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International Competition Network

Brussels, 14.4.1998

SG(98) D/ 3032

Registered with advice of delivery

Paul Horan
Chairman, Licensed Trade and Tourism Committee
Press and Parliamentry Office
Federation of Small Businesses
2 Catherine Place
Westminster
UK - London SW1E 6HF

Dear Mr Horan,

Subject: Case IV/35.628/F3 - AIL c/ Inntrepreneur ("old" Lease)

I refer to the application of May 31, 1995 made by Messrs Horan and Charleson on behalf of the Association of Inntrepreneur Lessees pursuant to Article 3(2) of Council Regulation no. 17, regarding alleged infringements of Article 85 in respect of the "old" Inntrepreneur lease (hereafter "the complaint"). This lease is entered into by the Inntrepreneur Pub Company Limited (or Inntrepreneur Estates Limited as it was called at that time) or related companies.

By this decision, I inform you that, for the reasons set out in the annex, which annex forms an integral part of the decision, there are insufficient grounds for granting your application. The Commission therefore decides to reject your application.

In reaching its decision, the Commission has taken due account of your comments of 4 January 1998 on the letter of November 24, 1997 pursuant to Article 6 of Commission Regulation 99/63 indicating the Commission's preliminary view (hereafter "the Article 6 letter). Your comments are addressed in the annex.

Yours faithfully,

For the Commission,

Emma BONINO
Member of the Commission

Enclosure: Annex to the Decision of the Commission to reject the complaint

Annex to the Decision of the Commission

to reject the complaint in

Case No IV/35.628/F3 - AIL c/ Inntrepreneur ("old" Lease)

I. THE FACTS

1. The Parties

1.1 The Tenants

. On May 31, 1995, Messrs Horan and Charleson, both former Inntrepreneur lessees, lodged on behalf of the Association of Inntrepreneur Lessees a complaint against the IEL Lease. In July 1995, AIL merged with the Federation of Small Businesses (hereafter "FSB").

. Between February 13 and February 25, 1996, 15 actual or former Inntrepreneur lessees instructed Messrs Horan and Charleson to represent them on actual or future issues which might occur relating to this complaint. The complaint is therefore considered by the Commission to be made by 17 actual or former Inntrepreneur lessees.

. In the comments on the Article 6 letter, the FSB extended the complaint to include RetailLink, i.e. the "new" lease (see point 2.2 below). However, this decision does not concern the "new" lease.

. The FSB also indicated in their comments on the Article 6 letter that the (original) complaint was, in the light of the UK OFT Enquiry, against IEL and its associated companies - Grand Metropolitan PLC (hereafter "GrandMet") and Courage Limited (hereafter "Courage"). The FSB also stated that the (original) complaint was also against the UK Office of Fair Trading (hereafter "OFT") in respect of its report of May 1995 into UK Brewers Wholesale Pricing Policy (hereafter "the OFT report"). In fact, the original complaint indicated: "We now make a formal complaint to the European Commission in respect of the IEL lease. The basis of the complaint being our submission made to the OFT on the 12th of April 1995 and which is enclosed with this letter." It cannot be said, therefore, that the original complaint was directed against the related companies and the OFT.

. However, the Commission accepts that as notification case No IV/34.387/F3 relating to the "old" lease was made by IPCL, GrandMet and Courage, the complaint can be considered as also lodged against these companies.

. The part of the complaint against the OFT and the OFT report is inadmissible. The OFT is one of the competent authorities of the Member States as referred to in Regulation No 17. In its capacity as author of the OFT report it is not an undertaking in the sense of Article 85, nor has the complainant identified the "infringement of Article 85 of the Treaty" (Article 3(1) of Regulation No 17) it has been a party to.

1.2 The Inntrepreneur Pub Company Limited (IPCL)

. The formation of IPCL was completed on 28 March 1991 as a joint venture in which the Australian brewing company Foster's Brewing Group (Foster's) and the UK manufacturer and distributor of branded food and alcoholic drinks GrandMet each owned 50%. This joint venture was part of a deal whereby GrandMet ceased its brewing activities. At that time, and until 4 December 1995, IPCL was named Inntrepreneur Estates Limited.

