Competition Authority decision of 20 October 1995 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/130/92E - Associated Marketing Ltd/ Waterford Carpets Ltd.

Decision No. 435.

Introduction

1.	 Notification was made on 25 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 agreement between Associated Marketing Ltd and Waterford Carpets Ltd. A Statement of Objections was on 19 June, 1995 and an oral hearing was held on 28 September, 1995. The request for a licence was withdrawn in the reply to the Statement of Objections.

The Facts

(a) The Subject of the Notification

2.    The notification concerns an agreement dated 28 February, 1975 between Associated Marketing Ltd (AML), the Agent, and Waterford Carpets Limited (Waterford) the Manufacturer, whereby AML agrees to provide marketing, sales, promotional and debtor management services in the State on condition that Waterford agrees to sell exclusively to AML.

(b) The parties involved

3.    Associated Marketing Ltd, incorporated in 1970, is involved in the business of marketing and selling commercial floor coverings in the State.  In addition to the marketing of carpets manufactured by Waterford Carpets,  AML also marketed Polyflor vinyls manufactured by Halstead Ltd and carpet products manufactured by Kraus Carpet Mills Ltd which are distributed in the EU by James Hamilton Seaton Ltd. Agreements relating to the latter were the subject of separate notifications CA/129/92E and CA/131/92E. The Halstead notification was subsequently withdrawn as it was stated that the agreement had been terminated.  Waterford Carpets Ltd,  a company based in Waterford, is a manufacturer of carpets for use in commercial and domestic floor coverings.

(c) The products and the market.

4.    The products involved in this notification are carpets, especially Tretford. Tretford is a cord carpet, made in Ireland of 80% natural fibre. It is a contract carpet at the lower end of the natural fibre carpet price range. The products are primarily for contract or commercial use. Users of commercial floor coverings include banks, offices, show-rooms, educational and other institutions, hospitals, hotels, sports complexes, airlines, factories, etc. Commercial floor coverings are purchased by flooring contractors, on behalf of the customers or as specified by flooring consultants, architects, interior designers, property managers,etc., either directly from the manufacturers or through distributors. 

5.      AML claims that there are alternative products available on the market for carpets - the closest substitutes to Tretford are imported ribbed needlefelts (of 100% man made fibre) - including other floor coverings. The principal manufacturers in the market in the State are Waterford Carpets Ltd, Navan Carpets Ltd, Munster Carpets Ltd,  Curragh Tintawn Carpets Ltd and Couristan Carpets. The principal distributors in Ireland are P G Power Distribution Ltd, Lee Distribution Ltd, Flooring Accessories Dublin Ltd, Furlong Carpets Wholesale and Brooks Thomas Ltd who sell mostly imported goods. The market is also supplied from abroad by manufacturers directly or through distributors or agents who sell to flooring contractors and retailers.  

(d) The agreement.

6.    The notified agreement is a letter of agreement, signed by AML and countersigned on 10th March 1975 by Waterford to confirm the terms and conditions under which AML will provide  what they describe as a marketing, invoice collection and debt management service for Waterford to be provided on condition that Waterford agree to offer to sell to AML " all your manufactured goods (and where applicable your services in relation to their installation of the same) at prices to be agreed. In this agreement the payment is calculated as "[  ]% of the invoiced value of your sales of goods or services within the Republic of Ireland. Whether effected by us or otherwise during the currency of this Agreement" [Schedule, clause 1]. The Annex states that this has been amended to [   ]% of the selling price.

7.    AML described this agreement as being, not an exclusive distribution agreement, but the sale of marketing services.  The Authority did not accept this view as set out in para. 31 below. The marketing strategies used are described in the notification in detail but the essential activity of AML is selling carpets to flooring contractors and distributors. They sell as principals and take the risk of bad debts. The manufacturer agrees not to supply to anyone else without their consent. The agreement refers to what is called a Financial Service which is merely that AML pays the manufacturer for goods before receiving payment from the customer. Where the Financial Service is not used, AML do not pay for goods delivered to customers until they have received payment at which time they pay the amount which they have received [clause 6]. 

8.	The agreement provides as follows:

"We [AML] shall provide for you the following services on condition that you will offer to sell to us all your manufactured goods...at prices to be agreed between us." The services are described as establishing marketing policies, establishing a sales organisation, developing sales outlets for the goods, distributing sales literature and organising participation in trade fairs. [clause 1]. AML also undertake that in all correspondence and dealings relating to the sale of Waterford goods and services AML will clearly indicate that they are selling as principals [clause 1(e)].

9.   AML agrees to "endeavour to ensure that all manufacturers participating in this scheme adhere strictly to standards and design...so that the quality of our mark with which you [the manufacturer] will be associated will maintain the highest possible reputation."[clause 1(g)]

10.  The manufacturer agrees "...to sell to us and deliver to our nominees at prices to be agreed between us". [clause 3(i)] The manufacturer agrees to issue an invoice to AML or directly to the customer,  "in our approved form and containing such details as we shall require" [clause 3(iv)]

11.   The manufacturer agrees to "...decline to accept any order...for the Irish market if such order does not come through us unless otherwise agreed in writing by us." [clause 3(vi)]. "The Irish market" is defined in the agreement as being the Republic of Ireland which is the contract territory.

