Irish Competition Authority Decisions

1. Dublin Institute of Technology, acting on behalf of an association of 14 third-level educational institutions, notified joint purchasing arrangements and a draft Agreement for the development and supply of computer software on 30 January 1998, with a request for a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Authority to issue a certificate, a licence under Section 4(2).

2. The notified agreement relates to the joint purchasing of software and services for Management Information Systems by fourteen third-level institutions. The Department of Education and Science has made available £5.9 million to upgrade college software on a common basis in the participating institutions. These institutions have established an ad-hoc association to negotiate joint terms for the purchase of Information Technology (IT) software on their behalf and have delegated one of their number, the Dublin Institute of Technology, to manage the contract award process. The contract has been advertised in the Official Journal of the European Union. The closing date for receipt of tenders was 19 December 1997. The award process is intended to result in common terms being determined with suppliers/service providers covering matters such as price and performance characteristics for a range of nine packages. It is envisaged that, once the contract award process has been completed, a “Master Contract” will be entered into on common terms by all of the institutions and all of the suppliers/service providers. The terms of the Master Agreement have not yet been finalised as they will emerge from the contract award process.

3. The parties to the joint purchasing agreement are the following third-level educational institutions:

i. RTC Athlone

ii. RTC Carlow

iii. RTC Cork

iv. Dublin Institute of Technology

v. RTC Dundalk

vi. RTC Dun Laoghaire

vii. RTC Galway

viii. RTC Letterkenny

ix. RTC Limerick

x. RTC Sligo

xi. RTC Tallaght

xii. Tipperary Rural and Business Development Institute

xiii. RTC Tralee

xiv. Waterford Institute of Technology.

The ad-hoc association mentioned in paragraph 2 above has no separate legal personality or existence and there is no written Association Agreement.

4. The relevant product/service market is that for business and administrative software and software services. This is a very large market. It is also a global market, since software products such as Microsoft Windows or Lotus Notes are developed for global application and require only slight modification or “localisation” (for example, language translation) in order to be saleable in local markets. Services may be provided either locally or from a centralised support centre serving a number of countries. The Authority therefore considers that the geographical market is at least the State.

5. The major providers/suppliers of such software internationally include major multinational companies such as Microsoft, Lotus, Corel, CAP Gemini and Novell. The major providers/suppliers of such software in Ireland include the above, plus a number of Irish producers who include Kindle, Saville Systems, Baltimore Technologies, CBT Group, Trintech, QFS and Iona Technologies.

6. The value of software exports from Ireland in 1996 was estimated at IR£3bn in 1996 [1]. The total output of indigenous Irish software companies is expected to reach IR£1bn by the year 2000 [2]. Consumption of IT goods (hardware and software) and services in Ireland is estimated at up to IR£700m for 1997 and expected to rise to IR£904m by the year 2000. Of these totals, software and services (which are the subject matter of the notified agreement) accounted for up to IR£319m in 1997, rising to IR£395m by the year 2000 [3]. While this consumption can be broken down into different sectors, such as finance/business/service, manufacturing, education/health/public administration, etc., these categories do not necessarily reflect different categories of goods or services but rather different applications.

7. The annual IT purchases (comprising hardware, software and services) of the member institutions of the Association are currently estimated at IR£5.7 million. This represents 0.8% of the total Irish market for hardware, software and services, or 1.8% of the market for software and services only. The arrangements which are the subject of the notified agreement will cover purchases amounting to approximately IR£5.9m over three years. This represents an annual value of about IR£2m or 0.6% of the Irish market.

8. The notified agreement is an unwritten joint purchasing agreement among the fourteen third-level educational institutions named in paragraph 3, above. Form CA states that there are no parties other than members of the Association, and describes the arrangement as “an Association to negotiate joint terms for the purchase of IT software on behalf of a number of Third Level Educational institutions.” The details annexed include a draft Agreement for the Development and Supply of Computer Software, between the Contractor (to be appointed) and the Customers (the third-level educational institutions).

