Irish Competition Authority Decisions

1. Notification was made on 20 July 1993 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 an exclusive distribution agreement between Gallaher (Dublin) Ltd. and Ritmeester B.V.

2. The notification concerns an exclusive distribution agreement whereby Ritmeester B.V. (“Ritmeester”) appoints Gallaher (Dublin) Ltd. (“Gallaher”) as the exclusive distributor of Ritmeester cigars (“the Products”) in the State.

3. Ritmeester is a wholly-owned subsidiary of Burger Sohne, A.G., Switzerland. Gallaher is a wholly-owned subsidiary of Gallaher Limited (UK) which, in turn, de-merged in 1997 from American Brands Inc., and became a plc in the UK. For the year ended 30/11/1992, Gallaher had a turnover of IR[ ]m.

4. This notification concerns an agreement dated 3rd May, 1993, between Ritmeester and Gallaher. Under the Agreement, Gallaher is appointed as the sole and exclusive distributor in the Republic of Ireland (including duty-free outlets located in the Republic of Ireland) of certain cigar products specified in the Agreement, which are manufactured by Ritmeester and supplied to Gallaher pursuant to the Agreement. The Products are specified in the Schedule to the Agreement [1]. However, other Products may be added to the Agreement as agreed from time to time between the parties.

5. In their original submission to the Authority, the parties claimed that the relevant market was the market for cigars. The parties claimed that the turnover of Ritmeester (consisting of the Products) in the market for cigars in 1992 was IR£[ ], involving a market share of [ ]%. The turnover of Gallaher in the market for cigars in 1992 was IR£[ ], or some [ ]% of the market. In addition, the parties claimed that Tobacco Distributors Limited and Players each had approximately [ ]% of the market.

6. The Authority indicated to the parties its preliminary view that the agreement appeared to be one between competing manufacturers and, on that account, would not qualify for the Category Licence [2]. The Authority did, however, indicate its preparedness to consider this issue in somewhat more depth on the basis of an individual decision. In their response, the parties claimed that the market for cigars could be segmented into three market sectors on the basis of cigar size; namely small, medium and large cigars. Further to this, the parties claimed that Gallaher’s cigar, Hamlet, was sold in the medium cigar market. The parties claimed that only one Ritmeester product was sold in this market segment, namely, Pikeur. The parties further argued that, as Pikeurs were sold at a price premium to Hamlet of IR£1 per 5-pack, there was effectively no price competition between the two brands . They also claimed that the consumer regards British and Dutch cigars as being fundamentally different and would not perceive them as equivalent products. Consequently, the parties submitted that they cannot be considered to be competing manufacturers.

7. In response to further queries by the Authority, the parties refined the market definition further, while re-iterating their earlier contention that British and Dutch cigars constitute separate markets. They claimed that there are, in fact, four specific and distinct segments in the cigar market in the State, as set out in Table 1 overleaf, the overall estimated market being approx. [ ]m sticks per annum. The four segments are, respectively, small/miniatures, large whiffs, panatellas and large cigars.

8. The parties did not believe that the Agreement, or any aspects of the Agreement, restricted them in their freedom to take independent commercial decisions. However, without prejudice to this, the Authority’s attention was drawn to the following provisions of the Agreement:-

- under Clause 2.1(a), Gallaher is appointed as the sole and exclusive distributor of the Products in the Territory;

- under Clause 2.2(a), Gallaher agrees that, for the duration of the Agreement, it will purchase from Ritmeester all of its requirements for the Products for resale within the Territory;

- under Clause 2.2(b), Gallaher agrees that, for the duration of the Agreement, it will not import, distribute or sell another brand of Dutch cigars or have any connection whatsoever with the import, distribution or selling of such brands in the Territory without the written consent of Ritmeester;

- under Clause 2.3(a), Ritmeester shall not appoint any other person, firm or company in the Territory as a distributor or agent for the Products in the Territory;

- under Clause 2.3(b), Ritmeester shall not supply directly any other person, firm or company in the Territory with any of the Products, whether for use or resale;

