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Dalgety Agriculture Ltd / Spillers Ltd/ Thomas Hill & Company Ltd. [1998] IECA 502 (16th June, 1998)
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[1998] IECA 502
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Dalgety Agriculture Ltd / Spillers Ltd/ Thomas Hill & Company Ltd. [1998] IECA 502 (16th June, 1998)
Competition
Authority Decision of 16 June 1998 relating to a proceeding under Section 4 of
the Competition Act, 1991.
Notification
No. CA/516/92E
Dalgety
Agriculture Ltd/Spillers Ltd/Thomas Hill & Company Ltd.
Decision
No 502
Introduction
1.
Notification was made by Dalgety plc 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 by the Competition Authority to grant a certificate, a licence under
Section 4(2) in respect of a Know-How Licensing Agreement.
The
Facts
(a)
Subject of the Notification
2.
The notification concerns a Know-How Licensing Agreement dated 5 June 1989
between Dalgety Agriculture Limited and Thomas Hill & Company Limited.
Dalgety plc is the ultimate parent of both Dalgety Agriculture Limited
(“Dalgety”) and Spillers Limited, (“Spillers”).
(b) The Parties Involved
3.
The principal activities of Dalgety plc are the manufacture and distribution of
animal feed supplies. Dalgety plc which has its registered office at 100
George Street, London, W1H 5RH is incorporated in Great Britain and is the
ultimate parent company of Dalgety & Spillers. Spillers is principally an
investment
holding company. Spillers has its registered office at 100 George Street,
London, W1H 5RH. Dalgety Agriculture Limited has its registered office at 180
Aztec West, Almondsbury, Bristol, Avon, BS12 5HQ. It is Spillers trading
division, Spillers Horse and Speciality Feeds, which performs the agreement.
Since the agreement was entered into, Spillers Horse and Speciality Feeds has
become a trading division of Dalgety Agriculture Ltd
[1].
4.
Thomas Hill & Co. is an Irish limited company which has its registered
office at Oliver Plunkett Street, Clonakilty, Co. Cork. Hill’s principal
activities are the manufacture and supply of animal feedstuffs.
(c)
The Products and the Markets
5.
The parties claimed that the contract products are sold in the market for
horsefeed. Sellers in the relevant market are feed merchants, wholesalers and
retailers and the buyers in the relevant market are horse owners.
6.
The parties claimed that the territory (the “Territory”) for the
purposes of the agreements is defined as the counties of Cork, Kerry, Limerick,
Waterford and Tipperary (except agreed accounts) and agreed accounts in Clare
though horsefeed is, in general, sold throughout Ireland. The parties claimed
that principal competitors of Hill in relation to the sale of horsefeed in the
Territory are W. Connolly & Sons Limited and Waterford Co-Op. These
competitors are also the principal suppliers of horsefeed throughout the State.
7.
The parties claimed that there are
substitute
products for horsefeed such as straight cereals and grass. Straight cereals
are cereals grown in fields, which are taken straight from the fields and not
processed in any way. Oats, wheat and barley are examples of cereals used in
horsefeed. Dalgety have not entered into other agreements of this kind in
relation to horsefeed products in Ireland. Dalgety and Spillers are not aware
of any relevant market studies.
8.
The Authority considers that the relevant market is the market for horsefeed in
the State. In this market demand originates in the farming sector and in the
equine farms in particular. In terms of demand substitutes there are the
horsefeed products of other producers. In addition, there are other substitute
products for horsefeed such as straight cereals and grass. In the
Authority’s view there is considerable opportunity for substitution in
supply within the animal feed sector generally. The European Commission found
this to be the case in
Dalgety/Quaker
Oats
[IV/M.554].
(d)
Structure of the Market
9.
