COMPETITION AUTHORITY

Competition Authority Decision of 24 March 1999 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/1/97: Johnstone Paints/Circle Paints Ltd

Decision No.  539

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Competition Authority Decision of 24 March 1999 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/1/97: Johnstone Paints/Circle Paints Ltd

Decision No.  539

Introduction

1. Notification was made by Circle Paints Limited on 9 January 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 grant a certificate, a licence under Section 4(2) in respect of an exclusive distribution agreement.

The Facts

(a) Subject of the Notification

2. This notification concerns an exclusive distribution agreement dated January 1st, 1995 between Johnstone's Paints plc and Circle Paints Limited. Under the agreement, Johnstone's Paints plc appointed Circle Paints Limited as its sole distributor of certain paint products in the State.  A specific list of the contract products is attached as Schedule 1 to the agreement. Additional products may be added to the agreement, following agreement by the Distributor.

(b) The Parties Involved

3. Circle Paints Limited is a wholly-owned subsidiary of Grafton Group plc and is a manufacturer and distributor of paint and related products. Grafton Group plc is publicly quoted on the Irish Stock Exchange and is involved in the business of builders/plumbers merchanting and the related manufacture of plastics, concrete products and paint and in DIY retailing. Circle Paints is based at Greenhills Road, Walkinstown, Dublin 12.  Grafton Group plc is based at Birch Avenue, Stillorgan Industrial Park, Blackrock, Co. Dublin.

4. Johnstone's Paints plc is based at Stonebridge House, Edge Lane, Droylsden, Manchester, England. At the date the agreement was signed, Johnstone's Paints was a wholly-owned subsidiary of Euridep S.A. ("Euridep"), which was in turn part of the French group Total S.A. ("Total").  On June 9th 1995, Euridep merged with the English company Kalon Group plc with the result that Total now holds approximately 57% of the issued share capital of Kalon.  

5. Kalon in turn holds the entire  issued share capital of Euridep and on January 1, 1996 acquired the entire issued share capital of the Johnstone's Paints from Euridep.  On January 2, 1996, Kalon Limited, of Huddersfield Road, Birstall, Batley, West Yorkshire, WF17 9XA, a wholly-owned subsidiary of Kalon, acquired Johnstone's Paints’ business and substantially all of its assets rights and obligations under the Agreement. Kalon also operates in Ireland through SPL Paints (Ireland) Limited (“SPL”) which is involved in the marketing, distribution and sale of paint and related products.

(c) The Products and the Market

        6. The parties claimed that the contract products are sold in the market for decorative paints, decorating sundries, wallcoverings and protective coatings in the State.  The parties estimated the size of the market in 1995 at approximately [ ] at wholesale prices.  The parties claimed that the following sellers were in the market, and provided estimates of their 1995 sales:

		Sellers into the Market                  Estimated Sales £m's.

		Akzo Nobel					[ ]
		ICI						[ ]
		Fleetwood					[ ] 
		SPL Limited					[ ]  
		Circle Paints Limited				[ ]  
		General Paints Limited			[ ]  
		Weathercrete					[ ]  
		Synthesis					[ ]  
		Johnstone's Paints				[ ]   
		Others						[ ]   

		TOTAL					[ ]

7. The parties claimed that the market is a very competitive one in which the highest market shares are held by the multinational groups Akzo Nobel and ICI. The parties further claimed that the buyers in the market can generally be split into four groups viz painting contractors, specialist paint shops, DIY retailers and hardware merchants.

8. The Authority is of the view that the relevant market is the manufacture of paints and related products. The total estimated share of Johnstone's Paints plc and SPL in the market was approximately [ ] in 1995. The estimated market share of Circle Paints Limited was approximately [ ]  in 1995.

(d) The Structure of the Market

9. The business of Johnstone's Paints plc consists of the manufacture of paints and related products. The turnover in the relevant market of Johnstone's Paints plc and of SPL in the market was [ ] in 1995. The turnover of Circle Paints Limited within the period ending December 31, 1995 was [ ], of which [ ] approximately consisted of sales to third parties and [ ] approximately consisted of sales to other Grafton group companies.  The turnover of Grafton Group plc for the period ending December 31, 1995 was £154,090,000.

