Irish Competition Authority Decisions

1. Notification was made of an agreement between Snowcream Ltd and Mr John Greene 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 to issue a certificate, a licence under Section 4(2) of the Act.

2. The notified agreement provides for the appointment by Snowcream of Mr John Greene, of Goresbridge, Co. Kilkenny, as a distributor of its liquid milk and other products to doorstep customers and certain smaller retail outlets in a specified area known as the round.

3. Snowcream is involved in the business of purchasing, processing and selling milk and related products in the counties of Waterford, Wexford, Wicklow and Kilkenny. It is a member of the group of companies controlled by Waterford Foods plc, of Dungarvan, Co. Waterford. Another company in the group, Premier Dairies, is also involved in the business of liquid milk distribution, principally in Dublin and surrounding areas. (Premier's distribution agreements are the subject of Decision No. 461 of 21 March 1996). Mr Greene is an independent contractor who undertakes doorstep delivery of Snowcream products to customers in the area of Bagenalstown, Co. Carlow.

4. The main product involved is liquid milk, which is sold to doorstep consumers, and to retail outlets. Among the other products involved are buttermilk and cream. The service involved in the agreement is the doorstep delivery of these products to consumers. The relevant geographical area is that in which the service is being provided as described in the agreement. Within this area, these same products are also distributed by Snowcream to retail outlets for resale to consumers. Such outlets also compete in the relevant market.

5. The agreement of 17 October 1991 between Snowcream and Mr John Greene of Co. Kilkenny, refers to Mr Greene as 'the franchisee'. It states that the sale and distribution of the products by Snowcream in the round had been operated by the franchisee, and that the franchisee was entitled to the goodwill in the round. Snowcream had agreed to purchase the goodwill of the round, and to appoint the franchisee as an independent distributor and seller of the products in the round. The franchisee agrees to purchase exclusively from Snowcream, at a price notified by Snowcream after consultation with the National Milk Distributors Association (clause 2.1). The franchisee shall not alter, remove or tamper with Snowcream's marks or numbers (clause 2.2). During the agreement, or for 12 months after its termination, the franchisee may not deal in competing products in the round (clause 2.3). No employee of the franchisee may deal in competing products in the round for 12 months after the termination of the agreement or termination of the contract of employment (clause 2.4). The franchisee agrees to maintain and increase sales (clause 2.5.1), and not to sell other products without approval (clause 2.5.2). The franchisee agrees not to resell the products at a price in excess of that specified by law (clause 2.6). The franchisee shall provide and maintain a suitable vehicle, and use it solely for the delivery of Snowcream products, and shall cooperate fully in the introduction of new technology, including computerisation of accounts (clause 2.7). The franchisee shall keep full records of customers accounts and produce them to Snowcream on demand (clause 2.8). He agrees to cooperate in marketing and promoting the products, including the delivery of promotional materials and gifts (clause 2.9). The franchisee agrees to deliver products to wholesale customers invoiced by Snowcream at a fee to be determined after consultation with the National Milk Distributors Association (clause 2.10). The franchisee may nominate a successor to operate the round (clause 5.1.1), who may not necessarily be acceptable to Snowcream (clause 5.1.2). The agreement is stated not to constitute a partnership or agency (clause 6.1). The agreement continues in force until it has been terminated by either party in accordance with specified provisions (clause 1.3). It may be terminated on 30 days written notice by either party after the first 18 months have expired (clause 4.1.6).

6. In its initial submission, Snowcream stated that the notified arrangement involved a series of agreements with milkmen. The essential features and the main provisions of the agreements were identical, and the arrangement was being notified as a standard arrangement. Slight differences arose in individual cases because of special circumstances relevant to individual milkmen and their relationship with Snowcream. Not all the agreements had been reduced to writing. In a letter of 12 October 1992, Snowcream stated that each individual agreement contained standard provisions, in respect of which a certificate or licence was requested. The arrangement was being notified as a standard arrangement as described, and the agreements included in the notification were merely examples of the implementation of the standard arrangement in individual situations.

7. In support of its request for a certificate, Snowcream presented the following arguments:

'It is submitted that the likely effect of the arrangement on competition in the State is negligible. Given that Section 4(1) of the Act was adopted by analogy to Article 85(1) of the EEC Treaty, it is submitted that the intended ambit of Section 4(1) should be understood in the light of the EC Commission's interpretation of the scope of Article 85(1) and, in particular, the EC Commission's Notice of 3 September 1986 on agreements of minor importance which do not fall under Article 85(1) (OJ C231 of 12 September 1986, p.2). In that Notice the EC Commission states its opinion (paragraph 1.2) that: " ... agreements whose effects on trade between Member States or on competition are negligible do not fall under the ban on restrictive agreements contained in Article 85(1). Only those agreements are prohibited which have an appreciable impact on market conditions, in that they appreciably alter the market position, in other words the sales or supply possibilities, of third undertakings and of users".

