Irish Competition Authority Decisions

1. Notification was made by Blugas Limited (Blugas) 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 grant a certificate, a licence under Section 4(2) in respect of the standard agreements Blugas has with its distributors.

2. This notification concerns a standard agreement by Blugas with its exclusive distributors who supply its dealers with cylinder liquefied petroleum gas (LPG) and its bulk customers with LPG. The distributors are also shareholders in Blugas. The agreement provides that the distributors should not deal in any competing brand of LPG for a period of 5 years. The notified agreement between Blugas and its dealers is the subject of the category licence for such agreements. ⁽¹⁾ The agreement with bulk customers is the subject of a separate decision. ⁽²⁾

3. Blugas Limited is a recent entrant as a supplier of LPG in the State. It was incorporated in 1987 and commenced trading two years later. The founders included Jones Oil Ltd, Suttons Oil Ltd. (now part of the IAWS group), and Three Rivers Oil Ltd (part of the Richmond Group). The founders were all involved in the oil distribution business, as distributors of Esso products in different parts of the State. At present, Jones Group owns just over 50% of the total shares in Blugas, while Suttons, Richmond Group and Erin Executor and Trustee Co. Ltd (the Allied Irish Investment Managers BES funds) own 17.6%, 12.7% and 17.6% respectively of the total shares. Of the six directors, two are nominated by Jones Group, and one each by Suttons and Richmond.

4. The principal activity of Blugas is the supply and distribution of LPG under the Blugas tradename. LPG is primarily supplied by Esso, and is imported into Dublin and stored at the Blugas terminal in Dublin. Cylinder LPG is supplied to dealers and bulk customers through distributors. Distribution was done by the three founder members, but Blugas took over the distribution function formerly undertaken by Jones Oil at the end of 1992.

5. The characteristics of the product and the market were described at length in the Authority's category licence for agreements with cylinder LPG dealers. Since LPG is distributed throughout the State, the appropriate geographic market is the State.

6. Under the notified Blugas distributor agreement, Blugas appoints a named distributor as an authorised distributor of the company within a territory set out in the agreement, to supply LPG in cylinders to appointed dealers, and LPG to bulk customers, subject to terms and conditions detailed in the agreement. The agreement requires the distributor not to engage in the sale or distribution of competing brands of LPG, for the period of the agreement, which can be up to five years, or for a specified period after termination of the agreement. The agreement contains provisions relating to termination, safety, tanks, cylinders and regulators, charges, force majeure and delivery, among others.

7. The main provisions of the agreement are as follows:

2. The Company hereby appoints the Distributor to act as a distributor for the resale of the Product within the Area for the period and upon the terms and conditions hereinafter contained and the Distributor hereby accepts such appointment PROVIDED always that nothing in this agreement shall confer on the Distributor any sole or exclusive rights in the Area other than those that may be agreed between the parties from time to time. The Company agrees to supply to the Distributor the Product subject to and upon the terms and conditions contained in this agreement.

3.1 This agreement shall commence on the date of its execution and shall (subject as herein provided) remain in force for a period of five years thereafter.

3.2 Either party may terminate this agreement with effect from the day arising two years and six months from the date of its execution by giving six months' prior notice in writing to the other.

5.1 The price of the Product shall be the Company's published wholesale price (that is, the price for the Product charged to the retailer) applicable at the time of delivery but subject to any purchasing rebate as shall then be applicable thereto in accordance with the provisions of clauses 5.2 and 5.3 hereof PROVIDED always that if either the Company or the Distributor can demonstrate to the reasonable satisfaction of the other party that another supplier of LPG is supplying LPG in the Area to its distributors at a price and/or with a purchasing rebate and/or on trading terms and conditions (including credit terms) which are materially different from those operated by the Company, then in such circumstances the parties shall immediately review and re-negotiate the price charged by the Company to the Distributor for the Product and/or the purchasing rebate allowed by the Company to the Distributor and/or the Company's trading terms and conditions (including credit terms).

8.2 Subject to the provisions of clause 16.3 hereof [force majeure] purchase from the Company all of its requirements for LPG for supply within the Area.

8.4 Subject to the provisions of this agreement, maintain an adequate stock of the Product for the purpose of meeting and supplying the requirements of existing and intending customers of the Distributor in the Area and shall store such stock at the Depots in accordance with generally accepted practices in the LPG industry.

