Irish Competition Authority Decisions

1. Arrangements for the purchase of the entire issued share capital of John D. Carroll Catering Ltd (Carrolls Catering) by Sutcliffe Ireland Ltd. (Sutcliffe) from Mr. John D. Carroll and Ms. Marie Therese Bosco Carroll (the Carrolls), 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 14 October 1992, between the shareholders and directors of Carrolls Catering [1] and Sutcliffe for the sale and purchase of the entire issued share capital of Carrolls Catering. As part of the arrangements Mr. John Carroll and Mr. K. Carroll entered into employment agreements with the company. Mr. K. Carroll was a director of Carrolls Catering but did not own shares in the company and was not a party to the sale agreement. The arrangements were not notified to the Minister for Industry and Commerce under the Mergers Act as they appear to fall below the threshold for notification under that Act.

3. The Carrolls were formerly the owners and managers of the business of Carrolls Catering. They are individuals resident in Ireland. They are stated to have no other business interests at the present time.

4. Sutcliffe Ireland is a private limited company incorporated in Ireland. It is a wholly owned subsidiary of Sutcliffe Catering Group which in turn was a wholly owned subsidiary of The P & O Services Group Limited at the time of the notification. The Sutcliffe Catering Group is engaged inter alia in the business of providing catering services in the UK. The ultimate parent was The Peninsular and Oriental Steam Navigation Company (P&O). Subsequent to the notification being made the Sutcliffe Catering Group was sold by P & O Services.

5. Carrolls Catering is engaged in the business of providing on-site catering facilities on a contract basis to offices, schools and factories and other establishments. Essentially Carrolls enters into an agreement to provide catering services on the client's premises for the staff and/or customers of the user. Typically such contracts are for a period of three years. Under such contracts Carrolls provides catering facilities, employing all the staff required for such services. Carrolls' customers are located throughout the country. There are several other firms engaged in this business. Many institutions and firms choose to provide their own in-house catering facilities. The market is that for the provision of on-site catering to offices, schools and factories and other establishments. The notifying parties have estimated the breakdown of market shares as follows:

%

Carrolls Catering 4.5 (13.6)

National Catering Services Ltd 5.0 (15.2)

Campbell Catering Ltd. 10.0 (30.3)

Gardner Merchant Ltd. 7.0 (21.2)

Management Catering Ltd. 2.5 ( 7.8)

Others (approx.) 4.0 (12.1)

In-house 67.0

Figures in parentheses indicate market shares excluding in-house catering business.

6. The parties' figures indicate that catering firms account for only one third of the market. This is because they consider that where such services are provided by businesses or institutions themselves, such operations should also be considered to be a part of the relevant market. Some businesses provide their employees with luncheon vouchers which can be used to purchase meals in cafes and restaurants as an alternative to arranging for catering services to be available on the premises.

7. Carrolls Catering operates on a nationwide basis with clients distributed throughout the country. Consequently the relevant market is the State.

8. The agreement relates to the sale by the Carrolls of the entire issued share capital of Carrolls Catering to Sutcliffe. The agreement notified included in clause 7 a number of non-compete provisions which are summarised below.

´Each of the vendors hereby covenants with the Purchaser.....that each of the vendors shall not (without the previous consent in writing of the Board of the Company, i.e. Sutcliffe):

1. for the period of five years after Completion either on their own account or for any other person, firm or company,

(a) transact business dealings with; or

(b) solicit or endeavour to entice away from the Company any person, firm, or company who or which within the preceding three years shall have been a customer of or in the habit of dealing with the Company.'

2. ´for the period of three years after Completion either on their own account or for any other person, firm, or company, solicit or endeavour to entice away from the Company any person who or which within the preceding one year shall have been an employee of the Company.'

3. ´for a period of three years after Completion within the Republic of Ireland.... engage or be concerned or interested whether as principal, director, manager, employee, agent, shareholder, partner, consultant, or otherwise in or provide funds (whether by way of loan, investment, gift or otherwise) to or for any trade or business or body corporate owning or operating such trade or business being carried on at Completion by the Company.'

