Irish Competition Authority Decisions

1. Arrangements for the purchase of a seed treatment business by Rhone-Poulenc Ireland Limited (RPI) from Shell Chemicals Ireland Limited (Shell) were notified to the Competition Authority on 18 September, 1992. The agreement was conditional on Shell and RPI entering into an agreement appointing Shell as sole and exclusive distributor of certain RPI products within the State at or before completion. The agreement also included a number of non-compete provisions. 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 6 August 1992, between RPI and Shell for the sale and purchase of the Shell seed treatment business. At the time of the sale and purchase, Shell and RPI were to enter into an agreement appointing Shell as sole and exclusive distributor of certain RPI products within the State.

3. Shell is a private limited company engaged in the marketing of a wide range of industrial chemicals, polymers and agricultural pesticides in the State. It has, as its ultimate parents, The Royal Dutch Petroleum Company and The Shell Transport and Trading Company Limited. RPI is a private limited company registered in Ireland and engaged in the importation and distribution of a wide range of chemical, agrochemical and animal health products. It is a subsidiary of the international company Rhone Poulenc.

4. The products concerned are those used in the seed treatment business within the State. Essentially seed assemblers treat their products in order to make them disease resistant. The parties have submitted that the following companies produce the following products for seed treatment in Ireland.

Rhone Poulenc Panoctine 30

Panoctine Plus

Rappor

Rappor Plus

Shell New Kotol

ICI Vincit

Ferrax

Bayer Raxil

Baytan

Janssen Pharmaceutical Fungazil

DowElanco Wireworm FS

In addition they have indicated that the following companies distribute the following products.

RPI Panoctine 30

Panoctine Plus

Shell New Kotol

Vincit

ICI Ferrax

Bayer Raxil

Baytan

Duphar Fungazil

Rappor

Rappor Plus

Wireworm FS

5. According to the parties the seed treatment market is highly competitive and new products are being developed by firms such as ICI, Bayer and Ciba-Geigy, the latter being a new competitor in the market.

6. There are a number of firms engaged in the seed assembly business in Ireland and they all treat their products in order to increase their resistance to disease. Specialised seed treatment dressing machines are used by seed assemblers for seed treatment. According to the parties most of these machines are leased to the seed assemblers for a nominal annual charge. The machines are maintained serviced and calibrated by the owner companies which are mainly producers\distributors of seed treatment chemicals. A number of these leasing agreements are included among the assets of the business being acquired by the company. The parties have stated that these leasing agreements provide that only products supplied by Shell may be used, unless otherwise agreed in writing by Shell. The parties stated that:

´The existence of this type of clause has historically made access to machinery important in order to access the cereal treatment market and may have inhibited chemical producers from penetrating the seed treatment market without alternative access to machinery.'

They also pointed out that, following problems with certain products in Autumn 1991 and Spring 1992, Shell granted RPI permission for its products to be used in Shell machines. In addition the parties have stated that upon completion of the acquisition, RPI deleted this form of clause from the standard Shell leasing agreements. The parties have claimed that assemblers remain reluctant to assume the responsibility of owning their own machines although they are freely available and are relatively inexpensive.

7. Detailed figures on the size of the seed treatment market are difficult to obtain. According to the CSO, the total value of seeds purchased by farmers in 1991 was £42.3m. The relevant market is the State.

8. The agreement relates to the acquisition by RPI of the seed treatment business of Shell. It includes in clause 10 a number of restrictive provisions which are summarised below.

Clause 10.01 restricts the vendors for four years from completion from:

(i) carrying on or assisting or being engaged concerned or interest in any business within Ireland which competes with any part of the business;

(ii) soliciting the custom within Ireland in relation to any services of the same type as those provided in the ordinary course of the Business of any person who at any time during the period of two years immediately preceding Completion was a customer or client of the Business;

(iii) soliciting any employee or consultant to the Purchaser;

Clause 10.02 provides that the vendor shall not at any time after completion, either on its own account or jointly with or on behalf of another person, either directly or indirectly cause or seek to cause to be terminated or adversely affected or otherwise interfere with any agreement or arrangement of any kind relating to the business. Clause 10.03 restricts the Vendor from disclosing any information of a secret or confidential nature or any know-how relating to the organisation, business, affairs, finances, customers, suppliers, employees or transactions of the business and from using to the detriment of the business any information which it has obtained or received in confidence in the course of or as a result of having owned the business, except to the extent required by law and then only after prior consultation with the purchaser.

