Irish Competition Authority Decisions

1. An agreement between Lee & Company Limited (Lee) and Musgrave Limited (Musgraves) containing a non-compete clause pursuant to the purchase and sale of Lee's cash and carry business in Sallynoggin, was notified to the Competition Authority on 22 September 1992. The notification requested a certificate or, in the event of the Authority refusing to grant a certificate, a licence. Notification of the transaction was also made to the Minister for Industry and Commerce under the Mergers Act, 1978 with clearance being obtained on 20 October 1992.

2. The notification relates to an agreement dated 9 September 1992 between Lee and Musgrave providing for the sale by Lee of its cash and carry warehouse in Sallynoggin, County Dublin to Musgrave. A statement of objections was issued to the parties on 30 September 1993, to which a response was received on 27 October 1993.

3. Musgrave Limited is a holding company with registered offices in County Cork. Its divisions trade exclusively in the grocery business in the Republic of Ireland. Musgraves Distribution Limited, a wholly-owned subsidiary of Musgraves, operates a similar business in Northern Ireland.

4. Musgraves operate nine cash and carry warehouses within the State. They are also involved in the retail sector of the grocery industry through their ownership of SuperValu and Centra Distribution Limited which exclusively supplies a number of retailers trading under the SuperValu and Centra names.

5. Lee & Company (Dublin) Limited is a Dublin-based company engaged for gain in the cash and carry business. Following the sale of its business in Sallynoggin, it now operates just one cash and carry business, at Thomas Street in Dublin. Its business forms part of the Keen Cost group of cash and carry operators which has a number of members throughout the country.

6. The business being acquired by Musgrave is that of a cash and carry in south County Dublin. A cash and carry business can be defined as an outlet involved in the wholesale of groceries and other goods to independent members of the retail trade and also to hotels and catering groups. The goods supplied by most cash and carry outlets can generally be put into four categories, namely, wines/spirits, frozen foods, catering supplies and hardware. With the exception of one business in Cork, Musgraves, with five outlets in the 32 counties, is the only cash and carry business to offer an additional feature, that of the provision of fruit and vegetables. Cash and carry outlets generally are not involved in the sale of goods of a short shelf life. Nor are they generally involved in the supply of goods to multiple and symbol outlets. Those outlets have their own network of suppliers organised by their head office or a wholesaling group.

7. There are 112 cash and carry outlets within the State, all of which are involved in the sale of goods to independent retailers. It is claimed that the prices of items do not vary greatly from one wholesale outlet to another so there are no great savings to be achieved by "shopping around". Not all outlets offer the same range of goods, however. Nevertheless it is claimed that there is little incentive for a retailer to travel outside his immediate environs in search of better conditions of purchase.

8. The Authority considers that the actual size of the potential market in terms of area would vary depending on the location of the business. In the Authority's view a cash and carry outlet attracts customers from a wide area. Other outlets within a reasonable driving time can be regarded as competing with it and therefore considered to be in the same geographic market. This means that in the case of the business in Sallynoggin, the market would include most of south County Dublin and North Wicklow. In this area, there are five other cash and carry businesses. Of these, two are engaged solely in the sale of non-grocery items such as toys, greeting cards, stationery, toiletries and cosmetics and are not, therefore, engaged in competition with the business in Sallynoggin. The three remaining businesses have warehouses ranging in size from 16,000 to 30,000 square feet. The Sallynoggin warehouse, at 45,000 sq. feet, is 50% larger than its largest competitor. In addition, it is the only business in the area to deal in the sale of fruit and vegetables as part of its grocery business.

(d) The Arrangements

9. The agreement, as notified, provides for the sale of Lee's cash and carry business at Sallynoggin to Musgrave. Clause 22 of the agreement contained a restrictive covenant as follows:

"The Vendor and the Directors of the Vendor who join in this Agreement for this purpose hereby undertake not to engage in or carry on the business of a Wholesale Grocer or Cash and Carry for a period of three years from the date hereof within a radius of five miles from the Vendors premises at Sallynoggin Road, Dun Laoghaire, County Dublin and not to canvas, issue mail shots or make deliveries within the said five miles PROVIDED ALWAYS and it is hereby agreed that nothing herein shall prevent the Vendor from continuing to trade from its Thomas Street, Dublin or other premises outside the five mile radius above referred to or continuing its association with AND, Keencost, Centicom Limited and I.A.D.T. Limited. The Vendor and its Directors hereby agree to accept any amendments to this Clause as may be sought by the Competition Authority. The Vendor will furnish a restrictive Covenant in this form duly executed by all the parties on the Completion."

(e) Submissions of the Parties

10. In support of the inclusion of a three year non-compete provision in the agreement, the parties referred to the Authority's decisions in Nallen/O'Toole and Athlone Travel/Michael Stein [1] where the Authority allowed the inclusion of a three year non-compete clause. The parties also referred to the Authority's decision in Phil Fortune/Budget Travel [2] where the Authority acknowledged that a non-compete period may be necessary to afford a purchaser the opportunity of establishing the reputation of a newly-acquired entity.

11. It was further submitted that because there were a number of similar outlets in the region, competition would not be restricted by the imposition of a three year non-compete clause on the vendors.

12. The Authority issued a statement of objections to the notifying parties, setting out the reasons why in its opinion, clause 22 of the agreement offended against section 4(1) of the Competition Act, 1991, and why the arrangements did not satisfy the requirements for a licence under section 4(2).

