Irish Competition Authority Decisions

1. Notification was made by Dalgety plc on 30 September 1992 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 grant a certificate, a licence under Section 4(2) in respect of a Know-How Licensing Agreement.

2. The notification concerns a Know-How Licensing Agreement dated 5 June 1989 between Dalgety Agriculture Limited and Thomas Hill & Company Limited. Dalgety plc is the ultimate parent of both Dalgety Agriculture Limited (“Dalgety”) and Spillers Limited, (“Spillers”).

3. The principal activities of Dalgety plc are the manufacture and distribution of animal feed supplies. Dalgety plc which has its registered office at 100 George Street, London, W1H 5RH is incorporated in Great Britain and is the ultimate parent company of Dalgety & Spillers. Spillers is principally an investment holding company. Spillers has its registered office at 100 George Street, London, W1H 5RH. Dalgety Agriculture Limited has its registered office at 180 Aztec West, Almondsbury, Bristol, Avon, BS12 5HQ. It is Spillers trading division, Spillers Horse and Speciality Feeds, which performs the agreement. Since the agreement was entered into, Spillers Horse and Speciality Feeds has become a trading division of Dalgety Agriculture Ltd [1].

4. Thomas Hill & Co. is an Irish limited company which has its registered office at Oliver Plunkett Street, Clonakilty, Co. Cork. Hill’s principal activities are the manufacture and supply of animal feedstuffs.

5. The parties claimed that the contract products are sold in the market for horsefeed. Sellers in the relevant market are feed merchants, wholesalers and retailers and the buyers in the relevant market are horse owners.

6. The parties claimed that the territory (the “Territory”) for the purposes of the agreements is defined as the counties of Cork, Kerry, Limerick, Waterford and Tipperary (except agreed accounts) and agreed accounts in Clare though horsefeed is, in general, sold throughout Ireland. The parties claimed that principal competitors of Hill in relation to the sale of horsefeed in the Territory are W. Connolly & Sons Limited and Waterford Co-Op. These competitors are also the principal suppliers of horsefeed throughout the State.

7. The parties claimed that there are substitute products for horsefeed such as straight cereals and grass. Straight cereals are cereals grown in fields, which are taken straight from the fields and not processed in any way. Oats, wheat and barley are examples of cereals used in horsefeed. Dalgety have not entered into other agreements of this kind in relation to horsefeed products in Ireland. Dalgety and Spillers are not aware of any relevant market studies.

8. The Authority considers that the relevant market is the market for horsefeed in the State. In this market demand originates in the farming sector and in the equine farms in particular. In terms of demand substitutes there are the horsefeed products of other producers. In addition, there are other substitute products for horsefeed such as straight cereals and grass. In the Authority’s view there is considerable opportunity for substitution in supply within the animal feed sector generally. The European Commission found this to be the case in Dalgety/Quaker Oats [IV/M.554].

9. The parties claimed that the Irish market for compound horsefeed is estimated to be in the region of 25,000 tonnes and to have an estimated value of IR£5m in the State or IR£200 per tonne. Hill’s turnover in the Territory is estimated to be in the region of [ ]. Spillers Horse & Speciality Feeds total turnover throughout the State in 1993 was estimated to be in excess of [ ]. The estimated market share of Spillers in relation to sales of the products in the State was approximately [ ] in 1993. The estimated market share of Hill in relation to sales of the products in the State was approximately [ ] in 1993.

10. This notification concerns a Know-How Licensing Agreement between Dalgety Agriculture Limited and Hill. There is an also a Trade Mark Licensing Agreement between Spillers and Hill which is the subject of Decision No. 503. These two agreements provide for the licensing by Dalgety to Hill of certain know-how (the “Know-How”) and marketing information to be used by Hill pursuant to the Know-How Licensing Agreement in order to manufacture horsefeed (the Products) in the Territory. The Trade Mark Licensing agreement provides for the licensing by Spillers to Hill of certain trade marks (“the Trade Marks”) for the purposes of selling the Products in the Territory.

11. Neither Dalgety, Spillers nor Hill have any substantial interests falling short of control (more than 25% but less than 50%) in any other company competing in a market affected by the notified agreements nor does any other such company have a substantial interest in either Dalgety, Spillers or Hill.

12. Under Clause 2.1, Dalgety appoints Hill as its sole licensee for the Territory and authorises Hill to use the “Technical Information” and “Marketing Information” in the manufacture and marketing of the Products in the Territory. Clauses 3.4, 3.5.1, and 5.3 require Hill to comply with formulations for the Products, quality control procedures and standards laid down by Dalgety in relation to the manufacture, packaging and advertising of the Products. In Clause 5.2 Hill undertakes that all Products manufactured by Hill shall be sold in bags or containers bearing the Trade Marks and shall bear the legend that the Products are manufactured by Hill under licence from Spillers and Dalgety.

