Irish Competition Authority Decisions

1. Notification was made to the Competition Authority on 30 November 1993 of the standard form loan agreement for lubrication bay equipment by Irish Shell Ltd (Shell) with a request for a certificate under Section 4(4) of the Competition Act, 1991, or, in the event of a refusal by the Competition Authority to issue a certificate, a licence under Section 4(2).

2. This notification relates to the standard form agreement concerning the loan of lubrication bay equipment by Shell to certain resellers of lubricating oils.

3. Shell is an Irish registered company engaged in the import, supply and distribution of various petroleum products. Its ultimate parent companies are Royal Dutch Petroleum Company and the Shell Transport and Trading Company Ltd. The Shell retail motor fuel network consists of a number of company-owned outlets and a number of dealer-owned outlets operating under the Shell brand. In addition, lubricating products are supplied to a number of other outlets, and to other customers.

4. The buyers are garages, workshops, car rental depots, industrial sites and other locations which are involved in operations requiring the product, e.g. the servicing of cars. Shell stated that a significant number of outlets had the supplier's equipment.

5. The product with which the notified agreement is concerned consists of lubricants, that is any oil based product which is used for the lubricating of a motor vehicle. While lubricating oils are to some extent interchangeable, the product is usually differentiated as follows:

(a) top engine oils;

(b) other multigrades;

(c) monogrades; and

(d) two-stroke oils.

Top engine oils appear to be the largest category of sales.

6. The characteristics of the market are described at length in the Authority's decision in respect of similar Burmah Castrol agreements. (Decision No. 361, paras 6 to 12).

7. Since outlets retailing lubricants are located throughout the State, the appropriate geographical market in this case is the State.

8. The standard agreement is between Shell and the ´user'. Shell agrees to provide and deliver specified items of lubrication bay equipment, of a stated value, and to make a contribution towards the installation charges; the user agrees to pay a contribution towards the installation costs (clause 1). For as long as the agreement remains in effect, the user agrees to confine purchases of automotive lubricants to be stocked in or dispensed through the equipment to brands marketed by Shell, and to place orders in as large quantities as possible and to give notice when delivery is required (clause 2). The equipment remains the property of Shell, who are allowed to put nameplates on it, but it will be maintained by the user, except that labour charges will be borne by Shell when carried out by its appointed agents, for a specified number of years or to the date of earlier termination (clause 3). Upon expiry or earlier termination, the user must return the equipment to Shell, or if this is not possible on earlier termination, the user must pay to Shell one tenth of the sum expended by Shell for each unexpired year of the agreement (clause 3). The equipment may be inspected by Shell (clause 4). Shell may terminate the agreement in specified circumstances (clause 9). The user may also terminate the agreement on giving not less than three months' notice, and he has the option to either return the equipment or purchase it at a price calculated in accordance with clause 3 (clause 10). Shell stated that the agreement was normally for a period of ten years.

9. In its initial submission, Shell stated that it believed that there were 50 to 60 sellers of lubricants on the Irish market, with 16 or so leading sellers. Some of the highest market shares were held by those companies outside the broader motor fuel sector, and the motor fuel companies had relatively small shares. It estimated that there were about 1,500 outlets using this type of product, with estimated sales in 1992 of 5 million litres and a value of £5m at wholesale prices. Shell maintained that there were no substantial barriers to suppliers entering the market. There was no need to establish brand recognition because many motorists did not know which brand of lubricant was used by garages. The product could be imported easily or sourced locally, and the equipment could be sourced locally. Many brands of oil, while not identical, were interchangeable. The equipment could be supplied by others, and was interchangeable between brands of oil. Shell stated that it was hoped that the user would use its products in the equipment as much as possible. In practice, products of other companies could be and were being used.

10. In support of its request for a certificate, Shell stated that the agreement facilitated the establishment of more competition in the relevant market by allowing outlets to have access to relatively expensive equipment. There was no guarantee that its products would be used, and Shell had never withdrawn the equipment from a user who had not used the applicant's products. Shell claimed that the provision of the equipment did not tie-in the user with its products, but, somewhat perversely, it encouraged entry by other companies which might decide against spending money on the provision of equipment, and concentrate solely on the supply of the products. It believed that the agreement did not appreciably affect trade in the State.

