Irish Competition Authority Decisions

1. Arrangements for the purchase of the entire issued share capital of Conkenner Limited (Conkenner) by Spring Grove Ireland Limited (Spring Grove) from Initial Services (International) Limited (ISIL), were notified to the Competition Authority on 30 December, 1992. The notification requested a certificate, or in the event of a refusal by the Authority to grant a certificate, a licence.

2. The notification relates to an agreement, dated 27 November 1992, between ISIL, BET plc (BET) and Spring Grove and the P&O Services Group for the sale and purchase of the entire issued share capital of Conkenner. The arrangements include a number of non-compete provisions together with restrictions on the use of certain industrial property rights (mainly trade marks). The arrangements were notified to, and approved by, the Minister for Industry and Commerce under the Mergers Act.

3. ISIL is a company incorporated in England and Wales. It is a wholly owned subsidiary of BET. Prior to the completion of the notified agreement Conkenner was a wholly owned subsidiary of ISIL. Conkenner is engaged in the provision of textile rental and associated services throughout the State. ISIL is engaged inter alia in the provision of such services in the UK.

4. Spring Grove is a private limited company incorporated in Ireland. It is a wholly owned subsidiary of Spring Grove Services which in turn is a wholly owned subsidiary of The P&O Services Group Limited. The ultimate parent is The Peninsular and Oriental Steam Navigation Company (P&O), a company listed on the London Stock Exchange.

5. Conkenner is engaged in the business of providing textile rental and associated services throughout the State on a contract basis to offices, schools and factories and other establishments. Prior to this agreement Conkenner operated under the trade names ´Initial Services', ´Swastika Laundry Limited' and ´M Laundries Limited'. The latter two are trading subsidiaries of Conkenner. The services provided to clients include:

(a) the provision of hand drying facilities, i.e. the sale or rental of warm air hand dryers, hire of wall cabinets containing continuous towels, the provision of paper towels and the hire or sale of cloth towels;

(b) workwear rental, being the hire, largely to employers, of items such as boiler suits, chefs' jackets and trousers, overalls and uniforms. The parties have indicated that: ´Such garments are normally sized and marked for particular wearers';

(c) dustmat rental, such mats being entrance or corridor mats, either impregnated with fluids or of special material or weave designed to remove dirt and dust from shoes;

(d) linen rental, being the hire of sheets, pillowcases, hand towels, bath towels, bath mats, table cloths and napkins to hotels, restaurants, caterers and hospitals.

Spring Grove is engaged in the first three activities.

6. The market is that for the provision of textile rental and associated services as described in the previous paragraph to offices, schools, factories and other establishments. There are several other firms engaged in this business. These include Celtic Linen, Connaught and Court Group and a number of others. The notifying parties have estimated the breakdown of market shares as follows.

Hand Drying Workwear Dustmat Linen

Facilities Rental Rental Services

Spring Grove 10 17 14 0

Conkenner 18 21 25 27

Spring Grove/

Conkenner Total 28 38 39 27

Connaught & Court 14 33 29 47

Celtic 9 10 14 19

Others 49 19 18 7

(All columns add to 100% after rounding up or down)

7. In addition the parties have indicated that many firms and institutions provide such services in-house and that specialist suppliers account for only a relatively small share of the market in each case. According to the parties in-house provision accounts for 75% or more of total use of such products and some customers regularly switch to in-house provision when contracts come up for renewal.

8. The agreement relates to the sale by ISIL of the entire issued share capital of Conkenner to Spring Grove. The agreement, as notified, included a number of non-compete provisions which are summarised below.

9. Clause 5 provides that, for a period of 10 years from Completion, Spring Grove shall not use and procure that no groupcompany shall use the industrial property rights or any other marks similar to or likely to be confused with them, and not to represent, and procure that no group company should represent, that they have any right in or to such industrial property rights. The industrial property rights means the trade marks and trade names of the business. Clause 5(2) provides for a number of exceptions to this provision. These essentially operate for a period of months from completion and are designed to give the purchaser time to remove such trade marks and logos from vehicles, staff uniforms, name boards etc.

