Irish Competition Authority Decisions

1. Notification was made to the Competition Authority on 15 March 1993 of an agreement between Unisolutions Associates and Dascom Services Ltd and Manix Systems Ltd with a request for a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Authority to issue a certificate, a licence under Section 4(2).

2. The notification relates to an agreement, which was signed on 9 December 1992, under which Unisolutions (the Originator) grants to Dascom and Manix (jointly and severally, the Distributor) the non-exclusive right and licence only to produce, develop and market computer software products in Europe, including the State.

3. Unisolutions is a five person company based in California, with registered offices at 2103 Matthews Avenue, Redondo Beach, CA 90278, USA. Its main business is in the USA where it has less than 5% of the US market in systems management of UNIX software. Dascom is an Irish company with its registered office in Weir View House, The Mall, Lucan, Co. Dublin, and Manix is its subsidiary, with a registered office in Haigh Terrace, George’s Street, Dun Laoghaire, Co. Dublin.

4. The product consists of computer software products, particularly to assist computer users in systems management of UNIX software. Unisolutions stated that UNIX was an extensively utilised software system found in many areas of the computer market. UNIX runs on many computer types, ranging from personal computers to mainframes. UNIX is an operating system originally developed at Bell Laboratories in 1969. The UNIX operating system is primarily written in the high level computer language C. UNIX is therefore portable over many different platforms so long as there are C compilers available for that particular platform.

5. Unisolutions stated that the major players in the UNIX market were Sun, Digital, Hewlett Packard, IBM, SGI and SCO. The party claimed that entry to the market was relatively easy, since the product was based on writing programmes for existing software to enable that software to perform more efficiently. Unisolutions considered the following to be substantial players in the same market - Computer Associates, Systems Centre, Tivoli, AIM, REEL Software, Delta Microsystems, Ease and EST. It maintained that there were at least five other companies of which it was aware which produced competing products.

6. The UNIX operating system is used widely throughout government, business and academia. The Authority is of the opinion that because of the size and fluid nature of the computer software industry, the relevant market in this particular case, is the development and distribution of computer software product(s) which assist computer users in systems management of UNIX software.

7. The arrangements [1] relate to an agreement dated 9 December 1992 between Unisolutions and Dascom and Manix for the non-exclusive distribution by Dascom and Manix of Unisolutions’ (software) products in Europe, including the State.

8. The distributor is granted the non-exclusive right and licence only to produce, develop and market the products in the territory (clause 1). The distributor must not hold itself out as agent of Unisolutions (clause 2(1)), and may market the products through an agent or sub-distributor, subject to certain conditions (clause 2(2)). The distributor is not entitled to claim against Unisolutions if the products are marketed in the territory by any person, including Unisolutions, from within or outside the territory (clause 3). The distributor must allow access to records, etc., by specified auditors to report on licence fees due (clause 5(1)). Ownership of the products and the brand names remain with Unisolutions, and no title in the products shall pass at any time to the distributor or to end users (clause 6). The licence fee is specified as an initial lump sum, plus a monthly percentage of the gross amounts received by the distributor (clause 11(1)). The distributor agrees to promote sales; to use brand names only under the agreement; to refrain from seeking end users outside the territory, except with agreement; not to establish or maintain any branch or distribution depot outside the territory; not to copy or amend the code or the products; not to develop competing products; to prepare a detailed annual promotion and sales plan; to furnish promotional and publicity material to Unisolutions; to furnish a list of end-users and the quantity and amount of sales; to distribute the products only in accordance with the terms of the Conditions of Business; to provide support to end users; and to produce one copy of any enhancement, and of each derivative work, to Unisolutions (clause 16).

9. The distributor agrees to keep restricted information, including the code and the intellectual property, confidential, and not to divulge it, but to use it only under the agreement, with some exceptions (clause 21). It is repeated that the appointment is non-exclusive, and that Unisolutions, itself or through others, may supply the products in the territory (clause 23(1)). On termination, the distributor will provide Unisolutions with a list of end users, and assign the benefit of all existing contracts to Unisolutions (clause 24(2)(b)). For three years, after termination, the distributor shall not directly or indirectly be engaged concerned or interested in a business which utilises or duplicates the Products or the Derivative Products or any part thereof or use the brand name or any of the Intellectual Property or any name or mark likely to be confused therewith (clause 24(2)(c)). The term of the agreement is for five years from 9 December 1992, and indefinitely thereafter, subject to one months notice (clause 25). The agreement is stated not to create any partnership or contract of agency (clause 28).

