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

Notification No. CA/519/92E
Dalgety Agriculture Ltd/Spillers Ltd/E. Morrin & Sons Ltd.

Decision No 505

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 (Spillers) and E. Morrin & Sons Ltd. Dalgety plc is the ultimate parent of both Dalgety Agriculture Limited (“Dalgety”) and Spillers Limited, (“Spillers”).

 (b) The Parties Involved

3. Dalgety plc is incorporated in Great Britain and 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. Spillers has its registered office at 100 George Street, London, W1H 5RH. The principal activities of Dalgety plc are the manufacture and distribution of animal feed supplies.  Although Spillers is a party to the Agreement, Spillers is essentially an investment holding company.  It is Dalgety Agriculture Ltd’s trading division Spratts Game Foods which performs the Agreement. E Morrin & Sons Ltd. is an Irish limited company with its registered office at Mill Street, Baltinglass, Co. Wicklow.  Morrin’s principal activities are the manufacture, sale and distribution of animal feedstuffs.

(c) The Products and the Markets

4.  The products are defined in the Know-How Licensing Agreement as “the whole current Spratts game feed range as modified from time to time by Dalgety to be produced and sold by Morrin in accordance with the terms of this Agreement and an Agreement of even date between Spillers and Morrin (i.e. the Trade Mark Licensing Agreement).”  Sellers in the relevant market are animal feed compounders and buyers are farmers rearing and releasing game birds.  The parties claimed that the Territory for the purpose of the Agreements is defined as the State but the Products are principally sold in the eastern part of the State.  The parties stated that the principal competitors in relation to the sale of game feeds in the Territory are, W. Connolly & Sons Ltd., Paul & Vincent, Messrs. Goode, Waterford Co-Op, E. Patten & Sons Ltd. and David Patton Ltd. 
5. Neither Dalgety nor Spillers directly sell the products or competing or substitute products in the Territory.  The parties claimed that the size of the market in the Territory is estimated to be in the regions of 800 tonnes which has a value of  IR£200,000, the price per tonne being IR£250.  The parties noted the existence of many other competitors from Northern Ireland.  Further the parties claimed that successful entry into the market for new suppliers was constrained by the consumers’ expectation of a high quality product.  In relation to (demand) substitute products, game birds can be reared on farm/turkey feed but not as successfully as when reared on compound game feeds.  The parties thus claimed that game feeds are to a small extent competitive with other animal feed products.

6. The Authority is of the view that the relevant market is the market for game feeds in the State. In relation to (demand) substitute products, game birds can be reared on farm/turkey feed but not as successfully as when reared on compound game feeds.  Although the parties claimed that game feeds are only to a small extent competitive with other animal feed products, the Authority is of the view that there is considerable scope for substitution in supply of feeds which would constrain monopoly power in any one particular animal feed sector but particularly in the game bird sector.  The European Commission found this to be the case in Dalgety/Quaker Oats [IV/M.554].

(d) Structure of the Market

7. Morrin’s total turnover in the territory in relation to the sale of the Products in 1993 was approximately [   ].  This translates into a market share for Morrin of [   ].  The parties pointed out that Morrin’s sale of game bird feed represents only [   ] of their total tonnage of animal feedstuffs.  Dalgety, trading as Spratts Game Foods, had an approximate turnover of  [   ] in relation to the sale of the Products in the State in 1993.  Dalgety and Spillers are not aware of any relevant market studies.

(e) The Notified Arrangements

8. This notification concerns a Trade Mark Licensing Agreement between Spillers and Morrin. There is also a Know-How licensing agreement between Dalgety Agriculture Limited (Dalgety) and E. Morrin & Sons Ltd (Morrin) dated 5 June 1989 which is the subject of Authority Decision No 504.

9. The Trade Mark Licensing Agreement provides for the licensing by Spillers to Morrin of its registered trade mark Spratts (“the Trade Marks”) for the purposes of selling the Products in the Territory and to manufacture and market the Products in the State. Neither Dalgety, Spillers nor Morrin 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 Morrin.

10. Clause 1(a) of the Trade Mark Licensing Agreement provides that Spillers authorises Morrin to use the Trade Marks in the Territory in relation to the Products provided that they are manufactured by Morrin in accordance with the specifications drawn up by Spillers and supplied to Morrin observing any directions by or teachings of Spillers from time to time in accordance with the provisions relating to standards of quality.  Clause 1(a) provides that Morrin shall not solicit sales of the Products bearing the Trade Marks outside the territory.  Clause 1(b) provides that Morrin was granted to be the sole user of the Trade Marks in the Territory.  Clause 2(a) provides that Morrin undertook to use the Trade Marks only in relation to the manufacture of game feed manufactured in accordance with specifications, directions and teachings supplied by Spillers from time to time.