- under Clause 5.1, Gallaher shall use its best endeavours to promote the sale of the Products throughout the Territory;

- under Clause 5.2, Gallaher shall be entitled, subject as provided in the Agreement, to promote and market the Products in the Territory in such manner as it may think fit and, in particular, shall be entitled to resell the Products to its customers at such prices as it may determine;

- under Clause 5.3, prior to 1st December each year, Ritmeester and Gallaher shall agree a publicity and sales promotion plan and budget for the next succeeding 12 months (that is, 1st December to 30th November);

- under Clause 5.4, Gallaher shall provide Ritmeester on a three-monthly basis with a report in such form as Ritmeester may reasonably require of Gallaher’s activities in the field of publicity and sales promotion in that period;

- under Clause 5.5, Gallaher shall, each month, advise Ritmeester of the sales made during the preceding month with respect to each Product and report to Ritmeester on market conditions prevailing in the Territory.

9. The parties claimed that neither the provisions noted above nor the Agreement itself have 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 Section 4(1) of the Act. In particular, the parties claimed that the effect of the Agreement is to encourage and promote competition by ensuring the efficient distribution of Ritmeester’s Products in the Territory. Ritmeester is a cigar manufacturer based in Holland. The most effective means by which Ritmeester might compete in the market in Ireland is by appointing a distributor such as Gallaher which is experienced in the distribution of tobacco products in Ireland. In this way, Ritmeester Products can effectively compete in the Irish market. The provisions noted at paragraph 8 above are necessary to ensure the successful operation of the agreement and are reasonable in their terms. The parties therefore stated their belief that the said provisions do not offend against Section 4(1) of the Act.

10. In this regard, the parties submitted that the Authority should adopt what has been termed under, in particular, United States, and European Community, competition law, a “rule of reason” approach and consider the Agreement and the provisions noted to be reasonable and pro-competitive in the context of Section 4(1) of the Act and, therefore, outside the application of that provision. In support of this view, the parties referred to the judgement of the European Court of Justice in Stergios Delimitis-v-Henninger Brau , Case 234/89, 28th February, 1991, the judgement of Mr. Justice Keane in Masterfoods Limited trading as Mars Ireland-v-HB Ice Cream Limited , 28th May, 1992, and statements in the Authority’s first Decision, Nallen/O’Toole, to the effect that Section 4(1) of the Act should not be interpreted literally, since to do so would mean that “ virtually every form of business agreement could be argued to prevent, restrict or distort competition .... Such an interpretation would render it virtually impossible for business to operate ”.

11. The parties claimed that, on a rule of reason basis, the terms of Clause 2 are reasonable and necessary, in order to achieve the beneficial objectives behind the agreement, namely, the effective distribution of Ritmeester’s Products in the Territory. As such, the Agreement and these related provisions are pro-competitive, in that they ensure that Ritmeester’s Products can compete in the Irish market. Furthermore, the obligations imposed on Gallaher by Clause 5 ensure that it performs its part under the Agreement. Thus, these provisions do not constitute restrictions on competition within the meaning of Section 4(1) of the Act, they do not therefore offend against Section 4(1), and the Authority should grant a Certificate in respect of the Agreement.

12. Alternatively, if the Authority should consider that some of the provisions noted at paragraph 7 might infringe Section 4(1) of the Act, the parties would refer to EC Commission Regulation 1983/83 (“Regulation 1983/83”), which generally exempts certain types of exclusive distribution agreements from the application of Article 85(1) of the Treaty of Rome, on which Section 4(1) of the Act is based, provided that the agreement contains provisions which are no more restrictive than those permitted under the Regulation.

13. A distinction is drawn in Article 2 of Regulation 1983/83 between certain types of provisions, which may be deemed restrictions on competition under the Regulation but which may be imposed on the exclusive distributor (these are listed under Article 2(2)), and certain obligations which may also be imposed on the exclusive distributor (these are listed under Article 2(3)). The parties would submit that the latter obligations are not restrictions of competition. By analogy with Article 2 of regulation 1983/83, the parties would submit that Clauses 5.1, 5.2, 5.3, 5.4 and 5.5, in particular, are obligations, in this sense, rather than restrictions of competition within the meaning of Section 4(1) of the Act.

