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Dekra Eireann Teoranta /Agents [1998] IECA 516 (17th July, 1998)
Competition
Authority Decision of 17 July 1998 relating to a proceeding under Section 4
of the Competition Act, 1991
Notification
No.CA/20/97 - Dekra Eireann Teoranta /Agents
Decision
No. 516
Introduction
1 Notification
was made on 3 October 1997 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 issue a certificate, a licence under
Section 4 (2) in respect of
a standard sub-franchise agreement. On 30 March 1998, following the issue of a
Statement of Objections by the Authority, a revised version of the agreement,
described as an agency agreement, was submitted.
(a) Subject
of the Notification
2 Under
the system of roadworthiness testing which is being introduced by the
Department of the Environment in fulfilment of Ireland’s obligations
under Directive 96/96/EC, all private cars over 4 years old will be required to
undergo a roadworthiness test. The notification concerns a standard agreement
which is to be entered into by Dekra Eireann Teoranta and approximately 70
agencies around the country, if Dekra is successful in its bid for the national
car testing franchise.
(b) The
Parties Involved
3 Dekra
Eireann Teoranta (Dekra) is a proposed joint venture between Dekra
International and the Society of the Irish Motor Industry (SIMI). Each of
these companies will have a 50% holding in Dekra. Dekra International is a
holding group based in Luxembourg with the express purpose of establishing
Dekra group services in European countries outside Germany. It is engaged in
activities such as accident repair cost estimates, periodical technical vehicle
inspections, capture, processing and marketing of automotive market data,
pricing of new and used cars and international green card claims management.
Countries covered by one or more of these activities are the UK, Benelux,
France, Spain, Italy, Austria, Switzerland and Portugal.
4 SIMI
is the representative body of the motor industry in Ireland. It exercises
pressure at national and EU level to ensure that the Government implements the
EU Directive on car testing and generally tries to maintain and improve the
reputation of the motor industry. According to the latest accounts of the
company, SIMI’s net current assets at 31 December 1996 were
£225,863; fixed assets were £561,943; the surplus for the year before
taxation was £66, 928.
(c) The
Market
5 The
market is the service, pursuant to the statutory obligation arising under EC
Directive 96/96, of roadworthiness testing of all private cars over 4 years old
in the State. The Irish Bulletin of Vehicle and Driver Statistics 1996
published by the Department of the Environment contains the following
information in relation to the age of private cars:
|
|
|
|
|
|
|
Year
first licensed
|
|
No.
licensed
|
Year
first licensed
|
|
No
licensed
|
1996
107,106
1986 61,451
1995 83,324
1985 54,658
1994 78,517
1984 39,333
1993 66,282
1983 25,262
1992 74,322
1982 19,254
1991 77,829
1981 15,452
1990 98,157
1980 12,678
1989 94,011
1979
&
1988 77,237
earlier years 19,809
1987 65,379
Total
No licensed
1,057,383
1. The
above figures show that of the 1,057,383 private cars registered at year ending
31 December 1996, 722,154 or 68% were 4 years old and over. Of these, 344,319
were 4-7 years old and 377,835 were 8 years old or more. These figures are
further broken down by 29 licensing areas. Dublin City and Counties has by far
the largest car population with 187,199 cars over 4 years old.
6. The
Authority is aware that the Minister has indicated an intention to appoint a
single franchise for vehicle testing throughout the country. Although such an
arrangement would be outside the scope of the Competition Acts, the Authority
is concerned at the proposal to establish a monopoly franchise for vehicle
testing. It is not aware of the reasons why it was decided not to allow
competition in respect of vehicle testing and no justification has been
advanced for such measures to the knowledge of the Authority. The Authority
notes that competition is likely to ensure high quality services to consumers
at low prices and consequently believes that the decision to prevent
competition will ultimately lead to consumers having to pay higher prices for
vehicle testing than might otherwise be the case. It appears, from the criteria
set out for appointing the successful franchise, that the Minister will retain
some control over prices. The Authority notes, however, that price controls are
far less effective than competition.
(d) The
Notified Agreement
7 The
standard agreement contains the following clauses:
-
Recital (A).
“The
Principal is engaged in the provision of roadworthiness testing for motor
vehicles under exclusive licence of the Department of the Environment for the
purposes of Council Regulation 96/96/EC. It wishes to appoint the Agent to
provide the Service on its behalf in the Territory.”
-
Recital (B).
“The
Agent is willing to work as agent for the provision of the Service in the
Territory upon the terms and subject to the conditions set out below.”
8 Under
Clause 2.1, the Principal appoints the Agent to act as its agent for the
provision and sale of the Service (defined as “the roadworthiness testing
service for motor vehicles operated pursuant to Council Directive 96/96/EC and
under licence by the Department of the Environment”) during the
continuance of the Agreement in the Territory (the area within which the Agent
may provide the service - to be defined in a schedule to the agreement). The
management structure, ownership and control of the Agent are to be as set out
in a Schedule to the Agreement and the Manager of the agent warrants that there
will be no change thereto during the currency of the Agreement without the
consent in writing of the Principal. Clause 2.2 states that the Principal shall
not appoint any other agent for the provision of the Service in the Territory,
unless with the consent of the agent or if such appointment is required by the
Minister for the Environment. Under Clause 2.3 the agent undertakes to provide
the Service only within the Territory and not to use the Proprietary Marks nor
make available the Service outside the Territory. Clause 3 states that the
Agreement shall commence on the execution thereof and shall continue in force
thereafter for an initial term of 10 years
unless
terminated.
