Competition Authority decision of 19 October 1995 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/33/94 - Maxol/Mulfield.

Decision No. 432

Introduction

1.	Notification was made of a distribution agreement between Maxol Ltd and Mulfield Co. Ltd, t/a Maxol Fuel Services, and Mr Gerard Carr on 30 November 1994 with a request for a licence under Section 4(2) of the Competition Act, 1991.

The Facts

(a)  The subject of the notification

2.	The notification concerns an agreement, dated 23 August 1994, between Maxol and Mulfield for the distribution of Maxol fuel oils in a specified area.  Because of the special features of this case, the Authority considered that it should be the subject of an individual decision.

(b)  The parties involved

3.	Maxol is an Irish registered company, which is part of the McMullan group of companies and which is engaged in the supply and distribution of petroleum products.  Mulfield is an Irish registered company, with its registered office in Dublin.  Mr Carr is a major shareholder in, and a director of, Mulfield.

(c)  The products and the market

4.	The products involved are fuel oil products - derv, gas diesel oil and domestic heating oil.  The oil companies involved in this market generally use distributors to deliver to final customers and do not use their own staff as in the past.  Maxol stated that there were 11 suppliers to the fuel oil market, and three further companies which supplied the retail market.  

(d)  The notified agreement

5.	The notified agreement is dated 23 August 1994.  Mulfield is appointed as non-exclusive seller and distributor of the products in and for the area specified (clause 2.1).  The territory appears to include all or most of Dublin City and County, and adjacent parts of Meath, Kildare and Wicklow (First Schedule).  The supplier reserves the right to operate directly in the territory.  The agreement contains many provisions which are commonly found in distribution agreements, and which have been described, for example, in the category licence for exclusive distribution agreements (Decision No. 144 of 5 November 1993), including an exclusive purchasing obligation and a prohibition on dealing in competing products.

6.	Certain clauses are of particular relevance in this instance:
(i)	Clause 2.3 prohibits the distributor and Mr Carr from seeking customers, establishing any branch or maintaining any distribution depot for the products outside the territory;
(ii)	The initial term of the agreement is two years (clause 3.1), and indefinitely thereafter, subject to 6 months' notice in writing on either side (clause 3.2); and

(iii)	Under clause 13.2, if the distributor wishes to dispose of any interest in premises or facilities to any other person, he must give first refusal, for the same consideration, to Maxol.

(e)  Maxol's other distribution agreements

7.	Maxol notified its standard exclusive distribution agreement to the Authority on 17 September 1992.  An amended agreement was submitted to the Authority on 24 August 1993.  The Authority decided that the amended agreement came within the scope of the category licence for exclusive distribution agreements, and satisfied its conditions.  Under the standard agreement, each distributor is appointed as exclusive seller and distributor in a specified area (clause 2.1), and must not seek customers, establish any branch or maintain any distribution depot for the products outside the territory (clause 2.3(c)).  The Authority is not aware that any alterations have been made to these clauses.

(f)  Submissions by Maxol

8.	In its submission, Maxol stated as follows:
	`Maxol is now reviewing its arrangements with its area distributors.  It is its intention to abolish the exclusive distribution system and to replace it with a system whereby distributors will be appointed as non-exclusive distributors.  Such distributors will be given a particular area by Maxol with a view to them concentrating sales in that area but when the changeover is finalised they will not be precluded from seeking customers or establishing a depot anywhere in Ireland if desired.

	Maxol cannot complete the changeover immediately.  The reason for this is because currently Maxol has binding agreements with approximately twenty nine other distributors besides Mulfield Company Limited.  These agreements grant those distributors exclusive rights in a particular area.  There are periods to run on these contracts varying between three and five years.  It is proposed that these contracts will run their course and upon renewal (if renewed) the agreements will be changed to non exclusive.  The agreement notified herewith will not be the standard contract used on the changeover but it is a once off contract used by Maxol Limited to sign up this new distributor on a non exclusive basis.  A draft of the standard contract which will be used to effect the changeover is currently under consideration by Maxol and when same is finalised and Maxol begins to use it a notification of it will (if necessary) be made to the Competition Authority.'

9.	Maxol also stated that:
	`It is estimated that approximately 250 fuel oil distributors operate within the State.  The majority of these have a formal distribution or supply agreement with one of the companies in the attached schedule.   The distributors market their products under a well known brand name e.g. Maxol, Shell, Texaco, etc.  Other "non aligned" distributors purchased their product on the open market and would have no formal ties or contracts with their suppliers.