. IPCL owned approximately 8,450 on-licence premises on 28th March 1991. Since 1st November 1992, in compliance with The Supply of Beer (Tied Estate) Order 1989 (hereafter "the Order") and with the Undertakings given to the UK Government's Secretary of State for Trade and Industry in March 1991 (hereafter "the Undertakings"), IPCL has not held more than 4,331 tied on-licence premises. Pursuant to the Undertakings IPCL had to release by March 28 1998 any beer purchase ties on all on-licence premises which they then owned.

. In August 1995, Foster's sold its UK brewing interests, grouped in Courage to Scottish & Newcastle Plc (hereafter "S&N"). Following this sale, Courage was renamed The Inntrepreneur Beer Supply Company (hereafter "TIBSCO"). However, Foster's retained its holding in IPCL. TIBSCO is the nominated supplier for the purpose of the Leases and owns the contract to supply the IPCL estate until March 28, 1998. Scottish Courage, the brewing division of S&N, acts as TIBSCO's agent in the performance of the supply contract. The effect of this is that, until the end of this supply contract, IPCL has no choice in deciding the brands of beer for which its lessees are tied.

. The FSB considers that prior to August 1995 the relevant companies did have a choice in deciding which brands their lessees should stock and those companies had a direct responsibility to act in the best interests of the tied lessees. In fact, the FSB states, the companies acted in their own interests only by receiving a premium for their brewing assets.

. On February 19, 1997, the Department of Trade and Industry agreed to release IPCL from the Undertaking (hereafter "the Release"). Following this decision, IPCL can continue to tie their existing (and new) lessees, is allowed to operate managed houses (1), can own an unlimited number of pubs and does not need to offer new tenants the right to sell one brand of draught cask-conditioned beer of a specified type purchased other than from the company or its nominees (hereafter "the guest beer clause").

. The FSB states that the effect of not allowing lessees a guest beer further helps to foreclose the UK beer market.

. The IPCL estate currently comprises, according to IPCL, some 2,903 on-licensed premises or pubs following the acquisition in May 1996 of the beneficial interests in the freehold and leasehold properties of 1,410 pubs by Spring Inns Limited (Spring), a subsidiary of Royal Exchange Trust Company Limited (2). At 24 May 1997, 2,412 IPCL houses were let on long leases, principally of 20 years duration, and 490 houses were let on shorter term agreements of between 3 and 5 years or on temporary agreements. At the fiscal year end of 30 September 1996, the net income of IPCL was £114 million.

. On September 21, 1997, The Grand Pub Company Limited, a company set up by the Japanese investment bank Nomura, entered into an agreement to acquire IPCL and Spring. The sale is due to be completed by March 28, 1998.

2. The Inntrepreneur Lease

. The Inntrepreneur Lease is essentially a standard lease which is entered into between IPCL and most of its tenants (hereafter "the Tenant"). Most of the clauses in the Lease deal with the terms upon which the property ("the Premises") is let to the Tenant and include numerous covenants in respect of the Premises.

2.1 The "old" Lease

. The first kind of agreement IPCL (or, before its creation, one of its parent companies) introduced in 1989 was a long-term (20 years) Lease, on a Landlord non-repairing basis; with provision for investment by the Tenant; with the possibility of assignment by the tenant of the lease after 2 years, and the possibility for the Tenant to charge the lease in order to borrow. Rent reviews are every five years and upwards only, and the tenant has 100% retainment of slot/amusement machine income.

. Inntrepreneur may agree to an assignment before the above-mentioned two year period is lapsed at its sole discretion. The FSB indicates that this usually happens when faced with the imminent business failure of a lessee so that an assignment is a best option. The FSB points out that there is no reference to income from slot/amusement machines contained in the lease.