12.	The Annex to Form CA states that the prices to customers are set by the manufacturer [p.6] "AML sells the Products at the prices decided by the Manufacturer and receives an agreed fee consisting of a percentage of the selling prices... The pricing policy is decided by the Manufacturer...AML does not have a decision making role in the pricing."

13.   The agreement had an original duration of three years from 10th March 1975 after which it could terminate by one party giving the other one year's notice, or in the event of breach of contract, or either party going into liquidation, bankruptcy or composition with creditors.

(e) Submissions of the parties

14.   AML submitted that the notified arrangements were unusual if not unique, but it was neither a distributor nor an agent. The company also submitted that the arrangements were in line with the regulations in the Commission Regulation No.1983/83 relating to Exclusive Distribution Agreements.  
15.   AML submitted that it was engaged by the manufacturer to handle all aspects of marketing the products on an independent basis and devised and implemented the entire marketing strategy. The manufacturer delivered the products to the customer or they were collected by the customer and the manufacturer then invoiced AML who in turn invoiced the customer.  They sold the products at the prices decided by Waterford and they were remunerated by an agreed fee consisting of a percentage of the selling prices. AML did not have a decision making role in the pricing policy decisions of Waterford. AML provided for the manufacturer its knowledge of the market in the State and its specialised marketing, selling and debtor management skills which the manufacturer would have to provide from within its own company instead.

16.   AML's argument was that the manufacturer was saved the cost of having a marketing and sales division familiar with the Irish market and AML carried the costs of marketing and sales. This kept down the costs of the products as it converted what would otherwise be a fixed cost into a variable cost related to actual sales. The manufacturer benefited from AML's knowledge of the market and its reputation for seeing that all sales were for applications for which the products were suitable. 

17.   They submitted that because of the arrangement Waterford had only one debtor and that AML was an insurable debtor. For the cost of the insurance premium, the manufacturer could completely eliminate provision for bad debts in the market concerned and thereby effect a reduction in the costs of the products.

18.   AML submitted that the arrangements did not restrict the parties in their freedom to take independent commercial decisions, save that prices were decided by the manufacturer.  The reason this was so was "because the parties do not see AML itself as trading in the products" - it is instead selling its marketing skills.

19. The arrangements between AML and each of the manufacturers were independent of each other and there was no co-operation between them nor did AML provide information about any of them to the others. The main restriction on the manufacturer was that for the duration of the agreement it did not sell directly or advertise in the State, other than through AML since a consistent marketing strategy could not be implemented and credit could not be controlled. 

20.   AML submitted that in order to win, hold and expand market share for the products, they carried out continuous market research along with a constant programme of promotion and advertising through the dissemination of product information. They also provided technical advice and guidance to flooring contractors since it was important that the specifier knew what floor coverings were available and understood their technical specifications, capabilities and limitations. Flooring contractors or distributors approached AML as the manufacturer's marketing arm and requested quotations for supply. The manufacturer carried all the product and delivery responsibilities and AML carried the credit risk, and to facilitate this service AML sold as principal. 

21.   AML submitted that the arrangements did not have the object or effect of preventing, restricting or distorting competition in the State or in any part of the State. The arrangements did not seek to or have the effect of restricting sales of the products.  AML submitted that it was only providing for the manufacturer what it would otherwise do itself "in house", therefore AML did not constitute an additional layer between the manufacturer and the market.

22. 	 AML originally also made submissions seeking a licence, which are not relevant to this decision because the licence requirement was withdrawn. 

(f) Subsequent developments       

23.   The Authority issued a Statement of Objections to the parties on 19 June, 1995 indicating its intention to refuse a certificate or licence in respect of the notified agreement. The parties responded by making further submissions on the notification and by withdrawing their application for a licence. The notification proceeded as a request for a certificate. The submission repeated the arguments made in the original Annexe and replied to the Statement of Objections for the purpose of arguing that the arrangement was not a distribution agreement.

24.	AML submitted that the features of the relationship with the carpet manufacturers which showed it to be something other than distribution were
	 (i) that the manufacturer was responsible for physical distribution and 
	(ii) that the manufacturer set the price.

25.	They submitted that the purchase and resale of the goods by AML should not be mistaken for a badge of distribution since it was only for the commercial convenience of the parties. They submitted that the territorial exclusivity was not restrictive of competition since the manufacturer could have territorial exclusivity if it did not appoint any intermediary; thus the appointment of any intermediary, subject to territorial restrictions, did not change the level of competition in the market. They submitted that the real price competition took place at the flooring contractor level, since sales could not be made directly to end users because the product must be laid by a competent flooring contractor. The price at which the flooring contractor purchased the product was set by Waterford. The flooring contractor was then free to determine his own mark up.

