Irish Competition Authority Decisions

1. This decision concerns an agreement between Mitchelstown Export Company Limited and Mitchelstown Co-Operative Agricultural Society Limited (the predecessor in title to Dairygold Co-Operative Society Limited (Dairygold)), together trading as C.M.P. Dairy and Mr Michael Cotter, notified on 30 September 1992, whereby the latter sold his milkround to Dairygold and undertook to promote the sale of C.M.P. products in and around Cork city. The notification requested a certificate or in the event of a refusal to issue a certificate, a licence. The Authority issued a Statement of Objections to the parties on 29 April 1994 indicating that it intended to refuse their request for a certificate or licence. An Oral Hearing was held on 11 October 1994.

2. The notification concerns an agreement dated 10 April 1990, between Mitchelstown Export Company Limited and Mitchelstown Co-Operative Agricultural Society, together trading as C.M.P. Dairy (C.M.P.) and Mr Michael Cotter. Under the terms of the agreement C.M.P. purchased a milk round which was at the time owned by Mr Cotter. In addition C.M.P. appointed Mr Cotter as exclusive distributor of its products in and around the Mayfield area of Cork City (the existing milk round). The agreement contained a number of non-compete clauses.

3. Dairygold was incorporated on 1 October 1990, having come into existence as a result of the amalgamation of Mitchelstown Co-Operative Agricultural Society Limited and Ballyclough Co-Operative Creamery Limited. Dairygold is a multi-purpose co-operative, engaged in a wide range of activities including inter alia dairy and meat processing, the sale of dairy and meat products on the domestic and export markets, the manufacture and sale of animal feed, grain trading, shop retailing and the supply of farm equipment. At the time of the agreement Michael Cotter owned a milk round in the vicinity of the Mayfield area of Cork city which he subsequently sold to Dairygold and which is the subject of this agreement.

4. The products concerned in this agreement are liquid milk, cream and potted products. There are a significant number of suppliers operating in this market including, Dairygold, Waterford Co-Op, Central Dairies, Dungarven, Avonmore Co-Op,

Thurles Co-Op Creamery, Shannon Dairies, Golden Vale Co-Op, North Cork Creameries, Dawn Dairies, Strand Dairies and Miltown Farm. The market which is serviced by Dairygold includes the greater part of Cork city and county, part of West Waterford, a significant part of South Tipperary and parts of South and East Limerick, (excluding Limerick city). According to Dairygold the market is highly competitive with no restrictions on new suppliers coming into the market. Buyers in the market consist of independent agents, supermarkets, convenience stores and shops, door step consumers and institutions i.e. hospitals.

5. The notification relates to an agreement dated 10 April 1990 for the sale by Mr Michael Cotter of the milk round which he owned in the Mayfield area of Cork city to Dairygold, trading as C.M.P. dairies. As part of the purchase agreement, C.M.P. appointed Mr Cotter as exclusive distributor of its products for its existing milk round. Clause 2 of the agreement prevented Mr Cotter, for a period of three years from the termination of the distribution agreement, from becoming involved in a business engaged in the sale, marketing or distribution of products similar to, or competing with C.M.P., within a distance of a half mile of any customer, who had been a customer of the existing milk round in the year prior to termination. In addition, clause 2.1 (ii) prevented Mr Cotter for a period of three years from termination, from enticing any person, firm or company who had been a customer or was in the habit of dealing with C.M.P. in the two years prior to the date of termination. Clause 4 of the agreement stated that Mr Cotter was obliged to deliver and sell C.M.P. products at a price not exceeding the retail price recommended by C.M.P. for those products.

6. The Authority communicated its concerns regarding the non-compete and the pricing clauses in a letter to the parties dated 16 July 1993. In a reply dated 31 August 1993, Dairygold argued strongly for the necessity of the non-compete clauses. They submitted that the relationship which existed between C.M.P. and Mr Cotter was one of supplier/independent distributor and not employer/employee. According to Dairygold, Mr Cotter earned his living by buying products from C.M.P. and reselling them at a profit rather than receiving a salary from C.M.P. Consequently they argued that the principles which apply to employer/employee contracts could not be applied to this arrangement. Mr Cotter was paid valuable consideration by Dairygold for the purchase of the milk round which he now operates as an exclusive distributor, therefore the terms of clause 2 were inextricably linked to the purchase by Dairygold of the milk round operated by Mr Cotter. Consequently, Dairygold submitted that the principles which the Authority applied to restrictions on a vendor following the sale of a business should apply in this case. The restrictions on Mr Cotter competing with Dairygold were necessary to protect Dairygold's interests in the event of Mr Cotter ceasing to operate the distribution agreement and seeking to take over the goodwill of the round himself. Due to Mr Cotter's long and established relationship with the customers of the milk round he would be in a very strong position to compete with Dairygold and in the circumstances it was reasonable that he should be prevented from competing for a limited period. In addition, Dairygold argued that because the vendor was well known in the area he could effectively continue to run the business hence a non-compete clause for a period of three years, rather than the two years normally accepted by the Authority, was justified (see paragraphs 12-14 below). Regarding the pricing restrictions contained in clause 4, Dairygold acknowledged that Article 3(f) of the Draft Licence for Categories of Exclusive Distribution Agreement indicated that it would not apply where a supplier obliges the exclusive distributor to sell at a fixed price, or not less than a minimum price or not more than a maximum. They stated that clause 4 had the effect of obliging Mr. Cotter not to sell at more than the maximum price recommended by C.M.P.