'It is submitted that, by analogy with the Notice, Section 4(1) cannot be regarded as applying to the arrangement concerning the appointment of individual Milkmen, because the arrangement does not have an appreciable impact on market conditions or on the sales or supply possibilities of third parties and consumers. The appointment of each individual Milkman concerns only a geographically limited area comprising approximately three hundred to four hundred households. In addition, Snowcream's sales of liquid milk for domestic consumption do not account for more than five per cent of the total market in the State (c.f. EC Commission Notice paragraph 7). As the effects of the arrangement on competition in the State are negligible, it is submitted that the arrangement does not fall within the prohibition contained in Section 4(1). Snowcream requests the Authority to issue a certificate on this basis.'

8. Snowcream also submitted arguments in support of its request for a licence which are not considered in this decision.

9. In response to questions from the Authority, Snowcream, in a letter dated 10 September 1993, stated that the agreements were for the purchase and resale of goods. In response to further questions, Snowcream responded as follows, in a letter dated 4 August 1995, in relation to retail prices:

‘Snowcreams milkmen are free to set their own resale prices. Resale prices are not set by Snowcream, either pursuant to any of the notified agreements or under any separate agreement or understanding. Where notified agreements refer to an obligation not to resell products at a price in excess of that permitted by law, this obligation only arises where there is in effect a legislative measure setting maximum prices for the relevant products. Where there are no such legislative measures in effect, the relevant clauses in the agreement are redundant and have no effect whatever. In particular, the relevant clauses do not operate to restrict the milkmens freedom to set resale prices.

Snowcream does provide its milkmen with lists of recommended prices. (These recommended prices are usually revised when the prices charged to distributors by Snowcream are altered). However, Snowcream does not seek to ensure that milkmen adhere to recommended prices. Snowcream does not intervene in any way when milkmen depart from recommended prices.’

10. In the same letter, in relation to distributors territories, Snowcream stated that:

‘Each milkman is allocated a specific area defined as the Round. However, these areas do not have strict boundaries as they are usually referred to by reference to the area around, or environs of, a particular town or towns. To a certain extent, the areas allocated to milkmen may overlap with the areas allotted to other milkmen.

Snowcream does not, either under any of the notified agreements or under any other agreement or understanding, prevent any milkman from supplying any customer outside his Round. It is therefore open to a customer to seek to deal with any milkman in a Round other than the Round in which that customers residence is located.’

11. Following the issue of a statement of objections, Snowcream proposed to amend the notified agreement as follows:

(a) terms in respect to the purchase price , margins and delivery fees would be negotiated directly with Mr Greene and not with the National Milk Distributors Association;

(b) confirmed that Mr Greene was free to set his own resale prices and would be informed accordingly.

12. 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'.

13. 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.' Snowcream is a corporate body engaged for gain in the supply and distribution of liquid milk and other products, and Mr Greene is engaged in the distribution of goods for gain. They are therefore undertakings, and the agreement is an agreement between undertakings. The agreement has effect within the State.

14. Snowcream notified the agreement with Mr Greene, and other agreements, as a standard agreement. It claimed that the agreements notified were merely examples of the implementation of the standard arrangement in individual situations. Under Section 7 of the Competition Act, however, only an agreement can be notified, and the Authority may only certify or licence a specific agreement. The Act does not recognise examples of the implementation of the standard arrangement in individual situations. This decision is therefore confined only to the agreement between Snowcream and Mr Greene which has been notified.

15. It is clear from the agreement that Mr Greene is appointed as the sole distributor of Snowcream products for door-to-door delivery in the area encompassed by the Round. He is also required to purchase exclusively from Snowcream. Snowcream products are also distributed to retail outlets for resale to consumers in the territory. The agreement with Mr Greene is not of a kind which is contemplated in the category licence for exclusive distribution agreements (Decision No. 144 of 5 November 1993), since the goods are supplied to other resellers within the territory.

16. There has been considerable debate in the economics literature regarding restrictions in vertical agreements such as distribution agreements. On the one hand such agreements may, in certain circumstances, be anti-competitive. On the other hand they may simply constitute a logical and efficient, and in some instances the only, mechanism by which the products concerned can be distributed, in which case they cannot be considered to have either the object or effect of preventing, restricting or distorting competition. An examination of the facts in each case is necessary to establish whether or not a distribution agreement such as that notified by Snowcream offends against Section 4(1). The Authority considers that the arrangements are designed to enhance the efficiency of liquid milk distribution, and to ensure a comprehensive and timely doorstep delivery system. The attractiveness of doorstep delivery is enhanced by the provision of rapid early morning delivery. Although the agreement prevents other distributors from engaging in the doorstep delivery of Snowcream products, customers can obtain them from retail outlets within the territory. There may also be doorstep delivery of competing products. The Authority concludes that, in this instance, the Snowcream distribution arrangements do not offend against Section 4(1), although they contain certain clauses which do offend.

