Irish Competition Authority Decisions

1. Musgraves Limited (Musgraves) notified two types of standard agreement relating to the operation of grocery retail outlets on 30 April, 1992. These agreements involve Musgraves, trading as SuperValu and Centra Distribution (Musgraves), and 352 licensees (licensee agreements) on the one hand and Musgraves and 18 franchisees (franchise agreements) on the other.

(a) Subject of the Notification

2. The notifications involve two types of standard agreements between Musgraves and a number of individual grocery retailers. The essential feature of the arrangements is that the retailers undertake to purchase all of their requirements from the range of merchandise offered by Musgraves. All of the retailers trade under either the SuperValu or Centra name. There are actually four standard agreements. Two of these are with retailers who own their own stores and these are referred to as licence agreements. There is a separate licence agreement for SuperValu and Centra retailers, although the two agreements are virtually identical The other two agreements are with retailers who operate stores which are owned by Musgraves. These are referred to as franchise agreements. Again while there are different agreements for Super Valu and Centra stores, the agreements are virtually identical. There are over 350 licence agreements and less than 20 franchise agreements.

(b) The Parties

3. The parties to these agreements are Musgraves, 352 independent retailers (the licensees) and 18 franchisees. Musgraves is a holding company. Its divisions trade almost exclusively in the grocery business. Musgraves Distribution Ltd., a wholly owned subsidiary of Musgraves, carries on the business in Northern Ireland.

4. At the retail end of the grocery market, retailers linked to Musgraves operate under the SuperValu and Centra names. SuperValu and Centra are known as Symbol Groups i.e. groups of independent retailers who operate under a common group name. The SuperValu and Centra Distribution division of Musgraves acts as a wholesaler supplying the retail outlets from two warehouses in Cork and Galway and a central billing system is in operation. Musgraves also operate nine cash and carry outlets.

(c) The Product and the Market

5. Musgraves provides a wholesale service, including central billing arrangements, for grocery goods to independent retailers. The retailers buy directly from Musgraves or alternatively they purchase their requirements under the central billing system from suppliers nominated by Musgraves.

6. According to the Fair Trade Commission, (1) there were four major wholesale groupings in 1991. These groups were members of the Irish Association of Distributive Trades (IADT). IADT members represented 54 wholesale companies which operated 140 warehouses in 1990. Of these 39 were delivered and the remaining 101 were cash and carry outlets. Inaddition, the ADM/Londis group operates a wholesale company which is owned by retailers, and a number of smaller wholesalers.

7. The delivered warehouses are largely concerned with servicing symbol shops in the various retail symbol groups. Cash and carry outlets represent a source of supply for independent grocers. In the 1991 review there was evidence to suggest that the cash and carry business was becoming less significant with a growing demand from retailers for wholesalers to provide credit and delivery services.

8. Musgraves also operates a central billing arrangement with its symbol group retailers. Under this system, goods are delivered by suppliers to individual retailers rather than to the wholesaler's warehouse for onward delivery. The supplier then bills the wholesaler for all deliveries to the symbol shops. The wholesaler pays the supplier and collects the money from its individual retail customers. The advantage of this arrangement to the wholesalers is that it allows them to trade in goods of a relatively short shelf-life which could not be stored indefinitely in their warehouse. For the retailers, it gives some of the benefits of bulk-buying which they would not otherwise be in a position to avail of.

9. Retail grocery outlets include both independent small retailers, retailers connected to particular wholesalers as well as outlets owned by the supermarket multiples. Details of the number of retail outlets associated with symbol groups as well as retail outlets operated by the multiples are given in Table 1.

Dunnes 41 51 50

Powers 69 68 69

Superquinn 11 12 13

L & N 14 16 18

Roches Stores 6 7 7

H Williams 33 - -

ADM Londis 78(a) 85(a) 90(a)

Musgraves 380 370 371

Associated National

Distributors (Mace) 320 193 (b)

BWG Foods (Spar,

Wisebuy, Family Value) 425 406 (b)

Notes: (a) Londis symbol shops only. (b) Separate figures for these groups were not available.

Source: FTC, (1991) and Checkout Yearbook (1993).

10. There are five multiple groups which between them operated 157 retail outlets in 1991. These are Quinnsworth, Dunnes Stores, Superquinn, L&N and Roches Stores. Only two ofthese, Quinnsworth and Dunnes could be regarded as operating nationally. In terms of turnover and market share these two are far larger than the other three multiple groups who operate on a regional basis and have far fewer stores.

11. Symbol group shops are groups of independent retailers who operate under a common group name. Among the major symbol groups operating in the grocery trade are SuperValu, Centra, Mace, Spar, and Wisebuy. There were almost 1,000 symbol group stores in the State in 1991. The symbol group shops are organised by a wholesaler or group of wholesalers, from which the retail members purchase a large part of their supplies. The retail members of symbol groups benefit from membership in a number of ways, such as being able to get and offer cheaper prices arising from bulk purchasing by the group members as a whole, combined advertising, other group promotions and the benefits of a common logo. There are over 370 stores attached to the two Musgrave symbol groups. This total has changed very little since the mid 1980's. There has in membership of the groups. SuperValu stores tend to be larger than Centra ones. Roughly 35% of the Musgrave affiliated stores trade as SuperValu outlets with the balance operating under the Centra name.

12. The majority of independently owned grocery outlets do not belong to any of the symbol groups. While most of these are single shop operations this category includes some operators with a number of stores. Independent stores range in size from small corner stores to supermarkets comparable in size to those operated by the multiples.

13. There are in addition a sizeable number of stores specialising in certain foodstuffs. These include butchers,greengrocers and tobacco, sweets and newspaper shops (TSNs). These are not grocery stores in the strictest sense. It is clear, however, that grocery stores are in competition with butchers and greengrocers for particular segments of the food market. Similarly there has been an increased tendency for TSNs to stock a small but significant range of grocery products. Many petrol stations now have forecourt shops which also stock a range of grocery products. These latter two groups would certainly appear to be competing in the convenience store segment of the grocery market.

Quinnsworth 10.0

Crazy Prices 10.5

Dunnes Stores 24.0

Superquinn 4.0

L & N 3.5

Roches Stores 2.0

SuperValu 12.0

Centra 4.0

Spar 4.0

Mace 3.0

Londis & Other

Symbols 4.0

Other Outlets 19.0

Source: Checkout Yearbook 1993.

14. No accurate assessment of market shares within the grocery trade is easily attainable. However, estimated market shares included in the Checkout yearbook for 1993 indicate that the five multiple groups accounted for 54% of the total national grocery trade. Three of the five groups have a share of less than 5% with Dunnes and Powers accounting for 44.5% of the market. The symbol groups accounted for 27% of the market at the end of 1992 with the Musgraves affiliated SuperValu/Centra stores, the largest symbol group, having 16% of the total, of which 12% was attributed to SuperValu stores. Their market share is far higher than that of the other symbol groups which between them had only 11% of the market. Of the multiples, only Dunnes Stores and the Powers Group have a larger share of the market. Musgraves indicated that they did not know the source of the Checkout data and produced alternative figures suggesting that their market share was lower than stated in the Checkout Yearbook.

(d) THE ARRANGEMENTS

15. Musgraves notified four agreements - the standard SuperValu and Centra licensee agreements and the standard SuperValu and Centra franchisee agreements.

16. The licensee agreements are entered into with independent retailers who own their own stores and agree to undertake the obligations in the licensee agreements. The most important provisions in the standard SuperValu licensee agreement are detailed below.

17. Under the agreement Musgraves, trading as SuperValu undertakes:

- to allow the retailer to operate as a SuperValuoutlet,

- to supply a SuperValu fascia sign,

- to sell to the retailer the range of merchandis which Musgraves Ltd. stocks at the scheduled wholesale price ruling at the date of delivery, and

- to provide the retailer with promotional material on a regular basis.

18. The retailer's obligations under the agreement are contained in Clause 3. The most important of these are:

"(a) pay an entrance fee of to the wholesaler

(b) to display the authorised SuperValu fascia sign

in a prominent position on the premises

(c) purchase all his/her/its requirements from the

range of merchandise offered by the wholesaler

(d) to support those suppliers nominated by the

wholesaler from whom there is a group discount

available on a Central Billing and Retail Rebate Scheme.

(e) support the SuperValu Group promotional

programme including the following:

(i) To display all point of sale material supplied by the Wholesaler in the manner stipulated by the Wholesaler.

(ii) To pay a weekly contribution towards SuperValu marketing costs, the amount to be decided by Musgraves Ltd. trading SuperValu & Centra Distribution and the Retailer to be bound by all such decisions in all respects absolutely.

(iii) To stock and display all SuperValu brands

at the price recommended by the wholesaler"

19. Clause 5 of the standard licensee agreement provides for purchasing fixtures and fittings for the SuperValu and Centra outlets:

"The retailer agrees to purchase all equipment (fixtures and fittings) from suppliers nominated and approved by the Wholesaler, and used in his premises, and further agrees to use the SuperValu corporate colours as specified by the Wholesaler".

20. Clause 12 contains restrictions relating to the sale of the licensee's premises.

"In further consideration of the financial, commercial and trading assistance given by the Wholesaler to the Retailer, the Retailer further agrees and covenants with the Wholesaler as follows:

(i) Not to transfer, sell, assign, let, sub-let, or otherwise dispose of the premises or the retail business carried out therein to a competitor of the Wholesaler.

(ii) In the first instance if he/she/it decides dispose of his/her/it's interest in the premises to offer to the Wholesaler the first option to purchase the premises at a price to be agreed between the parties. In default of agreement the price shall be determined by an independent valuer nominated by the Wholesaler and approved by the Retailer, such price to be determined on the basis of the then prevailing market value for the premises, with vacant possession having regard to the location of the premises. The Wholesaler shall have one month from the determination of the price as aforesaid to enter into Agreement for sale to purchase the same.

(iii) After termination of this Agreement, not to carry on the trade or business of retailer of the type of goods commonly sold by the Retailer from the premises for a period of one year from the date of termination within a radius of one mile from the premies......"

21. Clause 14 provides for termination of the Agreement:

"(a) Either party shall be entitled to terminate this Agreement by giving three months notice in writing to the other party, which termination shall not affect the accrued rights up to the date of termination of either party under the Agreement.

