Irish Competition Authority Decisions

1. Arrangements for the sale, as a going concern, of the business and assets including the goodwill of Legal and Commercial Insurances Limited (LCIL) to Sedgwick Dineen Limited were notified to the Competition Authority on 29 September 1992. The notification requested a certificate, or, in the event of a refusal by the Authority to issue a certificate, a licence.

2. The notification concerns an Asset Purchase Agreement dated 14 December 1990, between LCIL (the vendor), Paschal Butler, Kieran Halpin, Martin Murray, Henry Collier and Peter Lyons (the covenantors), and Sedgwick Dineen Limited (the purchaser) for the sale, as a going concern of the business and assets of LCIL to Sedgwick Dineen Limited (Sedgwick Dineen). Under the terms of the agreement some of the former employees of LCIL became employees of Sedgwick Dineen and entered into employment contracts. The arrangements also contained a number of non-compete clauses.

3. Sedgwick Dineen is a limited liability company incorporated in the State, and is involved in the insurance agency and broking business. LCIL was also a limited company incorporated in Ireland and was, at the time of the agreement, engaged in the business of providing insurance services. At the time of the agreement the covenantors were the beneficial owners of the share capital of LCIL.

4. The notification relates to an agreement made in December 1990 for the sale of the business and assets, including the goodwill of LCIL to Sedgwick Dineen. Clause 11.02(b) provided that each of the covenantors, other than Mr. Butler, should enter into service agreements with the company. The service agreements were included in schedule 3 of the agreement. The purchaser also undertook to employ a number of the employees of LCIL namely, Joan Harding, Donnacha Smith, Dara Larkin, Elizabeth Keoghan and Nial Bailey (the transferring employees). These employees also entered into service contracts with Sedgwick Dineen for a period of five years. The service agreements could be terminated by either party, at any time during, or after the five years for a number of reasons, subject to a period of prior written notice being given to the other party. Schedule 2 of the notified arrangements contained a consultancy agreement whereby Pascal Butler was employed by Sedgwick Dineen on a consultancy basis for a period of one year. Both the Asset Purchase Agreement and the service agreements contained non-compete clauses.

Under the terms of clause 8 of the Asset Purchase Agreement the covenantors (these individuals were effectively the vendors as they owned LCIL at the time of the agreement), agreed that for a period of five years, within the republic of Ireland they would not:

"(i) either directly or indirectly engage, be concerned or be interested, in any business, or undertaking, which is or because of the Covenantors actions will be materially in competition with the Continuing Business as carried on from time to time by the Purchaser;

(ii) either directly or indirectly, solicit or canvass the custom or services of any person firm company or organisation

(a) on whose behalf either the Vendor or in the course of the Continuing Business the Purchaser acts or has acted as insurance agent, insurance broker, or to whom either provides or has provided insurance consultancy services, in the period commencing two years before Completion and terminating on the fifth year following Completion or (in respect only of the Covenantors in question) the earlier termination of the Covenantors employment with the Purchaser

(b) in respect of any business competing with the Continuing Business from whom either the Vendor or the Purchaser obtains insurance on behalf of their clients, in respect of the Business or the Continuing Business in the same period referred to as in (a) above."

The Covenantors also agreed not to use or disclose any confidential information (other than information lawfully obtained independently of their relationship with the vendor or, which has lawfully become public knowledge or, which they are required by law to disclose), relating to the Continuing Business of the Purchaser.

5. Clause 5 of the service agreements which were contained in the third schedule to the agreement, provided that an employee could not, for the duration of the agreement, become involved in any business, within the State, which competed with the Company. However, an employee was allowed to hold debentures of, or shares in a company provided that the shares did not exceed 5% of the entire issued share capital of the class concerned of that company. In addition, the employee was prevented, within Ireland, for a period of one year from the date of termination of employment, from soliciting any customers of the company or its predecessor in the two years prior to termination, or from soliciting any employees of Sedgwick Dineen for the same period. The employee was also prevented, for the duration of the employment or at any time thereafter, from disclosing any secret or confidential information relating to the company, obtained in the course of employment.