10. Schedule 2 of the agreement contains the terms and conditions of the distributor, which consists of a demo licence agreement, a binary licence agreement, a user’s licence and the general terms and conditions of Manix. Under the demo licence agreement, Manix grants to the licensee a personal, non-transferable and non-exclusive right to use the software on the designated equipment at the designated locations (clause 1.2). The licensee agrees to use the software only for the legitimate purposes of evaluating the software to determine its suitability for normal commercial use (clause 2.1). There are provisions for non-disclosure of proprietary information (clause 8). The agreement is effective for 30 days (clause 10.1). The binary licence agreement is similar, but is a licence for the permanent use of the software. Again, it is a personal, non-transferable and non-exclusive licence to use the software on the designated equipment at the designated locations (clause 1.2). The licensee agrees to use the software only in connection with the operation and management of its own internal business, and not to copy the software except as necessary for such authorised use (clause 2.1). Non-disclosure provisions for proprietary information are included (clause 8). The agreement remains in effect unless terminated as provided in the agreement (clause 10.1). The users licence refers to the product, the defined computer or a replacement computer, and it specifies a contractual period, after which it is automatically reserved for successive 12-month contractual periods. The agreement may be terminated by either party at the end of each contractual period, subject to 90 days notice. The general terms and conditions attached to the user licence imposes a confidentiality requirement, prohibits copying of the programme, and permits the licenser to have access to all the computers employed by the user to ascertain the number of computers which use the programme and to ensure compliance with the agreement.

11. Schedule 4 relates to the prices and bulk purchase discounts of the distributor, and is referred to in clause 11(4) of the main agreement. It lists, effective 1 October 1992, the purchase licence fees, the monthly rental licence fees, documentation and services fees, and the proposed quantity discounts of Manix.

12. In its submission, in support of a request for a certificate, Unisolutions stated that the agreement was non-exclusive, as was the arrangement for licensing back to Unisolutions of any derivative products.

13. In support of the request for a licence, they stated that: The Agreement leads to an improvement in the distribution of the Products because Unisolutions is able to concentrate its sales activities, does not need to maintain numerous business relations with a larger number of dealers and, given that Unisolutions is a small company based in California, the Agreement enables Unisolutions to have its Products supplied in Ireland. Dascom and Manix, given the nature of their business activity, has a distribution and support system and the Products complement its business.

14. The Agreement

(a) facilitates the provision of sales of the Products

(b) facilitates the better marketing of the Products

(c) facilitates the continuity of supplies

(d) stimulates competition between different manufacturers in the software market in systems management

(e) has facilitated, given the obligations imposed on Dascom and Manix in respect of sales promotion, customer services and carrying of stocks, the ability of Unisolutions to compete in the market.

(f) is beneficial for consumers in that distribution of the Products is improved. Products are obtained more quickly, more easily and throughout the State.

(g) does not impose a restriction on Dascom and Manix in respect of the prices which it charges to retailers (Clause 11).

15. In addition, Unisolutions maintained that:

To enable Dascom and Manix to provide support service to end-users, Unisolutions has given its relevant source codes to Dascom and Manix. The source code represents the fundamental information about the way the Products are constructed. Usually the holder of the intellectual property rights in the source code will not allow others to have access because of the primary requirement of protecting ones work and ones investment. If end-users in Europe are to have access to the Products, thereby ensuring wider consumer choice and more competition, Unisolutions must have confidence that the party to whom it releases the source code will not engage in similar activity, with the danger of knowledge gained from the source code being used in another project.

16. Unisolutions claimed that it is very difficult to prove that another software programme has been produced using ones source code and that practically speaking, endeavouring to so prove would be prohibitive for an organisation the size of Unisolutions. The only practical way in which the concerns of Unisolutions can be addressed is to prevent the Distributor from engaging in similar business (Clause 16(7)). The licence back is non-exclusive and ensures that Unisolutions gets the benefit of any development of derivative products/works, while also allowing Dascom and Manix to market such products themselves (Clause 22).

17. In October 1995, the Authority wrote to each of the parties to enquire whether the notified agreement was still in existence and, if so, whether any amendments had been made to it. Dascom responded on 18 October to the effect that the agreement had now effectively lapsed, while Unisolutions replied on 27 October that the agreement was still in effect and that no amendments had been made to it. Given the conflict of views, each party was requested, on 2 November, to comment on the response of the other. Unisolutions stated, in a letter dated 7 November, that they regarded the agreement as being still in force. They noted that Dascom had indicated that the agreement had effectively lapsed. This would seem to confirm that the agreement was still in force, but that Dascom considered that it was of no practical relevance anymore. Nevertheless they wished the notification to proceed so that a licence or certificate could be obtained. Unisolutions did not want to be in a position where it sought to enforce the agreement and then found that a competition defence was raised by the other side.

18. On 2 November 1995, Dascom wrote as follows: ‘Manix Systems Limited t/a Unisolutions has not traded for the last two years nor has Dascom sold, developed, supported or been in contact with any of Unisolutions customers. While Unisolutions Solicitors may feel that there is an agreement in place it is of no commercial significance as we do not now operate in this specific marketplace. We do not have the personnel to participate in this market place’.

19. Section 4 (1) of the Competition Act 1991 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 trade in any goods or services in the State or in any part of the State are prohibited and void.

