Irish Competition Authority Decisions

1. Notification was made of an agency agreement between Jas Hennessy & Co. Ltd and Edward Dillon & Co. Ltd on 30 September 1992 with a request for a licence under Section 4(2) of the Competition Act, 1991. Subsequently, a request was made for a certificate, or in the absence of a certificate, a licence. A Statement of Objections was issued by the Authority to the parties in September 1995 to which both parties submitted a written response.

2. The notification concerns the appointment of Dillon as exclusive agent for the distribution and sale of Hennessy cognac brandies to in-bond customers within the State. A related agreement was also notified, appointing Dillon to be the exclusive distributor of Hennessy cognac brandies to duty paid customers (CA/1082/92E). On 1 September 1994, the Authority decided that this agreement satisfied the conditions of the category licence for exclusive distribution agreements. [1]

3. Hennessy is an Irish registered company, which is a subsidiary of Hennessy, a French company which is engaged in the manufacture, sale and distribution of cognac. Both companies are part of the group LVMH Louis Vuitton Moet Hennessy, registered in France, which is involved in the production of alcoholic drinks and luxury products such as perfumes and travel goods. Guinness owns 34% of Moet Hennessy, a subsidiary of LVMH, and LVMH owns an 11.5 % shareholding in Guinness.

4. Dillon is an Irish registered company, which is engaged in the business of alcoholic beverages. At the time of the notification, it was jointly owned by Irish Distillers Group (40.2%), United Distillers (a subsidiary of Guinness plc.)(29.9%) and Hennessy (29.9%). Subsequently, these were altered so that each shareholder owned 33.3% of the shares in Dillon, and this share restructuring was the subject of another notification (CA/39/93). However, Irish Distillers disposed of its shareholding in Dillon in May 1996 selling half of its shares to Bacardi Martini and half to Brown Forman which subsequently led to the withdrawal of the share restructuring agreement. Subsequently (in 199 8), Guinness and Grand Metropolitan merged to form the Diageo group. The current distribution of shareholding in Dillon is set out in Table 1.

The Brown Forman group is principally engaged in the production, marketing and distribution of certain spirits, wines, and leather and other luxury products. Brown Formans brands distributed by Dillon include Southern Comfort and Jack Daniels.

Bacardi-Martini is a holding company within the Bacardi Limited Group and is principally engaged in the production, marketing and distribution of certain spirits.

Diageo is principally engaged in the production, marketing, sale and distribution around the world of beer and spirits.

5. The products involved in the agreement are cognac brandies. While these form part of the total alcoholic drinks and spirit sections of the market, the Authority considers that brandy occupies a distinct market segment of its own. In its decision on the proposed take-over of Cooley Distillery plc by Irish Distillers Group plc, [2] the Authority stated that:

'It seems reasonable to conclude that there are definable and separate markets for beer and spirits. Within the spirits sector there are somewhat less clearly defined markets for the major categories - whiskey, gin, vodka, rum and brandy. The Authority does not believe that other spirits could be considered to be sufficiently close substitutes for whisk(e)y to be considered part of the same product market. In other words it believes that in the event of a small increase in whisk(e)y prices relative to that of other spirits, there would be a very limited shift in consumption away from whisk(e)y to such products. Consequently the Authority does not believe that there is a single spirits market'. (para 17).

The Authority also stated that it believed that in Ireland, although perhaps not elsewhere, Irish whiskey and Scotch whisky might constitute separate markets (para 18).

6. In its decision on the Guinness/Grand Metropolitan merger (Commission Decision of 15/10/1997 declaring a concentration to be compatible with the Common Market and the functioning of the EEA Agreement: Case No. IV/M.938), the Commission stated its view that the relevant product markets in that case, at all levels of the supply chain, were in general no wider than those for each of the individual internationally-recognised main spirit types (whiskey, gin, vodka, rum etc.), although narrower definitions might be appropriate to specific product or geographic areas.

7. The Authority considers that, due to its particular flavour, consumers usually regard brandy as distinct from other spirits. In addition, the retail price of Hennessy brandy, in both off-licences and licensed premises, is considerably more than the popular brands of whiskey, gin, rum and vodka, with differences of between 30 and 40 per cent. In the Authority's view, a small increase in the price of brandy would not lead to any significant shift in consumption from brandy to other spirits. It considers that brandy represents a separate relevant product market.

8. Cognac and brandy sales are responsible for over 10 per cent of the spirits market here with cognac enjoying sales of 195,000 cases each year. Hennessy accounts for between 80-90% of the volume of sales of cognac in the State (excluding duty-free areas). Courvoisier is the second largest seller of cognac in the State, followed by Martell, which is the number one brand in the UK, and Remy Martin, which has a 70% share of the premium VSOP category. Table 2 lists the distributors of the other leading brands of brandy in the State.

Under the notified agreement, Dillon may only sell the products to in-bond customers, whereas it also deals with both wholesale and retail customers in the rest of its business.