8.9 Furnish to the Company the following information as soon as it becomes available but in any event (except for such information required under sub-clauses (g), (h) and (i) hereof) not later than two weeks after the end of the month to which the information relates:-

(a) Sales for each customer by month.

(b) Sales for each Product and package size by month.

(c) Aged debt for each Product sector by month.

(d) Average customer price for each customer delivered by month.

(e) Average price for each Product and package size by month.

(f) Cylinder turnover for each customer by month.

(g) Stock levels by Product and package size held by the Depot when requested by the Company.

(h) Average delivery size by Product/package size when requested by the Company.

(i) A true extract from the audited accounts of the Distributor detailing the financial results pertaining to the sale of the Product during the financial year to which the said audited accounts relate not later than three months after the expiration of each such financial year.

8.10 Promptly advise and bring to the notice of the Company any information received by the distributor which may reasonably be considered to be of interest, use or benefit to the Company in relation to the marketing and sale of the Product in the Area Provided however that this shall not apply to any information which relates to the existing businesses or trades of the Distributor which are in direct competition with the business of selling LPG in the Area.

8.11 Comply fully with all marketing policies concerning the Product as are agreed with the Company from time to time.

8.12 Not to do or to cause or to suffer or to permit to be done any of the following acts or things either alone or in concert or jointly with another or others and whether directly or indirectly in any capacity whatsoever in Ireland:

(a) Sell, supply or offer for sale or supply the Product except under the Trademarks, brand names and denominations from time to time designated and/or approved by the Company.

(b) Buy, acquire, sell, supply, dispose of, deal in, store, transport, distribute or handle any LPG products of any kind whatsoever save those which the Distributor shall from time to time purchase from the Company or otherwise engage in any business or activity involving transactions of the kind set forth above.

8.13 Not, whether alone or in concert or jointly with another or others and whether directly or indirectly in any capacity whatsoever offer for sale or solicit custom or orders for the Product outside the Area.

For the purpose of this clause 8, any reference to the Distributor shall include a reference to any holding, subsidiary or associated company of the Distributor.

9.1 All Product sold by the Distributor shall be sold under the Trademarks which Trademarks shall not be altered or otherwise tampered with in any way by the Distributor.

13.1 Upon the termination of this agreement in accordance with its terms the Distributor (or any of its holding, subsidiary or associated companies) shall not for a period of one year thereafter within the Area by itself, its servants or agents or by letters, circulars or advertisements whether on its own behalf or on behalf of another or others canvass or solicit orders for LPG from or in any way interfere with, or seek to interfere with any person, firm or company who shall at any time during the continuance of the Distributor's appointment under this agreement have been a purchaser of the Product from the Distributor or the Company with the exception of the Distributor's coal customers and the Distributor's owned outlets.

13.2 The Distributor shall not (nor shall any of its holding, subsidiary or associated companies) at any time whether as principal, servant or agent either directly or indirectly without the consent in writing of the Company solicit or endeavour to solicit or obtain the services of any person employed by the Company.

15.1 The Distributor shall be entitled to appoint "selected Dealers" in the Area as will ensure full and proper representation throughout the Area for the supply and promotion of the Product PROVIDED however that all agreements with such Selected Dealers shall be entered into with the Company and not with the Distributor.

15.2 The Distributor shall not deliver any Product to a Selected Dealer or to a bulk customer unless that Selected Dealer or bulk customer shall have first entered into an agreement with the company in a form prescribed by the Company from time to time.

17.1 Neither party shall (and each party shall procure that none of its holding, subsidiary or associated companies shall) at any time divulge to any person whomsoever or make any use whatsoever (other than for the better fulfilment of its duties and obligations under this agreement or as may be required by law) of any secret or confidential information disclosed or made available to it by or through the other party relating to the Product or business affairs generally of the other party.

17.2 All confidential materials and data including price data and other commercial information of a confidential or sensitive nature furnished by either party to the other party in connection with the promotion and supply of the Product shall remain the property of the furnishing party and the other party shall return any or all such materials, data and information to the furnishing party promptly on demand and in any event upon termination of this agreement.

19.3 Nothing is this agreement shall constitute a partnership between the parties nor constitute one the agent for the other.

