Irish Competition Authority Decisions

1. On 1 October, 1991 Performing Right Society (PRS) and Irish Music Rights Organisation (IMRO) jointly notified to the Competition Authority, under Section 7 (2) of the Competition Act 1991, an agreement transferring functions between themselves dated 29 December, 1988 for the purpose of obtaining a certificate under Section 4 (4) of the Act or, in the event of refusal by the Authority to issue a certificate, a licence under Section 4 (2) of the Act.

2. Notice of the intention of the Authority to take a favourable decision in relation to the agreement was published in the Irish Times on 10 April, 1992. No substantive observations on this agreement were received from interested parties.

3. The agreement transfers from PRS to IMRO responsibility for the licensing of the repertoire of PRS, and the collection of royalties in respect of this, in the Republic of Ireland. This decision does not concern any of the other agreements which have been notified by PRS/IMRO.

4. PRS is an association of composers, lyricists (creators) and publishers which was incorporated in 1914 as a company registered in England and Wales. It is a private company limited by guarantee and not having a share capital.

5. The main objects of PRS are to exercise and enforce on behalf of its members all rights and remedies in relation to the exploitation of the copyright in their works; to collect and receive all royalties and fees payable in respect of their works; to restrain and recover damages for the infringement of the copyright; to obtain from members assignments of copyright; to distribute the net monies minus administration expenses to the members; to establish and support funds, trusts, associations or institutions for the benefit of its members or ex-members, to lend money to members and to invest the monies of the company not immediately required.

6. Copyright in relation to an original literary, dramatic, musical or artistic work is the exclusive right to do, or to authorise other persons to do, certain acts in relation to that work. Such acts include reproducing the work in any material form, publishing it, performing it in public, broadcasting it, causing it to be transmitted to subscribers to a diffusion service or making any adaptation of it. This type of copyright normally lasts during the lifetime of the creator and for fifty years after his death. The authorisation of other persons to use copyright material is normally by way of licence in return for payment of royalties to the copyright owner. Copyright is a form of property right which is protected and regulated by statute. The relevant legislation is the Copyright Acts, 1963 and 1987.

7. Collective licensing and enforcement of copyright in relation to musical works is common throughout the world, wherever copyright is enforced. In effect, the copyright owners combine to offer use of their works against payment of royalties. PRS accepts assignments from creators of the performing right in their musical works and then licenses the performance of those works through radio, television and public performances such as concerts and discos. Periodic royalty payments are made by PRS to the creators from the licence fees received. This system of copyright and its collective administration in practice can be said to involve two kinds of "monopoly", first, the exclusive right to the use of the original musical work which is inherent in the notion of copyright itself and, secondly, the monopoly of the licensing rights assigned to and controlled by PRS which appears to be the only body engaged in the collective administration of the performing right in musical works in Ireland.

8. The activities of PRS (and IMRO) relating to copyright licensing and royalty collection form part of a wider network involving reciprocal representation agreements with similar organisations in other countries. PRS represents in the State the interests of over 750,000 musical copyright owners of all nationalities. Its own membership is over 23,000, including 942 members in Ireland. The members of PRS in the Republic of Ireland are also generally members of the following bodies - Association of Irish Composers; Irish Association of Songwriters and Composers; and Republic of Ireland Music Publishers Association.

9. PRS, being a company not having a share capital, may not distribute dividends. Its income derives mainly from its licensing activities and, after deduction of expenses and taxation, it is distributed to members (apart from some funds placed in reserves). Its licence revenue in 1990 was in excess of Stg £123 million of which Stg £2.5 million represented payments to PRS and IMRO. The total licence revenue of IMRO in 1990 was IR £3.5m.

IMRO

10. IMRO is a registered private company limited by guarantee, not having a share capital. Its objects are broadly similar to those of PRS. Its main activities are the licensing of the performing right in the State and the collection of royalties. Prior to 1989, these activities were carried out by PRS itself. IMRO distributes its licence revenue less operating expenses to PRS and at year end 1990 showed net assets at nil. The company was registered with nine founding members, including PRS.

11. The applicants have stated that:

"Under the Articles of Association of IMRO, PRS controls the composition of its Board of Directors and PRS is the ultimate parent company of IMRO."

12. The following provisions are included in the Articles of Association of IMRO:

Article 2 - One of the members of IMRO is required to be PRS.

