Irish Competition Authority Decisions

1. Notification was made 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 issue a certificate, a licence under Section 4(2), in respect of a Shareholders Agreement relating to Broadcom Eireann Research Ltd (Broadcom).

2. The notification concerns the shareholders agreement dated 30 June 1987 between Bord Telecom Eireann (BTE), L.M. Ericsson Holdings Ltd (Ericsson) and Firmhold Properties Ltd relating to the subscription for shares in Firmhold Properties Ltd. Firmhold Properties Ltd, originally a shelf company, changed its name to Broadcom Eireann Research Ltd on 20 July 1987.

3.(i) Broadcom was acquired by BTE and Ericsson in 1987 as the joint venture vehicle for their participation in the EU programme for communications technologies [1] (RACE programme and latterly the ACTS programme) and to engage in telecommunications research projects under the programme. By 1994 the main activity of the company was research and consultancy in advanced telecommunications mainly through carrying out studies on behalf of BTE and Ericsson and participation in projects approved under the RACE programme. In 1994 Broadcom had a total research income of £2.4m. In 1994 the company's issued share capital was £100 in ordinary shares of £1 each with BTE and Ericsson holding 45 shares each and Trinity College, which subsequently became a shareholder, holding 10 shares.

(ii) BTE is the State owned company established in 1984 for the operation of the national telecommunications services. From BTE Annual Report, turnover in the year ended March 31 1997 was IR£1.22b.

(iii) Ericsson, a subsidiary of Telefonaktiebolaget LM Ericsson, Sweden, is an Irish registered company engaged in the manufacture of telecommunications equipment together with the production and development of related computer software and the provision of computer services. Ericsson, including its subsidiaries in Ireland, is a major product and service provider to telecommunications operators. A subsidiary supplies advanced telecommunications systems to industrial and commercial customers while another subsidiary is engaged in the provision of software for fixed and mobile telecommunications systems. From its Annual Report Ericsson had a turnover of IR£106.5m in 1995.

4. Broadcom was established primarily to carry out research for its shareholders and participate in projects under the EU funded RACE programme. RACE formed part of the EU's Third Framework Programme of Research, Technical Development and Demonstration and was concerned with research into advanced communications. A prerequisite of EU funding was that companies from at least 2 Member States should participate in each project. Each research consortium retains the benefit of the research undertaken, with the right to exploit discoveries, while the EU Commission funded 50% of the cost. Tendering for EU funded projects was open, without restriction, to companies and consortia in all Member States. The RACE programme, which operated from 1989 to 1994, involved an EU budget of around 1,000m ECUs.

5. An Eolas report indicated that up to 1994, Irish participants in RACE had secured contracts worth around £12m spread among 28 organisations in industry, the public sector and higher education. In 1992 Broadcom was the sole Irish partner in 8 RACE projects and was involved with other Irish partners in another 5 RACE projects. BTE on its own account was engaged, with other Irish partners, in another two RACE projects. When RACE terminated at the end of 1994 it was replaced by a similar EU funded programme, the ACTS programme.

6. The ACTS programme objective is to develop advanced communications systems and services for economic development and social cohesion in Europe. The programme covers such areas as interactive digital multimedia services, photonic technologies, high-speed networking, mobility and personal communications networks, intelligence in networks and service engineering and the quality and safety of communication services and systems. The programme which ends in 1998 is part of the Fourth Framework Programme.

7. Together with Telecom Eireann acting as a National Host partner, Broadcom are at present performing trials of applications/services that involve real time users. A National Host is a focal point of people and facilities organised to support trials in the ACTS context. Broadcom is participating in two distinct project areas within ACTS viz (a) Mobility and Personal Communications Networks : the objective is to accommodate the foreseeable demand for personal and mobile communications beyond the year 2000 and to permit the European industry to retain its leadership position in this area and (b) Intelligence in Networks and Service Engineering : the objective is to develop technology for flexible and real-time management of communication assets, reflecting the requirements of users, service providers and network operators.

8. The market in which Broadcom operates is that for research and development in advanced telecommunications. Many companies in the telecommunications sector have their own in-house R&D facilities and a number, such as Siemens Nixdorf, Mentec and Telecom Eireann have participated in RACE projects themselves. Other participants have been the Universities, the State and private companies. The main customers of Broadcom are essentially the shareholders themselves, who fund, and benefit from, the research work undertaken, and to an extent EU institutions. While the EU Commission provides 50% of the funding for approved RACE/ACTS projects and obtains reports, the Authority does not regard these programmes as representing the relevant market.