SCHEDULE 1

A. Purchasing rebate:

This is deductible from the price (excluding VAT) charged by the Distributor to the retailer for the Product. It is deductible at the time of payment by the Distributor in accordance with the provisions of paragraph C below and is subject to annual review in accordance with clause 5.2 hereof. The rebate for the period to 31st December 1991 shall be as follows:- [confidential]

B. Market Support:

As may be agreed between the parties from time to time.

D. Equipment:

The Company shall supply to contracted customers all cylinders and tanks and other equipment which the Company determines are necessary to service such customers. A cylinder service charge and/or tank rental will be charged on a quarterly basis by the Company to the Distributor which the Distributor shall then recover from the customer. The cylinder service charge (until such time, if any, that it may be varied by the Company) shall be IR£4.00 for every cylinder supplied to the Distributor by the Company in excess of 25% of the Distributor's annual (i.e 1st January to 31st December) purchases of the Product in cylinder form expressed in numbers of cylinders.

8. Initially Blugas appointed the following distributors in the contract territories specified:

(i) Jones Oil:- counties Dublin, Meath, Louth, Cavan, Monaghan, Offaly (as far as Tullamore), Kildare (as far as Kilcullen), Longford, Westmeath, Donegal, Leitrim, Sligo, Mayo (covering the region above Westport), Roscommon and Galway;

(ii) Suttons Oil:- counties Kerry, Cork, Limerick, Clare, Galway and Mayo (covering the region below Westport); and

(iii) Three Rivers:- counties Laois, Carlow, Kilkenny, Wexford, Offaly (from Tullamore onwards), Wicklow (from Wicklow town onwards), Kildare (from Kilcullen onwards), Waterford and Tipperary.

At the end of 1992 Blugas assumed the distribution function formerly carried on by Jones Oil. In this regard, the employees and assets of Jones Oil which were involved in the LPG business were transferred to Blugas. The distribution agreement with Jones Oil ceased on the transfer of the territory to Blugas. Blugas distributes without a distribution agreement with itself, and is not bound by any provision similar to clause 8.13 (prohibition on active sales outside the territory).

9. The Authority has granted a category licence for exclusive distribution agreements ³. The essential feature of such agreements is that the supplier agrees with the exclusive distributor to supply certain goods for resale within a defined area only to the exclusive distributor. The supplier may be obliged not to supply the contract goods to users in the contract territory. The agreement may have a long or an indefinite duration. The exclusive distributor may be obliged not to manufacture or distribute competing goods, to obtain the goods only from the supplier, and to refrain, outside the contract territory, from seeking customers and making active sales. Responding to unsolicited requests from outside the territory, or passive sales by the exclusive distributor, must be permitted. Certain requirements on the exclusive distributor, such as purchasing minimum quantities or promoting sales, are not regarded as offending against Section 4(1). Certain clauses are not permitted under the category licence, such as restrictions on the reseller's freedom to choose customers or to set resale prices (though recommending of prices is permitted), and restrictions on the reseller after the agreement expires. Agreements which do not satisfy the requirements of the category licence may be given individual consideration.

10. Blugas claimed that the distribution agreement did not offend against Section 4(1) of the Act. The overall effect of the Agreement was to encourage and promote competition by ensuring the efficient distribution of the Supplier's products. Certain provisions were necessary to ensure this ultimate objective and were reasonable in their terms. The parties further submitted that the Competition Authority adopt what has been termed under, in particular, United States, and European Community, competition law, a "rule of reason" approach and consider the Agreement and the provisions noted to be reasonable in the context of Section 4(1) and therefore outside the application of that provision. In this regard, the parties referred to the judgement of the European Court of Justice in Stergios Delimitis -v- Henninger Brau, Case 234/89, 28th February, 1991, and the judgment of Mr Justice Keane in Masterfoods Limited Trading as Mars Ireland -v- HB Ice Cream Limited, 28th May, 1992. Alternatively, if the Competition Authority should consider that some of the provisions noted at paragraph 3.2 might infringe Section 4(1) of the Competition Act, the parties drew the attention of the Competition Authority to EC Commission Regulation 1983/83, which generally exempted certain types of sole distribution agreements from the application of Article 85(1) of the Treaty of Rome, upon which Section 4(1) of the Competition Act was based, provided the Agreement contained provisions which were no more restrictive than those permitted under the Regulation. A distinction was drawn in Article 2 of Regulation 1983/83 between certain types of provisions which might be deemed restrictions on competition under the Regulation but which might be imposed on the sole distributor (these were listed under Article 2(2)) and certain obligations which might also be imposed on the sole distributor (these were listed under Article 2(3)). The parties submitted that the latter obligations were not restrictions on competition. By analogy with Article 2 of Regulation 1983/83, the parties submitted that Clauses 5.1, 8.4, 8.9, 8.10, 8.11, 8.12(a) and 8.12(b), in particular, were obligations in this sense rather than restrictions on competition within the meaning of Section 4(1) of the Competition Act. Blugas also made submissions in support of its request for a licence but these are not relevant to this decision.