9. Clause 3.01 (c) provides that the completion of the agreement is conditional upon a distribution agreement being executed and exchanged between the purchaser and the vendor at or before completion. Under the terms of the distribution agreement RPI has appointed Shell as its sole and exclusive distributor in the State of a certain chemical cereal herbicide. Such products are sprayed on plants at an early stage of growth to protect them against weed infestation. Clause 3.01 (g) provides that completion is conditional upon Shell being released from its obligations to Bayer (Ireland) Limited on foot of its existing distribution agreements in relation to the product commonly known as Raxil. This agreement was subsequently terminated.

10. The parties argued that as the acquisition agreement was tantamount to a concentration it did not fall within the ambit of section 4(1) of the Competition Act. They submitted that the position in this instance was different to that which arose in either the Philip Morris [1] case or in Woodchester [2] as RPI was not acquiring legal or de facto control over Shell but rather was acquiring certain assets, know-how, technology and goodwill from Shell in relation to the seed treatment business. It was argued that, as Shell was withdrawing completely from the market, there was no question of the arrangement serving as an instrument for the co-ordination of the commercial conduct of either Shell or RPI so as to restrict or distort competition in the seed treatment market. In addition it was submitted that the arrangements could not be regarded as anti-competitive given that there were several large multinational enterprises competing in the market, barriers to entry were low and competition was strong. In support of this they claimed that RPI's success in the market had encouraged other firms to accelerate the development of new products for the market.

11. The parties also submitted that the restrictions in clause 10 were not anti-competitive as they did not go beyond what was necessary to secure the transfer of the goodwill of the business being sold. A number of EC Commission decisions and judgments of the European Court of Justice were submitted in support of this claim as were the Authority's decisions in Nallen/O'Toole [3] and Athlone Travel [4].

12. It was stated that the distribution agreement was not anti-competitive since it related to a different product market and because the grant of distribution rights to Shell increased competition in that market. It was also submitted that this agreement satisfied the requirements for a licence set out in section 4(2) and the requirements of the EC Block Exemption for exclusive distribution agreements [5].

13. 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.'

14. 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 Shell and RPI. They are both corporate bodies engaged in the provision of goods and services for gain and are therefore undertakings within the meaning of the Act.

15. The present arrangements therefore constitute an agreement between undertakings whereby RPI has purchased Shell's seed treatment business. The Authority indicated in Woodchester that an agreement giving rise to a merger or concentration was not, in its opinion, outside the scope of section 4(1). It has restated this view on a number of occasions. The Authority does not accept the claim by the parties that, as the present agreement is for the sale of a business only, it lies outside the ambit of section 4(1). As the Authority indicated in Woodchester the prohibition in section 4(1) relates to any agreements between undertakings 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. It does not provide that certain types of agreements are not by their nature, subject to that provision. Thus in the Authority's view, the issue which it must decide upon in the case of any notified agreement, is whether it is an agreement between undertakings which has as its object or effect the prevention, restriction or distortion of competition within the State or within any part of the State. In Woodchester the Authority, while stating that the acquisition of a business did not offend against section 4(1) per se, indicated that in certain circumstances it might. In order to clarify its views it outlined in Scully Tyrrell [6] the circumstances in which it might find the acquisition of a business to be anti-competitive.

16. In this instance the Authority does not have detailed information on market shares which would allow it to measure the impact of the arrangements on the degree of market concentration which would normally be the first issue to be considered in assessing whether or not the acquisition can be regarded as anti-competitive. The Authority notes that there are a number of large firms competing in the relevant market. In addition it notes the claim that entry barriers are low. In such circumstances the Authority believes that the acquisition is unlikely to have an anti-competitive effect and hence it does not offend against section 4(1).

17. The agreement as notified contained a number of non-compete provisions which have been outlined above. Specifically under clause 10.01 the vendor may not engage in the relevant business or solicit customers or employees of the business for a period of four years from completion. Such restrictions have been dealt with on a number of occasions by the Authority and so it is only necessary to deal with them briefly in this decision. Specifically 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 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 such a transfer where only goodwill is involved while a restriction of up to five years may be acceptable where technical know-how is involved. The Authority considers that the particular business involving the production and preparation of chemicals for use in seed treatment involves a degree of technical know-how. Consequently, in its opinion, the restrictions in clause 10.01 do not offend against section 4(1).