9. The Authority considers the relevant market to be the market for R&D (research and development) into advanced communications technologies. This is a world-wide market with innovations originating in one place quickly being disseminated across the world. There are numerous bodies involved in the research including universities, research centres and firms involved in the advanced communications industries generally. The customers are the advanced communications companies which use the innovations to make communications technologies more reliable, fast and economical.

(e) The Notified arrangements

10.(i) The notified agreement was executed on 30 June 1987. Recital B of the agreement states that it was established by the Initiating Shareholders:

(1) to be a participant in the European Economic Community programme in communications technologies (RACE) on the basis of the RACE programme as defined in the Proposal for a Council Regulation on RACE (Commission document Com. (86) 547 final dated 29 October, 1986);

(2) to identify development projects suitable for RACE and to secure and obtain contracts for the Company under the RACE programme;

(3) to engage in telecommunications research generally for purposes of the RACE programme; and,

(4) to identify and communicate with suitable partners in order to establish groupings that can successfully bid for RACE development projects.

(ii) Under the agreement each of the initiating shareholders (BTE and Broadcom) agree to subscribe for 25% of the intended issued share capital of the company and agree that up to 4 other shareholders may, if agreed by them, be admitted to membership provided that the maximum shareholding of any other shareholder shall not be more than 25%. BTE and Ericsson retain pre-emption rights to jointly acquire at any time the shares of new shareholders. BTE and Ericsson shall be entitled to nominate 2 directors each with the Chairman/Managing Director to be appointed on the votes of the BTE/Ericsson directors. Any further shareholder shall be entitled to nominate 1 director.

(iii) Clause 7 states that the business of the company shall be as stated in Recital B and as elaborated in the Company's Memorandum of Association, which extends it to participation in telecommunications research generally, developing and producing telecommunication systems and the provision of consultancy services. Clause 8 provides that where the board has agreed on a proposed project the shareholders shall be liable for the cost of the project in proportion to their percentage shareholding and that a full audited account of expense of the project shall be furnished to each shareholder. Provision is made for regular reports, including quarterly financial reports, to the shareholders who also will have free and full access to the company records. Under clause 10 provision is made for initial funding of the company by the shareholders equally, over and above their subscriptions for shares.

(iv) Standard restrictions are placed on company transactions, largely relating to any dilution of assets, which require the agreement of all the shareholders. The agreement continues until all the shares in Broadcom are vested in the one person or the company is wound up.

11.(i). In their original submission in September 1992 the parties stated that the business carried on by Broadcom in essence, consisted of undertaking research projects (by direct contract or participating in a consortium organised for the purpose) promoted and facilitated by the Commission of the European Communities ("C.E.C.") to foster the advancement of research and development and scientific learning so as to assist the better progression of the European telecommunications/information technology software and software tools. The projects were organised, promoted and co-ordinated by C.E.C. (D.G. XIII) and brought together representatives of research institutions, universities and manufacturers.

(ii) In general, the parties did not believe that the Agreement restricted them in their freedom to take independent business decisions contending that the provisions of the Shareholders' Agreement were minimal, non-restrictive and a mere overlay on the basic corporate documents, namely, the Memorandum of Association and the Articles of Association. They contended that neither the provisions nor the Agreement itself had 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 within the meaning of the Competition Act and that the Agreement was effectively devoid of restrictive provisions.

12.(i) In a subsequent submission in October 1995 the parties contended that Broadcom was primarily a research vehicle and not engaged for "gain" and was therefore not an "undertaking" within the meaning of the Competition Act, 1991. This reasoning was based upon the fact that Broadcom Eireann Research Limited was funded entirely by the shareholders of Bord Telecom Eireann and L M Ericsson Holdings Limited, and was not established as a "profit centre" in its own right or in the reasonable expectation that it would generate a significant profit in its own right. It could not be maintained on the ordinary remuneration of capital principles.