10. Clause 7(1)(a) provided that for a period of 3 years from the date of completion, ISIL, BET or its subsidiaries, (the vendors), would not without the prior written consent of the purchaser:

(i) be engaged or concerned in any Competing Enterprise, (save as the holder of not more than 5% of the shares of a quoted company);

(ii) through any competing enterprise, transact business with any person who was a customer of a Conkenner Group Company during the 12 months preceding completion;

(iii) knowingly canvass or solicit orders for competing enterprises from any person who was a customer of a Conkenner Group Company during the 12 months preceding completion.

Essentially a competing business is defined in the agreement as one competing with the business of Conkenner.

Clause 7(1)(b) provides that ISIL and BET or its subsidiaries will not for a period of 10 years from Completion, use any one or more of the industrial property rights to do any of the things specified in 7(1)(a).

11. Clause 7(2) provides that ISIL, BET or its subsidiaries will not without the prior written consent of the purchaser assign licence or permit in the State the use of any one or more of the industrial property rights by any person interested directly or indirectly in any competing enterprise for a period of 10 years from Completion.

12. Clause 7(3) provided that, for a period of 3 years from completion, neither BET nor any of its subsidiaries would, without the prior written consent of the purchaser, knowingly solicit or entice away from any Conkenner group company any supplier who had supplied goods to it during the previous 12 months if this would adversely affect the supply of goods or services by the supplier to that company. Clause 7(4) provided that neither BET nor any of its subsidiaries would solicit or entice away from any Conkenner Group Company any manager or supervisor employed by it upon Completion, for a period of 3 years from that date, without the purchaser's prior written permission.

13. Clause 7(5) provided that neither, ISIL, BET nor any of its subsidiaries, would without the prior written consent of the purchaser, use or reveal to any person any of the trade secrets, secret or confidential operations, processes or dealings or any other confidential information concerning any Conkenner group company or its customers. Such information includes customer lists and names, sales statistics, reports on pricing, and information relating to sales by any group company, until such

time as they should fall into the public domain.

14. Clause 7(6) provides that each of the covenants and undertakings contained in clauses 7(1) to (5) shall be construed as a separate covenant and undertaking. Clause 7(8) provides that if the Competition Authority indicates that but for the duration, extent or scope of clause 5 or 7, it would issue a certificate in respect of the agreement, the parties shall forthwith in writing agree that provision with the minimum variation or modification so as to give the provision the maximum duration extent or scope permissible but so as to procure such certificate.

15. The parties referred to the decision of the EC Commission in Reuter/BASF [1] and the European Court of Justice decision in Remia [2] to support the view that the restrictions contained in the agreement did not prevent, restrict or distort competition and therefore merited a certificate. They also quoted extensively from the Authority's first decision in Nallen/O'Toole [3], where it granted a certificate in respect of a sale of business agreement incorporating non-competition clauses. They stated that the periods during which the restrictions would apply were ´related to the period during which a potential competitor would be able to build up a market position relevant to the life span of the goodwill'. They also claimed that the period of three years specified under clause 7 was reasonable in the circumstances and that it did not prevent, restrict or distort competition in trade in any goods or services in the State or in any part of the State.

16. They argued that it had effectively been agreed that for a period of 10 years the industrial property rights will be used by neither party in a competing enterprise. They claimed that this did not restrict competition but rather regulated the use of certain intellectual property rights. They stated that such considerations applied in respect of clauses 5, 7(1)(b) and 7(2).

17. The parties also claimed that the acquisition itself, as distinct from the ancillary restrictive clauses, might not be properly reviewable under Section 4(1) of the Competition Act. While recognising that the Authority had given its views on the applicability of Section 4(1) to mergers and acquisitions in Woodchester [4], the parties argued that the Authority's decision was essentially wrong in law. Specifically they submitted that the maxim generalia specialibus non derogant was applicable. They cited certain court judgements in support of this [5]. They also argued that the Competition Act did not contain any specific direction that the jurisprudence at Community level was to be used and that such omission suggested that the Oireachtas did not intend that such jurisprudence was to be given any particular weight. They also claimed that EC precedents indicated that mergers and acquisitions were not subject to Article 85(1).

18. The parties also submitted that the acquisition satisfied the test set by the Authority in Woodchester for establishing whether or not a merger could offend against Section 4(1). Specifically they stated that the markets were highly competitive with all of the users being competitors or potential competitors and consequently the acquisition could not be said to have resulted in, or be likely to result in a lessening of competition.

