Irish Competition Authority Decisions

1. Arrangements for the sale by Kantoher Food Products Limited (the vendor), of a turkey processing line located at Killeedy, Co. Limerick, to Carton Brothers (Processing) Limited (the purchaser) were notified to the Authority on 30 September 1992. The notification requested a certificate or, in the event of a refusal to issue a certificate, a licence. The Authority issued a Statement of Objections to the parties on 5 July 1994, indicating its intention to refuse their request for a certificate or a licence. Carton Bros. responded in a letter dated 2 August 1994. They did not request an Oral Hearing.

2. The notification concerns an agreement dated 29 July 1991 between Kantoher Food Products Limited (KFP), Carton Brothers (Processing) Limited (CBPL) and Carton Brothers Limited (Cartons), for the sale by KFP of the equipment and the goodwill of a turkey processing plant, located at Killeedy, Co. Limerick to CBPL. The agreement contained a non-compete provision.

3. The Carton group of companies (Cartons) was established in the early 1920's and is involved in the production, rearing, processing and sale of chickens and poultry products. On 16 November 1990, CBPL a subsidiary of Cartons acquired 76% of KFP. Prior to the takeover by Cartons KFP was a wholly owned subsidiary of Kantoher Co-Operative Agriculture and Dairy Society Limited (the Co-Op). In July 1991, due to financial difficulties at the plant, CBPL was no longer in a position to support KFP and sold the entire shareholding (76%) of CBPL to Donal Flynn, a former manager of KFP. Mr. Flynn undertook to procure substantial investment of new funds into KFP. Immediately following the purchase of the shareholding, KFP sold the turkey processing equipment to CBPL. This sale is the subject of the notification. In December 1991, a liquidator was appointed to KFP and its assets acquired by the Kerry/Grove Group. The liquidator of KFP together with Grove Turkeys Limited subsequently instituted legal proceedings against CBPL, Cartons and others seeking to have the contract of 29 July 1991 declared void on several grounds.

4. The products involved in this instance are chicken and poultry meat products. The 1989 Census of Industrial Production indicates that the factory gate value of sales of processed poultry was £118m. According to Cartons, the Irish market for chickens is highly concentrated with the top five companies having 85% of the market. They claimed that the turkey market was dominated by Kerry Group and Grove Turkey Group which are part of the same operation and control 75% of the market. The chicken business has a steady year round trade while the turkey business is seasonal with the bulk of the trade taking place at Christmas and other holidays. According to Cartons there is also a growing business for value-added turkey products.

5. Cartons submitted that the main customers for both chicken and turkey products are the major multiples, the butchery and catering trades. The key to both markets is the ability of the processor to negotiate long term supply contracts. Cartons traditionally operated in the Dublin wholesale turkey market (up to 1976), but have now concluded contracts to process turkeys for smaller contractors.

6. The notification relates to an agreement made in July 1991 for the sale by KFP of a turkey processing line to CBPL. Although the agreement was made in July 1991 the equipment which was the subject of the sale was not due to be removed by CBPL until 30 April 1993, (the transfer date). Under the terms of a licence contained in clause 3 of the sale agreement, CBPL licensed KFP to use the equipment until the transfer date. KFP processed turkeys both for CBPL and for itself under the licence agreement. Clause 4 of the agreement contained a non-compete provision restricting KFP from competing with the purchaser in the production of turkey products in Ireland for a period of three years from the transfer date. A liquidator was appointed to KFP in December 1991, and its assets were acquired by the Kerry/Grove Group. The liquidator together with Grove Turkeys Limited subsequently took legal proceedings against CBPL seeking to have the contract of 29 July declared void.

7. Cartons submitted that no restraint on competition was placed on KFP. Mr. Flynn was getting out of the turkey business and had no intention of competing therein after the transfer date. No restriction was placed on KFP until after the transfer date. In addition the restriction only applied to producing or processing turkeys and did not prevent KFP from selling or marketing turkey products not processed by it. At the time of the agreement KFP were in urgent need of investment. A substantial part of the consideration for the equipment was paid on closing while leaving the equipment in the possession of KFP and allowing them to use it until the transfer date. The joint running of turkey and chicken processing operations had caused substantial difficulties for KFP and an essential part of the company's rationalisation plan was to concentrate solely on chicken production. Cartons submitted that CBPL was responsible for the removal expenses of the equipment. In addition the agreement and price were negotiated at 'arms length' with both parties having their own individual legal advice throughout.

8. In support of the three year non-compete clause, Cartons referred to the Authority's decision in Nallen/O'Toole and in particular to the fact that a non-compete clause is essential for the transfer of the goodwill in the sale of a business. They submitted that the restrictions were limited in terms of time, geographic coverage and subject matter. They also referred to the decision of the European Commission in Reuter/BASF and to the Commission's conclusion that provisions restricting the vendor of a business competing with the business sold could be found to be legitimate and not to contravene Article 85(1).