. Under the Lease, the company makes on-licence premises available to the Tenant for the period of the agreement. In return for this, the Tenant not only pays rent, insurance premiums, and is responsible for the repairs and upkeep of the Premises, but also accepts exclusive purchasing obligations in relation to certain specified beers. The relevant provisions of this agreement are as follows:

Beer

. The Tenant agrees, subject to the specific exceptions mentioned below, to purchase all his requirements of the following types of beer only from the company or its nominee (3): light, pale or bitter ale, export or premium ale, mild ale, brown ale, strong ale (including Barley wine), bitter stout or porter, sweet stout, lager, export or premium lager, also known as malt lager or malt liquor, strong lager, 'diat pils' (or premium low carbohydrate beer), low carbohydrate (or 'lite' beer), in leases concluded until 30.04.90 also low alcohol ale, and low alcohol lager; however, these types have been waived as from 01.05.90 as a consequence of the Order, in leases concluded after 30.04.90, another type was added: dry lager (these beers are henceforward referred to as 'specified types' of beers).

. The actual beers supplied to the Tenant by the company's nominated supplier (currently TIBSCO who has appointed Scottish & Newcastle as an agent) are specified in the company's price list which is an integral part of the agreement. This price list specifies not only the brand or denomination of each beer supplied, but also its type. The Tenant is obliged to purchase these brands or denominations of beer exclusively from the company or its nominated supplier.

. The company reserves the right to add to, delete or substitute the brands of beer that it supplies to the Tenant by amending the contents of its price list from time to time.

. The FSB points out that the information in the four above paragraphs is correct but the detrimental effect of this information does not appear to be fully appreciated by the Commission. Because the company can add, delete or substitute the brands of beer under their types at any time, and alter the supply price at any time, the lessees and the lessees' consumers have no place in determining the market. The company can sell its supply agreements to another brewer or even a non brewer, it can also sell to an inferior brewer. The FSB also gives an overview of the different companies involved since 1990, asks whether the Commission under such circumstances would sign an Inntrepreneur lease and refers to the short term interest of the new owner, Nomura.

. The FSB also believes that no large company should be allowed to receive an individual exemption from Article 85(1) if it supplies beer by type and that the current price list is not defined as Scottish Courage have different regional price lists.

. Should the company wish to introduce a brand of beer on to the price list which is not of a 'specified type', a new agreement is required in order that the Tenant be obliged to purchase that beer exclusively from the company. The FSB points out that this has never been done in practice. This is not disputed by the Commission. It means that the scope of the non-compete obligation in the tie has not been extended.

. The Tenant may sell any type of beer other than 'specified types' (4) if:
(i) it is packaged in bottles, cans or other small containers; or
(ii) it is in draught form and the sale of that beer in draught form is customary or is necessary to satisfy a sufficient demand from the tenant's customers.

Stocking Obligations

. The Tenant takes on an obligation to stock and expose for sale certain listed brands of wines, spirits and other drinks (non-beer drinks). This list may be varied by the company. There is however no obligation to buy any such non-beer drinks from or through the company and the Tenant may stock other brands as well.

Minimum purchasing obligation (hereafter "mpo")

. The Tenant is set a minimum beer barrelage purchasing obligation, generally agreed at 80% to 90% of the estimated barrelage, in each twelve month period, with such mpo to apply pro-rata for any shorter period of the term. If the company reasonably believes that the overall UK sales of beers in licensed premises has proved to be less than the average UK sales of beers in licensed premises during the corresponding period last occurring before the date of an individual Lease, the mpo shall for the following year be adjusted by this percentage.

. The Tenant must compensate the brewer for any shortfall in the level of purchases below the mpo. However, no shortfall is deemed to occur to the extent that it is caused by purchases of Guest Beer(s). IPCL undertook, by a unilateral partial waiver of 16 July 1993, to permit unspecified beers purchased from brewers other than Courage to be credited towards the achievement of the mpo. Furthermore, Inntrepreneur informed the Commission that it had suspended the mpo provisions in or around November 1994. However, evidence in the possession of the Commission shows that this was not consistently put into practice by the company.

. The FSB points out that the suspension of the mpo in 1994 was conditional. This is not disputed by the Commission.

Advertising

. The Tenant may only advertise goods supplied by undertakings other than the company in proportion to the share of those goods in the total turnover of the premises.

Amusement machines

. The agreement allows the Tenant freedom in the selection, installation and use of machines (subject only to UK statutory requirements). It also permits the Tenant to retain 100% of the resulting revenue.

. The FSB states that this is not correct as they are not aware that the freedom to install machines is part of the agreement.