13. Clause 6.3 provides that during the periods of the Know-How Agreement, Hill shall not (a) within the territory sell any horsefeed other than the Products (this provision was subsequently deleted from the Agreement) (b) outside the territory, and in relation to the Products, seek customers, establish any branch and maintain any distribution depot.

14. Clause 6.3 further provided that the Technical Information licensed shall be used only for the purpose of production and sale of the Products under the Trade Marks in accordance with the terms of the Know-How Licensing Agreement and the Trade Mark Licensing Agreement.

15. Clause 6.4 provided that during the period of the Know-How Licence Agreement Dalgety and Spillers would not sell within the Territory horsefeed to customers other than Hill under the Trade Marks. Clauses 9.1 and 9.2 outlined confidentiality obligations to be observed by Hill both during and after the termination of the Know-How Licensing Agreement. Clause 14.2 provided that the rights and obligations conferred by the Know-How Licensing Agreement shall not be transferable or assignable by one party without the written consent of the other party, such consent shall not be unreasonably refused.

16. The parties stated that they did not believe that the agreement, or any aspects of the agreement, restrict the parties in their freedom to take independent commercial decisions. Without prejudice to the foregoing the parties drew the Authority’s attention to some provisions of the agreement.

17. The parties claimed that, in general, neither the provisions noted above nor the agreement had as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or any part of the State within the meaning of Section 4(1) of the Competition Act. The parties submitted that the Know-How licensing agreement does not constitute restrictions on competition within the meaning of Section 4(1) of the Act and that, on this basis, the agreement does not offend against Section 4(1) so that the Competition Authority should grant a certificate in respect of the agreement.

18. In particular, the overall effect of the agreement is to provide for the licensing by Dalgety and Spillers of proprietary Know-How, Marketing Information and Trade Marks to Hill to enable Hill to use this Know-How, Marketing Information and the Trade Marks to produce and market the Products in the Territory, thereby introducing new high quality products into a market which is already highly competitive. The provisions noted above are necessary to ensure the ultimate objective and are reasonable in their terms. The partied submitted that they therefore believe that the said provisions do not infringe Section 4(1) of the Competition Act.

19. The parties claimed that on the basis that the Competition Authority has adopted a rule of reason approach in reviewing agreements generally under Section 4(1), the parties would submit that the terms of the Know-How Licence Agreement and the Trade Mark Licence Agreement are reasonable and necessary in order to achieve the beneficial objectives behind the agreement, namely, introducing a new product into a market which is already highly competitive. In this regard, the European Commission has recognised that exclusive know-how licensing agreements including those involving trade mark licensing which involve the introduction and protection of new technology in the licensed territory may avoid the application of Article 85(1) of the Treaty upon which Section 4(1) of the Competition Act, 1991 is based. Accordingly, as the agreements and the provisions in the agreements are designed to allow for the introduction and protection of new technology into the Territory.

20. The parties submitted detailed arguments in support of the granting of a Licence. However, the Authority is of the opinion the grant of a Licence does not apply in this particular instance.

21. There were no submissions by third parties.

22. 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”.

23. 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’. Dalgety Agriculture Limited, Dalgety & Spillers and Thomas Hill & Co. are corporate bodies engaged for gain in the manufacture and distribution of horsefeed. They are therefore undertakings and the agreement is an agreement between undertakings. The agreement has effect within the State.

24. In the Authority’s opinion Dalgety and Thomas Hill & Co. are undertakings within the meaning of Section 3(1) of the Competition Act and the notified arrangement constitutes an agreement between undertakings. Dalgety notified the agreement with Thomas Hill & Co. as a know-how licensing agreement between undertakings. It is a know-how licensing agreement incorporating an ancillary trade mark licensing agreement whereby the licensee, Thomas Hill & Co. is granted an exclusive right to exploit the licensed technology within the Territory.

25. It is the view of the Authority that the Clauses in the Know-How licensing agreement do not restrict competition. Under Clause 2.1 of the Know-How Licensing Agreement, Dalgety appoints Hill as its sole licensee for the Territory and the licensee is required to comply with formulations for the Products (Clause 3.4), quality control procedures (Clause 3.5.1) and standards (Clause 5.3) as laid down by Dalgety. Under Clause 5.2 Hill undertakes that all Products manufactured by it shall be sold in bags or containers bearing the Trade Marks and to bear the legend that the Products are manufactured by Hill under licence from Spillers and Dalgety.