9. Clause 4 of the Development and Supply Agreement states that the Customers shall purchase, and the Contractor shall sell, the systems, goods and services indicated at the Second Schedule (“Committed Purchases”) in accordance with the terms of the Agreement. The Customers are entitled, but not obliged, at any time within three years of the date of commencement of the agreement, to purchase the systems, goods and services indicated at the Third Schedule (“Optional Purchases”) in accordance with the terms of the Agreement. Clause 4 also states that:

“It is further agreed, for the avoidance of doubt, that the Customers shall for the duration of this Agreement be free to purchase Systems, goods and services of the same or similar kind (as those indicated at the Third Schedule hereto) otherwise than from the Contractor [up to a limit of IR£[ ] per Customer per annum, limits non-assignable].”

10. The notifying party stated that it was intended that all member institutions would sign a Master Agreement with the successful suppliers/service providers, based on the notices published, the Tender Documentation and the proposals received from tenderers. The precise terms of this agreement were thus yet to be finalised, although outline Heads of Agreement were in course of preparation based on normal commercial terms. The Master Agreement would stipulate a minimum committed purchase and provide for optional additional purchases on the agreed terms over the lifetime of the agreement. The optional additional purchases would be at the discretion of the individual member institutions. The Master Agreement would contain no extraneous stipulations and would be a normal purchasing contract in all respects saving only that:

- it would involve a group of purchasers;

- it would contain a minimum committed purchase and a range of optional additional purchases;

- it would be exclusive on the purchasers’ part within the scope of the project (which was defined by the availability of a specific finance package from the Department of Education and Science); and

- it would operate for up to three years, which was itself a normal life span/product cycle for purchases of this type.

11. The notifying party stated that the Master Agreement would restrict buying/selling prices for IT software services only insofar as the Association would determine prices for purchases covered by the agreement and prospective service providers had been asked to abstain from contacting member institutions directly in relation to the same matters until the tender procedure was completed. This was necessary to ensure compliance with European Public Procurement Directives. It was envisaged that the tender procedure would result in a single service provider being identified as the most competitive candidate. However, it was also possible that different service providers would be identified as the most competitive candidates for different lots, of which there were nine described in the tender documentation. The Master Agreement would be non-exclusive insofar as its scope would be defined by the availability of the specific project funding from the Department of Education and Science. The member institutions would thus retain the freedom to purchase similar software outside of the scheme (from other suppliers/service providers) without the benefit of the specific departmental funding.

12. The notifying party argued that the arrangements would be eligible for a certificate because the members of the Association were non-profit-making organisations and so were not “undertakings” within the meaning of the Competition Acts. The formation of the Association and the aggregation of purchases was a consequence of the need to comply with Directive 92/50/EEC (procurement of services) which was formulated to promote competition and transparency in purchasing. The object of the arrangements was to secure the cost-effective purchase of suitable software, and therefore not to prevent, restrict or distort competition in the State. The effect on competition would not be significant as the Association would be formed simply to co-ordinate purchases relating to a single discrete project and would not affect general purchasing by the parties, even in the IT area.

13. The notifying party further argued that there was no separate market for academic software insofar as system requirements might largely be met by adapting existing general-purpose programmes or otherwise by producers of existing general-purpose programmes. They argued that the correct product-market definition was “business and administrative software and software services in the English-speaking world”. This general market was so large that the impact upon it of the members of the Association was infinitesimal. Notwithstanding the above contention on market definition, the total annual IT budgets of the participating institutions represented only a minor percentage of the annual Irish market for relevant goods and services, and the affected purchases represented an even smaller percentage. None of the parties to the Agreement would be compelled to purchase in accordance with the terms agreed by the Association, nor would any of the existing or prospective service providers/suppliers be compelled to deal with the Association, outside of the scope of this specific IT project.

14. Finally, the notifying party argued that the collective bargaining power of the parties to the agreement would not be significantly greater than that of any of the prospective service providers/suppliers and would in fact be considerably less than that of many. All of the existing or prospective service providers/suppliers would be free to tender for the project on equal terms and in accordance with an advertised objective procedure conducted in accordance with the Services Directive 92/50/EEC. If desired, intellectual property rights in new software could be owned and controlled by the developers who would then license it to the “purchasing” members of the Association. The developers would then remain free to exploit it in future. All intellectual rights in existing software (which would also be purchased by members of the Association) would almost certainly continue to be owned and controlled by the existing software owners and the purchasers would similarly receive only a licence in standard form.

