Irish Competition Authority Decisions

1. Arrangements for the creation of a veterinary partnership and for the subsequent purchase of the business by one of the partners were notified to the Competition Authority on 24 November, 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 arrangement, dated 5 March 1992, between Martin Andrew Doyle of Priory Street New Ross (the vendor) and Mr. Joseph Moffitt (the purchaser) of The Lodge, Mount Elliott, New Ross. The arrangement establishes a partnership for the purpose of a buy out of one of the partners by the other. This buy out is to be achieved over a period of 10 years. The purchase agreement and the associated partnership deed both include certain non-compete arrangements to apply from the time of the completion of the sale and the cessation of the partnership.

3. The Authority issued a Statement of Objections to both parties on 29 March 1993 expressing its concern with certain aspects of the non-compete provisions. The parties were given 28 days to respond and offered the opportunity of an Oral Hearing to present their case to the Authority. No reply was received from any of the parties.

4. Both Mr. Doyle and Mr. Moffitt are veterinary surgeons. Mr. Doyle has a practice located in the town of New Ross County Wexford which he has operated since 1965. Mr. Moffitt was employed by him as a veterinary assistant. Under the arrangements the parties will now operate the practice as a partnership with Mr. Moffitt buying out Mr. Doyle over a 10 year period.

5. The business in which the parties are engaged is a rural veterinary practice located in the town of New Ross. The parties provide veterinary services of all descriptions within a radius of approximately 20 miles of New Ross and perhaps further. Services would include a small pet practice along with veterinary services provided for farmers with various types of livestock. Mr. Doyle is a specialist in the equine/equestrian area. He has specifically excluded the equine practice from the sale agreement as he intends to continue in this business.

6. The market therefore is that for the provision of various types of veterinary services. The parties have stated that there are a number of veterinary practices located in New Ross and the surrounding areas and that it is also possible for new suppliers to enter the market. They estimate that the practice accounts for about one quarter of the veterinary business in the area. Four veterinary practices including Mr. Doyle's are listed in the latest edition of the Yellow Pages as being located in New Ross. In addition a number of others are located in adjoining towns. There were a total of 1,813 registered veterinary surgeons within the State on 1 January 1992.

7. The arrangements relate to the creation of a partnership between Mr. Doyle and Mr. Moffitt for the purpose of Mr. Moffit purchasing the business of the veterinary practice previously owned by Mr. Doyle over a period of 10 years. There are two related agreements one for the sale of the business over a period of 10 years and the other a deed of partnership which commenced on January 1 1992 and will continue until January 1 2003.

8. The sale agreement provides for the purchase of the Practice formerly operated by Mr. Doyle alone, including the goodwill attaching to it, over a period of 10 years. The purchase is being made in instalments on the basis of a schedule set out in the agreement under which a certain proportion of the business is to be transferred in return for payments by Mr. Moffitt. The first payment was made on 1 January 1992. Thereafter Mr. Moffitt will pay an annual sum on 1 January each year up to and including 1 January 2002.

9. Under clause 5 Mr. Doyle and Mr. Moffitt entered into a partnership agreement the terms of which are set out in an attached partnership deed.

Clause 7 provides that:

´the Vendor, will not within a period of five years engage in the private practice of Veterinary Surgeon within a radius of twenty miles from the town of New Ross such period to commence on the 29th day of September, 2002 accepting any work done by the Vendor, as assistant to the Purchaser.'

Clause 8 provides that:

´the Purchaser will not within a period of five years from the 29th day of September, 2002 engage in equine or equestrian practice within a radius of twenty miles from the town of New Ross accepting any work done by the Vendor, as assistant to the Purchaser.'

10. Clause 13.1.2 provides that each of the parties shall:

´devote his full time and attention to the Partnership diligently and faithfully employ himself in the Partnership and use his best skill and endeavours to carry on that business for the utmost benefit of the partnership.'

11. Clause 19.1 provides that any partner may retire from the partnership on giving the other partners not less than 6 months notice in writing expiring on the last day of the financial year. Clause 24 requires an outgoing partner to deliver up to the continuing partners lists of clients correspondence and all other documents and papers which may have come into his possession while he was a partner and he shall not retain any copies of them.

12. Clause 26.1 contains a number of non-compete provisions which are set out below.

´Each Partner hereby covenants with all the other Partners that he shall not for a period of [5] years from the date of retirement from the Partnership within an area of twenty miles radius of the town of New Ross;

(i) without the written approval of the Continuing Partners act for any person who shall have been a client [of] the Partnership within the preceding [2] years;

(ii) seek apply for accept or hold any part-time profession appointment whether honorary or paid by fees salaries or otherwise within the aforesaid area which is capable of being filled by a veterinary surgeon and for which the Continuing Partners or their nominees are applicants; or

(iii) do any act or thing which may tend to destroy or impair the goodwill of the practice of the Continuing Partners.

