Irish Competition Authority Decisions

1. A joint notification of a Franchise Agreement by Allied Carpets Group Limited and Hampden Group Plc, was made on 8 November 1996 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).

2. The Notification concerns a franchise agreement dated 16 September 1994 between Allied Carpets Group Limited (the Franchisor) and Hampden Group Plc (the Franchisee) for the sale of Allied Carpets in Northern Ireland and Republic of Ireland. The Agreement has also been notified to the UK Office of Fair Trading

3. Allied Carpets Group Limited is the holding company for the sale of carpets under the Allied Carpets brand name. Its registered office is in the UK. There is no group relationship between Hampden Group plc and Allied Carpets.

4. Hampden Group Plc, whose registered office is in Belfast, is a company which was originally formed to trade a DIY franchise in Ireland for “Texas” , a well known DIY retailer in the Republic of Ireland. The Texas franchise has now been replaced by the Homebase franchise, which is ultimately owned by J Sainsbury Plc. Hampden Group Plc also trades a franchise in the State which is an all Ireland franchise for Allied Carpets. They do so under the banner “Reid Carpets and Beds” and do so through Texas Homebase (Ireland) Limited, a wholly owned subsidiary of Hampden Group Plc. For the year ended 31 December 1995 the turnover of the Hampden Group Plc was £36.8m. Included in this figure is £7.8m turnover in respect of the Republic of Ireland. The profit of the company before tax was £1.5m.

5. The products according to the notifying parties are carpets and generic floor coverings. They state that the market is massive and is so large and has such a multiplicity of wholesalers, retailers and sources of the product that it is not possible to detail market turnover. Allied Carpets would be a significant seller of carpets in the UK but does not have a presence in the Republic. There is a ready source of substitute products. Under the Agreement Hampden were appointed the sole franchisee for Northern Ireland and the Republic of Ireland. At the time the Agreement was put in place, Hampden had no presence in this market segment in the State. For the purposes of this notification, the geographical market is the State.

6. The notified franchise agreement dated 16 September 1994 is between Allied Carpets Group Limited (Allied) and Hampden Group Plc. (Hampden). Clause 3 states that subject strictly to the provisions of this Agreement, from 1 February 1994 and thereafter from year to year until termination, Allied grants Hampden an exclusive franchise for the goods and services within Northern Ireland and the Republic of Ireland.

7. Under clause 4.1.1, Allied agrees to supply the Goods to the Franchisee at cost price and under clause 4.1.5 to furnish to the Franchisee on one occasion only in each month the Cost Price Information relating to the goods supplied by Allied during the preceding month. Under clause 5.1, the Franchisee agrees to identify to Allied the area and location within each franchise store from which it intends to sell the Goods and provide the services. The services are defined as the laying or fitting of measured and cut lengths of goods for customers, the provision of insurance cover for the benefit of customers against the risk of accidental damage to the goods following supply and laying/fitting and any other pre-sale or after-sale services. The clause provides for the sale of the goods and provision of the services in and from the Franchise Stores only, and the use of the Allied Method, Allied Trade Name and Cost Price Information solely and exclusively in the operation of the Franchise.

8. Under Clause 5.3 the Franchisee will not (either by itself or in concert with any other person firm or company) sell or advertise or display or permit to be sold or advertised or displayed any goods of the nature of the Goods or provide or permit to be provided any services of the nature of the Services or use the Allied Method or any part thereof therein, except in accordance with the Agreement. However, the Franchisee may purchase carpets and floor coverings from alternative suppliers from time to time, but only for sale under the Allied Trade Name at the Franchise Stores and subject (i) to the identity of such alternative suppliers and the terms and conditions of supply being approved by Allied and (ii) to all such carpets and floor coverings being deemed for all the purposes of this Agreement (including the calculation of the Franchise fee) to be the Goods. The Franchisee may also sell from the Texas Franchise Stores such floor coverings as prior to the date of this Agreement have historically formed part of the range of goods sold by the Franchisee under the “Texas” trade name.

9. The Franchisee undertakes not to disclose any information (whether confidential or not) relating to the Allied Method or the Cost Price Information or the business methods suppliers or customers of the Allied Group or the contents of this Agreement to any person firm or company. It will not disclose the Cost Price Information other than to the executive directors of the Franchisee from time to time and to respectively the Director of Operations of the Franchisee and the employee of the Franchisee responsible for the management of the accounts of the Franchisee relating to the Goods and the calculation of the Franchise Fee.

10. Under clause 5.13 the Franchisee will not assign or license or sub-license the Franchise. Under clause 5.14 the Franchisee will not at any time contact or seek to negotiate with any supplier of the Goods or provider of the Services to the Allied Group on any matter relating to the Goods or the Services. Under clause 5.20 the Franchisee will not solicit nor entice any of the employees or consultants of the Allied Group or any member of the same to breach any contract between the Allied Group or any such member and any of them and will neither employ nor seek to employ any existing member of staff of the Allied Group or any member of the same nor employ any person who had been a member of staff of the Allied Group or any such member during the period of one year preceding such employment by the Franchisee unless Allied has previously approved such employment by the Franchisee.

