Competition Authority Decision of 4 September 1995 relating to a proceeding under Section 4 of the Competition Act,1991.    
          
Notification No. CA/64/92 ‑ Mr. Flor Griffin/ Mr. Teddy O'Connor.

Decision No.  416

Introduction

1.	 Notification was made by Mr. Flor Griffin on 20 August, 1992 with a request for a licence under Section 4 (2) of the Competition Act, 1991 in respect of an agreement between Mr. Flor Griffin and Mr. Teddy O'Connor. The Authority issued a statement of objections to the parties on 16th May 1993. A response to the Statement was received on 19th May 1995 from solicitors acting for Mr. Griffin.

The Facts

(a) The Subject of the Notification

2.    The notification concerns an agreement (called a franchise agreement) between Mr. Griffin the "franchisor" and Mr. O'Connor the "franchisee" whereby Mr. Griffin permits Mr. O'Connor to set up and operate an electrical retail shop under the name of "Flor Griffin" in Mallow, Co. Cork.  

(b) The parties involved

3.    Mr. Griffin operates as an electrical retailer with outlets at Bandon, Co. Cork, the principal place of business, 9 Parnell Place, Cork and 32 North Street, Skibbereen, Co. Cork.

4.    Mr. O'Connor trades as an electrical retailer at West End, Mallow, Co. Cork under the trade name of "Flor Griffin" of which he is the user pursuant to this agreement. He is also engaged in the sale of lighting appliances at the same address.

(c) The product and the market

5.    The business involved in this notification is the retail sale of  electrical goods including white and brown goods. There are at least two retailers of electrical goods located in Mallow town other than the business called "Flor Griffin". Cork city is approximately 35 kilometres from Mallow town where a number of businesses operate as retailers of electrical goods. There are also electrical retailers located in other towns in the region. The Authority has stated in Nallen/O'Toole that competition in this market is not confined to the immediate town in which the shop is situated but that to some extent surrounding towns offer competition, and that comparison pricing is possible from national advertising of prices of large retailers in Dublin.

(d) The agreement

6.    The agreement was made on 30 June, 1992 for a term of 3 years from that date. Under the agreement Mr. Griffin agrees to permit Mr. O'Connor to operate a business of electrical retailer under the name "Flor Griffin", Mr. Griffin providing up to £80,000 worth of stock to set up the shop, and requiring Mr. O'Connor to buy his stock only from Mr. Griffin at net cost plus [ ]%. The shop is to be presented as linked to the existing "Flor Griffin" shops and Mr. Griffin will pay to advertise for all shops. The agreement also provides as follows:

(a) Under clause 5.4 Mr. Griffin agrees "To continue to advertise product prices, sales etc....". Clause 5.9 requires the parties to meet once a week "to discuss promotions generally for the coming week and for the future." This is complemented by clause 6.17 by which the "franchisee" will "co-operate with the Franchisor and other Franchisees in any advertising campaign...". The advertising would be for all four shops operating under the name "Flor Griffin".

(b)   Under clause 5.6 Mr. Griffin " ...will provide all product to the Franchisee at a price equivalent to the net cost of the product to the Franchisor plus the sum of [ ]%."

(c)   Under clause 5.8 Mr. Griffin "...shall not open a shop or franchise out the name Flor Griffin for any other shop within a 15 mile radius of the town of Mallow."

(d)   Under clause 6.7 Mr. O'Connor agrees to "...carry out a complete stock take once a week, up date the computer, replenish stocks and pay the Franchisor the agreed price per all goods sold." 

(e)   Under clause 6.9 Mr. O'Connor "...shall not buy electrical goods from any other source whatsoever with the exception of light fittings."

(f)   Under clause 6.10 Mr. O'Connor "...shall not commence or own any other electrical business or any related business within a  15 mile radius of Mallow, or within a 15 mile radius of any shop owned or franchised by the Franchisor."

(g)   Under clause 6.11 Mr. O'Connor "...shall not commence any electrical business similar to the Franchisor's for a period of one year after the termination of this agreement within any of the territories set out in the preceding paragraph."

(h) Under clause 6.13 Mr. O'Connor agrees "not to sell the business to any other electrical retailer for a period of 12 months." This appears to be intended to be twelve months from the date of coming into force of the agreement.

(i)   Under clause 8.1 Mr. O'Connor agrees on expiry of the agreement to "...dispose of all products in hand in accordance with the Franchisor's directions." Under clause 8.3 he agrees to cease the business immediately on expiry of the agreement.

(j) Mr. O'Connor agrees in clause 9.1 that if at any time he wishes "...to sell transfer or otherwise part with the business or any part of it or the location or any interest in it he should immediately give notice ... to the Franchisor and offer by notice in writing to the Franchisor to sell same to the Franchisor". The parties agree that an independent valuation will be obtained and if the Franchisor wishes he may buy the business, or premises, or interest therein at that valuation and if he does not do so, the Franchisee will be free to sell to any third party.

