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1. Notifications were made by Cable & Wireless Ltd on 25 and 29 September 1992, with requests for certificates under Section 4(4) of the Competition Act 1991 or, in the event of refusals by the Competition Authority to issue certificates, licences under Section 4(2) in respect of 25 standard rental agreements with their customers relating to telecommunications, staff location, time control and security service equipment. Notice of intention to issue a certificate was published on 15 July, 1994 and a submission was received.

2. The notifications concern rental contracts for the supply, installation and maintenance of the following equipment (the equipment) to commercial and other non-household users:

(i) telecommunication-related equipment

(11 notifications);

(ii) staff location, paging and public address systems (5 notifications);

(iii) time control equipment for monitoring working hours and staff deployment (5 notifications);

(iv) equipment for use in the security service industry, such as fire alarms and watchman's clocks (4 notifications);

3. Three of the notified agreements are in the name of Cable & Wireless (Ireland) Ltd. Fourteen of the notified agreements are in the name of Irish Telephone Rentals Limited (ITR) and eight are in the name of Sound Systems Ltd (SS). From 1 April 1991 the business of ITR was transferred to SS and SS changed its name first to Cable and Wireless (Ireland) Ltd and later in May 1992 to Cable and Wireless Ltd (C&W). The notifications are in respect of both current contracts and earlier versions of those contracts which are still in force.

4. The parties involved are C&W and its predecessors, ITR and SS, on the one part and organisations such as industry and business users, hotels, other commercial undertakings, hospitals, Government Departments, and other bodies including churches, schools etc.

5. C&W is an Irish registered company wholly owned by Cable and Wireless plc, a UK registered public company which had a total turnover of Stg. £3,176.2m in 1991. The UK parent company employs over 38,000 people and is engaged in world wide activities in the transmission of data and satellite communication, providing a wide range of telecommunications services, networks and equipment to business and residential customers internationally.

6. ITR was engaged in the sale, rental and maintenance of the equipment in the State for over 20 years until its business was transferred to SS in March 1991. In 1990/1 ITR had a turnover of £4.7m and its accounts at end March 1991 showed that the value of its installations on rental was £8.6m less £2.4m accumulated depreciation. ITR is now a wholly owned subsidiary of C&W with its activities limited to property holding. SS has also been engaged for over 20 years in the sale, maintenance and rental of The Equipment within the State and following its acquisition of the business of ITR continues to trade under the name of Cable and Wireless Ltd. Since 1991 therefore, all the sales/rental business of ITR and SS has been transacted by C&W.

7. At the time of notification, C & W had 3 other subsidiaries operating in the Irish market. Irish Time Systems Ltd was a supplier of time control equipment, fire alarm systems and devices for monitoring security patrols of premises. Sound Productions Ltd was a supplier of staff location equipment. C&W stated that it regarded these two companies to be among its competitors in the market for those particular products even though they were subsidiaries of C&W. However the Directors' Report with C&W's accounts for 1991/2 indicates that a decision was taken to wind down the activities of these 2 subsidiaries. In October 1993, these two companies were sold to a third party. A further C&W subsidiary, Cardio Limited, trades in the data communications market which entails products totally different to those specified at paragraph 2.

8. In the year ended 31 March 1992 the C&W Group had a turnover of £14.8m. Its accounts also showed that the value of installations on rental by the C&W company (including those transferred from ITR) was £10.571m less £3.8m for accumulated depreciation while the value of rented installations for the Group (including the £10.571m above) was £10.7m less £3.93m for depreciation. Additions to the rent roll in 1991/2 were valued at £1.183m. The major part of the Company's turnover arises from sales, rental and maintenance of Telecommunications Equipment.

9. The products involved in these notifications (i.e. the equipment) are as follows:

(i) Telecommunications-related Equipment.

(ii) Staff Location Equipment

(iii) Time Control Equipment

(iv) Security Service Equipment

10. Telecommunication-related equipment, known in the trade as Customer Premises Equipment (CPE), consists of private automatic branch exchange telephone systems, key telephone systems, automatic call distribution systems, dealerboards, telephone instruments, bells, loud speakers, facsimile machines, telephone answering systems and network management systems.

11. CPE suppliers on the Irish market fall into two categories:

(a) CPE manufacturers, such as Ericsson , Siemens, etc almost all of whom supply and support customers directly, generally via wholly owned local subsidiaries, and

(b) independent distributors such as C&W, TEIS, etc who buy CPE from a range of manufacturers and then offer both products and services (including maintenance) to their customers.