Article 4 - A resolution for cessation of membership must have the prior approval of PRS.

Article 12 - The presence of PRS is required for a quorum at a general meeting.

Article 19 - PRS can effectively veto a resolution at a general meeting to remove a director.

Article 21 - Nominations for directors require the written approval of PRS prior to any person being appointed as a director. The chairman of PRS and the Chief Executive Officer of PRS are ex-officio directors of IMRO and PRS has the right to appoint two other persons as directors. Any proposal to remove a director may not come before the members unless PRS has given its prior written consent to such a proposal. PRS has the right to remove any director of the company. PRS appoints the chairman and deputy chairman of IMRO.

Article 22 - The directors of IMRO may fill a casual vacancy on the board provided that PRS has consented in writing to the nomination.

Article 35 - A director nominated by PRS is required for the quorum of 3 at board meetings.

Article 53(1)- A Member's Voluntary Winding Up resolution cannot be proposed without the prior consent of PRS.

Article 53(2)- PRS has the right to propose at any time that the Company be wound up and for the purpose of any such resolution the votes cast by PRS shall be deemed to represent a majority consisting of three quarters of all such votes.

13. The PRS/IMRO agreement itself includes the following provisions:-

(i) IMRO undertakes to use its best endeavours to enforce in the Territory the rights licensed hereunder and to do so within the limits of the legal protection afforded. (Para 6).

(ii) IMRO shall supply PRS with any information for which it is asked concerning the tariffs IMRO applies to different types of music use in the Territory. (Para 6).

(iii) If any legal or other situation arises in the Republic of Ireland or by virtue of EC law which PRS considers makes the exercise of PRS's rights less favourable to its members or other persons through whom it derives its rights than would be the case if this Agreement did not exist, PRS may terminate this Agreement forthwith by notice in writing without prejudice to any right of action accrued hereunder down to the date of termination. (Para 10 (c)).

(iv) The Agreement shall continue from year to year subject to six months' written notice of termination from either party expiring on an anniversary of the commencement date. (Para 12).

(v) IMRO shall be entitled in each year of the Agreement to deduct from the gross sum due to PRS any sum set aside by IMRO as reserve for future contingencies subject to PRS's prior consent in writing. (Para 5 (3)).

14. In the context of the present agreement the relevant market is the market in services relating to the management of the performing right in musical works. the main services involved are the accepting of assignments from creators of the performing right in their musical works and the licensing of the performing right to users such as radio and television organisations, discos, public houses and cinemas, who pay a royalty for licences. The geographic scope of the relevant market is the State. IMRO is the only body in the State which is engaged in the licensing of the performing right in musical works belonging to the PRS repertoire. As such, it has a monopoly of the provision of this service in the State, a position which was formerly occupied by PRS. This monopoly extends only to musical works included in the PRS repertoire. In 1990, IMRO had 9,078 non-broadcast licensees, 24 radio licensees and 1 broadcast licensee (RTE), yielding royalties of IR£1.28m, IR£0.33m, and IR£1.62m respectively (total IR£3.23m). IMRO is also a party to copyright licence agreements with cable television companies, licence revenue from which amounted to IR£0.32m in 1990.

15. The Agreement assigns to IMRO the right to license exclusively the public performance of the PRS repertoire to users of musical works in the Republic of Ireland. The agreement also appoints IMRO to collect the royalties due from the users and obliges IMRO to remit to PRS all royalties and other monies collected less reasonable administration expenses, donations to Irish musical causes, reserves for future contingencies and taxes. IMRO is not entitled to assign any of its rights or obligations under the agreement to pay any other party. The agreement between PRS and IMRO came into force on 1 January 1989 for a period of 3 years and is automatically renewed yearly thereafter.

16. The parties have stated:

- It is submitted that PRS and IMRO may not be within the statutory definition of "undertaking" in that neither company is engaged for gain in the service which it provides. It is submitted that "gain" within the meaning of the Act, necessarily means gain to the undertaking and equally means only financial gain. Both companies are non-profit making and exist merely with the object of giving effect to the rights of the members of PRS (and affiliated organisations worldwide) under copyright legislation. There are no shares in the company, and consequently no dividends can be paid.

- It is no part of the intention or effect of the PRS/IMRO Agreement to affect competition in any goods or services in the State or in any part of the State.