19. Following discussions with the Authority the parties presented further arguments in support of the arrangements. They contended that BET possessed secret trading information which would allow it, at the end of two years, to solicit lucrative business away from Conkenner.

20. The parties indicated, however, by letters dated 6 July and 23 September 1993, that they would amend a number of the provisions of clause 7 by means of a supplemental agreement. These amendments are as follows.

Clause 7(1) as amended provides that:

(a) for a period of 2 years from the date of completion, ISIL, BET or its subsidiaries, will not without the prior written consent of the purchaser:

(i) be engaged or concerned in any Competing Enterprise, (save as the holder of not more than 5% of the shares of a quoted company);

(ii) through any Competing Enterprise, transact business with any person who was a customer of a Group Company at or about the date of Completion;

(iii) knowingly canvass or solicit orders for Competing Enterprises from any person who was a customer of a Group Company at or about the time of Completion;

(b) for a period of three years immediately following the date of completion:

(i) through any competing enterprise, transact business with any person who was a customer of a Group Company at or about the date of completion where such transaction or dealing arises directly or indirectly as a consequence of any canvassing or solicitation of orders as set out in subclause B below;

(ii) knowingly canvass or solicit orders for competing enterprises from any person who was a customer of a Group Company at or about the date of completion;

For the purpose of subclause 7(1)(b), canvassing or soliciting orders shall include contacting customers directly or indirectly with a view to informing customers that BET or any of its subsidiaries is operating/doing business in the Republic of Ireland or with a view to securing business from them.

Clause 7(1)(b), dealing with the use of Industrial Property rights, now becomes 7(1)(c).

Clause 7(1)(d) defines the term 'at or about the time of completion ' as a period of two months prior to the date of completion.

Clause 7(4) as amended provides that neither BET nor any of its subsidiaries will solicit or entice away from any Conkenner Group Company any manager or supervisor employed by it upon Completion, for a period of 2 years from that date, without the purchaser's prior written permission.

Clause 7(5), which relates to confidential information, was amended by the addition of the following.

´The foregoing provisions of this subclause shall not apply to the extent that

(i) BET or a subsidiary of BET is required by law to reveal the same; or

(ii) BET or a subsidiary of BET would, by virtue of such provisions be deemed to be prohibited itself from doing any one or more of the acts matters or things referred to in the foregoing subclauses of this clause 7 after the expiry of the respective periods of time specified in those subclauses.'

The parties confirmed by letter dated 27 October 1993, that both sides had agreed to the text of the supplemental agreement and that they were prepared to execute it as soon as practicable subject to a satisfactory response from the Authority. In a letter to the Authority dated 6 December 1993, the parties indicated that arrangements had been made to have the supplemental agreement executed.

21. 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.'

22. The parties to the present agreement are Spring Grove, ISIL and BET. Each of these is a body corporate which is engaged in the provision of a service or services for gain. Consequently they are undertakings within the meaning of section 3(1). The present arrangement is, in the Authority's view, an agreement between undertakings.

23. Under the agreement Spring Grove has purchased Conkenner from ISIL. The Authority has given its views for believing that mergers are not automatically excluded from the prohibition in section 4(1) at length in its decision on Woodchester. It does not propose to restate those here. To the extent that the parties have raised issues not covered in that decision the Authority proposes to deal with them briefly.

24. The parties have claimed that the Authority's interpretation of the Act in Woodchester is wrong in that an acquisition per se , as distinct from the ancillary restrictive clauses, is not subject to section 4(1), since specific provisions for dealing with acquisitions are provided under the Mergers Act. In the Authority's view it is inconsistent to claim that an acquisition agreement is not subject to section 4(1) but that certain clauses of such an agreement are subject to such provisions. The Authority does not believe that the legislation could be interpreted as implying that certain aspects of an agreement are subject to section 4(1) while others are not. Thus if the parties interpretation is correct then all aspects of the acquisition should properly be regarded as not reviewable under section 4(1) and non compete clauses regardless of their duration or extent would not be subject to its provisions.

