Irish Competition Authority Decisions

1. Notification was made by Peter and Deirdre Coyne, on 25 April 1996 with a request for a certificate under Section 4 (4) of the Competition Act, 1991 or, in the event of refusal by the Competition Authority to issue a certificate, a licence under Section 4 (2) in respect of a business sale agreement relating to a restaurant known as “Fat Freddy’s” in Galway city.

2. The notification concerns an agreement relating to the sale of “Fat Freddy’s which operates as a pizza restaurant between Carne Co. Ltd and Christopher Terry as vendors and Peter and Deirdre Coyne as purchasers.

3. Christopher Terry opened the restaurant in 1987 and prior to the sale he had been operating the business through his trading company, Carne Co. Ltd., of which he owned 95% of the shares. The purchasers of the restaurant were Peter and Deirdre Coyne.

4. The notified business sale agreement dated 29 March 1996 provides for the purchase price apportioned between the premises, the goodwill, the fixtures fittings and equipment and the stock. Also notified as part of the arrangements was an indenture dated 29 March 1996 relating to the sale of the goodwill of Fat Freddy’s and an agreement of the same date relating to trade, trade name and non- solicitation. Clause 2 of this latter agreement inter alia provides the following:

- 1. The vendors jointly and severally covenant with the purchasers that they will not within the area of the county Borough of Galway for a period of two years and six months commencing on 6 March 1996 either on their own account or jointly or for any other person, firm or company, or as a servant, agent or officer of any person, firm or company, carry on or be in any way engaged or interested, either directly or indirectly, in the business of manufacturing and/or selling pizzas and associated pizza products.

- 3. The Vendors jointly and severally covenant with the Purchasers that they will not either jointly or separately on their own behalf or on behalf of any other person, firm or company, canvass, solicit or endeavour to entice away from the Purchasers either inside or directly outside “Fat Freddy’s”, Quay Street, Galway any person, firm or company who is or has been a regular customer of the business known as “Fat Freddy’s”, Quay Street, Galway. [The purchasers acknowledge that Christopher Terry trades as Cafe du Journal in premises adjoining “Fat Freddy’s”, Quay Street, Galway, retailing foods other than pizzas.]

5. Arguments submitted on behalf of the notifying party in support of a certificate were as follows:

In relation to the non-compete covenants, the vendors were independently legally advised and agreed to the duration. The reason for the period of two years and six months was because it would cover three summer seasons. The business peaked during the summer months during an influx of tourists to Galway city and both the vendors and purchasers considered that it was reasonable to provide for three summer seasons as a period when the vendors could not compete. They stated that the non-compete clause was narrowly restricted to a particular type of food. The vendors were not restricted at any time after completion of the sale from opening up any restaurant, provided the type of food sold set out in the non-compete clause was not on the menu. With regard to the non-solicit of customers covenant, one of the vendors had a cafe/restaurant type business immediately next door to the business being sold. He was a frequent presence on the premises of both adjoining businesses which he owned. One of the vendors continued to run the adjoining cafe/restaurant and it was considered fair by all the parties that he should not be allowed to continue to visit the business on sale and solicit customers for his adjoining business. The parties would consider it unfair if after, say, two years the vendor could come back into Fat Freddy’s and solicit customers for his immediately adjoining business.

6. Following the issue of a Statement of Objections by the Authority on 15th May 1997, Peter and Deirdre Coyne by way of a waiver dated 20th May 1997 indicated that they would not enforce the non-compete and non-solicit restrictions beyond a period of two years from 6th March 1996. The Authority considers tht this waiver meets the concerns expressed in its Statement of Objections.

7. The Authority considers that Christopher Terry, Carne Company Ltd and Peter and Deirdre Coyne, are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 as they are all engaged for gain in the restaurant business. The agreement is therefore an agreement between undertakings and has effect within the State.

8. In the Authority's view agreements for the sale of property per se do not come within the scope of Section 4(1) of the Competition Act, 1991. The non-compete clause 2 .1 of the agreement relating to trade, trade name and non-solicitation prevents the vendors from carrying on the business of manufacturing and/or selling pizzas and associated pizza products for a period of two years and six months within the area of the County Borough of Galway. In its first decision, Nallen/O’Toole [1] the Authority stated that it regarded some restrictions on the seller of a business as being essential in order to ensure the adequate transfer of the goodwill of the business. In its opinion, provided such restrictions were limited in terms of their duration, geographic coverage and subject matter to what was necessary to secure the transfer of the goodwill of the business, they would not be in breach of Section 4(1) of the Act. In GI Corporation / General Semiconductor Industries Inc [2] the Authority considered that a restriction of two years would generally be regarded as sufficient for the complete transfer of the goodwill of a business. In this case, the notifying party stated that the reason for the period of two years and six months was because it would cover three summer seasons and business peaks during the summer with the influx of tourists to Galway city. The Authority does not accept this argument and sees no justification for an extension beyond the two year period for the complete transfer of the goodwill of the business. The Authority took the view that the object of this clause is to prevent, restrict or distort competition and the clause therefore offends against Section 4(1) of the Act. The purchasers have now agreed not to enforce the non-compete provision beyond a period of two years from 6th March 1996 - i.e. from a date prior to the business sale, and have executed a waiver to that effect. In the Authority’s opinion this amended provision does not offend against Section 4(1) of the Competition Act.

9. The scope of the restriction relates to the business of manufacturing and/or selling pizzas and associated pizza products within the geographical area of the county Borough of Galway. The Authority considers that the application of the restriction to pizza and associated products within the county Borough of Galway is no more than is necessary to protect the goodwill of the business being sold. The Authority therefore considers that the subject matter and geographical scope of the restriction do not offend against Section 4(1) of the Act.

10. Clause 2.3 prohibits the vendors from canvassing soliciting or endeavouring to entice away customers of Fat Freddy’s from the purchasers either inside or directly outside the restaurant. This restriction is for an indefinite period. The Authority considers that an indefinite restriction on the soliciting of customers goes far beyond what is necessary in order to ensure the complete transfer of the goodwill of the business. It therefore takes the view that the object of this clause is to prevent, restrict or distort competition and the clause therefore offends against Section 4(1) of the Act. The purchasers have now agreed not to enforce the non-solicit provision beyond a period of two years from 6th March 1996 - i.e. from a date prior to the business sale, and have executed a waiver to that effect. In the Authority’s opinion this amended provision does not offend against Section 4(1) of the Competition Act.

11. In the Authority’s opinion, Christopher Terry, Carne Co. Ltd. and Peter and Deirdre Coyne are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the business sale agreement, the indenture relating to goodwill and the agreement relating to trade, trade name and non-solicitation notified under Section 7 on 25 April, 1996 (Notification No. CA/18/96) is an agreement between undertakings. In the opinion of the Authority the notified agreement, as amended by way of the waiver dated 20th March 1997, does not offend against Section 4(1) of the Competition Act, 1991.

12. 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 business sale agreement dated 29 March 1996 between Christopher Terry and Carne Co. Ltd. as vendors and Peter and Deirdre Coyne as purchasers, notified under Section 7 on 25 April 1996 (notification no. CA/18/96), as amended by way of the waiver dated 20th March 1997, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority.

Isolde Goggin

Member

12 June 1997.

[1] Competition Authority Decision No. 1, 2 April, 1992.

[2] Competition Authority Decision No. 10, 23 October, 1992.