Competition Authority Decision of 16 June 1998 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/517/92E
Dalgety Agriculture Ltd/Spillers Ltd/Thomas Hill & Company Ltd.

Decision No 503

Introduction

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 Trade Mark Licensing Agreement.
 
The Facts

(a) Subject of the Notification

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

 (b) The Parties Involved

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.

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 0supply of animal feedstuffs.

(c) The Products and the Markets

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].

(d) Structure of the Market

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 or IR£200 per tonne in the State.  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.

(e) The Notified Arrangement

10. This notification concerns a Trade Mark Licensing Agreement between Spillers and Hill. There is an also a Know-How Licensing Agreement between Dalgety Agriculture Limited and Hill which is the subject of Authority Decision No 502. 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. Clause 1(a) of this Trade Mark Licensing Agreement provides that Spillers authorises Hill to use the Trade Marks in the Territory in relation to the manufacture of horsefeed provided that Hill accords with the clauses under the Know-How Licensing Agreement. Clause 2(a) ensures that the licensee manufactures the Product in accordance with the specifications directions and teachings supplied by Spillers in the use of Trade Marks and Clause 1(b) provides that Hill is to be granted the sole user of the Trade Marks in the Territory. 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

12. In Clause 5.2 of the Know-How licensing agreement 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 of the Know-How licensing agreement 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.

14. 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 agreement nor does any other such company have a substantial interest in either Dalgety, Spillers or Hill.  

(f) Submissions by the Notifying Party

15.  The parties do 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.

Arguments in Support of the Grant of a Certificate.

16. The parties claimed that, in general, neither the provisions noted above nor the agreement has 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. The parties submitted that the 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.

17. 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 parties submitted that the Competition Authority 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 in the context of Section 4(1) and therefore outside the application of that provision. 

18. 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. 

Arguments in Support of the Grant of a Licence

19. The parties submitted detailed arguments in support of the granting of a Licence.  However, the Authority is of the opinion that the grant of a Licence does not apply in this particular instance.
 (g) Submissions by Third Parties
20. There were no submissions by third parties.

(h) Assessment

(a) Applicability of Section 4(1)

21. 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”.

(b) The Undertakings and the Agreement

22. 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.

Applicability of Section 4(1)

(i) The status of the Trade Mark licensing agreement

23. In the Authority’s opinion Spillers 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 incorporating an ancillary trade mark licensing agreement. The Trade Mark Licensing Agreement is ancillary, encouraging the licensee, Thomas Hill & Co to maintain standards concerning the quality of the product, thus ensuring the protection of the goodwill attached to the Trade Mark.

 (ii) The exclusive agreement

24. It is the view of the Authority that the Clauses in Trade Mark Licensing Agreement do not restrict competition. Clause 1(a) of the Trade Mark Licensing Agreement provides that Spillers authorises Hill to use the Trade Marks in the Territory in relation to the manufacture of horsefeed provided that Hill accords with the clauses under the Know How Licensing Agreement. Clause 2(a) ensures that the licensee manufactures the Product in accordance with the specifications directions and teachings supplied by Spillers in the use of Trade Marks and Clause 1(b) provides that Hill is to be granted the sole user of the Trade Marks in the Territory. 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.

(iii) Economic Assessment

25. The Notification concerns a Trade Mark 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. The licensing of the Trade Mark is ancillary to the licensing of the Know-How and there are no obligations restrictive of competition, in the Authority’s opinion, in the Trade Mark Licensing Agreement.

26. The estimated market share of Spillers was [  ]. With the Irish market for horsefeed estimated at IR£5m, it can be seen that the licensing agreement has a negligible impact on competition. Thomas Hill is not precluded from selling any other horsefeed in the Territory, inter-brand competition is not restricted and with many other animal fed producers in the market, the level of competition is not diluted.

27. The Authority does not apply a literal interpretation of Section 4(1) in reviewing agreements. Trade marks are a form of intellectual property that enables a particular firm to distinguish its products from those of rivals.  Trade marks, in conjunction with advertising, convey information about quality, price and availability. This explains the genesis of the Clauses 3.4, 3.5.1 and 5.3 in the agreement that require Hill to comply with quality control and standards procedures as laid down by Dalgety . 

28. There are no obligations restrictive of competition, in the Authority’s opinion, in the Trade Mark Licensing Agreement other than those which also apply under the Know-How Licensing Agreement.

29. 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 Trade Mark Licensing Agreement that restrict the parties in their freedom to take independent commercial decisions.
Conclusions

30. 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. 

31. Therefore the Authority is of the opinion that the Clauses in the Agreement do not constitute restrictions on competition within the meaning of Section 4(1) of the Act.

The Decision

32. In the Authority’s opinion Spillers 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.

The Certificate

33.  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.

For the Competition Authority

Professor Patrick McNutt
Chairperson
16 June 1998