COMPETITION AUTHORITY

Competition Authority Decision of 30 June, 1995 relating to a proceeding under section 4 of the Competition Act, 1991.

Notification No. CA/918/92E  - Brooks Haughton / Agents.

Decision No. 411.

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Competition Authority decision of 30 June 1995 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/918/92E - Brooks Haughton Ltd / Agents.

Decision no. 411.

Introduction

1. Notification was made by Brooks Haughton Ltd on 30 September, 1992 with a request for a certificate under Section 4 (4)of the Competition Act, 1991 or, in the event of a refusal by the Competition Authority to grant a certificate,  a licence under Section 4 (2) in respect of an agency agreement between Brooks Haughton Ltd and its agents.

The Facts

(a) The Subject of the Notification

2.    The notification concerns a standard agency agreement between Brooks Haughton Ltd (Brooks) as principal or licensor and their agents or licensees whereby Brooks appoints agents in different areas of the State to operate a retail and wholesale business of builders providers and hardware and timber suppliers from a premises owned and stocked by Brooks.

(b) The parties involved

3.	Brooks is a wholly owned subsidiary of Brooks Group Ltd, which is a wholly owned subsidiary of Yhtyneet Paperitehtaat Oy (United Paper Mills Limited) of Finland. The parent company of United Paper Mills Ltd is Repola Corporation, Helsinki, Finland. The group is engaged in the forest industry business including the business of pulp and paper manufacture, saw milling and the distribution of wood products. Brooks is involved in the business of builders providers, hardware and timber suppliers, both retail and wholesale. The turnover for United Paper Mills Ltd for the year ended 31 December, 1991 was FIM 13,746.7 million and the turnover for Repola Corporation in the same period was FIM 22,270 million. The turnover of Brooks Group Ltd for the year ended 31 December, 1993 was £40 million and the turnover for Brooks Haughton Ltd in the year to 31 December 1991 was £9.1 million. The estimated total turnover for the Brooks Haughton franchised outlets at 31 December, 1991 was approximately £2 million.

4.	Six agents operate a premises on behalf of Brooks as retail and wholesale businesses. This agreement is one of two identical texts notified, the other being CA/834/92E Brooks Thomas, the Dublin based associate of Brooks Haughton.

(c) The products and the market

5.	The products involved in this agreement are hardware, building materials and timber supplies for use in the building and construction industry, DIY, etc. Brooks supplies the products to the agents for onward sale on a  wholesale basis to other retailers, and to builders, and on a retail basis to the general public. There are alternative sources of supply available for all products in the market. The market is stated to be highly competitive with a number of main suppliers and several smaller ones. The main operators in this market are the Brooks Group Ltd, Chadwicks, Heitons, Buckleys and James McMahon & Co. all of whom have branches in various parts of the State. There are also smaller hardware merchants operating in this market nationwide. The Brooks Group Ltd has two other companies involved in this industry also, namely Brooks Thomas Ltd and Brooks Hanley Ltd.

6.	The turnover for this market is difficult to quantify, but Brooks have estimated the total turnover in building materials to be approximately £800m for 1991. The Brooks Group Ltd estimated that their share of the market was between 5% and 10%.

(d) The agreement

7.	This is the standard agency agreement entered into by Brooks Haughton with persons or companies to operate retail and wholesale hardware stores and builders providers, using the name "Brooks" with the name of the agent e.g "Brooks Smith". The agent is appointed for a specified territory. This agreement is described as a franchise and the parties in the text of the standard agreement are described as Franchisor and Franchisee. The Authority does not consider this to be a franchise [see para 15].

8.	The nature of the agreement appears from the following clauses. Brooks agree with the agent that Brooks will provide premises, and stock [clause 2] and a forklift truck, side loader, tax, insurance and petrol [clause 5]. The agent will sell the stock, without property passing to him/it but directly from Brooks to the customer; and the agreement describes all monies as being due to Brooks from the customer [clauses 4H, 10 and 19E below]. The agent agrees not to give any warranty on goods sold, save as authorised by Brooks, and to indemnify Brooks from any cost arising from breach of this [clause 4J]. Brooks reserve to themselves the decision to grant credit terms to customers [clause 4L]. On termination of the agreement, the agent is to dispose of the stock in accordance with Brooks' directions [clause 12.2]. The agent is paid by way of a handling fee for some stock, a percentage commission on sales which are paid for according to credit terms, and what is described as an annual agency fee [clauses 7 and 9]. Monies collected by the agent are lodged to a bank account of Brooks, apparently without deduction, for the purpose of calculation of the commission [clauses 7B and C]. The task of the agent is to "work...to obtain orders for the sale of the merchandise...and develop the market...on behalf of Brooks." [clause 4A].

Clause 4H
"[The agent] Shall use its best endeavours to procure the payment of all monies due to Brooks by any customer and shall co-operate with Brooks in relation to any proceedings for the recovery of monies due by any customer."

Clause 10
" For the avoidance of doubt, the Merchandise supplied by Brooks to ____________ and any part thereof shall remain the property of Brooks until completion of bona fide sales thereof ( cash received) at the prices stipulated herein to arms length third party Purchasers. Brooks' standard conditions of sale ( which also contain a reservation of title) shall apply to all sales."

