Feds slap GE with antitrust lawsuitrelated to advanced service software

August 28, 1996

Allegations claim GE restricts competition in MontanaThe Justice Department filed suit this month against GE MedicalSystems, alleging that its licensing policies limiting accessto maintenance software for its CT and MRI products violate

Allegations claim GE restricts competition in Montana

The Justice Department filed suit this month against GE MedicalSystems, alleging that its licensing policies limiting accessto maintenance software for its CT and MRI products violate federalantitrust law. The agency's move reopens an issue that has longbeen a sore point between OEMs and independent service organizations.

In litigation filed Aug. 1 in U.S. District Court in Montana,the U.S. attorney general's office argued that GE illegally preventshospitals that use GE's medical software from competing with GEby maintaining equipment at other healthcare facilities, evenwhen they don't use the software to make those repairs.

In a complaint filed with the Montana court, Justice Departmentattorneys charged that GE's policies on advanced service softwarehave had an anticompetitive effect in the state by preventinghospitals with in-house service organizations from servicing OEMs'equipment. In Montana, only GE and Philips Medical Systems maintaina significant service presence, the complaint stated.

Two Montana hospitals, St. Patrick Hospital in Missoula andDeaconess Medical Center in Billings, have in-house service departments.Both hospitals have sold service to other facilities, but havenot been able to service imaging equipment at those facilitiesunder the terms of GE's advanced service software license.

"GE's agreements with St. Patrick and Deaconess have preventedthose hospitals from offering service for medical equipment tonearby healthcare facilities," the complaint states. "Thosehospitals are the only, or two of very few, actual or potentialservice providers other than GE for many healthcare facilitiesin Montana."

In a news conference, deputy assistant attorney general JoelKlein said the effect of GE's policy is to raise costs for hospitalsthat seek an alternative to OEMs for service. GE has more than500 restrictive licensing agreements in effect nationwide, hesaid.

Gary Foster, general manager of service marketing at GE, deniedthe allegations.

"We think the suit is without merit," Foster said."Our licensing policies have been and continue to be lawful."

According to Foster, the Justice Department initiated actionafter hearing complaints from hospitals that were denied accessto GE's advanced CT and MRI diagnostic software when they attemptedto provide independent service to other hospitals.

GE loosened restrictions on its software licensing policy inApril, after being notified by the Justice Department that itwas considering litigation. GE customers were informed by mailthat healthcare providers qualify to license its proprietary softwareonly when they are not in the business of servicing the same modalityof GE equipment for other providers, Foster said.

GE had earlier barred its licensees from providing outsideservice for any of its equipment, according to Ronald Katz, generalcounsel for Independent Service Network International, an Atlanta-basedtrade group for ISOs.

Foster stressed that the restrictions apply only to GE's advancedsoftware package. All customers have access to GE's basic servicesoftware, tools, and documentation essential to maintaining itsCT and MR systems, he said.

"The basic software package has a few less features, butthey do the same things," Foster said. "The main differenceis speed. Three-hour diagnostic routines, for example, can bereduced to two hours."

Foster noted that the current trend toward multivendor serviceinitiated by GE in 1994 and adopted by Siemens Medical Systems,Picker International, and Philips Medical Systems would be impossibleif proprietary software were a key to participating in the business.

"ISOs are free to develop their own proprietary softwareto make them more efficient, and many in fact have done so,"he said.

Katz, however, said it would be uneconomical to service scannersby relying on the basic software alone.

"The advanced software enables you to do things so muchmore quickly that if you didn't have it, you really couldn't compete,"he said.

Making an example? The Justice Department investigated a numberof manufacturers engaged in policies similar to GE's before filingsuit against the medical imaging market's leading vendor, accordingto Katz.

"My assumption is that they decided to go after the biggestone, on the theory that if they beat GE, then all the others willfall in line," he said.

According to Katz, Montana was selected as the site to prosecutethe case because its hospitals are particularly vulnerable toGE's allegedly restrictive policies.

"There are so few facilities that maintain imaging equipmentthere that these policies have a devastating effect in Montana.Once GE implements its policy in Montana, there is basically nochoice but GE," he said.

The Justice Department complaint alleges that GE's policy violatesthe Sherman Antitrust Act and asks the court that GE be requiredto end the policies and be enjoined from enforcing every relevantservice contract now in effect. The complaint did not specificallyask that a monetary penalty be assessed, other than to recoverthe costs of the action and any other relief the court finds necessaryto prevent recurrence of the alleged violations. Some industryobservers, however, believe that the feds may ask for penaltiesin the millions of dollars to punish GE.

GE and other OEMs have squabbled with ISOs for more than adecade over access to software, tools, and documentation neededto maintain CT, MRI, and other digital imaging equipment. GE wasinvolved in separate lawsuits with ISOsR Squared Scan Systems(now InnoServ Technologies) and Etek, while Picker Internationaldueled for years with Imaging Equipment Services and its president,Thomas Quinn. IES eventually was forced out of business, in partdue to costs related to its battle with Picker (SCAN 9/13/95).

Quinn waged a one-man campaign to prod the Justice Departmentand the Food and Drug Administration to investigate what he believedwere OEM violations of antitrust laws. He also claimed that OEMswere violating sections of 21 CFR (Code of Federal Regulations)dealing with public safety related to medical devices.

The 21 CFR sections stipulate that public health and safetyshould take precedence over other concerns, such as intellectualproperty rights exerted by OEMs over advanced service software,according to Donald Blumberg, president and CEO of D.F. Blumberg& Associates, a Fort Washington, PA, management consultingfirm.

"The act states that OEMs must be supportive of whoeverdoes the service. They must provide the necessary material toservice the equipment," Blumberg said. "That is notthe way the world has been working. GE and Picker and other vendorshave been erecting barriers to entry. They have been withholdingmaterials like parts, or have raised prices, or have not beencooperative."

The Justice Department's Montana lawsuit does not mention 21CFR, focusing instead on alleged violations of the Sherman AntitrustAct. But Blumberg believes that 21 CFR is another avenue thatthe feds could take to pursue their case against OEMs.

If the courts support the Justice Department's view of theadvanced service software issue, Blumberg believes the servicemarket could be radically reshaped. Service has been one of thefew lucrative sources of revenue for medical imaging vendors,many of whom are rumored to be selling equipment at cost or ata loss in order to capture service revenue. If ISOs, in-houseservice departments, and other OEMs gain access to advanced servicesoftware, they will lose their edge and may exit the service businessentirely.

OEMs with multivendor service programs stand to benefit, however,by gaining access to their competitors' most advanced serviceproducts.

"This will make it easier for those in the multivendorbusiness," Blumberg said.