Irish Competition Authority Decisions

1. Notification was made of a distributor agreement between Omnitron Ltd, Cryptovision A/S and Tandberg A/S 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 request for a licence under Section 4(2). A statement of objections was issued to the parties on 19 October 1994, following which they agreed to amend the agreement in a manner which was acceptable to the Authority.

2. The notification covers an agreement whereby Cryptovision appoints Omnitron as its exclusive distributor of certain encryption products in the State (and in the UK). Two other agreements between the parties were also notified - a manufacturing agreement and a quadripartite agreement (an agreement between the above three parties and Cablelink Ltd for the supply of the products to Cablelink) - which are not dealt with in this decision.

3. Omnitron is a privately owned Irish company, located in Athlone, which is a turnkey manufacturer of electronic equipment. Cryptovision A/S is a wholly owned subsidiary of Tandberg A/S, which is a publicly quoted Norwegian communications company.

4. The product is an encryption system for use in cable television and MMDS networks. Under a separately notified agreement, Omnitron also manufactures decoders for the system. According to Omnitron, there are five suppliers on the Irish market of encryption and decoder systems. Four of these market and support their own products directly. The product which Omnitron manufactures and distributes is based on advanced technology developed by Tandberg and sold through Cryptovision. The product is sold to cable and MMDS operators who provide satellite television services in Ireland, of which Cablelink is the best known.

5. The distribution agreement between Cryptovision, Tandberg and Erictron Ltd (now Omnitron) was made on 15 August 1990. It provides for the appointment of Omnitron as sole and exclusive distributor for the resale of certain products in the State, and, subject to certain exceptions, for the UK. Cryptovision agrees to sell the products within the State exclusively to the distributor, and not to appoint any other distributor or agent in the territory, nor supply any products for use or resale to any other person in the territory. The distributor shall not seek customers outside the territory. The distributor is free to appoint sub-distributors and/or agents in the sale and/or service of the products, subject to approval by the supplier. The distributor buys and sells in his own name for his own account, and acts as an independent trader, not a legal representative or agent. The distributor must appoint adequate staff and is responsible for sales promotion. The distributor is obliged to promote sales, and is entitled to resell the products to its customers at such prices as it may determine, provided that the prices of the product sold to Cablelink Ltd for the first year of the agreement shall be the prices specified in a Schedule to the agreement. Clause 4.9(i) of the agreement, however, provided that the parties should, in each subsequent year, negotiate in good faith amendments to the prices in the Schedule, including the selling prices to Cablelink. Provision was made for failure to reach agreement on such prices. Clause 4.9(iii) provided that the prices in the Schedule should be reviewed annually. These requirements were repeated in clause 6.1.

6. The distributor is required to provide quarterly reports on stocks, sales, forecasts and the market situation. The distributor must provide proper facilities and trained staff for servicing, and maintain adequate stocks. The agreement continues for a minimum period of six years, and thereafter, provided that, at any time after the third anniversary of the agreement, it may be terminated by either party on giving three years' notice. The distributor is obliged to sell the products only under the trademarks, and not to use the trademarks in connection with the sale of other products. The distributor is required to keep confidential information secret and confidential, and not to communicate this to any third party or use for development, production or sale of equipment so as to harm the interest of the supplier, during the term of the agreement and for three years after termination. A non-disclosure letter is to be signed by employees. The distributor agrees not to manufacture or deal in competing products, without the consent of the supplier, which consent will not be unreasonably withheld or delayed. The agreement is stated not to create a partnership or the relationship of principal/agent or employer/employee.

7. Schedule III contains the non-disclosure letter, the commitment remaining in force until the technology and trade secrets are generally available to the public. Schedule V contains a non-disclosure agreement between the parties to the main agreement. It covers certain confidential and proprietary business and/or technical information. For a period of five years from the date of receipt, all confidential information shall be maintained in confidence by the recipient, shall not be disclosed to any third party, and shall be protected in the same way the recipient protects its own confidential and proprietary information. The recipient also agrees not to use any confidential information except for the purposes of entering into business and/or technical discussions relating to the decoder. This agreement terminates after two years, but is replaced by a subsequent two-year agreement. Non-disclosure agreements dated 13 December 1989 and 15 August 1990 are included in the notified agreement. Finally, Schedule VI contains a registered user agreement, under which the users (the distributors) are granted permission to use the Cryptovision trademark only upon goods manufactured or distributed by them. The users shall be registered as sole registered users in the State. The licence is granted for a minimum period of six years, and thereafter until the termination of the manufacturing agreement and the distribution agreement, though it may be terminated earlier if these other agreements are terminated in less than six years.