2. Under
Clause 4.3, the Principal indemnifies the agent against any liability which it
may incur by reason only of its being held out as the Principal’s agent,
subject to compliance by the agent with its obligations under the agreement.
9 The
Agreement contains a number of initial obligations on the Principal relating to
the provision of standard construction plans of the premises, supervision of
construction or conversion works, training of personnel and transmission of
know-how. Where the Principal considers it necessary to employ an independent
consultant to give advice in relation to construction or conversion works, the
cost of such an independent consultant is to be borne by the agent. The
know-how includes specific software for carrying out servicing activities and
an IT connection with Dekra Eireann headquarters, the Department of the
Environment, Ireland’s National Vehicle and Driver file and the Garda
Siochana. The Principal has continuing obligations to permit the agent to
operate and promote the Business under the trade name “DEKRA
Eireann”, to supply the agent at its own expense with advertising and
promotional materials, to provide ongoing advice, know-how and assistance
relating to the management, finance, promotion and methods of operation to be
employed in providing the Service, and to supply up-to-date copies of price
lists. The Principal must also make available to the Agent members of the
Principal’s staff competent to provide any requisite on-site assistance
and advice, must directly or indirectly provide the Agent with an IT system,
must provide technical assistance, must provide standard forms of contract for
use by the agent in dealings with its customers, and must make available its
staff engagement service for the provision and selection of trained and
qualified staff for the provision of the Service. The Principal must also
improve and develop the System and make available to the agent and its
employees at cost, further training if necessary.
10 Under
Clause 6.11, one of the obligations of the Principal is:
“To
provide to the Agent the products and equipment described in the Operating
manual on the terms from time to time therein specified and to assist the Agent
in procuring such additional supplies of products and equipment as may be
required by the Agent to commence provision of the Service and to use
reasonable endeavours to negotiate and obtain from such suppliers favourable
discount rates for furnishing such supplies to the Agent.”
3. The
Principal is also obliged to make available to the agent all the services and
facilities which it makes available to other agents and to company-owned
outlets, to provide training at cost to new employees of the agent and to
provide further training to existing employees, to organise an annual
conference of the agents and to adapt/recalibrate the equipment and machinery
to be specified to implement any changes in the law, whether at European or
national level.
11 The
agent has obligations relating to acting in good faith and using its best
endeavours to promote and market the service. Under Clause 7.2, the agent is
entitled “without prior reference to the Principal to enter into
contracts for the provision of the Service in the name and on behalf of the
Principal.” The agent must operate with due care and diligence and in
accordance with sound commercial principles. The agent is to acquire the
premises on or before a certain date and to ensure that they are altered,
refurbished, equipped and fitted out in accordance with the requirements of the
Principal (clause 7.4), and to commence provision of the Service from the
premises on or before a certain date (clause 7.5). The agent must operate the
business in accordance with the provisions of the Operating Manual, ensure that
staff are properly trained, and use only such letter headings, invoices, signs,
display materials, promotional literature and equipment approved by the
Principal. The name of the Manager or any other individual associated with the
Agency must not appear in any letter headings, invoices, signs, promotional
literature etc. without the express approval in writing of the Principal. The
agent must comply with all advice and instructions given by the Principal with
regard to the provision of the Service and, in particular, the prices and
charges levied for the Service. In all dealings concerning the Service, the
agent must describe itself as “Service Agent” of the Principal.
12 The
agent must maintain the Premises to a high standard and use its best endeavours
to promote and increase the Service. It shall continuously provide the service
upon such days and between such hours as the Principal shall specify. Clause
7.16 states that “The Agent shall maintain sufficient stocks and employ
sufficient staff to meet demand from consumers of the Service and to provide an
efficient Service.” Under Clause 7.17, “The Agent shall promptly
pay all suppliers of goods and services sold or provided to the Agent for the
purposes of provision of the Service.” There are further obligations on
the agent concerning the standard of service to be provided.
13 The
agent undertakes to provide, as agent of the Principal, only such services as
may be described from time to time in the Operating Manual upon the terms and
conditions therein set out. The agent is to comply with all statutes, bylaws,
regulations and requirements of the Irish government or other competent
authority relating to the agent and the provision of the Service. The agent
undertakes to procure from the manager, and from such other staff as the
Principal requires, an undertaking in a form specified by the Principal not to
disclose to any third party any confidential information or knowledge
concerning the Service or the Proprietary Marks.
