Irish Competition Authority Decisions

1. A standard service contract between Delphi Software Ltd., (“Delphi”), and its customers was notified to the Authority on 23rd December, 1996. The notification requested a certificate under Section 4(4) of the Competition Act, 1991, or in the event of a refusal by the Authority to issue a certificate, a licence under section 4(2).

2. The notification concerns a standard contract between Delphi Software Ltd. and its customers which provides for the terms and conditions under which Delphi provides skilled personnel and other services to its customers and for the non-solicitation of employees and contractors of Delphi by its customers.

3. Delphi is an Irish incorporated company which is in the business of providing information technology personnel to its customers for an agreed fee for fixed or open-ended durations. Delphi sells its information technology services to the information technology departments of commercial organisations and to information technology suppliers.

5. As stated above Delphi’s services consist in the main of the supply of skilled personnel. Delphi’s turnover to year end march 1995 was £2.95m. Nearly all of this turnover arose within the state. At the time of notification Delphi estimated its share in the relevant market to be less than 5%.

6. The notified arrangements involve a standard contract setting out terms and conditions of trading as follows:

“1. The client hereby agrees not to solicit, recruit, hire or otherwise to retain the services of any Delphi employee or contractor except through Delphi. Should the client do so, as compensation for the cost to Delphi of its investment in and/or training of and/or loss of services of the said employee, or in the case of a contractor, as compensation for loss of the said contractor, the client undertakes to pay to Delphi a sum equal to six month’s daily fees for such employee or contractor.

2. Delphi also hereby undertakes not to solicit, recruit, hire or otherwise to retain the services of any employee of the client.

3. The foregoing terms and conditions (clauses 1 and 2 above) shall remain in force for the duration of the assignment and for a period of six months thereafter.”

(e) Submissions of the parties

4. The applicant states that the object and effect of the agreement is to ensure that Delphi’s clients agree not to solicit any of Delphi’s employees or contractors - except through Delphi.

5. Delphi states that the rationale for the non-solicitation clause, (clause 1), is to protect the investment Delphi has made in the recruitment and training of its personnel and the development of its customer base. Delphi’s core business is information technology consultancy and its major asset is its personnel.

6. Delphi submits that if the client was in a position to retain the employee or contractor then Delphi would effectively be ‘cut out’ after making the investment and arranging the consultancy contract.

7. Moreover, Delphi submits that the duration of these clauses is limited in scope to the duration of the assignment and six months thereafter. On these grounds Delphi contends that the agreement does not have as its object or effect the prevention, restriction or distortion of competition and it does not infringe Section 4(1) of the Act and therefore it should be granted a certificate.

8. Section 4(1) of the Competition Act, 1991, as amended, 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.”

9. Section 3(1) of the Competition Act, 1991, 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.” Delphi and its clients are therefore undertakings within the meaning of Section 3(1).

10. The Authority has decided to issue to a certificate in respect of another notification by Delphi, namely CA/32/96, Decision No.498, involving a standard Contract for Services agreement containing a non-compete clause which Delphi enters into with its sub-contractors. This certificate is consistent with precedents established by the Authority on similar cases. In Noel Murtagh/Apex Fire Ltd., Decision No. 20, the Authority took the following view:

“There is a difference between a restriction which seeks to prevent a former employee from entering the business and one which seeks only to protect the proprietary interests of the employer in his own business. The Authority believes that it is essential to employer/employee relationships that an individual should not be able to take up employment solely for the purpose of gaining an introduction to the employer’s customers in order to solicit such customers. A restriction on soliciting the former employer’s customer may be regarded as essential to employers’ proprietary interests and the goodwill of his business and a normal employer/employee relationship.”

In Decision No. 1., (Nallen & O’Toole), the Authority took the view that......

“The restraint must however be limited in terms of its duration, geographical coverage and subject matter to that which is necessary to secure the adequate transfer of the goodwill. Provided that this is the case then clearly the intention of such a restraint is not to restrict competition in the market in question.”

As the provision here is limited in scope to the duration of the assignment and six months thereafter the provision does not restrict competition.

11. The non-solicitation clause contained in the terms and conditions of trade here is parallel to the non-compete clause contained in the contract for services. The Authority is of the view that the non-solicitation clause contained in the service contract protects the proprietary interests of the applicant in its own business. The restraint here is identical to that contained in the contract for services. The Authority is therefore of the view that the standard contract of terms and conditions of trading between Delphi and its clients 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 on the basis of the facts in its possession, the standard service contract between Delphi Software Limited and its customers, setting out terms and conditions of trading notified on 23rd December, 1996 under Section 7 does not offend against Section 4(1) of the Competition Act.

For the Competition Authority

William Prasifka

Member

[ ] April 1998