12. There are approximately 40 suppliers of CPE equipment in the Irish market of whom only 4 or 5 are also manufacturers. C&W are not manufacturers. C&W claim to be the only suppliers of telephone equipment produced by manufacturers such as Panasonic, GEC, Melco Labs, Tie and Picture Tel, and also claim to be the only distributor with specifically trained and qualified staff for the maintenance of such equipment. The major suppliers are TEIS , C&W (incorporating SS ), LM Ericsson, Technico, GPT, Digital Telephones, Siemens, and Allied Telephones. C&W's estimate of the annual market is £45m. The 4 largest suppliers are estimated to hold 63% of the market.

13. Staff location equipment is stated to comprise wide area network pagers, on-site short range radio paging systems, public address systems and intercom systems.

14. C&W state that there are at least 50 suppliers selling into the Irish market for these products. In general the suppliers do not manufacture the equipment themselves. The major suppliers besides C & W are Sigma Wireless, SKS, Sound Productions Ltd, Sound Communications and Peats. C&W estimate that total market turnover is £4.5m. per annum. The 4 largest suppliers are estimated to hold 74% of the market.

15. Time control equipment includes time monitoring devices for the work place (enabling employees' hours to be calculated); central clock control systems and secondary clocks for use throughout premises; time systems for monitoring flexible working arrangements; time and date stamps and devices for monitoring security patrols on premises.

16. C&W estimate that there are approximately 15 suppliers active in the Irish market. The major suppliers apart from C & W are Flexitime, Compuplan and Irish Time Systems Ltd. C&W estimate that total market turnover is £2.75m. per annum. The 3 largest suppliers are estimated to hold 74% of the market.

17. The products covered by this heading are mainly fire alarms and watchmen's clocks. C&W are no longer active in the fire alarm area and by this stage are servicing the remainder of contracts most of which were concluded 10/15 years ago. Their estimate of the Irish market for security service equipment is around £5m per annum with about 40 companies involved.

18. In summary while there is a substantial degree of market concentration in each of the main product areas there are a large number of suppliers active in each sector. In the telecommunications sector up to November 1992, a licence from the Department of Transport, Energy and Communications was required to engage in the business of supplying, installing and maintaining equipment for attachment to the telephone network. However the qualification for licences was based on competency factors and by 1992, 300/400 companies or persons had been licensed for these purposes. Since 1992 the only requirement remaining is that the equipment should be type approved by the Department. There were therefore apparently no significant barriers to market entry by other competitors.

The market situation is summarised below :

Equipment Estimated No. of

market Annual Market suppliers

Telephone £45.0m 40

Staff location £ 4.5m 50

Time control £ 2.8m 15

Security service £ 5.0m 40

19. Customers seeking communications equipment have a number of options available to them when considering how best to satisfy their requirements i.e. to purchase the equipment outright, to take the equipment under a leasing agreement, or to rent it. In many cases the customer will also require post-installation support and maintenance. In general the equipment is supplied on terms that incorporate maintenance as an integral part of the product. In a sale agreement the customer pays up front the capital sum to acquire ownership of the equipment, and after the termination of the warranty period will make his own arrangements for ongoing repairs and maintenance. The customer owns the equipment. If a maintenance agreement has been offered to and accepted by the customer the responsibility of the supplier to continue such maintenance service is limited to any notice necessary (generally 3 months) from either the supplier or customer to terminate the maintenance agreement. In a lease agreement the customer reaches an agreement with a leasing company that the latter will pay the capital sum to the equipment supplier. The customer repays the capital cost to the leasing company over a number of years but from the end of the seller's warranty period is free to make his own arrangements for maintenance. In a rental agreement the customer pays a quarterly or annual charge to the equipment supplier for a defined number of years. The customer never attains ownership of the equipment. The supplier contracts to support and maintain this equipment for the duration of the rental agreement. C&W advise that, of the 3 options, rental is the least common representing less than 10% of The Equipment market.

20. The 25 notified agreements are all concerned with the rental of equipment. C&W advise that apart from themselves, suppliers in general do not offer rental contracts. Currently around 200 CPE, 30/40 time control and 150/200 staff location rental agreements are concluded by C&W annually. A significant, though minority element of the turnover of the C&W Group is derived from rental contract revenues. C&W claim to be the dominant supplier in the rental side of each market with their rental business representing less than 10% of each product market, excepting the security equipment market where their share is minuscule.

21. The relevant product markets in which the above mentioned goods and services are supplied could be characterised as a homogeneous market for the supply and maintenance of such equipment. Within the relevant product markets, a wide range of substitute products are readily available from sources other than C&W. The operational functional equivalent of everything supplied is available from other sources. To a large extent the equipment supplied by other suppliers is largely interchangeable with similar products supplied by C&W and C&W claim that, where consent for such substitution is required of C & W, it is readily given. The relevant geographic market is the State.