The clause also provided that the vendors should not make use of the name Carroll Catering or both Carroll and Catering with or without any other name or words in a business the same as that of the Company. It also provided that the clause will not prevent the vendors from holding for investment purposes stocks, shares, debentures or bonds in any public company, which is listed on a stock exchange subject to the vendors together not holding more than 10 percent of the equity share capital of such a company which itself or one of whose subsidiaries has an interest in a business the same as that of the Company.

9. Clause 8, as notified, restricted the vendors for an unlimited time from using or disclosing any confidential information used by the Company including but not limited to:-

´(a) information used in the production of goods or the provision of services;

(b) information relating to the programming or use of any computer;

(c) information relating to marketing including customers' names and market surveys

unless the use or disclosure of such information does not cause any damage or injury to the company.'

10. As part of the sale agreement Mr. John Carroll and Mr. K. Carroll entered into employment agreements with the company. Mr. John Carroll was to be employed as Deputy Chairman and full-time Executive Director until 12 July 1993 and as Deputy Chairman and part-time Executive Director from then until 6 February 1996. Clause 10 of this agreement contained a number of non-compete provisions. Specifically it provided that for three years after the termination of such employment, Mr. John Carroll would not, without the previous written consent of the Company:

(i) transact business dealings with or solicit or endeavour to entice away from the Company anyone who was a customer within the previous three years;

(ii) solicit or endeavour to entice away from the Company anyone who had been an employee within the previous three years;

(iii) engage in or be concerned or interested in any firm engaged in a business being carried on by the Company at termination.

The agreement with Mr. K. Carroll appoints him as Sales and Operations Director. It also contains a number of non-compete provisions although these are only for six months after termination of employment.

11. The parties referred to the decision of the EC Commission in Reuter/BASF [2] and the European Court of Justice decision in Remia [3] 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 [4], 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.'

12. They claimed that the period of three years specified under clause 7[3] was reasonable in the circumstances and did not prevent, restrict or distort competition in trade in any goods or services in the State or in any part of the State. Specifically they argued that, as Mr. John Carroll had built up this business from scratch, his personal involvement was a major contributory factor to its success and that, where the personal involvement of such an individual was a major element in the goodwill of the business, a restriction on doing business with or soliciting former customers, was justified. In addition they argued that, as the contract of the business with its clients were typically for a period of three years, they should be protected against competition from Mr. John Carroll for a period long enough to afford them the opportunity of renewing all of the existing contracts of the business.

13. They argued that the employment contracts did not constitute agreements between undertakings and so they did not come within the scope of section 4(1).

14. Following discussions with the Authority the parties indicated by letter dated 9 August 1993, that they would amend a number of the restrictive provisions in the sale agreement by means of a supplemental agreement and that they would amend the provisions of Mr. John Carroll's employment contract.

15. Clause 7(1) of the Principal Agreement was amended to provide that:

Each of the Vendors would not (without the previous consent in writing of the Board of the Company):

(a) for the period of three years after Completion either on their own account or for any other person, firm or company, solicit or endeavour to entice away from the Company any person, firm, or company who within two months prior to the date of Completion shall have been a customer of or in the habit of dealing with the Company.'

(b) for the period of two years after Completion either on their own account or for any other person, firm or company, transact business dealings with any person, firm, or company who within two months prior to the date of Completion shall have been a customer of or in the habit of dealing with the Company.'

16. The effect of these changes is to reduce the duration of the restriction on the vendors soliciting customers of the business from five years to three, while limiting it to those who were customers during the period immediately prior to completion rather than at any time during the previous three years. The restriction on doing business with such customers is reduced from five years to two. Clause 7.2 was amended so as to reduce the duration of the restriction on the vendors soliciting the employees of the business from three years to two. The restriction was also amended so as to apply only to those who were employees at completion as opposed to anyone employed within the preceding year. The restriction on being involved in a competing business in clause 7.3 was also reduced from three years to two.

17. Clause 8 relating to confidential information was also amended. In particular clause 8(b) which specified information relating to the programming or use of any computer was deleted, while it was also stated that the amended clause 8 would not apply ´to the extent that a Vendor would, by virtue of such provisions, be deemed to be prohibited himself or herself from doing any one or more of the acts matters or things referred to in subclauses (1),(2) or (3) of clause 7 after the expiry of the respective periods of time specified in those subclauses.'