11. In support of its request for a licence, Shell stated that, insofar as it provided for the supply of the product at the sites for a period of years, the agreement contributed to the continuous distribution of the product and enhanced distribution in the market as a whole. The equipment was expensive, but the agreement allowed for its dissemination in the market generally. Provision of the equipment saved the user a great deal of money, and facilitated the operation of many small businesses in the State. Shell maintained that the EC had been developing a policy on small and medium-sized enterprises generally ´and thus it would be innocuous if the EC's or Ireland' s competition policy was harsh on such businesses.' The Authority should be anxious to ensure that its application of the competition rules did not unduly restrict the development and maintenance of an Irish small and medium-sized business sector. In respect of the restriction on use of the equipment, Shell maintained that it would appear inequitable for it to provide equipment to the user and then for the users to be able to store products from competitors. Shell submitted that the requirements imposed were not indispensable given the nature of the agreement. A licence was sought for the duration of the agreement and for a period of five years. If the Authority only granted a licence for the duration of the agreement then the agreement would never actually work in practice because Shell would only conclude agreements after the licence had been issued.

12. Following the decisions relating to Burmah Castrol lubricating oil equipment agreements (Decisions Nos. 361, 380 and 407), the Authority wrote to Shell that it proposed to take a similar view regarding the notified Shell agreement. It stated that, should the agreement be amended so that it had a maximum duration of five years, the Authority would be able to grant a licence to the amended agreement. On 31 October 1995, Shell submitted a proposed amended agreement, in which the duration of the agreement, in clause 3, would be five years. Clause 3 was also to be amended to provide that, where it was not possible to return the equipment on earlier termination, the user had to pay Shell one fifth of the sum expended by Shell for each unexpired year of the agreement. Shell submitted an amended agreement made with Murphy & Gunn Ltd of Tallaght, Co Dublin, dated 22 November 1995, and stated that it was in the process of concluding similar agreements with other users.

13. Section 4(1) of the Competition Act, 1991, prohibits and renders void all agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State.

14. Shell and the resellers who are party to the notified standard agreement are all engaged in the supply and distribution of lubricating oils for gain, among other activities, and they are therefore ´undertakings' within the meaning of Section 3(1) of the Act. The notified agreement is an agreement between undertakings. The relevant product market is that of lubricating oils for resale, and particularly that part which is supplied to garages, workshops, etc. The relevant geographical market is the State.

15. The main feature of the Shell lubrication bay equipment loan agreement is that, for as long as the agreement remains in effect, the user agrees to confine purchases of automotive lubricants to be stocked in or dispensed through the equipment to brands marketed by Shell, and that the usual duration of the agreement was ten years.

16. The equipment which is the subject of the agreement is owned by Shell, is loaned to the user, and may be reclaimed by Shell in certain circumstances. Since the equipment is owned by Shell, it has a significant proprietorial interest in the equipment. The Authority quite clearly accepts that Section 4(1) does not call into question the existence of the property right. The exercise of a property right, however may be anti-competitive in nature, and may therefore fall within the scope of the activity prohibited by Section 4(1).

17. The essential feature of the arrangements under review is that Shell loans equipment to another party, in return for which the latter agrees to use the equipment exclusively for Shell products. There can be no general presumption under the Competition Act either in favour or against exclusive use of equipment obligations, and each case must be examined on its merits in the light of the prevailing economic circumstances. An obligation on a reseller to use equipment supplied by the supplier only for the storage and sale of the supplier's goods would not, in the view of the Authority, per se offend against Section 4(1), unless it had the effect of ensuring that only the goods of that supplier could be sold by the reseller. The use of equipment for the goods of a competitor results in the latter getting a ´free ride' in, and a competitive advantage from, the use of equipment for which the competitor did not pay. If exclusive use of the equipment, however, meant, in a particular set of circumstances, that the goods of only one supplier could be handled by the reseller, this would amount to exclusive purchasing. The reseller could not purchase competing goods from other suppliers, nor could competitors sell to that reseller.

18. In the present case, the requirement that the equipment only be used for the dispensing of Shell products, while it means that it cannot be used for the products of competitors, does not necessarily have the object or effect that the user of the equipment must purchase lubricating oils exclusively from Shell. While in many workshops there would be space for the installation of equipment for storing and dispensing the oil of one or more competitors, equally, in many instances there would not. What space there is may be better used for other commercial purposes. The existing equipment may be geared to the outlet's total requirements, and it cannot be expected that sales of lubricants would increase if additional equipment were installed. While workshops could return the equipment, they face strong disincentives to doing so. It would be possible to stock the products of competitors which are supplied in small containers, but this might not provide effective competition to oil from dispensing equipment, since it would be less convenient and would be more costly. In these circumstances, the Authority considers that the exclusive use of equipment requirement would in many cases represent an exclusive purchasing requirement. While a single agreement of this type would have no impact on competition in the relevant market, a network of such agreements, as in this case, added to a network of similar agreements made by at least one other oil supplier (Burmah Castrol), would restrict competition to some degree. The standard agreement to supply equipment provided it is used exclusively for Shell lubricants, therefore, offends against Section 4(1).

