Irish Competition Authority Decisions

1. An agreement between Reflex Investments plc (Reflex), Gerard Merrick, Consilii Merrick, Michael Kelly, John McNerney, and Dermot McCarthy (the Vendors) for the purchase and sale of the entire issued share capital of Auto-Computing Limited (Auto-Computing) containing a non-compete clause, was notified to the Competition Authority on 30 September 1992. The notification requested a certificate or, in the event of a certificate being refused, a licence. The Authority issued notice of its intention to issue a certificate in the Irish Times dated 21 January 1994, and invited submissions from interested third parties. A submission was received from Mr. Gerard Merrick.

2. The notification relates to an agreement dated 27 July 1990 between Reflex and the Vendors whereby the Vendors agree to sell the entire issued share capital of Auto-Computing to Reflex. The agreement also contains a non-compete provision. In addition Mr. Merrick and Mr. McCarthy entered into employment contracts with Auto-Computing as part of the arrangements.

3. Reflex is a public limited company registered in the State. Auto-Computing is also a limited company incorporated in the State. At the time of the agreement, the Vendors were the joint beneficial owners of Auto-Computing. Mr Merrick ceased to be employed by Reflex on 11 August 1993.

4. The notification relates to an agreement, dated 27 July 1990, for the sale by the Vendors of the entire share capital of Auto-Computing to Reflex. As part of the agreement, Gerard Merrick and Dermot McCarthy became employees of Reflex and entered into employment contracts. Clause 5.03(a) of the share purchase agreement prevented Mr. Merrick from competing in the same business as that sold for a period of two years from the date of completion of the agreement or the date of termination of employment, whichever was the later. This clause also prevented Mr. Merrick from soliciting staff of Auto-computing for the same period. (Clause 5.04(b) of Mr Merrick's employment contract contains similar provisions.) Clause 5.03(b) places similar restrictions on Mr. McCarthy for a period of one year from the appropriate date. In addition, under the terms of Clause 5.03(c), the vendors undertook not to purchase shares in any unquoted, competing Irish business, for a period of five years from the date of the agreement.

5. Following discussions with the Authority, the notifying parties, in a letter dated 12 November 1993, indicated their intention to amend the non-compete clause to remove the restrictions on Mr. Merrick and Mr. McCarthy from competing with Reflex following cessation of employment. In particular it stated that the restrictions on competition contained in clause 5.03 of the Share Purchase Agreement had been waived by Reflex as to the restrictions on Mr. Merrick and Mr. McCarthy leaving employment. In addition Reflex informed Mr Merrick by letter dated 26 October 1993 that they were waiving the provisions of clause 5.04(b) of the employment contract. The non-compete clauses from the date of completion, however, will continue to apply as will the restrictions in clause 5.03 (a) (iv) and 5.03 (b) (iv), relating to the protection of confidential information and, 5.03 (c) relating to the restriction on the vendors investing in shares in companies which carry on a competing business, for a period of five years from the date of completion.

6. Following publication of the notice of intention, the Authority received a submission from Mr. Merrick which objected to the restriction in clause 5.03 (c) of the Share Purchase Agreement on the grounds of its reasonableness and necessity. He argued that such a restriction would put him at a competitive disadvantage to others in this market. In support of this argument, he referred to the proposed changes in the Finance Act, 1994, in relation to the Business Expansion Scheme, whereby owner proprietors would be permitted, in some circumstances to avail of Business Expansion Scheme relief. He argued that the purpose of the amendment was to encourage competition and to create a business climate in which small businesses would prosper and employment opportunities would increase. The granting of a certificate to clause 5.03(c) by the Authority would, in Mr Merrick's opinion, represent a fundamental departure from the intention of the Competition Act, which was to prevent anti-competitive agreements. Given the relative lack of opportunities for employment for a person of his seniority and status in this sector, Mr. Merrick submitted that it was imperative, in order to obtain employment, that he be allowed to make investments in private companies. In conclusion, he submitted that clause 5.03 (c) would have the effect of preventing him from earning a living, was not necessary to protect the interests of Reflex and was fundamentally anti-competitive and against the public interest.

7. 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'.

8. 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.' Reflex is a public limited company engaged for gain and is, therefore, an undertaking. At the time of the agreement, the Vendors were joint beneficial owners of Auto-Computing, itself a limited company engaged for gain, and, therefore, are also undertakings within the meaning of the Act.

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

10. The agreement contained a non-compete provision of two years from the date of completion in the case of Mr. Merrick and one year in the case of Mr. McCarthy. These periods have since expired. In the Authority's opinion, they did not have the object or effect of preventing, restricting or distorting competition. The agreement also prevented Mr Merrick from competing in the same business as that sold for a period of two years from the date of cessation of employment. Mr. McCarthy was prevented from competing in the same business for one year from the date of cessation of employment. In the Authority's opinion, such a provision would offend against Section 4(1) and would not satisfy the requirements for a licence. As Reflex have indicated that they have waived the restrictions triggered by the cessation of employment, this no longer offends against Section 4(1). The agreement also contained a five-year restriction on the Vendors from purchasing shares in any unquoted, competing Irish company. As the computer business is one which involves a high degree of technical know-how, the Authority believes that in the case of this notification, a non-compete restriction of this duration does not have the effect of preventing, restricting or distorting competition. This is consistent with previous decisions of the Authority [2]. The Authority therefore cannot accept Mr. Merrick's argument that this provision offends against Section 4(1). In addition, the agreement contained an unlimited restriction on the Vendors using or disclosing confidential information relating to the business or affairs of the company, or of the purchaser or its customers. In the Authority's opinion, such a restriction is acceptable provided it is not used to prevent the Vendor from re-entering the market. In this instance the Authority is satisfied that this restriction will not be used for such a purpose and consequently, it does not offend against section 4(1).

11. In the Authority's opinion, Reflex and the Vendors are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements for the acquisition of Auto-Computing 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 of 27 July 1990 between Reflex and the Vendors for the purchase and sale of the entire issued share capital of Auto-Computing, as amended by the letter of 12 November 1993, does not, in the Authority's opinion, offend against Section 4(1) of the Competition Act, 1991.

12. 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 Reflex Investments plc, Gerard Merrick, Consilii Merrick, Michael Kelly, John McNerney, and Dermot McCarthy for the purchase and sale of the entire issued share capital of Auto-Computing Limited (notification no. CA/748/92E), notified to the Competition Authority on 30 September 1992, under Section 7, and amended by the letter of 12 November 1993, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

11 March 1994.