18. In their letter of 9 August 1993 the parties proposed that Mr. John Carroll's employment contract would be amended to provide that the restrictions contained therein in respect of (a) transacting business with or soliciting customers, (b) soliciting employees, and (c) being involved in a competing business would apply only for so long as Mr. Carroll was employed by the company. In addition it only applies in respect of employees and businesses currently engaged in by the company, and in respect of persons who were or shall have been customers at or at any time since 14 October 1992.

19. Subsequent to the receipt of this notification Sutcliffe Ireland acquired control of National Catering Ltd. Sutcliffe Ireland was in turn sold by its parent to Granada. The arrangements involved in those transactions are not part of the present notification. In July 1993, the name of John D. Carroll Catering Limited was also changed to Sutcliffe Catering Services Limited.

20. 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.'

21. 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 Sutcliffe and the Carrolls. Sutcliffe is a body corporate which has acquired the business of Carroll Catering with the intention of providing a service for gain. Consequently it is an undertaking within the meaning of section 3(1) [5]. The Carrolls were at the time of the Agreement the owners of the business of Carrolls Catering. The Authority has previously stated in identical circumstances that, in its view, the owners of a business are undertakings within the meaning of Section 3(1) [6]. The Carrolls are therefore undertakings. The present arrangement is, in the Authority's view, an agreement between undertakings.

22. The present arrangements therefore constitute an agreement between undertakings whereby Sutcliffe has purchased Carrolls Catering from the Carrolls. The Authority indicated in Scully/Tyrrell that in considering whether an agreement for the sale of business had the effect of preventing, restricting or distorting competition within the State or any part of the State, it would consider its effect on the degree of market concentration. Sutcliffe was not previously active in the market so the arrangement has no impact on the actual number of competitors or their market shares. Consequently the degree of market concentration, however measured, is unaffected by the arrangements.

23. If the definition of the relevant market were limited to the actual provision of catering services to firms and institutions by specialist catering firms, the market could be deemed to be highly concentrated. 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 the Authority believes that self operated catering services are sufficiently close substitutes for bought in catering services for them both to be regarded as part of the same market in the context of the present agreement [7]. The Authority believes that the acquisition of Carrolls Catering by Sutcliffe is highly unlikely to have any anti-competitive effects in the relevant market as there is no indication that the level of market concentration after the merger will pose any threat to competition. In its opinion the sale of the business does not offend against Section 4(1).

24. Clause 7 of the agreement, as notified, contained a number of non-compete provisions. Clause 7(4) is a restriction on the Vendor using certain trade names associated with the business which is being sold. The Authority has already indicated in previous decisions that it does not consider such provisions offend against Section 4(1) [8].

25. Clause 7(3), as notified, provided that the vendors would not directly or indirectly for a period of three years after Completion engage in the business being carried on at Completion by the Company. The Authority has stated its views on such restrictions in a number of previous decisions, (including that cited by the parties in their submission). Where such a restriction does not exceed what is necessary for the protection of the goodwill in terms of its duration, geographic coverage and subject matter, then it does not, in the Authority's opinion, offend against Section 4(1). In General Semiconductor, the Authority indicated that, having had an opportunity to consider a number of such agreements, it would generally consider a non-competition clause exceeding two years in a sale of business agreement to offend against Section 4(1) [9].

26. As clause 7(3) is limited to the business carried on by Carrolls Catering at Completion, the restriction does not go beyond what is necessary to protect the goodwill in terms of subject matter. It applies to the whole of the State but, as the business operated on a nationwide basis, this is no more than is necessary to protect the goodwill of the business being sold. The duration of the restriction was three years from the date of completion. A comparison with the position in Nallen/O'Toole where the Authority allowed a three year non-compete clause, is relevant. In that instance the Authority indicated that a period of more than two years was justified on the grounds that the business concerned was located in a small town, customers only purchased the products involved infrequently, it involved a fair degree of personal contact with the customers and the vendor remained active in business in the locality. In this instance, although the personal involvement of Mr. John Carroll was a factor in the development of the business, the purchaser will be supplying services on a regular basis, (in many cases on a daily basis), for the duration of the outstanding contracts. In such circumstances the Authority considers that customers would be likely to renew their contracts unless they feel that they can obtain a better service at a better price from a competitor.