11. In Clause 5.2 of the Know-How Licensing Agreement Morrin undertakes that all products manufactures by it shall be sold in bags or containers bearing the Trade Marks and shall bear the legend that the Products are manufactured by Morrin under licence from Spillers and Dalgety.  

12. Clause 6.3 of the Know-How Licensing Agreement provides 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.

(f) Submissions by the Notifying Party

13. The parties stated that they did not believe that the agreement or any aspect of the agreement, restricted 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 Issue of a Certificate.

14. The parties claimed that, in general, neither the provisions noted above nor the agreement have 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. 19. The parties submitted that the agreement did not constitute a restriction on competition within the meaning of Section 4(1) of the Act and that, on this basis, the agreement did not offend against Section 4(1) so that the Competition Authority should grant a certificate in respect of the agreement.

15. 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 Morrin to enable Morrin 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 object 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. In this regard 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. 

16. 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 trademark 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

17. 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.
 (g) Submissions by Third Parties
18. There were no submissions by third parties.

(h) Assessment

(a) Applicability of Section 4(1)

19. 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

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’. Dalgety Agriculture Limited, Dalgety & Spillers and E. Morrin & Sons Limited are corporate bodies engaged for gain in the manufacture of game feed. 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 agreement

21. In the Authority’s opinion Spillers and Morrin are undertakings within the meaning of Section 3(1) of the Competition Act and the notified arrangement constitute an agreement between undertakings. In the Trade Mark licensing agreement, the licensee, Morrin is granted an exclusive right to exploit the licensed technology within the State. The Trade Mark Licensing Agreement is ancillary, encouraging the licensee to maintain standards concerning the quality of the Product, thus ensuring the goodwill attached to the trade mark.
(ii) The exclusive agreement

22. 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 Morrin to use the Trade Marks in the Territory in relation to the manufacture of game feed provided that Morrin 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 Morrin is to be granted the sole user of the Trade Marks in the Territory.

(iii) Economic Assessment

23. The Authority paid special attention to the market share of the licensee in assessing this agreement. The estimated market share of Morrin in relation to the sale of the Products was approximately [   ] in 1993. Game feed represents [   ] of Morrin’s total tonnage for the sale of animal feed. The game feed product market is a specialist market with a derived demand for the products from different customers. However, the Authority is of the view that with a considerable number of competitors supplying game feed in the State, some of whom are also animal feed producers, that the licensed products are exposed to effective competition. In other words, the Authority is of the opinion, that there is sufficient supply substitutability in the animal feed market to delimit any market power that may accrue to Morrin as exclusive licensee of the Products.

24. The effect of the agreement is not to prevent the licensed products from being exposed to competition in the licensed territory from substitute goods. The other competitors in the market are not exposed to any risk of being deprived of the possibility of developing market share in the product covered by the agreement. Other competitors on the supply side of the market could produce a substitute product to the licensed product in response to increases in price 

25. The agreement will not afford the licensee, in the opinion of the Authority, the possibility of eliminating competition in respect of a substantial part of the relevant market. Therefore, in the opinion of the Authority the agreement is not restrictive of competition.

26. The obligations on Morrin, the licensee, under the clauses of the agreement, are not in the opinion of the Authority restrictive of competition. For example, clauses in the agreement ensure a minimum quality standard respected by licensor and other licensees in other jurisdictions and are not restrictive of competition. Clause 6.3(b) which prohibits Morrin, outside the Territory, and in relation to the Products, seek customers, establish any branch and maintain any distribution depot, is not restrictive of competition and is characteristic of a sole exclusive licensing agreement. Therefore the Licensing Agreement is not in the opinion of the Authority restrictive of competition. There is effective competition in the game feed market.

Conclusions

27. 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 the Trade Mark Licence 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 highly competitive product.

28. The Authority is of the opinion that this Trade Mark Licensing Agreement is analogous to the agreement notified in its Decision No.  503, 16 June 1998. 

29. The Authority held in its Decision No. 503 that an ancilliary Trade Mark Licensing Agreement may not contravene Section 4(1) where it is  concerned with the introduction of a new type of product know-how into a market which exhibits effective competition. And in general, the Authority is of the view that there should not be a presumption that intellectual property rights create market power.

30. The Authority is of the opinion that the clauses in this agreement do not constitute restrictions on competition within the meaning of Section 4(1) of the Act.

The Decision

31. In the Authority’s opinion Spillers and Morrin 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

32. 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