Irish Competition Authority Decisions

1 Notification was made on 3 October 1997 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 standard sub-franchise agreement. On 30 March 1998, following the issue of a Statement of Objections by the Authority, a revised version of the agreement, described as an agency agreement, was submitted.

2 Under the system of roadworthiness testing which is being introduced by the Department of the Environment in fulfilment of Ireland’s obligations under Directive 96/96/EC, all private cars over 4 years old will be required to undergo a roadworthiness test. The notification concerns a standard agreement which is to be entered into by Dekra Eireann Teoranta and approximately 70 agencies around the country, if Dekra is successful in its bid for the national car testing franchise.

3 Dekra Eireann Teoranta (Dekra) is a proposed joint venture between Dekra International and the Society of the Irish Motor Industry (SIMI). Each of these companies will have a 50% holding in Dekra. Dekra International is a holding group based in Luxembourg with the express purpose of establishing Dekra group services in European countries outside Germany. It is engaged in activities such as accident repair cost estimates, periodical technical vehicle inspections, capture, processing and marketing of automotive market data, pricing of new and used cars and international green card claims management. Countries covered by one or more of these activities are the UK, Benelux, France, Spain, Italy, Austria, Switzerland and Portugal.

4 SIMI is the representative body of the motor industry in Ireland. It exercises pressure at national and EU level to ensure that the Government implements the EU Directive on car testing and generally tries to maintain and improve the reputation of the motor industry. According to the latest accounts of the company, SIMI’s net current assets at 31 December 1996 were £225,863; fixed assets were £561,943; the surplus for the year before taxation was £66, 928.

5 The market is the service, pursuant to the statutory obligation arising under EC Directive 96/96, of roadworthiness testing of all private cars over 4 years old in the State. The Irish Bulletin of Vehicle and Driver Statistics 1996 published by the Department of the Environment contains the following information in relation to the age of private cars:

1996 107,106 1986 61,451

1995 83,324 1985 54,658

1994 78,517 1984 39,333

1993 66,282 1983 25,262

1992 74,322 1982 19,254

1991 77,829 1981 15,452

1990 98,157 1980 12,678

1989 94,011 1979 &

1988 77,237 earlier years 19,809

1987 65,379

6. The Authority is aware that the Minister has indicated an intention to appoint a single franchise for vehicle testing throughout the country. Although such an arrangement would be outside the scope of the Competition Acts, the Authority is concerned at the proposal to establish a monopoly franchise for vehicle testing. It is not aware of the reasons why it was decided not to allow competition in respect of vehicle testing and no justification has been advanced for such measures to the knowledge of the Authority. The Authority notes that competition is likely to ensure high quality services to consumers at low prices and consequently believes that the decision to prevent competition will ultimately lead to consumers having to pay higher prices for vehicle testing than might otherwise be the case. It appears, from the criteria set out for appointing the successful franchise, that the Minister will retain some control over prices. The Authority notes, however, that price controls are far less effective than competition.

7 The standard agreement contains the following clauses:

- Recital (A). “The Principal is engaged in the provision of roadworthiness testing for motor vehicles under exclusive licence of the Department of the Environment for the purposes of Council Regulation 96/96/EC. It wishes to appoint the Agent to provide the Service on its behalf in the Territory.”

- Recital (B). “The Agent is willing to work as agent for the provision of the Service in the Territory upon the terms and subject to the conditions set out below.”

8 Under Clause 2.1, the Principal appoints the Agent to act as its agent for the provision and sale of the Service (defined as “the roadworthiness testing service for motor vehicles operated pursuant to Council Directive 96/96/EC and under licence by the Department of the Environment”) during the continuance of the Agreement in the Territory (the area within which the Agent may provide the service - to be defined in a schedule to the agreement). The management structure, ownership and control of the Agent are to be as set out in a Schedule to the Agreement and the Manager of the agent warrants that there will be no change thereto during the currency of the Agreement without the consent in writing of the Principal. Clause 2.2 states that the Principal shall not appoint any other agent for the provision of the Service in the Territory, unless with the consent of the agent or if such appointment is required by the Minister for the Environment. Under Clause 2.3 the agent undertakes to provide the Service only within the Territory and not to use the Proprietary Marks nor make available the Service outside the Territory. Clause 3 states that the Agreement shall commence on the execution thereof and shall continue in force thereafter for an initial term of 10 years unless terminated.

