Irish Competition Authority Decisions

1. An agreement between Mentec Limited (the purchasers) and Denis McMahon, Francis Watters, Timothy Murphy, Margaret McMahon, Sam Alvis, David Alvis, Nigel Alvis, Patrick Cousins and W.H. Gardiner, (the vendors) containing a non-compete clause pursuant to the sale of the entire share capital of Online Computing Limited and its subsidaries (Online) was notified to the Competition Authority on 30 September 1992. The notification requested a certificate or in the event of a refusal by the Authority to issue a certificate, a licence.

2. The notification relates to an agreement dated 7 November 1988 between the vendors and Mentec Limited (Mentec) whereby the vendors agree to sell the entire share capital of Online and its subsidiaries to Mentec. The agreement also contains a non-compete provision.

3. Mentec is a limited company incorporated in the State and is engaged in the computer industry. Online is a limited company which was engaged in the business of selling computer systems and computer hardware and developing and selling software in the commercial manufacturing and distribution application area.

4. The notification relates to an agreement dated 7 November 1988, for the sale of the entire share capital of Online Computing Limited to Mentec. Clause 6 of the agreement contained a number of non-compete provisions preventing the vendors from:

(i) Competing in the computer hardware or software business within the Republic of Ireland for a period of five years from the date of completion of the agreement;

(ii) Soliciting any of Online's customers for a period of five years from the date of completion; and

(iii) Soliciting any of Online's employees for a period of five years from the date of completion.

5. Section 4(1) of the Competition Act states that

"all agreements between undertakings, decisions by associates 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."

6. 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. " The parties to this particular agreement are the vendors and Mentec. At the time of the agreement both companies were engaged for gain in the computer software and hardware industry in Ireland and were therefore undertakings. The vendors owned and controlled Online and were also undertakings [1]. The arrangements therefore constitute an agreement between undertakings.

7. The sale of business agreement itself was completed prior to 1 October 1991, the date on which the Competition Act came into force, consequently, this element of the agreement has been discharged by performance before the Act commenced. The property which was the subject of the agreement had been transferred. In the Authority's view, the prohibition in Section 4(1) only applies to a current or continuing contractual commitment or one entered into subsequent to the coming into force of the Act [2]. As the merger or sale element of the transaction was discharged prior to the commencement of the Act, that aspect of the arrangements does not come within the scope of Section 4(1).

8. The Authority has given its views on non-compete clauses in sale of business agreements in a number of previous decisions. In Nallen/O' Toole the Authority stated that "such a clause is essential in the sale of a business for the transfer of the goodwill of the business to the purchaser [3]" In general the Authority considers that a period of two years is adequate for such purposes. This view was restated by the Authority in General Semiconductor [4]. While the period of five years exceeds that which the Authority considers to be adequate in most cases, it is satisfied that in this instance the arrangements are concerned with more than just the transfer of goodwill. The creation, development and application of computer software involves a degree of technical "know how." The Authority indicated in ACT/Kindle that where a sale of business involved a transfer of technical know-how a non-compete clause of up to five years could be considered essential to the transfer and would not be regarded as offending against section 4(1) [5].This view was consistent with that of the European Commission which stated:

"where the sale of a business also involves the transfer of good-will and know-how, a period of approximately 5 years will normally be acceptable, whereas a period of 2 years will normally apply if the sale involves only the transfer of goodwill." [6]

The vendors who are referred to in Clause 6 of this agreement would have this technical "know-how" as they themselves would have developed it. Consequently, possession of this know-how would enable them to attract Mentec's customers if they were allowed to compete in the business. In the circumstances the period of 5 years is considered essential to the complete transfer of the business being sold.

9. The relevant geographic area specified in the non-compete clause is the Republic of Ireland. This is no more than is necessary for the transfer given the fact that Online had operated on a nationwide basis. Also the computer hardware and software industry is highly transparent. All potential customers are provided with extensive information as to availability of new products and updates of existing products. The restriction applies to the businesses in which Online had been involved. Consequently in terms of its duration, geographic scope and subject matter the restriction does not exceed what is necessary for the transfer of the business and does not therefore have as its object or effect the prevention, restriction or distortion of competition.

10. Mentec and the vendors are undertakings within the meaning of Section 3(1) of the Competition Act and the arrangements in question constitute an agreement between undertakings within the State. The Authority considers that the agreement for the sale of Online Computing Limited and its subsidiaries to Mentec Limited was completed prior to the commencement of the Competition Act, and consequently does not come within the scope of Section 4(1) of the Act. The Authority believes that a restriction on the seller competing with the purchaser is normally acceptable in order for the purchaser to acquire the complete goodwill of the business and, provided that it is limited in terms of duration, geographic coverage and subject matter to what is necessary to secure the complete transfer of the business, it does not have as its object or effect the prevention, restriction or distortion of competition within the meaning of Section 4(1) of the Competition Act. In the Authority's opinion, a restriction of five years is acceptable in a case where the sale involves the acquisition of technical know-how. In the Authority's opinion, the restrictions contained in clause 6 of the sale agreement do not prevent, restrict or distort competition in the State or in any part of the State. The agreement does not, in the Authority's opinion, offendagainst Section 4(1).

11. 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 Mentec Limited and Denis McMahon, Francis Watters, Timothy Murphy, Margaret McMahon, Sam Alvis, David Alvis, Nigel Alvis, Patrick Cousins and W.H. Gardiner, dated 7 November 1988, for the sale of Online Computing Limited and its subsidiaries (notification no. CA/295/92E), notified on 30 September 1992, under Section 7, does not offend against Section 4(1) of the Competition Act,1991.

For the Competition Authority.

Patrick Massey

Member

27 October 1993