The
parties claimed that the Irish market for compound horsefeed is estimated to be
in the region of 25,000 tonnes and to have an estimated value of IR£5m in
the State or IR£200 per tonne. Hill’s turnover in the Territory is
estimated to be in the region of [ ]. Spillers Horse & Speciality Feeds
total turnover throughout the State in 1993 was estimated to be in excess of [
]. The estimated market share of Spillers in relation to sales of the products
in the State was approximately [ ] in 1993. The estimated market share of
Hill in relation to sales of the products in the State was approximately [ ]
in 1993.
(e)
The Notified Arrangement
10.
This notification concerns a Know-How Licensing Agreement between Dalgety
Agriculture Limited and Hill. There is an also a Trade Mark Licensing Agreement
between Spillers and Hill which is the subject of Decision No. 503. These two
agreements provide for the licensing by Dalgety to Hill of certain know-how
(the “Know-How”) and marketing information to be used by Hill
pursuant to the Know-How Licensing Agreement in order to manufacture horsefeed
(the Products) in the Territory. The Trade Mark Licensing agreement provides
for the licensing by Spillers to Hill of certain trade marks (“the Trade
Marks”) for the purposes of selling the Products in the Territory.
11.
Neither Dalgety, Spillers nor Hill have any substantial interests falling short
of control (more than 25% but less than 50%) in any other company competing in
a market affected by the notified agreements nor does any other such company
have a substantial interest in either Dalgety, Spillers or Hill.
12.
Under Clause 2.1, Dalgety appoints Hill as its sole licensee for the Territory
and authorises Hill to use the “Technical Information” and
“Marketing Information” in the manufacture and marketing of the
Products in the Territory. Clauses 3.4, 3.5.1, and 5.3 require Hill to comply
with formulations for the Products, quality control procedures and standards
laid down by Dalgety in relation to the manufacture, packaging and advertising
of the Products. In Clause 5.2 Hill undertakes that all Products manufactured
by Hill shall be sold in bags or containers bearing the Trade Marks and shall
bear the legend that the Products are manufactured by Hill under licence from
Spillers and Dalgety.
13.
Clause 6.3 provides that during the periods of the Know-How Agreement, Hill
shall not (a) within the territory sell any horsefeed other than the Products
(this provision was subsequently deleted from the Agreement) (b) outside the
territory, and in relation to the Products, seek customers, establish any
branch and maintain any distribution depot.
14.
Clause 6.3 further provided that the Technical Information licensed shall be
used only for the purpose of production and sale of the Products under the
Trade Marks in accordance with the terms of the Know-How Licensing Agreement
and the Trade Mark Licensing Agreement.
15.
Clause 6.4 provided that during the period of the Know-How Licence Agreement
Dalgety and Spillers would not sell within the Territory horsefeed to customers
other than Hill under the Trade Marks. Clauses 9.1 and 9.2 outlined
confidentiality obligations to be observed by Hill both during and after the
termination of the Know-How Licensing Agreement. Clause 14.2 provided that the
rights and obligations conferred by the Know-How Licensing Agreement shall not
be transferable or assignable by one party without the written consent of the
other party, such consent shall not be unreasonably refused.
(f)
Submissions by the Notifying Party
16.
The parties stated that they did not believe that the agreement, or any
aspects of the agreement, restrict the parties in their freedom to take
independent commercial decisions. Without prejudice to the foregoing the
parties drew the Authority’s attention to some provisions of the
agreement.
Arguments
in Support of the Grant of a Certificate.
17.
The parties claimed that, in general, neither the provisions noted above nor
the agreement had as their object or effect the prevention, restriction or
distortion of competition in trade in any goods or services in the State or any
part of the State within the meaning of
Section 4(1) of the
Competition Act.
The parties submitted that the Know-How licensing agreement does not constitute
restrictions on competition within the meaning of
Section 4(1) of
the Act and
that, on this basis, the agreement does not offend against
Section 4(1) so that
the Competition Authority should grant a certificate in respect of the agreement.
18.