22. The standard agreements notified, which were in use at different time periods but which are still in force, are as follows:

(i) Current Agreements -Cable & Wireless Ireland Ltd ..

Telecommunications equipment - CA/133/92E

Staff location equipment - CA/137/92E

Time control equipment - CA/138/92E

All 3 agreements have identical clauses.

Under this standard contract, which is currently used for new agreements, C&W (the company) agrees to supply, instal and let on hire the equipment set out in the schedule, including cabling, at the customer's premises for a fixed term of years. The customer agrees to pay the labour cost of installation and an annual rental for the hire of the installation and its maintenance. The rental is adjustable annually by reference to a percentage proportionate to movements in electrician wage rates. Unless determined by mutual agreement in writing the term of the contract is for a stated number of years and thereafter until one or other of the parties gives 6 months notice expiring at a year end*. The installation remains the property of the company and the company undertakes to execute without charge during normal working hours all repairs and replacements arising from fair wear and tear. No additions or extensions to the installation may be made without the company's written consent. The customer may not repair or replace any part of the installation. If the customer repudiates the contract, and the company agrees, the customer will pay all amounts due and also a sum equal to the present value on a 5% per annum basis of the remaining rentals that would have been payable less a 25% deduction to cover the estimated cost of future maintenance and the value of the installation which has to be surrendered. The sum shall be payable as liquidated damages, it being an agreed estimate of the loss the company would suffer. Copyright and other industrial/intellectual property rights including software operating programmes remain vested in the company and the customer undertakes not to pass on such material to any third party. The customer may have the installation transferred at his own expense to any other premises within the area in which the Company operates. The customer shall not assign the contract without the prior written consent of the Company, such consent not to be unreasonably withheld.

*C & W have stated that the actual duration of the contract is a matter for negotiation but that the average period in more recent agreements has been 6 years.

(ii) Earlier agreements concluded by ITR and SS

The other 22 standard agreements notified are earlier versions of the contracts used by ITR and SS in different years. These agreements are basically similar to the C&W current contracts with some minor differences. Details are as follows:-

Reference Product Year used Term ** Notice features

CA/187/92E Telephone 1959 12 yrs. 6mth A

CA/190/92E do. 1962 7 yrs. do. A

CA/183/92E Security 1966 10 yrs. 12mth A

CA/177/92E Time control 1970 10 yrs. do. A

CA/188/92E Telephone 1976 14 yrs. do. B

CA/189/92E Telephone 1980 14 yrs. do. B

CA/178/92E Telephone 1988 14 yrs. 3mth B

CA/136/92E Telephone 1990 5 yrs. 3mth B

Reference Product Year Used Term **Notice Features

CA/175/92E Telephone 1974 14 yrs. 6mth A

CA/184/92E Staff location 1972 14 yrs. 6mth A

CA/182/92E Time control 1979 14 yrs. 6mth C

CA/191/92E Staff location 1987 - N/A CM

CA/176/92E Telephone 1987 - 6mth C

CA/180/92E Security 1987 12 yrs. 6mth C

CA/135/92E Staff location 1989 - 6mth CM

CA/181/92E do. 1989 - 6mth CM

CA/134/92E Telephone 1989 10 6mth C

CA/179/92E do. 1989 10 6mth C

CA/132/92E Time control 1989 - 6mth C

CA/186/92E do. 1989 - 6mth C

CA/185/92E Security 1989 - 6mth C

CA/139/92E do. 1989 - 6mth C

**This relates to the period set for notice of termination after the end of the fixed rental period

A - no separate charge for maintenance - no inflator

B - separate annual charge for maintenance with annual inflator

C - no separate charge for maintenance - inflator applies to 50% of annual rental

M - includes requirement to purchase batteries for pocket transceivers from the company

23. While 25 separate standard agreements were notified the provisions in each are broadly similar. The main provisions which are common to each of the 25 agreements notified are concerned with the rental and maintenance terms relating to the equipment on hire to the customer. These in general do not raise issues under the Competition Act. The restrictive provisions that have to be considered from the competition aspect are as follows:-

(i) The long duration of some of the agreements which have minimum periods ranging from 5 to 14 years and the notice period for termination thereafter.

(ii) The incorporation of both hire and maintenance in the same agreement. The current C&W agreement provides in para. 2 "The Subscriber will pay to the company for the hire of the installation and its maintenance during the continuance of this contract a total of IR....." while para. 6(a) provides that "The company shall .....guarantee to execute without charge in the Company's normal working hours all repairs and replacements arising solely from fair wear and tear....." Similar provisions are in the other 24 agreements although some provide for a separate annual charge for maintenance.

