Irish Competition Authority Decisions

Competition Authority Decision of 12 April 1995 relating to a proceeding under Section 4 of the Competition Act, 1991 .

1. Notification was made of a standard wholesale delivery agreement by Premier Dairies Group (Premier) on 30 September 1992 with a request for a certificate under Section 4(4) of the Competition Act, 1991 or in the event of a refusal by the Competition Authority to issue a certificate, a licence under Section 4(2). A statement of objections was issued on 19 September 1994, following which Premier made amendments to the agreement which were acceptable to the Competition Authority.

2. The notified agreement provides for the appointment by Premier of certain individuals to provide delivery and ancillary services to Premier, in respect of the distribution of liquid milk and other products to multiple supermarkets in the Dublin area.

3. At the time of the notification, Premier was jointly owned by Waterford Cooperative Society Ltd. and Express Food Group Ireland Ltd. Subsequently, Express disposed of its interest to Waterford, and Premier is now a wholly owned subsidiary of Waterford. Premier is involved in the business of purchasing, processing and selling milk and related products. The contractors, of whom there are 25 in total, are independent operators, who were formerly employees of Premier.

4. The main product involved is liquid milk which is delivered to multiple supermarkets. Among the other products involved are butter, cream, eggs, yogurt, cheese and fruit juices. The service is the delivery of these products to multiple supermarket outlets in the Dublin area. According to Premier, the relevant market was that for contract haulage. This was a very diverse market and one which was difficult to quantify or characterise. Service providers in the market included independent contractors who operated their own small business to larger companies with fleets of vehicles and employee drivers. Premier stated that the major providers of service in this market included Allegro, Marcus, D.M.L. Leamore and Molloy & Sharry. It said that it was difficult to estimate the market share of the services arrangements affected by the arrangements in the contract haulage market, but it was believed not to be significant. The Authority does not believe that the relevant market is that for the haulage of goods generally. Nevertheless any vehicles with cooler facilities suitable for delivering fresh produce could be used for the delivery of liquid milk in bottles and cartons. Therefore the relevant market is that for the delivery of fresh produce in refrigerated vehicles and clearly the notified agreements represent a somewhat higher proportion of that market than of the overall haulage market. The relevant geographical area is that in which the service is being provided, that is the Dublin area.

5. The agreement is a standard wholesale delivery agreement between Premier and each of its contractors. There are 25 such agreements in existence. These were made in October and November of 1991. The contractor is appointed to provide specified services within the Greater Dublin area. The appointment is non-exclusive, and other persons are to be appointed in the area. The services must be provided on a daily basis, in a proper manner having regard to the perishable nature of the products. The contractor is provided with collection and delivery particulars, and the contractor must adhere to these. The schedules may be amended from time to time. The services to be provided include the collection of products, the delivery of products to customers, merchandising in the outlets (except at specified premises), the collection of returned containers, and the collection of debts due to Premier. The contractor must refrain from delivering products to persons other than the specified customers. He must not at any time reveal confidential information relating to Premier's affairs or business. He is not to hold himself out as agent of Premier. The contractor must maintain a vehicle to perform the services at all times. He must not use the vehicle in eight named counties of Leinster for the carriage and delivery of any other products. Premier agrees not to appoint more than 25 contractors for wholesale deliveries unless the volumes required by customers increase. The contractor is to be paid fees based upon the gallonage of milk delivered and the quantities or volumes of other products delivered, these fees to be reviewed annually. The contractor is obliged to maintain in force insurance for the vehicle, the load of products and containers, and public and employers' liability, and must indemnify Premier against all loss or damage caused by the contractor. The agreement was to continue for an initial term of two years, and thereafter, but it could then be terminated by either party on giving 60 days' notice. The agreement is stated not to constitute a partnership or agency.

6. One clause of the agreement was of particular note, that is clause 4.02, which was as follows:

'(a) The Contractor undertakes that he will not during the term of this Agreement or for twelve months after the termination (howsoever arising) of the later of:-

(i) this Agreement; or

(ii) any agreement entered into between the parties governing the terms upon which the Contractor is to supply delivery services on behalf of the Company in replacement or modification of this Agreement, be interested or engaged either directly or indirectly:-

A. in the distribution within Counties Dublin, Louth, Meath, Kildare, Laois, Offaly, Wicklow, and/or Wexford of any products competing or intended or likely to compete with the Products; or

B. in the distribution or delivery to any Customers (or persons who are Customers at the time this covenant is sought to be enforced or who were Customers within six months prior to such enforcement) of any products distributed by the Company at the date of such termination.