14. The parties also referred to a draft Licence of Categories of Exclusive Distribution Agreements (“the Draft Category Licence”), published by the Authority in July, 1993. In the Draft Category Licence, which was closely modelled on Regulation 1983/83 (and subsequently adopted by the Authority), the Authority outlined certain provisions in exclusive distribution agreements which it stated generally offend against Section 4(1) of the Act, and certain provisions in such agreements which do not so offend. In relation to the latter, the Authority outlined, at paragraphs 26 and 27 (promotion of sales) and paragraph 28 (keeping of records, etc.), certain obligations which, if imposed on an exclusive distributor, it would generally consider as not restricting competition and, therefore, not offending against Section 4(1). The parties also noted that the Authority stated that the list provided in these paragraphs was not comprehensive, but only provided examples of clauses which generally do not restrict competition. On this basis, the parties submitted that Clauses 5.1, 5.2, 5.3, 5.4 and 5.5 of the Agreement, in particular, are obligations of the type outlined by the Authority at paragraphs 26 and 28 of the Draft Category Licence, rather than restrictions of competition within the meaning of Section 4(1) of the Act.

15. Despite their belief that it did not do so, the parties noted that the Authority might consider that the Agreement, or certain aspects of it, might infringe Section 4(1). If the Authority should reach such a conclusion, then the parties, without prejudice to any other rights which they or any of them might have at any time, submitted that the Authority, in exercise of its powers under the Act, should grant a Licence in respect of the Agreement for the purposes of Section 4(2) of the Act.

16. In relation to the conditions listed in Section 4(2) of the Competition Act, the parties considered that the Agreement “ contributes to improving the production or distribution of goods or the provision of services or to promoting technical or economic progress ”.

17. They stated that, in general, exclusive and sole distribution agreements lead to an improvement in distribution because the supplier is able to concentrate its sales activities and does not need to maintain numerous business relations with a large number of distributors. Exclusive and sole distribution agreements also facilitate the promotion of sales of a product and lead to intensive marketing and to continuity of supplies while, at the same time, rationalising distribution. Such agreements also stimulate competition between the products of differing manufacturers. The appointment of a sole and exclusive distributor who will take over sales promotion, customer services and carrying of stocks is often the most effective way, and sometimes indeed the only way, for the manufacturer/ supplier to enter a market and compete with other manufacturers/ suppliers already present. This is particularly so where, as in the present case, the manufacturer/ supplier is established outside Ireland and wishes to compete in the Irish market. Finally, an exclusive distribution agreement is particularly likely to stimulate competition where the exclusive distributor appointed in the contract territory is well-established and experienced in the particular market. In general, reference is made by the parties to Regulation 1983/83 and, in particular, paragraphs 5 and 6 of the preamble thereto.

18. The parties made reference to the Draft Category Licence, where the Authority stated as follows at paragraphs 34 and 35:-

“Exclusive distribution agreements generally lead to an improvement in distribution because the supplier is able to concentrate his sales activities and he does not need to maintain numerous business relations with a large number of dealers. Particularly in the case of international trade, difficulties resulting from linguistic, legal and other differences are more easily overcome by the appointment of a distributor located in the territory. In the case of domestic firms, it is often preferable for the supplier to concentrate on production and to delegate the distribution function to a specialist distributor who already possesses the necessary organisation and dealer contact.

Exclusive distribution agreements facilitate the promotion of sales of a product and lead to intensive marketing and to continuity of supplies while at the same time rationalising distribution. They stimulate competition between the products of different manufacturers. The appointment of an exclusive distributor who will take over sales promotion, customer services and carrying of stocks is often the most efficient way, and sometimes indeed the only way, for the manufacturer to enter a market and compete with other manufacturers who are already present. This is particularly so in the case of small and medium sized undertakings. It must be left to the parties, however, to decide whether, and to what extent, they consider it desirable to incorporate in the agreement the terms providing for the promotion of sales.”