14 The
Agent must have and use the Principal’s software in accordance with the
provisions of the Operating Manual and must exclusively use the IT
communications network made available for the Principal for the transmission of
the various data to the competent bodies of the government. The agent shall
ensure at all times that the testing of vehicles is carried out in a fair and
non-discriminatory manner; shall diligently supervise employees in carrying out
their testing duties; shall immediately report to the Principal any complaints
or allegations of improper business practices, and shall properly discipline
employees for such practices.
15 Clause
7.23 states that “The Agent shall procure from the Manager and from such
other staff as the Principal shall require, an undertaking in a form specified
by the Principal not to disclose to any third party any confidential
information or knowledge concerning the Service or the proprietary marks which
may be communicated to such manager or employee or which such manager or
employee may otherwise acquire unless such information has fallen into the
public domain, and the Agent shall at its own expense take such steps as the
Principal may direct in order to enforce or restrain any breach of the terms of
any such undertaking.”
16 Under
Clause 8, “Terms and Conditions for provision of the Service,” the
agreement states that:
“8.1 All
sales of the Service by the Agent on behalf of the Principal shall be made on
such terms and conditions as the Principal may from time to time specify in
writing to the Agent ...
8.2 All
sales of the Service by the Agent on behalf of the Principal shall be at the
price specified in the price lists which shall from time to time be supplied to
the Agent for the purpose by the Principal.
...
8.4 All
payments from customers in consideration for the Service shall be lodged into a
bank account in the name of Dekra Eireann details of which shall be provided by
the Principal.”
17 Under
Clause 9, “Restrictions on Agent”, the agent agrees, inter alia:
-
Clause 9.1.3. “not to permit or suffer any person to act or assist in
the provision of the Service until such person has signed a non-competition and
confidentiality undertaking in the form from time to time specified by the
Principal,
-
Clause 9.1.4.
not to provide the Service at any location other than the Premises without the
prior approval in writing of the Principal,
-
Clause 9.1.5. not to sell, assign, transfer, charge or sub-license the Agency
or the Proprietary Marks ....without the prior consent of the Principal,
-
Clause 9.1.6. not to deviate from the prices for the Service stated in the
Operating Manual from time to time,”
-
Clause 9.1.9. “not to alter or convert the Premises ..or the fixtures
and fittings ...nor install any equipment nor alter, erect or display any sign
...without the prior consent of the Principal,”
-
Clause 9.1.11. “not to use or publish any advertisements, signs,
directory entries or other forms of publicity ...without the approval of the
Principal,
-
Clause 9.1.12. not without the Principal’s prior written consent in any
capacity whatsoever be directly or indirectly engaged in any business or
undertaking, in particular any business connected with the sale, repair or
testing of motor vehicles, other than the Business,
-
Clause 9.1.13 not to purchase those products, materials and equipment
required by the terms of the Operating Manual to be purchased from the
Principal from any person other than the Principal without obtaining
confirmation in writing from the Principal that the products in question
satisfy the Principal’s quality specifications.”
18 Under
Clause 9.2 “the Agent covenants during the term of this Agreement and
for a period of six months after the expiration or termination for any reason
of this Agreement not to be engaged or interested, or concerned, whether itself
or together with any other person, firm or company in any capacity whatsoever,
save as authorised hereunder directly or indirectly, in the provision of the
Service or any like or competing service(s) in the Territory.”
19 Clause
9.3 states that “the Agent hereby acknowledges that the Operating Manual
and all other information and knowledge relating to the Service is of a
strictly confidential nature and accordingly, the Agent covenants that it will
not and it will procure that no other person shall at any time without the
prior written consent of the Principal whether before or after termination of
this Agreement divulge or use whether directly or indirectly for its own
benefit or that of any other person, firm or company any of such information or
knowledge relating to the Service which may be communicated to or otherwise
acquired by the Agent, its directors, agents or employees.”
20 The
Agreement provides that the Agent shall contribute to an insurance policy
designated by the Principal or shall at its own expense obtain and maintain a
policy approved by the Principal (clause 10). The Principal warrants that it is
entitled to license the Proprietary Marks and subject to registration pursuant
to the
Trade Marks Act 1996 of the non-exclusive trade mark licence granted ,
the use of the Proprietary Marks in the Territory (clause 11.1). The Agent
shall render to the Principal all reasonable assistance to enable the Principal
to obtain registration in any part of the world (clause 11.2). The goodwill and
all other rights associated with the Proprietary Marks are vested in the
Principal (clause 11.3) and the Agent undertakes not to behave in a manner
incompatible with the Principal’s exclusive rights to the Proprietary
Marks (clause 11.5.1). The Agent will notify the Principal of any infringements
of the Proprietary Marks (clause 11.6). The Principal agrees to make any
improvements, additions or modifications relating to the provision of the
Service available to the Agent without delay (clause 12.1). The Agent will
notify the Principal of any improvements relating to the provision of the
Service and the Principal may introduce such improvements without any
obligation to make payment therefor. The Agent must conduct the Business
strictly in accordance with the Operating Manual, the terms of which shall be
deemed incorporated into and shall form part of this Agreement (clause 13.3).
The Operating Manual remains the property of the Principal (clause 13.4).