9. In the Guinness/Grand Metropolitan decision, the Commission noted that “In contrast to most other Member States, where the parties and their major competitors distribute their products through wholly-owned subsidiaries, in Ireland many of the leading spirit manufacturers distribute their product through joint ventures with competing suppliers.” At the time that the merger was proposed, for instance, the Guinness/Grand Metropolitan partners owned 33% of Edward Dillon, 49.6% of Grants of Ireland and 100% of Gilbeys of Ireland.

10. The notified agreement was made on 24 May 1988 between Hennessy and Dillon. It formalised the long-standing distribution arrangements between the firms, and was accompanied by a distribution agreement for non-bonded customers, which is the subject of a separate notification. Dillon was appointed exclusive agent for the sale of Hennessy brand cognac brandies in the domestic market for in-bond customers within the State. Dillon is not permitted to deal in other brands of cognac or grape brandy, except specified brands. The agreement was initially to be valid for five years, but this was extended to ten years, terminating in 1998, by an amending agreement on 2 February 1989. On 6 June 1996, the agency agreement was extended so as to run for a further period of ten years from June 1996 (i.e. until 5 June 2006). The agreement continues on a yearly basis after the termination date, subject to six months' notice of termination. Dillon is to receive a commission of [ ] on the full FOR (Free on Rail) prices of all orders accepted by Hennessy. The in-bond delivered prices of the products shall be determined by Hennessy and shall be internationally competitive. There is to be consultation each year on the size of commission. Dillon agrees to refrain from disclosing any confidential information likely to further the interests of Hennessy competitors or to harm Hennessy in any way. Dillon is responsible for [ ] of the amount of bad debts.

11. In its initial submission with the notification, Dillon presented arguments in support of its request for a licence. As these arguments are not considered relevant to the Authority’s decision, they are not reproduced here.

12. In response to questions raised by the Authority, Dillon stated that its role was limited to that of a commercial agent. Dillon received a commission for its services, Dillon procured orders from customers and Hennessy reserved the right to refuse orders forwarded by Dillon. The risk of loss in selling the product remained with Hennessy, as title did not pass from Hennessy until a sale was made to its customers. Hennessy invoiced customers directly and organised distribution of the products. Hennessy maintained two warehouses in Ireland, one rented from Dillon, and its Irish subsidiary shipped product into Ireland, organised warehousing, managed and insured stock, provided advertising and promotional support and maintained separate accounts.

13. Following further questions from the Authority, Dillon responded in a letter of 12 January 1995. It first provided details of the list price of Hennessy paid by customers who purchased in bond through the agency agreement at the price set by Hennessy, and the duty paid price paid by customers who purchased through the exclusive distribution agreement, at a price stated to be set by Dillon. In addition, details were given of the duty payable on the importation of the products. The duty paid list price is the total of the bonded price, the duty, and an additional margin (of approximately [ ] per case), which is stated to be 'determined by Dillon based on its own analysis of conditions in the market.'

14. Dillon stated that the prices set by Hennessy under the Agency Agreement did not determine the prices set by Dillon under the distribution arrangements. Rather, the prices were similar under both arrangements because both sets of products were subject to similar market forces, similar consumer demands and in fact were freely traded on the secondary market. Dillon was able to set its own prices for products off the distribution price list and evidence of this was seen in the context of its policy of individually negotiated sales.

15. In addition, Dillon supplied a copy of the 'comfort letter', dated 6 June 1993, from DG IV of the European Commission in respect of the share restructuring agreement for Edward Dillon. This stated that, following amendments, sufficient prima facie justification had been provided for an exemption to be granted. In addition, it was stated that:

'Furthermore, the notified distribution agreements, including the Bushmills Distribution Agreement, appear to fulfil the conditions for exemption, under Commission Regulation 1983/83 (OJ 1983 no. L173).'

16. A statement of objections was issued to Dillon/Hennessy in September 1995. The essential offending point was that Dillon, as exclusive distributor, was in competition with its supplier Hennessy, while simultaneously acting as agent for Hennessy and that Dillon had access to information which would not normally be available to competitors.

17. Both Dillon and Hennessy responded with written submissions which argued, inter-alia, that the two firms were not competitors. Hennessy stated that Hennessy and Dillon supplied customers by reference to different volume requirements, with Dillon getting a financial return on every sale of Hennessy Brandy effected either under the Agency or Distribution agreement. They argued that

‘To suggest...that somehow Dillon will be restricted or even influenced by Hennessy in setting its own mark up because it has access to ‘confidential’ pricing information from Hennessy under the Agency Agreement is to miss the key point: Dillon cannot avoid having access to that information because it is nothing more than the universal IBD price which Hennessy charges all customers.”

