Irish Competition Authority Decisions

1. Notification was made of a standard agreement with distributors by Lee Strand Co-operative Creamery Ltd (Lee Strand) on 30 September 1992 with a request for a licence under Section 4(2) of the Competition Act, 1991. In a letter dated 10 July 1998, the parties informed the Authority that they wished to amend the licence application to a certificate application.

2. The notified agreement provides for the appointment by Lee Strand of distributors of its liquid milk and other products. The agreement relates to distributors in the Kerry and West Limerick areas (the Territory).

3. Lee Strand is engaged in the production and distribution of liquid milk and cream, and in the distribution of other products. Lee Strand is a co-operative located in Ballymullen, Tralee, Co. Kerry. Surplus milk is sold to Cadbury (Ireland) plc and Golden Vale plc. It also sells feed and fertilisers. Lee Strand owns a farm in Co. Wexford and is engaged in construction in Tralee. Sales are effected through its own vehicles and 15 distributors. The latter are independent contractors who undertake doorstep delivery of Lee Strand products in specified areas.

4. The Authority defines the market as the market for milk for consumption in the State. The main product involved is liquid milk, which is sold to doorstep customers. Among the other products involved are buttermilk, butter, cheese, butterspread, yoghurt and cream desserts. 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 Lee Strand to retail outlets for resale to customers. Such outlets also compete in the relevant market. Lee Strand stated that it operated in the Kerry and West Limerick liquid milk markets, where its competitors were Kerry Group and Golden Vale.

5. Lee Strand grants to the distributor a right to distribute and sell the products in the territory under the trade names in accordance with the Method (a system for conducting the business) (clause 4). The territory is defined in the agreement. No other person will be granted a licence to carry on business within the territory (clause 5). The agreement continues for five years, but may be terminated earlier on six months' notice (clause 2).

6. The distributor is required to conduct the business in a business-like manner; to provide a regular delivery service; to purchase exclusively from Lee Strand sufficient quantities of the products; to sell the products in good condition and not tamper with the products, packaging or marks; not to deal in competing goods or other products which would be inconsistent with his obligations; to use the tradenames only in connection with the products; not to use similar or confusing trade names; to promote sales; to inform Lee Strand of all inquiries from potential customers; to keep records and make these available to Lee Strand; to provide detailed reports to Lee Strand; to allow Lee Strand appoint a person to accompany the distributor to ensure compliance and assess the goodwill; to maintain vehicles properly; to employ sufficient staff; to carry a range of products; to cooperate in the marketing and promotion of products; and to sell minimum quantities (clause 6). He is required to keep information confidential and not to disclose confidential information for 18 months after termination of the agreement (clause 11). The distributor is stated to be an independent contractor, and not a partner, agent, employee or representative of Lee Strand (clause 12). The rights of the distributor may not be assigned without the prior consent of Lee Strand (clause 16).

7. In particular, the agreement contains the following clauses:

(i) Under clause 6(5), the distributor must sell and distribute the products within the territory only, and must refrain from selling and/or distributing them outside the territory without consent;

(ii) Under clause 17, neither party shall canvass or supply the customers or outlets of the other party;

(iii) Under clause 6(23), in addition to co-operation in marketing, the distributor is obliged to pass on to customers the full benefit of all special offers, price reductions, competitions, gifts, prizes, coupons and other incentives offered by Lee Strand; and

(iv) Under clause 7, the distributor agrees not to deal in competing products in the territory for six months after termination of the agreement.

8. A clause in the agreement as originally notified, which prevented the distributor from selling products to excluded customers (if any) specified in the agreement, has subsequently been deleted. By letter of 19 August 1993, Lee Strand confirmed that the agreement related to the purchase and resale of goods.

9. Lee Strand stated that the market was highly competitive, that there were no barriers to entry, and that sales levels were affected by the adequacy of family incomes and the buoyancy of the tourist season. In support of its request for a licence, Lee Strand presented the following arguments:

“The arrangements are aimed at providing customers with a daily year round supply of fresh dairy products of consistently high quality. The bulk of sales by the dealers, in urban areas, are door-to-door deliveries. In this way school going children and the family breadwinners are fortified at breakfast time with a well balanced and nutritional diet.