21 The
Principal shall pay the Agent a certain percentage commission on the net sales
value of the services. The agreement contains provisions for the calculation
and payment of such commission. Clause 15 states that “To guarantee
fulfilment of the obligations of the Agent under clauses 7.4 and 7.5 of this
Agreement, the Agent shall, prior to the execution of the Agreement, issue a
performance bond from a bank approved by the Principal ... in favour of the
Principal for a sum of [
]”.
22 Clause
17 provides that the Principal may immediately suspend the Agreement pending an
investigation on receipt of complaints or allegations of improper business
practices. Under Clause 18 there are numerous ways by which the Principal may
terminate the Agreement with immediate effect by giving notice in writing to
the agent. They relate to the failure of agent to comply with the obligations
already mentioned under the Agreement. The Agreement may be automatically
terminated without notice if the agent becomes insolvent, or the manager
suffers the filing of a petition in bankruptcy (clause 18.2.1 & 2), or if
the licence contract between the Principal and the Minister for the Environment
is terminated (clause 18.2.4). Either party may terminate the Agreement without
cause by giving at least 2 years prior notice in writing to the other party
(clause 18.3). Upon termination or expiration of the agreement the Agent shall
immediately cease to promote, market or advertise the service; cease to use the
system and all proprietary marks; return or dispose of all signs, advertising
materials, specifications, software etc; return the Operating Manual and all
items of equipment held on loan or hire from the Principal under the Agreement.
If the agreement is terminated under clause 18.3, the agent is entitled to
compensation to the extent that the Principal continues to derive benefits from
business introduced or augmented by the agent. The basis for the calculation of
the amount of such compensation is set out (clause 19).
23 Clause
20 states that the Principal may perform any of its obligations under the
Agreement through a holding company or subsidiary, and may assign its rights
under the agreement. However, the agreement is personal to the Agent, which may
not assign its rights thereunder without the prior written consent of the
Principal. The Manager undertakes to use best endeavours to procure that the
Agent, its shareholders, directors, agents and employees perform all the
obligations on the part of the Agent, to devote his full time and effort to
provision of the Service except where expressly agreed by the Principal and to
observe and perform all the restrictions and obligations on the part of the
Agent to be observed and performed under the terms of the Agreement. The
Agreement has provisions for arbitration in the case of a dispute between the
parties (clause 23) and severability (clause 25).
(e) Submission
by Dekra
24 Dekra
stated that the revised agreement created a principal/agent relationship. They
stated that the European Commission, in its Notice of 24 December 1962 on
exclusive agency contracts made with commercial agents, had made clear that, in
its view, genuine agency contracts had neither the object nor the effect of
preventing, restricting or distorting competition. The Commission had said that
the decisive criterion which distinguished the commercial agent from the
independent trader was the responsibility for the financial risks bound up with
the sale or with the performance of the contract. The commercial agent must not
assume any risk resulting from the transaction. The Commission had indicated
that the agent would be viewed as an independent trader - and treated
accordingly - where he was:
- required
to keep or did in fact keep as his own property a considerable stock of the
products covered by the contract, or
-
was
required to, or did in fact, organise, maintain or ensure at his own expense a
substantial service to customers free of charge, or
-
could
determine or did in fact determine prices or terms of business.
25 In
the
Suiker Unie
decision, the European Court of Justice had stated that:
“If
such an agent works for his principal, he can in principle be regarded as an
auxiliary organ forming an integral part of the latter’s undertaking
bound to carry out the principal’s instructions and thus, like a
commercial employee, forms an economic unit with this undertaking.”
26 Dekra
stated that the Competition Authority had, in its decisions, defined the
commercial agency relationship. It quoted from Decision No. 286, Conoco
Consignee Agreement, where the Authority stated that a commercial agent was a
self-employed intermediary between the principal and a purchaser or seller.
Dekra stated that the Authority had affirmed in Conoco and subsequently in
respect of agency agreements involving principals which benefited from a
statutory monopoly or exclusive territory that, since a commercial agent was an
auxiliary organ, similar to an employee, the agreement between a principal and
a commercial agent did not, in principle, offend against
Section 4(1). The
Authority had found, in its decisions, that clauses in an agency agreement,
such as territorial exclusivity and the imposition of prices and contract terms
by the principal, which might otherwise raise issues under the
Competition Act,
arose from the basic agency agreement and therefore did not offend against
Section 4(1).
27 Dekra
stated that the relationship between Dekra Eireann and the test centre, as
redefined in the revised agreement, constituted a commercial agency
relationship within the meaning of both the European and the Competition
Authority’s jurisprudence. The agent provided the testing service to the
public on behalf of its principal, Dekra Eireann, from premises owned/leased by
the agent. Dekra Eireann defined the service provided, set the price and terms
of that service and bore all financial risk. The takings of the test centre
were remitted without deduction to Dekra Eireann which then paid the agent a
commission for each test carried out. The profits and losses therefore accrued
essentially to the principal, Dekra Eireann, and not to its agent. Furthermore,
the agent was entitled to compensation in the event of termination unless
termination was due to a breach by the agent of the terms of the agreement, the
liquidation/insolvency of the agent or termination of Dekra Eireann’s
Ministerial licence. The agent was an integral part of Dekra Eireann’s
business, acting as an intermediary between Dekra Eireann, as principal, and
the consumer. Dekra Eireann acted through the agent as if it were acting
directly itself.