9. Cartons submitted that, due to the intention of Mr. Flynn that KFP would no longer engage in the processing and production of turkeys, the purchase of the plant equipment to be utilised to produce and process turkeys contributed to improving production with a consequent resulting benefit to consumers. It was also argued that the takeover would secure the survival of competition due to Mr. Flynn's intention not to continue to process turkeys. It was submitted that the three year non-compete clause was reasonable to secure the purchase of the business and goodwill of KFP and imposed upon KFP terms which were necessary to the attainment of the objectives.

10. The Authority communicated its concern regarding the non-compete clause in a letter to the parties, dated 15 July, 1993. In a reply dated 11 August, 1993 Cartons reiterated much of what they had already submitted in their original notification. In addition they indicated that, as in the Nallen/O'Toole and Athlone Travel cases, the seasonal nature of the turkey market justified the non-compete clause as the product was purchased infrequently. They argued that Cartons had brought considerable expertise and experience to KFP, including the training of personnel and the restructuring of the turkey processing line. They submitted that the expertise included technical know-how and they had installed their own computerised system of box weighing order processing and a computerised debtor system. They claimed that in line with the Authority's decision no. 10 GI Corporation/General Semiconductor, a period of five years was justified where technical know-how was involved. They stated the belief that it would be relatively easy for KFP to re-enter the turkey market after three years, having already established itself in the poultry business and having benefited from CBPL's involvement. Cartons had also given KFP the benefit of its poultry patent which it left with KFP. In addition Cartons submitted that KFP had benefited from CBPL's considerable repertoire of customer contacts during its involvement. As most turkeys were exported due to the infrequency of turkey sales, export contracts were very valuable. In conclusion Cartons submitted that KFP has only a 2.5% share of the turkey processing market and their exclusion from the market for three years would only have a very minimal effect on competition.

11. On 5 July 1994 the Authority issued a Statement of Objections to the parties indicating its intention to refuse their request for a certificate or a licence. In a reply dated 2 August 1994 the solicitors acting on behalf of Carton Bros. argued that the notified agreement which was the subject of the notification should be considered in the context of the overall rescue plan put in place to ensure the survival of KFP. They stated that the sale of the turkey processing line was an essential pre-requisite of this plan designed to provide KFP with a cash injection and to phase out turkey production which was causing KFP a substantial loss. Its object was not to restrain competition but to ensure the survival of KFP which was unable to compete in both the chicken and turkey businesses. They also argued that the agreement to sell the turkey processing line was contemporaneous to the agreement by CBPL to sell its shareholding in KFP to Mr. Flynn. They went on to argue that it had been agreed by both Mr. Flynn and CBPL prior to the sale of the shares that KFP would sell the turkey processing line and goodwill to CBPL immediately following the sale of shares to Mr. Flynn. The decision to sell the turkey processing line was, according to them, effectively made prior to the sale to Mr. Flynn and therefore at a time when KFP was in the control of CBPL. They argued that the notified agreement therefore involved an agreement between undertakings which were not economically independent but rather a group constituting a single economic entity and that the agreement amounted to a re-allocation of an asset and a function within the group. They cited the Authority's decision in AGF-Irish Life Holdings that an agreement between members of the same group which provided for a re-allocation of functions within the group did not offend against section 4(1).

12. They further argued that, although KFP had acquired a majority shareholding in KFP eight months prior to the agreement, this was an inadequate period for them to have acquired the goodwill of the business, that the goodwill had reverted back to KFP during the period up to the transfer date when it had operated the turkey processing line, and that the non-compete provisions were therefore justified. They also argued that Mr. Flynn's long standing service to KFP meant that much of the goodwill of the business attached to him. They also argued that the seasonal nature of the business justified a three year non-compete clause. In addition they stated that the line included equipment not commonly found in the turkey processing business which included technical know-how which would justify a non-compete restriction for up to five years.

13. In a letter dated 11 July 1994 solicitors acting on behalf of the liquidator of KFP stated that the liquidator supported the Authority's proposed decision and indicated that they considered a three year restriction to be excessive, particularly in the light of the Authority's guidelines set out in its decision in Nallen/O'Toole. None of the parties availed of the opportunity of an Oral Hearing afforded to them by the Authority.

(a) Section 4(1)

14. 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".

(b) The Undertakings and the Agreement

15. 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." CBPL is a corporate body engaged for gain in the rearing, processing and sale of poultry products. At the time of the agreement KFP was a corporate body engaged for gain in the turkey and chicken processing business. Consequently the notified arrangements constitute an agreement between undertakings.

(c) Applicability of Section 4(1)

16. While the sale of business agreement was initiated prior to 1 October, 1991, the date on which the Competition Act came into force, the equipment, which was the subject of the agreement was not transferred until 30 April 1993. In the Authority's view, the prohibition under Section 4(1) applies to a current or continuing contractual commitment, or one entered into subsequent to the coming into force of the Act. In this instance the Authority considers that the notified agreement is a continuing contractual commitment and therefore comes within the scope of the Act. In the Authority's opinion, a sale of business per se does not offend against Section 4(1). In this particular case, Cartons and KFP only had 6.2% and 2.5% shares respectively of the turkey market and the acquisition did not result in any significant increase in concentration in the market.