25. The parties have argued that the Act does not include any specific direction that the jurisprudence at Community level was to be used and that such omission suggests that the Oireachtas did not intend that such jurisprudence was to be given any particular weight. The Authority, however, notes the comments of Finlay CJ in VHI [6]. Having relied upon the definition of gain established in Arthur Average he went on to state that, although he did not find the word ´gain' in Section 3(1) of the Competition Act ambiguous,

´if it were so found it would be appropriate to look at the long title of the Act, where it was stated that the purposes of the Act included the prohibition by analogy with Articles 85 and 86 of the Treaty establishing the European Economic Community, and in the interests of the common good, the prevention, restriction or distortion of competition and the abuse of dominant positions in trade in the state. Articles 85 and 86 undoubtedly applied to a body corporate engaged in the supply of services even if it did not have as its objects the making of commercial profits..'

In the Authority's view such sentiments appear to indicate that where there is any ambiguity in the legislation, one should look to the long title of the Act and, as that provides that it is an Act to do certain things by analogy with Articles 85 and 86, EC decisions under those Articles should be considered.

26. The Authority also notes that, in decisions where it found that restrictive clauses in sale of business agreements infringed Article 85(1), the EC Commission stated that it was the sale agreement and not the restrictive clauses which constituted an agreement between undertakings [7]. The Authority believes that the exclusion of the acquisition and the associated restrictive clauses would mean that the provisions of the Competition Act differed substantially from those of Articles 85 and 86 and it considers this to be inconsistent with the long title to the Act and the interpretation placed on that in the VHI judgment.

27. There is no obligation on parties to notify agreements under the Competition Act. If the parties' arguments are accepted then the present agreement is not an agreement of a kind described in Section 4(1) and it may not be notified. The Authority could not issue a certificate or licence in respect of such an agreement since it can only issue these in respect of notified agreements. Since a certificate or licence can only be granted in respect of an agreement, the Authority could not issue one in respect of the non-compete provisions in the present agreement since, if the parties were correct, they are part of an agreement which could not be notified. Indeed the implication of the parties argument is that they should not have notified this agreement. The Authority considers that, on balance, the reasons stated in Woodchester for concluding that mergers are not automatically excluded from the scope of the Act remain valid.

28. The parties' figures on market share imply that the relevant markets are fairly highly concentrated and that the degree of concentration would increase significantly as a result of this agreement. In two instances, namely workwear and dustmat rental, the merged entity will have a market share of almost forty percent according to these figures, while in hand drying and linen services its share will be 28 and 27 percent respectively. In the latter case admittedly the agreement has no impact on concentration, since Spring Grove was not engaged in this market.

29. The Authority indicated in Scully Tyrrell [8] that, where the four firm concentration ratio post merger was below 40%, it believed an acquisition would be unlikely to have any adverse effect on competition and in such circumstances it would generally find that the acquisition did not offend against section 4(1). It indicated, however, that, where the four firm concentration ratio exceeded this threshold, it would conduct a more detailed examination of the arrangements. The parties figures would place this agreement into the latter category. While the detailed information needed to estimate the Herfindahl Hirschman Index (HHI) [9] is not available from the table, it is clear that in some, if not all, of the relevant markets the threshold set by the Authority in Scully Tyrrell is also exceeded on this measure.

30. The parties have submitted that many businesses provide the relevant products themselves. Clearly an alternative to renting workwear from the parties is for a firm to buy it themselves and supply it to their employees and let them make their own cleaning arrangements. Similarly businesses and institutions can purchase and install hand dryers, or cloth or paper towels on their premises and likewise in the case of dustmats. Indeed the parties have submitted that the vast majority of businesses and institutions do just this and that some proportion of their customers decide, each year, to provide such services themselves, rather than continue to obtain them from the notifying parties.

31. The important issue here is the question of the definition of the market. Specifically should the market be defined to include only sales by firms specialising in providing such products to others or should it include the self provision of such products by the users. A similar issue has arisen in respect of other notifications, including one involving the purchaser's parent company [10]. The market should properly be defined so as to include those products which are close substitutes and important competitors to the products in question. Clearly the range of products which may properly be regarded as close substitutes or important competitors will be confined within quite narrow limits. Products to which only a relatively small number of users might switch in the event of a variation in price ought not to be considered close substitutes. In Carrolls Catering the Authority stated that:

´In the Authority's view it is unlikely that contract catering firms either individually or collectively are in a position to exercise market power. It seems likely that if they attempted to do so, users of catering services would respond by providing such services in-house. In the Authority's view the costs of switching to in-house provision of such services would not represent a deterrent. Consequently it would appear legitimate to regard self operated services as sufficiently close substitutes for bought in catering services for them to be regarded as part of the same market.'

