Date: Fri, 12 Oct 2001 15:00:16 +0100 (BST) From: Michael Brown To: enquiries.competitionact@oft.gov.uk Subject: NHS / MS block licensing deal Dear Sir / Madam, I understand that the NHS is planning to negotiate a block licensing deal with Microsoft. I have a few questions: 1. Will this contract be put out to tender as required under EU law for any deal over £150,000? If so, what will the tender specify as requirements? The requirement cannot be for specifically Microsoft software licences, as this would obviously preclude all but one supplier and would therefore be anti-competitive. 2. Have the competition implications been considered? If this deal goes through, then Microsoft software will effectively become cost-free to users within the NHS. This will lock out any alternative suppliers and will therefore be anti-competitive. 3. Is the Government aware of the political risks of entering into a high-profile, potentially anti-competitive deal with Microsoft at a time when the company has been found guilty of anti-competitive practices in its own country and looks set to suffer a similar verdict by the EU? 4. Does the £70m deal represent best value? If so, where is the evidence; if not, then why is the deal being considered? Have any alternatives been evaluated? Sincerely, Michael Brown Managing Director, Fen Systems Ltd. ------------------------------------------------------------------------------ Date: Tue, 13 Nov 2001 14:35:57 +0000 From: Darren Eade To: mbrown@fensystems.co.uk Subject: NHS/MS Block licensing deal Parts/Attachments: 1 Shown ~9 lines Text 2 116 KB Application ---------------------------------------- Dear Mr Brown, Please see the attached reply to your e-mail of 12 October 2001. I am sorry for the delay in replying. Regards, D J EADE [ Part 2, Application/MSWORD 154KB. ] Dear Mr Brown, Thank you for your e-mail of 12 October addressed to the OFT enquiry point. You are concerned about the new software licensing deal between the National Health Service (NHS) and Microsoft Limited. You contend that the contract was not put out to open tender and that the agreement is likely to have a detrimental effect on competition. As you may already know, the Director General of Fair Trading (the Director) has responsibility for enforcing competition policy in the UK. The principal piece of competition legislation available to him is the Competition Act 1998 (the Act). The Chapter I prohibition prohibits agreements between undertakings that may affect trade within the United Kingdom (UK) and have as their object or effect the prevention, restriction or distortion of competition within the UK. The Chapter II prohibition prohibits conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market if it may affect trade within the UK. The Act gives the Director powers to investigate if there are reasonable grounds for suspecting that an undertaking is infringing either of the prohibitions and powers to impose fines up to a maximum of 10% of turnover. The Public Procurement Rules are embodied in a number of EC Directives. These collectively regulate the award of contracts by public authorities, bodies governed by public law and private undertakings operating in the utilities sectors on the basis of special or exclusive rights granted by Member States. The aim of the public procurement rules is to co-ordinate national award procedures for contracts above a minimum threshold throughout the EU so as to introduce transparency, non-discriminatory and fair and open competition in all Member States for the award of public contracts. As such, the NHS is subject to these EC Directives. There are legal consequences for a contracting authority if it is held by a court to have breached the public procurement rules. For example, under the Remedies Directive and the implementing regulations, the European Court of Justice has power to review the award of the contract and may award a number of remedies including (I) a declaration that the contract is void, (ii) an order varying the contract, and/or (iii) an award of damages to any person harmed by an infringement of the public procurement rules. As such, the procurement rules fall outside of the Director's jurisdiction. Accordingly, the Director cannot rule on whether there has been any breach of the EC procurement rules. Allegations of breaches of the EC procurement rules are for the consideration, in the first instance, of the European Commission. As regards the Act, the Act applies to agreements between undertakings (Chapter I) or the conduct of undertakings (Chapter II). Pursuant to section 60 of the Act, the definition of an undertaking depends on the case law of the European Court of Justice. In Höfner & Elser[1], the European Court of Justice said: 'in the context of competition law,...the concept of an undertaking encompasses every entity engaged in an economic activity, regardless of the legal status of the entity and the way in which it is financed'. As such, the NHS could be an undertaking when it is engaging in economic activity but will probably not be acting as an undertaking when it is exercising its 'public interest-type' functions. The NHS will not, therefore, be an undertaking for the purposes of the Chapter I and II prohibitions to the extent that they are purchasing services for the