6. The Authority communicated its concern regarding the duration of the non-compete clauses in a letter to the parties, dated 15 July, 1993. The parties made no response to the issues raised by the Authority. The Authority issued a Statement of Objections on 16 March 1994, indicating the reasons why, in its opinion, the notified arrangement offended against 4(1) of the Competition Act and did not satisfy the requirements for a licence set out in 4(2). In response to the statement of objections the parties submitted that the covenants preventing the covenantors from competing with the business or soliciting its customers for five years were justified on the grounds that the agreement entailed the transfer of considerable know-how. In support of their argument the parties referred to the "well established principles of the EC Commission" in this regard and also the Authority's decision in ACT/Kindle. They pointed out that the business carried out by LCIL and sold to Sedgwick Dineen involved the highly specialised insurance broking business of dealing with export and domestic credit insurance, with 80%/85% of the total export credit insurance being brokered through them. It was argued that the business was one which required considerable know-how and expertise and long term investment in building up relationships with overseas underwriters. It would take considerable time for Sedgwick Dineen to build up sufficient in-house expertise in this specialised field and would entail significant manpower training costs. According to the parties this could not be achieved in two years.

7. Regarding the one year restriction on soliciting employees of Sedgwick Dineen in clause 5(ii)(b) of the service agreements, the parties submitted that this clause fell outside the scope of Section 4 of the Competition Act in line with the Authority's notice on employee agreements. They argued that unlike the situation in decision numbers 12 and 24, (Scully/Tyrrell and Cambridge/Imari), the employees in question in this case did not exercise de facto control over the acquired company. They had no holdings in Sedgwick Dineen and did not exercise any de facto control over the operations of the company. Therefore the economic reality is that their relationship with the company constituted no more than that of employer/employee. The parties referred to decision no. 29 - John D. Carroll Catering Limited, where the Authority expressed concern that the inclusion of a post-employment covenant could be used simply to extend the duration of the non-compete clause in the sale of business agreement beyond what was necessary for the transfer of the goodwill. They submitted that this was not the intention in this case. The contracts were designed to secure the valuable services and expertise of these employees.

8. It was submitted that the one year restriction on an employee soliciting former colleagues on termination of his employment was justified for the same reasons as those put forward in order to justify the 5 year covenant in the Asset Purchase Agreement. Due to the fact that there were only a small number of people in Ireland who possessed the required expertise for this particular service, it was submitted that the one year covenant was necessary to protect the proprietary interests of the employer. An employee leaving the employment of Sedgwick Dineen would be recognised by the potential market as having the expertise necessary to carry out this business. If he were to be allowed to entice away present employees of Sedgwick Dineen's, this would put at risk the time and money spent by them in training these people and jeopardise the whole portfolio of the business.

9. 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 goods or services in the State or in any part of the State are prohibited and void".

10. Section 3(1) of the Competition Act defines an undertaking as "a person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of a service." Sedgwick Dineen is a corporate body engaged for gain in the insurance industry. LCIL was also a corporate body engaged for gain. Contrary to the claims of the parties that the covenantors were employees and therefore not undertakings, at the time of the agreement the covenantors were the beneficial owners of LCIL and were engaged for gain in the insurance agency and broking business. Therefore, they were undertakings.

11. As the Asset Purchase Agreement (other than the non-compete clause) was completed prior to 1 October, 1991, the date on which the Competition Act came into force, that element of the agreement was discharged by performance before the Act commenced. In the Authority's view, the prohibition under 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] The business and assets which were the subject of the agreement had been transferred, prior to the coming into force of the Act.

12. Clause 8 of the Asset Purchase Agreement provided that the covenantors were prevented from becoming engaged in a competing business for a period of five years from the date of completion. This clause also prevented them, for the same period from soliciting any person, firm, company or organisation who had been customers of the vendor or, in the course of continuing business, the purchaser, in the previous two years. The covenantors also agreed not to use or disclose any confidential information relating to the business. In its first decision, Nallen/O Toole, the Authority stated that it regarded some restrictions on the seller of a business as being essential in order to ensure the transfer of the goodwill of the business [2]. In its opinion, provided such restrictions were limited in terms of their duration, geographic coverage and subject matter to what was necessary to secure the transfer of the goodwill of business, they would not be in breach of section 4(1) of the Act. In General Semiconductor the Authority considered that a restriction of two years would generally be regarded as being sufficient for the complete transfer of the goodwill of a business [3]. In this instance the restrictions on becoming involved in a competing business or , soliciting customers is for a period of five years. Therefore, in the Authority's opinion it exceeds what is necessary to secure the transfer of the business and consequently it offends against section 4(1). In terms of geographic coverage and subject matter, the restrictions do not offend against section 4(1).