(b) In the event of the Retailer exercising his rights as aforesaid the Retailer shall be immediately bound by all provisions of Clause 12 hereof."

22. The standard Centra licensee agreement is identical to this apart from the omission of clause 3(a) (see para. 18).

23. The standard franchisee agreements deal with the situation where Musgraves owns the store and enters into a type of tenancy agreement with the franchisees. Franchisees are termed ´Managers' in the agreements. The SuperValu and Centra franchisee agreements are identical.

24. The franchisees are required to comply with the provisions of the standard licensee agreements in addition to the undertakings given in the franchisee agreements.

25. The franchisees give a series of undertakings to Musgraves. These undertakings deal with, inter alia, exclusive purchasing, promotion, insurance, service charges, trading laws, non-compete clauses and repairs. The following provisions are included:

"2(ii) To take all supplies of grocery products and all other allied products at all times for sale in the business to be carried on hereunder from a supplier or suppliers approved by the Company.

(iii) To take from the Company or a supplier or distributor authorised by the Company, all supplies and other commodities such as advertising material, trade notices, items, paper products and packaging bearing a trade mark or logo of the Company, and miscellaneous equipment incidental to the preparation, advertisement supply or presentation of the business as the Company may prescribe same to be willingly supplied by the Company at prices, which shall at all times be reasonable having regard to the cost thereof to the Company. If payment of any Invoice due to the Company is overdue all other Invoices and payments due by the Manager to the Company shall immediately become due and payable and interest on such unpaid amounts shall accrue at the rate of 1.5% per month...

(v) The Company shall insure and keep insured throughout the term of this Agreement with an Insurance Company of repute the premises together with all stock thereon, and all equipment and fixtures and fittings therein, and shall also insure against all claims for Public Liability and Employers Liability together with such consequential loss, together with cash in transit and on the premises at a level which shall be fixed at the discretion of the Company and shall further insure and continue to keep insured such risks as the Company may at its sole discretion deem to be prudent and practical in the circumstances of this Agreement and in the circumstances of the ownership and operation of the shop. The company shall furnish to the Manager copies of the Insurance Agreements entered into by it and shall also furnish to the Manager the amount of the Premiums payable in respect of such Insurance it shall arrange. The manager shall pay to the Company on presentation of the said premiums the amount which has been discharged by the Company in respect of same and this sum shall not be deemed to form any part or portion of the Management Charge herein referred to.

(vi) The Manager shall pay to the Company a Service Charge representing a percentage of the total sales of the Manager exclusive of V.A.T. on the premises during each accounting month. The Service Charge shall be the percentage amount agreed between the Company and the Manager and shall be paid, together with V.A.T. thereon at the rate of within ten days of the end of each accounting month. If the payment of the Service Charge is overdue, all other Invoices and payments due by the Manager to the Company shall immediately become due and payable and interest on such unpaid amounts shall accrue at the rate of 2% per month. In the event of the Manager and the Company failing to agree as to the percentage figure which is to be the Service Charge within a period of twenty one days the Company may forthwith and without further notice to the Manager, terminate this Agreement and same shall be forthwith determined and void and of no effect....

(x) The Company has the right to nominate the accountant to act for the manager to ensure proper books of account are kept. The Accountant nominated will be acceptable to Company and Manager and will at all times be the Managers accountant.

The rate of service charge is subject to alteration in line with fluctuations in the AA bank rate.

The service charge rate can be based on either of the following:

(a) % of turnover excluding VAT

(b) Interest at AA rates on total cost of premises,

renovations, equipment and fees outlaid by the Company.

This Agreement is for a period of after which the manager has the option to purchase the property at a cost to include original cost of premises including fees, renovations, equipment and fees on sale. This option will be at the discretion of the Company.

(xi) To allow the company or its Accountants or other duly authorised Agents of the company to examine during business hours at its own expense the books and records of the Manager. The Manager will keep complete and accurate books and records of the operation of the business at the Managed Premises, and will keep them available for the Company to inspect upon request for 24 months. In the event of such examination disclosing an error in the computation of the total gross sales made from or on the Managed Premises to an extent in excess of 2% the Manager shall bear the expenses of the examination forthwith, and shall forthwith pay any deficiency on the Service Charge which may be disclosed on such examination, together with any interest payable thereon.

(xii) To allow the Company's authorised personnel to enter the Managed Premises at all times during business hours to inspect and examine the Manager's stock, operations and facilitate for the purpose of determining whether the Manager has complied with his obligations under this agreement and with the standard prescribed by the Company.

(xv) Diligently and continuously to perform the services forming part of the operational system prescribed by the Company for the Managed premises in strict compliance with the provisions of this Agreement.

(xvi) To keep the Managed Premises open and in normal operation each and every day of the week including Saturdays and Sundays for such hours as shall be agreed between the Company and the Manager or in the event of disagreement such hours as the Company may reasonably direct.

(xix) Not except as herein authorised during the continuance of this agreement either alone or in association with or in the employment of any other person engage or be concerned directly or indirectly in any business or employment in the field of the grocery business or businesses allied or associated thereto except with the express authority in writing of the Company which authority shall not be reasonably withheld.

(xx) Not for a period of one year from the determination of this Agreement either alone or in association with or in the employment of any other person to engage or be engaged directly or indirectly in any business in the field of the sale of groceries or any business allied thereto within a radius of one mile of the Managed Premises, where the Managed Premises is in a a city and five miles of the Managed Premises where the managed Premises is elsewhere other than a city.

(xxii) To have and use on the Managed Premises only such cash registers as are supplied thereto by the Company. The said cash registers shall remain and always be the exclusive property of the Company. The said cash registers shall have two keys, one of which shall be retained by and be the exclusive property of the Company. The Manager hereby agrees not in any way to interfere with the mechanism or working of the said cash registers, and by virtue of the execution of this Agreement acknowledges that the Company and/or its designated representative may at any time have access to the said cash registers for the purposes of checking same, and in particular, for the purposes of checking the tally rolls thereon, then such checking and inspection shall be carried out in the presence of the Manager or in the presence of a representative to attend such inspection or checking of the cash registers shall not in any way preclude the Company or its designated representative from carrying out such checking and examination. The property in the said cash registers shall vest totally in the Company and the Company shall insure same in the full replacement value, and shall be at liberty from time to time or any time to remove whatever cash registers are placed in the managed Premises and to replace same with other cash registers. No other cash registers whatsoever shall be kept or used on the Managed Premises.

(xxv) The Company shall, at it's own discretion, carry out such repairs and renewals which it shall deem fit, proper and reasonable in order to maintain the Managed Premises at the standards which would be appropriate for such premises. Prior to carrying out such repairs and renewals the Company shall agree same with the Manger, but in the event of the Manager disagreeing with the company as the necessity of repairs and renewals shall be carried out with the least possible disturbance to the Manager. The costs of the said repairs and renewals shall be a charge against the accounts of the Manager, and shall be payable on presentation of the Invoices in respect of same.

26. Clause 3 of the standard agreements set out the circumstances in which the agreements shall cease to have effect. Such a situation could arise if the franchisee fails to observe the stipulations and agreements contained in Clause 2. Bankruptcy and default in payment for goods and other matters would also bring about a termination of the agreement. There is also a limit on the duration of the agreements:

This agreement shall cease and determine upon the happening of any of the following events, without notice being served by either party, namely;

(a) The affluxion of 10 years from the date hereof, provided however, and it is hereby agreed between the Company and the Manager that this Agreement shall continue so long only as the Manager holds his appointment as Manager of the SuperValu Franchise of the Company.

27. Post-termination provisions are also included in this Clause:

On the determination of this Agreement whether by affluxion of time or otherwise, the Manager shall forthwith discontinue any or all use of the name SuperValu and any other of the trade marks or logos referred to in this Agreement or any equipment or items bearing the name or trade mark of the Company or the logo thereof, and shall forthwith remove from display all advertisements, signboards or name plates supplied or used in connection with the exploitation of this Agreement, and shall not in any way whatsoever use the name of nor similar kind or routine service or method of selling grocery products whereby the public could be misled into believing that are in any way associated with the marketing from the Managed Premises or any other Premises.

(e) Submissions of the Parties

28. Musgraves submitted that the agreements were pro-competitive in their effects on the market and did not prevent, restrict or distort competition in any goods or services in the State. The agreements were stated to be pro-competitive because they allowed retailers supplied by Musgraves to compete effectively against the multiples. The undertakings given by the licensees and franchisees were said to be necessary to facilitate the success of the operation.

29. Musgraves submitted that the arguments they presented in support of an application for a licence were also applicable to the application for a certificate. They stated that they believed that the agreements between Musgraves and its licensees and franchisees contributed to improving the distribution of goods and to economic progress. They claimed that this was supported by the fact that they had increased the market share in recent years. This increase in share was due, inter alia , to the competitiveness of the retailers when compared with the multiples. The agreements improved the efficiency of the distribution of goods by bringing about a close and mutually beneficial relationship between the wholesaler and the retailers. The cost of transferring goods from the suppliers to consumers was reduced as a result of the agreements.

30. The benefits of technical and economic progress were brought to many small rural communities and were not confined to urban areas. The relationship brought about by the agreements has allowed the development of expertise in scanning, re-ordering of stocks and handling of goods, which was appropriate for operation by independent retailers. It had been possible, by making these agreements, to bring the benefits of modern technology to many independent businesses who would have found it very difficult to avail of these benefits on their own and would have been at risk of experimenting with untried, and over costly, or unsuitable systems

31. Consumers in remote areas gained because they were able to obtain their groceries at the same prices as those in urban areas. Before the advent of the type of trading exemplified in the agreements, there was a significant variation in the prices paid for many grocery items in urban and rural areas. Consumers in urban areas gained from the proximity to them of many of the SuperValu retailers thus obviating the cost and time of travelling to a multiple. Consumers gained from a greater diversity of services from supermarkets than had been available. These included:

(a) the willingness to deliver goods which have benefited many consumers,

(b) longer opening hours including Sunday opening which has benefited many persons,

(c) the generally higher standard of service resulting from the presence of the owner of the enterprise in the store.