9 The Agreement contains a number of initial obligations on the Principal relating to the provision of standard construction plans of the premises, supervision of construction or conversion works, training of personnel and transmission of know-how. Where the Principal considers it necessary to employ an independent consultant to give advice in relation to construction or conversion works, the cost of such an independent consultant is to be borne by the agent. The know-how includes specific software for carrying out servicing activities and an IT connection with Dekra Eireann headquarters, the Department of the Environment, Ireland’s National Vehicle and Driver file and the Garda Siochana. The Principal has continuing obligations to permit the agent to operate and promote the Business under the trade name “DEKRA Eireann”, to supply the agent at its own expense with advertising and promotional materials, to provide ongoing advice, know-how and assistance relating to the management, finance, promotion and methods of operation to be employed in providing the Service, and to supply up-to-date copies of price lists. The Principal must also make available to the Agent members of the Principal’s staff competent to provide any requisite on-site assistance and advice, must directly or indirectly provide the Agent with an IT system, must provide technical assistance, must provide standard forms of contract for use by the agent in dealings with its customers, and must make available its staff engagement service for the provision and selection of trained and qualified staff for the provision of the Service. The Principal must also improve and develop the System and make available to the agent and its employees at cost, further training if necessary.

10 Under Clause 6.11, one of the obligations of the Principal is:

“To provide to the Agent the products and equipment described in the Operating manual on the terms from time to time therein specified and to assist the Agent in procuring such additional supplies of products and equipment as may be required by the Agent to commence provision of the Service and to use reasonable endeavours to negotiate and obtain from such suppliers favourable discount rates for furnishing such supplies to the Agent.”

11 The agent has obligations relating to acting in good faith and using its best endeavours to promote and market the service. Under Clause 7.2, the agent is entitled “without prior reference to the Principal to enter into contracts for the provision of the Service in the name and on behalf of the Principal.” The agent must operate with due care and diligence and in accordance with sound commercial principles. The agent is to acquire the premises on or before a certain date and to ensure that they are altered, refurbished, equipped and fitted out in accordance with the requirements of the Principal (clause 7.4), and to commence provision of the Service from the premises on or before a certain date (clause 7.5). The agent must operate the business in accordance with the provisions of the Operating Manual, ensure that staff are properly trained, and use only such letter headings, invoices, signs, display materials, promotional literature and equipment approved by the Principal. The name of the Manager or any other individual associated with the Agency must not appear in any letter headings, invoices, signs, promotional literature etc. without the express approval in writing of the Principal. The agent must comply with all advice and instructions given by the Principal with regard to the provision of the Service and, in particular, the prices and charges levied for the Service. In all dealings concerning the Service, the agent must describe itself as “Service Agent” of the Principal.

12 The agent must maintain the Premises to a high standard and use its best endeavours to promote and increase the Service. It shall continuously provide the service upon such days and between such hours as the Principal shall specify. Clause 7.16 states that “The Agent shall maintain sufficient stocks and employ sufficient staff to meet demand from consumers of the Service and to provide an efficient Service.” Under Clause 7.17, “The Agent shall promptly pay all suppliers of goods and services sold or provided to the Agent for the purposes of provision of the Service.” There are further obligations on the agent concerning the standard of service to be provided.

13 The agent undertakes to provide, as agent of the Principal, only such services as may be described from time to time in the Operating Manual upon the terms and conditions therein set out. The agent is to comply with all statutes, bylaws, regulations and requirements of the Irish government or other competent authority relating to the agent and the provision of the Service. The agent undertakes to procure from the manager, and from such other staff as the Principal requires, an undertaking in a form specified by the Principal not to disclose to any third party any confidential information or knowledge concerning the Service or the Proprietary Marks.

14 The Agent must have and use the Principal’s software in accordance with the provisions of the Operating Manual and must exclusively use the IT communications network made available for the Principal for the transmission of the various data to the competent bodies of the government. The agent shall ensure at all times that the testing of vehicles is carried out in a fair and non-discriminatory manner; shall diligently supervise employees in carrying out their testing duties; shall immediately report to the Principal any complaints or allegations of improper business practices, and shall properly discipline employees for such practices.

15 Clause 7.23 states that “The Agent shall procure from the Manager and from such other staff as the Principal shall require, an undertaking in a form specified by the Principal not to disclose to any third party any confidential information or knowledge concerning the Service or the proprietary marks which may be communicated to such manager or employee or which such manager or employee may otherwise acquire unless such information has fallen into the public domain, and the Agent shall at its own expense take such steps as the Principal may direct in order to enforce or restrain any breach of the terms of any such undertaking.”