15. The notifying party also submitted arguments in support of the granting of a licence, if a certificate were to be refused. As the Authority does not consider these arguments relevant, they are not reproduced here.

16. The Authority asked the notifying party to clarify whether suppliers were in fact prevented from negotiating directly with members of the association in respect of this specific project only. The notifying party replied in writing that “The notified arrangements are such as to prevent suppliers from negotiating directly with Members of the Association in respect of this project only (which restriction is imposed by the European Public Procurement Directives). The notified arrangements will not restrict suppliers from dealing directly with members of the Association in respect of any other purchases of information technology hardware, software or services.” They also confirmed that appropriate amendments would be made in all supporting documentation, which had not yet been finalised.

17. Section 4(1) of the Competition Act, 1991 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 goods or services in the State or in any part of the State are prohibited and void.”

18. Section 3(1) of the Competition Act, 1991 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.” The notifying party has claimed that the members of the Association (i.e. the various third-level educational institutions) are not “undertakings” within the meaning of the Competition Acts as they are non-profit making institutions. According to the judgement of the Supreme Court in the VHI case, however, as delivered by Finlay C.J., the words “for gain” connote merely an activity carried on or a service supplied, as in this case, which is done in return for a charge or payment. In its decision on Athlone RTC/Bank of Ireland [4], the Authority found that Athlone RTC, which was engaged in the provision of the services of third-level education and research for which it received revenue by way of fees, was an undertaking. Indeed, Athlone RTC so described itself in its submission to the Authority in relation to that agreement. In the present case the fourteen members of the Association are all engaged in the provision of such services and all charge fees for such services. They are all therefore undertakings.

19. The joint purchasing agreement is therefore an agreement among undertakings, since there are no parties to it other than members of the Association. This agreement is unwritten but its terms are implicit in the information supplied with the notification and in certain terms of the draft “Agreement for the Development and Supply of Computer Software”, notably in Clause 4. The agreement has effect within the State.

20. The primary feature of the Agreement is that it is a joint purchasing agreement which is exclusive within the terms of a specific project defined by the availability of funding from the Department of Education and Science. The Authority has previously considered the issue of group buying in its decision on Musgraves [5]. In that decision, the Authority noted that the standard SuperValu licence agreement, while essentially concerned with exclusive purchasing, also involved elements of group buying. In coming to the conclusion that the arrangements offended against Section 4(1), the Authority made it clear that the proportion of the market affected by the group purchasing decision was a significant factor in assessing the impact on competition of the arrangements.

21. The European Commission has made a number of important decisions in the area of joint purchasing. In its decisions it has emphasised the importance of the amount of the market which is covered by the joint purchasing scheme, and of the freedom of group members to make purchases otherwise than through the group or association. In the Intergroup decision [6], the Commission found that Article 85(1) of the Treaty of Rome did not apply to an arrangement whereby an intermediary known as Intergroup acted on behalf of national SPAR chains in concluding supply contracts for goods. The object of the arrangements was to enable Intergroup customers, and particularly the SPAR chains, to carry out joint imports under identical purchasing conditions more favourable than those they would have received had they imported separately. Accordingly, the Commission stated, the object of the agreements was to confront suppliers with a combined single order from purchasers, who thereby held a stronger position resulting, not from their strength as individuals, but from the fact that they were operating together.

22. The volume of purchases made via Intergroup accounted for approximately 2.4% of imports of these products into the member state of destination. The total volume of imports carried out by each SPAR chain through or after negotiation by Intergroup represented between 0.06 and 0.89% of the total turnover of foodstuffs for all wholesalers affiliated to SPAR chains. The turnover on foodstuffs for all wholesalers affiliated to each SPAR chain represented between 0.02 and 3.82% of the total turnover of the foodstuffs retail trade in the member countries of the EEC.

23. In its decision, the Commission noted that the SPAR chains were free not to use Intergroup’s services when making purchases, and that, when availing themselves of those services, they were in any event free to determine their prices and resale terms without being subject to any form of co-ordination by Intergroup in respect of the marketing of the goods. The Commission also noted that the agreements did not have any substantial effect on competition, since imports effected by the SPAR chains through or after negotiation by Intergroup represented only a small part of their turnover, and because purchases effected or negotiated by Intergroup accounted for only a relatively small proportion of the total turnover in the retail food trade in each of the EEC member countries.

