Irish Competition Authority Decisions

1. Notification was made on 29 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 four agreements between North Western Cattle Breeding Society Ltd (NWCBS) and John Doherty, Michael Tarpey, John O'Loughlin and Sean McHugh respectively, each notified as the text of a standard form agreement. A Statement of Objections was issued on 30 June 1995 and an oral hearing held on 11 October 1995, at which NWCBS offered to amend the agreement in a manner which satisfied the concerns of the Authority. Notice of intention to grant a licence was published in the Irish Times on 10 November 1995. No submissions were received in response to the advertisement. Under Section 4(5) the views of the Minister for Agriculture, Food and Forestry were sought and some factual points were made which are taken into account in the decision.

2. The notification concerns four versions of a standard agreement between NWCBS and independent contractors for the provision of A.I. services within a designated area of the Society's region.

3. NWCBS was established to provide a full artificial insemination service in the north western region under licence from the Minister for Agriculture, on 13 July, 1963. The four named individuals are approved inseminators and independent contractors engaged on a contract basis by the Society. There are 67 contractors covered by one or other of the standard agreements.

4. The service provided under the notified agreements is the service of non-D.I.Y. artificial insemination of cattle, using a range of semen graded for improvement in beef or milk production, as well as other beneficial characteristics. There are other options available to farmers for breeding cattle. Less than 50% of breeding of cattle in the State is by A.I.

(i) All farmers may, subject to the Control of Bulls for Breeding Act, 1985 and the regulations made thereunder own a bull. Under the Act any herdowner may keep a herdbook registered pedigree bull. However, it is unlawful for a herdowner to have in his possession an unregistered bull unless such possession is covered by a permit. The criteria for obtaining a permit to keep an unregistered bull is set out in the Control of Bulls for Breeding (Permits) Regulations 1986 and the Control of Bulls for Breeding (Permits) (amendment) Regulations 1995. There are no statutory controls on the use of a legally held bull for breeding purposes in a herdowner's own herd.

(ii) A farmer may hire a herdbook registered bull from its owner for breeding within his own herd. Bulls permitted under the above legislation, on the other hand, cannot be hired for use outside the herd quoted on the permit.

(iii) A farmer may carry out D.I.Y. A.I. on his own herd without holding a licence for the purpose from the Minister, provided the semen used has been collected from his own bull. Where a herdowner wishes to carry out D.I.Y. A.I. using semen of a bull which is not his own he is required to :

(a) have the semen collected, processed and stored at an approved semen collection centre

(b) have the semen approved for use for breeding purposes by the Minister

(c) obtain a D.I.Y. A.I. Licence from the Minister.

In order to qualify for a D.I.Y. A.I. Licence a herdowner must successfuly complete an approved D.I.Y. A.I. training course. A holder of a D.I.Y. A.I. Licence can obtain approved semen for use in his own herd directly or indirectly from any of the nine licensed A.I. organisations; Semen Import Companies; Licensed Semen Distribution Companies or may indeed import semen provided he complies fully with the EU Directives governing trade in bovine semen which are transposed into national law by S.I. No. 297 of 1994 entitled European Communities (Trade in Bovine Breeding Animals their semen, Ova and Embroyos) Regulations 1994.

(iv) A farmer may use non-D.I.Y. A.I. Under the Minister's present scheme, such an A.I. service can only be supplied by the nine licensed field service organisations, i.e. the Cattle Breeding Societies, within their assigned geographic areas.

5. Outside of the use of live bulls for breding A.I. provides access to a wide variety of bovine semen, evaluated according to internationally comparable standards and approved for breeding purposes. Not all farmers are competent to use the D.I.Y. A.I. option. The Authority considers that the relevant market is for the service of providing non-D.I.Y. A.I. for cattle using a choice of semen.

Geographical market

6. The N.W.C.B.S. has an absolute monopoly in the North Western geographical area, as a result of its licence from the Minister. It is licensed exclusively to provide A.I. services for the area comprising Sligo, Mayo, Donegal, Leitrim (except for the Killeshandra creamery districts), Roscommon (except for some border areas of the county), some parts of Galway and Cavan (the area north west of the creamery districts of Swanlinbar and Templeport). The licence prohibits it providing A.I. services outside its geographical area. This is one of a series of licences to the nine Cattle Breeders Societies, creating local geographic monopolies covering the State. This system of licensing chosen by the Minister was challenged in the High Court in O'Neill v. Minister for Agriculture, Food and Forestry [1] as, inter alia, offensive under Articles 86 and 90 of the Rome Treaty. The challenge failed in the High Court, and that judgement is now under appeal. The relevant geographical market in which this agreement has effect is the Society's monopoly area.