17. For twelve months after termination of the agreement, the distributor may not deal in competing products in the round (clause 2.3). The Authority has indicated that post-term non-compete obligations in exclusive distribution and other distribution agreements generally offend against Section 4(1). The distributor may nominate a successor to operate the round, under clause 5.1.1, and the distributor, by implication, may sell the round to another person. The Authority considers that these features represent arrangements for the sale of a business, and that clause 2.3 represents a non-compete obligation following the sale of a business.

18. The Authority has accepted non-compete clauses in the case of agreements for the sale of a business as not offending against Section 4(1), provided that they are limited in scope and duration to what is necessary to transfer the goodwill of the business. While the Authority has indicated that a period of two years after the sale of a business is generally acceptable for the duration of a non-compete clause, it has stated in previous decisions that the length of period which is necessary would vary, and that it would depend upon such factors as the frequency of purchase of the products in question. Given that milk is delivered to the customer on a daily basis, the Authority considers that the 12-month period specified in clause 2.3 of the agreement is the maximum that could be justified for a non-compete clause after the sale of such a business, and that this clause does not offend against Section 4(1).

19. Under clause 2.4, no employee of the distributor may deal in competing products in the round for 12 months after the termination of the agreement or termination of the contract of employment. The Authority considers that the object of this clause is to protect the goodwill of Snowcream in the milk round. It considers that, even if Mr Greene had an employee who was prevented from dealing in competing products during the period specified, this would have no perceptible effect upon competition in the area served by Mr Greene. The clause does not, therefore, offend against Section 4(1), in the opinion of the Authority.

20. Under clause 2.6, the distributor agrees not to resell the products at a price in excess of that specified by law. There is no Maximum Prices Order for milk in existence at present. The Authority does not consider that a requirement not to do something illegal offends against Section 4(1). There is no other reference to resale prices in the agreement and Snowcream has stated that the distributor is free to set resale prices, although it recommends resale prices. Snowcream has submitted no evidence that the distributor has been informed of this freedom. As stated in the category licence for exclusive distribution agreements (Decision No. 144 of 5 November 1993, para 22), the Authority does not regard the recommending of resale prices by a supplier as offending against Section 4(1), provided, inter alia , that the distributor is informed that he is free to set his own prices. Since there was no evidence that Snowcream had informed the distributor of this freedom, the Authority considered that the arrangements offended against Section 4(1).

21. The distributor agrees to purchase at a price notified by Snowcream after consultation with the National Milk Distributors Association (clause 2.1). He also agrees to deliver to wholesale customers at a fee to be determined after consultation with the National Milk Distributors Association (clause 2.10). The NMDA is an association which represents its distributor members, and which engages in negotiations concerning prices and margins with Snowcream (and it is believed with other suppliers). The distributors are independent undertakings which should separately negotiate on these matters with Snowcream, and not combine to establish the prices at which each of them purchases from Snowcream. They are not engaged in collective purchasing, whereby their combined purchasing power could be used to secure lower prices which could be passed on to customers. While distributors are allocated certain territories, Snowcream has stated that the areas may overlap (See para 11), and thus, in certain cases, competitors in the same area have agreed to purchase at the same price from Snowcream. This would tend to facilitate downstream collusion, especially since Snowcream recommends resale prices, and the agreed purchase price is the recommended resale price less the agreed margin. This arrangement also means that each distributor has detailed information about the purchase prices of the others. Customers of one distributor could easily ascertain prices charged by another roundsman and, if these were lower, put pressure on their distributor for reduced prices. This outcome would be unlikely to arise in this case since prices charged by each distributor are likely to be the same, thus lessening any pressure to reduce prices. There would also appear to be an agreed common level of fees for wholesale deliveries. The Authority considered that an agreement between resellers in these circumstances regarding common purchase prices, margins and fees, adversely affected competition, and offended against Section 4(1). While Snowcream is free to set its own wholesale price or to negotiate with individual distributors, it was not acceptable that such a price should be set out on the basis of any negotiations with the NMDA.

22. Given the amendments to the agreement, which clarifies the right of Mr Greene to set his own resale prices and which also sets out that wholesale prices will be set by negotiation with Mr Greene and not NMDA, the Authority considers that the amended agreement with Mr Greene no longer offends against Section 4(1) of the Act.

24. Snowcream and Mr. Greene are engaged in the supply and distribution of liquid milk, and they are undertakings within the meaning of the Competition Act. The notified agreement is an agreement between undertakings. The Authority considers that the agreement notified on 30 September 1992 (notification no. CA/680/92E), offended against Section 4(1) of the Competition Act, 1991, and that it did did not satisfy the requirements for a licence under Section 4(2) of the Competition Act. The Authority considers, however, that the agreement, as amended, does not offend against Section 4(1) of the Act.

25. 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 Snowcream distributor agreement (notification no. CA/680/92E), notified on 30 September 1992 under Section 7, as amended by the letter of 19 March 1997 from Snowcream to Mr John Greene, does not offend against Section 4(1) of the Competition Act, 1991.

This certificate shall also apply in respect of the Snowcream distributor agreement with any other party where it has been amended to accord with the agreement with Mr Greene.