16 Under Clause 8, “Terms and Conditions for provision of the Service,” the agreement states that:

“8.1 All sales of the Service by the Agent on behalf of the Principal shall be made on such terms and conditions as the Principal may from time to time specify in writing to the Agent ...

8.2 All sales of the Service by the Agent on behalf of the Principal shall be at the price specified in the price lists which shall from time to time be supplied to the Agent for the purpose by the Principal.

...

8.4 All payments from customers in consideration for the Service shall be lodged into a bank account in the name of Dekra Eireann details of which shall be provided by the Principal.”

17 Under Clause 9, “Restrictions on Agent”, the agent agrees, inter alia:

- Clause 9.1.3. “not to permit or suffer any person to act or assist in the provision of the Service until such person has signed a non-competition and confidentiality undertaking in the form from time to time specified by the Principal,

- Clause 9.1.4. not to provide the Service at any location other than the Premises without the prior approval in writing of the Principal,

- Clause 9.1.5. not to sell, assign, transfer, charge or sub-license the Agency or the Proprietary Marks ....without the prior consent of the Principal,

- Clause 9.1.6. not to deviate from the prices for the Service stated in the Operating Manual from time to time,”

- Clause 9.1.9. “not to alter or convert the Premises ..or the fixtures and fittings ...nor install any equipment nor alter, erect or display any sign ...without the prior consent of the Principal,”

- Clause 9.1.11. “not to use or publish any advertisements, signs, directory entries or other forms of publicity ...without the approval of the Principal,

- Clause 9.1.12. not without the Principal’s prior written consent in any capacity whatsoever be directly or indirectly engaged in any business or undertaking, in particular any business connected with the sale, repair or testing of motor vehicles, other than the Business,

- Clause 9.1.13 not to purchase those products, materials and equipment required by the terms of the Operating Manual to be purchased from the Principal from any person other than the Principal without obtaining confirmation in writing from the Principal that the products in question satisfy the Principal’s quality specifications.”

18 Under Clause 9.2 “the Agent covenants during the term of this Agreement and for a period of six months after the expiration or termination for any reason of this Agreement not to be engaged or interested, or concerned, whether itself or together with any other person, firm or company in any capacity whatsoever, save as authorised hereunder directly or indirectly, in the provision of the Service or any like or competing service(s) in the Territory.”

19 Clause 9.3 states that “the Agent hereby acknowledges that the Operating Manual and all other information and knowledge relating to the Service is of a strictly confidential nature and accordingly, the Agent covenants that it will not and it will procure that no other person shall at any time without the prior written consent of the Principal whether before or after termination of this Agreement divulge or use whether directly or indirectly for its own benefit or that of any other person, firm or company any of such information or knowledge relating to the Service which may be communicated to or otherwise acquired by the Agent, its directors, agents or employees.”

20 The Agreement provides that the Agent shall contribute to an insurance policy designated by the Principal or shall at its own expense obtain and maintain a policy approved by the Principal (clause 10). The Principal warrants that it is entitled to license the Proprietary Marks and subject to registration pursuant to the Trade Marks Act 1996 of the non-exclusive trade mark licence granted , the use of the Proprietary Marks in the Territory (clause 11.1). The Agent shall render to the Principal all reasonable assistance to enable the Principal to obtain registration in any part of the world (clause 11.2). The goodwill and all other rights associated with the Proprietary Marks are vested in the Principal (clause 11.3) and the Agent undertakes not to behave in a manner incompatible with the Principal’s exclusive rights to the Proprietary Marks (clause 11.5.1). The Agent will notify the Principal of any infringements of the Proprietary Marks (clause 11.6). The Principal agrees to make any improvements, additions or modifications relating to the provision of the Service available to the Agent without delay (clause 12.1). The Agent will notify the Principal of any improvements relating to the provision of the Service and the Principal may introduce such improvements without any obligation to make payment therefor. The Agent must conduct the Business strictly in accordance with the Operating Manual, the terms of which shall be deemed incorporated into and shall form part of this Agreement (clause 13.3). The Operating Manual remains the property of the Principal (clause 13.4).

21 The Principal shall pay the Agent a certain percentage commission on the net sales value of the services. The agreement contains provisions for the calculation and payment of such commission. Clause 15 states that “To guarantee fulfilment of the obligations of the Agent under clauses 7.4 and 7.5 of this Agreement, the Agent shall, prior to the execution of the Agreement, issue a performance bond from a bank approved by the Principal ... in favour of the Principal for a sum of [ ]”.