28 According
to Dekra, all other clauses in the agreement which might otherwise raise
competition concerns (such as the granting of territorial exclusivity, the
requirement that the agent comply with Dekra Eireann’s instructions
regarding operating methods and terms of contract, including prices), arose
directly from the agency arrangement and did not, therefore, offend against
Section 4(1). The post-termination non-compete clause (clause 9.2) was limited
in time to 6 months and applied only to the contract area. The confidentiality
clause (clause 9.3) protected confidential information both during and after
the agreement as long as it had not fallen into the public domain. The
information covered by the clause would be technical in nature and akin to
technical know-how. Dekra cited the Competition Authority’s decision in
Betco Marketing Ltd/Holland Sweetener Co. (Decision No. 376) as acknowledging
that post-termination restrictions on the use of such information would not
have the object or effect of restricting competition.
29 In
summary, Dekra stated that the operator of the motor test centre, as agent, was
to be an auxiliary organ of the principal, Dekra Eireann. It would undertake no
autonomous commercial behaviour and would be fully integrated into the
latter’s business. In accordance with case law of the Competition
Authority, such an agency/principal arrangement, and also any restrictions
which were fundamental to that relationship, did not offend against
Section
4(1) of the
Competition Act.
(f) Submission(s)
by other Parties
30
Mr Michael Penston in a submission to the Authority stated that “Dekra is
an organisation co-owned by the Society of the Irish Motor Industry (SIMI).
SIMI has a conflict of interest in being involved in this matter and the
franchise should not be granted to any organisation with whom SIMI is directly
connected. SIMI is an organisation whose overriding aims are to increase the
profits and wealth of their members, being part of the motor industry. The
implementation of the vehicle inspection scheme should be, and seen to be,
completely independent of any vested interests”
(g) Directive
96/96EC
31 With
the primary aim of enhancing road safety, the European Community required
Member States generally to have in place by 1 January 1994 a system of
roadworthiness testing of private cars over 4 years old every 2 years. In the
case of a number of Member States including Ireland, the final date for
implementation was extended to 1 January 1998. Article 2 of the Directive
states “ The roadworthiness tests provided for in this Directive shall be
carried out by the State, or by a public body entrusted with the task by the
State or by bodies or establishments designated and directly supervised by the
State, including duly authorised private bodies. In particular, when
establishments designated as vehicle testing centres also perform motor vehicle
repairs, Member States shall make every effort to ensure the objectivity and
high quality of the vehicle testing”
(h)
Department of the Environment’s Brief for Consultants: Introduction of a
System of Roadworthiness Testing of Private Cars in Ireland.
32 The
Department of the Environment in a Brief for Consultants, published in June
1997, stated that car testing in Ireland will be phased in over the period
1998/99 and will involve testing cars, including imported used cars, in the
region of 7 to 8 years old in the first year of operation of the scheme which
will commence as early as possible in 1998, with all cars over 4 years old
being tested in the second year of operation of the scheme. On foot of a
Government decision testing will be carried out at dedicated test centres (i.e.
no repairs, servicing or sales) established and operated by an agent selected
on the basis of competitive tendering throughout the EU. Management
consultants are to be appointed by the Department of the Environment to assist
it in evaluating tender proposals, interviewing applicants, vetting the
favoured proposal, recommending the successful applicant and drawing up the
legal/contractual arrangements for the appointment of the agent. The
competition will be advertised in the EU Journal. It will be open to
companies, public sector entities or specially formed consortia to submit
franchise proposals. The initial testing franchise will be for a ten year
period. There is a small levy payable to the Department of the Environment in
respect of which a roadworthiness certificate is issued. The agent will have to
meet its own staff costs and all overheads (construction, lease, rent etc. of
premises, equipment costs, insurance etc.). The Department states that, with a
view to minimising the cost to the motorist, the proposed levels of test and
re-test fees will be a key criterion in the assessment of franchise proposals.
After the appointment of the successful agent any adjustment in the level of
these fees will be subject to the approval of the Minister for the Environment.
Other key criteria may include the ability to provide the necessary resources
to operate successfully, experience/expertise in the area of vehicle testing
and information technology, financial standing, non-association with any
company or organisation in such a manner as to constitute a conflict of
interests, provision of quality assurance, customer service and strong emphasis
in staffing, training, labour relations and health and safety. The Department
of the Environment will supervise the operation of the scheme at national level.