(b) If the Contractor is entitled to receive a redundancy payment from the Company, the Contractor agrees that 10% of the gross amount of the said sum shall be paid to the Contractor only on the expiry of a period of twelve months after the termination (howsoever arising) of the later of:-

(i) this Agreement; or

(ii) any agreement entered into between the parties governing the terms upon which the Contractor is to supply delivery services on behalf of the Company in replacement or modification of this Agreement.

PROVIDED that the Company is satisfied that the Contractor has complied on all respects with the terms of sub-clause (a) of this Clause .....'

7. The side letter referred to such matters as the gross income, redundancy/changeover terms, cessation/discontinuation/non-renewal of contract, the contract, vehicle provision and transfer, spare vehicles, insurance and bonus. (Premier was to sell a vehicle to each contractor at an agreed price). Furthermore, clause 5 provided that the terms for cessation of contract were subject to full adherence with the non-competition clause in the contract. In this connection, a retention amount of 10% of the redundancy sum due was to be retained by Premier, and paid at the conclusion of the 12 month period if the non-competition clause had been complied with.

8. In its initial submission, Premier stated that the purpose of the agreement was to establish procedures whereby, through the use of contractors, Premier would achieve an efficient, timely and quality delivery system for its products to its wholesale, institutional and other customers. It stated that all of the contractors were formerly employees of Premier who took a redundancy package.

9. In support of its request for a certificate, Premier made the following submission:

'An analogy can be drawn between the arrangements between Premier and Contracts and the arrangements referred to in the Commission Notice of 24 December 1962 on exclusive agency contracts made with commercial agents.

The Contractors provide mainly a delivery service. They do not assume any risks associated with the sale of milk. In particular it should be noted that the Contractors:-

- do not purchase milk;

- do not in fact determine prices for milk or set terms of sale

- simply provide a service for a fee.

On this basis, the Commission's view are relevant where they state that the prohibitions laid down in Article 85 paragraph (1) are not fulfilled "by exclusive agency contracts made with commercial agents, since they have neither the object nor the effect of preventing, restricting or distorting competition within the Common Market. The commercial agent only performs an ancillary function in the commodity market. In that market he acts on the instructions and in the interests of the enterprise on whose behalf he is operating." The Contractors effectively perform a service analogous to that of an agent or employee of Premier.

It is argued that, by analogy, the arrangements being notified do not offend against Section 4(1) of the Competition Act, 1991 and that the Authority should issue a certificate under Section 4(4) to this effect.' Premier also submitted arguments in support of its request for a licence which are not considered in this decision.

10. Following the issue of a statement of objections, Premier proposed to amend clause 4.02 of the agreement, so as to reduce the scope of the non-compete obligations and to confirm that a failure on the part of the contractor to comply with the terms of the amended clause would not, of itself, disentitle the contractor to the outstanding amount of the redundancy payment. The post-termination restriction referred to not soliciting customers instead of not competing with Premier. The text of the amended clause is as follows:

'(a) The Contractor undertakes that he will not during the term of this Agreement or any agreement entered into between the parties governing the terms upon which the Contractor is to supply delivery services on behalf of the Company in replacement or modification of this Agreement be interested or engaged either directly or indirectly:-

(i) in the distribution within Counties Dublin, Louth, Meath, Kildare, Laois, Offaly, Wicklow, and/or Wexford of any products competing or intended or likely to compete with the Products; or

(ii) in the distribution or delivery to any Customers (or persons who are Customers at the time this covenant is sought to be enforced or who were Customers within six months prior to such enforcement) of any products distributed by the Company at the date of such termination.

