Irish Competition Authority Decisions

1. Notification was made of a master franchise agreement between Andrew Whittaker and Andrea Michele Whittaker, trading as Computa Tune, Computa Tune Services Ltd and Kenneth Green on 14 June 1993 with a request for a certificate under Section 4(4) of the Competition Act, 1991. A statement of objections was issued on 24 October 1995 to which no response was received.

2. The notification concerns a master franchise agreement, dated 27 October 1992, between the Whittakers trading as Computa Tune (the master franchisor) and Computa Tune Services (the master franchisee), and Mr Green (the principal), for the marketing, advertising, management, administration and training in the operation and promotion of the Computa Tune Service. The business is one of vehicle engine tuning and servicing from specially equipped commercial vehicles operating under a uniform name and logo within the State. A standard franchise agreement was stated to be part of the master franchise agreement, but this was not notified and is not dealt with in this decision.

3. Andrew Whittaker and Andrea Michele Whittaker trade as a partnership under the name Computa Tune, from an address in Lancashire. Computa Tune Services is an Irish registered company, whose principal is Kenneth Green of Skerries, Co. Dublin.

4. The service consists of vehicle engine tuning and servicing from specially equipped vehicles. While engine tuning and servicing is provided from many premises throughout the State, the notifying party stated that their system was new and revolutionary, and that they had no direct knowledge of any other parties who provided the same or a similar service to that of Computa Tune. They stated that there was presently no competition to the franchise.

5. The notified agreement is a master franchise agreement between the Whittakers/Computa Tune and Computa Tune Services Ltd, dated 27 October 1992. It contains many provisions which are commonly found in franchise agreements. The master franchisee is granted a sole and exclusive licence to supply the service within the territory (the State), using the trade names and logos included in the intellectual property and the system, and benefiting from the training, advice, etc of the franchisor (clause 2.1). The master franchisee is not allowed to appoint franchisees without permission, nor grant sub-franchises (clause 2.2). He is not allowed to provide the same or a similar service outside the territory (clause 2.3). He is required to operate from the specified premises, and may not conduct any other business from the premises without permission (clause 2.4). He may not operate any competing business (clause 2.5). The initial term of the agreement is 15 years (clause 3 and Schedule 1). There is an option to renew for an additional ten years, subject to conditions (clause 4). The fees to be paid to the franchisor are specified (clause 5). The master franchisee must keep records and accounts, and make them available to the franchisor (clause 6). The master franchisee agrees to enter into a registered user agreement (clause 7.2.1), and to ensure that each franchisee also does so (clause 7.2.2), and agrees not to disclose the system, knowhow or secret or confidential information to any unauthorised person (clause 7.5).

6. The franchisor agrees to make available confidential manuals and training aids, and these cannot be changed by the master franchisee without approval (clause 8.1). The franchisor will assist in the selection and training of franchisees, and not unreasonably withhold approval of any franchisees (clause 8.2). He will notify the master franchisee of any improvement or changes to the system (clause 8.3). He will attend the master franchisee's premises twice a year to analyse the operating methods, etc, and suggest improvements, which must be implemented (clause 8.4). The franchisor will loan a copy of the manual, and permit the master franchisee to lend a copy to each of its franchisees (clause 8.5). He also provides the system and continuing advice and guidance (clause 8.6). He agrees to try to ensure the supply by nominated suppliers of parts, equipment and vehicles (clause 9.1). The master franchisee shall not sell or transfer these, but he is deemed to be acting as the fiduciary agent of the nominated suppliers (clause 9.1.5). The master franchisee must use only parts, etc, supplied by nominated suppliers (clause 9.2), though substitutes may be approved by the franchisor (clause 9.3.1).