(i) Subsequent
Developments
33 On
8 January 1998 the Authority wrote to the Department of the Environment and
Local Government expressing its concern at that Department’s proposal to
award an initial testing franchise, apparently to a single entity for the whole
country, for a ten-year period. The Authority was deeply concerned that the
proposed arrangements would seriously restrict and distort competition in the
market for the supply of vehicle testing services. The selected franchisee
would not be exposed to any form of competition for ten years. During that
period customers would be unable to select their preferred supplier. Further,
it appeared that prices would be fixed so that not only would customers lose
the benefit of competition; any cost reductions through improved technology or
process efficiency would not be passed on to them.
34 The
Authority noted that the Department’s guidelines throughout referred to
“the franchisee”, in the singular. In the Authority’s view,
there was not justification for such an approach. The appointment of several
master franchisees, with the freedom to compete with each other on price and
service quality, would allow customers the benefits of competition without
compromising standards. Even if a number of master franchisees were each to be
granted monopoly rights in a particular region, some form of yardstick
competition, whereby performance and price in the different regions were
compared to each other, might be possible. The proposed arrangements, however,
together with Ministerial control of prices, eliminated any prospect of
competition in any form - price, quality, speed of service - for a ten-year
period and removed any possibility of choice from the customers who would be
paying for the service.
35 Furthermore,
the Authority considered that the Department’s proposals did not provide
any guarantee of service quality or value for money. Indeed, it could be argued
that an arrangement which insulated the franchisee against competition for ten
years was almost a recipe for poor service quality, since it placed the burden
of keeping up standards entirely on the Department rather than allowing the
market to do so. The proposed arrangement also reduced the pricing mechanism to
an occasion for intensive lobbying of the Minister by the selected franchisee.
The Authority considered that the proposed arrangements were profoundly
anti-competitive. The interests of customers would be better served, and
quality better maintained, by licensing a number of competing suppliers,
reducing the franchise period and allowing the market, rather than the
Minister, to set prices.
36 On
29 January 1998 the Department replied, stating that the proposed arrangements
for a car testing regime in Ireland were the result of policy decisions taken
by the Government following consideration of a range of options. Relevant
factors, including international experience with the operation of car testing
schemes, the technical requirements set out in EC Directive 96/96 and more
generally, the obligations imposed by national and EU law had been taken into
account by the Government in coming to its decision. The Department would
employ consultants who would, inter alia, advise on how tender documents and
the franchise contract should be drafted to reflect and protect the interests
of the individual (motorist) consumer. The franchisee for the scheme would be
appointed on a competitive basis which would inter alia have regard to the
relative economic advantages of the proposals in accordance with procedures
which reflected EU competition law. Finally, the Department was satisfied that
it did not come within the ambit of the Competition Acts, as far as the
proposed car testing scheme was concerned.
37 The
agreement as originally notified to the Authority was a standard franchise
agreement. On 6 February 1998 the Authority issued a Statement of Objections in
which it found that certain clauses relating to (i) procurement of equipment,
(ii) restrictions on the activities of the agent, (ii) non-competition and (iv)
resale price maintenance contravened
Section 4(1) of the
Competition Act, 1991,
and were not licensable under
Section 4(2). An oral hearing was held on 10
March 1998 at which amendments to the agreement were proposed which satisfied
the Authority’s concerns under headings (i), (ii) and (iii) above, but
not under heading (iv). On 30 March 1998 solicitors acting for Dekra submitted
a revised agreement. They stated that the agreement had been amended so that,
rather than creating a principal/agent relationship between the master agent
and the test centres providing the service, a principal/agent relationship was
formed. They put forward the arguments summarised in Section (e), above.
38 Copies
of the Statement of Objections were sent to the Tánaiste and Minister
for Enterprise, Trade and Employment, and to the Minister for the Environment
and Local Government, for comment. No observations were received. However, the
Department of the Environment noted that the Authority acknowledged that the
Government’s proposals for car testing were outside the scope of the
Competition Acts and stated its view that the commentary in paragraph 6 of this
document was “clearly inappropriate”.
(j)
EU position regarding Commercial Agents
39 Agency
agreements are not subject to a block exemption. The EU Commission issued a
notice on Exclusive Dealings with Commercial Agents in 1962 but this Notice is
now regarded as legally obsolete. The EU Commission has indicated its intention
to prepare a revised Notice on this matter but this has not yet been finalised.
The EC Court of Justice considered the question of agency in the Suiker
4. Unie
case, where it stated:
'If
such an agent works for his principal he can in principle be regarded as an
auxiliary organ forming an integral part of the latter's undertaking bound to
carry out the principal's instructions and thus, like a commercial employee,
forms an economic unit with this undertaking'.
5. The
EU Council Directive on Self Employed Commercial Agents
[1]
was adopted on 18 December 1986 and was implemented into Irish law from 1
January 1994 by way of Statutory Regulation SI No. 33 of 1994. A commercial
agent is defined in the Directive as "a self-employed intermediary who has
continuing authority to negotiate the sale or purchase of goods on behalf of
another person, hereinafter called the principal, or to negotiate and conclude
such transactions on behalf of and in the name of the principal". The
Directive outlines rights and obligations for commercial agents and principals.
Assessment
(a) Section
4(1)
40
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
41
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”. Dekra Eireann Teoranta is a proposed joint venture between
Dekra and SIMI to operate the national car testing franchise for gain, and is
an undertaking.