22 Clause 17 provides that the Principal may immediately suspend the Agreement pending an investigation on receipt of complaints or allegations of improper business practices. Under Clause 18 there are numerous ways by which the Principal may terminate the Agreement with immediate effect by giving notice in writing to the agent. They relate to the failure of agent to comply with the obligations already mentioned under the Agreement. The Agreement may be automatically terminated without notice if the agent becomes insolvent, or the manager suffers the filing of a petition in bankruptcy (clause 18.2.1 & 2), or if the licence contract between the Principal and the Minister for the Environment is terminated (clause 18.2.4). Either party may terminate the Agreement without cause by giving at least 2 years prior notice in writing to the other party (clause 18.3). Upon termination or expiration of the agreement the Agent shall immediately cease to promote, market or advertise the service; cease to use the system and all proprietary marks; return or dispose of all signs, advertising materials, specifications, software etc; return the Operating Manual and all items of equipment held on loan or hire from the Principal under the Agreement. If the agreement is terminated under clause 18.3, the agent is entitled to compensation to the extent that the Principal continues to derive benefits from business introduced or augmented by the agent. The basis for the calculation of the amount of such compensation is set out (clause 19).

23 Clause 20 states that the Principal may perform any of its obligations under the Agreement through a holding company or subsidiary, and may assign its rights under the agreement. However, the agreement is personal to the Agent, which may not assign its rights thereunder without the prior written consent of the Principal. The Manager undertakes to use best endeavours to procure that the Agent, its shareholders, directors, agents and employees perform all the obligations on the part of the Agent, to devote his full time and effort to provision of the Service except where expressly agreed by the Principal and to observe and perform all the restrictions and obligations on the part of the Agent to be observed and performed under the terms of the Agreement. The Agreement has provisions for arbitration in the case of a dispute between the parties (clause 23) and severability (clause 25).

24 Dekra stated that the revised agreement created a principal/agent relationship. They stated that the European Commission, in its Notice of 24 December 1962 on exclusive agency contracts made with commercial agents, had made clear that, in its view, genuine agency contracts had neither the object nor the effect of preventing, restricting or distorting competition. The Commission had said that the decisive criterion which distinguished the commercial agent from the independent trader was the responsibility for the financial risks bound up with the sale or with the performance of the contract. The commercial agent must not assume any risk resulting from the transaction. The Commission had indicated that the agent would be viewed as an independent trader - and treated accordingly - where he was:

- required to keep or did in fact keep as his own property a considerable stock of the products covered by the contract, or

- was required to, or did in fact, organise, maintain or ensure at his own expense a substantial service to customers free of charge, or

- could determine or did in fact determine prices or terms of business.

25 In the Suiker Unie decision, the European Court of Justice had stated that:

“If such an agent works for his principal, he can in principle be regarded as an auxiliary organ forming an integral part of the latter’s undertaking bound to carry out the principal’s instructions and thus, like a commercial employee, forms an economic unit with this undertaking.”

26 Dekra stated that the Competition Authority had, in its decisions, defined the commercial agency relationship. It quoted from Decision No. 286, Conoco Consignee Agreement, where the Authority stated that a commercial agent was a self-employed intermediary between the principal and a purchaser or seller. Dekra stated that the Authority had affirmed in Conoco and subsequently in respect of agency agreements involving principals which benefited from a statutory monopoly or exclusive territory that, since a commercial agent was an auxiliary organ, similar to an employee, the agreement between a principal and a commercial agent did not, in principle, offend against Section 4(1). The Authority had found, in its decisions, that clauses in an agency agreement, such as territorial exclusivity and the imposition of prices and contract terms by the principal, which might otherwise raise issues under the Competition Act, arose from the basic agency agreement and therefore did not offend against Section 4(1).

27 Dekra stated that the relationship between Dekra Eireann and the test centre, as redefined in the revised agreement, constituted a commercial agency relationship within the meaning of both the European and the Competition Authority’s jurisprudence. The agent provided the testing service to the public on behalf of its principal, Dekra Eireann, from premises owned/leased by the agent. Dekra Eireann defined the service provided, set the price and terms of that service and bore all financial risk. The takings of the test centre were remitted without deduction to Dekra Eireann which then paid the agent a commission for each test carried out. The profits and losses therefore accrued essentially to the principal, Dekra Eireann, and not to its agent. Furthermore, the agent was entitled to compensation in the event of termination unless termination was due to a breach by the agent of the terms of the agreement, the liquidation/insolvency of the agent or termination of Dekra Eireann’s Ministerial licence. The agent was an integral part of Dekra Eireann’s business, acting as an intermediary between Dekra Eireann, as principal, and the consumer. Dekra Eireann acted through the agent as if it were acting directly itself.