(iii) The restriction on the customer's ability to repair or replace all or any part of the installation. The current C&W agreement provides in para. 5 "The Subscriber agrees to notify the Company immediately any fault occurs in the installation or any repairs become necessary......The subscriber shall not repair or replace or cause to be repaired or replaced any part of the installation." The ITR agreements state at para. 8 "The installation shall not in any way be interfered by the subscriber ...." Provisions similar to those above are in all agreements.

(iv) The restriction on the customer's ability to add to, alter or extend the equipment without the written consent of the company. The C&W and SS agreements (with the exception of a 1959 SS agreement) provide at para. 8 "No additions alterations or extensions of any kind are to be made to the installation without the written consent of the Company and if any additions, alterations or extensions are made without the written consent of the company, it shall, if it thinks it in any way prejudices the operation of the installation be at liberty to remove such additions, alterations or extensions and the Subscriber agrees to indemnify the Company for such costs as may be involved. Any alterations or extensions to the Installation necessary shall be carried out by the Company at the Subscribers expense." The ITR agreements provide at clause 8 "Any alterations or extensions to the Installation necessary or requested by the Subscriber shall be carried out by the Company at the Subscribers expense." A similar provision is inserted in the 1959 SS agreement.

(v) The restriction on the customer passing on intellectual property such as software to third parties. The 3 C&W agreements and the 10 latest ITR agreements provide at para. 14 "Copyright and all other forms of ownership including industrial and intellectual property rights in all documents including operating programs for software-operated systems .....remain vested in the Company. The Subscriber undertakes not to pass such material or any part thereof or copies of the whole or any part thereof to any third party without the written consent of the Company".

(vi) The requirement to purchase batteries for transceivers from the company.

24. In a comprehensive submission C&W put forward a number of arguments as to why a certificate should be issued viz.

(i) That the object of the notified agreements was to ensure that the customer who opted to rent rather than buy or lease equipment from C&W had at all times fully functional equipment and an optimal repair and maintenance service throughout the duration of the rental period. In particular, the provisions of certain clauses in the agreements did not have as their object or effect the restriction of competition in the Republic of Ireland or any part of it.

(ii) That it was standard practice for customers to choose the supplier on the strength of its after installation service. The customer expected all comparable suppliers in the market to offer the same or a substantially similar product. Accordingly, the combination of initial installation and subsequent support and maintenance was something which the customer would seek and deliberately choose. In all but the most unusual circumstances the customer required both elements of the product from a single source even when given the option of separating the installation and maintenance between different suppliers. As a result, it was clear that the acceptance by the customer in a rental contract of terms relating to the maintenance of the product by C & W, did not impose supplementary obligations which by their nature or commercial usage had no connection with the subject of such contract.

(iii) That it was recognised that a customer might not have the necessary expertise to enable it to determine whom it should engage for the maintenance and repair of such equipment and that a customer would not normally wish to be concerned with engaging an independent contractor in this regard. One of the objects of C&W was therefore to relieve the customer of this responsibility and provide an integrated rental and maintenance service which accorded with the normal expectation in the market place for customers renting or indeed, as in the vast majority of cases, buying, such equipment. In providing maintenance with the rental of the equipment, C&W was not restricting the customer's ability to shop around but was simply offering a composite service in common with several other suppliers within the market.

(iv) That given the level of capital expenditure incurred by C&W in the purchase of the equipment and the fact that it was not in C&W's possession during the rental period, the protection afforded to C&W by the arrangement could not be regarded as a supplementary obligation and was an essential element of the rental contract.

C&W also submitted arguments in support of the grant of a licence which are not relevant to this decision and are not considered here.

25. In regard to certain specific clauses in the agreements C&W provided added comments viz.

(i) In relation to the prohibition on additions or extensions to the installation C&W stated that this clause ".... does not have as its object the prevention, restriction or distortion of competition. It provides that no additions, alterations or extensions are to be made to rented equipment without the written consent of C&W and has as its object the protection of C&W's investment. Pursuant to the arrangement C&W parts with possession of the rented equipment which at all times belongs to it. In view of the fact that C&W has continuing obligations under the contract to ensure that the CPE equipment is maintained to a reasonable functional standard the limited prohibition in clause 7 is also designed as a protective measure, having regard at all times to ensure the proper functioning and operation of the telecommunications equipment supplied by it. In seeking to control the people who handle and operate CPE equipment and any additions to it C&W is furthering this object. The supplier's capital investment in sensitive equipment is also protected."