Clause 19E
"Reservation of Title:
Under no circumstances shall title to the Merchandise become or be deemed to become the property of __________ by reason of the terms of this Agreement or invoices issued pursuant to it."

9.    The following clauses restrict the behaviour of the agent. It agrees [clause 2] to sell whatever stock Brooks may supply, or such other stock as Brooks may permit it to sell; and not to sell other merchandise, whether competing products or not, without the consent of Brooks [clause 4B]. It shall not deal with other manufacturers or suppliers of goods similar to or capable of of competing with Brooks merchandise [clause 4F]. Brooks set a minimum price for the stock [clause 4G]. The agent is not to apply for registration of any trade mark or trade name in connection with the business or the merchandise without the consent of Brooks [clause 4P]. It is appointed for a sole territory [clause 3] and agrees not to sell to customers of Brooks outside that territory, or customers of other franchisees of Brooks, without the written consent of Brooks [clause 4T]. The agent and any shareholders of the agent are not to be involved in any other business during the agreement and are to devote their full working time to the business [clause 14B]. This is complemented by clause 4F which provides that the agent is not to enter any other franchise, distribution or agency agreement with any person, and is to work exclusively on behalf of Brooks. Clause 4F also provides that the agent is not to change the nature of its business.  The agreement can be terminated on the occurrence of various events, such as breach of contract or the appointment of a receiver or liquidator, or by two years notice. It also terminates if ownership of shares in the agent company changes [clause 12].
10. Under clause 13A the agent agrees that:
	"(i) They will not without the consent of Brooks in writing  divulge to any person any secrets, trade secrets,  confidential knowledge or information concerning the  business, finance or affairs of the Business, or of  Brooks or its subsidiaries, their customers or clients  and will use their best endeavours to prevent the  publication or disclosure of any such secrets, knowledge  or information by any third party;

	 (ii)Without prejudice to the generality of the provisions  contained in the immediately preceding sub-clause, they  shall not for the period of two years next following the termination date of this agreement (howsoever caused) either on their own account or for any person, firm or  company directly or indirectly solicit, interfere with or endeavour to entice away from Brooks or any of its  subsidiaries any person who is a director, employee or  consultant of any such company (whether or not such person would commit any breach of his contract of  employment or engagement by reason of leaving the service  of such company) nor shall they knowingly employ or aid or assist in or procure the employment by any other  person, firm or company of any such persons.

	(iii)During the period of two years following the termination aforesaid ( howsoever caused) either on their  own account or for any other person, firm or company directly or indirectly solicit, interfere with or  endeavour to entice away from Brooks the custom of any  person, firm or company who at the date of aforesaid or who in the period of six months immediately prior to such  date was a customer or client of or in the habit of  dealing with Brooks or the Business or who at such date  was to their knowledge negotiating with Brooks or the  Business."

(e) Submissions of the parties

11.	Brooks Haughton Ltd submitted in request of a certificate that the arrangements did not have the object or effect of restricting or distorting competition in the State or in any part of the State, taking into account strong competition from other suppliers of the goods and services in question, and the necessity for Brooks to impose strict control on the quality and standard of the goods and services offered by the 'franchisee'. The company submitted that the 'franchisee' was assisted in setting up business because the premises from which they operated was generally owned by Brooks and stocked with merchandise provided by the company. The initial outlay required by the 'franchisee' in order to commence business was minimal and they were strongly supported by Brooks. The company also submitted arguments in support of its request for a licence, which are not relevant to this decision. 

(f) Subsequent developments

12.    The Authority issued a Statement of Objections to the parties on 17 May, 1995 indicating its intention to refuse a certificate or licence in respect of the notified agreement. By letter of 2 June, 1995 Brooks Haughton Ltd stated that the provision concerning the post termination non-solicit of employees [clause 13A(ii)] in the agreement would be deleted, the period of the post termination non-solicit of customers clause [clause 13A(iii)] would be amended to one year and the geographical scope reduced to the business of the customers of the contractor. These amendments were given effect by means of a letter issued by Brooks to all their agents informing them of the changes to the agreement. Confirmation of this was provided to the Authority on 30 June, 1995.

Assessment.

(a) Section 4(1)

13.	Section 4(1) of the Competition Act states that 'all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void'.

(b)	The Undertakings and the Agreement

14.	 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.' Brooks Haughton Limited and the contractors ('franchisees') are all engaged for gain in the business of builders providers and hardware merchants, both wholesale and retail and, consequently, they are all undertakings within the meaning of section 3(1) of the Competition Act. The agreement is therefore an agreement between undertakings.

15.   The Authority considers that this agreement although described as a franchise does not come within the scope of the franchise category licence1. The description "franchise" is applied informally to many different types of agreement but no definition exists in Irish domestic law. The Authority's category licence for franchise agreements defines a franchise as an agreement whereby one undertaking, the franchisor, grants the other, the franchisee in exchange for direct or indirect financial consideration, the right to exploit a franchise for the purposes of marketing specified types of goods and/or services. The term franchise is defined as a package of industrial or intellectual property rights. Necessarily only franchises of the type contemplated in the definition can benefit from the licence.