The
other parties to the agreement will be engaged for gain in the provision of car
testing services and will be undertakings. Consequently, the notified
arrangements constitute an agreement between undertakings. The agreement will
have effect within the State.
(c) Applicability
of Section 4(1)
42 In
its decision on the Conoco consignee agreement
[2],
the Authority stated its view that the question of commercial agency was quite
complex, and that each case must be examined on its own merits in relation to
the
Competition Act, in the light of certain general considerations. In the
first place, the Authority considered that it was not conclusive that one party
was referred to as an “agent” in the agreement, since he might not
perform the functions of an agent in any real sense. Conversely, it did not
matter if the agreement stated that there was no relationship or contract of
agency between the parties. This might be done, for example, to limit one
party’s ability to undertake binding obligations on behalf of the other,
without the latter’s knowledge or consent. From the point of the of the
Competition Act, the Authority was concerned with whether the relationship
between the two parties was such that one of them might be termed a
“commercial agent” of the other. It was not intended that the views
of the Authority about whether a person was a commercial agent or not should
have any implication for the legal relationship between the two parties.
43 The
Authority considers that a commercial agent is a self-employed intermediary
between the principal and a purchaser or seller. The commercial agent concludes
the sale or purchase of goods and services on behalf of the principal, on a
continuing basis. The commercial agent is an auxiliary organ, forming an
integral part of the principal’s business, and is bound to carry out the
instructions of the principal. His position is similar to that of an employee.
Being integrated into the principal’s business, the commercial agent can
undertake no autonomous commercial behaviour under the agreement, and certain
restrictions on him are fundamental to the relationship. The Authority
considers that profits or losses essentially accrue to the principal and not to
the commercial agent.
44 In
this case the Authority does not consider that the notified arrangements are
such as to create a relationship of commercial agency. The agent is obliged to
invest in the products and equipment which are required in order to provide the
services in question (Clause 6.11). While the principal is to use reasonable
endeavours to procure favourable discount rates from suppliers, it is clear
that it is the agent who pays. This is confirmed by Clause 7.17, which states
that “The Agent shall promptly pay all suppliers of goods and services
sold or provided to the Agent for the purpose of provision of the
Service.” Furthermore, clause 15 states that “... the Agent shall,
prior to the execution of the Agreement, issue a performance bond from a bank
approved by the Principal ... in favour of the Principal for a sum of [
]”,
in order to guarantee fulfilment of its obligations under clauses 7.4 and 7.5
of the agreement.
45 It
is clear, therefore, that the agent bears a separate commercial risk, distinct
from that borne by the principal, in relation to both the purchase of the
equipment and the performance of the service outlet. In its decision on North
West Cattle Breeders’ Association
[3],
the Authority noted that it was satisfied that the agreements, as amended,
created a relationship of agency because, inter alia, the contractor carried no
risk in relation to the equipment used. In relation to the performance bond,
the agent carries a substantial financial risk in relation to its performance
of the agreement. It cannot therefore be considered as an auxiliary organ
forming an integral part of the principal’s business. In the
Authority’s opinion, the notified arrangements are of the nature of a
franchise agreement rather than an agency agreement.
46 In
the absence of an agency relationship, the Authority considers that certain
clauses of the agreement offend against
Section 4(1). These are clauses 2.2 and
2.3, which create an exclusive territory for the agent; and clauses 7.7, 7.22,
8 and 9.1.6 whereby the Principal sets the prices and charges to be levied for
the service and the terms and conditions thereof, and the agent must not
deviate from the prices set in the operating manual. This is in line with the
Authority’s reasoning in its Category Licence for Franchise Agreements
[4],
in which it states (paragraph 17) that “in certain circumstances the
following obligations may involve a restriction upon competition:
(a)
an obligation on the franchisor, in the State or in a defined area of the
State, the contract territory, not to:
-
grant the right to exploit all or part of the franchise to third parties,
-
itself exploit the franchise, or itself market the goods or services which are
the subject matter of the franchise under a similar formula,
-
itself supply the franchisor’s goods to third parties;
(b)
an obligation on the franchisee to exploit the franchise only from the contract
premises;
(c)
an obligation on the franchisee to refrain, outside the contract territory,
from seeking customers for the goods or the services which are the subject
matter of the franchise ...”
6. The
Authority stated in that decision that such obligations could involve market
sharing between the franchisor and the franchisee or between franchisees, and
that their effect was to protect each franchisee from competition from the
franchisor or from other franchisees. The Authority also stated that, in its
opinion, any provisions in a franchise agreement which restricted the
franchisee’s freedom to determine his own prices would always offend
against Section 4(1).
Non-competition.