(ii) In relation to the requirement that any alterations or extensions to the Installation shall be supplied by the Company C&W have pointed out the significant benefit to customers of this provision i.e. "The customer does not have to make any capital investment .....Sound Systems, in addition to accepting the obligation to finance and execute any such additional work, waive any opportunity to exploit such a situation by agreeing in advance that any additional equipment to be provided will be supplied on the terms and conditions of the original contract ... Therefore the provision in question is not a restriction in any manner but rather represents a facility of which customers are often glad to benefit."

(iii) The requirement that "only batteries supplied by the company be used in paging receivers" is justified on the following basis:

Rather than simply pass to the customer the responsibility for damage caused by the use of incorrect batteries the company adopted the pre-emptive and preventative measure. In the interest of protecting both parties to the agreement and to ensure that the equipment is not damaged by the use of incorrect materials, the company undertook to stock and supply the correct types of batteries for supply to rental customers at normal prices. This practice was designed to ensure that incorrect types of batteries would not be used, damage would not be caused, and neither party would suffer any abnormal cost or loss.

26. The Authority wrote to C&W on 28 April 1994 expressing its concern in relation to the prohibitions in the agreements on additions, alterations or extensions without the written consent of the company and the requirement in three agreements that batteries for pocket transceivers must be purchased from the company. In a letter dated 26 May 1994 C&W agreed to remove the requirement relating to the purchase of batteries from the three relevant agreements and to amend all agreements to provide that consent for additions, alterations or extensions to rented equipment will only be withheld for objectively valid reasons which shall be disclosed to the customer. C&W also stated that they would write to all their contracted customers advising them of the amendments.

27. Following publication on 15 July 1994, of its intention to issue a certificate, the Authority received a submission from a Telephone Systems Consultant in relation to the penalty clause contained in the standard agreements. The submission stated that users of the systems found that this clause restricted them in choosing a replacement system. A copy of a Judgment of Mr. Justice Costello delivered on 8 February 1991 in the matter of a High Court action between ITR, the plaintiff, and the Irish Civil Service Building Society Ltd., the defendant, was also enclosed. The action arose out of a decision by the defendant to seek to prematurely terminate rental contracts relating to telephone and broadcasting equipment. The issue arising in the contract for broadcasting equipment was whether ITR was entitled to an award under the repudiation clause (i.e. clause 11, see para 22) or whether this clause was a penalty clause. Mr. Justice Costello inter alia found as follows:

"I have come to the conclusion that the formula contained in clause 11 does not produce a liquidated sum that can properly be regarded as a genuine pre-estimate made at the date of the contract of the loss which the Plaintiff would suffer should the contract be prematurely determined and that it is in the reality a penalty and therefore unenforceable".

Damages in a much reduced amount were awarded to the Plaintiff.

28. The submission did not make the further argument that the penalty clause was thereby restrictive of competition. The Authority, as stated at paragraph 23(i), consider that the long duration of the contracts is a competition issue and this is dealt with at paras 39 and 40 below.

29. Section 4(1) of the Competition Act, 1991 prohibits and renders void 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.

30. The term "undertaking" is defined in Section 3(1) of the Act, 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".

31. The rental contracts notified are in the names of Cable and Wireless (Ireland) Ltd, now known as Cable and Wireless Ltd (C&W), Irish Telephone Rentals Ltd and Sound Systems Ltd (which was since renamed Cable and Wireless Ltd). ITR were and SS, now named Cable and Wireless Ltd, are, companies engaged for gain in the sale, hire, provision and maintenance within the State of The Equipment and are therefore undertakings under the Act.

32. The other parties to the rental contracts are organisations within the State, such as industrial and business users, hotels, other commercial undertakings, hospitals, Government Departments, and other bodies including churches, schools, etc. Most of these organisations are undertakings within the meaning of the Competition Act because they are engaged for gain in the production, supply or distribution of goods or the provision of a service. A number of the organisations may not come within this definition of an undertaking and are not therefore covered by the Act. This decision does not apply to those agreements. With the exception of these agreements, the rental agreements notified to the Authority by C&W are agreements between undertakings. The agreements have effect within the State.

33. The Authority does not believe that the rental segments of each of the product markets involved could be regarded as separate markets. At the time the equipment is acquired by the customer it may be purchased outright, it may be leased under a leasing contract or it may be rented. While purchase involves cash up front, both leasing and rental involve deferred payments on the part of the customer. If the customer is reluctant or unable to pay the full price up front he still has the options of leasing or rental. The method of acquisition is a matter of choice for the customer to decide having regard to his own economic criteria or convenience at the time he seeks to acquire the equipment. The larger part of C&W's turnover derives from the sale of equipment rather than rental and it would be too extreme to regard them as catering for 2 separate markets for each of the product areas based on the method of acquisition eventually decided by their customer. In the light of the choice that is freely available at the time of acquisition of the equipment the Authority does not regard the rental sector as a separate market but as part of the overall market for the equipment in question.