7. On 29 April 1994, the Authority issued a Statement of Objections to the parties indicating its intention to refuse to issue a certificate or grant a licence in respect of the notified agreement. On 26 May 1994 Dairygold replied arguing that the non-compete provisions contained in clause 2 of the agreement were not anti-competitive rather they argued that the restrictions were essential to protect the goodwill of the milk round which Dairygold had purchased from Mr. Cotter. They cited the decision of the EU Commission in Reuter/BASF [1] and of the European Court of Justice in Remia [2] in support of their arguments. In addition they referred to the Authority's decisions in Nallen/O'Toole [3] and Rohan Construction/Rohcon [4]. Dairygold also indicated that it was prepared to reduce the period of restraint to one year from the termination of the distribution agreement. Dairygold also stated that it was prepared to amend clause 4 so as to eliminate any restrictions on retail prices. Mr. Cotter also responded arguing that the restrictions were not anti-competitive.

8. On 11 October 1994 the Authority held an Oral Hearing at which Dairygold presented further arguments in support of the non-compete provisions contained in clause 2 of the agreement. In particular they argued strongly that they had not acquired the goodwill at the time of the sale as Mr. Cotter remained on in the business as an exclusive distributor. Consequently a non-compete clause following the termination of the exclusive distribution agreement was essential to enable them to acquire the goodwill. They pointed out that while Mr. Cotter did not operate in an exclusive territory, he did have a specific customer base, and in the circumstances a non-compete clause relating to the customers which he dealt with was justified. Dairygold also explained that the agreement which they had concluded with Mr. Cotter was not unusual insofar as they were currently in the process of negotiating similar agreements with three or four other Dairygold roundsmen. In addition they restated their proposal to reduce the period of restraint in clause 2 to one year from the termination of the distribution agreement.

9. Section 4(1) of the Competition Act states that 'all agreements between undertakings, decisions by associations of undertakings and concerted practices, which have as their object or effect the prevention, restriction or distortion of competition in goods or services in the State or in any part of the State are prohibited and void'.

10. Section 3(1) of the Competition Act defines an undertaking as 'a person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of a service.' Dairygold is a corporate body engaged for gain in the production and sale of dairy and meat products. Mr. Cotter was, at the time of the agreement, the beneficial owner of the milk round and subsequently operated it as an exclusive distributor and is therefore an undertaking. In a submission to the Authority, Dairygold submitted that:

'the contractual relationship between CMP and Mr. Cotter is not one of employer/employee but rather one of supplier/independent distributor. In particular, Mr. Cotter earns his living by buying products from CMP which he then resells and makes a profit on the margin rather than receiving a salary from CMP. Consequently, the principles which may apply to an employer/employee situation do not apply to the agreement.'

Consequently the notified arrangements constitute an agreement between undertakings.

11. As the sale of business was completed prior to 1 October, 1991, the date on which the Competition Act came into force, this element of the agreement had been discharged by performance before the Act commenced. In the Authority's view, the prohibition under Section 4(1) only applies to a current or continuing contractual commitment, or one entered into subsequent to the coming into force of the Act [5]. The milk round which was the subject of the agreement had been transferred before the Act came into force.

12. The non-compete provisions in clause 2 of the agreement prevented the vendor from competing with Dairygold, for a period of three years from the termination of the distribution agreement, within a half mile radius of any customer of the milk round, who had been a customer in the previous year. Under the terms of that clause he was also prevented for the same period, within a half mile radius of any customer of the existing milk round, from soliciting any person, firm or company who had been a customer of C.M.P. in the two years prior to termination. The Authority considers that following the sale of the business, Mr. Cotter was an exclusive distributor who was appointed by Dairygold in order to distribute certain dairy products in a specified territory i.e the Mayfield area of Cork. He did not own the milk round, having sold it to Dairygold who subsequently appointed him as its distributor.