28 According to Dekra, all other clauses in the agreement which might otherwise raise competition concerns (such as the granting of territorial exclusivity, the requirement that the agent comply with Dekra Eireann’s instructions regarding operating methods and terms of contract, including prices), arose directly from the agency arrangement and did not, therefore, offend against Section 4(1). The post-termination non-compete clause (clause 9.2) was limited in time to 6 months and applied only to the contract area. The confidentiality clause (clause 9.3) protected confidential information both during and after the agreement as long as it had not fallen into the public domain. The information covered by the clause would be technical in nature and akin to technical know-how. Dekra cited the Competition Authority’s decision in Betco Marketing Ltd/Holland Sweetener Co. (Decision No. 376) as acknowledging that post-termination restrictions on the use of such information would not have the object or effect of restricting competition.

29 In summary, Dekra stated that the operator of the motor test centre, as agent, was to be an auxiliary organ of the principal, Dekra Eireann. It would undertake no autonomous commercial behaviour and would be fully integrated into the latter’s business. In accordance with case law of the Competition Authority, such an agency/principal arrangement, and also any restrictions which were fundamental to that relationship, did not offend against Section 4(1) of the Competition Act.

30 Mr Michael Penston in a submission to the Authority stated that “Dekra is an organisation co-owned by the Society of the Irish Motor Industry (SIMI). SIMI has a conflict of interest in being involved in this matter and the franchise should not be granted to any organisation with whom SIMI is directly connected. SIMI is an organisation whose overriding aims are to increase the profits and wealth of their members, being part of the motor industry. The implementation of the vehicle inspection scheme should be, and seen to be, completely independent of any vested interests”

31 With the primary aim of enhancing road safety, the European Community required Member States generally to have in place by 1 January 1994 a system of roadworthiness testing of private cars over 4 years old every 2 years. In the case of a number of Member States including Ireland, the final date for implementation was extended to 1 January 1998. Article 2 of the Directive states “ The roadworthiness tests provided for in this Directive shall be carried out by the State, or by a public body entrusted with the task by the State or by bodies or establishments designated and directly supervised by the State, including duly authorised private bodies. In particular, when establishments designated as vehicle testing centres also perform motor vehicle repairs, Member States shall make every effort to ensure the objectivity and high quality of the vehicle testing”

32 The Department of the Environment in a Brief for Consultants, published in June 1997, stated that car testing in Ireland will be phased in over the period 1998/99 and will involve testing cars, including imported used cars, in the region of 7 to 8 years old in the first year of operation of the scheme which will commence as early as possible in 1998, with all cars over 4 years old being tested in the second year of operation of the scheme. On foot of a Government decision testing will be carried out at dedicated test centres (i.e. no repairs, servicing or sales) established and operated by an agent selected on the basis of competitive tendering throughout the EU. Management consultants are to be appointed by the Department of the Environment to assist it in evaluating tender proposals, interviewing applicants, vetting the favoured proposal, recommending the successful applicant and drawing up the legal/contractual arrangements for the appointment of the agent. The competition will be advertised in the EU Journal. It will be open to companies, public sector entities or specially formed consortia to submit franchise proposals. The initial testing franchise will be for a ten year period. There is a small levy payable to the Department of the Environment in respect of which a roadworthiness certificate is issued. The agent will have to meet its own staff costs and all overheads (construction, lease, rent etc. of premises, equipment costs, insurance etc.). The Department states that, with a view to minimising the cost to the motorist, the proposed levels of test and re-test fees will be a key criterion in the assessment of franchise proposals. After the appointment of the successful agent any adjustment in the level of these fees will be subject to the approval of the Minister for the Environment. Other key criteria may include the ability to provide the necessary resources to operate successfully, experience/expertise in the area of vehicle testing and information technology, financial standing, non-association with any company or organisation in such a manner as to constitute a conflict of interests, provision of quality assurance, customer service and strong emphasis in staffing, training, labour relations and health and safety. The Department of the Environment will supervise the operation of the scheme at national level.