13. The parties claimed that a longer restriction was justified as the sale involves technical know-how. The EC Regulation on know-how licensing defines know-how as 'a body of technical information that is secret substantial and identified in appropriate form' [4]. The Authority pointed out in its decision in ACT/Kindle that it would accept such a definition of technical know-how [5]. While the Authority accepts that the credit insurance business is highly specialised and requires considerable expertise, it does not believe that there is technical know-how involved. Consequently the Authority cannot accept the argument put forward by the parties in support of the five year duration of the non-compete clause

14. The restriction on using or disclosing confidential information is for an unlimited period. In Budget Travel the Authority considered that an unlimited restriction on the vendor using or disclosing confidential information could be used to prevent Budget from re-entering the market after a non-compete clause had expired [6]. So long as it is not used for this purpose the Authority would not regard it as offending against section 4(1).

15. The service agreements in Schedule three are part of the overall agreement. This is an agreement between the transferring employees (four of these were the vendors of LCIL) and Sedgwick Dineen. Clause 5 of this agreement prevented the employee from becoming involved in any competing business for the duration of the agreement. However, this did not preclude the employee from holding debentures of or shares in a company, provided that the shares did not exceed 5% of the total issued share capital of that company. In Scully Tyrrell the Authority indicated that where the vendors remained on as shareholders and/or employees of the business following a merger, a restriction on the vendors competing with the business for as long as they were employees or shareholders and for two years after they ceased to be shareholders, did not offend against section 4(1) [7]. As the restriction in this instance only applies for so long as the individual is employed, in the Authority's opinion, it does not offend against section 4(1).

16. Under the terms of clause 5, the employee was also prevented, for a period of one year from the termination of employment, from soliciting any person, firm or company who was a customer of the company or its predecessor in the previous two years. The employee was also prevented from soliciting any employees of the company for the same period. In the light of its decision in Apex/Murtagh, the Authority believes that a restriction on soliciting customers of a business for up to one year after termination of employment is acceptable [8]. The Authority believes that such a restriction may be regarded as essential to protect the proprietary interests of the business and therefore does not offend against section 4(1).

17. The Authority considers that the restriction on soliciting employees of Sedgwick Dineen after the vendors employment ceases goes beyond what is necessary in order to protect the proprietary interests of the business. Therefore, in the Authority's opinion the restriction on soliciting employees offends against section 4(1).

18. In Apex/Murtagh the Authority considered that a restriction on use and disclosure of confidential information obtained during the course of employment was necessary for the protection of employer/employee relationships. In that decision the Authority stated that confidentiality was fundamentally necessary for the maintenance of such relationships and was akin to the goodwill being transferred in the sale of a business. Therefore, in the Authority's opinion the unlimited restriction on the use of confidential information obtained during the course of employment, in section 6 of the service agreements does not offend against Section 4(1).

19. The Authority concludes therefore, that the restrictions in the Asset Purchase Agreement on competing with the business and on soliciting any person, company or organisation who was a customer in the two years prior to completion, for a period of five years after completion offend against Section 4(1). The restriction on soliciting employees for one year after employment ceases, in the service agreements also offends against section 4(1) and therefore a certificate cannot be granted.

20. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which offends against Section 4(1) but which, ´having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

21. The restriction on engaging in a competing business and enticing customers for up to five years, in clause 8 of the Asset Purchase Agreement is considered to go beyond what is necessary to secure the transfer of the goodwill of the business. Consequently, in the Authority's opinion, it cannot be regarded as indispensable to the attainment of the objectives of the agreement and so does not satisfy the requirements for a licence. The restriction in the service agreements, on enticing employees for one year after employment ceases is also considered to exceed what is necessary in order to protect the proprietary interests of the business and could have a damaging effect on the individual successfully competing if he decided to re-enter the market following termination of employment. Consequently, in the Authority's view it cannot be regarded as being indispensable and does not sasisfy the requirements for a licence.

22. In the Competition Authority's opinion the agreement between LCIL, Paschal Butler, Kieran Halpin, Martin Murray, Henry Collier and Peter Lyons and Sedgwick Dineen relating to the sale of LCIL to Sedgwick Dineen (notification no. CA/204/92E) notified on 29 September 1992, under Section 7(2), constitutes an agreement between undertakings. It considers that the restrictions in clause 8 of the Asset Purchase Agreement on the vendors competing with, or enticing customers of the purchaser for a period of five years from completion, offend against section 4(1) of the Competition Act and do not satisfy the requirements for a licence under section 4(2). Similarly in its view, the restriction in the service agreements which form part of the Asset Purchase Agreement, on soliciting employees for one year after employment ceases offends against section 4(1) and fails to satisfy the requirements for a licence. Consequently the Authority refuses to issue a certificate or grant a licence in respect of the notified agreement.

For the Competition Authority

Patrick Massey

Member

19 May 1994