11. In answer to a number of questions posed by the Authority, Blugas responded in November 1992. It stated that all three of the original distributors were engaged in other activities such as the distribution of oil, and also, in one case, coal. While distributors were in practice granted sole distribution rights in their area, each distributor could accept unsolicited orders placed by customers outside the contract territory. Blugas stated that the price at which the distributor resold to the retailer (and also to the bulk purchaser) was not fixed under clause 5.1. This clause concerned the price at which Blugas sold to the distributors, and not the resale price. This clause also permitted Blugas to alter the price it charged to a particular distributor because of developments in the distributor's contract territory. It submitted that there was no discrimination by Blugas in its treatment of the distributors in that the price charged to the distributors in the other contract territories would not be changed unless there were similar developments in the market in those contract territories. In other words, where the market conditions in the contract territories were different, there might be a different price charged by Blugas to its distributor, but this did not involve discrimination between the three distributors as they were operating in different circumstances and different market conditions so that it was not reasonable or justifiable to compare the prices charged by Blugas to each individual distributor. Blugas and its distributors were allowed the flexibility to respond to developments in each territory, which was, in turn, pro-competitive.

12. Blugas argued that it and its distributors were more closely associated than was normally the case, so that a post-termination non-compete clause was permissible. Each distributor was extremely well-acquainted with Blugas' business so that it would be unfair if such a distributor could immediately carry competing products once its agreement with Blugas was terminated. A Blugas distributor in some respects acted like an agent rather than a distributor, and under EC competition law it appeared to be permissible to impose a post-termination non-compete obligation on a former agent for up to two years. The distributors were also shareholders in Blugas and were much closer to Blugas and more acquainted with Blugas' business than might otherwise be the case with a supplier and its distributor. The former distributor was only restrained from soliciting orders for LPG from parties who purchased Blugas LPG from either the distributor or Blugas during the period of the agreement. The closeness of the relationship also made it justifiable and reasonable that the distributor should not be permitted to solicit former employees of Blugas once the distribution agreement was terminated.

13. Blugas stated that, as a new entrant into the market, if Blugas were to distribute its own LPG directly to dealers, rather than through its existing distributors, either it would find that the costs involved would be too high and that in-house distribution would not be viable, or it would have to sell its products at such a high price that they would not be competitive in the market. In the start-up phase, the distributors were more cost-effective and more efficient in the distribution of products than Blugas could have been. This meant that consumers received a better service at a more competitive price than if Blugas distributed directly to the market.

14. 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.

15. According to Section 3(1) of the Act, ´undertaking means a person being 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.' Blugas is an incorporated body engaged for gain in the production, supply and distribution of LPG, both to resellers and to final consumers, and is an undertaking within the meaning of the Act. The two distributors are bodies corporate who purchase LPG from Blugas for resale to purchasers, and they are thus engaged in the supply and distribution of LPG for gain. They also are undertakings within the meaning of the Act. The distributor agreements are agreements between undertakings. Since the product is distributed throughout the State, the relevant geographical market is the State.

16. The situation in this case is complicated by the inter-relationships between Blugas, its shareholders and its distributors. When Blugas was established, its major shareholders were Jones Oil, Three Rivers Oil and Suttons. These companies were also the only distributors of Blugas LPG. At present, Jones Oil is the holder of a majority of the shares in Blugas, and the other two firms remain as sizeable shareholders and they each appoint a director to Blugas. Jones Oil is no longer a distributor of Blugas products, its distribution functions in its original territory having been taken over by Blugas itself. The other two companies, however, remain as distributors.