8. In its initial submission, in support of the request for a certificate, Omnitron stated that the clauses in the distributor agreement identified as restricting the parties' freedom to take independent commercial decisions were not anti-competitive, and were identified in EU Regulation No. 1983/83, the block exemption for exclusive distribution agreements [1], as permitted restrictions under that regulation. The non-compete restrictions in the agreement, which were permitted by the Regulation, were not absolute but required the prior written consent of Cryptovision. Reference was made to Authority decisions in sale of business cases where non-compete clauses were found not to offend against Section 4(1). Omnitron also stated that:

´Exclusive distribution agreements lead to an improvement in distribution and are beneficial to both supplier and distributor. Generally a supplier will not have a distributive organisation of its own in the territory and the appointment of an exclusive distributor is its method of penetration of the market. The improvement in distribution is achieved because the supplier may concentrate its sales activities and does not need to maintain numerous business relations with a larger number of dealers. Further, the appointment of a Distributor who is also manufacturing in the Territory enhances the quality of support service available to a customer.

The granting of exclusive distribution rights to Omnitron Limited for a minimum period of 6 years is vital to Omnitron Limited because its decision to manufacture the Product and invest in capital equipment was dependent on a certain volume of business being available. The Distributor Agreement gave Omnitron Limited access to the local market and strengthened the forecast demand.....

The Distributor Agreement provides certain benefits for the distributor such as training, for a fee, and after sales support.

The arrangements do not have the object or effect of distorting competition in the State because there are four other suppliers in the market and it is competitive. In fact the market price of the Product supplied by Omnitron is higher than that of competitors because of its technical superiority.'

9. In support of its request for a licence, Omnitron stated as follows:

´(a) If the Agreements were not in place Omnitron could not have entered the market. Firstly, it would not have the technology itself and secondly the decision to invest could only be justified on the basis of an assurance on volume.

It would not have the certainty of supply and the support services which it is granted by the agreements and which it requires in order for it to set up and invest in the equipment needed to produce and distribute the Product. The method established by the arrangements for production and distribution of the Product and for security of supplies contributes to promotion of technical and economic progress because it enables Omnitron Limited to bring to the market a high quality product and in fact one which is technically superior to the product of its competitors.

(b) Omnitron Limited has no direct contact with consumers but the fact that it exists in the market and operates through its arrangements means that ultimately the consumer has access (from the Operator) to a high quality product at a reasonable price.

(c) The only restrictions which the arrangements contain are those listed.....These restrictions only go so far as is necessary to allow the supplier penetrate the market and to give Omnitron Limited assurance that its investment will be protected.

(d) The arrangements do not afford the possibility of eliminating competition but generate a competitive environment by giving Omnitron access to the market to compete with the four other suppliers to the Operators. There is no relationship between Omnitron and any competitors nor is there any agreement on pricing, market share, territory etc.'

10. In response to questions from the Authority concerning clause 4.9 of the agreement, Omnitron stated, in a letter of 15 March 1994, that references to agreeing prices were prices to be agreed between Cryptovision and Omnitron, but that the Schedule set out only prices at which the products would be sold by Omnitron to Cablelink for the year 31 July 1990 to 31 July 1991. Omnitron stated that the arrangements in clause 4.9(i), which specified the prices to Cablelink for the first year, had now expired. No-one other than Omnitron decided at what prices its products were sold to its customers. Omnitron was negotiating prices with Cablevision and Cryptovision had no part in this process. No response was made to the Authority's queries regarding the references in clause 4.9 to the fact that selling prices to Cablevision were to be negotiated between Omnitron and Cryptovision in each subsequent year and were to be reviewed annually.

11. Following the issue of a statement of objections, the parties agreed to amend the agreement in order to meet the concerns expressed by the Authority. The agreement was amended on 19 January 1995 to provide that "the price at which the products shall be resold by the Distributor shall be such price as the Distributor may determine." Deletions were made of references to the distributor's resale prices.

12. 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.

13. 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." Omnitron, Cryptovision and Tandberg are corporate bodies engaged in the manufacture and distribution of products for gain, and they are therefore undertakings. The agreement is an agreement between undertakings, and it has effect within the State.

14. There has been considerable debate in the economics literature regarding vertical restrictions such as exclusive distribution. On the one hand such agreements may, in certain circumstances, be anti-competitive. On the other hand they may simply constitute a logical and efficient and in some instances the only mechanism by which the products concerned can be distributed, in which case they cannot be considered to have either the object or effect of preventing, restricting or distorting competition. An examination of the facts in each case is necessary to establish whether or not an exclusive distribution agreement such as the one notified in this instance offends against section 4(1). Having considered the submissions made by the parties in this instance, and the fact that there is an agreement between the parties for the supply of the products to Cablelink, the Authority concludes that on balance the evidence does not suggest that the arrangements are designed solely to enhance the efficiency of distribution or that exclusive distribution constitutes the only likely means of distributing the products. Given that the agreement clearly prevents other distributors from dealing in the products and denies customers the possibility of obtaining supplies from such other distributors, the Authority concludes that in this instance the exclusive distribution arrangements offend against section 4(1). In addition, it considered that clauses 4.9 and 6.1 limited the freedom of the exclusive distributor to set its own resale prices, and that they also offended against Section 4(1). Following amendment of the agreement, these clauses no longer offend against Section 4(1).