7. The franchisor provides initial training for the master franchisee, and persons may be required to repeat the training (clause 10.1), and training for other franchisees and employees (clause 10.2). The franchisor may decide whether employees need training (clause 10.4), and all senior staff must be trained and retrained (clause 10.5). The master franchisee agrees to adhere to the system, (clause 11.2), and agrees not to reveal the system to any unauthorised person (clause 11.5.1). He may be required to enter into a software licence agreement (clause 11.5.2). He will allow inspection of the premises (clause 11.7), and allow communication by the franchisor with franchisees and their customers (clause 11.8). He will keep a minimum stock of parts and trained senior staff, and ensure that standards are maintained (clause 11.10). The franchisor may amend the service, and this must be incorporated by the master franchisee (clause 11.11). The master franchisee must not give preference to any franchisee over others (clause 11.12).

8. The master franchisee shall offer the service to the standard determined (clause 12.1.1). He must operate between 5 and 20% of the number of franchisees (clause 12.2.1). He must not be engaged in a competing business (clause 12.4.1), or in any other business without consent (clause 12.4.2). He must notify any improvements, and allow these to be incorporated without charge (clause 12.5). He must operate for specified hours (clause 12.6). He must not sell the business, except as provided (clause 12.8.1). He must not, during the term of the agreement, divulge confidential business information to unauthorised persons (clause 12.8.2). He must provide an annual conference for franchisees (clause 12.11.2). He must ensure that all franchisees are properly trained and retrained (clause 12.13). He must ensure that key personnel, franchisees, etc, give a confidentiality undertaking, during the term of the agreement, and enforce this (clause 12.14). He must exploit the potential of the business, while maintaining standards (clause 12.16.1). The master franchisee must ensure that all agreements are as set out in the Manual, that all franchisees enter into and comply with franchise agreements, and that these shall not be varied without the franchisor's consent (clause 12.17). The franchisor's approval must be obtained for the appointment of franchisees (clause 12.18). Targets are set for the appointment of franchisees (clause 12.19.1 and 2). The master franchisee must procure that franchisees use only specified parts, equipment and vehicles supplied by nominated suppliers (clause 12.21). He must procure that franchisees offer the service in accordance with the highest standards and in accordance with the agreement (clause 12.22). He may not terminate any franchise agreement without consent (clause 12.23). He must change signs, etc when directed (clause 12.24).

9. The franchisor may engage in advertising (clause 13.1), and shall make available advertising materials (clause 13.2), and the master franchisee shall inform the franchisor of spending on advertising and promotion (clause 13.3). The master franchisee must publish a recommended price list after consultation with the franchisor (clause 13.4). He must advertise and promote the service (clause 13.5), and obtain permission for advertising which differs from that of the franchisor (clause 13.6.1). He must ensure that franchisees use only advertising and stationery which conforms to the Manual (clause 13.7). The franchisor may make improvements, and make these available (clause 16.1). Improvements by the master franchisee must be made available without payment (clause 16.2 and 3).

10. The principal guarantees the performance of all obligations (clause 18.1). He shall not be engaged in any competing business (clause 18.2.1), or be involved in any other business without consent (clause 18.2.2). He may not during the currency of the agreement, impart details of the system or knowhow or other secret or confidential information relating to the business to unauthorised persons (clause 18.2.3). The principal must not sell shares in the master franchisee without consent (clause 18.3.2). He may not be associated with any competing business (clause 18.3.4). He must undergo training and retraining (clause 18.3.5), and must not appoint additional directors or managers unless they enter into a service agreement and undergo training (clause 18.3.6).