32. Consumers also gained from the vigorous competition which Musgraves had provided for the multiples and had forced multiples to compete strongly on price and to improve their services. This was particularly important in the period since the demise of H. Williams and Tesco when there were only two national multiples. The agreements could not be shown to have eliminated competition in a substantial part of the market given their market share. Even in the convenience sector there were many competitors, including other symbol groups such as Spar, Mace, Londis as well as many independent traders and the petrol retailers. While the market share of Musgraves varied from place to place, the effect of the agreements did not eliminate competition in any part of the country. In all parts of the country there was competition to Musgraves. Nor was there any products or product range where Musgraves had a monopoly of the market. Musgraves submitted detailed argumentation in support of a number of the restrictions contained in the agreements.

33. In relation to the exclusive purchasing requirements, Musgraves stated that the wholesaler earned its income from sales to the retailers. There was no other payment by the retailer other than the payment by the retailer for the goods (apart from the payment by the eighteen franchisees of a sum equal to the interest on the value of the premises occupied by them). The payment for the goods comprised the price of the goods, which was the same to all retailers, and a handling charge, which was on a scale and had a slight advantage for larger outlets to recognise economies of scale. About half the margin before the Long Term Allowance was earned from the handling allowance. If the retailer did not purchase the goods, the wholesaler was not remunerated for the services provided to the retailer.

34. The essence of the concept was that the combined purchasing power of the retailers enabled the best possible prices to be obtained from suppliers. This enabled the

retailers to compete more effectively. If any individual retailer purchased separately from the wholesaler, the whole group was weakened and the viability of all might be threatened. No individual retailer would be able to purchase more cheaply than Musgraves across the range of merchandise. By attempting to do so, retailers would put their viability at risk.

35. In connection with the requirement to support suppliers nominated by them, Musgraves stated that there were many products where it was more practicable to have them delivered direct to the retailer than to be delivered from a central warehouse. Examples of these were fruit and vegetables, dairy products and fresh products generally. These could be centrally billed. It was possible for Musgraves to negotiate arrangements with suppliers of many of these products which incorporated service levels, quality standards, promotion schemes, lower credit risk, reduced sales representative cost, lower interest cost on outstanding debt, etc. which could be shared between the wholesaler and the retailer and which would enable the retailer to obtain the goods at lower prices than would be possible if the retailer purchased separately. Musgraves were also able to negotiate credit terms, thus allowing the retailer proper working capital to expand and develop the business. Retailers purchasing independently from suppliers often obtained little or no credit, which impacted heavily on their development and expansion opportunities. The central billing arrangements with suppliers encouraged them to deliver to remote areas. Central billing resulted in a substantial reduction in a retailer's administration costs, as the vast majority of the work was done centrally by Musgraves thus allowing the retailer to be more competitive in retail price levels.

36. Musgraves stated that the requirement to stock and display all SuperValu (or Centra) brands at the price recommended by the wholesaler applied to own brands with the Musgraves names rather than the supplier's name on the product. These tended to be known value items. These products were nationally advertised and were chosen in order to compete with the remainder of the trade. It was essential that the products should be sold at the prices advertised nationally. If they were not, the image of the symbol would be devalued to consumers. In practice, because these tended to be low margin items, the majority of retailers sold them at the recommended price. Musgraves had no objection of any kind to the retailer selling the products at less than the recommended price. The restriction was on selling at more than the recommended price for the reasons given above. It was believed that this restriction was also indispensable to the success of the concept.

37. The Authority queried Musgraves in connection with an article in the October 1992 edition of Retail News. This involved an interview with Mr. Pat Herlihy, described as operations director at Musgraves. In this interview Mr. Herlihy described how retailers order their stock from Musgraves using hand held computer terminals. The report then stated that:

´These display the relevant product, price and margin information on each of the lines in the warehouse'. Musgraves were asked how this conformed with earlier information provided by them that retailers were free to set their own prices and margins. In their reply they indicated that the prices shown were only recommended prices and that retailers were free to set their own prices. They also claimed that this was similar to the long accepted practice of suppliers recommending prices to the trade. They indicated that this differed from the arrangements in respect of own brands which are dealt with elsewhere. Musgraves indicated that Retailers were provided with suggested retail prices and suggested gross margins for all goods sold, but were free to sell below these prices if they so wished, so long as the item was not on promotion (i.e. nationally advertised). In a letter dated 6 April, 1993, Musgraves indicated that the arrangements in relation to pricing which applied to a licensee also applied to a franchisee.

38. Musgraves submitted that they in all cases nominated two suppliers for the retailer to choose from. The reason for this clause was to ensure that the equipment obtained by the retailer met the standards required from a Musgraves retailer. The service was also valuable because it prevented the retailer from purchasing unsuitable equipment or purchasing from unsuitable suppliers. The combined experience of the group was made available to any new retailer or to any retailer updating the equipment.

39. Musgraves argued that these clauses were to protect the wholesaler in the event of the retailer deciding to end the agreement. They were similar in their effect to clauses found in many employment contracts. In addition to protecting the wholesaler they also protected the other retailers as any significant reduction in the number of retail outlets would mean a reduction in the viability of the whole group. Essentially, Musgraves invested in the Musgraves symbol brand names. These names, because of their reputation, brought customers to the shops. They considered that it was reasonable for Musgraves to protect its investment by restricting the retailer from disposing of the premises to a competitor of Musgraves. The second part of the clause, obliging the retailer to give Musgraves first refusal on the premises, was fair to the individual retailer while ensuring that Musgraves was able to protect their investment. The third part of the clause ensured that the retailer was not able, after receiving a fair price for his/her business, to restart the business again within a mile from the premises sold.

40. Musgraves argued that a number of EU block exemptions were relevant to these agreements. These were:

(1) 1983/83 Exclusive distribution

(2) 1984/83 Exclusive purchasing

(3) 4087/88 Franchising

(4) 556/89 Know-how licensing

They stated that, while in many respects, the Musgraves agreements could be classified as exclusive distribution agreements or exclusive purchasing agreements, it was apparent that these regulations were intended to apply to manufactured goods being distributed by exclusive distributors. Nevertheless many of the arguments made by the EU in justifying these block exemptions applied equally in the case of the notified agreements. Similarly, the Franchise Regulation had a general applicability to the form of agreements being notified but not all of the requirements of the Regulation were met by the agreements. The know-how licensing regulation had also some relevance for this notification. In effect, it was the know-how of Musgraves which was being made available to the retailers and which, inter alia, ensured their success.

41. In relation to clause 2(v) of the standard franchise agreement, which provides for the organising of insurance by Musgraves, it was submitted that adequate insurance on stock was essential in Musgraves' interests. Musgraves nominated a small number of insurance brokers to provide insurance services to their franchised outlets. The use of these brokers was supported by the notifying parties on the basis that it was more convenient and efficient to obtain insurance services in this manner. In order to ensure that the nominated broker remained competitive, Musgraves sought quotes every 2/3 years from a number of brokers, the one deemed to provide the best cover, having regard to rates and quality of service, was then recommended to all retailers, not just the franchisees. Approximately one-third of the licensees insured through the recommended broker although they were not obliged to do so.

42. Musgraves reserved the right to inspect the franchisee's stock at any time under Clause 2(xii). Musgraves stated that as the franchisee does not make any form of capital investment, some assurance of compliance with trading conditions was essential. It has claimed that the "operational system" referred to in clause 2(xv), involved conditions relating to standards of hygiene, point-of-sale materials as well as assurances that all legal requirements were being met. There was no separate document setting out the operational system.

(f) EU Regulations

43. Eu Regulation No. 1983/83, of 22 June 1983, is a block exemption regulation which applies Article 85(3) of the Treaty of Rome to categories of exclusive distribution agreements. The regulation entered into force on 1 July 1983 and it expires on 31 December 1997.(2). The main features of the regulation are summarised in the Authority's Category Licence for Exclusive Distribution Agreements.(3). The regulation applies to agreements involving only two parties in which one agrees to supply only the other with certain goods for resale within the whole or a defined area of the common market. The exclusive distributor - the purchaser may undertake to purchase complete ranges or minimum quantities of the goods, to sell the goods under trademarks or packed and presented as specified by the supplier, and to engage in sales promotion, involving advertising, maintaining a sales network or stock of goods. The Regulation provides that distributors must be free to set their own prices.

44. EU Regulation No. 1984/83, of 22 June 1983, is a block exemption regulation which applies Article 85(3) of the Treaty of Rome to categories of exclusive purchasing agreements. The regulation entered into force on 1 July 1983 and it expires on 31 December 1997.(4). The main features of the regulation are summarised in the Authority's Motor Fuels Category Licence.(5). The general provisions regarding what is and is not permissible are very similar to those of Regulation 1983/83. The exclusive purchasing agreement, however, must have a maximum duration not exceeding five years, although it may be renewed, and it must not cover more than one type of goods which are not connected to each other either by their nature or by commercial usage. Under the terms of the Regulation the reseller must be free to set prices.

45. EU Regulation No. 556/89 of 30 November 1988, is a block exemption regulation which applies Article 85(3) of the Treaty of Rome to categories of know-how licensing agreements. It came into force on 1 April 1989 and applies until 31 December 1999.(6). Know-how, for the purpose of this regulation, is defined as "a body of technical information that is secret, substantial and identified in any appropriate form."

46. The regulation exempts agreements involving the transfer of know-how from the provisions of Article 85(1). The regulation recognises that such agreements are pro-competitive and have beneficial effects on the economy by facilitating the transfer of technology and boosting innovation. The regulation lists obligations of a restrictive nature that benefit from automatic exemption pursuant to Article 85(3) of the Treaty. A know-how licensing agreement to which only two undertakings are party and which contains one or more of these obligations is exempt from the provisions of Article 85(1). Obligations included are requirements that the licensee not divulge the know-how to third parties, grant sub-licenses, assign the license or exploit the know-how where it remains secret after termination of the agreement. A number of obligations involving territorial rights and protection are also included.

47. EU Regulation number 4087/88 of 30 November 1988 is a block exemption regulation which applies Article 85(3) of the Treaty of Rome to categories of franchising agreements. It came into force on 1 February 1989 and remains in force until 31 December 1999.(7). Franchising agreements essentially consist of licences of industrial or intellectual property rights (trademarks or names or know-how) to be exploited for the purpose of selling goods or providing services to end-users in premises of uniform appearance and with the same business methods.