18. The Authority's decision is not concerned with the seed assembly machinery leases directly as it considers that these constitute separate agreements between the business and its customers which have not been notified. It notes that the existing Shell agreements provided that the lessees could only use Shell products in the machines. Clause 10.02 of the acquisition agreement provided that the vendor should not cause or seek to cause to be terminated any agreement relating to the business. There is no time limit on this clause. If the exclusive use provisions of the leasing agreements were retained, then clause 10.02 would prevent Shell from re-entering the seed treatment business after the expiry of the provisions in clause 10.01. This would arise because the lessees could not use Shell's products in the machines and Shell could only sell its products if the lessees terminated the assembly machine leases. RPI indicated that it intended to remove the exclusive use provisions from the lease agreements. As a result of the amendment to the machine leases, Clause 10.02 does not prevent Shell re-entering the market for seed treatment chemicals and so it does not, in the Authority's opinion offend against section 4(1).

19. Clause 10.03 prevents the Vendor from disclosing any information of a secret or confidential nature or any know-how relating to the organisation, business, affairs, finances, customers, suppliers, employees or transactions of the business and shall not use to the detriment of the business any information which it has obtained or received in confidence in the course of or as a result of having owned the business, except to the extent required by law and then only after prior consultation with the purchaser.

20. 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 [7]. In particular the Authority wishes to draw attention to the views expressed by the European Commission in the Reuter/BASF case with which it fully agrees.

´It is further recognised that it may be necessary in certain cases to provide additional safeguards to ensure the effective performance of an agreement in cases where technical knowledge, constituting an important part of the value of a transferred undertaking, is placed at the disposal of the transferee. As in the case of goodwill, it must be possible to prevent the transferrer for a certain time from using such knowledge in a manner which would prevent the transferee from acquiring the undertaking with its market position undiminished.

Here too, the protection afforded to the transferee should be limited in time, since the transfer of legally unprotected know-how confers no exclusive rights on the purchaser. Contrary to the contention of BASF, the transfer of technical know-how in connection with the sale of an undertaking does not automatically preclude any further activity on the part of the seller based on such know-how. The opportunity of using such know-how which is unknown to competitors is, like goodwill, a competitive advantage. This advantage can be diminished by the development of third party competitors of their own know-how in the particular field of research. Unlike third parties the transferrer of an undertaking remains aware of the contents of any transferred know-how, since he cannot divest himself of his own knowledge. For this reason it appears legitimate to protect the transferee in order for a certain time to enable him to acquire the undertaking with its competitive position undiminished. This need to protect the competitive position of the undertaking provides the justification for and prescribes the time limits to any non-competition clause involved [8].'

21. The Commission went on to state that:

´In no circumstances may an obligation to keep know-how secret from third parties, imposed on the transfer of an undertaking, be used to prevent the transferrer, after the expiry of the reasonable term of a non-competition clause, from competing with the transferee by means of new and further developments of such know-how.'

In this instance the Authority believes that the restriction on the vendor disclosing technical know-how to third parties does not offend against section 4(1) provided it is not used to prevent the transferrer, after the expiry of the provisions contained in clause 10.01, from competing with the transferee by means of new and further developments of such know-how.'

22. In the Authority's opinion, Shell and RPI are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements for the acquisition by RPI of the seed treatment business of Shell, constitute an agreement between undertakings. The Authority believes that the acquisition of the business does not offend against section 4(1). The restrictions in the agreement are no more than is necessary to secure the transfer of the business to RPI. The agreement of 6 August 1992 for the acquisition of the seed treatment business of Shell by RPI between Shell Chemicals Ireland Ltd. and Rhone Poulenc Ireland Ltd. does not, in the Authority's opinion, offend against Section 4(1) of the Competition Act, 1991.

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 of 6 August 1992 for the acquisition of the seed treatment business of Shell by RPI between Shell Chemicals Ireland Limited and Rhone Poulenc Ireland Limited, (notification no. CA/98/92), notified on 18 September 1992 under Section 7, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

3 February 1994.