19. 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 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'.

20. In the opinion of the Authority, the equipment loan agreement as notified did not fulfil the conditions necessary for the grant of a licence under Section 4(2) of the Act. The amended agreement, involving a reduction in the duration of the agreement from ten years to five, does, in the Authority's view, satisfy the conditions of Section 4(2).

21. In the case of the notified agreement, the Authority does not consider that there are any benefits in the way of economies of bulk distribution from an equipment exclusivity requirement, since the agreement relates to only a small proportion of Shell's lubricants for resale and deliveries appear to be in relatively small volumes. There would appear to be no, or only a minimal, reduction in distribution costs which could be shared with consumers. The Authority accepts that in some cases high quality equipment has been supplied, and that high quality technical services are provided by Shell, which promote technical progress, and that these benefit consumers. It is likely that the particular equipment would not have been installed in the workshops unless exclusive use of the equipment had been a requirement. Shell would have been unlikely to provide equipment if it could have been used freely for competitive products. In this respect, exclusive use for a period of time can be regarded as indispensable to securing the benefits from the supply of the equipment, which may be shared fairly with consumers.

22. The agreement has a foreclosure effect against new suppliers, since it represents exclusive purchasing. Because the agreement had a term of ten years, the Authority considered that this presented the danger of long-term foreclosure of the market to competitors' products. It applied in a large number of cases, and could not be regarded as insignificant in its effects. An exclusive use requirement for this length of time would afford the possibility of eliminating competition in respect of a substantial part of the products in question, and could not be regarded as indispensable. The notified agreement did not, therefore, satisfy all the conditions of Section 4(2).

23. Shell has reduced the period of the agreement, and thus the term of exclusive use of equipment, from ten years to five years. In addition, under clause 10, the user is able at any time to terminate the agreement on giving not less than three months' notice, and he must then return the equipment or purchase it at a price calculated in accordance with clause 3. On giving the required notice before the end of the term, therefore, the user has the option of returning the equipment or of purchasing it at its discounted value. If the equipment is retained by the user, it can be used for any lubricants of the workshop's choosing. As in the case of the Burmah equipment loan agreements (Decision No. 407), the Authority considers therefore that, as the period of the exclusive use of equipment requirement is limited to the period of the agreements, which have a maximum duration of five years, and the user has an option to purchase the equipment at any time, this does not afford the possibility of eliminating competition to a substantial degree. Since all the conditions of Section 4(2) have been fulfilled, a licence can be granted for the agreement with Murphy & Gunn Ltd, dated 22 November 1995.

24. Shell and the users who are party to the standard form lubrication bay equipment loan agreement are undertakings within the meaning of the Competition Act. The notified agreement is an agreement between undertakings, and it operates within the State. The Authority considers that the notified agreement offended against Section 4(1) of the Competition Act, and that it did not satisfy the conditions set out in Section 4(2) of the Act. The Authority considers, however, that the amended agreement with Murphy & Gunn Ltd, dated 22 November 1995, offends against Section 4(1) of the Act, but that it satisfies the requirements of Section 4(2), and it grants a licence to the amended agreement and to other agreements which are amended in the same way. The Authority considers that, given the five year duration of the agreements, the licence should be granted for a period of ten years from the date when the agreement was amended, to expire on 21 November 2005. The Authority does not consider it necessary to attach any conditions to the licence.

25. The Authority grants the following licence:

The Competition Authority grants a licence under Section 4(2) of the Competition Act, 1991 to the Irish Shell Ltd standard form lubrication bay equipment loan agreement (notification no. CA/65/93) notified under Section 7 on 30 November 1993, as amended by the agreement with Murphy & Gunn Ltd, dated 22 November 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 22 November 1995 to 21 November 2005.

The licence shall also apply in respect of the Shell equipment loan agreement with any other party where it has been amended to accord with the agreement with Murphy & Gunn Ltd.