13. The parties have stated that there are a number of veterinary practices in New Ross and the surrounding areas and that it is presumably possible for new practices to commence. They have stated that, as the agreement concerns a small rural veterinary practice, the arrangements would not have the effect of preventing, restricting or distorting competition within the State in veterinary practices. They also made some arguments to justify the grant of a licence should a certificate be refused. Specifically they argued that the arrangements would result in the smooth transition of the practice, initially to a partnership and thereafter to the purchaser as a sole practitioner. They claimed that this would help the practice and that customers would benefit from the smooth transition and the continuation of the practice. They stated that the restrictions imposed would not interfere with the running of the practice and that the retiring partner would have some opportunities to continue in practice.

14. On 15 April the Authority wrote to Simon W. Kennedy solicitors, requesting certain additional information. It also indicated that, in its previous decisions relating to sale of business agreements, it had indicated that non-compete clauses of more than two years duration would generally be regarded as offending against section 4(1) and not meeting the requirements for a licence under section 4(2) of the Competition Act. The parties were asked what justification there was for a longer period of restriction in this instance. On 22 June 1993 the Authority wrote again to the solicitors representing both parties as no reply had been received in response to its earlier letter.

15. The parties argued, in a letter dated 8 July 1993, that the non-compete provisions were purely for the benefit of Mr. Moffit. They claimed that a restriction for more than two years was justified in this instance given the fact that Mr. Doyle has operated the business for 28 years in New Ross, was well known within the locality and is closely identified with the practice by everyone in the locality.

16. The Authority issued a Statement of Objections to the parties on 29 March 1994 indicating that it intended to refuse a certificate or licence to the notified agreement and setting out the reasons why it intended to do so. It indicated in a letter to the parties that it accepted that a non-compete clause of more than two years duration might be necessary in this instance but it did not consider that a restriction for five years was justified. In addition it indicated that such a restriction should date either from the termination of the partnership or the date of completion of the sale and could not apply in both instances. No response was received from either of the parties.

17. 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.'

18. 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 Mr. Doyle and Mr. Moffitt who are engaged as partners in the provision of veterinary services for gain and are therefore undertakings within the meaning of the Act. This view is consistent with that taken by the Authority in its first decision where it decided that two individuals who had carried on an electrical goods business in partnership were undertakings. [1] The arrangements involving the sale of business agreement and the deed of partnership constitute an agreement between undertakings.

19. The Authority has stated on a number of occasions that agreements for the sale of a business do not per se offend against Section 4(1) of the Competition Act. The Authority believes that the agreement notified is purely concerned with the transfer of ownership of a business and, in the absence of any indication that such a transfer would of itself prevent, restrict or distort competition, does not believe that the sale offends against section 4(1).

20. The arrangement is slightly unusual in that the sale is to take place in instalments over a period of 10 years. This gradual transfer of ownership is to be secured by the creation of a partnership involving both Mr. Doyle and Mr. Moffitt for that period. The Authority has indicated in previous decisions that it would take a negative view of any artificial arrangements designed to extend the period during which one or other of the parties were restrained from competing with the business being sold. [2] The Authority accepts that the present arrangement has not been designed with that object in view but that it constitutes an arrangement whereby the current owner can arrange for his future retirement and can sell his business to an individual who would not have the capital or resources to acquire it immediately.

21. The Authority has, in a number of decisions, indicated that in the case of a sale of business a restriction on the vendor competing with the business following the completion of the sale does not offend against section 4(1), provided it does not exceed what is necessary to secure the transfer of any goodwill involved, in terms of its duration, geographic coverage and subject matter. It has also stated on several occasions that it generally considers a period of two years sufficient to ensure the transfer of goodwill. Clause 7 provides for a restriction on the vendor competing with the business for a period of 5 years after completion of the sale. As only a transfer of goodwill is involved the Authority can see no reason for accepting such a long restriction and it believes that its effect will be not merely to secure the transfer of goodwill, but also to restrict competition. The restriction is confined to an area within 20 miles of the town of New Ross which is the area within which the practice operates. It is confined to the provision of veterinary services. Thus in terms of its geographic scope and subject matter it does not exceed what is necessary to protect the purchaser's interest in the goodwill of the business. Clause 7 of the sale agreement offends against section 4(1) since its duration exceeds what is necessary to secure the transfer of the goodwill of the business.

22. Clause 8 restricts the purchaser from providing certain equine and equestrian services within a radius of 20 miles of New Ross for a period of 5 years from 29 September 2002. Restrictions of this sort on the purchaser are unusual and would not normally be considered essential to the agreement. Effectively the vendor intends to continue in this business, so the intention is that this element of the partnership, with its associated goodwill, will be retained by him. In effect the sale involves the dissolution of the partnership with each party retaining a part of the business previously carried on jointly. Thus for reasons already outlined some restriction on the other partner, who is the purchaser in this instance, may be necessary to ensure that the vendor retains that part of the goodwill of the partnership. Such restrictions must, however, be subject to the limitations outlined in the previous paragraph. As in the case of clause 7 the Authority believes that the duration of clause 8 exceeds what is necessary to secure the transfer of the goodwill by virtue of its duration and it therefore also offends against section 4(1).