20. 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. Unisolutions is engaged for gain in the development and distribution of computer software products, and Dascom and Manix are engaged in the distribution of such products for gain, and they are all undertakings. The agreement is an agreement between undertakings, and it has effect within the State.

21. Under the notified agreement, the distributor is granted the non-exclusive right to produce and market specific computer software products in the territory, which includes the State. The distributor does not purchase goods from Unisolutions for resale, although its functions are in many respects analogous to those of a normal distributor of goods for resale.

22. The Authority is cognisant of the fact that as a necessary part of the agreement Unisolutions had to share its source code with Dascom. The source code of the program is the step by step instructions which the computer uses to perform the tasks the programmer wants the computer to perform. As with any task there are many different ways in which a programmer can get the computer to perform the same function. To share the source code with Dascom, the intellectual property rights of Unisolutions must be sufficiently protected for Unisolutions to be willing to enter the agreement voluntarily.

23. Copyright was deemed to subsist in computer programmes under the European Communities (Legal Protection of Computer Programs) Regulation 1993, (S.I. No. 26 1993). However, it is stated in Regulation 3 (3) of the same Regulation that the ideas and principles which underlie any element of a computer program, including those which underlie its interfaces, are not protected by copyright. This would enable a company with access to Unisolutions source code make a reasonable facsimile of their software without infringing Unisolutions copyright. It is because of this, that a company such as Unisolutions, (which has shared what is in essence the capital of their firm) will attempt to ensure that their interests are protected.

24. Against this background, the Authority looked at Clause 22(2) in the agreement under which Dascom granted to Unisolutions a perpetual non-exclusive assignable licence to all products developed by the distributor as a result of its access to the computer programming code of the products. This clause ensures that any improvements or alternative uses made by Dascom of the knowledge capital in the program will be licensed back to Unisolutions. This Clause, in the opinion of the Authority, does not restrict in any way the use that Dascom may make of such enhancements and it is necessary to ensure that Unisolutions will participate in the arrangement. In the opinion of the Authority, this does not contravene Section 4(1) of the Competition Act. This clause links with Clause 16 under which Dascom must produce one copy of any enhancement, and of each derivative work, to Unisolutions. This clause is a complement to Clause 22(2) and in the opinion of the Authority, does not contravene Section 4(1) of the Act.

25. In this agreement, there are obligations on Dascom to furnish to Unisolutions a list of end-users and the quantity and amount of sales and upon termination, to provide to Unisolutions a list of end-users and assign the benefit of all existing contracts to Unisolutions. In the opinion of the Authority, as the property rights in the programs are at all times vested in Unisolutions, such a clause does not contravene Section 4(1) of the Act.

26. Under Clause 24(4)(c), Dascom ‘shall not directly or indirectly be engaged, concerned or interested in a business which utilises or duplicates the Products or the Derivative Products or any part thereof or use the brand name or any of the Intellectual Property or any name or mark likely to be confused therewith’ for three years after termination. The Authority normally considers that post-term non-compete clauses by their very nature are anti-competitive. In this particular case, however, the Authority is of the view that the post-term non-compete clause is necessary to protect the intellectual property rights of Unisolutions and that the provisions noted in Clause 24(4)(c) are essential to facilitate the transfer of specialist know how and technology under the agreements, vide Decision no 502, 16 June 1998. The Authority views such transfer of technical know-how as essentially pro-competitive. The Authority is therefore of the opinion that in this particular instance, where Dascom have access to the source codes for the programs ( op.cit. paras 21, 22, this represents a major part of the capital of Unisolutions), the three year post-term non-compete clause in the agreement does not constitute a restriction on competition within the meaning of Section 4(1) of the Act.

27. In the Authority’s opinion, Unisolutions, Dascom and Manix are undertakings within the meaning of section 3(1) of the Competition Act and the notified arrangements constitute an agreement between undertakings. In the Authority’s opinion the non-exclusive distribution agreement dated 9 December 1992 between Unisolutions Associates and Dascom Services Limited and Manix Systems Limited does not contravene Section 4(1) of the Competition Act.

28. 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 agreement dated 9 December 1992 between Unisolutions Associates and Dascom Services Limited and Manix Systems Limited for the non-exclusive distribution of computer (software) programs notified under Section 7 of the Competition Act on 15th March 1993 (Notification No. CA/11/93 ) does not contravene Section 4(1) of the Competition Act, 1991, as amended..

[1] There was a prior agreement between Unisolutions and Manix. This had terminated at 31 July 1992, and a sum was due to Unisolutions. Unisolutions had agreed to refrain from enforcing its rights against Manix in consideration of Dascom and Manix paying a sum to Unisolutions and entering into this agreement. In addition, Unisolutions agreed to waive its rights against Manix for overdue royalty payments, while the distributor granted Unisolutions a perpetual non-exclusive assignable licence to all products developed by the distributor as a result of its access to the computer programming code of the products (clause 22(2).