The Authority has previously considered that insurance companies could substitute in-house provision of services for those of loss adjusters [11].

32. The Authority believes that the argument advanced in Carrolls Catering could also be applied in this instance to justify regarding self-provision of the products by users as constituting a part of the market. Specifically the Authority believes that, were the enlarged firm to attempt to exercise market power, many of its customers would choose to provide such products in-house. Indeed the parties have indicated that the vast majority of firms and institutions do in fact rely on in-house provision. Allowing for the level of in-house provision suggests that specialist providers of such services account for a quarter or less of the relevant markets. This indicates that in-house provision is a sufficiently close substitute for bought-in services for it to be considered part of the same market. The inclusion of in-house provision indicates that post-merger levels of concentration are considerably below the thresholds at which the Authority believes a merger might pose problems for competition and therefore merit closer examination. Consequently the Authority concludes that the present acquisition does not offend against section 4(1).

33. The agreement as notified contained a number of non-compete provisions. These included restrictions on the vendor competing with the business for a period following completion as well as restrictions in relation to industrial property rights. The former type of restriction has been dealt with on a number of occasions by the Authority. The Authority has indicated that in the case of a sale of business it normally regards a restriction on the vendor competing with the business following completion as necessary to secure the complete transfer of the goodwill of the business. It has stated that provided the restriction on the vendor is limited in terms of duration, geographic scope and subject matter to what is necessary to achieve that purpose, then it does not, in the Authority's view offend against section 4(1). The Authority has indicated that it regards a period of two years as sufficient to secure the transfer of goodwill.

34. Clause 7(1)(a) as notified restricted the vendor from being engaged in a competing enterprise, from transacting business with any former customers through a competing enterprise and from soliciting orders from former customers for any competing enterprise for a period of 3 years from completion. The duration of this restriction went beyond what was necessary to secure the transfer of the goodwill of the business as the Authority does not believe that a restriction of more than 2 years was justified in this instance. In this context it is relevant that Spring Grove is already active in the relevant markets and that the combined business would operate under the Spring Grove name. The Authority concluded that clause 7(1)(a) as notified offended against section 4(1).

35. The duration of the restriction on being engaged in a competing enterprise has now been reduced to 2 years by an amending agreement submitted to the Authority and no longer offends against section 4(1). The restriction on doing business with or soliciting customers (now clause 7.1(b))is now limited to those firms or individuals who were customers at or about the date of completion as opposed to those who were customers at any time during the 12 months preceding completion. The parties argued strongly, however, that a period of three years from completion was justified for this restriction as a significant proportion of Conkenner's customer contracts would not come up for renewal for more than two years and BET would be free to approach such customers knowing that their contracts were due to expire. By letters dated 6 July and 23 September 1993, the parties indicated their intention to amend the clause so that the three year restriction on the vendor preventing it from transacting business with persons who were customers at or about the time of the agreement only applied 'where such transaction or dealing arises directly or indirectly as a consequence of any canvassing or solicitation of orders...'. Canvassing or soliciting orders is defined as including '...contacting customers directly or indirectly with a view to informing customers that BET or any of its subsidiaries is operating/doing business in the Republic of Ireland or with a view to securing business from them'. The Authority remains of the view that a restriction of 2 years on a vendor competing with a business which he has sold is normally adequate to secure the complete transfer of the goodwill and provide sufficient protection to the purchaser. However, the Authority considers that a three year restriction on soliciting former customers may be necessary in this case. Therefore, clause 7(1)(c), as amended, does not, in the Authority's opinion, offend against section 4(1).