26.	The exclusive territory clause [3 (vi)] did no more than recognise the reality of the arrangements. If Waterford decided to effect a direct sale themselves this could only be done on the back of the market awareness and market for their product developed by AML. They considered it right in such circumstances that they should be paid for the provision of such marketing awareness and market development and they submitted that this was all that the agreement provided. 

27.	At the oral hearing, counsel for AML further argued that the relationship between AML and the manufacturer was not a vertical relationship. The argument was that since AML were selling a service to the manufacturer, the relationship was horizontal. It was argued that the relationship was not subject to the analysis applicable to vertical relationships, and that therefore the resale price maintenance clause, and the exclusive territory, were not on their face offensive. No authority was offered for this line of argument. They stated that they did not consider themselves to be agents of the manufacturer.
28.	It was argued that there was no restriction of competition in either of the restrictions on AML, since the manufacturer could choose to sell the product directly and that this would produce the same level of competition in the market. However, it was submitted on behalf of AML that the territorial restrictions, which limit the manufacturer selling into the market directly or through any other distributor, could be removed from the agreement, since they did no more than describe behaviour which the manufacturer would in any case continue to observe without contractual stipulation.

Assessment

(a) Section 4(1)

29.	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

30.	 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.' Associated Marketing Ltd is engaged for gain in the distribution of carpets and floor coverings. Waterford Carpets Ltd is engaged in the manufacture of carpets for gain. Consequently, they are both undertakings within the meaning of section 3(1) of the Competition Act. The agreement is therefore an agreement between undertakings.

(c)  Applicability of Section 4 (1)

31.   The Authority issued a Statement of Objections to the parties on the basis that this agreement operated as an exclusive distribution agreement, and that the price and territory restrictions were offensive for the reasons given in the Exclusive Distribution category licence. AML argued that the relationship was not one of exclusive distribution. AML have described this agreement as being for the supply of marketing services. In fact, the marketing services, although described in more detail than in most distribution agreements are not different in nature to any of the marketing activities any distributor could choose to pursue to market their goods. AML buy and resell the suppliers' products. They are the only undertaking with whom the supplier has a supply agreement in the territory (the State), and the supplier undertakes not to supply to any other person in the State without the consent of AML. 

32.	Despite the arguments made by AML this appears to the Authority to be a vertical agreement for the distribution of goods. For the avoidance of doubt, the Authority does not accept the argument that the service of marketing and selling the goods of a manufacturer operates on a level horizontal to the manufacturer. 

33.	 By clause 3 (vi) the manufacturer agrees not to supply its goods or services other than to the distributor, unless with the consent of the distributor.  The notifying party, at the oral hearing stated that this extended to obliging the manufacturer to consult on approaches made by other distributors, outside the State, to supply into the State.  The effect of this clause is reinforced by the provision that the manufacturer will pay AML a percentage of the value of all sales in the State, whether effected by AML or not [Schedule, Clause 1.]  

34.	 There has been considerable debate in the economics literature regarding vertical restrictions such as exclusive distribution, and the creation of exclusive territories.  On the one hand such agreements may, in certain circumstances, be anti-competitive.  On the other hand they may simply constitute a logical and efficient and in some instances the only mechanism by which the products concerned can be distributed, in which case they cannot be considered to have either the object or effect of preventing, restricting or distorting competition.  An examination of the facts in each case is necessary to establish whether or not an agreement such as the one notified in this instance offends against section 4(1).  Having considered the submissions made by the parties in this instance, the Authority concludes that on balance the evidence does not suggest that the arrangements are designed solely to enhance the efficiency of distribution or that creating territorial exclusivity constitutes the only feasible means of distributing the products.  Given that the agreement clearly prevents other distributors from dealing in the products and denies customers the possibility of obtaining supplies from such other distributors, the Authority concludes that in this instance the arrangements offend against section 4(1). 

35.	The Annex provides that the manufacturer will fix the price of the product. The Authority has stated in numerous decisions that resale price maintenance generally offends against Section 4(1). It does so by preventing intra brand competition. It prevents the seller competing on price against other brands; it removes the incentive for the seller to create or pass on efficiencies in distribution or retailing; and it, typically, keeps price levels higher than they would otherwise be. The price obligation therefore offends against Section 4(1).

The Decision

36.  In the opinion of the Competition Authority the agreement of 28 February, 1975 between Associated Marketing Limited and Waterford Carpets Limited (notification no. CA/130/92E) notified on 25 September, 1992, under Section 7, constitutes an agreement between undertakings. It considers that the restrictions in clause 3(vi) of the agreement and the fact that the distributors prices are set by the supplier offend against Section 4(1) of the Competition Act, 1991. Consequently the Authority refuses to issue a certificate in respect of this notification.  

For the Competition Authority

Patrick Massey
Member
20 October, 1995.