(i) Subsequent Developments

33 On 8 January 1998 the Authority wrote to the Department of the Environment and Local Government expressing its concern at that Department’s proposal to award an initial testing franchise, apparently to a single entity for the whole country, for a ten-year period. The Authority was deeply concerned that the proposed arrangements would seriously restrict and distort competition in the market for the supply of vehicle testing services. The selected franchisee would not be exposed to any form of competition for ten years. During that period customers would be unable to select their preferred supplier. Further, it appeared that prices would be fixed so that not only would customers lose the benefit of competition; any cost reductions through improved technology or process efficiency would not be passed on to them.

34 The Authority noted that the Department’s guidelines throughout referred to “the franchisee”, in the singular. In the Authority’s view, there was not justification for such an approach. The appointment of several master franchisees, with the freedom to compete with each other on price and service quality, would allow customers the benefits of competition without compromising standards. Even if a number of master franchisees were each to be granted monopoly rights in a particular region, some form of yardstick competition, whereby performance and price in the different regions were compared to each other, might be possible. The proposed arrangements, however, together with Ministerial control of prices, eliminated any prospect of competition in any form - price, quality, speed of service - for a ten-year period and removed any possibility of choice from the customers who would be paying for the service.

35 Furthermore, the Authority considered that the Department’s proposals did not provide any guarantee of service quality or value for money. Indeed, it could be argued that an arrangement which insulated the franchisee against competition for ten years was almost a recipe for poor service quality, since it placed the burden of keeping up standards entirely on the Department rather than allowing the market to do so. The proposed arrangement also reduced the pricing mechanism to an occasion for intensive lobbying of the Minister by the selected franchisee. The Authority considered that the proposed arrangements were profoundly anti-competitive. The interests of customers would be better served, and quality better maintained, by licensing a number of competing suppliers, reducing the franchise period and allowing the market, rather than the Minister, to set prices.

36 On 29 January 1998 the Department replied, stating that the proposed arrangements for a car testing regime in Ireland were the result of policy decisions taken by the Government following consideration of a range of options. Relevant factors, including international experience with the operation of car testing schemes, the technical requirements set out in EC Directive 96/96 and more generally, the obligations imposed by national and EU law had been taken into account by the Government in coming to its decision. The Department would employ consultants who would, inter alia, advise on how tender documents and the franchise contract should be drafted to reflect and protect the interests of the individual (motorist) consumer. The franchisee for the scheme would be appointed on a competitive basis which would inter alia have regard to the relative economic advantages of the proposals in accordance with procedures which reflected EU competition law. Finally, the Department was satisfied that it did not come within the ambit of the Competition Acts, as far as the proposed car testing scheme was concerned.

37 The agreement as originally notified to the Authority was a standard franchise agreement. On 6 February 1998 the Authority issued a Statement of Objections in which it found that certain clauses relating to (i) procurement of equipment, (ii) restrictions on the activities of the agent, (ii) non-competition and (iv) resale price maintenance contravened Section 4(1) of the Competition Act, 1991, and were not licensable under Section 4(2). An oral hearing was held on 10 March 1998 at which amendments to the agreement were proposed which satisfied the Authority’s concerns under headings (i), (ii) and (iii) above, but not under heading (iv). On 30 March 1998 solicitors acting for Dekra submitted a revised agreement. They stated that the agreement had been amended so that, rather than creating a principal/agent relationship between the master agent and the test centres providing the service, a principal/agent relationship was formed. They put forward the arguments summarised in Section (e), above.

38 Copies of the Statement of Objections were sent to the Tánaiste and Minister for Enterprise, Trade and Employment, and to the Minister for the Environment and Local Government, for comment. No observations were received. However, the Department of the Environment noted that the Authority acknowledged that the Government’s proposals for car testing were outside the scope of the Competition Acts and stated its view that the commentary in paragraph 6 of this document was “clearly inappropriate”.

39 Agency agreements are not subject to a block exemption. The EU Commission issued a notice on Exclusive Dealings with Commercial Agents in 1962 but this Notice is now regarded as legally obsolete. The EU Commission has indicated its intention to prepare a revised Notice on this matter but this has not yet been finalised. The EC Court of Justice considered the question of agency in the Suiker

'If such an agent works for his principal he can in principle be regarded as an auxiliary organ forming an integral part of the latter's undertaking bound to carry out the principal's instructions and thus, like a commercial employee, forms an economic unit with this undertaking'.

40 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”.

41 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”. Dekra Eireann Teoranta is a proposed joint venture between Dekra and SIMI to operate the national car testing franchise for gain, and is an undertaking. The other parties to the agreement will be engaged for gain in the provision of car testing services and will be undertakings. Consequently, the notified arrangements constitute an agreement between undertakings. The agreement will have effect within the State.