Rent

. On the signing of the tenancy agreement, the parties set a particular level of rent to be paid by the Tenant to the company. Where an existing tenant switches from some other form of agreement to an Inntrepreneur Lease, the initial rent may be subject to arbitration. Alternatively the Tenant could, where applicable, seek a determination of the level of the initial rent in accordance with the provisions of the Landlord and Tenant Act 1954, which has applied to all tenancies since 11 July 1992, following the enactment of the Landlord and Tenant (Licensed Premises) Act 1990. Thereafter, the company has the right to review the rent every five years.

. The agreement provides that the reviewed rent payable shall be the higher of the rent payable in the preceding period and the 'open-market' rent, meaning 'the best annual rental obtainable by a willing landlord from a willing tenant', having regard to the terms of the agreement (i.e. including the tie). In the event of a dispute, a procedure is undertaken whereby a surveyor or valuer acting as an arbitrator is appointed jointly by Tenant and company to settle the matter. If the company and the Tenant fail to agree on such an appointment, the agreement provides for the dispute to be resolved by a person appointed by the President of the Royal Institution of Chartered Surveyors.

. The FSB states that this clause is not correct, as, in their opinion, the "tie" is not included in the assumptions under the rent review clauses.

. If a Tenant is released from the beer tie, the parties have to agree on an appropriate increase in the rent.

2.2 The new standard forms and the RetailLink changes

. Since the introduction in 1989 of the 20 year Lease, other standard forms of Leases have been introduced, notably the Fixed Term Agreement which is for a term of three years, the Turnover Related Agreement which is for a period of 10 years and long fully repairing and insuring leases for terms between 10 and 30 years.

. Following the introduction of RetailLink in February - March 1997, some changes have been introduced to the Inntrepreneur Lease by way of a Purchasing Agreement and a Deed of Variation, i.e. the "new" Lease. However, the "new" Lease is the subject of different proceedings and is thus not considered by the present decision. (5)

3. Procedural developments

. On 14 October 1997, IPCL withdrew all its notifications prior to 1st January 1997, i.e. all its notifications of the "old" Lease. This includes the notification of July 17, 1992 (Case IV/34.387/F3 - Inntrepreneur/GrandMet/Courage), for which a Notice pursuant to Article 19(3) was published (6), by which the then notifying parties requested, if the Commission would find Article 85(1) to be applicable and Regulation No 1984/83 to be inapplicable, a retroactive exemption pursuant to the date of introduction of the Inntrepreneur Lease.

. The FSB has formulated a series of questions on the above paragraph. They relate to procedural issues such as the possibility to withdraw notifications (Question 1), the consequences of such a withdrawal (Question 3), and access to documents (Question 5). Question 2 is linked to the presumption that the Commission is still in a position to apply Article 85(3), which is no longer the case, and Question 4 is about the length of time the Commission had to decide upon the request for exemption.

. Question 1 to 4 will be dealt with further below. With regard to access to documents, pursuant to Section II.D.1 of the Notice, published on 23 January 1997 (OJ No C 23/3), a complainant is entitled to be offered the opportunity to acquaint himself with the documents on which the Commission bases its position. The Commission's position is based, as results from Part "II. Appreciation" below, upon the withdrawal by Inntrepreneur of their request for exemption for the "old" Lease. Inntrepreneur's letter of withdrawal, dated 14 October 1997, has been sent to the complainant as an annex to the Article 6 letter.

II. APPRECIATION

1. Lack of Community interest

1.1 Concept

. The purpose of this section is to indicate the powers of the European Commission, the way these powers are exercised, the application of Articles 85 and 86 by national courts and the cooperation between national courts and the Commission. In doing so, explicit reference is made to the Notice on cooperation between national courts and the Commission in applying Articles 85 and 86 of the EEC Treaty (7) (hereafter "the Notice"). The Notice refers to case law of the European Courts, and, with respect to the concept of "lack of Community interest", particular reference is made to the Automec II judgment (8). This case law has been confirmed in later cases. (9)

. "The Commission is the administrative authority responsible for the implementation and for the thrust of competition policy in the Community and for this purpose has to act in the public interest. National courts, on the other hand, have the task of safeguarding the subjective rights of private individuals in their relations with one another." (paragraph 4 of the Notice) "In performing these different tasks, national courts and the Commission possess concurrent powers for the application of Article 85(1) and Article 86 of the Treaty." (paragraph 5 of the Notice) However, "Article 85(2) enables national courts to determine, in accordance with the national procedural law applicable, the civil law effects of the prohibition set out in Article 85." (paragraph 6 of the Notice) The Commission is in no position to determine such civil law effects. On the other hand, "the Commission has sole power to exempt certain agreements pursuant to Article 85(3)" (paragraph 7 of the Notice).