(ii) They acknowledged that in the decision in Deane & Others v The Voluntary Health Insurance Board [1992] 2IR319 the Supreme Court held that the word "gain" was not equivalent to the word "profit" and thus the phrase "engaged for gain" was merely an activity carried on or a service supplied which was done in return for a charge or payment. Nevertheless, it was contended that insofar as Broadcom Eireann Research Limited levied charges or derived income from external sources this was merely by way of contribution to overhead thereby reducing the ultimate cost to the principal shareholders, Bord Telecom Eireann and L M Ericsson Holdings Limited. The contribution of Trinity College Dublin was mainly in the nature of the making available of scientific expertise;

(iii) They added that 50% of the cost of RACE/ACTS programs was recovered from the European Commission and RACE project sales are disclosed in the profit and loss account of the Annual Accounts. They stated that the RACE programme was administered by the European Commission and was financed under the standard contracts for each project in which Broadcom participated. The allowable costs reimbursed by the European Commission were 50% of the actual costs of performing the work. The remaining costs were covered by shareholder companies. The direct beneficiaries of work undertaken as regards delivery of reports were the European Commission. The shareholders benefited from RACE and ACTS from the fact that they were involved more closely in the standard setting process in Europe and were made aware of the areas of research being undertaken in Europe.

(iv) They also indicated that Broadcom intended to continue to operate as a research company in relation to RACE's replacement ACTS [ vide para 5].

13. In its Co-operative Joint Ventures (Antitrust) Notice 1993 [2] the EU Commission stated that

"Joint ventures between non-competitors created for research and development ....do not in principle fall within Article 85(1). The non-application of the prohibition is justified by the combination of complementary knowledge, products and services in the joint venture. That is, however, subject to the reservation that there remains room for a sufficient number of R&D centres, ...in the respective area of activity of the joint venture."

14. 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”.

15. Section 3(1) of the Competition Act defines an undertaking as "a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service".

16. BTE is engaged for gain in the operation of a national telecommunications service and is therefore an undertaking. Ericsson is engaged for gain in the manufacture and sale of telecommunications equipment and software. The parties have contended that Broadcom is primarily a research vehicle and not engaged for gain and is therefore not an undertaking within the Competition Act. They have also contended that insofar as Broadcom levies charges or derives income from external sources this is merely by way of contribution to overheads thereby reducing the ultimate cost to the principal shareholders. The Authority does not accept this contention. Broadcom is a separate corporate entity engaged in the provision of R&D services for which it receives payment. It is therefore an undertaking. In any event the principal parties to the agreement, BTE and Ericsson, are undertakings and the agreement between them is an agreement between undertakings, regardless of the status of Broadcom.

17. Human capital accumulation and R&D expenditure are directly linked with improvements in technology and with the introduction of new technologies. Improvements in technology are markedly discrete and random which mirrors the probability of success in research and development. Only a small proportion of research and development projects are successful and often in ways which were not originally intended. The attendant risk associated with R&D often leads to a sub-optimal amount of research being undertaken.

18. The Authority is aware of the 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. A firm by increasing its R&D expenditure will simultaneously increase its probability of success whilst lowering the probability of all rivals succeeding. As every firm has the same incentive there can be too much R&D relative to the social optimum. The problem is that due to the public good nature of R&D the innovators incentive to innovate is lowest precisely when the positive externalities on other firms (the spillovers) are large.

19. Therefore schemes (such as RACE and ACTS) are designed primarily to increase the amount of R&D undertaken, though not without attendant risks of cost padding and the probability that the market may be a better selector of which research and development projects to undertake. Under the RACE and the ACTS programmes, the Commission chooses work programmes and calls for proposals from companies such as Broadcom to undertake the research. The establishment of (patent) rights over R&D output confers an intellectual property right on the innovator which is necessary to encourage the innovators to undertake the R&D expenditure.

20. If firms can choose between different routes in terms of R&D spending there is an incentive to go for more risky R&D technologies in a winner takes all environment. In these type of industries there is over-investment in risky projects [4]. In terms of any welfare analysis, if the private surplus from innovation is lower than the social surplus then agents have too little incentive to invest in R&D. In this scenario, the innovator is unable to appropriate sufficient private gains to give them the incentive to undertake costly R&D. This is termed the appropriability effect . If however, the opposite is the case and the innovator does not see the business stealing aspect of their innovation then the private benefit outweighs the social benefit and too much R&D is undertaken. These effects are in essence negative externalities which impinge on the returns of other innovators.