11. The master franchisee may sell the business with consent (clause 19.2.0), and must give notice to the franchisor, who has an option to purchase (clause 19.2.2), and any proposed purchaser must meet reasonable standards (clause 19.2.3), and enter a new agreement (clause 19.2.4), along with other conditions. The master franchisee agrees, during the term of the agreement, not to solicit or attempt to solicit any employee of the franchisor, and not to employ any person who, in the preceding 12 months, has been an employee of the franchisor or other franchisees, without the permission of the franchisor (clause 21.2). The master franchisee agrees, for one year after termination, not to be engaged in a competing business in the territory (clause 23.2.1), nor to accept or solicit the custom of any person that has been a franchisee or a customer of a franchisee, nor to divert or seek to divert any custom from the franchisor or any of the franchisees in the territory (clause 23.2.2). The master franchisee must not, at any time after termination, reveal or use any of the intellectual property or the knowhow (clause 23.2.3). He must not, for one year after termination, interfere with or endeavour to entice away or employ any employee of the franchisor or of the business or of any of the franchisees (clause 23.2.4). The master franchisee shall not hold itself out as agent, legal representative, employee, contractor or partner of the franchisor (clause 26.6).

12. At the time of notification, Computa Tune stated that it was initially believed that six franchisees would operate in the territory, but there was presently only one and the number was unlikely to exceed three in the forseeable future. In support of the request for a certificate, they claimed that the arrangement would not have an adverse effect in competition in the State as it was a revolutionary method of tuning and servicing vehicles. They stated that they were not aware of any present competition and that the question of competition should now be left until a similar arrangement was proposed to the Authority.

13. The Authority granted a category licence for certain franchise agreements on 17 November 1994 (Decision No. 372). Under the category licence restrictions on the franchisee which are necessary to protect the franchisor's industrial or intellectual property rights or to maintain the common identity and reputation of the franchised network are not deemed to constitute restrictions of competition. The category licence permits franchise agreements between two undertakings which contain certain restrictions on competition. An obligation not to compete with other franchisees is permitted during the term of the agreement, but a non-compete clause is permitted only for one year after termination of the agreement and is restricted to the franchisee's territory. The licence also states that it does not apply in certain circumstances, where, for example, it contains specified restrictions on the franchisee, such as restrictions on the franchisee's ability to determine sale prices.

14. Following the granting of the category licence, the Authority wrote to the parties involved on 2 May 1995 stating that it considered that the notified agreement fell within the scope of the category licence, but did not satisfy its requirements. The Authority specified certain clauses which were not acceptable, that is clauses 13.4, 21.2 and 23.2.4. It stated that the agreement could be amended so that it satisfied the conditions of the category licence.

15. On 17 May 1995, solicitors for Computa Tune responded as follows:

´With regard to Clause 13.4 of the Master Licence Agreement dated 27th October 1992 regarding the publication of a ´recommended price list'. The purpose of this Clause is not to restrict the Licensee ´in the determination of sale prices', but gives the Licensee an opportunity to discuss its charges for the Computa Tune Service with the Licensor. The Clause should not be interpreted as enabling the Licensor to restrict the Licensee's freedom in estimating the cost of employing its services.

The reason for incorporating Clauses 21.2 and 23.2.4 into the Master Licence Agreement is simply to protect the Licensor's goodwill, they are not intended to distort or restrict competition in any way. It is reasonable for the Licensor, after giving its name, reputation and experience to a Licensee, to be able to prevent it from soliciting its employees without its consent. It is also reasonable and indeed very common in an Agreement of this nature to include a clause which prevents the Licensee from enticing employees away from the Licensor for a certain period after termination of the Agreement.

In the circumstances, we trust that no amendment to the Agreement will be required to satisfy the conditions of a Category Licence.'

16. On 13 June 1995, however, a letter from Computa Tune stated that they could ´confirm that the Computa Tune Services franchise agreements have been amended in relation to clauses 13.4, 21.2 and 23.2.4'. The Authority wrote to the solicitors for Computa Tune on 20 June 1995 drawing attention to the apparent confusion and requesting a copy of the amendments. The solicitors replied on 27 July 1995 stating that they were instructed by Andrew Whittaker that he would not have confirmed that the agreement had been amended in relation to these clauses had he realised the implications of such amendments.

17. On 21 June 1995, Kenneth Green of Computa Tune Services wrote that they were confirming that they agreed to the changes in the Computa Tune franchisees agreements and clauses 13.4, 21.2 and 23.2.4 had now been amended. They also confirmed that from that date all new contracts would be adjusted accordingly and all existing franchisees would be written to advising them of the changes. No evidence was furnished to the Authority that the amendments have been made.