19. Ritmeester has appointed a distributor to act on its behalf in the State, as the geographic nature of the State would not make it cost-effective for Ritmeester to have its own distribution network. Linking with Gallaher also allows for economies of scale. Gallaher sells the products through all trade sectors and, therefore, the consumer can purchase the brands freely throughout the country. With shared costs, the price of the Products is also economic. In contrast, if Ritmeester were to distribute the products itself, the cost would need to be passed on to the consumer in part, which would increase prices.

20. In summary, the parties claimed that the Agreement is to the benefit of all parties concerned - Ritmeester, Gallaher and the consumer (as regards the consumer, it “ allows consumers a fair share of the resulting benefit ”). In the latter context, the parties referred to paragraph 36 of the (1983) Draft Category Licence, where the Authority stated as follows:-

“As a rule, such exclusive distribution agreements also allow consumers a fair share of the resulting benefit as they gain directly from the improvement in distribution, and their economic and supply position is improved as they can obtain products, particularly those manufactured in other countries, more quickly and more easily.”

In this regard, the parties noted that the Products are manufactured outside the State, i.e. in Holland.

21. The parties also claimed that the Agreement “ does not impose on the companies concerned terms which are not indispensable to the attainment of those objectives ”. In general, they claimed that the provisions of the Agreement noted above are reasonable and necessary if the objectives (of the agreement) are to be attained. Moreover, these provisions produced a clear division of functions between the parties, and compel Gallaher to concentrate its sales efforts on the Products and the Territory.

22. The parties claimed that these provisions are necessary to attain the improvement in the distribution of goods sought through exclusive distribution. In this regard, the parties made reference to paragraph 37 of the Authority’s (1983) Draft Category Licence.

23. In particular, the parties made the following individual comments:-

- Clause 2.1(a) - the grant of sole and exclusive distribution rights encouraged Gallaher to concentrate its efforts under the Agreement. Furthermore, such a provision was expressly permitted by the terms of Article 1 of Regulation 1983/83. Such a provision was also expressly permitted by Article 1 of the Draft Category Licence.

- Clause 2.2(a) also guaranteed Ritmeester a reliable source of demand which, in turn, encouraged Ritmeester to manufacture its Products. Furthermore, such a provision was expressly permitted by the terms of Article 2(2)(b) of Regulation 1983/83 and Article 2(2)(b) of the Draft Category Licence;

- Clause 2.2(b) also ensured that Gallaher would concentrate its efforts on the Agreement. Furthermore, such a provision was expressly permitted by the terms of Article 2(2)(a) of Regulation 1983/83 and Article 2(2)(a) of the Draft Category Licence. The terms of Clause 2.2(b) were also limited, and narrower than those permitted by Article 2(2)(a) of Regulation 1983/83 and Article 1(2)(a) of the Draft Category Licence, in that they only referred to competing Dutch cigars and not to competing cigars in general;

- Clause 2.3(a) essentially confirmed that Gallaher would be appointed as Ritmeester’s sole and exclusive distributor of the Products in the Territory and, therefore, was also permitted by the terms of Article 1 of Regulation 1983/83 and Article 1 of the Draft Category Licence;

- Clause 2.3(b) , as with Clause 2(1)(a), helped to ensure that there was a clear division between the roles and functions of supplier and distributor and, as such, contributed to the successful operation of the Agreement. Furthermore, such a provision was expressly permitted by the terms of Article 2(1) of Regulation 1983/83 and Article 2(1) of the Draft Category Licence.

- Clause 5.1 encouraged Gallaher to perform its part under the Agreement. As such, it did not raise any competition issues.

- The parties claimed that Clause 5.4 was necessary, so that Ritmeester would have an overview of the performance of Gallaher in marketing and sales and, as such, did not raise any competition issues.