- Competition is neither restricted, prevented nor distorted because no impediment exists to the formation or other performing right organisations in the State and because PRS would be free to terminate this Agreement (under Clause 10) if it could more advantageously administer its members' rights in any other way. In addition, IMRO has no commercial independence and is simply continuing the arrangements operated by PRS in the State before 1989.

- It is submitted that the PRS/IMRO Agreement should be regarded as transparent for the purposes of considering the other aspects of the Arrangements.

17. The Agreement has already been considered under Articles 85(1) and 86 by the European Commission on the basis of a preliminary examination. In its administrative letter of 11 April 1991, the Commission indicated that the examination "has not revealed the existence of any grounds .......... for further action on the part of the Commission in respect of the notified agreement." The Authority understands that the reason for this decision was that the agreement involved no real change in relation to the position of third parties.

18. Section 4 (1) of the Competition Act, 1991 prohibits and renders void 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.

19. The term "undertaking" is defined in Section 3 (1) of the Competition Act, 1991 as follows:-

"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. Each of the parties is a body corporate engaged in the provision of a service. The services provided by PRS and IMRO include in the case of IMRO, the licensing of the PRS repertoire to users in the State and the collection of royalty payments and, in the case of PRS, the remittal of royalty payments to musical creators resident in the State.

21. The parties have submitted that neither of them may be within the statutory definition of "undertaking" in that they are not engaged "for gain" in the service which they provide.

22. The immediate issue raised by this submission relates to the interpretation of the words "for gain" in the statutory definition of "undertaking". The term "undertaking" is one of the pivotal terms in the Act and its interpretation is of considerable importance in defining the scope of the Act generally. Accordingly, the Authority considers that it should in the present decision outline its overall approach to the interpretation of the term undertaking as well as dealing with the immediate issues raised in the PRS/IMRO submission.

23. The overall approach taken in the Competition Act, 1991 was largely inspired by the competition provisions of the Treaty of Rome, particularly Articles 85 and 86. Indeed, the wording of those articles was followed almost verbatim in Sections 4 and 5 of the 1991 Act (the main difference being the omission in the Act of any reference to trade between Member States). The Authority, accordingly, gives full weight in its decisions under Section 4 of the Act to the Community jurisprudence on Articles 85 and 86 of the Treaty, whenever relevant.

24. The concept of undertaking has been extensively defined in a number of EC cases. These cases have also been discussed in the leading text books. Kerse for example states:

"It is significant that Articles 85 and 86 do not refer to "persons" but "to undertakings", a much looser and wider concept. The Treaty does not define "undertakings" for these purposes but, broadly speaking, "undertaking" encompasses any body, whether company, partnership, sole trader, etc., carrying on economic activities. An economic rather than a legal approach is necessary. So the Court has said: "In competition law, the term "undertaking" must be understood as designating an economic unit for the purposes of the subject matter of the agreement in question even if in law that economic unit consists of server persons natural or legal." [1] Autonomous commercial activity is more relevant than legal personality in this context and no useful distinction can be drawn from the different legal forms which a business may take, or its precise status under domestic law. Individuals may be "undertakings"; for example, a self-employed inventor commercially exploiting his patents by licensing, a commercial adviser and even artistes when they commercially exploit their artistic performances. The term may include non profit making bodies. An undertaking is an "undertaking" for the purposes of Articles 85 and 86 even if it has its seat outside the Community." [2]

Bellamy & Child point out:

"the 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 activities.

Undertakings engaged in the supply of services are "undertakings" within the meaning of Article 85 (1) as well as undertakings engaged in the supply of goods. But it is essential that the "undertaking" should carry on some economic or commercial activity; bodies which are not engaged in any such activity are not "undertakings" within the meaning of Article 85(1)." [3]

Van Bael and Bellis state:

"The term "undertaking" is not defined anywhere in the Treaty. According to the Commission "the term "undertaking" must be viewed in the broadest sense covering any entity engaged in economic or commercial activities such as production, distribution or the supply of services and ranging from small shops run by one individual to large industrial companies." Indeed, from the cases it appears that virtually every natural or legal person participating in the economic process will qualify as an undertaking. For example, in addition to companies and associations of various kinds, individuals have likewise been held to constitute an undertaking within the sense of Article 85. The nationality or location of the undertaking has no bearing on the issue. Similarly, it is irrelevant whether the undertaking is privately or publicly owned. Even state-controlled trade organisations of East European countries have been considered to fall within the scope of the undertaking concept.