16.   This agreement is not intended to license a substantial body of know-how or other intellectual property rights to a franchisor who would then use that licensed material to market specified goods or services. This agreement is a mechanism for the operation of a chain of outlets, bearing the name of Brooks and the other party, keeping Brooks and the other party as legally separate entities but at the same time allowing Brooks control of prices and other matters such as credit control. There is no method referred to as being licensed and no intellectual property is involved, other than the use of the trade name "Brooks". The goods being sold are not manufactured by Brooks nor is Brooks the exclusive importer in the State for them.

17.   It is provided in the agreement that no relationship of partnership or employment is created thereby. In fact the elements of the contract add up to a relationship best categorised as agency. The agent's role is, operating from Brooks' premises, to obtain customers to buy Brooks' goods. The customer deals with the agent but the sale of goods contract is made with Brooks. The Authority considers that this is the net effect of clauses 4H, 10 and 19E. The Authority takes clause 4J recited at paragraph 8 above as a further indication of intention that the sale of goods contract be between Brooks and purchasers. The proceeds of sale are remitted to Brooks, and then a payment of commission is made by Brooks to the agents. Profits and losses on the transaction essentially accrue to the principal. The Authority accepts that it is not intended by this agreement to make the agent an employee of Brooks and that the agent is self employed. He or it is an auxiliary organ forming an integral part of the business of Brooks Haughton and the Authority concludes that he or it is an agent of Brooks.

Applicability of Section 4(1)

18.   The Authority has stated in its decision on the Conoco Consignee Agreement2 that generally the relationship of principal and agent does not in itself offend against section 4(1), but that individual clauses may offend. The notified agreement does not offend per se.  No clauses of this agreement offended except clause 13.

19.   Under clause 13 A (iii) the agent agreed for two years post-termination not to solicit, interfere with or endeavour to entice away from Brooks the custom of any person who at the date of termination or within the previous six months was a customer or in the habit of dealing with Brooks or the Business [i.e. that run by the agent] or who was at that date to their knowledge negotiating with Brooks or the Business. This provision was expressed to be to assure the goodwill of the business to Brooks.

20.   The clause in this agreement extended not only to the geographical area and the customers of the agent, but also to the area and customers of the principal, in respect of whom the agent had no special knowledge, and to that extent the Authority considered that it offended under Section 4(1). It also extended for two years from the date of termination and for that reason also offended under Section 4 (1). The Authority did not consider that the goodwill accumulated by the agent could be significant given that a major concern of this agreement was to ensure that all dealings were identified with the Brooks name and it did not consider that a transfer of that goodwill, if any, necessitated a non-solicit clause of this extent or duration.

21.	Clause 13 A (ii) provided, for two years after termination, for the agent not to solicit or employ any "director, employee or consultant" of Brooks or its subsidiaries, or "aid or assist in or procure the employment" of such a person by anyone else.  The restriction on soliciting, employing, or being involved in the placement of any director, employee or consultant of Brooks did not benefit from the justification that the agent was placed so as to compete unfairly with the principal. Neither could it be justified in terms of a transfer of goodwill, and the Authority considered that it offended against Section 4(1). As notified neither clause was indispensable and neither would have satisfied the criteria of Section 4(2).

22.	The company has now amended the standard agreement by means of a letter issued to all their agents informing them of the waiver of parts of clause 13. The effect is to delete clause 13 a (ii) (post termination non-solicit of employees) entirely and to amend Clause 13 A (iii) (the non-solicit customers clause). The period of the clause is reduced from two years to one; and the geographical scope is reduced to cover only customers of the business of the individual contractor. The Authority has previously decided in the context of the employer-employee relationship in Apex Murtagh3 that the employee's relationship with an employer can put him in possession of information which would put him at a competitive advantage to the employer in the area of the employment if in business for himself, and that a restriction limited to protecting the employer from that does not offend against section 4(1). Specifically in that instance the Authority stated that a restriction on soliciting customers, with whom the employee had dealings, for a period of time, was not anti-competitive. The Authority considers that the same considerations apply in the relationship of principal and agent, and that the clauses as amended are limited to protecting the legitimate interest of the principal. Consequently, these clauses no longer offend against section 4 (1).

Decision

23.	In the opinion of the Competition Authority, the standard agency agreement between Brooks Haughton Ltd and its agents, (notification no. CA/834/92E), notified on 30 September 1992, under Section 7, constitutes an agreement between undertakings.  The Authority considered that the restrictions in clause 13A (ii) and (iii) of this agreement offended against section 4(1) of the Competition Act and did not satisfy the requirements for a licence under section 4(2). As the offensive provisions have now been amended the agreement no longer offends against Section 4(1). 

The Certificate

24.	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 standard agreement between Brooks Haughton Ltd and its agents, (notification no. CA/834/92E), notified on 30 September, 1992, under Section 7, and amended by a letter from Brooks on 15 June, 1995 to all their agents, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey
Member
30 June, 1995.

Notes:-