48. The Block Exemption applies to agreements which contain at least one of a number of specified restrictions including that of territorial protection granted by the franchisor and the obligation on the franchisee not to deal in goods competing with those manufactured by the franchisor or bearing its trademark. The regulation also contains a list of restrictions which, if present in an agreement, prevent the application of the exemption. This applies in particular to market sharing between competing manufacturers, clauses unduly restricting the franchisee's choice of suppliers or customers and to cases where the franchisee is restricted in determining its prices.

(g) Subsequent Developments

49. Following a meeting with representatives of the Authority on 16 June 1992, Musgraves proposed the following amendments to the licence agreement. In relation to clause 3(e)(iii), Musgraves submitted that the wording of the clause should be amended to read:

"To stock and display all SuperValu brands, either at or below the price recommended by the Wholesaler".

50. Musgraves proposed the insertion of an additional clause in the standard licensee agreement as follows:

"The retailer hereby covenants with the Wholesaler so long as this Agreement is in force (a) to carry on his business as Supermarket Operator from the premises (b) and further that he shall not, without the consent of the Wholesaler, which consent shall not be unreasonably withheld, carry on the business of Supermarket Operator in another premises in the Republic of Ireland. In consideration of the terms of this Agreement, the retailer acknowledges and agrees that such restriction is reasonable and valid".

51. The Authority informed Musgraves of its concerns regarding several aspects of the agreements. Following discussions, Musgraves proposed a number of further amendments to the licencee agreements in a letter dated 16 November 1993. These are set out below.

Clause 3(e)(iii) ´To stock and display all SuperValu brands. The retailer can set his own retail prices, the prices being circulated by the wholesaler being merely suggestions. The

retailer, is, however, recommended not to exceed the recommended prices.'

Clause 5 ´(i) in order to ensure compatibility with the wholesaler's computer based systems, to purchase all equipment which interfaces with the computer systems from one of two suppliers nominated by the wholesaler,

(ii) for all other equipment, to comply with the wholesaler's standards and specifications for the equipment and the presentation of the contract premises and transport.'

Clause 12 It was proposed to retain the existing clause 12(i) which prevented the transfer of sale of the premises to a competitor of Musgraves. In addition the following amendments were proposed.

12(ii) ´the licensee undertakes that if he wishes to sell the premises he will inform the wholesaler of his intention and allow the wholesaler to offer to purchase the premises on the same terms as all other parties.'

(iii) the licensee agrees to give the one year's notice of his intention to sell the premises to a competitor of the wholesaler.'

In place of the old clause 12(iii) which included a one year post term ban it was proposed to include a new clause 12(iv) which stated that:

'the licensee agrees not to engage, directly or indirectly for six months after the expiry or termination of this agreement, in any similar business in the same area [or in any other area where he would be in competition with another SuperValu outlet].'

In the case of the franchise agreements Musgraves proposed the following amendments. Musgraves proposed amending clause 2(v), so as to allow the franchisees to arrange their own insurance, subject to a requirement that Musgraves determine the appropriate level of insurance required and for the franchisee to produce evidence of insurance. Clause 2(x), would be amended to allow the franchisees to appoint their own auditors subject to Musgraves agreement which would not be unreasonably withheld. Musgraves proposed reducing the post-term non-compete provision in clause 2(xx), from 12 to 6 months and its scope from 5 miles to 1 mile in country areas, thereby making it the same as in city areas. Musgraves proposed adding to the end of clause 3(i), the words ´except where the know-how has become generally known or easily accessible.'

52. It was indicated to Musgraves that most of the proposed amendments were acceptable to the Authority. It was pointed out, however, that as Musgraves recommended prices for most of the goods sold by the retailers and as the retailers could not exceed such prices for goods on promotion, clause 3(e)(iii) as amended should apply to non-own brand goods also. It was also indicated that while a six month post-termination non-compete clause was acceptable the remaining provisions of clause 12 were not. It was also pointed out to the parties, that while they had sought to justify these provisions on the grounds that Musgraves had borne the cost of building and developing the stores and should therefore be protected against their being sold to competitors, in fact the vast majority of stores were owned by the retailers themselves and it was they who had paid for their construction and development.

53. Musgraves then submitted further amendments to the agreement in a letter dated 14 February 1994. These were as follows:

To stock and display all SuperValu brands. The Wholesaler provides recommended selling prices as guidelines. The Retailer is, however, recommended not to exceed the recommended prices of SuperValu and other brands when they are on promotion.

Clause 5 To substitute for existing clause 5.

(i) In order to ensure compatibility with the wholesaler's computer systems to purchase all equipment which interfaces with the computer systems from one of two suppliers nominated by the Wholesaler,

(ii) for all other equipment, to comply with the Wholesaler's standards and specifications for the equipment and the presentation of the contract premises and transport.

Clause 12 To substitute for the existing clause 12.

In further consideration of the financial, trading and commercial assistance given by the Wholesaler to the Retailer, the Retailer further agrees and covenants as follows:

(a) where the Retailer has purchased the site or premises from the Wholesaler, or where the Wholesaler has made the site or premises available to the Retailer,

(i) If it is decided to dispose of the Retailer's interest in the premises in the ten years after purchase, to offer to the Wholesaler the first option to purchase the premises at a price to be agreed between the parties. In default of agreement the price shall be determined by an independent valuer nominated by the Wholesaler and approved by the Retailer, such price to be determined on the basis of the then prevailing market value for the premises, with vacant possession having regard to the location of the premises. The Wholesaler shall have one month from the determination of the price aforesaid to enter into an Agreement for Sale to purchase the same.

(ii) after the expiry of ten years, the Retailer undertakes that if he wishes to sell the premises he will inform the Wholesaler of his intention and allow the Wholesaler to offer to purchase the premises on the same terms as all other parties.

(b) where the Retailer has not purchased the site or premises from the Wholesaler,

(i) the Retailer undertakes that if he wishes to sell the premises, within ten years after the date of this agreement, he will inform the Wholesaler of his intention and allow the Wholesaler to offer to purchase the premises on the same terms as all other parties.

(ii) after the expiry of ten years from the date of this agreement, if the Retailer sells the premises without allowing the Wholesaler to offer to purchase the premises the Retailer undertakes to give one year's notice of the determination of this agreement.

(c) the Retailer agrees not to engage, directly or indirectly, for a period of one year after the expiry of this agreement, in any similar business within one mile of the Premises.

Additional clause 13(b) existing clause becomes clause 13(a). The Retailer hereby covenants with the Wholesaler so long as this agreement is in force (a) to carry on his business as Supermarket Operator from the premises, (b) and further that he shall not, without the consent of the Wholesaler, which consent shall not be unreasonably withheld, carry on the business of Supermarket Operator in another premises in the Republic of Ireland. In consideration of the terms of this agreement the Retailer hereby acknowledges and agrees that restriction is reasonable and valid.

54. The Authority wrote to Musgraves on 21 February 1994 asking for an explanation for the change in the proposed wording of clause 3(e)(iii). In a reply, dated 4 March 1994, Musgraves stated that they had re-considered the wording proposed in their letter of 16 November 1993. They now felt that such wording would have a considerable effect on the group and they could not accept it. The wording of 16 November stated that retailers were free to set their own prices but were recommended not to exceed the recommended price of SuperValu own brands when they were on promotion. Musgraves argued that although the revised wording did not explicitly state that retailers were free to set their own prices it was implied. Nevertheless they went on to state that the reason for changing the proposed wording was because Musgraves wished the recommended prices in the case of goods on promotion to be maximum prices. They advanced various arguments to justify their setting maximum prices.

55. Clause 2(v) - in substitution for existing clause 2(v).

(i) The franchisee shall insure and keep insured throughout the term of this agreement with an insurance company of repute, all stocks in the premises and all equipment and fixtures and fittings therein, and shall also insure against all claims for Public Liability and Employers Liability together with such consequential loss, together with cash in transit and on the premises, at a level which shall be fixed at the discretion of the Company and shall further insure and continue to keep insured such risks as the Company may at its sole discretion deem to be prudent and practical in the circumstances of this agreement and in the circumstances of the ownership and operation of the shop.

(ii) The Manager shall furnish to the Company a copy of the policies and the acknowledgement that cover is in place for a period of 12 months, at least two weeks before the renewal date of the policy. If the Manager fails to provide the required evidence of insurance, the Company may insure all of the franchisee's risks temporarily and all charges arising from such insurance shall be paid to the Company by the manager on presentation of an invoice for such charges. Such charges shall not be deemed to form any part of the Management Charge herein referred to.

Clause 2(x) - in substitution for existing clause 2(x).

The appointment of an Auditor by the Manager shall be subject to the agreement of the company which agreement shall not be unreasonably withheld.

Clause 2(xx) - in substitution for clause 2(xx).

Not for a period of one year from the determination of this agreement either alone or in association with or in the employment of any other person to engage or be engaged directly or indirectly in any business in the field of sale of groceries or any business allied thereto within a radius of one mile of the Managed Premises.

Clause 3(i) - in substitution of second paragraph of clause.

On the determination of this agreement whether by affluxion of time or otherwise, the Manager shall forthwith discontinue any or all use of the name SuperValu and any other of the trade marks or logos referred to in this Agreement or any other of the trade marks or logos referred to in this agreement or any equipment or items bearing the name or trade mark of the company or the logo thereof, and shall forthwith remove from display all advertisements, signboards or name plates supplied or used in connection with the exploitation of this agreement, and shall not in any way whatsoever use the name of nor similar kind or routine service or method of selling grocery products whereby the public could be misled into believing that are in any way associated with the marketing from the Managed Premise or any other Premises except where the know-how has become generally known or easily accessible.

56. The Authority issued a Statement of Objections to Musgraves on 26 April 1994 indicating its intention to refuse their request for a certificate or licence in respect of the notified agreements. Musgraves responded in a letter dated 26 May 1994 with further arguments in support of their request. An Oral Hearing was held on 28 June 1994 at which further arguments were advanced by Musgraves.