(e) The Notified Arrangements

10. This notification concerns an exclusive distribution agreement between Circle Paints Limited and Johnstone's Paints plc. Under clause 2.1 Johnstone's Paints plc grants Circle Paints Limited the sole and exclusive right to carry on the promotion and sale of the contract products in the State. Under clause 2.3.3, Johnstone's Paints plc agrees not to sell or supply the contract products to any person other than Circle Paints Limited in the State. Under clause 2.4.2 Circle Paints Limited agrees to purchase all of its requirements for the contract products from Johnstone's Paints plc.

11. Under clause 6. 1.1 Circle Paints Limited may not without the previous consent in writing of Johnstone's Paints plc be concerned or interested either directly or indirectly in the manufacture, sale or supply of any goods in the State which are similar to or competitive with the contract products. [                                                                                                                ]

12. Under clauses 8.1 and 8.2, Johnstone's Paints plc and Circle Paints Limited undertake to keep certain information confidential, both during the term of the agreement and afterwards. Under clause 9.1 Circle Paints Limited agrees not to sell the contract products under any name or mark other than the name and mark used by Johnstone's Paints plc in relation to the contract products. Under clause 10.2.1 Circle Paints Limited agrees not to use Johnstone's Paints plc intellectual property other than as permitted by the Agreement and otherwise then directly in the business.

13. Neither Johnstone's Paints plc nor Circle Paints Limited has a substantial interest falling short of control in any other company competing in the Market, nor does any other such company have such a substantial interest in either Johnstone's Paints plc or Circle Paints Limited.

(f) Submissions by the Notifying Party

14.  The parties stated that they did not believe that the agreement, or any aspects of the agreement, restrict the parties in their freedom to take independent commercial decisions.  Without prejudice to the foregoing the parties drew the Authority’s attention to some provisions of  the agreement.

Arguments in Support of the Grant of a Certificate

15. The notifying party claimed that, in general, neither the provisions nor the agreement itself had as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or any part of the State within the meaning of Section 4(1) of the Act. In particular, the overall effect of the agreement was to encourage and promote competition by ensuring the efficient distribution of the Supplier's products. The provisions noted above were necessary to ensure this ultimate objective and were reasonable in their terms.  The notifying party claimed that the provisions do not infringe Section 4(1) of the Act.

16. The notifying party submitted that the Competition Authority should adopt what has been termed under United States and European Community Competition Law in particular a "rule of reason" approach, and that it should consider the agreement, and the provisions noted, to be reasonable in the context of Section 4(1) and therefore outside the application of that section.  On this issue the Distributor referred to the judgement of the European Court of Justice in Stergios Delimitis v. Henninger Brau. Case 234/89.  February 28th 1991 and to the judgement of Mr Justice Keane in Masterfoods Limited v. HB Ice Cream Limited.  May 28th 1992.  The Distributor also referred to the draft notice in respect of shopping centre leases published by the Competition Authority in June 1993 and in particular to paragraph 9 thereof, which referred to the Authority considering that it should apply a rule of reason to all agreements.

17. On the basis that the Competition Authority has adopted a rule of reason approach in reviewing agreements generally under Section 4(1), the notifying party further submitted that the terms of clauses 2.1, 2.3.3, 2.4.2, 6.1.1, 6.1.2(a) and 6.1.2(b) were reasonable and necessary in order to achieve the beneficial objective behind the Agreement, namely the effective distribution of the Supplier's products in the Republic of Ireland.  As such, the Agreement and these related provisions promote competition in that they ensure that the supplier's products can compete in the Irish market. Consequently, the provisions noted should not be taken to constitute restrictions on competition within the meaning of Section 4(1) of the Act.

18. The notifying party claimed that the terms of clauses 8.1, 8.2, 9. 1, and 10.2.1 did not constitute restrictions on competition in any sense and in particular within the meaning of Section 4(1) of the Act and that on this basis the Competition Authority should grant a certificate in respect of the agreement.

19. Alternatively, if the Competition Authority should consider that some of the provisions noted at paragraph 3.2 might infringe Section 4(1) of the Act, the notifying party  referred to EC Commission regulation 1983/83 which generally exempted certain types of exclusive distribution agreements from the application of Article 85(1) of the Treaty of Rome, upon which article Section 4(1) of the Act was based, provided that the agreement in question contained provisions which were no more restrictive than those permitted under the Regulation.