- The parties claimed that Clause 5.5 was a necessary and reasonable provision, in order to permit Ritmeester to review the operation of the Agreement and, therefore, does not raise any competition issues.

24. The parties claimed that, on the basis of the above, and in particular, by analogy with Regulation 1983/83 and the (1983) Draft Category Licence, Clause 2 did not impose on the parties terms which were not indispensable to the attainment of the objectives of the Agreement. Furthermore, the parties stated that the terms of Clause 5 did not raise competition issues in the context of Sections 4(1) and 4(2) of the Act.

25. The parties also claimed that the Agreement “ does not afford companies the possibility of eliminating competition in respect of a substantial part of the products or services in question ”. In this connection, they claimed that the market for cigars in the State was highly competitive, with a number of distributors holding significant market shares. In particular, Tobacco Distributors Ltd. and Players each had approximately [ ]% of the market. Furthermore, the parties stated that the Products represented only [ ]% of the market. While Gallaher had [ ]% of the market, this consisted exclusively of cigars manufactured and sold by Gallaher itself, mainly, the Hamlet brand. The parties pointed out that Gallaher did not act as an exclusive distributor of cigars in the Territory for any company apart from Ritmeester. Consequently, the exclusive distributor did not have “exclusive agreements in respect of a substantial range of competing products” (Article 3(1) of the Draft Category Licence) so that the concerns raised by the Authority at paragraph 46 of the Draft Category Licence did not arise under the Agreement.

26. The parties to the Agreement have not made any notification to the European Commission of the Agreement or of any appurtenant matter. No notice has been received by any of them of any proceedings before the EC Commission in relation to the Agreement. None of the parties is aware of any proceedings under the competition law of any country or state relating to or arising from the Agreement or any appurtenant matter.

27. 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 ”.

28. 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 ”.

29. Gallaher is engaged for gain in the distribution of tobacco products and is thus an undertaking. Ritmeester is engaged for gain in the production of tobacco products and is also an undertaking. Thus, the notified arrangement is an agreement between undertakings.

30. In its Decision No. 528 of 4 December, 1998 - Category Certificate/Licence in Respect of Agreements between Suppliers and Resellers, the Authority observed that, where either party to a vertical agreement has more than 20% of the relevant market, it may enjoy a degree of market power. Economic analysis suggests that in those circumstances non-price vertical agreements may have anti-competitive effects and therefore, as in this case, contravene Section 4(1). Moreover, the Authority considers that, where either party’s market share exceeds 40%, such arrangements do not necessarily satisfy all four of the requirements for a licence and the Category Licence does not apply in such circumstances. The Authority recognises, however, that an individual agreement might satisfy this requirement, although the party’s market share may exceed this level.

32. The main distributors in the Irish market for “standard” (i.e. non-luxury) cigars are Gallaher ( Hamlet by Benson & Hedges, Pikeur, Minilights, Tips and Half-Corona by Ritmeester), John Player ( Cafe Creme , Castella Classic [4] and Half-Corona by Henri Wintermans), Tobacco Distributors Ltd. ( Agio, King Edward , Panter), PJ Carroll ( Villiger) and Swedish Match ( Wings, Willem II ).

33. The parties claimed that the turnover of Ritmeester (consisting of the Products) in the market for cigars in 1992 was IR£[ ], representing a market share of [ ]%. The turnover of Gallaher in the market for cigars in 1992 was IR£[ ], or some [ ]% of the market. In addition, the parties claimed that Tobacco Distributors Ltd and John Player each have approximately [ ]% of the market.

34. In the 31 May 1998 edition of Retail Magazine , it was claimed that Gallaher, through its Hamlet and Ritmeester brands, has a market share of 75% of the Irish cigar market. From Checkout magazine, Gallaher claims 75% of the overall market but this is disputed by Tobacco Distributors Ltd (TDL). TDL claims that Gallaher’s market share is 58%, TDL’s own market share is 13% and they ascribe a 2% market share to P.J. Carroll’s. In Retail Magazine 31/05/1997, it was claimed that Gallaher had 76% of the overall market (with Hamlet holding 55%).