(b) The Contractor covenants with the Company that he will not for the period of twelve months after the termination of this Agreement, howsoever arising, without the prior written consent of the Company (such consent to be withheld only if and to the extent necessary to protect the legitimate interests of the Company) either on his own behalf or on behalf of any person firm or company directly or indirectly seek to procure orders from any person firm or company in connection with the sale of milk or dairy products, who has at any time immediately preceding such termination done business with the Company and to whom the Contractor has delivered products on behalf of the Company, provided that nothing in this Clause shall prohibit the seeking or procuring of orders or doing of business not relating or similar to the businesses described above.

(c) If the Contractor is entitled to receive a severance payment from the Company, the Contractor agrees that 10% of the gross amount of the said sum shall be paid to the Contractor only on the expiry of a period of twelve months after the termination (howsoever arising) of the later of:-

(i) this Agreement; or

(ii) any agreement entered into between the parties governing the terms upon which the Contractor is to supply delivery services on behalf of the Company in replacement or modification of this Agreement.'

11. Premier presented the following arguments in support of the post-termination non-solicit clause:

'(a) While there are significant differences at law between an employee and an independent contractor they each share a common trait in that each has the ability following the termination of its involvement with a company to use knowledge they have gained of the company, its operation and customers to damage the company's goodwill.

(b) In the Apex Fire Protection Limited /Noel Murtagh decision of 10 June 1993 (Notification No. CA/1130/92) the Authority reviewed the terms of a non-solicitation clause following the termination of an employment relationship. I would submit that the clause outlined above is within the scope of that decision and goes no further than is required to protect Premier's legitimate interests:-

- the round belongs to Premier i.e. Premier organised it, served it prior to the Contractor and after the Contractor - therefore, Premier has a legitimate interest to protect;

- the post-termination restriction is for a period of 12 months. Given that the Contractor will serve most customers on an almost daily basis, it is felt that a 12 month restriction would be adequate to allow Premier to re-acquire any of its goodwill which the Contractor may have acquired while carrying out services on its behalf;

- the restriction applies only to persons who are customers of Premier's immediately prior to the termination. Thus, unlike many non-solicitation clauses, the clause does not look back to the period prior to the termination and thereby seek to prevent the Contractor from soliciting business from persons who were formerly customers of Premier;

- with the consent of Premier the Contractor is entitled to carry on any business in competition with them and Premier is only entitled to withhold consent where it is necessary to protect its legitimate interests.

(c) Premier has goodwill which it is legitimately entitled to protect. As can be seen from the range of services which the Contractor provides to Premier's customers, the Contractor has extensive dealings with Premier's customers. Not only does the Contractor deliver goods and accept returns, but in a number of cases he also takes orders, merchandises and collects debts (see Clauses 3.02 - 3.07 of the Delivery Agreement), thus the Contractor is the main point of contact between Premier and its customers. It would be unfair if the Contractor were in a position to use the knowledge of Premier's customers and Premier's operations acquired by him while contracted by Premier to assist a competitor against Premier.

(d) The restriction imposed by the above non-solicitation clause is not a total prohibition on all forms of competition. Although the Agreement allows Premier to rotate contractors between different rounds, Premier has never exercised this discretion because customer idiosyncrasies and the importance of the distributor having a familiarity with the round and the operations of the customers within that round have dictated that the same contractor has delivered to the same customers on a daily basis. Thus, the above non-solicitation clause allows a contractor to continue to solicit customers of Premier with whom he has not previously dealt and may, of course, also solicit non-Premier customers.

It is widely accepted that solicitation does not prohibit normal forms of advertising and thus a Contractor will be free to engage in such activities. Furthermore, on the expiry of the 12 month period he will be free to solicit customers of Premier to whom he has previously delivered. Accordingly, this clause would give the Contractor greater scope to earn his livelihood following the termination of the Delivery Agreement.'

12. Premier submitted a copy of a letter to one of its contractors, Mr Bobby Raymond, dated 4 January 1995, making the above amendments to the agreement, which was counter-signed by Mr Raymond.

13. Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings 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.

14. Section 3(1) of the Competition Act defines an undertaking as "a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service". Premier is engaged in the supply and distribution of goods for gain, and the contractors are engaged in the distribution of goods for gain. They are all therefore undertakings, and the standard agreement is an agreement between undertakings. It has effect within the State.