42 In its decision on the Conoco consignee agreement [2], the Authority stated its view that the question of commercial agency was quite complex, and that each case must be examined on its own merits in relation to the Competition Act, in the light of certain general considerations. In the first place, the Authority considered that it was not conclusive that one party was referred to as an “agent” in the agreement, since he might not perform the functions of an agent in any real sense. Conversely, it did not matter if the agreement stated that there was no relationship or contract of agency between the parties. This might be done, for example, to limit one party’s ability to undertake binding obligations on behalf of the other, without the latter’s knowledge or consent. From the point of the of the Competition Act, the Authority was concerned with whether the relationship between the two parties was such that one of them might be termed a “commercial agent” of the other. It was not intended that the views of the Authority about whether a person was a commercial agent or not should have any implication for the legal relationship between the two parties.

43 The Authority considers that a commercial agent is a self-employed intermediary between the principal and a purchaser or seller. The commercial agent concludes the sale or purchase of goods and services on behalf of the principal, on a continuing basis. The commercial agent is an auxiliary organ, forming an integral part of the principal’s business, and is bound to carry out the instructions of the principal. His position is similar to that of an employee. Being integrated into the principal’s business, the commercial agent can undertake no autonomous commercial behaviour under the agreement, and certain restrictions on him are fundamental to the relationship. The Authority considers that profits or losses essentially accrue to the principal and not to the commercial agent.

44 In this case the Authority does not consider that the notified arrangements are such as to create a relationship of commercial agency. The agent is obliged to invest in the products and equipment which are required in order to provide the services in question (Clause 6.11). While the principal is to use reasonable endeavours to procure favourable discount rates from suppliers, it is clear that it is the agent who pays. This is confirmed by Clause 7.17, which states that “The Agent shall promptly pay all suppliers of goods and services sold or provided to the Agent for the purpose of provision of the Service.” Furthermore, clause 15 states that “... the Agent shall, prior to the execution of the Agreement, issue a performance bond from a bank approved by the Principal ... in favour of the Principal for a sum of [ ]”, in order to guarantee fulfilment of its obligations under clauses 7.4 and 7.5 of the agreement.

45 It is clear, therefore, that the agent bears a separate commercial risk, distinct from that borne by the principal, in relation to both the purchase of the equipment and the performance of the service outlet. In its decision on North West Cattle Breeders’ Association [3], the Authority noted that it was satisfied that the agreements, as amended, created a relationship of agency because, inter alia, the contractor carried no risk in relation to the equipment used. In relation to the performance bond, the agent carries a substantial financial risk in relation to its performance of the agreement. It cannot therefore be considered as an auxiliary organ forming an integral part of the principal’s business. In the Authority’s opinion, the notified arrangements are of the nature of a franchise agreement rather than an agency agreement.

46 In the absence of an agency relationship, the Authority considers that certain clauses of the agreement offend against Section 4(1). These are clauses 2.2 and 2.3, which create an exclusive territory for the agent; and clauses 7.7, 7.22, 8 and 9.1.6 whereby the Principal sets the prices and charges to be levied for the service and the terms and conditions thereof, and the agent must not deviate from the prices set in the operating manual. This is in line with the Authority’s reasoning in its Category Licence for Franchise Agreements [4], in which it states (paragraph 17) that “in certain circumstances the following obligations may involve a restriction upon competition:

(a) an obligation on the franchisor, in the State or in a defined area of the State, the contract territory, not to:

- grant the right to exploit all or part of the franchise to third parties,

- itself exploit the franchise, or itself market the goods or services which are the subject matter of the franchise under a similar formula,

- itself supply the franchisor’s goods to third parties;

(b) an obligation on the franchisee to exploit the franchise only from the contract premises;

(c) an obligation on the franchisee to refrain, outside the contract territory, from seeking customers for the goods or the services which are the subject matter of the franchise ...”

47 Under Clause 9.1.3, the agent agrees not to permit any person to act or assist in the operation of the business until such person has signed a non-competition and confidentiality undertaking in the form specified by the principal. Under Clause 9.1.12 the Agent undertakes that it will not, without the Principal’s prior written consent, in any capacity whatsoever be directly or indirectly engaged in any business or undertaking which competes with the Service and, in particular, in any business connected with the sale, repair or testing of motor vehicles, other than the Business. Clause 9.2 is a covenant by the Agent not to be engaged, interested or concerned in any capacity, save as authorised in the agreement, “in the provision of the Service or in any like or competing service(s) in the Territory”, for the duration of the agreement and for six months thereafter.