35. The Authority considers that there are several quite distinct segments in the market for cigars. At the top level, there are large/luxury cigars which can retail for upwards of IR£20 each. In the rest of the market, the Authority considers that there are four different segments, corresponding to those described by the parties in their most recent submission. The Authority considers that, apart from price, cigars are differentiated by such characteristics as size, type and taste of tobacco used, length of time required to smoke the cigar etc.

36. In the opinion of the Authority, the market segment in which the Pikeur brand is competing is distinct from the market segment in which Hamlet is the biggest seller. This is a distinction which is based on size, the time required to consume the cigar, the taste and other characteristics rather than price alone. In the Authority’s view, the main competitor to Hamlet is the Castella Classic brand, marketed by John Player. Thus, the Authority is satisfied that Pikeur and Hamlet cigars are not easily substitutable, and are therefore not competing directly in the same market - they are, rather, complementary products.

37. The Authority has previously considered exclusive distribution agreements involving potentially competing manufacturers, among them CA/940/92E (PJ Carroll / S.E.I.T.A) and CA/196/92E (Player & Wills / Reynolds) . The first of these cases involved the appointment of an Irish cigarette manufacturer as exclusive distributor of branded French cigarettes, while the second involved a similar appointment of another Irish concern in respect of imported menthol cigarettes. In both cases, the agreements were given the benefit of the Exclusive Distribution Category Licence. The relevance of these cases to the current case lies in the fact that, in the Authority’s view, the imported product was not, in fact, in direct competition with, but rather complemented, the distributor’s own brands.

38. The Authority is satisfied that the other Ritmeester brands distributed by Gallaher face strong competition from competing brands in both the Small/ Miniature and Panatella market segments. The Authority is further satisfied that there is no risk of undue concentration in these segments arising from the agreement, since Gallaher does not produce any brands of its own in these segments.

39. The Authority considers that the Gallaher portfolio of products is such that it represents a formidable group of products in the overall cigar market in the State. The Authority accepts the argument that, to enter a foreign market, there are economic advantages in getting an established producer to distribute and market the products in the first instance. The market penetration of the Ritmeester products suggests that the notified agreement has ensured that Ritmeester brands have been successful in consolidating their position in the cigar market in the State. The Authority considers that the effective distribution of Ritmeester brands through Gallaher has increased competition in the market. This has benefited consumers as, in the opinion of the Authority, the extension of choice is an important element in raising consumer welfare. It follows that the arrangement does not afford the parties the possibility of eliminating competition in respect of a substantial part of the products or services in question.

40. In the Authority's opinion Gallaher and Ritmeester are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, and the notified Agreement is an agreement between undertakings. The Authority considers that the Agreement contravenes Section 4(1) of the Competition Act, 1991. Nevertheless, the Authority is of the opinion that all the conditions set out in Section 4(2) of the Act have been fulfilled in respect of the Agreement. The Authority therefore grants a licence under Section 4(2) in respect of the notified Agreement. The licence shall apply from 15 December, 1998, to 31 December 2003.

For the Competition Authority

Declan Purcell,

Member

15 December 1998

[1] The products are Pikeur (5-packs and 50-drum), Pikeur Mini Lights (10-tin), Tip (10-box and 50-drum) and Half Corona (5-pack). In addition the following are offered at duty free outlets; Livarde (50-pack), Livarde Lights (50-pack), Pikeur (50-pack), Half Corona (25-pack), Corona (25-pack), Tip (50-pack) R.D. Fresh & Mild Cigarillos (50-pack) and R.D. Fresh & Mild Panatelas (50-pack)

[2] Decision 144 of 5 November 1993 - Licence for Categories of Exclusive Distribution Agreements .

[3] The Gallaher and Ritmeester brands are highlighted in bold.

[4] “The Castella Classic cigar is seen by the consumer as a real alternative to Hamlet and retails at £2.07 for 5 cigars” - Business & Finance , 27 August 1998. The typical retail price of 5 Hamlet cigars is £2.11.