17. The Blugas distribution agreement provides that Suttons and Three Rivers is each allotted a specific territory, and that each will supply only dealers and bulk customers who have signed a supply agreement with Blugas. The distributor is prevented from dealing in competing brands of LPG, and must purchase all its requirements of LPG from Blugas. The agreement lasts for no more than five years, thought it can be terminated earlier, and it can be renewed. The price to the distributor is Blugas' published wholesale price (the price charged to the retailer) less purchasing rebates. This may be varied to meet changes in competitive conditions. Certain information must be furnished each month to Blugas, including average customer prices. The distributor must not offer for sale or solicit custom outside its territory. The distributor must not canvass or solicit customers of the distributor or Blugas for one year after termination of the agreement. It shall not at any time solicit or endeavour to solicit or obtain the services of any employee of Blugas.

18. In normal circumstances, given that LPG distribution is characterised by a high degree of vertical integration and/or exclusivity, the Authority would consider that the notified agreements, which involve exclusive distribution and exclusive purchasing, offended against Section 4(1). Such agreements would normally be capable of being licensed, although in this instance some amendment might have been required in order to satisfy the requirements of Section 4(2). In the circumstances of the notified Blugas agreements, the agreements are between an undertaking and other undertakings who are shareholders in the first undertaking. The Authority considers that different considerations apply in this situation. In its decision in Scully Tyrrell ⁴ the Authority stated that ´the vendors could not be expected to compete with Edberg for so long as they continue to be significant shareholders and enjoy a degree of control over the running of the business and that in such circumstances any agreement not to compete does not offend against Section 4(1). The Authority does not believe that such a restriction would be acceptable if the shareholding was held for purely investment purposes or if it was part of an artificial arrangement which had the object or effect of evading the prohibition contained in Section 4(1)'. In the case of Blugas, the two distributors have more than just a minor shareholding, and they each nominate a director of Blugas. The undertakings came together to establish Blugas on the basis that they would act as distributors of Blugas products. In the circumstances, the Authority considers that the restrictions on competition do not offend against Section 4(1), so long as the distributors are significant shareholders in Blugas.

19. In particular, clause 13.1 prevents the distributor, for one year after termination of the agreement in the area, from canvassing or soliciting orders for LPG from any person who at any time during the agreement had been a purchaser of LPG from the distributor or from Blugas. All customers must have entered into a supply agreement with Blugas, under Clause 15, and all such persons are regarded as customers of Blugas. The agreement therefore imposes restrictions on the ability of the distributor to compete with Blugas after the distribution agreement has expired. Such a restriction in a normal exclusive distribution agreement would be regarded by the Authority as offending against Section 4(1), and would not be licensable. If the distributor continued as a shareholder after the distribution agreement was terminated, or if its shareholding was disposed of at that time, such a restriction would not offend against Section 4 (1).

20. In addition, clause 13.2 prevents the distributor, at any time, from soliciting or endeavouring to solicit or obtain the services of any person employed by Blugas. The Authority considers that a restriction on the distributor from soliciting persons employed by the supplier during the term of the agreement does not offend against Section 4(1). Furthermore, the Authority considers that such a restriction would not offend against Section 4(1) after the distribution agreement has been terminated for so long as the undertaking remained as a significant shareholder, and for up to two years after it had disposed of its shareholding.

21. The Authority considers that none of the other clauses in the notified agreement comes within the scope of the prohibition in Section 4(1) of the Act. The requirements to keep an adequate stock of products, to supply information, to comply with agreed marketing policies, to supply products under trademarks, and restrictions on disclosing or using confidential information, do not affect competition, in the opinion of the Authority.

22. Blugas and its distributors are undertakings within the meaning of the Competition Act, and the standard distribution agreement is an agreement between undertakings. Because the standard agreement is with significant shareholders in Blugas, the Authority considers that it does not offend against Section 4(1) of the Competition Act, 1991. For the purpose of clarity, the Authority considers that where one or more of the parties dispose of their shareholding, this would constitute a material change in the circumstances on which the certificate was based, as described in Section 8 (6) of the Act.

23. 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 standard agreement between Blugas Ltd and its two distributors, notified under Section 7 on 30 September 1992 (notification no. CA/539/92E), does not offend against Section 4(1) of the Competition Act 1991, on the grounds that the distributors are significant shareholders in Blugas.

1. Cylinder LPG category licence, Decision No. 364 of 28 October 1994.

2. Decision No. 389 of 10 April 1995.

3. Decision No. 144 of 5 November 1993.

4. Decision no. 12 of 29 January 1993, para 76.