. "As the administrative authority responsible for the Community's competition policy, the Commission must serve the Community's general interest." (paragraph 13 of the Notice). The Notice made clear (paragraph 14) that "the Commission intends to concentrate on notifications, complaints and own-initiative proceedings having particular political, economic or legal significance for the Community. Where these features are absent in a particular case, complaints should, as a rule, be handled by national courts or authorities." In paragraph 15 the Commission indicated that "there is not normally a sufficient Community interest in examining a case when the plaintiff is able to secure adequate protection of his rights before the national courts and that in such circumstances the complaint will normally be filed."

. "In this respect the Commission would like to make it clear that the application of Community competition law by the national courts has considerable advantages for individuals and companies:
- the Commission cannot award compensation for loss suffered as a result of an infringement of Article 85 or Article 86. Such claims may be brought only before the national courts. Companies are more likely to avoid infringements of the Community competition rules if they risk having to pay damages or interest in such an event, [...
- before national courts, it is possible to combine a claim under Community law with a claim under national law. This is not possible in a procedure before the Commission. [..." (paragraph 16 of the Notice)

. It follows from the rationale of the Notice, as can be seen from the citations quoted above, that it is in the Community's general interest to avoid a duplication of procedures based on Community competition law between the Commission and the national courts. However, it is self-evident that the avoidance of duplication of procedures can only go so far as Community law would permit.

. For instance, when a request for an exemption is lodged at the Commission, there remains, in view of the sole power of the Commission to grant such a request, a Community interest for the Commission to deal with the case. In such a factual situation, a duplication of procedures cannot be excluded. In such circumstances, a cooperation between the national courts and the Commission is essential and the Notice offers some indications to deal with such situations.

1.2 Community interest in this particular case

. The factual situation so far with regard to the Inntrepreneur Leases which do not incorporate the Purchasing Agreement and the Deed of Variation (the "old" Lease) was that Inntrepreneur, by way of its notification of July 17, 1992, requested the Commission, inter alia, to grant a retroactive exemption pursuant to Article 85(3). Furthermore, the Commission has published a notice pursuant to Article 19(3) of Regulation No 17 indicating the Commission's intention to grant a retroactive exemption (see paragraph 39 above). In line with the guidance offered in paragraph 30 of the Notice, national judges could suspend their proceedings while awaiting the Commission's decision. This has been done, inter alia, by Mr. Justice Morris in the High Court of Justice - Chancery Division - on February 8, 1994 in the case of Inntrepreneur Estates (CPC) Ltd. and Courage Ltd versus Mr and Mrs Bayliss. In such a factual situation, and as long as the request for exemption for the "old" Lease was pending, there was, as stated in the above paragraph, a Community interest for the Commission to deal with the case.

. This factual situation has changed in view of Inntrepreneur's decision of October 14, 1997 to withdraw all notifications made before January 1, 1997, i.e. all notifications related to the "old" Lease, and in particular the notification of 1992 (paragraph 39 above).

. The notifying parties are entitled to proceed this way as, in the current procedural framework of EC competition law, it is the sole decision and responsibility of the notifying parties to decide whether or not to notify agreements (with a view of requesting an exemption pursuant to Article 85(3)) and, correspondingly, to decide whether or not they withdraw such an application.

. There is, following this withdrawal, no longer a request for exemption pending for the "old" Lease. When the notifying parties do not wish to proceed with their case, it is the Commission's practice not to examine whether the agreement could be exempted ex officio. The Commission is, therefore, not going to exempt the "old" Lease, not back to 1989, not for the period 1989-1997, not for the period January 1 to October 14, 1997, and not for the period after October 14, 1997.

. This means that the only remaining question with regard to the application of Community competition law to the "old" Lease, is whether or not Article 85(1) is applicable.