7. These four agreements are the standard agreements made by the NWCBS with individual operatives, permitting them to provide A.I. services.

(i) CA/200/92E is a notification of an agreement of 22nd May 1985 between the Society and John Doherty notified as an example of a text which is used as standard.

(ii) CA/201/92E is an agreement dated 19th April 1990 amended by an agreement of 29th April 1990, made between the Society and Michael Tarpey notified as a text of a standard agreement used with other contractors. The unamended text is virtually identical to that notified in CA/200/92E. The amendment provides, inter alia, that the whole agreement as amended will expire on 31st December 1990. However, the notification is of this text as a standard text and the Authority has dealt with this notification as such. The only relevant difference between this text and that notified as CA/200/92 is that it is drafted to be used by a relief contractor who is brought into another contractor's area for a limited period, usually a week. This does not give rise to any competition issue beyond those identified in the analysis of CA/200/92E.

(iii) CA/202/92E is an agreement dated 24th May 1982 between the Society and John O'Loughlin, notified as a text of a standard agreement used with other contractors. It is virtually identical to CA/200/92E save for a temporary provision fixing the fee to be charged in the case of a repeat call for a first insemination. This raises no new issue beyond the general issue raised in CA/200/92E by the fixing by the Society of the fees charged by the contractors. The only other different provision is that the Society supplies certain equipment to the contractor, and this does not raise any competition issue.

(iv) CA/203/92E is an agreement dated 7th June 1991 between the Society and Sean McHugh, notified as a standard text used with other parties. It takes the form of the standard agreement referred to in the text as "22.10.81",which for the purposes of this assessment is identical to the agreement notified as CA/200/92E with an amending agreement also dated 7th June 1991. The purpose of the amendment, which is stated to be operative until 31.12.2000, is to modify the standard agreement to apply to a "Year Round Relief Contractor" who is called in as necessary to fill in for any one of the contractors operating from one named sub-station. The relief contractor agrees not to provide any other AI service in the Society's licensed area [clause 17].

8. The individual contractors operate from sub-stations, sharing the expenses thereof with each other and the Society. The contractors are each licensed by the Society for an exclusive geographical area, which is a sub-division of the sub-area allocated to the sub-station. Originally the NWCBS provided services by establishing and staffing sub-stations, each of which catered for a sub-division of the area licensed to the Society. It has since in or about 1980 changed over from directly employing A.I. personnel to contracting with them as independent contractors. When the Society did so, it retained ownership of sub-stations, and continued to employ the clerical staff therein.

9. The operatives licensed are former employees of the NWCBS and the agreements are drafted with the intention, inter alia, of ensuring that they are no longer employees. The contractors agree to provide an A.I. service, at a price set by the Society, using only semen supplied by the Society, and remitting a set percentage of the fee for each service to the Society. They operate from premises owned by the Society, and staffed by employees of the Society, 50% of whose wages are paid by the Society. The contractors operating from a substation contribute to a fund for its running costs such as telephone, electricity and equipment, in proportion to their respective volumes of work. The contractors' activities are very much controlled by the Society which in part reflects the fact that the Society as licensee has statutory obligations, responsibility for which it cannot delegate to the contractors. However the contract provides that they are not employees. There is no explicit statement in the contract that the contractors are providing the A.I. service as agents on behalf of the Society as a principal. The contractors also agree to buy a share in one or more bulls owned by the Society, under clause 24 (clause 25 in CA/202). Clause 13 (Clause 14 of CA/202 and CA/203) incorporates a list of conditions described as the Department of Agriculture's conditions. These are almost identical to those contained in the licence of 1963 to the Society; and the contractor's obligation under this licence is to enable the Society to comply with these. The requirements are mainly to do with recording transactions, and health controls, and do not raise competition issues.