17. The non-compete provision in clause 4 of the agreement prevents the vendor from competing with the purchaser for a period of three years from the date of the transfer of the equipment. The Authority has given its view on non-compete clauses in sale of business agreements in a number of previous decisions. In the Authority's opinion, provided such a restriction does not exceed what is necessary to secure the transfer of the goodwill in terms of its duration, geographic coverage and subject matter, then it does not offend against Section 4(1). The Authority believes however that the transfer of goodwill is not an issue in this instance as Cartons owned 76% of the entire shareholding of KFP prior to July 1991, when they sold it to Mr. Flynn and then bought the turkey processing line. Therefore they had already acquired at least part of the goodwill of the business. They then sold the shareholding in the overall business and on the same day bought back a part of that business, while licensing the vendor to operate the equipment involved for up to three years after the sale. During that time the vendor has processed turkeys for CBPL which were sold under its name. No evidence was advanced to suggest that the vendor or Mr. Flynn acted on CPBL's behalf in dealing with customers. Thus the Authority is satisfied that the turkeys processed by the vendor using the equipment licensed to it were considered by those customers to be CPBL's products and the goodwill associated with CPBL's turkey processing business has in fact accrued to CPBL. In the circumstances, the Authority considers that a non-compete clause for three years from the date of the transfer of the equipment is not justified. More importantly it is not just the duration of the non-compete clause but the fact that it only began to operate long after the date of the agreement which is problematical. Consequently the Authority considers that the restriction in clause 4 offends against Section 4(1).

18. In their submission to the Authority, Cartons indicated that the three year restriction was justified in line with the Authority's decision in Nallen/O'Toole and Athlone Travel, as the seasonal nature of the turkey market resulted in the product being purchased infrequently. The Authority does not believe that infrequency of sales is an issue in this case. Turkey processors operate largely by building up long term supply contracts with major multiples, butchers and caterers. As stated in the previous paragraph, the Authority believes that the transfer of the relevant goodwill had taken place by the time of the transfer of the equipment. Consequently the Authority cannot accept Cartons' submission in this regard.

19. Cartons also submitted that there was technical know-how involved. They argued that in re-structuring the turkey processing line Cartons installed their own computerised system of box weighing order processing and a computerised debtor system. 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'. The Authority indicated in its decision in ACT/Kindle that it would accept such a definition of technical know how. In this instance the equipment was installed by Cartons and was subsequently transferred back to them with the other equipment. A longer restriction on competing with the purchaser of a business is afforded where the purchase involves a high degree of technical know-how to afford the purchaser the opportunity to become familiar with the know-how and to be in a position to exploit it fully. Again, however, such considerations do not arise in this case, since, if there was any technical know-how involved, it was the purchaser who supplied it in the first place and it does not therefore need additional time to become familiar with such know-how. Therefore the Authority does not accept Cartons submission in this regard.

20. Finally Cartons argued that the agreement did not offend against section 4(1) since it was effectively, if not in fact, concluded at a time when KFP was under the control of CPBL and it therefore constituted an agreement between a parent and a subsidiary. Irrespective of the actual time at which the agreement is concluded agreements between a parent and a subsidiary which result in their not competing with each other are not considered to be anti-competitive as they are regarded as part of a single economic entity. However, this ceases to apply if and when the undertakings cease to be part of a single economic entity. Arrangements which were acceptable and not considered offensive under section 4(1) while the parties constitute a single economic entity, might offend once the undertakings become independent. In this case the parties no longer constituted a single economic entity and thus a restriction on competing with one another offends against Section 4(1).

(d) Applicability of Section 4(2)

21. 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.'

22. The restriction on the vendor competing for three years from the transfer date in clause 4 of the agreement is considered to go beyond what was necessary to secure the transfer of the goodwill of the business as Cartons had already acquired the goodwill prior to the agreement. Consequently, in the Authority's opinion, it could not be regarded as indispensable to the attainment of the objectives of the agreement and so does not satisfy the requirements for a licence.

23. In the opinion of the Competition Authority, the agreement between Kantoher Food Products Limited and Carton Brothers (Processing) Limited relating to the purchase of the turkey processing line at Killeedy, Co. Limerick by Carton Brothers (Processing) Limited (notification no. CA/1107/92E) notified on 30 September 1992, under Section 7, constitutes an agreement between undertakings. It considers that the restriction in clause 4 of the agreement on the vendors competing with the purchaser, for three years from the date of the transfer of the equipment, offends against section 4(1) of the Competition Act and does not satisfy the requirements for a licence under section 4(2). Consequently the Authority refuses to issue a certificate or grant a licence in respect of the said notified agreement.

For the Competition Authority

Patrick Massey

Member

7 September 1994