20. A distinction was drawn in Article 2 of the Regulation between certain types of provisions which might be deemed restrictions on competition under the Regulation but which might be imposed on the exclusive distributor (these were listed under Article 2(2) of the Regulation) and certain obligations which might also be imposed on the exclusive distributor (listed under Article 2(3)), but which would not be deemed to be restrictions on competition.  By analogy with Article 2 of the Regulation the Distributor submited that clauses 8.1, 8.2, 9.1, and 10.2. 1 were obligations in this second sense rather than restrictions on competition within the meaning of Section 4(1) of the Act.

21. The notifying party also referred to a Licence for Categories of Exclusive Distribution Agreements published by the Authority in November 1993. They submitted that clauses 8. 1, 8.2, 9. 1 and 10.2. 1 of the agreement were obligations of the type referred to by the Authority rather than restrictions on competition within the meaning of Section 4(1) of the Act. The Distributor submits that the terms of clauses 9. 1 and 10. 2. 1, which related to the Supplier's intellectual property rights in the Contract Products, were reasonable obligations imposed on the distributor rather than restrictions on competition within the meaning of Section 4(1).  In particular, these provisions were necessary to secure the proprietary rights of the supplier in the names of  the products produced by it and to avoid confusion in the eyes of the consumer.

Arguments in Support of a Grant of a Licence

22. The notifying party submitted detailed arguments in support of the granting of a Licence.  However, the Authority is of the opinion that the grant of a Licence does not apply in this particular instance.
(g) Submissions by Third Parties
23. There were no submissions by third parties.

(h) Assessment

(a) Applicability of Section 4(1)

24. 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

25. Section 3(1) of the Competition Act defines an undertaking as ‘a person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of a service’. Johnstone's Paints plc and Circle Paints Limited are corporate bodies engaged for gain in the manufacture and distribution of paints and paint products. They are therefore undertakings and the agreement is an agreement between undertakings. The agreement has effect within the State

(c) Economic Assessment

26. The Authority is of the view that the notified agreement would have fallen under the new Category Certificate & Licence (in respect of agreements between suppliers and resellers), Decision No 528, 4 December 1998, but for a concern that the exclusive distribution agreement is between parties which might be regarded as "manufacturers of identical goods or of goods which may be considered by users as equivalent in view of their characteristics, price and intended use" (Article 7 of the Category Certificate & Licence).  

27. The notifying party in its submission to the Authority did concede that it is possible to view the parties as being involved in the manufacture of similar products, and on that basis it was possible that the Category Licence (for Exclusive Distribution Agreements), Decision No 144, 5 November 1993, might not apply to the agreement.  

28. Although the agreement is an agreement between competitors, the Authority has concluded, that the products are exposed to effective competition in the relevant market from the products of rival competitors. In its assessment of the conditions of competition, the Authority draws particular attention to the fact that the market shares of the parties are small and to the existence of other competitors in the market. In these circumstances the Authority is of the view that the agreement is unlikely to result in a degree of foreclosure in the market. Therefore the Authority is of the opinion that the agreement does not contravene section 4(1) of the Act.

29. It is the view of the Authority that the provisions in the agreement do appear to be in a form which would be permissible if they fell under the Category Certificate & Licence. The Authority is of the view, that neither the agreement nor any aspects of the agreement, restricts the parties in their freedom to take independent commercial decisions. They are pro-competitive rather than anti-competitive and it is the view of the Authority that the agreement does not involve a restriction of competition within the meaning of Section 4(1) of the Act,.

30. Therefore the Authority is of the opinion that the clauses of the agreement do not constitute restrictions on competition within the meaning of section 4(1) of the Act.

The Decision

31. In the Authority’s opinion Johnstone's Paints plc and Circle Paints Limited. are undertakings within the meaning of section 3(1) of the Competition Act and the notified arrangement constitutes an agreement between undertakings. In the Authority’s opinion the exclusive distribution agreement dated January 1, 1995 does not contravene section 4(1) of the Competition Act.

The Certificate

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 exclusive distribution agreement dated 1 January 1995 between Johnstone’s Paints plc and Circle Paints Limited notified under section 7 of the Competition Act on 9 January 1997 (Notification No. CA/1/97) does not contravene section 4(1) of the Competition Act, 1991, as amended.

For the Competition Authority

Professor Patrick McNutt
Chairperson
24 March 1999