18. In its own submission, Dillon explained in detail the nature of the relationship between themselves and Hennessy highlighting that it was analogous to the type of arrangements found within the one firm rather than that of competitors:

‘Under both the agency and distribution arrangements, there is a close connection between the operations of Dillon and Hennessy which could accurately be characterised as a distribution/marketing collaboration. The operations of the parties are fully integrated and the allocation of distribution functions between them is similar in type and character to the allocation of arrangements within a single firm.’

Agreements in Ireland were best characterised as a form of vertical integration by Hennessy whereby it benefited from considerable economies of scope through its association with Dillon. The allocation of responsibilities between them is similar in type and character to the allocation of arrangements within a single firm.

19. Dillon argued that the Hennessy and Dillon Distribution and Agency Dillon and the Hennessy companies were similar in operation and character to the allocation made between Hennessy and Hennessy Ireland; the net result was a relationship of co-operation, not competition , between Dillon and Hennessy as, for example, both Dillon and Hennessy profited from the sale of each unit of product concluded in the State. With regard to Dillon having access to confidential information of a competitor Dillon argued that ‘The possession by Dillon of the knowledge of prices charged by Hennessy cannot diminish competition because there is no competitive rivalry between Dillon and Hennessy.’

20. Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings 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.

21. 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". Hennessy is engaged in the production and distribution of spirits for gain, and Dillon is engaged in the distribution of wines and spirits for gain, and they are both undertakings.

22. The Authority considers that the key fact of this case is that Hennessy has a 33.3% shareholding in Dillon. In its Decision No. 2 of 14 May 1992 CA/7/91 - AGF-Irish Life Holdings plc, the Competition Authority decided that two companies which were wholly-owned subsidiaries of the same holding company were not independent undertakings but were in fact separate arms of the same organisation and were not therefore in competition with each other. The Authority held that the agreement did not contravene Section 4(1) because ICI and CG had no real freedom to determine their course of action on the relevant market, and the proposed arrangements merely involved a reallocation of functions within the group. Similarly, in its Decision No. 5 of 30 June 1992 CA/1/91E - Performing Right Society and Irish Music Rights Organisation, an agreement between Performing Right Society (PRS) and Irish Music Rights Organisation (IMRO), which at that time had a parent-subsidiary relationship, was found by the Authority not to contravene Section 4(1) for the same reasons. In the case of AGF-Irish Life/NEM Insurance Decision No. 18 of 9 June 1993: CA/12/93 - AGF-Irish Life/NEM Insurance, the agreement involved a subsidiary which was not wholly-owned. Nevertheless, the Authority concluded that there was no question of the members of the group having sufficient commercial autonomy for them to decide to compete with one another in their respective markets. Consequently the Authority came to the same conclusion as in AGFI and PRS/IMRO that such an arrangement did not prevent, restrict or distort competition.

23. In its Decision No. 542 of 24 March 1999 (Notification No. CA/23/96 - Hampden Group/Homebase), the Authority took a similar view. In that case, J. Sainsbury plc, the parent company of Homebase, also owned 29% of Hampden, and had the right to appoint two directors. The Authority noted that this shareholding was sufficient to bring the two companies under common control, according to the criteria in the Mergers Act and the Competition Authority’s Category Certificate for Mergers Category Certificate in respect of Agreements involving a Merger and/or Sale of Business: Decision No. 489, 2 December 1997. The other shareholdings in Hampden were largely institutional and the largest shareholding was 7.3%. The Authority therefore considered that, given the position of the major shareholder vis-à-vis the other shareholders, the agreement was not anti-competitive.

24. Hennessy has an even larger shareholding in Dillon and has held a shareholding in the company since 1965. Hennessy also appoints two directors in Dillon. The case differs from that of Hampden/Homebase in that the other shareholders are also spirits producers and have substantial shareholdings. However, the Authority considers that, in relation to this product market alone, and while Dillon does not distribute brandy on behalf of any of the other shareholders, Hennessy is likely to have decisive influence over Dillon and that for the purposes of the notified agreement, they can be considered as forming a single economic unit. In its view, the agreement is not, in fact, an agreement between separate undertakings but rather is an assignment of functions between different parts of the same organisation. As the undertakings involved are not competitors, the Authority considers that the notified agreement does not have the object or effect of preventing, restricting or distorting competition and therefore does not contravene Section 4(1).

25. In the Authority's opinion, Hennessy and Dillon are both undertakings within the meaning of Section 3(1) of the Competition Act, 1991, and the notified agency agreement constitutes an agreement which applies within the State. The agreement does not contravene Section 4(1) of the Act because both companies are under common control and are not in competition with each other, the arrangements merely involving an assignment of functions between different parts of the same organisation.

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 agency agreement between Jas Hennessy and Co. Ltd and Edward Dillon & Co. Ltd (notification no. CA/319/92E), notified on 30 September 1992 under Section 7, does not contravene Section 4(1) of the Competition Act, 1991, as amended.

For the Competition Authority,

[1] Decision No. 144 of 5 November 1993

[2] Decision No. 285 of 25 February, 1994