies City agreement with any other party where it has been amended to accord with the agreement with Mr Kevin Fitzpatrick.

For the Competition Authority

Patrick M Lyons
Chairman
21 March 1996.