Although the Member States as such do not qualify as "undertakings" and are therefore not the addresses of Articles 85 and 86, these Treaty provisions coupled with Articles 3 (f) and 5 of the Treaty are increasingly used by the Court to scrutinise the effects of national legislation upon competition." [4]

25. Commission decisions also illustrate this broad approach to the interpretation of the term "undertaking" in Community Law. For example, in a 1989 case dealing with television broadcasting organisations in Germany, [5] the Commission states as follows:-

"The functional concept of undertaking in Article 85 (1) covers any activity directed at trade in goods or services irrespective of the legal form of the undertaking and regardless of whether or not it is intended to earn profits."

26. In its first decision [6] under Section 4 of the Act, the Authority stated as follows:

"There 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 commercial activities."

27. The Authority is aware that the scope of the statutory definition of "undertaking" was considered recently by the High Court in a case involving an alleged abuse of a dominant position by the Voluntary Health Insurance Board. In its judgment, which is not yet officially reported, the Court held that VHI did not come within the statutory definition because it was not engaged for gain in the provision of a service. It is understood that this decision is being appealed to the Supreme Court. The High Court decision confirms that there is some difference between the Irish and community concepts of undertaking. The Authority remains of the view that the difference, in substance, between the two concepts is very small. In fact, the Authority believes that the definition of the term "undertaking" in the Competition Act was seeking to do no more than to confirm that certain activities not normally regarded as "economic activities" were not included within the scope of the Act. These activities include those carried out by local authorities, as well as certain activities carried out by entities such as charitable or benevolent associations. The inclusion in the definition of the qualification "for gain" ensured that such activities were not caught by the Act. This interpretation is supported by the fact that the Act, unlike most of the competition legislation which preceded it, contains no express exclusions for particular enterprises or activities. The Authority has also taken into account various statements on the matter made in the Houses of the Oireachtas by the minister for Industry and Commerce during the passage of the Competition Bill. These confirm that the intended scope of the definition was to encompass all commercial activities whether in the public or private sectors or whether they relate to goods or to services. Furthermore, a narrow definition of undertaking might mean that certain public enterprises would be outside the scope of the Competition Act while other enterprises, with which they are in competition, would be caught by the Act. In addition, the situation might arise where such public enterprises would be caught by EC Competition Law but not by Irish Competition Law.

28. In the view of the Authority, it is immaterial whether "profit", in the technical sense, actually occurs or not. The term "gain" is clearly a wider one than "profit". In this connection, it is noted that the phrase "engaged for profit". In this connection, it is noted that the phrase "engaged for profit" was used in the Mergers Act, 1978 but this was not repeated in the 1991 Act. In the view of the Authority the term gain means any consideration or reward in return for the supply of a good or the provision of a service.

29. The main activity carried out by PRS and IMRO is the licensing of the performing right in musical works to a multiplicity of users. Licences are granted in return for the payment of a consideration (a royalty) by the user. The amount of this royalty is determined by agreement between the parties. There is no essential difference between this transaction and the sale and purchase of any other goods or service. There can be no doubt, therefore, that the licensing of the performing right in musical works constitutes an economic activity. On these grounds, the Authority is satisfied that PRS and IMRO are "undertakings" within the meaning of the Act.

30. It is also necessary to consider the specific points raised by the notifying parties (see para. 16). These were (i) that the term "gain" must be interpreted as meaning financial gain only and (ii) that it must mean gain to the undertaking in question.

31. The Authority accepts that financial or monetary gain, as the form of gain normally associated with the pursuit of economic activities, is the main form of gain envisaged in the statutory definition of undertaking. It does not accept, however, that this is the only form of gain envisaged or that an entity carrying out economic activities for other forms of reward or benefit is automatically excluded from the scope of the definition and, thereby, from the scope of the principal provisions of Part II of the Competition Act. It is not necessary to pursue this aspect further here since, in the Authority's view, "gain" even in the narrower sense is, in fact, present in the case under consideration.