In
particular, the overall effect of the agreement is to provide for the licensing
by Dalgety and Spillers of proprietary Know-How, Marketing Information and
Trade Marks to Hill to enable Hill to use this Know-How, Marketing Information
and the Trade Marks to produce and market the Products in the Territory,
thereby introducing new high quality products into a market which is already
highly competitive. The provisions noted above are necessary to ensure the
ultimate objective and are reasonable in their terms. The partied submitted
that they therefore believe that the said provisions do not infringe
Section
4(1) of the
Competition Act.
19.
The parties claimed that on the basis that the Competition Authority has
adopted a rule of reason approach in reviewing agreements generally under
Section 4(1), the parties would submit that the terms of the Know-How Licence
Agreement and the Trade Mark Licence Agreement are reasonable and necessary in
order to achieve the beneficial objectives behind the agreement, namely,
introducing a new product into a market which is already highly competitive. In
this regard, the European Commission has recognised that exclusive know-how
licensing agreements including those involving trade mark licensing which
involve the introduction and protection of new technology in the licensed
territory may avoid the application of Article 85(1) of the Treaty upon which
Section 4(1) of the
Competition Act, 1991 is based. Accordingly, as the
agreements and the provisions in the agreements are designed to allow for the
introduction and protection of new technology into the Territory.
Arguments
in Support of the Grant of a Licence
20.
The parties submitted detailed arguments in support of the granting of a
Licence. However, the Authority is of the opinion the grant of a Licence does
not apply in this particular instance.
(g) Submissions by Third Parties
21.
There were no submissions by third parties.
(h)
Assessment
(a)
Applicability of Section 4(1)
22.
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”.
(b)
The Undertakings and the Agreement
23.
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’. Dalgety Agriculture Limited, Dalgety & Spillers and Thomas
Hill & Co. are corporate bodies engaged for gain in the manufacture and
distribution of horsefeed. They are therefore undertakings and the agreement is
an agreement between undertakings. The agreement has effect within the State.
Applicability
of Section 4(1)
(i)
The status of the Know-How licensing agreement
24.
In the Authority’s opinion Dalgety and Thomas Hill & Co. are
undertakings within the meaning of
Section 3(1) of the
Competition Act and the
notified arrangement constitutes an agreement between undertakings. Dalgety
notified the agreement with Thomas Hill & Co. as a know-how licensing
agreement between undertakings. It is a know-how licensing agreement
incorporating an ancillary trade mark licensing agreement whereby the licensee,
Thomas Hill & Co. is granted an exclusive right to exploit the licensed
technology
within
the Territory.
(ii)
The exclusive agreement
25.
It is the view of the Authority that the Clauses in the Know-How licensing
agreement do not restrict competition. Under Clause 2.1 of the Know-How
Licensing Agreement, Dalgety appoints Hill as its sole licensee for the
Territory and the licensee is required to comply with formulations for the
Products (Clause 3.4), quality control procedures (Clause 3.5.1) and standards
(Clause 5.3) as laid down by Dalgety. Under Clause 5.2 Hill undertakes that all
Products manufactured by it shall be sold in bags or containers bearing the
Trade Marks and to bear the legend that the Products are manufactured by Hill
under licence from Spillers and Dalgety.
(iii)
Economic Assessment: Intellectual Property Rights
26.
The Notification concerns a Know-How Licensing Agreement to provide for the
licensing by Dalgety and Spillers to Hill of certain know-how, marketing
information and trade marks and to manufacture and distribute the said products
in part of the State.
27.
There is an inherent tension between competition law and the protection granted
a company under the various intellectual property rights (including know-how)
[2].
There is a trade-off between the dynamic growth inducing effects of innovation
and the static loss due to the sub-optimal diffusion of the innovation. The
economics profession has consistently found that the dynamic gains outweigh the
static losses
[3].
This is due to the public good nature of innovation, which can be very costly
to achieve but can often be disseminated virtually costlessly.
28.
In this particular transaction as notified by Dalgety, there are many animal
feed producers in the relevant market and the estimated market shares in the
State accruing to Thomas Hill as the licensee of the horsefeed was [ ] in
1993. In addition, the estimated market share of Spillers was [ ].
[4]
With the Irish market for horsefeed estimated at IR£5m, it can be seen
that the licensing agreement has a negligible impact on competition.