26. The Notification concerns a Know-How Licensing Agreement to provide for the licensing by Dalgety and Spillers to Hill of certain know-how, marketing information and trade marks and to manufacture and distribute the said products in part of the State.

27. There is an inherent tension between competition law and the protection granted a company under the various intellectual property rights (including know-how) [2]. There is a trade-off between the dynamic growth inducing effects of innovation and the static loss due to the sub-optimal diffusion of the innovation. The economics profession has consistently found that the dynamic gains outweigh the static losses [3]. This is due to the public good nature of innovation, which can be very costly to achieve but can often be disseminated virtually costlessly.

28. In this particular transaction as notified by Dalgety, there are many animal feed producers in the relevant market and the estimated market shares in the State accruing to Thomas Hill as the licensee of the horsefeed was [ ] in 1993. In addition, the estimated market share of Spillers was [ ]. [4] With the Irish market for horsefeed estimated at IR£5m, it can be seen that the licensing agreement has a negligible impact on competition.

29. The agreement is an exclusive know-how licensing agreement whereby, Dalgety as the licensor undertakes not to exploit the licensed technology in the licensed territory or to grant further licenses. Therefore Dalgety appointed Hill as sole licensee for the Territory and authorises Hill as the licensee to use the technical know-how provided by Dalgety. Thomas Hill is not precluded from selling any other horsefeed in the Territory, inter-brand competition is not restricted and with many other animal feed producers in the market, the level of competition is not diluted.

30. The Authority would contend that there should not be a presumption that intellectual property rights create market power. Licensing in this case, for example, where market shares are relatively small and where there is effective competition, simply allows Dalgety plc to transfer their know-how to Thomas Hill and although the agreement contains clauses that allow a transfer of goodwill, no aspects of the agreement restrict the parties in their freedom to take independent commercial decisions.

31. The agreement does not have as its object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or any part of the State within the meaning of Section 4(1) of the Competition Act. However the Authority had a concern about Clause 6.3(a). Clause 6.3(a) provided that Hill shall not sell any horsefeed within the Territory other than the Products. This provision has been deleted from the Agreement as noted by a Side Letter, dated 3 May 1995, issued by Dalgety to Thomas Hill & Company.

32. The Authority does not apply a literal interpretation of Section 4(1) in reviewing agreements. The Authority is of the view that the terms of this Know-How Licensing Agreement are necessary in order to ensure good relations between the parties in the award of an exclusive license for the manufacture of a product and its introduction into a competitive product.

33. The licensed products are exposed to effective competition in the licensed territory. In its assessment of the conditions of competition, the Authority draws particular attention to the fact that the licensee's market share is insignificant. There are no restrictions on prices and quantities and there is no obligation on Thomas Hill, the licensee, to assign improvements to the relevant technology. In general, the Authority is of the view that there should not be a presumption that intellectual property rights create market power.

34. Therefore the Authority is of the opinion that the clauses in the Know-How Licensing Agreement do not constitute restrictions on competition within the meaning of Section 4(1) of the Act.

35. In the Authority’s opinion Dalgety and Thomas Hill & Co. are undertakings within the meaning of Section 3(1) of the Competition Act and the notified arrangement constitutes an agreement between undertakings. In the Authority’s opinion the exclusive licensing agreement dated 5 June 1989 does not contravene Section 4(1) of the Competition Act.

36. The Competition Authority has issued the following certificate

The Competition Authority certifies that, in its opinion, the agreement dated 5 June 1989 for the exclusive license notified under Section 7 on 30 September 1992, does not contravene Section 4(1) of the Competition Act.

[1] In January 1998 Kerry Group purchased Dalgety Food Ingredients. Kerry Group sold the Spillers flour milling business to Tomkins in March of 1998 (this acquisition is currently under investigation by the UK’s MMC).

[2] Know-how protection applies to information whose economic value depends on its not being generally known. Know-how protection is conditioned upon the efforts to maintain secrecy and has no fixed term. As with copyright protection, know-how protection does not preclude independent creation by others.

[3] See Barro R., Economic Growth in a Cross-Section of Countries, Quarterly Journal of Economics , May 1991, 106:2, pp 407-444.

[4] In a letter in response to a query on this point, dated 6 March 1998, Dalgety confirmed that the total sales of their Spillers brand in the State was [ ] in 1993. This converts into a market share of [ ] for Spillers in the State.