10. Under clause 1 of the agreements, the contractor agrees to "provide a full artificial insemination service (which includes, but is not limited to first inseminations and two free repeats within six months) to all farmers" within the defined area. In CA/203/92E this obligation is extended as described below. Clause 2 in conjunction with Schedule 3 defines the territory of operation for the contractor. Under clause 3 of the agreement, the Society has "the absolute right from time to time to fix the maximum fees chargeable by the contractor to the farmer". Clause 4 outlines the division of the fees between the contractor and the Society. The contractor collects money on behalf of the Society, retains a proportion as his commission and remits the balance to the Society. Under clause 6 of the agreement "the Society shall charge for each dose of semen at the rate from time to time decided by the Society" and the contractor must pay a deposit of 5% of the basic fee for those supplies. The contractor is also restricted from holding in his possession, dealing in or disposing of supplies of semen other than for use in the discharge of his obligations.

11. Under clause 7 of CA/200/92E and CA/203/92E the contractor is required to contribute 2% of the basic fee for each first A.I. service to a special fund "for the purpose of equalising fee earning opportunities between contractors throughout the licence region" to be administered by the Society. In CA/201/92E the contractor "may contribute" to the fund. This obligation is not contained in CA/202/92E. The contractor contributes 50% of the costs for any sub-station clerks and for other costs and expenses such as telephone, E.S.B., heating and lighting and equipment, save that contractors engaged on a temporary relief basis under CA/201/92E contribute to any substation only in proportion to the volume of work they do there. Under clause 10 of CA/200/92E, and clause 11 of CA/202/92E, the Society disclaims vicarious liability for the acts and defaults of the contractor. Clause 16 of the agreements (clause 17 of CA/202/92E) defines the contractor as "a self-employed contractor and no contract of employment, either express or implied shall be deemed to exist between the Society and the contractor ..."

12. Under clause 20 (clause 21 of CA/201 and CA/202) of the agreement the contractor "shall not on his own behalf or on the behalf of any others during or for a period of one year after the termination of this agreement provide an artificial insemination service except through or by agreement with the Society in any area served by him at any time prior to termination. The contractor further agrees not to use or disclose to any third party any confidential information, trade secrets, or customer lists for the duration of this agreement and during the two year period following the termination of this agreement." This obligation is not contained in CA/203/92E.

13. Under clause 24 (clause 25 of CA/202) the contractor "shall enter into a separate agreement with the Society whereby inter alia the contractor purchases from the Society for a consideration to be agreed with the Society a share in one or more bulls owned by the Society.".

14. CA/203/92E contains a 1991 amendment of the agreement notified as CA/200/92E, the purpose and effect of which is to control the work of the contractor much as it must have been when the Society employed people directly. The amendment provides that the contractor is obliged to deal with calls from farmers "as expeditiously as possible" and specifies the time allowed to deal with a request. The contractor is obliged to provide a Sunday service in co-operation with other contractors; he is obliged to provide a "synchronisation service" [clause 3(c)].

15. CA/203/92E also provides that the Society may "levy a charge" for certain repeat inseminations, in circumstances of which the Society will inform the contractor. The contractor collects, and may keep a percentage of, that charge [clause 5]. The contractor shall complete insemination dockets in a form prescribed in the agreement and return them to the Society; and shall not be entitled to receive his percentage of fees until this is done [clause 8]. The contractor's obligation, imposed by the 1981 agreement text, to comply with prices set by the Society is reiterated (clause 10). How these prices are calculated, and the share of the contractor, is amended by clause 14 and 15, but the essential nature of the clause, which is that the Society sets the price and the contractor keeps a percentage of it, is unchanged. Where the Society supplies any semen "from external sources" it may "at its sole discretion charge to the Contractor the price at which it is to be sold [excluding the service fee] by the Contractor to the farmer" [clause 16]. To the reasons for termination of the agreement is added the contractor's dealing in any competing products or services [clause 13].

16. The NWCBS originally submitted that the activities of the Society were controlled and regulated under the provisions of the Live Stock (Artificial Insemination) Act, 1947 and the regulations made thereunder. The Society maintained that the Competition Act, 1991 did not apply to its activities. The Society derived its authority from the 1947 Act which was effectively the means by which the State operated and controlled the practice of providing an A.I. service for cattle. If any of the activities of the Society were considered by the Authority to be in breach of the Act, the Society requested that a licence be granted to enable the Society to continue its activities.