. This is a question which the national court is in a position to decide. It can be added that the national court can take into account some factual and legal elements which the Commission has made public on earlier occasions. With regard to a general market description, reference can be made to the earlier mentioned 19(3) notices for the "old" and "new" Inntrepreneur lease and to similar such notices in the Bass (10), Whitbread (11) and S&N (12) cases. As to the legal point of the applicability of Article 85(1) to the "old" Lease, the most recent indirect guidance can be taken from the Commission's intention indicated in the earlier mentioned Inntrepreneur 19(3) notice for the "new" lease to grant an exemption to the "new" Lease.

. Furthermore, in the event that the national judge finds that Article 85(1) is applicable, he is in a position to determine the civil law effects following from the prohibition set out in Article 85(2). The national judge, and he alone, can decide such issues as the severability or not of a particular clause found to be falling foul of Article 85(1) from the rest of the agreement. Furthermore, he can distinguish, as to the civil law effects resulting from the applicability of Article 85(1), between those Tenants who have entered into the Purchasing Agreement and Deed of Variation and those who have not. The judge can also award compensation for loss suffered as a result of an infringement of Article 85. Furthermore, the national court could deal at the same time with claims under national law, such as "misrepresentation" claims which, according to information in the possession of the Commission, have already been made by several Inntrepreneur tenants before the national courts.

. The FSB states in the reply to the Article 6 letter that "as complainants we are not seeking subjective rights or claims against Inntrepreneur as private individuals. The writers of this response (Messrs Horan and Charleson) can confirm that at present they have no legal claims or claims for compensation against Inntrepreneur or its associated companies. As complainants we are simply asking the Commission to make a decision, yes or no, as to the Inntrepreneur agreement. We ask this of the Commission because no other authority has the power to do so and because it is the Commission's responsibility."

. The statement in the above paragraph indicates that some of the complainants do not wish to claim a particular interest before the national courts with regard to the applicability of Article 85(1) to the Lease. This would not change the above conclusion with regard to the absence of Community interest for the Commission to rule upon the complainant's request that the "old" Lease has infringed Article 85(1) since the date of its introduction.

1.3 Conclusion

. The Commission considers that there are insufficient grounds for granting the complainant's application as, in the absence of a request for exemption pursuant to Article 85(3), it would lead to a duplication of procedures and is therefore not in the Community interest for the Commission to rule upon the complainant's request that the "old" Lease has infringed Article 85(1) since the date of its introduction.

. The complaint against the OFT and the OFT report is inadmissible. In its capacity as author of the OFT report, the OFT is not an undertaking in the sense of Article 85, nor has the complainant identified the "infringement of Article 85 of the Treaty" (Article 3(1) of Regulation No 17) the OFT has been a party to.

(1) An on-licensed premise or pub where the operator is an employee of the company, instead of an independent tenant or lessee

(2) According to IPCL, Spring has the right at any time to give notice to the relevant IPCL subsidiary that it wishes to complete the transfer of the legal title to any person Spring may nominate

(3) Subject to the right of the [existing - see paragraph 11 as to the situation for new tenants Tenant, pursuant to the guest beer clause.

(4) This right is subject to compliance with the more detailed provisions of the lease which set out the precise circumstances in which the tenant may sell types of beer other than 'specified types'.

(5) See the 19(3) Notice for the "new" Lease in OJ C 374, 10.12.1997, p. 11.

(6) OJ C 206, 30.7.1993, p. 2.

(7) OJ C 39, 13.2.1993, p. 6.

(8) Case T-24/90, Automec v Commission, judgment of 17 September 1992, ECR 1992, II-2223.

(9) Case C-91/95 P, Tremblay and Others v Commission, judgment of 24 October 1996, ECR 1996, I-5547, confirmation of Case T-5/93, judgment of 24 January 1995, ECR 1995, II-0185.

(10) OJ C 285, 9.11.1988, p. 5 and its corrigendum OJ C 324, 17.12.1988, p. 16 for the "traditional tenancy agreements and OJ C 36, 3.2.1998, p. 5 for the standard leases.

(11) OJ C 294, 27.9.1997, p. 2.

(12) OJ C 8, 13.01.1998, p. 4.

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