57. With regard to clause 3(e)(iii) Musgraves argued that it was absolutely essential in their view, for the competitiveness of the SuperValu and Centra stores, that Musgraves should be able to specify the maximum prices of goods on promotion regardless of whether they were own brand or suppliers' brands. They considered that there was nothing anti-competitive in a supplier or a wholesaler being able to determine a maximum price. They then proposed a further amendment to clause 3(e)(iii) as follows:

To stock and display all SuperValu brands. The wholesaler provides recommended selling prices as guidelines. The retailer must not exceed the recommended price of the SuperValu and other brands when they are a nationally advertised promotion.

Musgraves stated that if they or any of the other wholesalers with symbol groups could not set maximum prices for goods on promotion, there would be no meaningful future for group trading.

58. In relation to the proposed amendments to clause 12 Musgraves argued that it did not give them an option to purchase but merely allowed them to bid for the premises in a fair way. They submitted that it would provide them with a minimum protection against a takeover of outlets by stealth without their ever having the opportunity to purchase the outlet.

59. The Authority is charged with deciding whether to issue a certificate or a licence to agreements notified to it. It accepts amendments to notified agreements and, where such amendments have been made, it decides whether the amended agreement satisfies the criteria for a certificate or licence. In this instance the parties have proposed a large number of possible amendments following indications from the Authority that certain clauses in the notified agreements did not, in its view, meet the requirements for a licence. These various proposals have not fully dealt with the Authority's concerns. The Authority has therefore taken a decision in respect of the notified agreements as these are the agreements before it. For purposes of clarity it gives its views concerning a number of the proposed amendments. Considerable time has been expended in dealing with the present notifications. In particular the parties have been given numerous opportunities to propose amendments. It will not be possible to repeat this in future cases.

60. 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'.

61. The notified agreements involve Musgraves plc and a number of independent retailers - ´the licensees', and ´the franchisees'. The latter group operate SuperValu or Centra outlets which are owned by Musgraves. Musgraves and the licensees are engaged for gain in the grocery business and are therefore undertakings within the meaning of Section 3(1) of the Competition Act. The franchisees are engaged for gain in the supply of grocery goods and the provision of associated services since they keep any profit made after meeting costs and paying the service charge to Musgraves. Franchisees are risk takers - they are involved in buying stock for resale with no guarantee that a profit will be generated from turning over the stock acquired. In the Authority's view, franchisees are also undertakings within the meaning of the Act.

62. The primary feature of the agreement, which is contained in Clause 3, is that the licensee is obliged to purchase his requirements from Musgraves or a supplier appointed by Musgraves. Therefore this provision constitutes an exclusive purchasing arrangement which lasts for the duration of the agreement. The Agreement is of indefinite duration although there is provision for its termination. Clause 14 allows either party to terminate the agreement by giving three months' notice in writing to the other party.

63. Under Clause 3(c) and 3(d), licensees are required to purchase from Musgraves or from suppliers nominated by them. In this respect it should be noted that SuperValu/Centra are the third largest retail grocery operation in Ireland behind Dunnes Stores and Powers (see table 2) with outlets throughout the State. The exclusive purchasing requirement has a twofold effect. It restricts retailers from buying from anyone other than Musgraves or suppliers approved by Musgraves, thereby preventing licensees in the Musgraves operation from obtaining goods on more favourable terms than they can get through Musgraves. In addition, it denies many suppliers of grocery goods and allied products and services the opportunity of dealing with a considerable proportion of the retail grocery market other than through Musgraves. Freedom of choice in the supply and distribution of grocery goods is, in the Authority's view, restricted to an appreciable extent as a result of these agreements. The Authority considers, therefore, that these provisions have the object and effect of preventing, restricting or distorting competition in goods in the State, and offend against Section 4(1) of the Act.

64. The Authority believes that an exclusive purchasing agreement must be considered in its economic and legal context and as part of a network of such agreements by one supplier, and if necessary, as part of a series of networks of several suppliers.

65. While each individual agreement might generally have relatively little effect on competition, all the licence agreements together form a network of restrictive agreements for the distribution of grocery and associated products and services. No licensee can purchase their requirements from anyone other than Musgraves, or a supplier recommended by them, for a relatively long period of time. This tends to introduce a considerable degree of rigidity into the market and makes it more difficult for a new entrant to the market to trade successfully. Musgraves stated that they listed all national suppliers and supported many local suppliers so that many suppliers had the opportunity of selling to the group's retailers.

66. Essentially, this notification concerns exclusive purchasing, however, elements of group buying are also involved. In this context, the EU Commission, in its decision on the National Sulphuric Acid Association (8), found that the rules of a joint buying pool for the purchase of sulphur infringed Article 85(1) of the Treaty but exempted the arrangements under Article 85(3). Under these rules, each member was required to purchase at least 25% of its sulphur requirements from the pool. The Commission stated that:

"Each member of the Pool, to the extent he is committed to purchasing through the Pool, is prevented from competing with other Pool members to obtain more favourable terms from the suppliers than those obtained by the management committee."

"To whatever amount the member is committed, he is deprived of the choice to negotiate terms and conditions with the suppliers...".

67. The Commission also noted the effect of such arrangements on suppliers stating that because Pool members were committed to purchasing through the Pool, suppliers in the Community were excluded from selling directly to those members and therefore at least 21% of all sulphur imported by UK acid-makers would be supplied to one outlet, i.e. the Pool. In this case suppliers are prevented from negotiating for business directly with the SuperValu and Centra retailers - they must deal with a single purchaser, Musgraves.

68. In the Intergroup Decision (9) the EU found that Article 85(1) did not apply to an arrangement whereby an intermediary known as Intergroup acted on behalf of national SPAR chains in purchasing and selling goods. The Commission noted that the Spar chains were free not to use Intergroup's services when making purchases and they were free to determine their prices and resale terms. The Commission concluded that the agreements did not have substantial effects on competition and that the freedom of choice in both supply and demand in respect of the products concerned was not affected by the agreements to any appreciable extent. In that instance, however, purchases by Intergroup accounted for a very small proportion of sales of Spar stores. Such considerations do not apply here. Consequently, the exclusive purchasing arrangements offend against Section 4(1).

69. Clause 3(e) of the standard licensee agreement providesthat the SuperValu retailers supported the Promotional Programme. Clause 3(e)(iii) requires the licensee to stock and display all SuperValu brands at the price recommended by Musgraves. Musgraves own brand goods account for 15% of dried goods sold by the retailers.

70. Musgraves submitted that SuperValu brands are usually low margin items which are nationally advertised. They stated that they had no objection to retailers selling the products at less than the recommended prices - the restriction was on selling at more than the recommended price. The clause, however, states that the retailer is obliged to stock and display all SuperValu brands at the recommended prices. If a retailer was not to comply with this obligation, he could be considered to be in default of the agreement and Musgraves would have grounds for termination under Clause 7. In these circumstances, the scope for retailers to sell SuperValu brands at anything other than the recommended price is extremely limited. While Musgraves claimed that they had no objection to retailers selling such items at a lower price, clause 3(e)(iii) specifically required retailers to display the goods at the recommended price. Retailers cannot sell at lower prices while observing this clause. Even if these prices were not binding, resellers might believe that they were binding or that they should be followed given the wording of this clause. The Authority regards anything which enforces, or is conducive to, resale price maintenance as a serious restriction on competition.

71. The Court of Justice decision in Pronuptia indicates that the communication by the supplier to the retailer of recommended prices does not contravene Article 85(1) ´provided that there is no agreement or concerted practice that the distributor observe those prices.' The exclusive distribution and exclusive purchase block exemptions provide that the distributor or reseller must be free to determine prices and terms of resale. Similarly the franchise block exemption allows the franchisor to recommend prices but provides that the franchisee must be free to determine prices.

72. In Papiers peints de Belgique the Court of Justice upheld a Commission decision that an agreement between wallpaper manufacturers, which required retailers to display the lists of prices fixed jointly by the manufacturers, and not to make any public announcement of rebates on these prices, while allowing them to grant rebates in particular cases on a regular basis, was in breach of Article 85(1).(10). In Hasselblad the Court upheld the Commission decision that measures designed to restrict price advertising were in breach of Article 85(1).(11).

73. The arrangements involve an agreement between a wholesaler and a large number of retailers on the prices which apply to a range of products. In the Authority's view, the obligation on the retailers to display own label products at the recommended prices is likely to result in selling at those recommended prices and this is a form of resale price maintenance and therefore offends against Section 4(1). It also restricts the retailers' ability to advertise lower prices and for this reason also offends against Section 4(1).

74. National promotions may include non-own brand products as well as own label products. Musgraves have submitted that ´retailers are provided with suggested retail prices and suggested gross margins, but are free to sell below these prices if they so wish, so long as the item is not on promotion ...'. The retailers are, in effect, required to adhere to the prices set by Musgraves for goods that are on promotion. This applies to both own brand and non-own brand products. Therefore the points made above in relation to own label goods apply equally to non-own brand products and the pricing policy used by Musgraves in respect of these products while on national promotion offends against Section 4(1). In the Authority's opinion this provision is tantamount to a formof resale price maintenance for such goods and it offends against Section 4(1).

75. As pointed out Musgraves also include recommended prices for all other goods stocked in their warehouse on their hand-held computer terminals (see para. 37). Although this practice is not specifically provided for in the notified agreement, the Authority believes that it forms part of the total relationship between the parties and that it should be considered in this context. This agreement is not between a supplier and its distributors. Musgraves is a wholesaler and organises a central billing arrangement for the SuperValu and Centra retailers. The only reason advanced to justify the recommending of prices by Musgraves is that the recommending of prices by suppliers is a long accepted practice. The Groceries Order, while allowing suppliers to recommend prices, does not allow wholesalers to do so. Consequently the arrangement is not in line with long accepted practice. The Authority accepts that Musgraves is not acting purely as a wholesaler in the context of the notified agreements. It is to a degree akin to a franchisor in that it has established and developed a uniform system for grocery retailing under the SuperValu and Centra names. The Authority believes therefore that there is nothing anti-competitive in Musgraves recommending prices per se in the context of these agreements. It notes, however, that under EU law, suppliers are only allowed recommend prices provided there is no concerted practice that retailers observe these prices. Given that retailers are required by the agreement to display own brand items at the recommended price, and to adhere to recommended prices for all items on promotion, the Authority is concerned that they might also believe that they had to observe the ´recommended prices' for other goods. Such provisions also offend against Section 4(1).

