Abuse of a dominant position via licence terms
The UK Office of Fair Trading (OFT) has been investigating alleged anti-competitive behaviour by a software supplier in relation to restrictive contractual provisions imposed within its software licences.
Background:
- The investigation is under Chapter II of the Competition Act 1998 and Article 102 of the EU Treaty and relates to a company called epyx Limited (E) and its conduct in the market for the supply of computer based service, maintenance and repair (SMR) platforms (SMR platforms) in the UK.
- SMR platforms are online trading platforms that facilitate electronic trading between businesses with vehicle fleets and their supplier networks. They are used by companies who manage the SMR requirements of vehicle fleets (such as leasing companies, rental companies and corporate fleets) to procure SMR services for these vehicles from other businesses (such as vehicle dealers, fast-fit outlets and garages). E supplies the 1link Service Network SMR platform and it has become the industry standard SMR platform in the UK.
- The companies who buy and the suppliers who sell SMR services are referred to as 'buy-side' customers and 'supply-side' customers respectively. SMR platforms are two-sided in that they connect these two groups (the demand-side and the supply-side) and allow them to transact business. It is a form of online procurement platform and is intended as a one-stop platform.
Complaint:
- A complaint against E alleged an abuse of a dominant position. The OFT considered that certain provisions in E's contracts may restrict its SMR platform customers - particularly those that manage vehicle fleets - from evaluating, developing, marketing and using alternative systems, and may therefore raise barriers to market entry by potential competitors.
E's contracts:
- E’s contracts contained provisions which prevent testing and evaluation of alternative systems and restrict independent development and sponsorship of the development of alternative systems. Often buy-side customers desire to use a single procurement platform only. Supply-side suppliers on the other hand will often use multiple systems in order to be able to do business with and comply with the platform choice made by their buy-side customers. There are significant barriers to entry – especially the need to develop a sizeable user community on both sides of the transaction. Supportive, larger buy-side customers are therefore vital to the success of any new entrant.
- Buy-side contracts - These contracts are generally based on E’s templates and are often subject, as one might expect, to a fairly high degree of negotiation given the size and buying power of the customers. However, they seemingly
frequently retain key restrictions from the original template. The offending provisions here included:
- ‘use and/or development’ restrictions:
- to process all service and maintenance transactions through the platform’;
- ‘not to develop, use, market or support the sale of any alternative systems’;
- minimum annual fee provisions (even if the fee calculated per transaction would be less – effectively a quantity commitment with a ‘shortfall’ fee being charged); and
- duration provisions - minimum terms of three to five years with notice periods of between three and 36 months.
- ‘use and/or development’ restrictions:
- Supply-side contracts -
These are much more typically ‘standard form’ with little or no negotiation. The offending provisions here included:
- use restrictions - obligation to process all SMR transactions with E’s buy-side customers through E’s platform; and
- development restrictions - prohibition on developing, marketing or supporting the sale of alternative systems including a prohibition on development for five years following the termination of their subscription.
- Apparently E has, prior to this investigation, unilaterally phased out the development restrictions from its latest supply-side contracts.
The Findings:
- The OFT has taken the view that the supply of SMR platforms in the UK represents a ‘separate relevant market’ for competition law purposes. E’s platform is regarded as the ‘industry standard’ platform in the UK and there are no alternatives which offer the same functionality or access to such a broad range of customers.
- The barriers to entry in the relevant market mean that E faces a limited degree of potential competition in the foreseeable future. The contractual provisions referred to are considered to be capable of creating or re-enforcing exclusivity or in effect exclusivity in the relevant market. The provisions raise the barrier to customers ‘switching’ and may prevent the emergence of alternative systems.
The Undertakings:
- In the light of these findings, E has therefore agreed to provide the OFT with certain undertakings in order to avoid any further regulatory action. E intends, upon acceptance of these undertakings, to implement them by submitting variations (to existing customer contracts) within two weeks of the undertakings being accepted. This was thought to be sufficient in a relatively small market to meet the concerns identified by the OFT particularly where the supplier had invested significant sums in developing a new service.
- As a result all of E’s customers will be able to:
- discuss alternative systems with third parties;
- evaluate and test alternative systems;
- disclose when their contract is coming up for renewal;
- promote the use of alternative systems;
- develop their own alternative systems including collaborating with any third party.
- Buy-side customers:
- minimum length of contract will be reduced (a maximum initial term of 12/18 months);
- notice requirements will be cut (three months to take effect at the end of the minimum term or the end of the current contract year);
- will be permitted in some circumstances to use alternative systems in parallel (particularly in the run up to the end of a contract or any renewal);
- will be entitled to reasonable technical support from E during any transition period.
- Supply-side customers:
- will be entitled to use an alternative system where dictated by an E buy-side customer in line with their new freedoms as outlined above;
- will continue to be able to use alternative systems to process any transaction with a buy-side party which is not an E subscriber.
- It was accepted by the OFT that a degree of exclusivity as now permitted following these undertakings does not give rise to major competition concerns provided that the exclusivity is relaxed around the time when the customer is able to terminate the exclusive contract (as is now envisaged by the proposed undertakings).
- The OFT sought views on the proposed undertakings from interested parties. The consultation has been closed and it remains to be seen what the final form of the undertakings looks like.
Points to note:
- This situation is obviously comparatively unusual and does not apply to the vast majority of software licences or software based services. However, what this investigation does highlight is that in particular circumstances, contractual restrictions in software licences or other IT arrangements can be anti-competitive and need to be carefully considered.
- Whilst undertakings may have been regarded as being sufficient here that may not necessarily be the case in other circumstances in the future where a supplier is regarded as being in a dominant position. It must be remembered that abuse of a dominant position under competition law can give rise to very substantial fines and liability in damages where third parties have been adversely affected.