	A new distributor may enter the market at any time and in any location but because of the existing authorised distributor agreements which grant exclusive territorial rights that distributor may be restricted in his sources of supply.  It should be noted that when the new arrangements are fully in place, this will no longer be applicable to Maxol because none of the authorised distributors will have an exclusive area and Maxol will be free to appoint one or more distributors in a particular area and to supply them with product.

	A company seeking to enter the distributorship market might also enter it by purchasing an existing business together with the supply contract and customer list as a means of entering into the fuel distribution business.

	The fuel oil market has become increasingly competitive in recent years due to:-
	1.	An increase in the number of operators.  For example, the number of distributors in County Clare has increased from 9 in 1985 to 18 in 1992 and to 22 in 1994.

	2.	The loss of volume particularly in urban areas where natural gas is fast gaining market share.

	3.	As the three basic products derv,  gas diesel oil and domestic heating oil (kerosene) handled by distributors are of a standard quality, the price is very competitive.'

10.	In support of its request for a licence, Maxol submitted as follows:
	`Maxol is of the view that the four general points made in relation to its exclusive distribution arrangements notified in September 1992 are relevant here also.  These are as follows:-

	(a)	The Agreement provides the authorised distributor thereto with the opportunity to market product under a national brand;

	(b)	The Agreement ensures continuity of supply to an authorised distributor;

	(c)	The Agreement ensures that the authorised distributor can rely on the quality of product, safety and obtain technical support from Maxol;
 
	(d)	The Agreement is the most cost effective way of supplying a local user.'

11.	Maxol made the following specific points in respect of clause 2.3:
	`.........., Maxol is of the view that the most competitive way forward in the fuel oil market is by the appointment of distributors as non-exclusive.  It is starting this process by appointing Mulfield Company Limited (the "Distributor") as a non exclusive distributor under Clause 2.1 of this Agreement.  This Agreement will entitle Maxol to appoint other distributors in the same area as the area designated to the Distributor.  In addition, other distributors will not be prevented from actively seeking customers in the Distributor's area.  While in future agreements a "Territory" will be designated to a distributor and the distributor will be expected to concentrate its sales in that particular area, the distributor will nevertheless not be precluded from setting up elsewhere if it sees a competitive advantage in doing so.

	Maxol is of the view that clause 2.3 is justified in view of the investment made by Maxol in a distributors business through interest free product loans, equipment loans, sales support, technical support, marketing grants and subsidised rentals on sites licenced to distributors.
	The restriction in 2.3(c) is retained in this Agreement as Maxol still has exclusive distribution arrangements in most areas other than the areas covered by this Agreement.  Maxol cannot give the Distributor rights to seek customers, establish a branch or maintain a distribution depot in other areas as the grant of such a right would cause Maxol to breach its existing exclusive distribution agreements with its twenty nine other exclusive distributors.  It is envisaged in future contracts that this clause will be dropped.'

12.	Maxol also made submissions about other clauses in the agreement, and it went on to state that:

	`Maxol submits that the Agreement is in fact less restrictive than the standard exclusive distribution agreement already licensed by the Competition Authority under the Category Licence and the points made in paragraphs 14 and 15 of the Category Licence do not apply here.  The Agreement allows Maxol to appoint other distributors and (implicity) allows other distributors to distribute into the area covered by this Agreement.  It is submitted that the Agreement promotes competition as the Distributor will work hard to keep a competitive edge over other possible distributors in the area (whether appointed by Maxol or other oil companies).  The distributor will have to maintain competitive prices and services to retain customers.  Consumers gain from the resulting improvement in distribution.  Therefore a licence should be granted for the Agreement.'

13.	In conclusion, Maxol stated that:
	`Maxol refers to the Licence for Categories of Exclusive Distribution Agreements issued on 5th November 1993 and EC Regulation 1983/83 [the block exemption for exclusive distribution agreements] both of which permit operation of agreements which are more restrictive than the Agreement notified herewith.  Maxol submits that the Agreement (being less restrictive than that which is in any event permitted under the Licence and Regulation) should be licenced.'

Assessment

Applicability of Section 4(1)

14.	Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings 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.

The undertakings

15.	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."  Maxol Limited, Mulfield and Mr Carr are engaged in the supply and/or distribution of fuel oils for gain, and are therefore undertakings within the meaning of Section 3(1) of the Act.  The agreement is an agreement between undertakings.  It has effect within the State.