(k)  Under clause 10.1 "The products and any other goods delivered by the Franchisor to the Franchisee shall remain the sole and absolute property of the Franchisor as legal and equitable owner until such time as any items is sold, but shall be at the Franchisee's risk from the time of delivery to him."

(e) Submissions of the parties

7.    Mr. Griffin submitted that his intention in permitting Mr. O'Connor to carry on a business using his trade name was to improve trade and competition in the Mallow area. The purpose of the restriction in preventing Mr. O'Connor, the user of the trade name, from setting up a similar business   was to protect the proprietor's interest, that is, the substantial sums of money invested in launching the new business.  The one year restriction on selling the business was in consideration of the time, effort and investment being made by Mr. Griffin. He submitted that it would not restrict competition in the State or in any part of the State. He further submitted that the arrangements improved the distribution of the goods in question by providing a similar service in the Mallow area to that provided by him in Bandon and Cork. Consumers benefited from the lower cost of the goods. Mr. Griffin submitted that the arrangement did not eliminate competition, but merely restrained Mr. O'Connor, who will have profited from the arrangement, from taking advantage of the situation for a period of 12 months. 

(f) Subsequent developments

8.   The Authority issued a Statement of Objections to the parties on 16 May, 1995 indicating that it intended to refuse a certificate or licence to the notified agreement and setting out the reasons why it intended to do so.  

9.   The notifying party responded by letter dated 19 May, 1995 and proposed amendments to clause 6.10 of the agreement to clarify that it operated during "the subsistence or term" of the agreement only. The proposed amendment did not meet the objections raised by the Authority as regards that clause,  and in the Authority's view the submission did not meet its objections made to clauses 5.4, 5.9, 6.11, 6.17 and 9.1. This was indicated in a subsequent letter to the notifying party on 29 May, 1995. No further response was received from either party.

Assessment

(a) Section 4 (1)

10.	 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 trade in any goods or services in the State or in any part of the State are prohibited and void'.

(b)	The Undertakings and the Agreement

11.	 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.'  Mr. Griffin and Mr. O'Connor are both engaged for gain in the operation of retail electrical businesses and are therefore both undertakings within the meaning of the Act. Consequently, the notified arrangements constitute an agreement between undertakings.

(c)	Applicability of Section 4(1)

12.   The Authority considers that this agreement although described as a franchise is not one of the type defined in the Authority's Category Licence for Franchise Agreements. The franchise category licence  defines a franchise as providing, inter alia, for the use by a franchisee of secret, substantial and identified know-how the property of the franchisor. The rationale of a franchise as so defined, and the reason for licensing that type of agreement is that the Franchisor having developed a business method and a package of technical know-how and other intellectual property is enabled to realise a profit without further heavy capital investment. Necessarily only franchises of the type contemplated in the definition can benefit from the licence.

13.    The only industrial or intellectual property involved in this agreement is the trade name "Flor Griffin". There is no property in a trade name and if there is copyright in this name as there is stated to be it does not amount to a franchise as defined. The agreement refers to "a method" without further elaboration and no description is supplied.

14.   This is an agreement whereby Mr. Griffin agrees to provide stock and display goods up to a value of £80,000 to set up Mr. O'Connor in a shop, using the name "Flor Griffin", and requiring Mr. O'Connor to buy his stock only from Mr. Griffin at net cost plus [ ]%. The shop is to be presented as  linked to the existing "Flor Griffin" shops and Mr. Griffin will pay to advertise for all four shops.

15.   The owner of an existing business is, of course, entitled to set up a second premises and there are a number of ways in which that can be done without infringing Section 4(1), but where the second shop is constituted as a legally and economically independent undertaking, clauses such as those addressed below which restrict the behaviour of the satellite may offend against Section 4(1).
 
16.   The agreement provides by a retention of title clause that title to any item will not pass to Mr. O'Connor until it is sold to a customer. Mr. O'Connor pays for stock only after it is sold, and on termination of the agreement he will dispose of stock as instructed by Mr. Griffin. The agreement controls Mr. O'Connor's behaviour in various ways which would be inoffensive only if he were an agent. However, since Mr. O'Connor does take title to the goods, albeit momentarily, he appears not to be intended to be an agent for Mr. Griffin; and the agreement does not contain any positive indicators of agency. The Authority has considered the agreement on the basis that he is not an agent.

17.    Clauses 6.9 and 5.6 restrict Mr. O'Connor to buying his stock from Mr. Griffin only. This restricts his freedom to look for other suppliers, and the Authority notes in this regard that he is limiting himself to taking supplies at [ ]% above the net costs to Mr. Griffin, raising the implication that he is preventing himself from obtaining goods from a cheaper source. The restriction also prevents other suppliers from supplying Mr. O'Connor. The Authority sees this as a restriction on Mr. O'Connor's behaviour but it does not amount to a restriction of competition in this market since it does not prevent or inhibit goods of this type reaching the market via other retailers and there is no barrier to other retailers entering this market and offering these goods. Since the restriction applies only to one retail outlet, these clauses do not offend against Section 4(1).