15. The notified agreement contains certain clauses which are not usually found in exclusive distribution agreements, and which derive largely from the fact that Omnitron manufactures certain Cryptovision products under a separate agreement. Certain information is to be kept secret and confidential during the term of the agreement, and for three years after termination. The non-disclosure agreement relates to confidential and proprietary business and/or technical information, and imposes a confidentiality requirement for five years, this being renewed every two years. This agreement is also included in the manufacturing agreement. Omnitron is also required to secure that a non-disclosure letter is signed by employees, the commitment remaining in force until the technology and trade secrets become generally available to the public.

16. The Authority considers that the confidentiality clauses which operate during the term of an exclusive distribution agreement do not offend against Section 4(1). The non-disclosure agreement in this case, if it is renewed, could extend the term of non-disclosure for up to five years after the exclusive distribution agreement has terminated. The confidential information concerned is business and/or technical information, each of which requires separate consideration.

17. In previous decisions [2], the Authority has indicated that it agrees with the EU definition in the Regulation on know-how licensing [3] that ´know-how means a body of technical information that is secret, substantial and identified in the appropriate form' (Article 1(7)1). In the opinion of the Authority, the technical information concerned, which is primarily supplied under the associated manufacturing agreement, constitutes know-how. In the know-how Regulation, an obligation on the licensee not to divulge the know-how communicated by the licensor after the agreement has expired is considered as not generally restrictive of competition (Article 2(1)1). Since the know-how would probably not be transferred unless it could be ensured that it would not be divulged to others after the agreement ended, the Authority considers that such a provision does not offend against Section 4(1). In the Regulation, an obligation on the licensee not to exploit the licensed know-how after termination of the agreement in so far and as long as the know-how is still secret is also regarded as not generally restrictive of competition (Article 2(1)3). Recital 14 of the Regulation states that ´A post-term use ban may be regarded as a normal feature of the licensing of know-how as otherwise the licensor would be forced to transfer his know-how in perpetuity and this could inhibit the transfer of technology.' The Authority agrees with the view of the EU Commission in this respect. The non-disclosure agreement provides that the know-how will be used in discussions under the agreement, and this implies that it must not be used after termination of the agreement. The Authority considers that such a provision does not offend against Section 4(1).

18. The Authority has taken the view in the category licence for exclusive distribution agreements [4] that prohibitions on the use or disclosure of confidential information after termination of the agreement, provided that such prohibition does not prevent the exclusive distributor from competing after termination, do not offend against Section 4(1). Provided that the restrictions in the notified agreement on the use or disclosure of confidential business information by Omnitron after termination of the agreement were not used to prevent it competing with the supplier, they would not offend against Section 4(1).

19. As part of the agreement, one undertaking has agreed to impose non-disclosure provisions on its employees. For the reasons given above, the Authority considers that the obligation on Omnitron to secure a non-disclosure letter from employees does not offend against Section 4(1).

20. The agreement also includes a registered user agreement which licenses Omnitron to use trademarks only on Cryptovision products for the duration of the exclusive distribution and manufacturing agreements. Since this does not affect competition, the Authority considers that it does not offend against Section 4(1).

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

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

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

22. The Authority considers that exclusive distribution agreements generally satisfy all the conditions of Section 4(2), for the reasons given in the category licence (paras. 34 to 44). It considers that the Omnitron/Cryptovision agreement as amended fulfils the conditions of the category licence and the conditions of Section 4(2).

23. The Competition Authority considers that the exclusive distribution agreement between Omnitron Ltd, Cryptovision A/S and Tandberg A/S (notification no. CA/799/92E) notified on 30 September 1992, under Section 7(2) of the Competition Act, constitutes an agreement between undertakings. It considers that it offends against Section 4(1) of the Competition Act, but that, with the removal of the clauses which limited the freedom of the exclusive distributor to set its own resale prices, the agreement satisfies the conditions of Section 4(2) of the Competition Act, and it grants a licence to the agreement as amended by the supplemental agreement of 19 January 1995. The Authority considers that the licence should be granted for a period of five years, to expire on 11 April 2000. The Authority does not consider it necessary to attach any conditions to the licence.

24. The Competition Authority has issued the following licence:

The Competition Authority grants a licence under Section 4(2) of the Competition Act, 1991 to the exclusive distribution agreement between Omnitron Ltd, Cryptovision A/S and Tandberg A/S (notification no. CA/799/92E) notified under Section 7 on 30 September 1992, as amended by the supplemental agreement of 19 January 1995, on the grounds that, in the opinion of the Authority, all the conditions of Section 4(2) of the Competition Act, 1991 have been fulfilled.

The licence shall apply from 12 April 1995 to 11 April 2000.

2. See, for example, ACT/Kindle, Decision No. 8 of 4 September 1992, at paras 49 and 50.

3. Regulation No. 556/89 on the application of Article 85(3) of the Treaty to certain categories of know-how licensing agreements, OJL 61, 4.3.1989, p.1.

4. Decision No. 144 of 5 November 1993, Article 3(i).