11. Under Clause 10.1 Allied will be entitled to terminate the Agreement in whole or in part or withdraw the Franchise in respect of the whole or any part of the Franchise Area or from all or any of the Franchise Stores by serving not less than 14 days’ written notice if the Franchisee fails to pay to Allied on their respective due dates the Cost Price of the Goods the Franchise Fee or any other moneys due or owing; if the Franchisee fails to perform or observe any term or condition of the Agreement; if the Franchisee goes into liquidation or receivership; if any person, firm or company unacceptable to Allied obtains control of the Franchisee; or if the Franchisee discloses or makes available the Cost Price Information to any person, firm or company other than to the executive directors of the Franchise (clause 10.1.5). Under clause 10.2 Allied will be entitled to terminate this Agreement in whole or in part or withdraw the Franchise in respect of the whole or any part of the Franchise Area or from all or any of the Franchise Stores by serving not less than six months’ written notice for failure to pay the Franchise Fee.

12. The notifying parties stated that the Agreement will not prevent, restrict or distort competition in the State given the size of the market and the multiplicity of sellers of the product. There is also a multiplicity of sources for alternative product. The presence of another retailer of product in the market will afford the public a greater choice of product. The terms imposed are only those which are necessary to ensure a continuity of supply so as to justify the capital expenditure in the equipping of stores for the sale of products. The market is of such a size and nature that the elimination of competition is not foreseen as a possibility as the result of the implementation of the Agreement.

13. 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 ”.

14. 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”. Allied, the Franchisor and Hampden the Franchisee, are both engaged for gain in the business of carpets and generic floor coverings and are therefore undertakings within the meaning of Section 3(1) of the Competition Act. The Franchise agreement is an agreement between undertakings. It has effect within the State.

15. The Competition Authority has issued a certificate and licence in respect of a category of agreements between suppliers and resellers (Decision No. 528). The Decision applies to vertical agreements between undertakings which operate at different stages in the supply chain in respect of the same product or service, whereby one party supplies the product concerned to the other for resale. Franchise Agreements are covered by the Category Certificate/Licence. With regard to post-term limitations, the Authority has stated that any restrictions which apply after the termination of an agreement generally contravenes Section 4(1). In the case of franchise agreements, however, a limited post-term non-compete clause of one year or less does not, in the Authority’s opinion, contravene Section 4(1), as it is an ancillary restriction needed to protect the goodwill of the franchisor. It is an essential feature of a franchise agreement that the franchisor provides the franchisee with the necessary information, training, intellectual property and other technical know-how to operate the business. Clearly, it would not be in the franchisor’s interests to provide such know-how if the franchisee could simply terminate the agreement and use the information provided to compete with the business - this would effectively prevent the operation of franchise type arrangements.

16. Under Clause 5.14 the Franchisee agrees that it will not, at any time, contact or seek to negotiate with any supplier of the Goods or provider of the Services to the Allied Group on any matter or thing related to the Goods or the Services. This clause has no time limit. The Authority considers that, while a provision preventing a franchisee from negotiating directly with suppliers for the duration of the agreement, and for a certain period afterwards, could be justified, there is no justification for a permanent prohibition on such activities, which would serve to extend the duration of the non-compete clause indefinitely. It considers therefore, that Clause 5.14, insofar as it extends for a period of one year after the termination of the franchise agreement, has the object or effect of preventing, restricting or distorting competition, and therefore contravenes Section 4(1). By letter dated 12 May 1999, the notifying parties confirmed to the Authority that this clause is intended only to have force or effect during the currency of the Agreement and not further or otherwise. In these circumstances, therefore, Clause 5.14 no longer contravenes Section 4(1) of the Competition Act, 1991

17. Under Clause 5.20 the Franchisee agrees not to solicit or employ existing staff or staff who in the previous year had been employed by Allied unless approved by Allied. The Authority considers that the restriction upon the solicitation by a Franchisee of the existing employees of the Franchisor during the term of a franchise agreement and for no more than the maximum duration of one year under the permitted post-termination non-compete clause does not contravene Section 4(1) of the Act. It also considers that clause 5.20 which prevents the employment of such persons who in the previous year were employed by Allied, does not restrict or distort competition. This clause does not, therefore, contravene Section 4(1) of the Competition Act, 1991.

18. The Competition Authority considers that Allied Carpets Group Ltd and Hampden Group plc are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the notified franchise agreement is an agreement between undertakings. In the Authority’s opinion, the notified agreement, as amended by letter of 12 May 1999, does not contravene Section 4(1) of the Competition Act, 1991 as amended.

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 franchise agreement between Allied Carpets Group Ltd and Hampden Group plc, (Notification No. CA/30/96) notified under Section 7 on 8 November 1996, and amended by letter dated 12 May 1999, does not contravene Section 4(1) of the Competition Act,1991, as amended.

For the Competition Authority