29.
The agreement is an exclusive know-how licensing agreement whereby, Dalgety as
the licensor undertakes not to exploit the licensed technology in the licensed
territory or to grant further licenses. Therefore Dalgety appointed Hill as
sole licensee for the Territory and authorises Hill as the licensee to use the
technical know-how provided by Dalgety. Thomas Hill is not precluded from
selling any other horsefeed in the Territory, inter-brand competition is not
restricted and with many other animal feed producers in the market, the level
of competition is not diluted.
30.
The
Authority would contend that there should not be a presumption that
intellectual property rights create market power. Licensing in this case, for
example, where market shares are relatively small and where there is effective
competition, simply allows Dalgety plc to transfer their know-how to Thomas
Hill and although the agreement contains clauses that allow a transfer of
goodwill, no aspects of the agreement restrict the parties in their freedom to
take independent commercial decisions.
Clause
6.3(a) of the Know-How Licensing Agreement
31.
The agreement does not have as its object or effect the prevention, restriction
or distortion of competition in trade in any goods or services in the State or
any part of the State within the meaning of
Section 4(1) of the
Competition
Act. However the Authority had a concern about Clause 6.3(a). Clause 6.3(a)
provided that Hill shall not sell any horsefeed within the Territory other than
the Products. This provision has been deleted from the Agreement as noted by a
Side Letter, dated 3 May 1995, issued by Dalgety to Thomas Hill & Company.
Conclusions
32.
The Authority does not apply a literal interpretation of
Section 4(1) in
reviewing agreements. The Authority is of the view that the terms of this
Know-How Licensing Agreement are necessary in order to ensure good relations
between the parties in the award of an exclusive license for the manufacture of
a product and its introduction into a competitive product.
33.
The licensed products are exposed to effective competition in the licensed
territory. In its assessment of the conditions of competition, the Authority
draws particular attention to the fact that the licensee's market share is
insignificant. There are no restrictions on prices and quantities and there is
no obligation on Thomas Hill, the licensee, to assign improvements to the
relevant technology. In general, the Authority is of the view that there
should not be a presumption that intellectual property rights create market
power.
34.
Therefore the Authority is of the opinion that the clauses in the Know-How
Licensing Agreement do not constitute restrictions on competition within the
meaning of
Section 4(1) of
the Act.
The
Decision
35.
In the Authority’s opinion Dalgety and Thomas Hill & Co. are
undertakings within the meaning of
Section 3(1) of the
Competition Act and the
notified arrangement constitutes an agreement between undertakings. In the
Authority’s opinion the exclusive licensing agreement dated 5 June 1989
does not contravene
Section 4(1) of the
Competition Act.
The
Certificate
36.
The Competition Authority has issued the following certificate
The
Competition Authority certifies that, in its opinion, the agreement dated 5
June 1989 for the exclusive license notified under
Section 7 on 30 September
1992, does not contravene
Section 4(1) of the
Competition Act.
For
the Competition Authority
Professor
Patrick McNutt
Chairperson
16
June 1998
[1]
In January 1998 Kerry Group purchased Dalgety Food Ingredients. Kerry Group
sold the Spillers flour milling business to Tomkins in March of 1998 (this
acquisition is currently under investigation by the UK’s MMC).
[2]
Know-how protection applies to information whose economic value depends on its
not being generally known. Know-how protection is conditioned upon the efforts
to maintain secrecy and has no fixed term. As with copyright protection,
know-how protection does not preclude independent creation by others.
[3]
See Barro R., Economic Growth in a Cross-Section of Countries,
Quarterly
Journal of Economics
,
May 1991, 106:2, pp 407-444.
[4]
In a letter in response to a query on this point, dated 6 March 1998, Dalgety
confirmed that the total sales of their Spillers brand in the State was [ ]
in 1993. This converts into a market share of [ ] for Spillers in the State.
© 1998 Irish Competition Authority