34. The provision of rental facilities by C&W, per se , as an alternative to purchase or leasing for the acquisition of the equipment must be regarded as pro -competitive because it provides an additional facility to enable customers to acquire The Equipment. The acquisition of this equipment can be a substantial expenditure factor for companies and the availability of rental enables them to obtain modern equipment to improve their productivity at a lesser immediate cost. In some cases customers might not otherwise be able to obtain the equipment. On the other hand the customer, at the time he seeks to acquire the equipment, has the choice whether to rent, obtain under leasing or purchase. In US v United Shoe Machinery (1953)* the US Government charged that United Shoe maintained its market share of 75% to 85% of the American shoe machinery market primarily through its practice of refusing to sell its machinery, agreeing only to lease it. However in this instance C&W's market share is much smaller and its customers have a free choice at the time of acquisition to either purchase, lease or rent the equipment from C&W or go to any of its competitors. In these circumstances the Authority would not regard the provision of rental facilities per se as offending against Section 4(1) of the Competition Act.

*110. F. supp. 295 (1953)

35. C&W have stated that each of the standard agreements notified, which have been used in their varying forms since 1959, are for varying periods ranging from 5 to 14 years with a provision for up to 12 month's notice of termination by either party after the end of the fixed or minimum term. While, at the shorter end, a rental period of 5 years is in line generally with normal leasing periods for many categories of office and industrial equipment, a period of 14 years is more akin to lettings of property rather than equipment. A number of the agreements also provide for strict terms for repudiation of agreements, i.e. that if the customer repudiates the agreement, and if C&W accept this repudiation, C&W may remove the installation with the customer obliged to pay rentals to date plus a discounted value of rental for the remainder of the full term of the contract less 25% to cover the estimated cost of maintenance and the value of the recovered material. The attention of the Authority was drawn to a court case involving the repudiation clause in a contract and which was found to be unenforceable (see paras 27 and 28). The Authority notes that the determination of the Court that the penalty clause is unenforceable affects the ease or otherwise of exit from the contract for customers. This is relevant as a competition issue insofar as the duration of the agreements is a competition issue. This is dealt with in paragraphs 39 and 40. Other agreements allow for mutual determination but in all cases C&W are in a position to require that the rental agreements be continued for their full term if they so wish.

36. In addition to the minimum term, the agreements continue thereafter until either party gives notice of termination which expires at the end of a calendar year. The period of the notice required varies from 3 to 12 months. This can effectively extend the contract from anything from 3 months to almost 24 months depending on the notice period provided and the time of year the notice is made.

37. Customers who have satisfied their equipment requirements under a rental agreement are effectively out of the market for this equipment from other equipment suppliers. This is no different to the position of customers who have recently purchased equipment since these are similarly out of the market for some considerable time. However since maintenance is included in the rental contracts, other persons who provide maintenance are effectively excluded for the full period of the rental contract from competing for the maintenance of the equipment also. Because of the restrictions in the agreements against additions or extensions to the installations without the consent of C&W, competitors of C&W may also be excluded from a significant element of such additional business. By reason of the rental contracts therefore competitors of C&W may be excluded from part of the market for supply, maintenance and additions for some very extensive periods.

38. C&W have indicated that they are the only company to any degree involved in the renting of the equipment with their rental business representing a significant though minority element of their turnover in each category or less than 10% of each product market, excepting the security equipment market where their share is miniscule and not relevant in this context.

39. The Authority does not believe that the rental of equipment, per se , is anti -competitive. The Authority would accept that the customer on entering into his original contract with C&W, or its predecessors, made his decision freely on the basis of his own economic criteria when he chose to rent rather than purchase or lease. Apart from the lower up front costs, other customer benefits might have been the fact that future rental/maintenance payments are set for the long term (which facilitates financial planning), and the security of a satisfactory maintenance/repair service with the ability to withhold rental payments if the maintenance service contracted for is not provided. Unlike the purchaser who may have to contract for the maintenance of his installations at periodic intervals, the rental customer is covered by a long term rental/maintenance package. In its initial negotiations with its customer on rental/maintenance terms including the duration of the agreement, C&W has no special market power and the duration fixed in the agreement is that agreed by the customer. C&W appear to be meeting a market need. On its part, C&W has to provide, through rental payments, for the recovery of the cost of the installation, as well as its financing charges, and for the projected cost of maintenance which they are committed to provide over the full period of the contract. It should follow that the longer the rental term, the lower the annual amortisation charge. The Authority does not see its role as second guessing commercial decisions made by companies. Its concern is whether arrangements have the object or effect of interfering with competition within the State.