48 The Authority not having seen the undertakings referred to in Clause 9.1.3 in the forms specified, it cannot consider them. Any decision of the Authority in relation to the notified arrangements, therefore, cannot be construed as referring to such undertakings. Clause 9.2 satisfies the category licence for franchise agreements. Clause 9.1.12 only prevents the agent from competing with the principal in the provision of the Service for the duration of the agreement. In the Authority’s opinion, this clause is reasonable in the context of a franchise-type agreement in order to protect the franchisor’s industrial or intellectual property rights or to maintain the common identity and reputation of the franchised network. The Authority therefore considers that either Clauses 9.2 and 9.1.12 do not offend against Section 4(1) or, alternatively, that if they do, they are licensable under Section 4(2).

49 Under Clause 7.23 of the Agreement, the agent, in a form to be specified by the principal, must procure an undertaking from the manager and staff not to disclose to any third party any confidential information. Under Clause 9.1.3, the agent agrees not to permit any person to act or assist in the operation of the business until such person has signed a non-competition and confidentiality undertaking in the form specified by the principal, during the continuance of the Agreement. Clause 9.3 is a covenant by the agent not at any time to divulge any information or knowledge related to the Service unless such information or knowledge has fallen into the public domain.

50 The Authority not having seen the undertakings referred to in Clauses 7.23 and 9.1.3 in the forms specified, it cannot consider them. Any decision of the Authority in relation to the notified arrangements, therefore, cannot be construed as referring to such undertakings. The Category Licence for franchise agreements states (Article 3.2(a)) that the category licence applies notwithstanding any obligation on the agent not to disclose to third parties the know-how provided by the principal, and that the agent may be held to this obligation after termination of the agreement. Likewise, the agent may be held to this obligation after termination of the agreement. The licence does not apply (Article 5(d)) where the agent is prevented from continuing to use the licensed know-how after termination of the agreement, where the know-how has become generally known or easily accessible, other than by breach of an obligation by the agent. As the Authority considers that Clause 9.3 meets the terms of the category licence, it does not propose to consider in detail whether or not this clause offends against Section 4(1).

51 Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which, "having regard to all relevant market conditions, contributes to improving the production or distribution of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question"

52 The Authority considers that the clauses (2.2 and 2.3) which have the effect of creating an exclusive territory for the franchisee/agent offend against Section 4(1). In line with its reasoning in the Category Licence for Franchise Agreements, however, the Authority considers that such arrangements will improve the provision of services as they allow Dekra the possibility of establishing a uniform network with limited investment.

53 However, the Authority considers that the clauses (7.7, 7.22, 8 and 9.1.6) which have the effect of allowing the Dekra set the prices charged for the service have no such beneficial effects. The Department of the Environment brief to consultants at paragraph 1.6 (“Evaluation Criteria in Assessment of Franchise Proposals”) states that “With a view to minimising the cost to the motorist the proposed levels of test and re-test fees will be key criteria in the assessment of the franchise proposals. After appointment of the successful franchisee any adjustment in the levels of these fees will be subject to the approval of the Minister for the Environment.” The authority notes that the EC Directive contains no provisions in relation to fees or charges, but that the restrictions in relation to them, as outlined above and contained in the consultants’ brief, were introduced by the Department of the Environment to be taken into account in assessing the franchise proposal. It is for that reason that Dekra are anxious to have uniform prices. However, in circumstances where the decision to appoint a single franchisor has eliminated all possibility of inter-brand competition, an agreement which also eliminates intra-brand competition and thereby effectively eliminates all possibility of competition cannot be held to satisfy the requirements of Section 4(2). The Authority therefore considers that the notified arrangement is not licensable under Section 4(2).

54 The Competition Authority considers that Dekra Eireann Teoranta and its agents are undertakings and the notified agreement (CA/20/97) is an agreement between undertakings. The Authority considers that the agreement contravenes Section 4(1) of the Competition Act, 1991 and does not satisfy all the conditions of Section 4(2) of the Act. It has therefore refused to issue a certificate or to grant a licence in respect of the notified agreement.

Isolde Goggin

Member

17 July 1998

[1] Council Directive 86/653 of 18 December 1986 on the co-ordination of the laws of the Member States relating to self-employed commercial agents

[2] Decision no. 286 of 25 February 1994

[3] Decision No. 446 of 15 December 1995

[4] Decision No. 372 of 17 November 1994