17. The Society submitted that it was acting in deference to statutory authority. They maintained that there was nothing to stop a farmer in choosing a different supply of semen from another area through the nomination process. The only point which had to be adhered to at all times was that the semen had to be supplied through the Society to ensure statutory compliance which was the Society's principal concern. The Society also made arguments relevant to a request for a licence, relying on the universal service obligation of the Society, and the support of the national breeding programme. These are not relevant to this decision.

18. A Statement of Objections was issued on 30th June 1995 and an oral hearing held on 11th October 1995. In a submission immediately before the oral hearing, and at the oral hearing, the Society made the alternative argument that the independent contractors were the agents of the Society. One of the arguments made was that the Society was the only licensed provider of the service, and that as such the contractor, was providing the service "on behalf of" the licensee since it could not be provided "on behalf of" any other party. The other argument made was that the terms of the notified agreement clearly created an agency relationship. The contractors were obliged by clause 1 to follow the directions of the Society; the various provisions of the contract which controlled the manner in which the contractors carried out their job were cited as indicators that they were not acting on their own behalf but on behalf of the Society. They did not buy and resell semen (except in one set of circumstances limited to agreements 203/92E) and the semen remained the property of the Society; all equipment used was provided by and remained the property of the Society. They carried virtually no risk in the transaction. The contractor was an auxiliary organ forming an integral part of the Society's business, and he concluded the supply of the service on behalf of the Society. At the oral hearing, the Society accepted that the agreements were slightly equivocal and it proposed to make amendments to make clear the agency relationship at the oral hearing.

19. Following the oral hearing the Society supplied to the Authority by letter of 26 October the text of the proposed amendments as follows:

(a) The "Doherty" (CA/200/92E) and "O'Loughlin" (CA/202/92E) Agreements.

Clause 1 - Insert on the third line after the word "service" and before the bracket the following;- " on behalf of the Society".

Clause 3 - Delete the words " by the Contractor" where they appear.

Clause 6 - Delete the sentence which reads; " The Society shall charge for each dose of semen at the rate from time to time decided by the Society".

(b) The "McHugh" (CA/203/92E) and "Tarpey" (CA/201/92E) Agreements.

Amendment as above in the main parts of the Contracts.

(c) The "McHugh" (CA/203/92E) Agreement.

Delete clause 16 which appears in the supplement part of the Contract.

20. The representatives of the Society confirmed by letter of 30th November that the amendments had been made, by way of letter from the Society to each contractor setting out the changes appropriate to that contractor's version of the agreement respectively and stating "If you have any objection to these changes please let me know within the next ten days. If I do not hear from you, I will take it that you are accepting the changes." The representatives of the Society confirmed that no adverse responses had been recieved within that time. The Society had submitted at the oral hearing that they considered the changes could all be effected by their unilateral waiver.

21. The submission of the Minister for Agriculture, Food and Forestry stated that it was understood that the purpose of the proposed amendments was to remove any remaining doubts that the contractors were not independent but were operating on behalf of the Society. Under those circumstances the changes were in keeping with the conditions of the A.I. Licence issued to the Society by the Minister under the Live Stock (Artificial Insemination) Act, 1947 and were therefore acceptable to the Department.

22. 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'.

23. 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.' NWCBS and the independent contractors are all engaged for gain in the provision of an A.I service in the north west region. Consequently, they are all undertakings within the meaning of Section 3(1) of the Competition Act. The agreements are therefore agreements between undertakings.

24. It was submitted by the NWCBS that its operations did not come within the Competition Act, 1991 in that they were governed by the Livestock (Artificial Insemination) Act 1947. The Authority does not consider that the 1947 Act, and the Competition Act operate in a mutually exclusive way. In the event, no provision of the 1947 Act was relied on to justify any restriction which would otherwise offend against Section 4(1).

25. These are agreements whereby the NWCBS appoints contractors for sub-areas of its licensed area, gives them permission to operate an AI service in that area and restricts them from operating outside it. The contractors are stated not to be employees. They are described in the original submission in the Annexe to Form CA as independent contractors, and self employed contractors in the text of the agreement. In considering the argument that the agreement created the relationship of agency, the Authority considered that there were a number of elements in the agreements which ran counter to the argument. The contractors were not referred to as agents, nor were they stated to be acting on behalf of the Society. There were described as charging a fee to farmers, and themselves being charged by the Society for the semen used in the service; and the agreement notified as CA/203/92E provides for the contractor to buy imported semen for resale. Clause 10 denies any vicarious liability by the Society for the acts and defaults of the contractor. As neither the agreements nor the surrounding facts provided sufficient indication that they were operating as agents of the Society the Authority took the view that the inseminators were not agents. As such, the Authority considered that a number of clauses in the agreements offended against Section 4(1) and did not satisfy the requirements of Section 4(2). These were the restrictions relating to geographical exclusivity (clause 2), exclusive purchasing (clause 6, and in the case of CA/203/92E clause 16), fixed fees (clauses 3 and 4), equalisation of earnings in CA/200/92E and CA/203/92E (clause 7) and post-termination non-compete restrictions (clause 20, in all agreements except CA/203/92E).