Some of the dealers make daily deliveries to remote rural districts which in some cases is a "sine qua non" for the attraction of tourists which in turn is the bedrock of their economic welfare. Such deliveries also contribute to the improvement of the quality of life and degree of comfort of aged people living in these areas. Consumers whether they are living in the centre of Tralee or the furthermost westerly or southern points of County Kerry have the products available to them at the same price ( vide para. 11). Without the conditions incorporated in the Agreements the natural tendency for the agents concerned or any agents would be to "cherry pick" customers and not to supply or under-supply the others.

Competition in the markets in which Lee Strand operates is cut-throat”.

10. Lee Strand also stated that the arrangements did not cover prices or discounts, which were the subject of separate negotiation with each of the 15 distributors.

11. In response to certain questions posed by the Authority, Lee Strand replied on 10 July 1995 as follows:

‘Sales of liquid milk, not effected through agents, are undertaken by the company’s own distribution staff/vans and comprehend all of County Kerry and West Limerick.

Agents of Lee Strand are not required to resell the company’s products at the same price. Whilst the company does recommend retail selling prices, these prices are not binding on them. Thus there is no separate agreement or undertaking regarding prices.

The arrangements referred to in paras. 6(16), 6(19) and 6(23) are not designed or intended that distributors charge fixed prices. The requirements as regards the making available of the distributor’s records and that a nominated person accompanies the distributor are to enable Lee Strand to know the identity of its end-use customers and to ensure that the products are handled with the required attention and care, and that these customers are being serviced to the highest standards. While there is no mandatory obligation on the agents to pass on the benefit of all special offers or price reductions, the pursuit of prudent marketing strategies, however, means that the agents do in practice pass on these reductions, although they are not legally obliged to do so.’

12. The Authority issued a Statement of Objections on 7 May 1996 as under clause 7, the distributor agreed not to deal in competing products in the territory for six months after termination of the agreement. The agreement has a fixed term of five years, though it may be terminated earlier in certain circumstances. Under clause 16, the rights of the distributor may not be assigned without the prior consent of Lee Strand.

13. The Authority considered that, by implication, the distributor may assign the round to another person during the currency of the agreement. In these circumstances, the Authority considered that the non-compete clause represents a non-compete clause following the sale of a business. The Authority has accepted non-compete clauses in the case of agreements for the sale of a business as not contravening 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 considered that the six-month period specified in clause 7 of the agreement is acceptable for a non-compete clause after the sale of such a business, and that this clause did not contravene Section 4(1), provided that the distributor has, in fact, sold his interest in the round.

14. In other circumstances, however, the distributor might not have sold the business. The agreement may be terminated by Lee Strand at any time if certain events occur, and the agreement terminates automatically in any case at the end of five years. In these situations, there is no sale of business. The Authority has indicated that post-term non-compete obligations in exclusive distribution and other distribution agreements generally contravene Section 4(1). It considered that the non-compete obligations in the standard Lee Strand agreement, where they are not associated with a sale of business, contravened Section 4(1) of the Act.

15. Further under clause 6(23), the distributor was required to pass on to consumers the full benefit of all special offers, price reductions, and other incentives, for the purpose of improving or retaining sales. Such a clause could assist in securing adherence to prices set by the supplier. Lee Strand has stated that it does recommend retail selling prices, but that these prices are not binding on its distributors. No evidence had been submitted by Lee Strand that the distributors have been informed that the recommended prices are not binding. The Authority regards the recommending of resale prices to the distributor by the supplier, where the distributor is not informed that he is free to set his own resale prices, as amounting to resale price maintenance, which contravenes Section 4(1) of the Act. In the circumstances, clause 6(23) could assist in the maintenance of resale prices, and it also contravenes Section 4(1).

16. In a letter dated 4 June 1996 Lee Strand stated that because of the Authority’s concerns they had decided to:

(i) Modify the notified agreement in order to make it clear that the post termination non-compete clause shall not apply or does not relate to the sale of business.

(ii) Notify each of the distributors by means of a circular letter that the recommended prices are not binding and that each of them is free to set their own retail price. Lee Strand also stated that this was to be incorporated in the amended notified agreement.

17. In a further letter dated 12 July 1996 Lee Strand proposed subject to the agreement of the Authority to add the following provision to clause 7 (Post-termination non-compete clause) of the notified agreement.

20. 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.’