21. Research joint ventures enable companies to exploit complementarities, undertake research with large fixed costs (thus exploiting returns to scale), avoid perhaps wasteful duplication and if patent protection is incomplete enables firms to jointly internalise the positive externality that their individual research would yield. Conducting R&D efficiently is the objective from both an industry and society’s point of view. While there may be some concerns expressed in the literature that research co-operation between competitors may lead to collusive behaviour - this will not occur if the parties to the research joint venture are not competitors [5] - it is the view of the Authority that such concerns are not an issue in this particular case.

22. Under the notified agreement two companies engaged in the telecommunications business formed, in 1987, a co-operative joint venture company to undertake research and development in particular projects, in partnership with other companies or consortia in other Member States, so as to qualify for funding under a EU Research and Development programme. One of the parties to the joint venture, BTE, is engaged in providing a telecommunications service and is primarily a user of telecommunications equipment and systems. Ericsson, however, is engaged in the manufacture of telecommunications equipment and in the supply of telecommunications software and systems. Such an agreement does not per se contravene Section 4(1) of the Competition Act.

23. The notified agreement contains a number of standard restrictions on the company relating to its internal management and are designed to protect the position of each of the shareholders. The Authority has decided in a number of decisions that such restrictions do not contravene Section 4(1) of the Competition Act. The agreement does not contain any restrictive provisions on the shareholders.

24. Under clause 8 of the notified Agreement the shareholders are liable for the cost of research projects undertaken in proportion to their percentage shareholding in Broadcom. Apart from some third party contracts, the Broadcom business is essentially a joint R&D facility for use by its own shareholders who stand to benefit ultimately from the R&D. The shareholders are not obliged to channel all their R&D activities through Broadcom, nor do they do so. To the extent that the shareholders use their own facilities or the joint facilities of Broadcom for R&D, other research companies are unable to bid for that business.

25. However it is a matter for commercial decision by companies whether to use their own facilities or contract out their work to third parties and this does not raise any issues under the Competition Act. The Authority considers the relevant market to be the market for R&D into advanced communications technologies. It is clear from para. 5 op.cit. that there are a large number of other R&D organisations within the State engaged in telecommunications R&D, a number of which collaborate in projects with Broadcom. Therefore, in the opinion of the Authority the notified arrangements have not restricted the development of other R&D centres. In the Authority's opinion the notified agreement does not contravene Section 4(1) of the Competition Act.

26. The Authority is of the opinion that research joint ventures between non-competitors do not contravene section 4(1). This is because they facilitate research and development which may not occur in the absence of such co-operation. The Authority considers research and development one of the engines of growth in the economy. The RACE and ACTS programmes encourage firms to take on research in a co-operative manner exploiting any complementarities and economies of scale in research there may be between them and thus avoiding unnecesary duplication.

27. The Authority considers that there is sufficient competition in the market for R&D into advanced communications technologies. The research is in areas marked by the Commission for research and are in areas that the Commission has identified as crucial to the future development of the communications industries in the EU. The Authority has contended in previous decisions [ vide Decision No. 502] that there should be no presumption that intellectual property rights create market power.

28. In the Authority's opinion Bord Telecom Eireann, L.M. Ericsson Holdings Ltd and Broadcom Eireann Research Ltd are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the notified Shareholders Agreement is an agreement between undertakings. In the Authority's opinion the notified agreement does not contravene Section 4(1) of the Competition Act.

29. 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 Shareholders Agreement dated 30 June 1987 between Bord Telecom Eireann, L.M. Ericsson Holdings Ltd and Broadcom Research Eireann Ltd notified under Section 7 on 30 September 1992 (Notification No. CA/683/92E) does not contravene Section 4(1) of the Competition Act.

[1] RACE = Research and Development in Advanced Communications Technologies in Europe and ACTS = Advanced Communications Technologies and Services

[ ]   ²para. 33, O.J. C43/2 (16 February 1993)

[3] See Barro R., Economic Growth in a Cross-Section of Countries, Quarterly Journal of Economics , May 1991, 106:2, pp 407-444.

[4] Dasgupta P. and J. Stiglitz (1980) “Uncertainty, Industrial Structure and the Speed of R&D.” Bell

Journal of Economics 11: pp 1-28

[5] See Grossman, G. and C. Shapiro (1986) “Research Joint Ventures: An Antitrust Analysis.” Journal of Law, Economics and Organization 2: pp 315-337 and Ordover, J and R. Willig (1985) “Antitrust for High-Technology Industries: Assessing Research Joint Ventures and Mergers.” Journal of Law and Economics 28: pp 311-333.