26. The Authority is satisfied however that the agreements, as amended, create a relationship of agency. The contractor is stated to provide the service on behalf of the Society [clause 1]. The Society determines and defines the service to be provided, sets the price for the service and the semen, and retains property in the semen. The contractor carries no risk in relation to the equipment used. He carries half of the cost of staffing and utilities in the AI substation, but the staff are the employees of the Society. It was argued that "if a group of AI calls were not attended to on any day, the Society and not the Contractor would be held responsible by the farmers and by the Department of Agriculture." In relation to clause 10, of CA/200/92E it was stated "...the reality is that any such claims are in fact handled by the Society."

27. For the avoidance of doubt, although it does not affect the Authority's view that this is now an agency agreement, the Authority does not accept the argument that, since the Society was the only licensed provider of the service and the contractor was providing the service "on behalf of" the Society, the contractor was automatically an agent of NWCBS. The contractor could provide the service in the form of another legal relationship.

28. The Authority has said in a number of decisions that where the relationship of agency does not offend per se, clauses in the agreement may be found offensive. In this case, the relationship of agency between the NWCBS and the inseminators is not itself offensive. In the context of an agency agreement, the clauses listed in paragraph 26 do not offend against Section 4(1) since the restrictions imposed on the agent are compatible with the agent's role as an auxiliary organ of the principal.

29. The agreements provide for a post termination non-compete clause, limited to one year, and to the area where the contractor had previously been operating. In this instance, the statutory licensing system as it is at present would prevent a contractor entering the same geographical market as the Society as a competitor. However, apart from that statutory provision, the Authority has stated in CrossVetpharm Ltd/Agents [2] that a post termination restriction, limited in time and limited to the customers with whom the agent had dealt does not offend against Section 4(1), as being necessary to protect the goodwill of the principal. The present restriction does satisfy those requirements and does not offend against Section 4 (1). There is also a two year restriction on the agent using confidential information, trade secrets or customer lists. In Apex/Murtagh [3] the Authority found that a restriction on an employee disclosing confidential information after termination, did not offend because such a restriction was essential to permit the disclosure necessary in an employer/employee relationship. The Authority considers that the same is true for agents.

30. In the opinion of the Competition Authority the agreements between North Western Cattle Breeding Society Limited and John Doherty, Michael Tarpey, John O'Loughlin and Sean McHugh, as amended (notifications no. CA/200/92E, CA/201/92E, CA/202/92E and CA/203/92E respectively) notified on 29 September, 1992, under Section 7, constitute agreements between undertakings. The Authority believes that the four standard agreements as notified, on 29 September 1992 under Section 7, between the North Western Cattle Breeders Society and their contractors, (CA/200,1,2,3/92E), offended against Section 4(1) of the Competition Act and did not satisfy the requirements for a licence under Section 4(2). The agreements, as amended by letters of 16th November 1995 no longer offend against Section 4(1).

31. 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 four standard agreements set out below between the North Western Cattle Breeding Society Ltd and John Doherty, Michael Tarpey, John O'Loughlin and Sean McHugh, notified on 29 September 1992 under Section 7, as amended by letter of 16 November 1995 to the contractors, do not offend against Section 4(1) of the Competition Act:

Notification No. CA/200/92E North Western Cattle Breeding Society Ltd/J. Doherty

Notification No.CA/201/92E North Western Cattle Breeding Society Ltd/Ml. Tarpey

Notification No.CA/202/92E North Western Cattle Breeding Society Ltd/J. O'Loughlin

Notification No. CA/203/92E North Western Cattle Breeding Society Ltd/ S. McHugh

For the Competition Authority

Patrick Massey

Member

15 December, 1995.