21. 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.” Lee Strand is a corporate body engaged for gain, inter alia , in the supply and distribution of liquid milk and other products, and the distributors are engaged in the distribution of goods for gain. They are all therefore undertakings, and the standard agreement is an agreement between undertakings. The agreements have effect within the State.

22. It is clear from the agreement that the distributor is appointed as the sole distributor of Lee Strand products for door-to-door delivery in the area described in the agreement. He is also required to purchase exclusively from Lee Strand. Lee Strand products are also distributed to retail outlets for resale to consumers in the territory. The standard agreement 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.

23. In the opinion of the Authority distribution agreements do constitute an 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. The Authority considers that the arrangements as notified by Lee Strand are designed to enhance the efficiency of liquid milk distribution, and to ensure a comprehensive and timely doorstep delivery system. Although the agreement prevents other distributors from engaging in the doorstep delivery of Lee Strand products, most customers can obtain milk supplies from retail outlets within the Territory, thus ensuring intra-brand competition. There may also be doorstep delivery of competing products by other distributors thus ensuring inter-brand competition within the Territory. The Authority concludes that, in this instance, the Lee Strand distribution arrangements do not contravene Section 4(1).

24. The original agreement, however, did contain certain clauses which did contravene Section 4(1) but these have been amended. With respect to Clause 7, the amendment states ‘However such a restrictive covenant or measures having equivalent effect shall not apply in any circumstances associated with or related to situations where there shall be no sale of business’ . The distributors have been informed of their right to choose their own resale prices as noted in an enclosed Side Letter dated 10 July 1996.

25. Under clause 7, the distributor agrees not to deal in competing products in the territory for six months after termination of the agreement. The agreement has a fixed term of five years, though it may be terminated earlier in certain circumstances. Under clause 16, the rights of the distributor may not be assigned without the prior consent of Lee Strand. The Authority considered that the six-month period specified in clause 7 of the agreement is acceptable for a non-compete clause after the sale of such a business, and that this clause did not contravene Section 4(1).

26. Under clause 6(23), the distributor is required to pass on to consumers the full benefit of all special offers, price reductions, and other incentives, for the purpose of improving or retaining sales. Such a clause could assist in securing adherence to prices set by the supplier. Lee Strand has stated that it does recommend retail selling prices, but that these prices are not binding on its distributors. Evidence by way of a Side Letter has been submitted by Lee Strand that the distributors have been informed that the recommended prices are not binding. The Authority does not regard the recommending of resale prices to the distributor by the supplier, where the distributor is informed that he is free to set his own resale prices, as amounting to resale price maintenance. In the circumstances, clause 6(23) does not contravene Section 4(1).

27. Under clause 6(5), the distributor is permitted to sell the products only in the defined area. A provision of this kind normally operates as a ban on both active and passive sales of the products, since it restricts the distributor from canvassing for business outside his area and also from responding to requests from customers outside the area, and the ban on passive sales usually restricts or eliminates intra-brand competition and offends against Section 4(1). For the reasons given in para. 23, however, the Authority considers that clause 6(5) does not restrict intra-brand competition in the circumstances of the notified agreement, and that it does not contravene Section 4(1).

28. Generally the distributor is charged with servicing doorstep customers, while Lee Strand is responsible for supplying retailers and other large customers. Under clause 17, neither party may canvass the customers or outlets of the other. The Authority considers that this restriction allows more efficient systems of delivering to different types of customer, and that the clause does not contravene Section 4(1).

29. The Authority notes that the post-termination restriction on competition, where this is not associated with the sale of a business, as described in Clause 7 has been amended and that the restrictions on the reseller to set his own prices has been amended. In the Authority’s opinion the amended agreement does not contravene Section 4(1).

30. Lee Strand and its distributors are engaged in the supply and distribution of liquid milk, and they are undertakings within the meaning of the Competition Act. The notified standard agreement (CA/268/92) is an agreement between undertakings. The Authority considers that the notified agreement, as amended, does not contravene Section 4(1) of the Competition Act, 1991. It intends to grant a certificate in respect of the notified agreement.

31. Lee Strand and the distributors 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 as Notification no. CA/268/92, does not contravene Section 4(1) of the Competition Act, 1991.

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 Lee Strand distributor agreement (Notification no. CA/268/92), notified on 30 September 1992 under Section 7, does not contravene Section 4(1) of the Competition Act, 1991.