36. Clause 7(1)(c) [12] restricts the vendor and BET from being engaged in a competing enterprise, from transacting business with any former customers through a competing enterprise and from soliciting orders from former customers for any competing enterprise for a period of 10 years, using any of the industrial property rights of the business. Clause 7(2) provides that the vendor and BET will not licence or permit the use by any competing enterprise of any of the industrial property rights for a period of 10 years from completion. The Authority has accepted in previous decisions that a restriction of unlimited duration on the vendor of a business using any of the trade names associated with the business is necessary to prevent the vendor from representing itself as being associated with the business [13]. In the Authority's view this restriction would not prevent the vendor re-entering the market or markets involved following the expiry of a legitimate non-competition clause on the same basis as any other new entrant. Consequently it has neither the object or effect of preventing, restricting or distorting competition and does not offend against section 4(1).

37. Clause 7(3) provides that, for a period of 3 years, neither the vendor nor BET will knowingly solicit or entice away any supplier to the business, without the purchaser's prior written agreement, if the effect of such a move would be to reduce the supplier's supply of goods and/or services to the business. This provision does not, in the Authority's view prevent the vendor or BET doing business with such suppliers or from re-entering the market once a legitimate non-competition clause has expired and hence does not offend against Section 4(1).

38. Clause 7(4), as notified, restricted the vendor and BET soliciting or enticing away from any group company any manager or supervisor employed by the business upon completion for a period of 3 years. The Authority has already accepted in a number of decisions that a restriction on a vendor soliciting former employees to take up employment with it may be necessary to secure the transfer of the goodwill of the business being sold. It has previously accepted a restriction of 3 years in such clauses were necessary in certain decisions [14]. The Authority has already indicated in para 35 that it considers a period of 2 years sufficient to secure the transfer of goodwill in this instance. Consequently clause 7(4), as notified, offended against section 4(1). As it has now been amended so as to reduce the duration of this restriction to two years, the Authority considers that it no longer offends against section 4(1).

39. Clause 7(5) is a restriction on the vendor and BET using or revealing to anyone any confidential information relating to the business being sold. While it refers to trade secrets and processes, the Authority does not believe that any ´technical know-how' is covered by this provision but that it simply relates to confidential business information. The Authority has stated in previous decisions that such restrictions are acceptable provided it is not intended that they be used to prevent the vendor re-entering the relevant market once a legitimate non-competition clause has expired [15]. Clause 7(5), as notified, included no such provision and, in the Authority's opinion, it offended against section 4(1). Clause 7(5) as amended, however, does not offend against section 4(1).

40. Clause 5 provides that, following an initial period designed to afford the purchaser the opportunity to remove the name and logos of the business from its vehicles, staff uniforms etc., the purchaser will not use any of the vendor's industrial property rights. Such rights are defined to include the trade marks, logos and other marks which were the property of Conkenner. The Authority does not believe that this restriction is designed to or will have the effect of impairing the purchaser's ability to compete in the relevant markets since the purchaser is already well established in those markets. The European Court of Justice has indicated that an agreement not to market goods under a trademark infringes Article 85(1) if the purpose is to secure market protection [16]. In Penneys [17] the Commission granted a negative clearance to an agreement which involved one party agreeing not to make use of a disputed trade mark for 5 years, in a situation where the party restrained was already carrying on business successfully under other names. This case involved a dispute concerning trade marks and the Commission accepted that the agreement was the least restrictive solution to a genuine dispute. In the Authority's view clause 5 does not offend against section 4(1).

41. The agreement between Spring Grove Ireland Limited and Initial Services (International) Limited and BET plc for the sale of the entire issued share capital of Conkenner Limited is an agreement between undertakings since the parties to the agreement are undertakings.

42. In the Authority's opinion, the sale of the business of Conkenner Limited does not have the object or effect of preventing, restricting or distorting competition within the State or any part of the State and does not offend against section 4(1). The restrictions contained in clause 5 and in clause 7, as amended by a Supplemental Agreement, do not offend against section 4(1) of the Competition Act.

43. 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 of 27 November 1992 between Spring Grove Ireland Limited, P&O Services Group Limited, Initial Services (International) Limited and BET plc for the acquisition of the entire issued share capital of Conkenner Limited by Spring Grove, (notification no. CA/1135/92), notified on 30 December 1992 under Section 7 as amended by a Supplemental Agreement, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick M. Lyons

Chairman

18 November 1993.