13. In a letter to the Authority dated 27 October 1993, the parties indicated that they were prepared to amend clause 22 to provide for the duration of the restrictive covenant to be reduced from three years to two years.

14. 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'.

15. 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 the present agreement are Lee and Musgrave. They are both corporate bodies engaged in the provision of goods for gain and are therefore undertakings within the meaning of the Act.

(i) The acquisition agreement

16. The present arrangements therefore constitute an agreement between undertakings whereby Lee has sold its cash and carry business in Sallynoggin, County Dublin to Musgrave. The Authority has stated in a number of previous decisions that so long as merger-type arrangements do not result, or are not likely to result in, a diminution of competition, then, in its opinion, they do not offend against Section 4(1).

17. Musgrave is a company with a long established name in the grocery business. It is primarily involved in the wholesale supply of goods to retailers trading under the Musgrave-owned SuperValu and Centra names. It is also well established in the cash and carry business with outlets in Ballymun (North Dublin), Clondalkin (West Dublin), Cork and Belfast. It does not operate a cash and carry business within a ten mile radius of its newly- acquired outlet in Sallynoggin. The Authority does not believe, therefore that the acquisition results in any degree of concentration in the market and that the sole effect of the takeover is to provide Musgrave with an entry into, what was for it, a new and previously untapped market. The Authority believes, therefore, that the sale element of the agreement does not have the effect of preventing, restricting or distorting competition and, for this reason, does not offend against section 4(1).

18. Clause 22 of the agreement provided that the vendor could not operate a cash and carry business within a five mile radius of the premises at Sallynoggin for a period of three years.

19. The Authority has outlined its views on non-compete clauses in a number of previous decisions [3]. In these, the Authority indicated that, in the case of a sale of business, some restriction on the seller may be necessary to ensure the complete transfer of goodwill of the business. It stated that, provided the restriction was limited in terms of its duration, geographical coverage, and subject matter to what was necessary for the complete transfer of goodwill, then the restriction was not in breach of Section 4(1) of the Act. The Authority has stated that it generally regards a restriction of two years as sufficient to ensure the complete transfer of the goodwill of a business. This view was reiterated in the Authority's decision in GI/General Semiconductor in which it was stated that

"..having now considered several such agreements .....where only the transfer of goodwill is involved it (the Authority) will generally not accept a restriction on competition of more than two years."

20. In support of the three year duration of the clause, the parties referred to the Authority's decisions in Nallen/O'Toole and Athlone Travel in which a three year non-compete clause was allowed. However, the Authority considered that the circumstances of that agreement differed from those contained in the present one. In Nallen/O'Toole, the Authority acknowledged the fact that the products concerned were purchased infrequently and this, coupled with the degree of personal contact which was considered an important feature of the business concerned, justified the inclusion of a three year non-compete clause. The parties, in referring to the Authority's decision in Phil Fortune/Budget Travel in further support of their arguments, stated that this agreement contained a non-compete provision of three years. This statement is incorrect. That agreement, contained a non-compete clause of two years duration. This was accepted by the Authority. The parties argued that the cash and carry business involves close customer contact and, because Musgrave have not previously operated a cash and carry business in the area, that a non compete provision of three years was essential to allow them the opportunity of establishing a reputation in the South Dublin/North Wicklow area. The Authority accepts that, in the sale of business, a non-compete period can be essential in establishing a reputation. However, the Authority does not believe that its duration should exceed what is absolutely necessary to achieve this objective. In Phil Fortune/Budget Travel, the purchaser, although having some experience in the business, had not previously operated her own business. A two-year non-compete provision was considered appropriate to the circumstances. The Authority cannot accept that Musgrave, given its size and its established reputation in the cash and carry business, would need anything more than two years to establish itself in the South Dublin/North Wicklow area. To the extent that the non-compete provision contained in clause 22 exceeded this two year period, the Authority considered that the clause offended against section 4(1) and did not satisfy the requirements for a licence under section 4(2). As the parties agreed to reduce the duration of the non-compete clause from three years to two years, the Authority considers that it no longer exceeds what is necessary to secure the complete transfer of goodwill in the sale of the business and consequently, no longer offends against section 4(1).

21. The effect of clause 22 is confined to a five mile radius of Lee's former business in Sallynoggin. The geographical extent of the clause, does not, in the opinion of the Authority, exceed what is necessary to secure the complete transfer of the goodwill. It is confined to the business of operating a cash and carry outlet and is therefore acceptable in terms of subject matter.

22. In the Authority's opinion, Lee & Company (Dublin) Limited and Musgrave Limited are undertakings within the meaning of section 3(1) of the Competition Act and the notified arrangements for the acquisition of Lee's cash and carry business at Sallynoggin, County Dublin constitute an agreement between undertakings. In the Authority's opinion, the arrangements do not have as their object or effect, the prevention, restriction or distortion of competition. The agreement dated 9 September 1992, for the sale by Lee of its cash and carry business in Sallynoggin, County Dublin to Musgraves, as amended by the letter of 27 October 1993, does not, in the Authority's opinion, offend against section 4(1).

23. 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 Lee & Company Limited and Musgrave Limited for the sale by Lee & Company Limited of its cash and carry business in Sallynoggin, County Dublin, to Musgrave Limited, (notification no. CA/100/92), notified to the Authority on 22 September 1992, and amended by the letter of 27 October 1993, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

18 November 1993.