76. Musgraves proposed amending clause 3(e)(iii) to provide that the retailer would stock and display all SuperValu brands, be free to set his own prices but would be recommended not to exceed the recommended prices for such goods. In the Authority's opinion such a provision would not offend against Section 4(1) since it leaves retailers free to set their own prices. The wording is in line with that accepted by the EU Commission for franchise agreements in Pronuptia.

77. Musgraves then changed their proposal. Specifically the reference to retailers' freedom to set their own prices was dropped. The new proposal referred to Musgraves providing recommended prices as guidelines and retailers being recommended not to exceed these in the case of SuperValu brands and others when they were on promotion. When asked why they were making this further change Musgraves stated that they wished to be able to fix the maximum prices at which their retailers could sell. They claimed that otherwise the group's image would be damaged. They also referred to the speed with which individual prices could change in the grocery business and the requirement that as a competitor they would need to respond to this. They stated that: ´Musgraves has the ability, by using its computer system, to inform all its retailers of the new maximum price while ensuring that the retailers are still obtaining an overall margin which allows them to stay in business.' They referred to a report prepared for the OECD Secretariat which stated inter alia that there was a difference between fixing minimum and maximum prices and that maximum prices could be used to eliminate double mark-up problems thereby increasing efficiency. (12)

78. The Authority believes that such a provision would offend against section 4(1) since, according to Musgraves, its aim is to enable Musgraves to set maximum prices, which means that retailers are not entirely free to set their own prices. In the Authority's opinion the setting of maximum prices in this fashion by a wholesaler such as Musgraves constitutes a formof price fixing which is anti-competitive. The independent retailers must be free to set prices, as setting prices on the basis of their own commercial judgment is an essential feature of the competitive process. In seeking to set maximum prices, Musgraves are going beyond what the EU Commission accepted as legitimate for a franchisor in Pronuptia i.e. they may recommend retailers not to exceed the recommended price. The Authority notes Musgraves statement that their computer system allows them to inform retailers of new maximum prices while ensuring that they are still obtaining an overall margin which allows them to stay in business. If Musgraves arrangements allows them to lower the maximum prices of some goods and ensure adequate margins for the retailers, this implies that other prices must rise to maintain the overall margin. It is for the individual retailer to decide upon the appropriate prices for the products he sells and upon his margins. The State has abolished price controls including the setting by it of maximum prices, relying instead on the competitive process to ensure that prices to the consumer are kept as low as possible. The Authority believes that in such circumstances, wholesalers or any other third party cannot be allowed to establish maximum retail prices for those retail outlets supplied by them.

79. There is also a danger that a maximum price could quite easily become the minimum price. This reinforces the problems caused by allowing a wholesaler to set maximum prices. Musgraves referred to a study prepared for the OECD Secretariat to justify the selling of maximum prices. The report on franchising indicates that three of the twenty four members of the OECD allow franchisors to set maximum prices. The study also points out, for example, that:

´All countries are very suspicious of restrictions that aim to limit the franchisee's freedom to choose their own price, and it is difficult to find another topic where there is such unanimity. Resale price maintenance isvirtually always unlawful. Only more limited restrictions - such as the use of recommended prices - are tolerated and even then sometimes only in exceptional circumstances such as promotional campaigns for the introduction of new products.' (13)

80. The present arrangement is not a pure franchise agreement although Musgraves dispute this point. Musgraves themselves have pointed out that the agreement does not satisfy all the criteria of the EU Franchise Regulation. Therefore, the propositions advanced in the study are not directly applicable. The Authority does not in any case accept the arguments made in the study cited by Musgraves. The Authority believes that its views on setting maximum prices are consistent with those of competition authorities in the vast majority of OECD countries.

Equipment -Clause 5

81. Clause 5 of the standard licensee agreement as notified, requires retailers to purchase all fixtures and fittings from suppliers nominated and approved by Musgraves. Musgraves submitted that they nominated two suppliers for the retailer to choose from. Musgraves indicated that this clause was included to ensure that equipment obtained by the retailer met the standards required from a SuperValu/Centra retailer.

82. This requirement had the effect of restricting the retailer in selecting suppliers to carry out work in the retail outlet. On the supply side, it denied suppliers, other than those already approved by Musgraves, access to business available in SuperValu outlets. These suppliers have the opportunity to become approved by Musgraves every 2/3 years. To the extent that this happens there is a possibility that competition could arise. The Authority accepts that Musgraves are entitled to seek to maintain standards in those retail outlets affiliated to their symbol group. However, itconsidered that SuperValu retailers should be free to choose suppliers of these services provided the products supplied conform to Musgraves standards especially as ownership of the equipment rests with the licensee. In the Authority's view this clause offended against Section 4(1).

83. Musgraves have proposed amending clause 5. Except in the case of equipment which interfaces with their computer system the retailers may purchase equipment from any supplier. The only requirement is that such equipment comply with Musgraves specifications and standards. Such a provision does not offend against section 4(1). The retailers would still have to obtain equipment which interfaces with the computer system from one of two suppliers named by Musgraves. This provision offends against section 4(1) for the same reasons as the original clause 5.

Post-termination Restrictions - Clause 12

84. Clause 12 as notified required the licensee (i) not to sell the business to a competitor of Musgraves, (ii) to give Musgraves first option to purchase the business and (iii) not to compete in the grocery trade within a limited radius of the business for one year. Clause 12 makes selling the business to competitors of Musgraves impossible and it seeks to enforce a non-compete clause of one year on the licensee. The licensee is also bound by this clause if he terminates the agreement under clause 14.

85. The effect of the requirement not to dispose of the business to a competitor of Musgraves is to prevent competitors, whether existing ones or new entrants, from acquiring retail outlets and thereby extending market share. Its object therefore is to prevent, restrict or distort competition. This requirement is unlikely to affect competition to any significant degree in the short term as the likelihood is that only a small number of retailers will wantto sell their business at any one time. Nonetheless, over time this requirement could have a significant effect on competition. Once an outlet becomes a SuperValu outlet, it is likely to remain under that name as long as it continues as a grocery outlet. This introduces a considerable amount of rigidity into the market and makes it difficult, in particular, for new entrants to successfully enter the market. It is relevant that the restriction applies to almost 400 grocery outlets located nationwide, with an estimated 16% of the grocery market. Musgraves argued that it was misleading to aggregate the SuperValu and Centra stores in this way. Nevertheless the fact remains that the total number of SuperValue and Centra stores is more than twice the number of stores currently owned by all of the multiple groups combined. While some of these outlets may be small, together they represent a significant proportion of all the supermarket outlets within the State. The number of SuperValu stores alone is greater than the numbers of the two largest multiples combined. The Authority does not believe that Musgraves are entitled to seek to prevent the stores being acquired by a competitor in this way. In the case of licensees, Musgraves do not own the stores. The object of this clause is to ensure that outlets which have become part of the SuperValu group are not subsequently acquired by another group or multiple, and thus it has both the object and the effect of restricting or distorting competition and offends against Section 4(1).

86. Clause 12(ii) requires the retailers to give Musgraves first option on the purchase of premises being disposed of. In this connection, the Authority has considered the implications of the judgment of the High Court on 1 May, 1991, in the case of Texaco (Ireland) Limited v. Thomas Farrell and Esso Ireland Ltd. Blaney J. held that a pre-emption clause in a solus agreement, whereby the dealer had first to offer his premises for sale to Texaco, was in restraint of trade and was void. It should be noted that Musgraves do not make any major investment in the licensees' shops and therefore should not bein a position to dictate how these outlets are used once the licensee agreement is terminated.

87. If the retailer cannot sell the outlet to a competitor of Musgraves under 12(i) and the premises has been designed as a grocery outlet, its value to potential buyers in other markets may not be as great as it would be to people in the grocery trade. This reduces the likelihood of the licensee getting a fair price for the premises and increases the probability that the outlet will continue within the Musgraves operation. Clause 12(ii) reinforces the restriction contained in clause 12(i). It also offends against Section 4(1).

88. Clause 12(iii) requires the retailers not to carry on the trade or business within a radius of one mile from the outlet for a period of one year. The one year non-compete clause would be acceptable where Musgraves had purchased the business including goodwill. The Authority has ruled in a number of decisions relating to the sale of a business that a non-compete clause of two years duration is acceptable. However, if Musgraves have not purchased the business they should not be permitted to keep the licensee out of the market by virtue of this provision. They may prevent him using the SuperValu name - to the extent the goodwill of the business is associated with that name, it belongs to Musgraves. Clause 12(iii) provided that the retailer could not operate as a grocery retailer from the premises for twelve months after termination of the agreement. The Authority considers that such a post-term restriction represents a restriction on competition which offends against Section 4(1). It notes that EU Exclusive Purchase and Exclusive Distribution Block Exemptions do not allow such post-term restrictions. The Authority can see no reason for allowing such a restriction in this case. In the Authority's opinion the retailer is entitled to operate as a grocery retailer following termination of the agreement whether as an independent or as part of another symbol group. In the Authority's view clause12 and each of its parts restrict competition and offend against Section 4(1) of the Act.

89. Musgraves have proposed a number of amendments to clause 12. Firstly they proposed that the licensee would be required to inform Musgraves of any intention to sell the premises and to allow it to purchase the premises on the same terms as all other parties and to require the licensee to give one year's notice of intention to sell to a competitor. As the original clause 12(i) remained under this proposal, the amendment appeared superfluous. Its object and its likely effect is to prevent competitors acquiring those premises and thus to restrict competition. It therefore, would offend against Section 4(1). They also proposed reducing the post-term non-compete clause to 6 months. They sought to justify this on the grounds that the EU franchise Regulation allows a post-term non-compete clause for up to one year for the purpose of preventing former franchisees exploiting the know-how of the franchisor which had been provided under the terms of the agreement. While the Authority accepts that the arrangements have some elements of a franchise agreement, it does not believe that the know-how provided to the retailers by Musgraves is sufficient to justify a post-term non-compete clause. Thus even a six month restriction would, in the Authority's view, offend against Section 4(1).