23. The Authority has not previously considered a partnership arrangement. It did, however, indicate in Nallen/O'Toole that it ´does not regard partnerships as being in contravention of the Act per se . In certain circumstances, however, partnership agreements may be in breach of Section 4(1).' It agrees with the views expressed by Mr. Justice Taft in the Addyston Pipe case in the United States almost a century ago.

´Again, when two men became partners in a business, although their union might reduce competition, this effect was only an incident to the main purpose of a union of their capital, enterprise, and energy, to carry on a successful business, and one useful to the community. Restrictions in the articles of partnership upon the business activity of the members, with a view to securing their entire effort in the common enterprise, were, of course only ancillary to the main end of the union, and were to be encouraged.' [3]

24. Consequently the requirement in clause 13.1.2 that each partner ´devote his full time and attention to the Partnership diligently and faithfully employ himself in the Partnership and use his best skill and endeavours to carry on that business for the utmost benefit of the partnership', cannot be said to offend against Section 4(1). Indeed the Authority has already indicated in Scully Tyrrell that:

´It is clear, even if it is not explicitly stated, that an agreement between parties to carry on business together, implies that they will not compete against the business or against each other so long as they remain in business together.' [4]

25. Similarly the Authority considers that the requirements in clause 19.1, to give notice of intention to retire from the partnership, and clause 24, to hand over correspondence and other information which rightly belongs to the partnership, do not offend against section 4(1).

26. Clause 26.1 contains a number of non-compete provisions which are to apply upon the dissolution of the partnership. These are related to the fact that the partnership is linked to the sale of the business. As already noted the purchaser of a business is entitled to protection against competition by the vendor where such protection is necessary to secure the complete transfer of the goodwill of the business. This applies equally where the vendor and purchaser have been engaged together as partners in a business. As stated, however, such protection must not exceed what is necessary to protect the transfer of the goodwill of the business.

27. Clause 26.1 restricts each partner for a period of 5 years from the date of retirement from the partnership, within an area of twenty miles radius of the town of New Ross from:

(i) acting for any person who would have been a client of the partnership within the preceding two years without the written approval of the continuing partners;

(ii) seeking, accepting or holding any part-time professional appointment whether honorary or paid which would be capable of being filled by a veterinary surgeon and for which the continuing partners or their nominees have applied; or

(iii) doing anything to damage the goodwill of the practice of the Continuing Partners.

This restriction is confined to activities which may be engaged in by a veterinary surgeon within the area in which the partnership operates and in terms of its geographic scope and subject matter does not offend against section 4(1). In the Authority's view, however, the restriction for a period of 5 years exceeds what is necessary to secure the transfer of the goodwill to the continuing partners for the reasons already set out above and thus offends against section 4(1).

28. In addition the Authority has to consider the relationship between clause 26.1 of the partnership deed and clause 7 of the sale agreement. The latter contains a restriction of 5 years dating from September 2002. While the Authority accepts that it is the intention of the parties to operate the partnership until that time it must nevertheless recognise the possibility that one or other party may retire from the partnership before that date. In particular if Mr. Doyle were to retire in September 1997, for example, the combined effect of the two clauses would be to prevent him from competing for a period of some 10 years after the partnership ceased. Should Mr. Doyle retire from the partnership then the business and the goodwill attaching to it would remain with Mr. Moffit. He would be entitled to be protected against Mr. Doyle competing with the business for some period of time after he had retired in order to ensure that he acquired the full goodwill of the business. However, once that period had expired Mr. Moffit would be entitled to no further period of protection. Thus in the event of Mr. Doyle retiring before 2002, some restriction on his competing with the business for a period of time after he retired from the partnership would be acceptable, but in those circumstances a further period beginning in September 2002 when Mr. Moffit would make the final payment for the business, would not. Protection against competition is only acceptable so long as it is necessary to secure the transfer of the goodwill. The transfer of the goodwill does not take place in instalments. The fact that the parties to a sale of business may agree to have the purchaser pay for the acquisition over a period of time does not, in the Authority's view, affect the period during which a non-compete clause can be regarded as not offending against section 4(1). For this reason the combined non-compete provisions also offend against section 4(1).

29. 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.'

30. In the Authority's opinion the non-compete provisions contained in the notified arrangements go beyond what is necessary to secure the transfer of the business. Consequently, in the Authority's opinion, they cannot be regarded as indispensable to the attainment of the objectives of the agreement and so do not satisfy the requirements for a licence.

31. ´In the opinion of the Competition Authority the agreement between Mr. Martin Andrew Doyle and Mr. Joseph Moffitt for the creation of a partnership between them and the eventual acquisition of the business by Mr. Moffitt (notification no. CA/1133/92) notified on 24 November 1992, under Section 7(1), constitutes an agreement between undertakings. It considers that the restrictions in clauses 7 and 8 of the Share Purchase Agreement and in clause 26 of the partnership agreement offend against section 4(1) of the Competition Act and do not satisfy the requirements for a licence under section 4(2). Consequently the Authority refuses a certificate or licence in respect of this notification.

For the Competition Authority

Patrick Massey

Member

10 June 1994