24. The Commission also considered group purchasing in its decision on the National Sulphuric Acid Association [7]. In that case the Commission found that the rules of a joint buying pool for the purchase of sulphur infringed Article 85(1) of the Treaty but exempted the arrangements under Article 85(3). Under these rules, each member was required to purchase at least 25% of its sulphur requirements from the pool. The Commission stated that:

“Each member of the Pool, to the extent he is committed to purchasing through the Pool, is prevented from competing with other Pool members to obtain more favourable terms from the suppliers than those obtained by the management committee”.

“To whatever amount the member is committed, he is deprived of the choice to negotiate terms and conditions with the suppliers which could include, as regards e.g. length of contract and rebates, those terms which would meet the needs of the individual member concerned more specifically than could be obtained by a body acting for a variety of sulphur users with widely varying requirements.”

25. The Commission also noted the effect of such arrangements on suppliers, stating that, because Pool members were committed to purchasing through the Pool, suppliers in the Community were excluded from selling directly to those members and therefore at least 21% of all sulphur imported by UK acid-makers would be supplied to one outlet, i.e. the Pool.

26. In the case of the notified agreement, the project is of a limited duration. The size of the project is also restricted by the funding available, to IR£5.9 m over three years. This represents an annual value of about IR£2 m or 0.3% of the total Irish market of IR£700m for hardware, software and services in 1997. The Authority therefore considers that the size of the market affected by the group purchasing arrangement does not give rise to any competition concerns.

27. The ability of purchasers to conclude agreements outside the group purchasing scheme is an important factor in considering its effects. If, in this case, suppliers are prevented from negotiating directly with the members of the association in respect of this specific project only, and are not prevented from dealing directly with the members in respect of any other purchases of information technology hardware, software or services, the Authority considers that the agreement does not contravene Section 4(1). The information provided in the Annex to Form CA states that “The Master Agreement will restrict buying/selling prices for IT software services only insofar as the Association will determine prices for purchases covered by the agreement ...”. Elsewhere the Annex says that member institutions “will thus retain the freedom to purchase similar software outside of the scheme (from other suppliers/service providers) without the benefit of the specific department funds.”

28. The Authority considers that there is no reason why any member institution should not be free to purchase from the Contractor outside the terms of the agreement. The notifying party has now confirmed in writing that suppliers are prevented from negotiating directly with Members of the Association in respect of this specific project only, and are not restricted from dealing directly with Members of the Association in respect of any other purchases of information technology hardware, software or services. The Authority therefore considers that the notified arrangements do not contravene Section 4(1) of the Competition Act, 1991.

29. In the Authority’s opinion, the fourteen third-level educational institutions listed in paragraph 3 of this decision are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, as amended, and the notified agreement is an agreement between undertakings. In the Authority’s opinion, the notified agreement does not prevent, restrict or distort competition and thus does not contravene Section 4(1) of the Competition Act.

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 joint purchasing arrangements among the fourteen third-level educational institutions listed below, notified under Section 7 of the Competition Act on 30 January 1998 (notification no. CA/3/98) do not contravene Section 4(1) of the Competition Act, 1991, as amended.

For the Competition Authority,

Isolde Goggin

Member

17 June 1998.

RTC Athlone RTC Letterkenny

RTC Carlow RTC Limerick

RTC Cork RTC Sligo

Dublin Institute of Technology RTC Tallaght

RTC Dundalk Tipperary Rural and Business

RTC Dun Laoghaire Development Institute

RTC Galway RTC Tralee

Waterford Institute of Technology

[1] Source: International Data Corporation

[2] Source: Business and Finance, “The Irish Software Boom”.

[3] Source: International Data Corporation

[4] Notification No. CA/20/96 - Athlone Regional Technical College/The Governor and Company of the Bank of Ireland, Decision No. 475 of 12 December 1996.

[5] Notifications Nos. CA/18/92E and CA/19/92E - Musgraves ltd./Licensee and Franchise Agreements, Decision No. 354 of 19 September 1994.

[6] Commission Decision of 14 July 1975, OJ No. L212, 9 August 1975, p. 23-26.

[7] Commission Decision of 9 July 1980, OJ No. L260, 3 October 1980, p. 24-33.