90. Musgraves subsequently proposed an alternative amendment to clause 12. This would distinguish between premises sold or provided to the retailer by Musgraves and those which were not. In the former case, the retailer would, if he decided to sell the premises within ten years of acquiring it, be required to give Musgraves first option to purchase the premises. After ten years if the retailer wished to sell he would have to inform Musgraves and allow them to offer to purchase the premises at the same price as anyone else. The Authority accepts that, where Musgraves have sold premises to retailers, they have invested substantially in the developmentand/or construction of such premises in the expectation that they would benefit from such premises being operated as part of their symbol group for some period of time. Consequently, the Authority does not believe that a requirement that the retailer would have to give Musgraves first option to buy back the premises if he wished to sell within ten years, would offend against Section 4(1). After ten years the Authority can see no reason for restricting the retailer's freedom to sell to whoever he chooses. There is no justification for allowing Musgraves any advantage over any other would be buyer. The object is to try to prevent other retail groups from purchasing the store and this would be its most likely effect. Thus it would offend against Section 4(1).

91. In the case of premises not acquired from Musgraves they proposed that, where the retailer sells the premises within ten years of the commencement of the agreement, he must inform Musgraves, and allow them to offer to purchase the premises on the same terms as anyone else. After ten years if they do not inform Musgraves of their intention to sell they must give one year's notice of intention to terminate the agreement. The Authority again concludes that the object, and the most likely effect, of such a provision is to prevent Musgraves competitors from acquiring the premises. Thus it would also offend against Section 4(1).

92. Musgraves then proposed that the post-term non-compete clause remain at 12 months as originally notified. The Authority has already stated that such a restriction would

offend against Section 4(1).

93. Musgraves also indicated that they wished to amend the licensee agreement by inserting an additional clause 13(b) under which the licensee agreed to operate his business from the premises and not, without Musgraves consent, which should not be unreasonably withheld, carry on the business of supermarket operator in another premises in the State. The Authority accepts that such a restriction is designed to prevent retailers from using know-how supplied by Musgraves or commercial information relating to prices, promotions and other activities other than as part of the SuperValu or Centra symbol group. It would not therefore, in the Authority's opinion, offend against section 4(1).

94. Clauses 3(b), 3(c) and 3(d)(iii), of the Centra licensee agreement are identical to clauses 3(c), 3(d) and 3(e)(iii) respectively of the SuperValu licensee agreement. Similarly clauses 5 and 12 in both agreements are identical. Each of these provisions offends against Section 4(1) for the reasons set out in the previous paras.

95. Clause 2(ii) of the standard franchisee agreements contain the purchasing restrictions. Under this clause the franchisees are obliged to purchase all their requirements from Musgraves or suppliers approved by Musgraves. The franchisee agreements, and therefore this requirement, last for a period of ten years. Musgraves own these outlets. They could operate these stores themselves in which case supplies would be obtained exclusively from Musgraves. They cannot be compelled to grant access to their stores to competitors as they have made a significant investment in such stores. If Musgraves choose to grant to someone else the right to operate one of their stores then a requirement for that individual to obtain their supplies through Musgraves does not offend against Section 4(1).

Pricing Arrangements

96. The pricing provisions contained in clauses 3(d)(iii) and 3(e)(iii) of the Centra and SuperValu licensee agreementsrespectively also apply to SuperValu and Centra franchisees, i.e. they must stock and display all Musgraves own brands at the price recommended by the wholesaler. The arrangements relating to non-own brand products on national promotion and to the prices of all other goods also apply to franchisees. As already stated such arrangements offend against Section 4(1) of the Act.

Supply of Equipment

97. Clause 2(iii) requires franchisees to take ´all supplies and other commodities such as advertising material, trade notices, items, packaging material, bearing a trade mark or logo of the company, and miscellaneous equipment incidental to the preparation, advertisement, supply or presentation of the business' from Musgraves or a supplier or distributor authorised by Musgraves. Musgraves have submitted that such an arrangement is designed to ensure standard format and quality. In addition they have stated that these goods can be obtained from one of three suppliers who are obliged to tender for the provision of these goods every 2/3 years. This does not offend against Section 4(1) for the same reason as in the case of clause 2(ii).

Insurance

98. Clause 2(v) of the standard franchise agreement provides for the provision of insurance services. These services are organised by Musgraves and paid for by the franchisees.

Musgraves have a right, as owners of the premises, to make the necessary insurance arrangements for them. As they are extending credit to the franchisees on stock supplied they are entitled to satisfy themselves as to the adequacy of insurance cover on such stock. However, this Clause restricts suppliers of insurance services, other than those approved by Musgraves, from dealing with the individual retailers. In addition, the franchisees are prevented from making their own stockinsurance arrangements and from trying to negotiate better terms with insurance companies. The Authority believes that the franchisees should be free to do so, subject to satisfying Musgraves that the stock is adequately insured, and therefore this Clause offends against Section 4(1) of the Act. Musgraves have proposed to amend this clause to enable the franchisees to choose their own insurer subject to satisfying Musgraves that adequate insurance arrangements for stock are in place. Such a provision would not offend against Section 4(1).

Service Charges

99. Under Clause 2(vi) of the standard franchisee agreements, the franchisee is required to pay a service charge to Musgraves based on a percentage of total sales during each month. Musgraves have stated that this payment is to cover the interest charges on the franchisees' premises. The Authority is satisfied that this provision does not offend against Section 4(1).

Accounting Requirements

100. Clause 2(x) provides for the nomination of an accountant by Musgraves to act on behalf of the franchisee. The accountant nominated must be acceptable to both Musgraves and the franchisee. Franchisees are independent operators and as such should be allowed to appoint accountants to act on their behalf subject to the provision that these individuals are acceptable to Musgraves. Accordingly, the Authority is of the view that clause 2(x) offends against Section 4(1). Musgraves proposed to amend this clause to allow the franchisee to appoint an auditor of their choice, subject to Musgraves approval and in that case it would no longer offend against Section 4(1). Clause 2(xi) allows Musgraves to examine the franchisees' books and records during business hours. These clauses allow Musgraves to monitor their investment in the franchisees' business. They also require franchisees to maintain proper records thereby facilitating the operation of a successful business. They do not restrict competition and so do not offend against Section 4(1).

Inspection of Business

101. Clause 2(xii) allows Musgraves to inspect and examine the franchisee's stock and operation. Clause 2(xv) requires franchisees to perform the services forming a part of the operational system prescribed by Musgraves. Musgraves are entitled to inspect their own premises and to seek to ensure that the standards prescribed in the agreement are being adhered to. Accordingly, these clauses do not restrict competition and do not offend against Section 4(1).

Opening Hours

102. Clause 2(xvi) of the standard franchise agreement provides that the retail outlet shall remain open every day, the hours of opening to be agreed between Musgraves and the retailer. In the event of dispute, Musgraves' view on opening hours will prevail. There is a possible restriction on the dealer in deciding his own opening hours, however, it is in the interests of both parties to agree on the optimum opening hours as both the retailer and Musgraves stand to benefit from such an agreement. Provided that the hours are agreed with the franchisee, this provision does not restrict the franchisee in determining opening hours, and does not offend against Section 4(1).

Non-involvement in Grocery Business

103. Clause 2(xix) provides that franchisees cannot be involved, except with the approval of Musgraves, in the grocery business otherwise than as a manager of a SuperValu or Centra outlet for the duration of the agreement. Implicit inthis provision is the concept that the franchisees should not compete against the business of which they are an integral part. This clause restricts the freedom of franchisees by preventing them setting up as competitors of SuperValu/Centra in the grocery business. However, it ensures that the franchisees devote all their efforts to the running of the franchise retail outlet. In addition, the small number of franchisees means that the potential effect of this restriction on competition is negligible. Therefore this clause does not offend against Section 4(1).

104. Clause 2(xx) of the standard franchisee agreement provides that once the agreement has been terminated, the franchisee cannot be engaged in the grocery business for a period of one year within a one mile radius of the outlet, in a city, or a five mile radius, if the outlet is located in a rural area. It should be noted that there is no sale of business involved here and that the franchisee cannot operate from his previous place of business because this is owned by Musgraves and in all likelihood will continue to be operated as an Musgraves retail outlet by another franchisee or licensee. Accordingly, any goodwill generated by use of the Musgraves trade marks, logos, etc., will work to the benefit of the new retailer. The franchisee may have generated goodwill of a personal nature through knowledge of and dealings with local people. The Authority is of the view that this element of the goodwill properly belongs to the franchisee and that he should be allowed to benefit from his efforts in this respect and that a non-compete clause is not warranted in this instance. Accordingly, this provision offends against Section 4(1) of the Act. Musgraves proposed to reduce the duration of this clause to 6 months, but subsequently changed their mind. They also proposed reducing its geographic scope to a one mile radius of the premises in country areas. Such proposals would still offend against Section 4(1).Cash Registers

105. Clause (xxii) provides that only cash registers which are supplied by Musgraves may be used and they shall remain the property of Musgraves. Each cash register has two keys, one of which is retained by Musgraves. Musgraves reserve the right to obtain access to the cash registers at any time for the purposes of checking the tally roll and can also remove them at any time and replace them with other cash registers. In the Authority's opinion this clause does not offend against Section 4(1).

Repairs and Renewals

106. Clause 2(xxv) provides for the repair and renewal of franchisees' premises by Musgraves. Musgraves may insist on this work being carried out if the franchisee disagrees about the need for it. The cost of the work is borne by the franchisee. As owners of the outlets the Authority believes that Musgraves are entitled to make provision for the repair and renewal of their premises. Accordingly, this clause does not offend against Section 4(1) of the Act.

Termination

107. Clause 3 of the standard franchisee agreements contains provisions for the termination of the agreements as well as post termination provisions. The Agreements may cease to have effect if the franchisee fails to observe the stipulations set out in Clause 2. Bankruptcy and default in payment for goods would bring about termination of the agreement. They may also lapse after a 10 year period. If an agreement between Musgraves and a franchisee lapses, Musgraves as owners of the premises would be likely to enter into a subsequent agreement with another franchisee for the operation of the outlet. Therefore the competitive situation would remain unchanged. The provisions in clause 3 relating to cessation of theagreements do not offend against Section 4(1).