purpose of improving healthcare services for the benefit of society in general using monies raised by taxation. To summarise, while Microsoft Limited is undoubtedly and undertaking for the purposes of the Act, the NHS is unlikely to be an undertaking. As such, there is not agreement between undertakings for the purposes of the Chapter I prohibition. Further, as the NHS is not an undertaking there can be no breach of the Chapter II prohibition by the NHS. As regards Microsoft Limited and the Chapter II prohibition, it is the abuse of a dominant position that infringes the Chapter II prohibition not being dominant in a particular market or markets. As the alleged abuse is that of the NHS (for failing to put the contract for software services out to competitive tender) there are no reasonable grounds for suspecting that the Chapter II prohibition has been infringed by Microsoft Limited in this particular case. You will appreciate that this is a preliminary view of officials based on some limited facts and that this view neither binds the Director nor is a substitute for statutory guidance on the application of the Act. Nevertheless I hope that the comments in this letter help to explain the Office's view in relation to the issues you have raised. I am sorry that I cannot send you a more helpful reply. It is not that the matters you have raised are not important but that they do not fall within the jurisdiction of the Director for the reasons given. Yours sincerely D J EADE Competition Enforcement Division 5 [1] Höfner & Elser -v- Macrotron case C-41/90 [1991] ECR I-1979 at paragraph 21. ------------------------------------------------------------------------------ Date: Wed, 14 Nov 2001 02:48:54 +0000 (GMT) From: Michael Brown To: Darren Eade Subject: Re: NHS/MS Block licensing deal Thank you for your reply. > In Höfner & Elser[1], the European Court of Justice said: > 'in the context of competition law,...the concept of an undertaking > encompasses every entity engaged in an economic activity, regardless > of the legal status of the entity and the way in which it is > financed'. > As such, the NHS could be an undertaking when it is engaging in > economic activity but will probably not be acting as an undertaking > when it is exercising its 'public interest-type' functions. The NHS > will not, therefore, be an undertaking for the purposes of the Chapter > I and II prohibitions to the extent that they are purchasing services > for the purpose of improving healthcare services for the benefit of > society in general using monies raised by taxation. To summarise, > while Microsoft Limited is undoubtedly and undertaking for the > purposes of the Act, the NHS is unlikely to be an undertaking. As > such, there is not agreement between undertakings for the purposes of > the Chapter I prohibition. Further, as the NHS is not an undertaking > there can be no breach of the Chapter II prohibition by the NHS. Does the fact the the NHS is "purchasing services...using monies" not qualify it as an undertaking? It seems to me that purchasing is, by definition, an economic activity. You could argue that the NHS is exercising purely its 'public interest-type' functions while *providing* the healthcare services but I don't see that there are any grounds for claiming that *purchasing* items or services is not an economic activity. The fact that the monies are raised by taxation is surely irrelevant to the argument, since the definition of an undertaking is "regardless of the legal status of the entity and the way in which it is financed". It is also dubious to claim that the services in question were purchased for the sole purpose of "improving healthcare services for the benefit of society in general". Is it possible to show a direct way in which these purchases provide an improved healthcare service? The closest link I can think of is that, allegedly, the purchases represented an overall cost saving which, it could be argued, frees up more public money to be spent on providing an improved healthcare service. This is an indirect link and, possibly more importantly, it is a purely economic case. This would therefore, one presumes, constitute an economic activity and so the argument is reduced ad absurdum. I contend that the NHS is engaging in an economic activity when it makes a purchasing decision. Consequent to this, I contend that the NHS is an undertaking as defined in Höfner & Elser. As you say, there is no debate on the status of Microsoft Limited; it is clearly an undertaking. I also contend that one effect of this purchasing decision is the distortion of competition within the UK (as the action has significantly raised the barrier to competitors attempting to sell to the NHS, which is a large economic entity). Therefore, I contend that there are reasonable grounds for suspecting that one or both of the NHS and Microsoft Limited is/are infringing the Chapter I prohibition, and thus the Act gives the Director powers to investigate. I look forward to hearing your views on these points. Regards, Michael Brown Fen Systems Ltd. ------------------------------------------------------------------------------ Date: Mon, 19 Nov 2001 14:53:11 +0000 From: Darren Eade To: mbrown@fensystems.co.uk Subject: Re: NHS/MS Block licensing deal Parts/Attachments: 1 Shown ~12 lines Text 2 117 KB Application ---------------------------------------- Dear Mr Brown, Thanks for your further e-mail. A substantive reply is attached to this e-mail which, I hope, helps explain in more detail the OFT view and how we arrived at it. The question is not one of politics but of jurisdiction. In this context, we are required by the Act to be consistent with European case law precedent. Regards, D J EADE [ Part 2, Application/MSWORD 156KB. ] Dear Mr Brown, I refer to your e-mail of 14 November in reply to my e-mail of 13 November. In summary, you contend that the National Health Service (NHS) is an undertaking for the purpose of the Competition Act 1998 (the Act) and that as such the Director General of Fair Trading (the Director) has the necessary jurisdiction to investigate the NHS's arrangements with Microsoft under the Chapter I prohibition. To explain further why the Office takes the view that the NHS is not an undertaking for the purpose of the Act, when purchasing software services, it might be helpful to set out in more detail our reasoning for reaching this view. In my previous e-mail I referred to the case of Höfner & Elser[1]. I argued that the NHS would not be an undertaking when it is exercising its 'public interest-type' functions to the extent that it purchases services for the purpose of improving healthcare services using monies raised by taxation. You, quite correctly, contended that the fact that money is raised by taxation is irrelevant in terms of defining whether a party is an undertaking. I referred to monies raised by taxation only to illustrate that the nature of the transaction has a public interest dimension. In this context, the purpose of the NHS is to provide healthcare services to the population in general. Further, the Secretary of State for Health has a duty under the National Health Service Act 1977 to continue the promotion in England and Wales of a comprehensive health service, and for that purpose to provide or secure the effective provision of services; these services are of general benefit to society as a whole and must be provided free of charge except in so far as the making and recovery of charges is expressly provided for by statute. To explain our view further as to why we take the view that the NHS is not an undertaking in relation to your particular complaint, in Poucet & Pistre[2] the European Court of Justice, commenting on a case involving a public social security system, stated that: 'The Court has held (in particular in Höfner & Elser) that in the context of competition law the concept of an undertaking encompasses every entity engaged in an economic activity, regardless of the legal status of the entity and the way in which it is financed. Sickness funds, and the organisations involved in the management of the public social security system, fulfil an exclusively social function. That activity is based on the principle of solidarity and is entirely non-profit making.' As such, the principle of solidarity (i.e. that fact that the services available to a person under the NHS bear no relationship to the amount (if any) contributed by that person to the NHS by way of taxes or National Insurance contributions) and the fact that the body in question fulfils a purely social function is central to the question as to whether or not that body is an undertaking. As such, whether this might involve the purchase of, say, a renal dialysis machine or the necessary computer software services required for the general purpose of helping to run the NHS is irrelevant if the purpose in both cases is to facilitate the overall objective of the NHS - the provision of free healthcare services to society as a whole. You should be aware that there is an exclusion from the Act for undertakings entrusted with services of general economic interest in so far as the Chapter I or Chapter II would obstruct the performance, of the particular tasks assigned to the undertaking in question. Also, the Secretary of State may by Order exclude for reasons of public policy agreements from the application of the Chapter I prohibition. The Office has not considered whether the exclusions are applicable or not in this case given that our current view is that the NHS is not an undertaking for the purposes of the Act. The issue is not one of policy or lack of political will but one of establishing jurisdiction under the Act. As previously noted, this is just a view and neither binds the Director nor is it a substitute for statutory guidance on the application of the Act. The Office is, of course, receptive to alternative views on this jurisdictional issue and would reconsider its preliminary view on jurisdiction in the light of further arguments views suggesting that the NHS should be regarded as an undertaking in these particular circumstances. I hope that my further comments help to explain the Office's view in relation to these issues Yours sincerely D J EADE Competition Enforcement Division 5 [1] Höfner & Elser -v- Macrotron case C-41/90 [1991] ECR I-1979 at paragraph 21. [2] Poucet -v- Assurance Générales de France & Another and Pistre -v- Caisse Autonome Nationale de Compensation joined cases C-159/91 and C-160/91, [1993] ECR I-631. ------------------------------------------------------------------------------