32. It is clear from the financial statements of PRS and IMRO that both derive financial gain from the activities which they carry out. In 1990, IMRO derived IR£3.55 million in licence revenue. It expended IR£0.78 million in defraying costs of administration. It remitted IR£2.76 million to PRS. No surplus of income over expenditure was recorded in that year but there is nothing to prevent surpluses occurring in the future. PRS had a licence revenue in 1990 in excess of Stg£123 million. It allocated Stg£100.3 million to its members and to affiliated societies. Costs of administration of Stg. £23.7 million were defrayed. An appropriation of Stg £200,000 was made from their income and expenditure account to reserves bringing the total to Stg £1.3 million. IMRO's licence revenue includes monetary reward for the administration services which it provides under the cable television agreements which are the subject of separate notifications to the Authority. [7] These services, which are carried out on a commercial basis, clearly to beyond the object of merely giving effect to the rights of members of PRS.

33. It is recognised that the ultimate beneficiaries of the activities of PRS and IMRO are the members of PRS who, in fact, are the proprietors of the two bodies. This raises the question whether a body in respect of which all or most of the gain derived from its activities goes to its constituent members could be outside the scope of the statutory definition. Such an interpretation, if adopted, could have far-reaching consequences. It could be argued, for instance, that since any company exists ultimately for the benefit of its members rather than its own benefit, it should therefore be exempt from the Competition Act. Such an interpretation would deprive the whole Competition Act of any real meaning or effect.

34. The purpose of the system under which companies and certain other forms of association may be incorporated and registered is to enable individual persons to pursue, collectively, goals and objectives which would be difficult or impossible to pursue on their own. A body corporate, in itself, is merely a legal conception. Its purposes, objectives and activities are determined by individual human beings. To suggest some general distinction between a purpose of the body and a purpose of the constituent members is somewhat unreal. The purposes of a company and the purposes of its members, as members, are ultimately identical.

35. In the present case, it is clear the individual members of PRS do derive gain from the activities of PRS/IMRO. That, indeed, is the reason for the existence of these bodies. But the pursuit of that objective must also be attributed to the two bodies themselves. In seeking gain for their members as members the bodies must by the same token be considered to be seeking gain for themselves.

36. In sum, the Authority believes that PRS and IMRO provide a service for gain and are, therefore, undertakings within the meaning of the Competition Act.

37. The agreement under consideration is a formal written agreement signed and sealed by PRS and IMRO and dated 29 December, 1988. There can be no doubt that it constitutes an "agreement" for the purposes of the Competition Act.

38. The principal question that arises under this heading is whether, having regard to the relationship between PRS and IMRO, the agreement between them of December 1988 can be considered to be restrictive of competition within the meaning of Section 4 (1) of the Act.

39. In paragraphs 11-13 above, various provisions in the agreement under consideration and in the articles of association of IMRO which pertain to the relationship between IMRO and PRS were outlined. From these it is clear that PRS, by means of various rights vested in it, including those in relation to control of the composition of the Board of Directors of IMRO, is the parent company of IMRO and that a "parent-subsidiary" or "group" relationship exists between the two bodies. They, therefore, constitute a single economic entity.

40. In its decision in the AGF-Irish Life Holdings case, [8] the Authority considered that an agreement between member companies of the same group which provided for a reallocation of functions within the group did not offend against Section 4 (1). The reasoning stated in that decision is equally applicable in the present case because:

(i) PRS and IMRO, being a parent and a subsidiary, are not independent undertakings but are in fact separate arms of the same organisation and are not therefore in competition with each other;

(ii) IMRO has no real freedom to determine its own course of action on the relevant market;

(iii) The proposed arrangement merely involves a reallocation of functions within the same group.

Accordingly, the Authority considers that the present agreement does not have as its object or effect the prevention, restriction or distortion of competition in the State.

41. Both of the notifying parties, PRS and IMRO, are undertakings for the purposes of the Competition Act, 1991 and the agreement of 29 December, 1988 between them constitutes an agreement between undertakings for the purposes of Section 4(1) of the Act.

42. The agreement of 29 December 1988 does not offend against Section 4 (1) because of the parent/subsidiary relationship which exists between the parties and because the agreement concerned involves no more than a transfer of functions between them.

43. Accordingly, the Authority has granted the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the agreement of 29 December, 1988 between Performing Right Society and Irish Music Rights Organisation (CA/1/91E) which was notified under Section 7 on 1 October, 1991 does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority:

E Carey

Member

30 June, 1992.