13. The Authority has accepted in the case of a sale of business that a restriction on the vendor competing with the business for some time after the sale does not offend against Section 4(1). Under the terms of this agreement, however, the purchaser decided to appoint the vendor as its exclusive distributor for the area in which the business operated, and is seeking to prevent the vendor competing with the business for a period of three years after the termination of the distribution agreement. Such a restriction restricts competition. The Authority has accepted in numerous decisions involving a sale of business that a restriction on the vendor competing with the business is not anti-competitive provided it does not exceed what is necessary to enable the purchaser to secure the goodwill of the business. The emphasis is on what is necessary to enable the purchaser to secure the goodwill. In the Authority's opinion, a purchaser is not entitled to a longer period of restriction if, because of the way he chooses to operate the business, he fails to secure the goodwill. Dairygold purchased the business in April 1990 and a restriction on Mr. Cotter competing with Dairygold for some time after completion would not be considered anti-competitive. Dairygold, having purchased the business, is clearly entitled to operate it as it sees fit and in this instance it chose to appoint Mr. Cotter as its distributor. Having taken that decision it is not open to Dairygold to claim that it has not acquired the goodwill of the business which it bought and that it is entitled to protection against competition by the former owner for a period of three years starting from an, as yet unknown, date in the future. In the Authority's opinion even a lesser period of restraint of one year from the termination of the agreement, as proposed by Dairygold, cannot be justified in such circumstances. In effect, while Dairygold are claiming that the restriction is justified by virtue of their purchasing the business, they are also claiming that the goodwill attaches to the former owner as he operates as their distributor. Both the Authority's Category Licence for Exclusive Distribution Agreements and the EC Block Exemption for such agreements do not allow post-term non-compete provisions. While the Authority does not consider that this agreement alone would have a significant impact on competition, it is relevent that Dairygold indicated at the Oral Hearing that they were in the process of negotiating similar agreements with a number of other roundsmen. In the Authority's opinion, the combined effect of such agreements would lead to a significant restriction on competition in the Cork area. Having considered the arguments presented by the parties, it can see no reason for accepting such a restriction in this instance. Consequently in the Authority's opinion, the restrictions in clause 2 offend against Section 4(1).

14. Under the terms of Clause 4 of the agreement, Mr Cotter is obliged to sell C.M.P. products at a price not exceeding the price recommended by C.M.P. for those products. In the Licence for Categories of Exclusive Distribution Agreements, the Authority stated its views regarding pricing restrictions [6]. In particular it stated that any limitations on the exclusive distributor in determining his own resale prices were considered as serious infringements of the prohibition in section 4(1). In regard to the setting of maximum retail prices the Authority stated that this practice is in itself anti-competitive and there is a real danger that the maximum price imposed on a supplier would become, at the same time, the effective minimum price charged by the resellers. In their submission to the Authority, Dairygold acknowledged that Article 3(f) of the Category Licence, stated that the licence would not apply where the supplier obliges the exclusive distributor to sell at a fixed price, or not less than a minimum price or more than a maximum. The EC Block Exemption for Exclusive Distribution Agreements requires that distributors be free to set their own resale prices. Consequently the Authority considers that the restriction on pricing in clause 4 offends against Section 4(1). It notes, however, that Dairygold had offered to remove this restriction.

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

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

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

16. The restrictions on competing and enticing customers in clause 2 of the Agreement go beyond what is necessary to secure the proprietary interests of Dairygold. Consequently, in the Authority's opinion, they can not be regarded as indispensable to the attainment of the objectives of the agreement and so do not satisfy the requirements for a licence. Similarly, the restriction on resale pricing in clause 4 does not contribute to any improvement in distribution or to promoting technical or economic progress, it does not therefore confer any benefits on consumers and cannot be considered to be indispensable. It therefore fails to meet the requirements for a licence.

17. In the opinion of the Competition Authority, the agreement between Dairygold, C.M.P. Dairy and Michael Cotter relating to the sale of the milkround in Mayfield, Cork City by Michael Cotter to Dairygold and the subsequent appointment of Mr Cotter as an exclusive distributor of C.M.P. products (notification no.

CA/720/92E) notified on 30 September 1992, under Section 7(2), constitutes an agreement between undertakings. It considers that the restriction in clause 2 of the Agreement on the vendor competing with the business and enticing customers of the milk round following termination of the distribution agreement and the restriction on pricing in clause 4 offend against section 4(1) of the Competition Act and do not satisfy the requirements for a licence under section 4(2). Consequently the Authority refuses to issue a certificate or grant a licence in respect of the notified agreement.

For the Competition Authority

Patrick Massey

Member

17 November 1994

2. Remia BU and Others v. European Commission, Case 42184 [1993] ECR 2545.

3. Competition Authority decision no. 1, 2 April 1992.

4. Competition Authority decision no. 301, 25 March 1994.

5. Notice in respect of Mergers and Takeovers which predate the Competition Act' - Competition Authority, Iris Oifigiuil, 14 May 1993, p.367.

6. Competition Authority, Licence for Categories of Exclusive Distribution Agreements, decision no. 144, 5 November 1993.