27. The Authority considered the parties' claim that the duration of the non-compete clause should be sufficiently long to enable them to have an opportunity of renewing all of the business' existing contracts without facing competition from Mr. John Carroll. The Authority's view is that the non-compete clause must be limited in duration to what is necessary to enable the purchaser of a business to secure its goodwill. It must therefore be no more than is necessary to enable the purchaser to build up a relationship with the customers of the business. The Authority cannot accept the argument that a non-compete clause should be for so long as is necessary to enable the renewal of all of the business' existing contracts since in many cases this could represent a period well in excess of two years.

28. In the light of its General Semiconductor decision the Authority believes that a restriction of more than two years would offend against Section 4(1), unless there were good reasons to justify a longer restriction. Consequently it will be extremely reluctant to certify that a sale of business agreement with a non-compete clause of more than two years does not offend against section 4(1), where only a transfer of goodwill is involved. In this instance the Authority considered that the duration of the restriction on the vendors competing with the business originally contained in clause 7(3) went beyond what was necessary to secure the complete transfer of the goodwill of the business, and it therefore offended against Section 4(1). The duration of the clause has now been reduced to two years and consequently it no longer offends against section 4(1).

29. Clause 7(1), as notified, restricted the vendors from transacting business with or soliciting customers of Carrolls Catering for five years from completion. The duration of this provision also went beyond what was necessary to secure the complete transfer of the goodwill of the business and, in the Authority's view, offended against Section 4(1). The duration of clause 7(1) has now been reduced to three years in respect of soliciting customers of the business and two years in respect of doing business with such customers. The Authority remains of the view that a restriction of two 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. The Authority considers that a three year restriction applying only to soliciting former customers may be necessary in this case, given the key role played by Mr. Carroll in the development of the business, and the fact that his personal contacts in the business constitute an important element of the goodwill of the firm. The limitation of the restriction on doing business with such customers to two years means that Mr. Carroll would be free to deal with them after such a time if they were to approach him. He would also be free to advertise his services after two years. The clause as amended does not, in the Authority's opinion offend against section 4(1).

30. Clause 7(2), as notified, provided that for a period of three years after Completion the vendors would not solicit or entice any employee of the company. As the Authority considered that a restriction on the vendor competing with the business for a period of two years was sufficient to secure the transfer of the goodwill of the business, the restriction in clause 7(2) also offended against section 4(1). As the duration of this clause has been reduced to two years, it does not, in the Authority's opinion offend against section 4(1).

31. The restrictions in clause 8 relate to the disclosure of know-how and confidential information. The Authority has already considered such restrictions in previous decisions [10]. In ACT/Kindle the Authority indicated that it would accept a five year restriction on the vendor using technical know-how. It indicated that:

´To afford the purchaser unlimited protection against the use of technical know-how by the seller would, in the Authority's view, restrict competition since such an unlimited restriction would go beyond what is necessary to secure the complete transfer of the business to the purchaser.'

In the Authority's view the information used in the production of goods or the provision of services which is specified in clause 8(a) does not constitute technical know-how. The Authority indicated in ACT/Kindle that it would accept the definition of technical know-how contained in the EC Know How Licensing Regulation. This provides that ´know-how means a body of technical information that is secret, substantial and identified in the appropriate form' [11]. In this instance the Authority does not consider that information used in the production of goods or the provision of services constitutes technical know-how as defined in the Regulation. The restriction in clause 8 on the use of know-how involved in the production of any goods or provision of a service unless it did not cause any damage or injury to the company, could effectively constitute a restriction on producing such goods or providing such services in competition with the company for an unlimited period of time.

32. In Budget Travel the Authority indicated that a restriction on the use of confidential information could not be used to prevent the vendor of a business re-entering the market once a non competition clause had expired. Clause 8, as notified, could have had this effect, and it therefore offended against section 4(1). In addition the restriction in clause 8 (b) on the use or disclosure of any information relating to the programming or use of any computer also offended against section 4(1) as it went beyond what was necessary to protect confidential information belonging to the company. Indeed such a restriction could make it extremely difficult, if not impossible, to engage in any form of business, given the importance of computers in modern business. As clause 8 has been amended to provide that it will not be used to prevent the vendor re-entering the market once the non-compete provisions have expired and the reference to programming or use of computers has been dropped, it no longer offends against section 4(1).