47 Under
Clause 9.1.3, the agent agrees not to permit any person to act or assist in the
operation of the business until such person has signed a non-competition and
confidentiality undertaking in the form specified by the principal. Under
Clause 9.1.12 the Agent undertakes that it will not, without the
Principal’s prior written consent, in any capacity whatsoever be directly
or indirectly engaged in any business or undertaking which competes with the
Service and, in particular, in any business connected with the sale, repair or
testing of motor vehicles, other than the Business. Clause 9.2 is a covenant by
the Agent not to be engaged, interested or concerned in any capacity, save as
authorised in the agreement, “in the provision of the Service or in any
like or competing service(s) in the Territory”, for the duration of the
agreement and for six months thereafter.
48 The
Authority not having seen the undertakings referred to in Clause 9.1.3 in the
forms specified, it cannot consider them. Any decision of the Authority in
relation to the notified arrangements, therefore, cannot be construed as
referring to such undertakings. Clause 9.2 satisfies the category licence for
franchise agreements. Clause 9.1.12 only prevents the agent from competing with
the principal in the provision of the Service for the duration of the
agreement. In the Authority’s opinion, this clause is reasonable in the
context of a franchise-type agreement in order to protect the
franchisor’s industrial or intellectual property rights or to maintain
the common identity and reputation of the franchised network. The Authority
therefore considers that either Clauses 9.2 and 9.1.12 do not offend against
Section 4(1) or, alternatively, that if they do, they are licensable under
Section 4(2).
Confidentiality.
49 Under
Clause 7.23 of the Agreement, the agent, in a form to be specified by the
principal, must procure an undertaking from the manager and staff not to
disclose to any third party any confidential information. Under Clause 9.1.3,
the agent agrees not to permit any person to act or assist in the operation of
the business until such person has signed a non-competition and confidentiality
undertaking in the form specified by the principal, during the continuance of
the Agreement. Clause 9.3 is a covenant by the agent not at any time to
divulge any information or knowledge related to the Service unless such
information or knowledge has fallen into the public domain.
50 The
Authority not having seen the undertakings referred to in Clauses 7.23 and
9.1.3 in the forms specified, it cannot consider them. Any decision of the
Authority in relation to the notified arrangements, therefore, cannot be
construed as referring to such undertakings. The Category Licence for franchise
agreements states (Article 3.2(a)) that the category licence applies
notwithstanding any obligation on the agent not to disclose to third parties
the know-how provided by the principal, and that the agent may be held to this
obligation after termination of the agreement. Likewise, the agent may be held
to this obligation after termination of the agreement. The licence does not
apply (Article 5(d)) where the agent is prevented from continuing to use the
licensed know-how after termination of the agreement, where the know-how has
become generally known or easily accessible, other than by breach of an
obligation by the agent. As the Authority considers that Clause 9.3 meets the
terms of the category licence, it does not propose to consider in detail
whether or not this clause offends against
Section 4(1).
(d) Applicability
of Section 4(2)
51 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 services 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 undertakings 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"
52 The
Authority considers that the clauses (2.2 and 2.3) which have the effect of
creating an exclusive territory for the franchisee/agent offend against
Section
4(1). In line with its reasoning in the Category Licence for Franchise
Agreements, however, the Authority considers that such arrangements will
improve the provision of services as they allow Dekra the possibility of
establishing a uniform network with limited investment.
53 However,
the Authority considers that the clauses (7.7, 7.22, 8 and 9.1.6) which have
the effect of allowing the Dekra set the prices charged for the service have no
such beneficial effects. The Department of the Environment brief to consultants
at paragraph 1.6 (“Evaluation Criteria in Assessment of Franchise
Proposals”) states that “With a view to minimising the cost to the
motorist the proposed levels of test and re-test fees will be key criteria in
the assessment of the franchise proposals. After appointment of the successful
franchisee any adjustment in the levels of these fees will be subject to the
approval of the Minister for the Environment.” The authority notes that
the EC Directive contains no provisions in relation to fees or charges, but
that the restrictions in relation to them, as outlined above and contained in
the consultants’ brief, were introduced by the Department of the
Environment to be taken into account in assessing the franchise proposal. It is
for that reason that Dekra are anxious to have uniform prices. However, in
circumstances where the decision to appoint a single franchisor has eliminated
all possibility of inter-brand competition, an agreement which also eliminates
intra-brand competition and thereby effectively eliminates all possibility of
competition cannot be held to satisfy the requirements of
Section 4(2). The
Authority therefore considers that the notified arrangement is not licensable
under
Section 4(2).
Conclusion
54 The
Competition Authority considers that Dekra Eireann Teoranta and its agents
are undertakings and the notified agreement (CA/20/97) is an agreement between
undertakings. The Authority considers that the agreement contravenes
Section
4(1) of the
Competition Act, 1991 and does not satisfy all the conditions of
Section 4(2) of
the Act. It has therefore refused to issue a certificate or to
grant a licence in respect of the notified agreement.
7. For
the Competition Authority,
Isolde
Goggin
Member
17
July 1998
[1]
Council Directive 86/653 of 18 December 1986 on the co-ordination of the laws
of the Member States relating to self-employed commercial agents
[2]
Decision no. 286 of 25 February 1994
[3]
Decision No. 446 of 15 December 1995
[4]
Decision No. 372 of 17 November 1994
© 1998 Irish Competition Authority
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