40. In US v United Shoe Machinery Corporation, the US Court ruled that United Shoe's 10 year leases were "so drawn and so applied as to strengthen United's power to exclude competitors" but this was in the context of a company which had refused to allow its machinery (which was generally regarded as superior) to be purchased and which held 75/85% of the relevant market. In concluding its leases in the first place, C&W (or its predecessors SS and ITR) had no special or exclusive rights to market the products involved and had offered rental only as an option to other forms of acquisition. Furthermore C&W's rental share of the relevant market for each of the 3 product categories involved is less than 10% and a proportion of this would be represented by agreements of 5 years'duration, as well as by pre-1978 agreements, which by now can be terminated with a maximum of 12 months notice, if either party thereto so chooses. In this regard the Authority would not regard a 5 year rental agreement as representing any degree of foreclosure since an alternative purchaser (or customer under a leasing agreement) would be unlikely to seek to replace the equipment within 5 years of acquisition. In view of the wide date spread of past rental agreements managed by C&W, a significant number could be expected to finish their minimum term each year with the customer then free to terminate the agreement, if he so wishes, and re-enter the market. Since the basic installations are of a type which are normally replaced by the customer only after long periods of use it is not clear why competition should be affected by the length of such leases. In any event the share of the annual market affected by the longer term rental agreements must be well below the 10% mentioned above and the Authority therefore considers that the duration aspect of even the long term rental agreements could not have any significant effect on competition. For these reasons the duration aspect of the agreements does not offend against Section 4(1).

41. Each of the 25 agreements notified provides that the Company shall for the duration of the contract execute without charge all repairs and replacements arising solely from fair wear and tear. It seems clear from the agreements furnished that where the maintenance charge is not shown separately it has effectively been built into the rental payable particularly in those later agreements which provide for an annual inflation adjustment having regard to electrician pay rates. The incorporation of maintenance in the rental agreement means that no other company may compete against C&W for the maintenance of the equipment. While the Authority considers that it could offend against Section 4(1) of the Competition Act to make purchase transactions conditional on a long term maintenance contract with the original supplier, the situation is different in regard to rental contracts. In the former situations, the ownership of the equipment passes from the supplier when it is acquired by the customer, but, under a rental agreement, the ownership of the property remains with the supplier with the customer required to return it to the supplier on termination. The customer in a rental agreement acquires a package consisting of the equipment and a prompt maintenance service to keep it fully operational. The nature of the equipment is such that in many cases any malfunction would add costs to business far greater than the immediate cost of repair. Effectively the customer under the rental agreement is paying for an early response maintenance service. C&W have a proprietary interest in maintaining the value of their property and a contractual obligation to keep it in good working order. If the equipment does not function satisfactorily the customer may refuse to continue rental payments. It seems essential therefore that to protect their property C&W must be in a position of control over the maintenance of their equipment. The Authority therefore does not consider that the incorporation of maintenance with rental terms, in the case of these agreements, offends against Section 4(1).

42. Most of the agreements notified also specifically prohibit the repair or replacement by the customer of any part of the installation. The effect of this provision is that the customer is prohibited from approaching any of C&W's competitors to have the equipment repaired or replaced. As a result of this clause C&W can ensure that the equipment is maintained by itself to both its satisfaction and that of the customer. In the opinion of the Authority, an integrated rental and maintenance contract, without the involvement of a third party, is a more practical arrangement from the point of view of both supplier and subscriber. Furthermore under the notified contracts C & W guarantee to execute without charge in the company's normal working hours all repairs and replacements arising from fair wear and tear in order to maintain the equipment in efficient working order. In these circumstances it seems more likely that the supplier and owner of the equipment would provide a more satisfactory service to the subscriber than a third party especially if the third party was a competitor of the supplier/owner. If, in the absence of this provision, the equipment was inadequately serviced or repaired by a third party which resulted in the equipment not functioning satisfactorily the rental company could be responsible for putting it right. The restriction on repairs by others seems necessary to protect C&W's position in the light of their proprietary interest in the equipment and their contractual obligation in relation to maintenance. The Authority therefore considers that this provision does not offend against section 4(1).

43. Three older staff location equipment agreements concluded by ITR contained a requirement that consumables, i.e. batteries for paging receivers, must be purchased from the company. The company claimed that the purpose of this requirement was to prevent damage to the instrument that might be caused by the use of unsuitable batteries. The Authority however took the view that considering the wide availability of batteries, it should be possible for customers to purchase batteries to the correct specification from other sources if they so wished. While the impact of this requirement in the ITR agreements on competition, if it is practicable to enforce, may not be very significant, the Authority considered that the restriction involved offended against Section 4(1). The Authority also noted that this restriction was not incorporated in the current agreements used by C&W. However as C&W has now agreed to amend the three agreements by the deletion of this clause, this aspect no longer offends against Section 4(1).