33. The employment contracts between Carrolls Catering and Mr. John Carroll and Mr. K. Carroll were entered into as part of the sale agreement. They were expressly included as part of the notified arrangements. Essentially the arrangement involved Sutcliffe buying the business of Carrolls Catering and retaining the services of the Carrolls. If Mr. John Carroll had not entered into such an employment agreement the purchase price would have been lower than it was. Consequently, in the Authority's view the agreement between Mr. John Carroll and Carrolls Catering was an essential part of the overall agreement and it must be regarded as part of that agreement between undertakings [12]. The agreement between Carrolls Catering and Mr. K. Carroll was also entered into as part of the sale. One of the parties to that agreement, however, Mr. K. Carroll, was not, and is not now, an undertaking, since he did not own or control the business, and he was not a party to the sale agreement. He was a director of Carrolls Catering but he held no shares in that company. This agreement is not an agreement between undertakings and so does not come within the scope of section 4(1). This view is consistent with that expressed by the Authority in its notice on Employee Agreements [13] and its decision in Peter Mark [14]. It is without prejudice to the fact that he might become an undertaking on the cessation of this employment.

34. The Authority has indicated in Scully/Tyrrell, where the vendors remained on as shareholders and employees of the business following a merger, that a restriction on the vendors competing with the business for so long as they were employees and/or shareholders and for two years after they disposed of their shareholding did not offend against section 4(1). It went on to state that:

´In its view a restriction on individuals competing with a business in which they were shareholders would offend against Section 4(1) where such shareholding was purely for investment purposes or was an artificial arrangement whose object or effect was to evade the prohibition contained in that section. It would take a similar view of an employment contract that was an artificial arrangement whose object or effect was to evade the prohibition contained in that section.'

35. In the Authority's view the effect of clause 10 of the employment contract, as notified, was to further extend the duration of the non-competition clause contained in clause 7 of the sale agreement. Specifically, as Mr. John Carroll will remain employed under the agreement until February 1996, a non-compete clause for three years from that date would result in a restriction on competition for over six years from the date of completion. The Authority believes that, where the vendor agrees to become an employee of the business, he should not compete with it for so long as he remains an employee, but a restriction on his competing after he has ceased to be an employee is not acceptable. In particular it is concerned that this could simply become a way of extending the duration of non-competition clauses in sale of business agreements far beyond what is necessary to secure the transfer of the goodwill of the business. Consequently, in the Authority's opinion, clause 10 of the employment agreement between Mr. John Carroll and Carrolls Catering offended against section 4(1). As the duration of clause 10 has now been limited to the period during which Mr. John Carroll remains an employee it no longer offends against section 4(1).

36. The Authority wishes to point out that, in its opinion, where restrictions in a sale of business agreement offend against section 4(1), because they are deemed to go beyond what is necessary to secure the transfer of the goodwill, they cannot be regarded as indispensable to the sale of the business, and, consequently, they would fail to meet the requirements for a licence specified in section 4(2).

37. The agreement between Sutcliffe (Ireland) and Mr. John D. Carroll and Ms. Marie Therese Carroll for the sale of the entire issued share capital of Carrolls Catering is an agreement between undertakings, since the parties to the agreement are undertakings. The employment agreement between Mr. John Carroll and Carrolls Catering is also an agreement between undertakings, since it constitutes an integral part of the overall sale agreement. As Mr. K. Carroll was not, and is not an undertaking, the employment agreement between him and Carrolls Catering is not an agreement between undertakings and is not, therefore, an agreement of a kind described in section 4(1). The notified agreement, as amended by the letter of 9 August 1993, does not, in the Authority's opinion offend against section 4(1).

38. 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 14 October 1992 between John D. Carroll Catering Limited and Sutcliffe Ireland Limited for the acquisition of the entire issued share capital of Carroll Catering Limited by Sutcliffe, (notification no. CA/1136/92), notified on 30 December 1992 under Section 7, and amended by the letter of 9 August 1993, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

9 September 1993.