18. The Authority issued a statement of objections to the parties on 24 October 1995 indicating that it intended to refuse to issue a certificate to the notified agreement and setting out the reasons why it intended to do so. No response was received from them.

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

20. Section 3(1) of the Competition Act defines an undertaking as a ´person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of a service.' Computa Tune, the Whittakers, Computa Tune Services and Kenneth Green are engaged in the supply of services for gain, and they are undertakings. The master franchise agreement is an agreement between undertakings. It has effect within the State.

21. In its category licence for franchise agreements, the Authority has taken the view that franchise agreements as such are not restrictive of competition, nor are obligations in franchise agreements which are necessary to support the essential ingredients of the franchising relationship (para 13). It also stated that franchise agreements which contain obligations which go beyond certain parameters may offend against Section 4(1).

22. Under clause 13.4, the master franchisee must publish a recommended price list after consultation with the franchisor. While the Authority has accepted that the franchisor may recommend prices to the franchisee, provided that the franchisee is free to set its own prices (Article 5(e) of the category licence), it considers that clause 13.4 goes beyond this, and offends against Section 4(1). The Authority considers that any requirement to consult in respect of prices inhibits the pricing freedom of the franchisee, and offends against Section 4(1).

23. Under clause 21.2, the master franchisee agrees, during the term of the agreement, not to solicit any employee of the franchisor, and not to employ any person who, in the preceding 12 months has been an employee of the franchisor or other franchisees, without the permission of the franchisor. He must not, under clause 23.2.4, for one year after termination, interfere with or endeavour to entice away or employ any employee of the franchisor or of the business or of any of the franchisees. The Authority considers that restrictions upon the solicitation by a franchisee of the employees of the franchisor or other franchisees during the term of a franchise agreement, and for no more than the maximum duration of one year under the permitted post-termination non-compete clause, do not offend against Section 4(1). It considers, however, that these clauses, by preventing the employment of such persons at any time, restrict or distort competition, and offend against Section 4(1). In the Authority's opinion, franchisees, like any other business, should be entitled to employ whoever they choose, otherwise there would be an interference with competition.

24. Under clause 7.5, the master franchisee agrees not to disclose the system, knowhow or secret or confidential information to any unauthorised person. He agrees not to reveal the system to any unauthorised person (clause 11.5.1), and he must not, at any time after termination, reveal or use any of the intellectual property or the knowhow (clause 23.2.3). The Authority considers that such restrictions, if they were to be enforced after any of the information had come into the public domain, would adversely affect competition, and would offend against Section 4(1). A restriction on the franchisee using the knowhow after it has become generally known or easily accessible is not permitted under Article 5(d) of the category licence.

25. The master franchisee agrees, under clause 23.2.2, for one year after termination, not to divert or seek to divert any custom from the franchisor or any of the franchisees in the territory. Under Article 3.1 (c) of the category licence, a franchisee may be prevented from competing for up to one year after termination of the agreement, in the territory where it has exploited the franchise. The post-term non-compete clause in this case is confined to the franchise territory and therefore does not offend against Section 4(1).

26. The notified agreement does not conform with the provisions of the franchise category licence. The notification did not include a request for a licence and so the Authority did not consider the question of the grant of an individual licence for the agreement.

27. The Authority considers that Computa Tune, Andrew and Andrea Michele Whittaker, Computa Tune Services Ltd and Kenneth Green are undertakings, and that the master franchise agreement of 27 October 1992, notified on 14 June 1993 (notification no. CA/23/93), is an agreement between undertakings. The Authority considers that the agreement offends against Section 4(1) of the Competition Act, 1991. The Authority therefore refuses to issue a certificate in respect of the notified agreement. The notified agreement does not conform with the provisions of the franchise category licence.