108. Clause 3 also includes post-agreement provisions. One of these provisions seeks, in the future, to prevent franchisees from using a method of selling grocery goods similar to that operated under the SuperValu/Centra names. Know-how acquired by the franchisees over the duration of the agreement could be generic in nature therefore it would not belong, in any technical sense, to Musgraves and they could not seek to enforce a provision on this basis. This provision is acceptable to the extent that the SuperValu/Centra method of selling grocery products is unique to that operation. Van Bael and Bellis note, in relation to the EU block exemption on franchising agreements that "it is forbidden to prevent the franchisee from continuing to use the licensed know-how after termination of the agreement, where the know-how has become generally known or easily accessible".(14). In the Authority's opinion, this provision may have the effect of unfairly restricting franchisees in any subsequent attempts they might make to re-enter the grocery business by preventing them from using knowledge of a generic nature gained through operating a SuperValu or Centra outlet. Accordingly, it offends against Section 4(1) of the Act. Musgraves have proposed to amend this clause to exclude know-how which is easily accessible. Such a proposal would not offend against Section 4(1).

109. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of the agreements 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 arenot 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'.

Exclusive Purchase Requirement

110. The exclusive purchase arrangements in clauses 3(c) and (d) of these agreements contribute to reducing cost and improving the distribution of grocery goods. The combined purchasing power of the retailers through Musgraves enables the best possible price to be obtained from suppliers. This enables the retailers to compete more effectively.

111. Consumers benefit to the extent that some part of the savings accruing to the retailers is passed on in the form of lower prices. They also benefit from the provision of additional services such as free delivery provided by SuperValu/Centra stores. The Authority accepts that consumers have gained from the competition which Musgraves has provided for the multiples particularly in rural areas.

112. Musgraves earns its income from sales to the retailers. There is no payment by the retailer other than payment for the goods. If the retailers order stock other than through Musgraves, the whole group is weakened and its viability would be threatened. Accordingly, the Authority believes that the purchasing obligation is indispensable to the attainment of the objectives of the agreement.

113. Musgraves has a significant share of the retail grocery market, 16%. Nevertheless, others, e.g. Dunnes Stores and Powers, have larger market shares and there are numerous othercompetitors in the market. The Authority's view therefore is that the purchasing requirements do not afford Musgraves the possibility of eliminating competition in respect of a substantial part of the market.

114. The exclusive purchase agreement will last for as long as an agreement between Musgraves and a licensee is in force. The standard licensee agreement can be terminated at any time by the licensee although there is no specific duration for the agreement. The Authority agrees with the view of the EU Commission that if exclusive purchase agreements were of indefinite duration, this would effectively block competing suppliers and distributors access to any retail outlets permanently. However, given the fact that provision is made for the termination of the licensee agreement, the requirements for a licence in Section 4(2) are satisfied.

Pricing Practices

115. The Authority does not believe that the requirement in Clause 3(e)(iii) to stock and display all SuperValu own brands at the price recommended by Musgraves contributes to an improvement in the provision of services or to promoting technical or economic progress. It believes that such benefits essentially derive from the purchasing arrangements and the associated central billing system. Given that the Authority does not consider that the pricing provisions lead to any efficiency benefits, consumers, by definition, do not benefit from such gains. The Authority also concludes that the requirements are not indispensable for SuperValu to derive the benefits from operating as a symbol group. Accordingly, the requirements for granting a licence under Section 4(2) are not satisfied. Similarly the Authority considers that the requirement to sell those goods which are on national promotion at the price set by Musgraves also amounts to resale price maintenance. This requirement does not satisfy therequirements for a licence for the reasons given above.

116. In coming to the conclusion that the price arrangements do not satisfy the criteria for a licence the Authority has taken account of the fact that, in over 30 years, the EU Commission has virtually never exempted such arrangements from the prohibition contained in Article 85(1). It can see no good reason for departing from well established EC precedents in the present case.

117. Franchise agreements do not benefit from the EU block exemption on such agreements if the franchisee is restricted in determining prices. On this basis, the licensee agreement would not be exempt under EU regulations. The Authority believes for the same reasons that the proposed amendment, which would allow Musgraves to set maximum prices, would not satisfy the requirements for a licence.

Equipment

118. The arrangements for the provision of fixtures and fittings in Clause 5 of the Agreement is important to the efficient operation of the Musgraves organisation. In view of the experience of Musgraves in arranging for the provision of this type of service, it is likely that the retailers will be helped rather than hindered in their efforts to modernise, maintain and operate retail outlets by the involvement of Musgraves. Consumers may benefit from the economies of scale involved in organising these services for a large number of retail outlets as opposed to their provision on an independent basis.

119. The arrangements help to safeguard the identity and reputation of the network symbolised by the SuperValu name. However, the Authority does not believe that these obligationsare indispensable to the attainment of the objectives of the agreement. It believes that the standards Musgraves seek to attain can be achieved in a less restrictive manner.

120. While these requirements have an effect on suppliers of fixtures and fittings in any attempts they make to generate business in the Musgraves outlets, the Authority believes that it is likely that they do not result in the elimination of competition in a substantial part of the market in question. Nonetheless, all the requirements in Section 4(2) are not satisfied and a licence cannot be granted.

121. Under the proposed amendment to clause 5 only the restriction requiring retailers to purchase equipment which would interface with the computer system from one of two suppliers would offend against Section 4(1). The Authority believes that this would meet the requirements of Section 4(2).

Post Agreement Provision - Clause 12

122. Clause 12 of the licence agreement sets out the post agreement provisions which prevent (1) licensees selling their premises to competitors of Musgraves, (2) require that first option on the purchase of the premises be given to Musgraves and (3) prevent licensees trading as independents in the locality for a period of one year.

123. In the Authority's view this clause does not contribute to improving the distribution of goods or provision of services or to promoting technical or economic progress. As there are no clear gains in efficiency, no benefit derives to consumers. The Authority does not regard these clauses as indispensable to the overall arrangement.

124. Although the EU block exemption on franchising agreements allows a post term non-compete clause of up to 1year to protect the franchisee's know-how, the Authority considers that the provision in this agreement is designed to prevent competition and not to protect know-how. Accordingly, it would not benefit from the EU block exemption even if it came within its scope. The exclusive purchase block exemption does not permit such clauses. Clause 12 fails to meet the requirements of Section 4(2). The Authority believes that this is also true of the various amendments proposed to clause 12 which were found to offend against Section 4(1).

125. The Authority concludes, for the same reasons given in connection with the standard SuperValu licensee agreement, that:

(i) the exclusive purchasing requirement in Clause 3 satisfies the requirements for the issuing of a licence under 4(2) of the Act;

(ii) the pricing arrangements in Clause 3(d)(iii),

the provisions relating to fixtures and fittings in Clause 5 and the post agreement provisions in Clause 12 fail to meet the criteria in 4(2).

126. The pricing requirements for licensees also apply to franchisees. The Authority considers that for the same reasons outlined in paras. 115-117, the arrangements as they apply to franchisees do not satisfy the requirements of 4(2).

127. Clause 2(xx) of the standard franchise agreements prevent franchisees from engaging in the grocery business for one year within a limited radius of the premises. This provision seeks to ensure that any new Musgraves franchisee does not face competition from the outgoing franchisee for at least one year. This has the effect of restrictingcompetition which is not in the interests of consumers. The benefits that arise from the overall arrangements will not be adversely affected by the removal of this provision. The Authority's view therefore is that it is not indispensable to the overall arrangements. This clause does not fulfil all the requirements of Section 4(2).

128. Musgraves and the SuperValu and Centra licensees and franchisees are all undertakings and the notified agreements between Musgraves and the various licensees and franchisees are agreements between undertakings. The requirement that the licensees obtain all of their supplies from Musgraves or a supplier nominated by them offends against Section 4(1). The exclusive purchase obligation, however, satisfies the requirements for a licence. The following provisions of the notified agreements also offend against Section 4(1) for the reasons set out above.

- Clause 3(e)(iii)

- Clause 5

- Clause 12

- Clause 3(d)(iii)

- Clause 5

- Clause 12

- Clause 2(v)

- Clause 2(x)

- Clause 2(xx)

- Clause 3

The Authority considers that none of these provisions satisfy the requirements for a licence as set out in Section 4(2). (15) The Authority therefore refuses to issue a certificate or grant a licence to the licensee agreement between Musgraves Limited and the SuperValu and Centra licensees, (CA/18/92E) and to the franchise agreement between Musgraves Limited and the SuperValu and Centra franchisees, (CA/19/92E), notified on 30 April 1992 under section 7 of the Competition Act.

For the Competition Authority

Patrick Massey

Member

19 September, 1994

(1) Fair Trade Commission : Report of Review of the

Restrictive Practices (Groceries) Order, 1987,

Stationery Office, Dublin, 1992), P1 8304.

(2) Commission Regulation No. 1983/83, OJ L173 30.6.1983,

P1.

(3) Competition Authority Decision No. 144, 5 November 1993.

(4) Commission Regulation No. 1984/83, OJ 173, 30.6.1983 P5.

(5) Competition Authority Decision No. 25, 1 July 1993.

(6) Commission Regulation No. 556/89, OJ L461, 4.3.1989, P1

(7) Commission Regulation No. 4087/88, OJ L359, 28.12.1988,

P46

(8) Commission Decision of 29 July 1980, OJ L260, 3.10.1980,

P24.

(9) Commission Decision of 14 July, 1975, OJ L212, 9.8.75.

(10) Case No. 73/74 [1975], ECR 1491.

(11) Case No. 86/82, [1984], ECR 883.

(12) OECD (1994); Competition Policy and Vertical Restraints:

Franchising Agreements, OECD, Paris.

(13) P.162.

(14) Competition Law of the EEC, second edition, Van Bael

and Bellis, P169.

(15) The Authority believes however, that the proposed amendments to clause 5 of the licence agreements would meet the requirements for a licence. Similarly the proposed amendments to clauses 2(v), 2(x) and 3 of the franchisee agreement would not offend against Section 4(1).