44. The C&W agreements and 10 SS agreements contained a provision that no additions, alterations or extensions were to be made to the installation without the written consent of the Company. The ITR agreement and the 1959 SS agreement provided that any alterations or extensions to the installation necessary or requested by the customer shall be carried out by the Company at the subscriber's expense. Over the past decade in particular there have been rapid technological advances in the capability and range of functions of communications equipment, which, combined with normal growth in businesses, would have led to increased demand from existing customers for additions, alterations or extensions to their existing installations. With recent advances in technology there is the capability to significantly upgrade existing installations by the addition of new equipment compatible with the original equipment. This can involve major new investment. Much of the new equipment on the market can be mutually compatible with existing systems with equipment from other suppliers largely interchangeable with that supplied by C&W. C&W claimed that where their consent to such substitution had been sought it had been readily given. Nevertheless the Authority was concerned that the relevant clauses in the agreements could be used to prevent the customer seeking an alternative supplier for additional compatible equipment for use with an existing rented installation even though the additional equipment was not the subject of the original contract. The Authority were also concerned that, by the operation of these clauses, other suppliers with the capability to supply and instal compatible equipment would be prevented from tendering for this business. The Authority therefore considered that this provision offended against Section 4(1) of the Competition Act and would not have satisfied the requirements of Section 4(2) in the Authority's opinion.

45. The Authority does not consider, however, that C&W should have to permit additions, alterations or extensions which would damage or inhibit the effective working of the existing installation. They accept that C&W should have a concern to protect their proprietary interest in the rented installation and their position under the maintenance element of the contract. It considers however that this could be adequately ensured in a less restrictive way which would not offend against Section 4(1). C&W has now agreed to amend these clauses by providing that their consent for additions, alterations or extensions will only be withheld for objectively valid reasons which shall be disclosed to the customer. The amended clause on this basis no longer offends against Section 4(1).

46. The C&W agreements also provide that C&W may remove at the customer's expense any unauthorised addition, alteration or extension to the rented installation if C&W thinks it in any way prejudices the operation of the installation. Similar clauses are inserted in the other two C&W standard contracts and in the SS contracts. The effect of these clauses was to provide C&W with additional powers to enforce the prohibition on unauthorised additions, alterations and extensions. Since the amended agreement provides that C&W's consent to such additions, alterations or extensions will only be withheld for objectively valid reasons which shall be disclosed to the customer, this clause no longer offends against Section 4(1).

47. A number of the agreements require the customer not to pass on copyright material, including software to any third party without the written consent of the Company. In more recent years software programmes have become a major feature of large telephone installations. The software, like the hardware, remains the property of the rental company and the Authority would not consider these measures, which are inserted to protect the proprietary interest of the rental company, as offending against Section 4(1).

48. Cable and Wireless (Ireland) Ltd., Irish Telephone Rentals Ltd., (ITR) and Sound Systems Ltd., (SS) now known as Cable and Wireless Ltd., (C&W) are undertakings within the meaning of Section 3(1) of the Competition Act. Most of the other parties are also undertakings and the rental contracts constitute agreements between undertakings. In the Authority's opinion, the notified agreements, as amended by letter dated 26 May 1994,do not offend against Section 4(1) of the Competition Act, 1991.

49. 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 agreements set out below in respect of standard rental contracts notified on 25 and 29 September, 1992 under Section 7, and amended by letter of 26 May, 1994, do not offend against Section 4(1) of the Competition Act, 1991:

(a) notification nos. CA/133/92E, CA/137/92E, CA/138/92E,- current contracts relating to telecommunication- related, staff location, and time control equipment between Cable and Wireless Ltd., and business users,

(b) notifications nos. CA/132/92E, CA/134/92E, CA/135/92E, CA/139/92E, CA/175/92E, CA/176/92E, CA/179/92E, CA/180/92E, CA/181/92E, CA/182/92E, CA/184/92E, CA/185/92E, CA/186/92E, and CA/191/92E- old contracts relating to telecommunication-related, staff location, time control and security equipment between Irish Telephone Rentals Ltd. (now Cable and Wireless Ltd.) and business users, and

(c) notifications nos. CA/136/92E, CA/177/92E, CA/178/92E, CA/183/92E, CA/187/92E, CA/188/92E, CA/189/92E and CA/190/92E- old contracts relating to telecommunication-related, staff location,time control and security equipment between Sound Systems Ltd. (now Cable and Wireless Ltd.) and business users.

For the Competition Authority

Des Wall

Member

19 September 1994