18.   Mr. Griffin agrees not to open a shop under his own trade name within a 15 mile radius of Mr O'Connor's shop in Mallow (Clause 5.8). This does not prevent him opening a shop under any other name. As the Authority does not consider that this trade name is an effective barrier to entry in this market, this is not a restriction of competition. This clause therefore does not offend against Section 4(1).

19.   The agreement does not state explicitly that advertising will include price advertising. That is, however, the obvious inference of Clauses 5.4, 5.9 and 6.17 and in the absence of any explanation to the contrary in the submissions of the parties the Authority is obliged to consider these provisions on the basis that it is intended to advertise the same prices for goods sold in all four shops. The Authority has stated in a number of previous decisions that price fixing between independent sellers of goods offends under section 4(1). These clauses therefore offend against Section 4(1).

20.   The restriction in Clause 6.13 on sale of the business in the first twelve months restricts the behaviour of Mr. O'Connor but it does not limit competition in this market since it does not prevent any other competitor entering by way of setting up their own business. No competitor can enter by way of buying Mr.O'Connor's business but this does not reduce the number of competitors or potential competitors in the market. This clause therefore does not offend against Section 4(1).

21.   Mr. O'Connor agrees not to open or own any electrical or related business within 15 miles of Mallow, where he is situated, or within 15 miles of any shop (anywhere) owned or "franchised" by Mr. Griffin. This clause (6.10) does restrict Mr. O'Connor from competing in this market and prevents him expanding his present business. There does not appear to be anything in the nature of this agreement which necessitates this restriction; and the clause offends against  Section 4(1). The restriction is continued for one year after termination of this agreement (clause 6.11) and for the same reasons this offends against Section 4(1).

22.	Clause 8.3 requires Mr. O'Connor to cease to carry on the business immediately on the expiry of this agreement. The Authority has taken this not to operate as a post-termination non-compete clause, but to be confined to the business as defined in the agreement, which is the business of electrical retailer, at the premises specified, under the name "Flor Griffin". Since Mr. O'Connor will in any case no longer be entitled to use the name "Flor Griffin" on the expiry of the agreement, the clause therefore does not offend under section 4(1).

23.   The obligation under clause 9.1 to give first refusal  refers both to the business and the premises in which it is carried on and has the effect that if Mr. O'Connor wants to terminate the agreement he must either simply cease to trade, or, in order to realise any benefit from the business, comply with this clause in order to sell. The clause is not an inhibition to Mr. O'Connor leaving the agreement since he will be able to sell at either an independent valuation or an open market price. It can have the effect of preventing other people coming into this market by way of buying Mr. O'Connor's business. In Musgraves Ltd./Licensee and Franchisee Agreements the Authority considered that the object and possibly the effect of a clause requiring licensees to give first refusal of premises to Musgraves to be to prevent competitors acquiring the premises, with, implicitly the goodwill and benefit of location. In this case the location of an electrical goods store is not as crucial as that of a convenience supermarket; and here only one premises is affected, unlike the network of premises of Musgraves licensees and franchisees. However there appears to be no object to this clause other than to prevent the entry of a competitor via the business or premises of Mr. O'Connor and it therefore offends against Section 4(1).

(b) Applicability of section 4(2).

24.   Under Section 4 (2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which, "having regard to all relevant market conditions, contributes to improving the production or distribution of goods or provision of a service or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not - 

(i) impose on the undertaking concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question".

25.   The Authority has stated in numerous decisions that there is very rarely an improvement in the production or distribution of goods or services, or consequent benefit to customers resulting from any price fixing agreement. No argument was put forward in this notification to show an improvement resulting from these clauses (5.4, 5.9 and 6.17) or from the agreement as a whole but in any case the Authority considers that price fixing cannot be indispensable to any improvement resulting from this agreement.

26.   Since no argument was put forward to show any improvement, or consequent benefit to consumers resulting from these clauses, (6.10 and 6.11) it is not possible for the Authority to find this restriction indispensable to such improvement. For the sake of clarity, the Authority considers that a post termination restriction on competing in the context of an agreement between two entities such as these does not produce any improvement, or benefit to consumers and it would thus not be possible to find it indispensable.

27.   No argument was made for a licence for Clause 9.1. Since no argument was put forward to show any improvement resulting from this clause, it is not possible for the Authority to find this restriction indispensable.

The Decision

28.   In the  opinion of the Authority the agreement of 30 June 1992 between Mr. Griffin and Mr. O'Connor for the operation of an electrical shop under the trade name "Flor Griffin" (notification no. CA/64/92 ) notified on 20 August, 1992, under Section 7(1), constitutes an agreement between undertakings. It considers that the restrictions in clauses 5.4, 5.9, 6.10, 6.11, 6.17 and 9.1 of the agreement offend against Section 4(1) of the Competition Act, 1991 and do not satisfy the requirements for a licence under Section 4(2). Consequently the Authority refuses a certificate or licence in respect of this agreement.

For the Competition Authority

Patrick Massey
Member
4th September 1995.