15. The essential feature of the notified agreement is that the contractors, who are former employees of Premier, collect milk and other products from Premier for delivery to Premier's multiple customers in the Dublin area; in return for the performance of this service, the contractors are paid a fee by Premier. The agreement does not involve the purchase and resale of the products by the contractors. While the contractors do merchandise goods and collect debts from the customers, they are not involved in any sense in selling the products, and they cannot be considered to be commercial agents of Premier. Nor are they employees of Premier. The Authority considers that the agreement involves merely the delivery of Premier products by the contractor on an exclusive basis. It considers that undertakings are entitled to decide how their products shall be distributed to their customers. Premier has decided that, rather than deliver its goods itself, it should use contractors, the ones appointed initially having previously been employees. In general, distribution agreements involving delivery only do not, in the Authority's opinion, offend against Section 4(1) of the Competition Act.

16. While a delivery agreement might not per se offend against Section 4(1), certain clauses in the agreement might offend. The Authority considered that none of the clauses in the standard agreement offended against Section 4(1), except clause 4.02. This clause prevented the contractor from distributing competing products within a specified area (Dublin and seven other counties), and from distributing or delivering competing products to any customer of Premier, during and for 12 months after termination of the Agreement. Clause 4.02 also provided that, where a redundancy payment is involved, 10% of this would only be paid to the contractor 12 months after termination of the agreement and provided that the contractor had complied with the non-compete clause. The Authority has no objection to a non-compete clause while the agreement is in existence, but it considered that a post-termination non-compete clause offended against Section 4(1). 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). The notified agreement, however, did not relate to a sale of business and its accompanying goodwill. It arose from a decision of Premier to alter its method of distributing its products from using employees to using self-employed contractors. Given that the vehicles bear the Premier logo, there is undoubtedly goodwill which belongs to Premier involved in these arrangements, but it remains with Premier. Premier was seeking to prevent the contractor competing with Premier for one year after the termination of the distribution agreement. Such an obligation restricted competition, and it went beyond what was necessary to secure the successful operation of the distribution agreement. The Authority has not allowed post-term non-compete provisions in its category licence for exclusive distribution agreements (Decision No. 144 of 5 November 1993), and it has indicated that such provisions in an employment contract would offend against Section 4(1) if the former employee intended to establish his own business (Notice on Employee Agreements, Iris Oifigiuil, 18 September 192, pp. 632-3). The Authority also noted that, in the present case, part of the initial compensation payment to the contractor under the redundancy scheme was being withheld to ensure compliance with the non-compete provisions. The Authority regards any payment to ensure that competition is prevented or restrained as offending against Section 4(1) of the Act. The Authority also considered that these clauses went beyond what was necessary to secure the successful operation of the distribution agreement. Since they were not indispensable to the attainment of the objectives of the agreement, they did not satisfy the conditions of Section 4(2) of the Act.

17. Premier has deleted the post-termination non-compete clause and replaced it by a restriction on the contractor soliciting former customers. Payment of the balance of the redundancy payment no longer depends on adherence to not competing after termination of the agreement. In its decision on Apex/Murtagh (Decision No. 20 of 10 June 1993, paras 34 to 42), the Authority accepted that a restriction upon a former employee soliciting business from former customers after cessation of employment did not amount to preventing that person from entering the business. It also accepted that, provided that the restriction was limited in terms of scope, duration and area, it would not offend against Section 4(1). For the reasons given in that decision, given the relationship between Premier and the contractors, the Authority considers that the amended agreement with Mr Raymond no longer offends against Section 4(1) of the Act.

18. In the Authority's opinion, Premier Dairies Group and the contractors are undertakings and the notified agreement is an agreement between undertakings. The Authority considers that the notified wholesale delivery agreement offended against Section 4(1) of the Competition Act, 1991, and that it did not satisfy the conditions set out in Section 4(2) of the Act. The Authority considers, however, that the agreement, as amended, does not offend against Section 4(1) of the Act.

19. The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the Premier wholesale delivery agreement (notification no. CA/394/92E), notified on 30 September 1992, under Section 7(2), as amended by the agreement of 4 January 1995 between Premier Dairies Ltd and Mr Bobby Raymond, does not offend against Section 4(1) of the Competition Act, 1991.

This certificate shall also apply in respect of the Premier wholesale delivery agreement where it has been amended to accord with the agreement with Mr Bobby Raymond.