The agreement

16.	Maxol has claimed that the agreement is a non-exclusive agreement, and that it is not an exclusive distribution agreement (although several of the points made in its submission relate to exclusive distribution agreements).  The implication is that this is an exclusive purchasing agreement.  The Authority must consider, however, the content of the agreement per se and the whole agreement in the context of Maxol's other distribution agreements, all of which involve exclusive distribution.

17.	Mulfield is appointed as distributor within a specified area.  While the concept of a specified area is central to an exclusive distribution agreement, it does not apply at all to an exclusive purchasing agreement.

18.	In spite of what Maxol stated in its submission, Mulfield is prevented from actively seeking customers outside its territory, and Maxol's other exclusive distributors are prevented from actively seeking customers outside their respective territories, including in the territory allocated to Mulfield.  Such a situation is a characteristic of exclusive distribution agreements, but is not present in the case of exclusive purchasing agreements.

19.	Mulfield has been appointed as non-exclusive distributor in the specified area.  This implies that another distributor or other distributors might also be appointed in the same territory.  To date no other distributor has been appointed.  The agreement provides that the supplier may operate directly in the territory, but an exclusive distribution agreement does not entirely preclude the supplier from dealing with certain customers within the territory.

20.	The Authority accepts that Maxol intends that its fuel oil distribution system should be altered over time from an exclusive distribution system to one involving exclusive purchasing by certain distributors.  It considers, however, that the Mulfield agreement, together with the other agreements, protects Mulfield and the other distributors from active competition from members of the distribution network outside each distributor's territory, and that the Mulfield agreement is, de facto, an exclusive distribution agreement.  It would not appear possible, in the circumstances, to have one area in the State subject to a non-exclusive distribution agreement, while all other areas at the same level of distribution are subject to exclusive distribution agreements with the same supplier.

21.	The Mulfield agreement is considered by the Authority to be an exclusive distribution agreement, and to be part of a network of Maxol exclusive distribution agreements.  Many other suppliers of fuel oil utilise exclusive distributors, while some distribute through exclusive purchasers.  The Authority considers that the Mulfield agreement offends against Section 4(1) of the Competition Act for the reasons given in the category licence for exclusive distribution agreements.

22.	The Authority considers that the requirement that the distributor must give first refusal to Maxol, if he wishes to dispose of the premises, does not offend against Section 4(1) of the Act.  While this might be used to deny use of the premises to a competitor of Maxol, there are many other premises which could be used as a fuel oil distribution depot, and the sector is very competitive.  In the circumstances, such a requirement does not prevent, restrict or distort competition.

23.	For the sake of completeness, the Authority states that, were the notified agreement to involve only exclusive purchasing, it would also find that it offended against Section 4(1) of the Act, for the reasons given in the Conoco distributor cases (Decision No. 413 of 25 August 1995).  In addition it would find that the clauses which specified a territory for the exclusive purchaser and prevented the exclusive purchaser from engaging in active sales throughout the State offended against Section 4(1).  It would also find that an exclusive purchasing agreement which was of indefinite duration, as in this case, because it was not limited to a maximum duration of five years, offended against Section 4(1).

Applicability of Section 4(2)

24.	Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which, "having regard to all relevant market conditions, contributes to improving the production or distribution of goods or provision of 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."

25.	The Authority considers that the Mulfield agreement constitutes an exclusive distribution agreement, and that it satisfies the conditions of the category licence, and thus the conditions of Section 4(2) of the Competition Act, for the reasons given in the category licence.

26.	For the sake of completeness, the Authority states that, were the notified agreement to involve only exclusive purchasing, it would find that it would not satisfy the conditions of Section 4(2) of the Act, because of the inclusion of the clauses, except that relating to exclusive purchasing, referred to in para 23, on the grounds that they were not indispensable to secure the benefits from the agreement.

The Decision

27.	In the opinion of the Authority, the distribution agreement between Maxol Ltd and Mulfield Co. Ltd, t/a Maxol Fuel Services, and Mr Gerard Carr, notified to the Authority on 30 November 1994 (notification no. CA/33/94), is an exclusive distribution agreement.  It considers that it offends against Section 4(1) of the Competition Act, 1991, but that it satisfies the conditions of the category licence for exclusive distribution agreements (Decision No. 144 of 5 November 1993).

For the Competition Authority

Patrick M. Lyons.
Chairman
19 October 1995.